Civil Law | Obligations and Contracts, LTD, and Torts and Damages REVIEWER For the 2020/21 #BestBarEver

TABLE OF CONTENTS Pure and Conditional (a) Real — the obligation to give;
With a Period (b) Personal — the obligation to do or not to do.
OBLIGATIONS 2
Alternative and Facultative Sources
CONTRACTS 49 Joint and Solidary
4. Sources of Obligations
Divisible and Indivisible
NATURAL OBLIGATIONS 67
With Penal Clause Source De inition Examples
ESTOPPEL 67 D. Extinguishment of Obligations
Law (Art Imposed by the law itself Art 195 Civil Code -
SPECIAL CONTRACTS 67 Payment or Performance
1158) support
Application of Payments
QUASI-CONTRACTS 107 Contracts Arise from stipulation of Obligation to repay a loan
Payment by Cession
(Art 1159) parties (Art 1306); by virtue of an agreement
LAND TITLES AND DEEDS 108 Tender of Payment and Consignation
Loss of The Thing Due Quasi- Arise from lawful, Return money paid by
TORTS 125 contracts voluntary and unilateral mistake (Art 2154)
Condonation or Remission of Debt
acts and which are
DAMAGES 135 Confusion or Merger of Rights enforceable to the end that
Compensation no one shall be unjustly
enriched (Art 2142).
OBLIGATIONS Novation
Acts or Arise from civil liability Restitution,
A. General Provisions
A. General Provisions omissions which is the consequence indemni ication,
1. Concept and Birth of Obligation punished of a criminal offense (Art reparation.
Sources by law 1161)
Law ART 1156. An obligation is a juridical necessity to give, to do or
not to do. Quasi- Torts; Arise from damage Art 2193 - head of the
Contracts delicts caused to another through family liable for damage
Quasi-Contracts
Obligation is a legal relation established between one party and an act or omission, there caused by things thrown
another, whereby the latter is bound to the ful illment of a prestation being fault or negligence, or falling from building in
Delict which the former may demand of him. but no contractual which he resides;
Quasi-delict 2. Elements of Obligation relation exists between Art 2183 - Possessor of an
B. Nature and Effects of Obligations the parties. (Art 2176) animal to pay for damages
(a) An active subject — the obligee or creditor; which it may cause.
1. Compliance with Obligations
(b) A passive subject — the obligor or debtor;
2. Breach of Obligations and Grounds for Liability ART 1157. Obligations arise from:
3. Effects of Fortuitous Events in Obligations (c) The object or prestation;
(1) Law;
4. Usurious Transactions; Interests The subject matter of an obligation — and may consist of
giving a thing, doing or not doing a certain act. (2) Contracts;
5. Presumptions
(d) The ef icient cause — the vinculum or juridical tie. (3) Quasi-contracts;
6. Remedies of Creditors for Breach of Obligations
C. Kinds of Obligations 3. Kinds of Obligation according to subject matter (4) Delicts — Acts or omissions punished by law; and

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(5) Quasi-delicts.
(1) Law
ART 1158. Obligations derived from law are not presumed.
Only those expressly determined in this Code or in special
laws are demandable xxxx.
Bautista v. F.O. Borromeo, Inc.
Borromeo paid the widow of its employee, Quintin Delgado,
compensation (death bene it) and funeral expenses for the latter's
death while in the course of employment. This obligation arises
from law - Section 2 of the Workmen's Compensation Act.
There is no need to establish any contractual relationship between
Quintin Delgado and herein petitioners. Indeed, there is none. The
cause of action of respondent corporation is one which does not
spring from a creditor-debtor relationship. It arises by virtue of its
subrogation to the right of Quintin Delgado to sue the guilty party.
Such subrogation is sanctioned by the Workmen's Compensation Law
aforesaid. It is as a subrogee to the rights of its deceased employee,
Quintin Delgado, that Borromeo iled a suit against petitioners.
Pelayo v. Lauron
Obligations arising from law are not presumed. Those expressly
determined in the code or in special laws, etc., are the only
demandable ones. Obligations arising from contracts have legal force
between the contracting parties and must be ful illed in accordance
with their stipulations.
If every obligation consists in giving, doing, or not doing something,
and spouses are mutually bound to support each other, there can be
no question but that, when either of them by reason of illness should
be in need of medical assistance, the other is under the unavoidable
obligation to furnish the necessary services of a physician in order
that health may be restored, and he or she may be freed from the
sickness by which life is jeopardized; the party bound to furnish such
support is therefore liable for all expenses, including the fees of the
medical expert for his professional services. This liability
originates from the mutual obligation which the law expressly
established between the married couple.
Thus, the person bound to pay the fees due to the plaintiff for the
professional services that he rendered to the daughter-in-law of the
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
defendants during her childbirth is the husband of the patient and not
her father and mother-in-law, the defendants herein.
Martinez v. Martinez
The money with which the vessels were purchased was furnished by
the plaintiff, the father of the defendant. Does this fact make him the
owner of them, the title having been taken and registered in the son's
name? NO.
It is provided in Article 161 of the Civil Code, relating to minors, that
"the ownership or enjoyment of property acquired by a minor child
with funds of his parents, pertain to the latter." This article does not
apply to the present case, for the son was of age.
This is the only provision which we have found anywhere in the laws
now in force that declares the property to belong to the person who
paid the money.
(2) Contracts
ART 1159. Obligations arising from contracts have the force
of law between the contracting parties and should be complied
with in good faith.
Perez v. Pomar
It does not appear that any written contract was entered into between
the parties for the employment of the plaintiff as interpreter, or that
any other innominate contract was entered into; but whether the
plaintiff's services were solicited or whether they were offered to the
defendant for his assistance, inasmuch as these services were
accepted and made use of by the latter, we must consider that there
was a tacit and mutual consent as to the rendition of the services.
This gives rise to the obligation upon the person bene ited by the
services to make compensation therefor, since the bilateral obligation
to render service as interpreter, on the one hand, and on the other
to pay for the services rendered, is thereby incurred.
An innominate contract of facio ut des was implicitly established.
The obligations arising from this contract are reciprocal, and, apart
from the general provisions with respect to contracts and obligations,
the special provisions concerning contracts for lease of services are
applicable by analogy.
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Maritime Company of the Philippines v. Reparations Commission
It is a fundamental requirement that the contract entered into must be
in accordance with, and not repugnant to, an applicable statute. Its
terms are embodied therein. The contracting parties need not repeat
them. They do not even have to be referred to. Every contract thus
contains not only what has been explicitly stipulated, but the
statutory provisions that have any bearing on the matter.
The rule is that the law forms part of, and is read into, every
contract, unless clearly excluded therefrom in those cases where
such exclusion is allowed.
(3) Quasi-Contracts
ART 1160. Obligations derived from quasi-contracts shall
be subject to the provisions of Chapter 1, Title XVII, of this
Book.
A quasi-contract is that juridical relation resulting from a lawful,
voluntary, and unilateral act, and which has for its purpose the payment
of indemnity to the end that no one shall be unjustly enriched or
bene ited at the expense of another. It could either be:
(a) Negotiorum gestio — the voluntary management of the
property or affairs of another without the knowledge or
consent of the latter (Art 2144). This does not apply when
(i) property or business is not neglected, in which case
provisions on unauthorized contracts shall govern,
and
(ii) the manager has been tacitly authorized by the owner,
in which case the rules on agency shall govern.
(b) Solutio indebiti — created when something is received when
there is no right to demand it and it was unduly delivered
through mistake (Art 2154). Whether the payment was made by
mistake is a judicial matter. General presumption: “money paid
by one to another was due to the latter”.
(c) Other cases — Arts 2164 - 2175. Recovery may be allowed in
view of the peculiar circumstances or factual environment to
the end that a recipient of bene its or favors resulting from
lawful, voluntary and unilateral acts of another may not be
unjustly enriched at the expense of the latter.
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Cruz v. J.M. Tuason & Co., Inc.
A presumed quasi-contract cannot emerge as against one party when
the subject matter thereof is already covered by an existing contract
with another party.
Corollarily, if the one who claims having enriched somebody has
done so pursuant to a contract with a third party, his cause of action
should be against the latter, who in turn may, if there is any ground
therefor, seek relief against the party bene ited. It is essential that the
act by which the defendant is bene ited must have been voluntary and
unilateral on the part of the plaintiff.
In the case at bar, since appellant has a clearer and more direct
recourse against the Deudors with whom he had entered into an
agreement regarding the improvements and expenditures made by
him on the land of appellees, it cannot be said, in the sense
contemplated in Article 2142, that appellees have been enriched at the
expense of appellant.
National Commercial Bank of Saudi Arabia v. CA
Solutio indebiti applies where:
(1) a payment is made when there exists no binding relation
between the payor, who has no duty to pay, and the person
who received the payment, and
(2) the payment is made through mistake, and not through
liberality or some other cause.
In the case at bar, PBC and NCBSA were bound by their contract, the
letter of credit, under which NCBSA obliged itself to pay PBC, subject
to compliance by the latter with certain conditions provided therein.
As such, the cause of action was based on a contract, and the
prescriptive period is ten, not six years.
Siga-an v. Villanueva
Under Article 1960, if the borrower of loan pays interest when there
has been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied.
It was duly established that respondent paid interest to petitioner.
Respondent was under no duty to make such payment because there
was no express stipulation in writing to that effect. There was no
binding relation between petitioner and respondent as regards the
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
payment of interest. The payment was clearly a mistake. Since
petitioner received something when there was no right to demand it,
he has an obligation to return it.
(4) Delict
ART 1161. Civil obligations arising from criminal offenses shall
be governed by the penal laws, subject to the provisions of
Article 2177, and of the pertinent provisions of Chapter 2,
Preliminary Title, on Human Relations, and of Title XVIII of
this Book, regulating damages.
DMPI Employees Credit Cooperative, Inc. v. Velez
Every person criminally liable for a felony is also civilly liable. Civil
liability includes restitution, reparation for damage caused, and
indemni ication of consequential damages.
Civil Case No. CV-94-214, an independent civil action for damages
on account of the fraud committed against respondent Villegas
under Article 33 of the Civil Code, may proceed independently even if
there was no reservation as to its iling.
Hun Hyung Park v. Eung Won Choi
The public prosecutor has generally no interest in appealing the civil
aspect of a decision acquitting the accused. The acquittal ends his
work. The case is terminated as far as he is concerned. The real
parties in interest in the civil aspect of a decision are the
offended party and the accused.
In case of acquittal, the accused may still be adjudged civilly liable.
The extinction of the penal action does not carry with it the extinction
of the civil action where
(a) the acquittal is based on reasonable doubt as only
preponderance of evidence is required;
(b) the court declares that the liability of the accused is only
civil; and
(c) the civil liability of the accused does not arise from or is not
based upon the crime of which the accused was acquitted.
The civil action based on delict may, however, be deemed
extinguished if there is a inding on the inal judgment in the
criminal action that the act or omission from which the civil
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liability may arise did not exist.
Dayap v. Sendiong
If demurrer is granted and the accused is acquitted by the court, the
accused has the right to adduce evidence on the civil aspect of the
case unless the court also declares that the act or omission from
which the civil liability may arise did not exist. This is because when
the accused iles a demurrer to evidence, he has not yet adduced
evidence both on the criminal and civil aspects of the case. The only
evidence on record is the evidence for the prosecution. What the
trial court should do is
1. issue an order or partial judgment granting the demurrer to
evidence and acquitting the accused, and
2. set the case for continuation of trial for the accused to
adduce evidence on the civil aspect of the case and for the
private complainant to adduce evidence by way of rebuttal.
Thereafter, the court shall render judgment on the civil aspect of the
case.
A scrutiny of the MTC's decision supports the conclusion that the
acquittal was based on the indings that the act or omission from
which the civil liability may arise did not exist and that petitioner did
not commit the acts or omission imputed to him; hence, petitioner's
civil liability has been extinguished by his acquittal.
(5) Quasi-delict
ART 1162. Obligations derived from quasi-delicts shall be
governed by the provisions of Chapter 2, Title XVII of this
Book, and by special laws.
A quasi-delict is a fault or act of negligence or omission of care which
causes damages to another, there being no pre-existing contractual
relations between the parties. There must be:
(1) An act or omission by the defendant;
(2) Fault or negligence by the defendant;
(3) Damage caused to the plaintiff;
(4) Direct relation or connection of cause and effect between 1
and 3; and
(5) No pre-existing contractual relations between the parties.
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Lasam v. Smith
In a legal sense and, consequently, also in relation to contracts, a caso
fortuito presents the following essential characteristics:
(1) The cause of the unforeseen and unexpected occurrence, or
of the failure of the debtor to comply with his obligation,
must be independent of the human will.
(2) It must be impossible to foresee the event which
constitutes the caso fortuito, or if it can be foreseen, it must
be impossible to avoid.
(3) The occurrence must be such as to render it impossible for
the debtor to ful ill his obligation in a normal manner. and
(4) The obligor (debtor) must be free from any participation
in the aggravation of the injury resulting to the creditor.
Elcano v. Hill
The defendant could have been prosecuted in a criminal case because
his negligence causing the death of the child was punishable by the
Penal Code. Here is therefore a clear instance of the same act of
negligence being a proper subject-matter either of a criminal action
with its consequent civil liability arising from a crime or of an
entirely separate and independent civil action for fault or negligence
under Article 1902 of the Civil Code. Thus, in this jurisdiction, the
separate individuality of a cuasi-delito or culpa aquiliana under the
Civil Code has been fully and clearly recognized, even with regard to a
negligent act for which the wrongdoer could have been prosecuted
and convicted in a criminal case and for which, after such a
conviction, he could have been sued for this civil liability arising
from his crime.
The acquittal of Reginald Hill in the criminal case has not
extinguished his liability for quasi-delict, hence that acquittal is not a
bar to the instant action against him.
Virata v. Ochoa
The principal issue is whether or not the petitioners, heirs of the
deceased Arsenio Virata, can prosecute an action for damages based
on quasi-delict against Maximo Borilla and Victorio Ochoa, driver
and owner, respectively of the passenger jeepney that bumped
Arsenio Virata.
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER For the 2020/21 #BestBarEver
Kinds of delivery
It is settled that in negligence cases, the aggrieved parties may
choose between an action under the RPC or for quasi-delict (a) Actual or tradition;
under Article 2176. What is prohibited by Article 2177 is to recover (b) Constructive or Implied:
twice for the same negligent act.
(i) Traditio simbolica — as when the keys of a
Neplum, Inc. v. Orbeso bodega are given.
Within what period may private offended parties appeal the civil (ii) Traditio longa manu — delivery by mere
aspect of a judgment acquitting the accused based on reasonable consent or the pointing of an object.
doubt? Is the 15-day period to be counted from the promulgation of (iii) Traditio brevi manu — a possessor of a thing
the decision to the accused or from the time a copy thereof is served not as an owner, becomes the possessor as owner.
on the offended party? Our short answer is: from the time the E.g. a tenant who buys the house he is renting.
offended party had actual or constructive knowledge of the
judgment, whether it be during its promulgation or as a consequence (iv) Traditio constitutum possessorium — opposite
of the service of the notice of the decision. of brevi manu.
(v) Tradition by the execution of legal forms and
Thus, deemed instituted in every criminal prosecution is the civil solemnities.
liability arising from the crime or delict per se (civil liability ex
delicto), but not those liabilities from quasi-delicts, contracts or ART 1165. When what is to be delivered is a determinate
quasi-contracts. In fact, even if a civil action is iled separately, the ex thing, the creditor, in addition to the right granted him by
delicto civil liability in the criminal prosecution remains, and the article 1170, may compel the debtor to make the delivery.
offended party may -- subject to the control of the prosecutor -- still
If the thing is indeterminate or generic, he may ask that the
intervene in the criminal action in order to protect such remaining
obligation be complied with at the expense of the debtor.
civil interest therein. By the same token, the offended party may
appeal a judgment in a criminal case acquitting the accused on If the obligor delays, or has promised to deliver the same thing
reasonable doubt, but only in regard to the civil liability ex delicto. to two or more persons who do not have the same interest, he
shall be responsible for any fortuitous event until he has
And this is precisely what herein petitioner wanted to do: to appeal effected the delivery.
the civil liability arising from the crime -- the civil liability ex delicto.
Duties of debtor in obligation to give a determinate thing
B. Nature and E ects of Obligations 1. Preserve or take care of the thing due;
1. Compliance with Obligations 2. Deliver the fruits of the thing (Art 1164);
3. Deliver its accessions and accessories (Art 1166);
(1) In Obligations to Give
4. Deliver the thing itself (Arts 1163, 1233, 1244; as to kinds of
ART 1163. Every person obliged to give something is also delivery, Arts 1497-1501); and
obliged to take care of it with the proper diligence of a good
father of a family, unless the law or the stipulation of the 5. Answer for damages in case of non-ful illment or breach (Art
parties requires another standard of care. 1170).
Duties of debtor in obligation to deliver a generic thing
ART 1164. The creditor has a right to the fruits of the thing from
the time the obligation to deliver it arises. However, he shall 1. Deliver a thing which is of the quality intended by the
acquire no real right over it until the same has been delivered parties considering the purpose of the obligation and other
to him. circumstances (Art 1246); and
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2. Be liable for damages in case of fraud, negligence, or delay,
in the performance of his obligation, or contravention of
the tenor thereof (Art 1170).
Remedies of creditor when debtor fails to comply. Demand
(a) Speci ic performance;
(b) Rescission or cancellation; or
(c) Damages.
ART 1166. The obligation to give a determinate thing includes
that of delivering all its accessions and accessories, even
though they may not have been mentioned.
Fidelity & Deposit Co. v. Wilson
The delivery of a thing constitutes a necessary and indispensable
requisite for the purpose of acquiring the ownership of the same by
virtue of a contract. The ownership, the property right, is only
derived from the delivery of a thing.
Therefore, by reason of the nondelivery, Terrell did not acquire the
ownership of the property transferred to him by Wilson. It is only the
jus ad rem, and not the jus in re, that was acquired by Terrell by virtue
of the transfer, made by the consent of the transferor and the
transferee but not consummated by the delivery which never came to
pass and which delivery was the object of such transfer.
But if Terrell could not be considered as the owner of said funds in
question, it is undeniable that he had rights with regard to the same as
a creditor by virtue of that transfer.
Cruzado v. Bustos
It is indeed true that it is not necessary that the thing sold or its price
should have been delivered in order that the contract of purchase and
sale be deemed perfect on account of its being consensual, and from
it reciprocal obligations arise mutually to compel the parties to effect
its ful illment; but there is no transmission of ownership until the
thing, as in the case at bar, the land, has been delivered, and the
moment such delivery is made the contract of purchase and sale is
regarded as consummated.
The iction created by means of the execution and delivery of a public
instrument produces no effect if the person acquiring it never takes
possession of the thing sold or acquired, as happened in the case at
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
bar.
Pornellosa v. Land Tenure Administration
Tanguilig v. CA
The deed of sale is a mere private document and does not
conclusively establish their right to the parcel of land. While it is
valid and binding upon the parties with respect to the sale of the
house erected thereon, yet it is not suf icient to convey title or any
right to the residential lot in litigation. Acts and contracts which have
for their object the creation, transmission, modi ication or
extinguishment of real rights over immovable property must appear
in a public document.
Caleon v. Agus Development Corp
Whether or not the lease of an apartment includes a sublease of the
lot on which it is constructed.
The lease of a building naturally includes the lease of the lot, and the
rentals of the building includes those of the lot.
(2) In Obligations to Do
ART 1167. If a person obliged to do something fails to do it, the
same shall be executed at his cost.
This same rule shall be observed if he does it in contravention
of the tenor of the obligation. Furthermore, it may be decreed
that what has been poorly done be undone.
Remedies of creditor if debtor fails to do
(a) To have the obligation performed by himself or by another
at debtor’s expense.
(b) Plus damages.
Chavez v. Gonzales
It is clear that the defendant-appellee contravened the tenor of his
obligation because he not only did not repair the typewriter but
returned it "in shambles," according to the appealed decision. For
such contravention, as appellant contends, he is liable under Article
1167 of the Civil Code, jam quot, for the cost of executing the
obligation in a proper manner.
In addition, the defendant-appellee is likewise liable, under Article
1170, for the cost of the missing parts for in his obligation to repair
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the typewriter he was bound, but failed or neglected, to return it in the
same condition it was when he received it.
(1) Whether the agreement to construct the windmill system
included the installation of a deep well.
NO. It is a cardinal rule in the interpretation of contracts that the
intention of the parties shall be accorded primordial consideration
and, in case of doubt, their contemporaneous and subsequent acts
shall be principally considered. An examination of such
contemporaneous and subsequent acts of respondent as well as the
attendant circumstances does not persuade us to uphold him.
(2) Whether petitioner is under obligation to reconstruct the
windmill after it collapsed.
YES. In a long line of cases this Court has consistently held that in
order for a party to claim exemption from liability by reason of
fortuitous event under Art. 1174, the event should be the sole and
proximate cause of the loss or destruction of the object of the
contract.
Petitioner failed to show that the collapse of the windmill was due
solely to a fortuitous event. Interestingly, the evidence does not
disclose that there was actually a typhoon on the day the windmill
collapsed. Petitioner merely stated that there was a "strong wind." But
a strong wind in this case cannot be fortuitous — unforeseeable nor
unavoidable. On the contrary, a strong wind should be present in
places where windmills are constructed, otherwise the windmills
will not turn.
Finally, petitioner's argument that private respondent was already in
default in the payment of his outstanding balance of P15,000.00 and
hence should bear his own loss, is untenable. In reciprocal
obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is
incumbent upon him. When the windmill failed to function properly
it became incumbent upon petitioner to institute the proper repairs in
accordance with the guaranty stated in the contract. Thus, respondent
cannot be said to have incurred in delay; instead, it is petitioner who
should bear the expenses for the reconstruction of the windmill.
Article 1167 is explicit on this point that if a person obliged to do
something fails to do it, the same shall be executed at his cost.
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Vil-Rey Planners and Builders v. Lexber, Inc. 2016
Whether Vil-Rey is liable for breach of contract.
Breach of contract is the failure of a party, without legal reason, to
comply with the terms of a contract or perform any promise that
forms either a part or the whole of it.
The parties took on reciprocal obligations. These are obligations that
arise from the same cause, such that the obligation of one is
dependent upon that of the other.
The reciprocal obligation in this case was Lexber's payment of the
50% balance upon Vil-Rey's completion of the works on or before 15
January 1997. However, despite the grant of extension until 31
January 1997, and even after the lapse of another ive-day grace
period, Vil-Rey failed to inish the works under the third contract.
The law provides that the obligation of a person who fails to ful ill
it shall be executed at that person's cost. The CA was correct in
ruling that Vil-Rey should be held liable for the amount paid by
Lexber to another contractor to complete the works.
Article 1169 of the Civil Code provides that in reciprocal obligations,
delay by one of the parties begins from the moment the other ful ills
the obligation. In this case, Lexber is guilty of delay with regard to the
amount of P84,364.19, which should be paid. Also, the delay shall
make it liable to Vil-Rey for damages, which We impose in the form
of interest at the rate of 6% per annum from 24 December 1996 until
the inality of this Decision. Thereafter, it shall earn interest at the rate
of 6% per annum until satisfaction.
(3) In Obligations Not to Do
ART 1168. When the obligation consists in not doing, and the
obligor does what has been forbidden him, it shall also be
undone at his expense.
As a rule, the remedy of the obligee is the undoing of the forbidden thing
plus damages (Art 1170). If it is not possible, physically or legally, or
because of the rights acquired by third persons who acted in good faith,
the remedy is an action for damages caused by the violation.
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
2. Breach of Obligations and Grounds for Liability
ART 1170. Those who in the performance of their obligations
are guilty of fraud, negligence, or delay, and those who in
(2) Negligence
any manner contravene the tenor thereof, are liable for
damages.
Areola v. CA
We uphold petitioner-insured's submission. Malapit's fraudulent act
of misappropriating the premiums paid by petitioner-insured is
beyond doubt directly imputable to respondent insurance company. A
corporation, such as respondent insurance company, acts solely thru
its employees. The latters' acts are considered as its own for which it
can be held to account.
Consequently, respondent insurance company is liable by way of
damages for the fraudulent acts committed by Malapit that gave
occasion to the erroneous cancellation of subject insurance policy. Its
earlier act of reinstating the insurance policy can not obliterate the
injury in licted on petitioner-insured. Respondent company should be
reminded that a contract of insurance creates reciprocal obligations
for both insurer and insured.
Picart v. Smith
(1) Fraud
ART 1171. Responsibility arising from fraud is demandable in
all obligations. Any waiver of an action for future fraud is
void.
Fraud (deceit or dolo) — deliberate or intentional evasion of the
normal ful illment of an obligation.
(a) Includes any act, omission or concealment involving some
kind of malice or dishonesty. It is synonymous to bad faith.
Moral damages may be recovered.
(b) Art 1170 refers to incidental fraud (dolo incidente)
committed in the performance of an obligation already existing
because of contract. It is different from causal fraud (dolo
causante) or fraud employed in the execution of a contract
under Art 1338, which vitiates consent and makes the contract
voidable.
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(c) Employed to evade the normal ful illment of an obligation and
its existence merely results in breach giving rise for the
innocent party to recover damages.
ART 1172. Responsibility arising from negligence in the
performance of every kind of obligation is also demandable,
but such liability may be regulated by the courts, according to
the circumstances.
ART 1173. The fault or negligence of the obligor
a) consists in the omission of that diligence which is
required by the nature of the obligation and
b) corresponds with the circumstances of the persons, of
the time and of the place.
When negligence shows bad faith, the provisions of articles
1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be
observed in the performance, that which is expected of a good
father of a family shall be required.
The test by which to determine the existence of negligence in a
particular case may be stated as follows: Did the defendant in doing
the alleged negligent act use that reasonable care and caution
which an ordinarily prudent person would have used in the
same situation? If not, then he is guilty of negligence.
The existence of negligence in a given case is not determined by
reference to the personal judgment of the actor in the situation before
him. The law considers what would be reckless, blameworthy, or
negligent in the man of ordinary intelligence and prudence and
determines liability by that.
The question as to what would constitute the conduct of a prudent
man in a given situation must of course be always determined in the
light of human experience and in view of the facts involved in the
particular case.
The proper criterion for determining the existence of
negligence in a given case is this: Conduct is said to be negligent
when a prudent man in the position of the tortfeasor would have
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foreseen that an effect harmful to another was suf iciently probable to
warrant his foregoing the conduct or guarding against its
consequences.
Layugan v. IAC
Negligence is the omission to do something which a reasonable
man, guided by those considerations which ordinarily regulate the
conduct of human affairs, would do, or the doing of something which
a prudent and reasonable man would not do.
The evidence on record discloses that three or four meters from the
rear of the parked truck, a lighted kerosene lamp was placed. Whether
the cargo truck was parked along the road or on half the shoulder of
the right side of the road would be no moment taking into account the
warning device consisting of the lighted kerosene lamp placed three
or four meters from the back of the truck. But despite this warning,
which we rule as suf icient, the Isuzu truck driven by Daniel Serrano,
an employee of the private respondent, still bumped the rear of the
parker cargo truck.
Thus, the absence or want of care of Daniel Serrano has been
established by clear and convincing evidence.
PNB v. CA
Damages are not intended to enrich the complainant at the expense
of the defendant, and there is no hard-and-fast rule in the
determination of what would be a fair amount of moral damages
since each case must be governed by its own peculiar facts. The
yardstick should be that it is not palpably and scandalously
excessive.
PNB v. Pike
The bank is under obligation to treat the accounts of its depositors
with meticulous care, always having in mind the iduciary nature of
their relationship.
Said iduciary relationship means that the bank's obligation to
observe "highest standards of integrity and performance" is deemed
written into every deposit agreement between a bank and its
depositor. The iduciary nature of banking requires banks to assume a
degree of diligence higher than that of a good father of a family.
Article 1172 states that the degree of diligence required of an obligor
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
is that prescribed by law or contract, and absent such stipulation then
the diligence of a family. In every case, the depositor expects the bank
to treat his account with the utmost idelity.
Samson v. CA
WON private respondent Angel Santos committed fraud or bad faith
in representing to petitioner that his contract of lease over the
subject premises has been impliedly renewed by Susana Realty.
It was this representation which induced petitioner to enter into the
subject contract with private respondent.
Bad faith is essentially a state of mind af irmatively operating with
furtive design or with some motive of ill-will. It does not simply
connote bad judgment or negligence. It imports a dishonest purpose
or some moral obliquity and conscious doing of wrong. Bad faith is
thus synonymous with fraud and involves a design to mislead or
deceive another, not prompted by an honest mistake as to one's rights
or duties, but by some interested or sinister motive.
In contracts, the kind of fraud that will vitiate consent is one where,
through insidious words or machinations of one of the contracting
parties, the other is induced to enter into a contract which, without
them, he would not have agreed to. This is known as dolo causante
or causal fraud which is basically a deception employed by one
party prior to or simultaneous to the contract in order to secure the
consent of the other.
From the start, it was known to both parties that, insofar as the
agreement regarding the transfer of private respondent's leasehold
right to petitioner was concerned, the object thereof relates to a future
right. It is a conditional contract recognized in civil law, the ef icacy
of which depends upon an expectancy -- the formal renewal of the
lease contract between private respondent and Susana Realty.
In sum, we hold that under the facts proved, private respondent
cannot be held guilty of fraud or bad faith when he entered into the
subject contract with petitioner.
Dioquino v. Laureano
The error committed by the lower court in holding defendant
Federico Laureano liable appears to be thus obvious. Its own indings
of fact repel the notion that he should be made to respond in damages
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to the plaintiff for the broken windshield. What happened was
clearly unforeseen. It was a fortuitous event resulting in a loss
which must be borne by the owner of the car.
La Mallorca v. CA
The plaintiffs suf iciently pleaded the culpa or negligence upon
which the claim was predicated when it was alleged in the complaint
that "the death of Raquel Beltran, plaintiffs' daughter, was caused by
the negligence and want of exercise of the utmost diligence of a very
cautious person on the part of the defendants and their agent."
The driver, even before receiving the proper signal from the
conductor, and while there were still persons on the running board of
the bus and near it, started to run off the vehicle. The presentation of
proof of the negligence of its employee gave rise to the presumption
that the defendant employer did not exercise the diligence of a good
father of the family in the selection and supervision of its employees.
And this presumption petitioner had failed to overcome.
Consequently, petitioner must be adjudged pecuniarily liable for the
death of the child Raquel Beltran.
PAL v. CA
We agree with the respondent court in inding that the dizzy spells,
headache and general debility of private respondent Samson was an
after-effect of the crash-landing and We ind that such holding is
supported by substantial evidence.
PNCC v. CA
The petitioner failed to exercise the requisite diligence in maintaining
the NLEX safe for motorists. The lighted cans and lane dividers on the
highway were removed even as lattened sugarcanes lay scattered on
the ground. The highway was still wet from the juice and sap of the
lattened sugarcanes. The petitioner should have foreseen that the wet
condition of the highway would endanger motorists passing by at
night or in the wee hours of the morning.
PASUDECO's negligence in transporting sugarcanes without proper
harness/straps, and that of PNCC in removing the emergency warning
devices, were two successive negligent acts which were the direct
and proximate cause of Latagan's injuries. As such, PASUDECO and
PNCC are jointly and severally liable.
Prudential Bank v. Rapanot, et al. 2017
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In loan transactions, banks have the particular obligation of ensuring negligence arises complainant must burden to prove the the repair.
that clients comply with all the documentary requirements pertaining upon proof that there prove the negligence negligence of
to the approval of their loan applications and the subsequent release was a contract and of defendant. accused. Metro Manila Transit Corp. v. CA
of their proceeds. that it was not
Petitioner's attempt to prove its diligentissimi patris familias in the
carried out.
If only the Bank exercised the highest degree of diligence required by selection and supervision of employees through oral evidence must
the nature of its business as a inancial institution, it would have fail as it was unable to buttress the same with any other evidence,
Ramos v. Pepsi Cola
discovered that (i) Golden Dragon did not comply with the approval object or documentary, which might obviate the apparent biased
requirement imposed by Section 18 of PD 957, and (ii) that Rapanot In order that the defendant may be considered as having exercised all nature of the testimony.
already paid a reservation fee and had made several installment diligence of a good father of a family, he should not be satis ied with
payments in favor of Golden Dragon, with a view of acquiring Unit the mere possession of a professional driver's license; he should have Calalas v. CA
2308-B2. carefully examined the applicant for employment as to his
The issue in this case is whether petitioner is liable on his contract of
quali ications, his experience and record of service.
carriage. The irst, quasi-delict, also known as culpa aquiliana or
The Bank's failure to exercise the diligence required of it constitutes culpa extra contractual, has as its source the negligence of the
negligence, and negates its assertion that it is a mortgagee in good From Article 2180, two things are apparent:
tortfeasor. The second, breach of contract or culpa contractual, is
faith. premised upon the negligence in the performance of a contractual
(1) That when an injury is caused by the negligence of a servant
or employee there instantly arises a presumption of law that obligation.
a. Kinds of Negligence as Ground for Liability there was negligence on the part of the master or employer
either in the selection of the servant or employee, or in Consequently, in quasi-delict, the negligence or fault should be clearly
Culpa Contractual — that which results from breach of established because it is the basis of the action, whereas in breach of
contract; supervision over him after the selection, or both; and
contract, the action can be prosecuted merely by proving the
Culpa Aquiliana — tort or quasi-delict; (2) that the presumption is juris tantum and not juris et de jure, existence of the contract and the fact that the obligor, in this case the
and consequently may be rebutted. It follows necessarily common carrier, failed to transport his passenger safely to his
Culpa Criminal — that which results in the commission of a destination.
that if the employer shows to the satisfaction of the court
crime.
that in selection and supervision he has exercised the care
and diligence of a good father of a family, the presumption is There is, thus, no basis for the contention that the ruling in Civil Case
Contractual Aquiliana Criminal overcome and he is relieved from liability. No. 3490, inding Salva and his driver Verena liable for the damage to
petitioner’s jeepney, should be binding on Sunga. It is immaterial that
Negligence is merely Direct, substantive and independent of a Vinluan v. CA the proximate cause of the collision between the jeepney and the
incidental contract truck was the negligence of the truck driver. The doctrine of
In case of injury to a passenger due to the negligence of the driver of proximate cause is applicable only in actions for quasi-delict,
There’s a pre-existing No pre-existing obligation, except the duty to the bus on which he was riding and of the driver of another vehicle, not in actions involving breach of contract. The doctrine is a
obligation do no harm. the drivers as well as the owners of the two vehicles are jointly and device for imputing liability to a person where there is no relation
severally liable for damages. between him and another party. In such a case, the obligation is
Preponderance of evidence required Proof beyond created by law itself. But, where there is a pre-existing contractual
reasonable doubt Baliwag Transit v. CA relation between the parties, it is the parties themselves who create
The proximate cause of the death of Mario Dionisio was the the obligation, and the function of the law is merely to regulate the
Defense of a good Defense of a good The employee’s guilt negligence of driver Juanito Fidel when he failed to take the necessary relation thus created.
father of a family father of a family is a is automatically the precaution to prevent the accident. He boarded his bus, sat on the
inapplicable. proper and complete employer's civil guilt driver's seat and was at the steering wheel when the bus moved, Air France v. Carrascoso
Respondeat defense. if the former is pinning down the deceased who was repairing the defective brake
superior applies. insolvent. Although the relation of passenger and carrier is "contractual both in
system below. Driver Fidel should have known that his brake system origin and nature" nevertheless "the act that breaks the contract
was being repaired as he was in fact the one who told Dionisio to do may be also a tort".
Presumption of Ordinarily, Prosecution has

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Barredo v. Garcia
CA held the petitioner herein, Fausto Barredo, liable in damages for
the death of Faustino Garcia caused by the negligence of Pedro
Fontanilla, a taxi driver employed by said Fausto Barredo.
The pivotal question in this case is whether the plaintiffs may bring
this separate civil action against Fausto Barredo, thus making him
primarily and directly responsible as an employer of Pedro
Fontanilla.
Authorities support the proposition that a quasi-delict or "culpa
aquiliana" is a separate legal institution under the Civil Code,
with a substantivity all its own, and individuality that is entirely
apart and independent from a delict or crime.
The same negligent act causing damages may produce civil liability
arising from a crime under Article 100 of the Revised Penal Code, or
create an action for causi-delito or culpa extra-contractual.
Philippine Rabbit Bus Lines, Inc. v. IAC
The principle about the 'last clear chance' would call for
application in a suit between the owners and drivers of the two
colliding vehicles. It does not arise where a passenger demands
responsibility from the carrier to enforce its contractual obligations.
For it would be inequitable to exempt the negligent driver of the
jeepney and its owners on the ground that the other driver was
likewise guilty of negligence.
Macalinao v. Ong
Under local jurisprudence, the following are the requisites for the
application of res ipsa loquitur:
(1) The accident is of a kind which ordinarily does not occur in
the absence of someone's negligence;
(2) It is caused by an instrumentality within the exclusive
control of the defendant or defendants; and
(3) The possibility of contributing conduct which would make
the plaintiff responsible is eliminated.
There exists a fourth requisite under American jurisprudence, that
is, that the defendant fails to offer any explanation tending to show
that the injury was caused by his or her want of due care.
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
Sps Santos v. Pizarro
An act or omission causing damage to another may give rise to two
separate civil liabilities on the part of the offender, i.e.,
(1) Civil liability ex delicto, under Article 100 of the Revised
Penal Code; and
(2) Independent civil liabilities, such as those
(a) not arising from an act or omission complained of
as a felony, e.g., culpa contractual or obligations
arising from law under Article 31 of the Civil Code,
intentional torts under Articles 32 and 34, and
culpa aquiliana under Article 2176 of the Civil
Code; or
(b) where the injured party is granted a right to ile an
action independent and distinct from the criminal
action under Article 33 of the Civil Code.
Either of these liabilities may be enforced against the offender subject
to the caveat under Article 2177 of the Civil Code that the plaintiff
cannot recover damages twice for the same act or omission of
the defendant.
At the time of the iling of the complaint for damages in this case, the
cause of action ex quasi delicto had already prescribed. Nonetheless,
petitioners can pursue the remaining avenue opened for them by their
reservation, i.e., the surviving cause of action ex delicto. This is so
because the prescription of the action ex quasi delicto does not
operate as a bar to an action to enforce the civil liability arising
from crime especially as the latter action had been expressly
reserved.
(3) Delay
ART 1169. Those obliged to deliver or to do something incur in
delay from the time the obligee judicially or extrajudicially
demands from them the ful illment of their obligation.
However, the demand by the creditor shall not be necessary in
order that delay may exist:
(1) When the obligation or the law expressly so declare;
or
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(2) When from the nature and the circumstances of the
obligation it appears that the designation of the time
when the thing is to be delivered or the service is to be
rendered was a controlling motive for the
establishment of the contract; or
(3) When demand would be useless, as when the obligor
has rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a proper
manner with what is incumbent upon him. From the moment
one of the parties ful ills his obligation, delay by the other
begins.
GR: Demand is necessary to put debtor in default or mora.
EXC:
(1) When the law so provides;
(2) When the obligation expressly so provides;
(3) When time is of the essence;
(4) When demand would be useless, as when the debtor has
rendered it beyond his power to perform;
(5) When debtor has expressly acknowledged that he really is in
default.
Kinds of Mora
(1) Mora solvendi — on the part of debtor;
(2) Mora accipiendi — on the part of creditor;
(3) Compensatio morae — both are in default; as if neither is in
default.
Mora solvendi
Requisites
(1) The obligation must be due, enforceable, and already
liquidated or determinate in amount;
(2) There must be non-performance;
(3) There must be a demand, unless not required;
(4) The demand must be for the obligation that is due.
Effects
(1) If the debtor is in default, he may be liable for interest or
damages;
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(2) He may also have to bear the risk of loss;
(3) He is liable even for a fortuitous event, subject to
mitigation.
Mora accipiendi
When creditor unjusti iably refuses to accept payment or
performance at the time it can be done.
Bayla v. Silang Traf ic Co.
Whether under the contract between the parties the failure of the
purchaser to pay any of the quarterly installments on the purchase
price automatically gave rise to the forfeiture of the amounts already
paid and the reversion of the shares to the corporation.
The contract provides for interest at the rate of six per centum per
annum on deferred payments. It also provides that if the purchaser
fails to pay any of said installments when due, the said shares are to
revert to the seller and the payments already made are to be forfeited
in favor of said seller.
The provision regarding interest on deferred payments would
not have been inserted if it had been the intention of the parties
to provide for automatic forfeiture and cancelation of the
contract. Moreover, the contract did not expressly provide that the
failure of the purchaser to pay any installment would give rise to
forfeiture and cancelation without the necessity of any demand from
the seller.
Aerospace Chemical Industries, Inc. v. CA
Whether damages have been properly awarded against petitioner for
its unjusti ied delay in the performance of its obligation under the
contract.
Delay begins from the time the obligee judicially or extrajudicially
demands from the obligor the performance of the obligation. In order
that the debtor may be in default, it is necessary that the
following requisites be present:
(1) that the obligation be demandable and already liquidated;
(2) that the debtor delays performance; and
(3) that the creditor requires the performance judicially or
extrajudicially.
In the present case, private respondent required petitioner to ship out
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
or lift the sulfuric acid as agreed, otherwise petitioner would be
charged for the consequential damages owing to any delay.
Records reveal that a tanker ship had to pick-up sulfuric acid in Basay,
then proceed to get the remaining stocks in Sangi, Cebu. A period of
three days appears to us reasonable for a vessel to travel between
Basay and Sangi. Logically, the computation of damages arising from
the shipping delay would then have to be from December 15, 1986,
given said reasonable period after the December 12th letter.
Finally, we note also that petitioner tries to exempt itself from paying
rental expenses and other damages by arguing that expenses for the
preservation of fungible goods must be assumed by the seller. Rental
expenses of storing sulfuric acid should be at private respondent’s
account until ownership is transferred, according to petitioner.
However, the general rule that before delivery, the risk of loss is borne
by the seller who is still the owner, is not applicable in this case
because petitioner had incurred delay in the performance of its
obligation as per Article 1504 of the Civil Code.
Binalbagan Tech, Inc. v. CA
A party to a contract cannot demand performance of the other
party’s obligations unless he is in a position to comply with his
own obligations. Similarly, the right to rescind a contract can be
demanded only if a party thereto is ready, willing and able to comply
with his own obligations thereunder (Art. 1191, Civil Code).
In a contract of sale, the vendor is bound to transfer the ownership of
and deliver, as well as warrant, the thing which is the object of the
sale (Art. 1495, Civil Code); he warrants that the buyer shall, from the
time ownership is passed, have and enjoy the legal and peaceful
possession of the thing.
Petitioner was evicted from the subject subdivision lots in 1974 by
virtue of a court order in Civil Case No. 293 and reinstated to the
possession thereof only in 1982. During the period, therefore, from
1974 to 1982, seller private respondent Angelina Echaus’ warranty
against eviction given to buyer petitioner was breached though,
admittedly, through no fault of her own. It follows that during that
period, 1974 to 1982, private respondent Echaus was not in a legal
position to demand compliance of the prestation of petitioner to pay
the price of said subdivision lots. In short, her right to demand
payment was suspended during that period, 1974-1982.
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The cause of action of private respondent Echaus is based on the deed
of sale aforementioned. The deed of sale whereby private respondent
Echaus transferred ownership of the subdivision lots was executed on
May 11, 1967. She iled Civil Case No. 1354 for recovery of title and
damages only on October 8, 1982. Deducting eight years (1974 to
1982) from the period 1967 to 1982, only seven years elapsed.
Consequently, Civil Case No. 1354 was iled within the 10-year
prescriptive period.
Agcaoili v. GSIS
GSIS sold a house to Agcaoili, and required him to immediately
occupy it under pain of cancellation of the sale. Under the
circumstances there can hardly be any doubt that the house
contemplated was one that could be occupied for purposes of
residence in reasonable comfort and convenience. There would be no
sense to require the awardee to immediately occupy and live in a
shell of a house, a structure consisting only of four walls with
openings, and a roof; and to theorize, as the GSIS does, that this was
what was intended by the parties, since the contract did not clearly
impose upon it the obligation to deliver a habitable house, is to
advocate an absurdity, the creation of an unfair situation. Since GSIS
did not ful ill that obligation, and was not willing to put the house in
habitable state, it cannot invoke Agcaoili's suspension of payment of
amortizations as cause to cancel the contract between them. It is
axiomatic that "(i)n reciprocal obligations, neither party incurs
in delay if the other does not comply or is not ready to comply
in a proper manner with what is incumbent upon him."
Bricktown Development Corp. v. Amor Tierra Development Corp.
The core issues herein are
(a) whether or not the contracts to sell were validly rescinded or
cancelled by petitioner corporation and, in the af irmative,
(b) whether or not the amounts already remitted by private
respondent under said contracts were rightly forfeited by
petitioner corporation.
The terms of payment agreed upon by the parties were not met by
private respondent. A notice of cancellation was ultimately made
months after the lapse of the contracted grace period.
A grace period is a right, not an obligation, of the debtor. When
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unconditionally conferred, such as in this case, the grace period is
effective without further need of demand either calling for the
payment of the obligation or for honoring the right. The grace period
must not be likened to an obligation, the non-payment of which,
under Article 1169 of the Civil Code, would generally still require
judicial or extrajudicial demand before “default” can be said to arise.
Verily, in the case at bench, the sixty-day grace period under the terms
of the contracts to sell became ipso-facto operative from the moment
the due payments were not met at their stated maturities. On this
score, the provisions of Article 1169 would ind no relevance.
The cancellation of the contracts to sell by petitioner corporation
accords with the contractual covenants of the parties, and such
cancellation must be respected. It may be noteworthy to add that in a
contract to sell, the non-payment of the purchase price (which is
normally the condition for the inal sale) can prevent the
obligation to convey title from acquiring any obligatory force.
While we must conclude that petitioner corporation still acted within
its legal right to declare the contracts to sell rescinded or cancelled, it
would be unconscionable to sanction the forfeiture by petitioner
corporation of payments made to it by private respondent.
Enriquez v. Ramos
The deed of sale with mortgage makes it the express duty of the
defendant-appellee to pay the realty taxes on the mortgaged lots, to
register the mortgaged estates, and to contribute P50,000 for the
construction of roads on the purchased lots. By its express terms, if
the defendant-appellee failed to ful ill these conditions her entire
obligation was to become immediately due and demandable and the
mortgagee would have the option to foreclose the mortgage. These
terms of the contract have the force of law between the parties
thereto.
Leaño v. CA
On the issue of whether petitioner Leañ o was in delay in paying the
amortizations, we rule that while the contract provided that the total
purchase price was payable within a ten-year period, the same
contract speci ied that the purchase price shall be paid in monthly
installments for which the corresponding penalty shall be imposed in
case of default. Petitioner Leañ o cannot ignore the provision on the
payment of monthly installments by claiming that the ten-year period
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
within which to pay has not elapsed.
Respondent Fernando performed his part of the obligation by
allowing petitioner Leañ o to continue in possession and use of the
property. Clearly, when petitioner Leañ o did not pay the monthly
amortizations in accordance with the terms of the contract, she was
in delay and liable for damages. However, we agree with the trial
court that the default committed by petitioner Leañ o in respect of the
obligation could be compensated by the interest and surcharges
imposed upon her under the contract in question.
Lee v. De Guzman, Jr.
Whether or not the decision rendered by the CA and af irmed by the
Supreme Court is capable of performance and can be judiciously
executed.
The question is, should respondent Motorcars be made liable to
ful ill a seemingly impossible obligation?
Heirs of Luis Bacus v. CA
It is well-settled that when after a judgment has become inal and
executory, facts and circumstances transpire which render its
execution impossible or unjust, the interested party may ask a
competent court to stay its execution or prevent its enforcement.
Unfortunately it is not possible for Motorcars to comply with the writ
of execution since admittedly, the then Delta Motors who
manufactured 1983 models of Toyota Liftback had already closed
shop, but be this as it may, there is no question that indeed there was
a perfected contract of sale between petitioner Lee and private
respondent Motorcars.
The relief left for petitioner Lee is that found under Article 1170.
There was therefore delay in the delivery of the subject vehicle which
entitles petitioner to be awarded damages.
Vermen Realty v. CA
Article 1191 provides the remedy of rescission in (more
appropriately, the term is “resolution”) in case of reciprocal
obligations, where one of the obligors fails to comply with what is
incumbent upon him.
The general rule is that rescission of a contract will not be
permitted for a slight or causal breach, but only for such
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substantial and fundamental breach as would defeat the very
object of the parties in executing the agreement.
Petitioner would never be able to ful ill its obligation in allowing
private respondent to exercise the option to transfer from Phase I to
Phase II, as the construction of Phase II has ceased and the subject
condominium units will never be available.
The impossibility of ful illment of the obligation on the part of
petitioner necessitates resolution of the contract for indeed, the
non-ful illment of the obligation aforementioned constitutes
substantial breach of the Offsetting Agreement. The possibility of
exercising the option of whether or not to transfer to condominium
units in Phase II was one of the factors which were considered by
private respondent when it entered into the agreement. Since the
construction of the Vermen Pines Condominium Phase II has stopped,
petitioner would be in no position to perform its obligation to give
private respondent the option to transfer to Phase II.
Obligations under an option to buy are reciprocal obligations. The
payment of the purchase price by the creditor is contingent upon the
execution and delivery of a deed of sale by the debtor. In this case,
when private respondents opted to buy the property, their obligation
was to advise petitioners of their decision and their readiness to pay
the price. They were not yet obliged to make actual payment. Only
upon petitioners' actual execution and delivery of the deed of sale
were they required to pay.
In Nietes v. CA, we held that notice of the creditor's decision to
exercise his option to buy need not be coupled with actual payment of
the price, so long as this is delivered to the owner of the property
upon performance of his part of the agreement. Consequently, since
the obligation was not yet due, consignation in court of the purchase
price was not yet required. In instances, where no debt is due and
owing, consignation is not proper. Therefore, petitioners' contention
that private respondents failed to comply with their obligation under
the option to buy because they failed to actually deliver the purchase
price or consign it in court before the contract expired and before they
execute a deed, has no leg to stand on.
Corollary, private respondents did not incur in delay when they did
not yet deliver payment nor make a consignation before the
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expiration of the contract. In reciprocal obligations, neither party
incurs in delay if the other does not comply or is not ready to comply
in a proper manner with what is incumbent upon him. Only from the
moment one of the parties ful ills his obligation, does delay by the
other begin.
Nacar v. Gallery Frames 2013 modi ied by
⭐Lara’s Gift and Decors v. Midtown Industrial Sales Aug 2019
The guidelines on the imposition of interest as provided in Eastern
Shipping Lines and Nacar are further modi ied for clarity and
uniformity, as follows:
With regard to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, goods, credits or judgments, the interest due shall
be that which is stipulated by the parties in writing,
provided it is not excessive and unconscionable.
2. In the absence of stipulated interest, in a loan or forbearance
of money, goods, credits or judgments, the rate of interest on
the principal amount shall be the prevailing legal interest
prescribed by the BSP.
For both Nos 1 and 2, the interest shall be computed from
default, i.e., from extrajudicial or judicial demand in
accordance with Article 1169 of the Civil Code, UNTIL
FULL PAYMENT, without compounding any interest unless
compounded interest is expressly stipulated by the parties,
by law or regulation.
Interest due on the principal amount accruing as of judicial
demand shall SEPARATELY earn legal interest at the
prevailing rate prescribed by the BSP, from the time of
judicial demand UNTIL FULL PAYMENT.
3. When the obligation, not constituting a loan or forbearance
of money, goods, credits or judgments, is breached, an
interest on the amount of damages awarded may be imposed
in the discretion of the court at the prevailing legal interest
prescribed by the BSP, pursuant to Articles 2210 and 2211
of the Civil Code.
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
No interest, however, shall be adjudged on unliquidated
claims or damages until the demand can be established with
reasonable certainty.
Accordingly, where the amount of the claim or damages is
established with reasonable certainty, the prevailing legal
interest shall begin to run from the time the claim is made
extrajudicially or judicially UNTIL FULL PAYMENT, but when
such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only
from the date of the judgment of the trial court UNTIL
FULL PAYMENT. The actual base for the computation of the
interest shall, in any case, be on the principal amount inally
adjudged, without compounding any interest unless
compounded interest is expressly stipulated by law or
regulation.
University of Pangasinan, Inc. v. Fernandez 2014
The CA properly imposed a legal interest upon the total monetary
award reckoned from the Entry of Judgment on July 11, 2005 until full
satisfaction thereof, but the Court modi ies the rate indicated in the
assailed decision to conform to the doctrine in Nacar.
In Nacar, during the execution proceedings, the LA, NLRC and the CA
did not impose a legal interest upon the total adjudged award.
Thereafter, this Court granted the petition iled before it by the
dismissed employee pleading for the imposition upon the monetary
award of the legal interest, which the Court declared to be 12% per
annum from the date of the Entry of Judgment on May 27, 2002 to
June 30, 2013, and 6% per annum from July 1, 2013 until their full
satisfaction.
Similarly, in the case of Florentino and Nilda, LA Gambito's decision
became inal and executory on July 11, 2005, during which time, the
prevailing rate of legal interest was 12%.
Republic v. Hon. Mupas 2015
Interest in eminent domain cases “runs as a matter of law and follows
as a matter of course from the right of the landowner to be placed in
as good a position as money can accomplish, as of the date of taking.”
The Government’s initial payment of just compensation does not
excuse it from avoiding payment of interest on the difference
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between the adjudged amount of just compensation and the initial
payment.
The initial payment scheme as a prerequisite for the issuance of the
writ of possession under RA 8974 only provides the Government
lexibility to immediately take the property for public purpose or
public use pending the court’s inal determination of just
compensation.
Contrary to the Government’s opinion, the interest award is not
anchored either on the law of contracts or damages; it is based
on the owner’s constitutional right to just compensation. The
difference in the amount between the inal payment and the initial
payment – in the interim or before the judgment on just compensation
becomes inal and executory – is not unliquidated damages which
do not earn interest until the amount of damages is established with
reasonable certainty. The difference between inal and initial
payments forms part of the just compensation that the property
owner is entitled from the date of taking of the property.
With respect to the amount of interest on just compensation, we
decisively ruled in Republic v. CA that the just compensation due to
the property owner is effectively a forbearance of money, and not
indemnity for damages.
Odiamar v. Valencia 2018
The Court notes that there are two (2) types of interest, namely,
monetary interest and compensatory interest.
Monetary interest is the compensation ixed by the parties for the
use or forbearance of money. On the other hand, compensatory
interest is that imposed by law or by the courts as penalty or
indemnity for damages. In other words, the right to recover interest
arises only either by virtue of a contract (monetary interest) or as
damages for the delay or failure to pay the principal loan on which the
interest is demanded (compensatory interest).
Anent monetary interest, it is an elementary rule that no interest
shall be due unless it has been expressly stipulated in writing. In
this case, no monetary interest may be imposed on the loan
obligation, considering that there was no written agreement expressly
providing for such.
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This notwithstanding, such loan obligation may still be subjected to
compensatory interest, following the guidelines laid down in Nacar
v. Gallery Frames.
Heirs of Jarque v. Jarque 2018
Since the obligation of P950.00 is a forbearance of money, the amount
of P950.00 shall earn interest from the time of demand in the
counterclaim. The awards of moral and exemplary damages and
attorney's fees shall earn interest at the rate of 6% per annum from
the time they became determinable, i.e., date of the MCTC Decision,
until inality of this judgment. The total amount shall thereafter earn
interest at the rate of 6% per annum from such inality of judgment
until its satisfaction.
(4) Contravention of Tenor of Obligations
Pacmac v. IAC
The main issue in the instant petition hinges on the actual business
relationship between PACMAC and VULCAN on August 3, 1965 when
the latter suddenly stopped deliveries of its products to the former.
The appellate court erred when it failed to consider the evidence
proving that the exclusive contract of distributorship between the
parties went beyond the expiration of the two year written contract
between the parties.
After the termination of the two-year written contract, the parties
agreed on another term regarding the duration of their distributorship
arrangement. They also agreed that the distributorship arrangement
would remain in full force until one year from and after notice of its
termination would have been given to PACMAC.
The inevitable conclusion, therefore, is that the parties’ contract of
exclusive distributorship arrangement was still in existence on
August 3, 1965 when VULCAN decided to stop deliveries of its
products to PACMAC. VULCAN's unilateral act of terminating the
contract without legal justi ication makes it liable for damages
suffered by PACMAC pursuant to Article 1170.
Llorente, Jr. v. Sandiganbayan
In jurisprudence, “undue injury” is consistently interpreted as “actual
damage.” Undue has been de ined as “more than necessary, not proper,
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
[or] illegal;” and injury as “any wrong or damage done to another,
either in his person, rights, reputation or property[;] [that is, the]
invasion of any legally protected interest of another.” Actual damage,
in the context of these de initions, is akin to that in civil law.
FGU Insurance Corp. v. G.P. Sarmiento Trucking
The law, recognizing the obligatory force of contracts, will not permit
a party to be set free from liability for any kind of misperformance of
the contractual undertaking or a contravention of the tenor thereof. A
breach upon the contract confers upon the injured party a valid cause
for recovering that which may have been lost or suffered. The remedy
serves to preserve the interests of the promisee that may include his
a) “expectation interest,” which is his interest in having the
bene it of his bargain by being put in as good a position as he
would have been in had the contract been performed, or his
b) “reliance interest,” which is his interest in being
reimbursed for loss caused by reliance on the contract by
being put in as good a position as he would have been in had
the contract not been made; or his
Austria v. CA
c) “restitution interest,” which is his interest in having
restored to him any bene it that he has conferred on the other
party.
The effect of every infraction is to create a new duty, that is, to
make recompense to the one who has been injured by the failure of
another to observe his contractual obligation unless he can show
extenuating circumstances, like proof of his exercise of due diligence
or of the attendance of fortuitous event, to excuse him from his
ensuing liability.
3. Effects of Fortuitous Events in Obligations
ART 1174. Except
a) in cases expressly speci ied by the law, or
b) when it is otherwise declared by stipulation, or
c) when the nature of the obligation requires the assumption
of risk,
Tugade v. CA
no person shall be responsible for those events which could
not be foreseen, or which, though foreseen, were inevitable.
Republic v. Luzon Stevedoring
By RGL
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Whether nor not the collision of appellant's barge with the supports
or piers of the Nagtahan bridge was in law caused by fortuitous event
or force majeure. NO.
Caso fortuito or force majeure by de inition, are extraordinary
events not foreseeable or avoidable, "events that could not be
foreseen, or which, though foreseen, were inevitable." It is, therefore,
not enough that the event should not have been foreseen or
anticipated, as is commonly believed but it must be one impossible
to foresee or to avoid. The very measures adopted by appellant
prove that the possibility of danger was not only foreseeable,
but actually foreseen, and was not caso fortuito.
Luzon Stevedoring Corporation, knowing and appreciating the perils
posed by the swollen stream and its swift current, voluntarily entered
into a situation involving obvious danger; it therefore assumed the
risk, and can not shed responsibility merely because the precautions
it adopted turned out to be insuf icient. Hence, the lower Court
committed no error in holding it negligent in not suspending
operations and in holding it liable for the damages caused.
Whether in a contract of agency (consignment of goods for sale) it is
necessary that there be prior conviction for robbery before the loss of
the article shall exempt the consignee from liability for such loss. NO.
A fortuitous event can be produced by nature, e.g., earthquakes,
storms, loods, etc., or by the act of man, such as war, attack by
bandits, robbery.
To avail of the exemption granted in the law, it is not necessary that
the persons responsible for the occurrence should be found or
punished; it would only be suf icient to establish that the
unforeseeable event, the robbery in this case, did take place without
any concurrent fault on the debtor's part, and this can be done by
preponderant evidence. To require in the present action for
recovery the prior conviction of the culprits in the criminal case, in
order to establish the robbery as a fact, would be to demand proof
beyond reasonable doubt to prove a fact in a civil case.
Tugade was charged with Reckless Imprudence Resulting in Damage
to Property. He pleaded not guilty and while admitting that the
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collision was caused by faulty brakes of his taxicab, sought to
exculpate himself with the explanation that this fault could not and
should not be traced to him.
As far as the record shows, the accident was caused either by defects
in the automobile or else through the negligence of its driver. That
is not a caso fortuito.
Southeastern College, Inc. v. CA
Whether the damage on the roof of the building of private
respondents resulting from the impact of the falling portions of the
school building’s roof ripped off by the strong winds of typhoon
“Saling”, was, within legal contemplation, due to fortuitous event.
YES.
There is no question that a typhoon or storm is a fortuitous event, a
natural occurrence which may be foreseen but is unavoidable despite
any amount of foresight, diligence or care. In order to be exempt from
liability arising from any adverse consequence engendered thereby,
there should have been no human participation amounting to a
negligent act.
In the present case, other than the said ocular inspection, no
investigation was conducted to determine the real cause of the partial
unroo ing of petitioner’s school building. Private respondents did not
even show that the plans, speci ications and design of said school
building were de icient and defective. Neither did they prove any
substantial deviation from the approved plans and speci ications. Nor
did they conclusively establish that the construction of such building
was basically lawed.
We thus hold that petitioner has not been shown negligent or at fault
regarding the construction and maintenance of its school building in
question and that typhoon “Saling” was the proximate cause of
the damage suffered by private respondents’ house.
Mindex Resources Development v. Morillo
Petitioner claims that the burning of the truck was a fortuitous event,
for which it should not be held liable pursuant to Article 1174.
Both the RTC and the CA found petitioner negligent and thus liable for
the loss or destruction of the leased truck. True, both parties may
have suffered from the burning of the truck; however, as found by
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
both lower courts, the negligence of petitioner makes it responsible
for the loss. Article 1667 of the Civil Code holds lessees responsible
for the deterioration or loss of the thing leased, unless they prove that
it took place without their fault.
Witness Alexander Roxas testi ied how petitioner fell short of
ordinary diligence in safeguarding the leased truck against the
accident, which could have been avoided in the irst place.
Herbosa v. CA
Petitioner spouses contracted the services of PVE for the betamax
coverage of their then forthcoming wedding celebration. Studio
manager of PVE, informed the petitioners that the videotape coverage
of their wedding celebration was damaged due to mechanical defect
in their equipment.
PVE disclaimed any liability for the damaged videotape by invoking
force majeure or fortuitous event and asserted that a defective
transistor caused the breakdown in its video tape recorder. However,
said respondent failed to substantiate its bare allegation by presenting
in evidence the alleged defective transistor before the trial court.
At any rate, in order that fortuitous event may exempt PVE from
liability, it is necessary that it be free from negligence. The record
shows, however, that the alleged malfunctioning of the video tape
recorder occurred at the beginning of the video coverage at the
residence of the bride. The PVE crew miserably failed to detect the
defect in the video tape recorder and that they discovered the same
rather too late after the wedding reception. There appeared to be no
valid reason why the alleged defect in the video tape recorder had
gone undetected.
FGU Insurance Corp v. CA
ANCO’s representatives failed to exercise the extraordinary degree of
diligence required by the law to exculpate them from liability for the
loss of the cargoes.
The barge D/B Lucio had no engine of its own and could not
maneuver by itself. Yet, the patron of ANCO’s tugboat M/T ANCO left
it to fend for itself notwithstanding the fact that as the two vessels
arrived at the port of San Jose, Antique, signs of the impending storm
were already manifest.
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The calamity which caused the loss of the cargoes was not
unforeseen nor was it unavoidable. In fact, the other vessels in the
port of San Jose, Antique, managed to transfer to another place. The
captain of the tugboat should have had the foresight not to leave the
barge alone considering the pending storm. The records clearly show
the failure of petitioners’ representatives to exercise the extraordinary
degree of diligence mandated by law. To be exempted from
responsibility, the natural disaster should have been the proximate
and only cause of the loss. There must have been no contributory
negligence on the part of the common carrier..
Schmitz Transport and Brokerage Corp. v. Transport Venture, Inc.
The principle embodied in the act of God doctrine strictly requires
that the act must be occasioned solely by the violence of nature.
Human intervention is to be excluded from creating or entering into
the cause of the mischief. When the effect is found to be in part the
result of the participation of man, whether due to his active
intervention or neglect or failure to act, the whole occurrence is then
humanized and removed from the rules applicable to the acts of
God.
That no tugboat towed back the barge to the pier after the cargoes
were completely loaded by 12:30 in the morning is, however, a
material fact which the appellate court failed to properly consider and
appreciate — the proximate cause of the loss of the cargoes. Had the
barge been towed back promptly to the pier, the deteriorating sea
conditions notwithstanding, the loss could have been avoided. But the
barge was left loating in open sea until big waves set in at 5:30 a.m.,
causing it to sink along with the cargoes. The loss thus falls outside
the “act of God doctrine.”
TVI’s failure to promptly provide a tugboat did not only
increase the risk that might have been reasonably anticipated
during the shipside operation, but was the proximate cause of
the loss.
This Court holds then that petitioner and TVI are solidarily liable for
the loss of the cargoes.
Sps Poon v. Prime Savings Bank 2016
The Civil Code uses rescission in two different contexts, namely:
(1) rescission on account of breach of contract under Article
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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. 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.
The closure of respondent's business was neither a fortuitous nor an
unforeseen event that rendered the lease agreement functus of icio.
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.
As an alternative justi ication for its premature termination of the
Contract, respondent lessee invokes the doctrine of unforeseen
event under Article 1267. Tagaytay Realty Co., Inc. v. Gacutan lays
down the requisites for the application of Article 1267, as follows:
1. The event or change in circumstance could not have been
foreseen at the time of the execution of the contract.
2. It makes the performance of the contract extremely dif icult
but not impossible.
3. It must not be due to the act of any of the parties.
4. The contract is for a future prestation.
The dif iculty of performance should be such that the party seeking to
be released from a contractual obligation would be placed at a
disadvantage by the unforeseen event.
The law speaks of "service." This term should be understood as
referring to the performance of an obligation or a prestation. In a
reciprocal contract such as the lease in this case, one obligation of
respondent as the lessee was to pay the agreed rents for the whole
contract period. It would be hard-pressed to complete the lease term
since it was already out of business only three and a half years into
the 10-year contract period. Without a doubt, the second and the
fourth requisites mentioned above are present in this case.
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
The irst and the third requisites, however, are lacking. It must be
noted that the lease agreement was for 10 years. The closure of
respondent's business was not an unforeseen event. As the lease was
long-term, it was not lost on the parties that such an eventuality
might occur, as it was in fact covered by the terms of their Contract.
Besides, as We have previously discussed, the event was not
independent of respondent's will.
4. Usurious Transactions; Interests
ART 1175. Usurious transactions shall be governed by special
laws.
Security Bank and Trust Co. v. RTC of Makati
The sole issue to be settled in this petition is whether or not the 23%
rate of interest per annum agreed upon by petitioner bank and
respondents is allowable and not against the Usury Law.
CB Circular No. 905 did not repeal nor in anyway amend the Usury
Law but simply suspended the latter’s effectivity.
The rate of interest was agreed upon by the parties freely.
Signi icantly, respondent did not question that rate. It is not for
respondent court a quo to change the stipulations in the contract
where it is not illegal. We ind no valid reason for the respondent
court a quo to impose a 12% rate of interest on the principal balance
owing to petitioner by respondent in the presence of a valid
stipulation. In a loan or forbearance of money, the interest due should
be that stipulated in writing, and in the absence thereof, the rate shall
be 12% per annum. Hence, only in the absence of a stipulation can
the court impose the 12% rate of interest.
Sps Solangon v. Salazar
In the case at bench, petitioners are required to pay the stipulated
interest rate of 6% per month or 72% per annum which is de initely
outrageous and inordinate. Surely, it is more consonant with justice
that the said interest rate be reduced equitably. An interest of 12%
per annum is deemed fair and reasonable.
Cuaton v. CA
Whether the 8% and 10% monthly interest rates imposed on the
one-million-peso loan obligation of petitioner to respondent Rebecca
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Salud are valid.
NO. The reduction of said rates to 12% per annum is fair and
reasonable.
Integrated Realty Corp. v. PNB
We ind nothing illegal in the interest of one and one-half percent
(1 1/2%) imposed by PNB pursuant to the resolution of its Board
which presumably was done in accordance with ordinary banking
procedures. Not only did IRC and Santos fail to overcome the
presumption of regularity of business transactions, but they are
likewise estopped from questioning the validity thereof for the irst
time in this petition. There is nothing in the records to show that they
raised this issue during the trial by presenting countervailing
evidence.
David v. CA
Article 2212 contemplates the presence of stipulated or
conventional interest which has accrued when demand was
judicially made. In cases where no interest had been stipulated by the
parties, as in the case of Philippine American Accident Insurance, no
accrued conventional interest could further earn interest upon judicial
demand.
In the said case, we further held that when the judgment sought to be
executed ordered the payment of simple “legal interest” only and said
nothing about payment of compound interest, but the respondent
judge orders payment of compound interest, then, he goes beyond the
con ines of a judgment which had become inal.
PNB v. CA
When an obligation arises "from a contract of purchase and sale
and not from a contract of loan or mutuum," the applicable rate is
"6% per annum as provided in Article 2209 of the NCC and not the
rate of 12% per annum as provided in (CB) Cir. No. 416."
The proper rate of interest referred to in the judgment under execution
is only 6%. This interest according to Eastern Shipping shall be
computed from the time of the iling of the complaint considering
that the amount adjudged (P98,691.90) can be established with
reasonable certainty. Said amount being merely the uncollected
balance of the purchase price covered by the 23 checks encashed and
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appropriated by Ibarrola’s agents. However, once the judgment
becomes inal and executory, the "interim period from the inality
of judgment awarding a monetary claim and until payment
thereof, is deemed to be equivalent to a forbearance of credit."
Thus, in accordance with the pronouncement in Eastern Shipping, the
rate of 12% p.a. should be imposed, and to be computed from the
time the judgment became inal and executory until fully satis ied.
The actual base for the computation of this 12% interest after the
judgment in this damage suit became inal shall be the amount
adjudged (P98,691.90).
Eastern Shipping Lines, Inc. v. CA see Lara’s Gift and Decors v.
Midtown Industrial Sales
Almeda v. Cariño
In accordance with our decision in Eastern Shipping Lines, Inc. v.
CA, when the judgment of the court awarding the sum of money
becomes inal and executory, a 12% legal interest per annum shall
also be imposed from such inality until satisfaction thereof, this
interim period being deemed to be by then an equivalent to a
forbearance of credit.
Siga-an v. Villanueva, supra
Interest is a compensation ixed by the parties for the use or
forbearance of money. This is referred to as monetary interest.
Interest may also be imposed by law or by courts as penalty or
indemnity for damages. This is called compensatory interest. The
right to interest arises only by virtue of a contract or by virtue of
damages for delay or failure to pay the principal loan on which
interest is demanded.
Article 1956 of the Civil Code, which refers to monetary interest,
speci ically mandates that no interest shall be due unless it has
been expressly stipulated in writing. As can be gleaned from the
foregoing provision, payment of monetary interest is allowed only if:
(1) there was an express stipulation for the payment of interest;
and
(2) the agreement for the payment of interest was reduced in
writing.
Petitioner and respondent did not agree on the payment of interest for
the loan. Neither was there convincing proof of written agreement
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
between the two regarding the payment of interest.
There are instances in which an interest may be imposed even in the
absence of express stipulation, verbal or written, regarding payment
of interest.
(1) Article 2209 states that if the obligation consists in the
payment of a sum of money, and the debtor incurs delay, a
legal interest of 12% per annum may be imposed as
indemnity for damages if no stipulation on the payment of
interest was agreed upon.
(2) Article 2212 provides that interest due shall earn legal
interest from the time it is judicially demanded, although the
obligation may be silent on this point.
All the same, the interest under these two instances may be imposed
only as a penalty or damages for breach of contractual
obligations. It cannot be charged as a compensation for the use or
forbearance of money. In other words, the two instances apply only
to compensatory interest and not to monetary interest. The case
at bar involves petitioner's claim for monetary interest.
Asiatrust Development Bank v. Tuble 2012
Whether or not the bank is entitled to include these items in the
redemption price: (1) the interest charges on Promissory Note No.
0142; and (2) the 18% annual interest on the bid price of P421,800.
The bank included numerous charges and loans in the redemption
price, which inexplicably ballooned to P1,318,401.91. On this error
alone, the claims of petitioner covering all the additional charges
should be denied. Thus, considering the undue inclusions of the
additional charges, the bank cannot impose the 18% annual interest
on the redemption price.
In any event, assuming that the Real Estate Mortgage Contract
subsists, we rule that the dragnet clause therein does not justify
the imposition of an 18% annual interest on the redemption
price.
In addition to the 18% annual interest, the bank also claims a 12%
interest per annum on the consumption loan. A default must exist
before the bank can collect the compensatory legal interest of 12%
per annum. Based on the indings of the RTC and the CA, the
obligation of Tuble as evidenced by Promissory Note No. 0142, was
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set to mature on 1 January 1999. But then, he had already settled his
liabilities on 17 March 1997 by paying P1,318,401.91 as redemption
price. Thus, Tuble is NOT in default.
Sps Bonrostro v. Sps Luna 2013
Article 1191 cannot be applied to sales of real property on
installment since they are governed by the Maceda Law.
Tender of payment is the manifestation by the debtor of a desire to
comply with or pay an obligation. If refused without just cause, the
tender of payment will discharge the debtor of the obligation to pay
but only after a valid consignation of the sum due shall have been
made with the proper court.
Consignation is the deposit of the proper amount with a judicial
authority in accordance with rules prescribed by law, after the tender
of payment has been refused or because of circumstances which
render direct payment to the creditor impossible or inadvisable.
The spouses Bonrostro erroneously assumed that their notice to pay
would excuse them from paying interest. Their claimed tender of
payment did not produce any effect whatsoever because it was not
accompanied by actual payment or followed by consignation. Hence,
it did not suspend the running of interest. The spouses Bonrostro are
therefore liable for interest on the subject installments from the date
of default until full payment.
5. Presumptions
ART 1176. The receipt of the principal by the creditor without
reservation with respect to the interest, shall give rise to the
presumption that said interest has been paid.
The receipt of a later installment of a debt without reservation
as to prior installments, shall likewise raise the presumption
that such installments have been paid.
Manila Trading & Supply Co. v. Medina
Appellant avers that the genuine receipts dated January, 1957 raise the
presumption that prior installments were paid. This might be true if
such receipts recited that they were issued for the installments
corresponding to the month of January, 1957; but nowhere does that
fact appear. And even if such recital had been made, the resulting
presumption would only be prima facie, and the evidence before
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Or action to rescind that must be of last resort, availed of only after

us is clear that the payments made do not correspond to the Petitioner argues that assuming arguendo that a contract of sale was
all other legal remedies have been exhausted and have been proven
installment falling due on the dates of the genuine receipts. entered into, it was not consummated as the entire purchase price
futile. For an accion pauliana to accrue, the following requisites
was not paid. Assuming that to be so albeit, by the Deed in question
must concur:
Ledesma v. Realubin petitioner acknowledged receipt of the P8,000.00 purchase price, it
1) That the plaintiff asking for rescission, has a credit prior to does not by itself bar the transfer of the ownership or possession of
Invoking Article 1176, petitioner claims that in as much as she
the alienation, although demandable later; the property, much less dissolve the contract of sale. The contract
admittedly paid her October, 1956 purchase, it is to be presumed that
remains but the payment of the price is a resolutory condition, and
her prior purchases were likewise paid, because her account with the 2) That the debtor has made a subsequent contract conveying
the remedy of the seller is to exact ful illment or, in case of a
respondent was a running account. We cannot agree. Realubin proved a patrimonial bene it to a third person;
substantial breach, to rescind the contract under Article 1191.
as a fact that the prior purchases were not paid, and that the October
3) That the creditor has no other legal remedy to satisfy his
purchases were for cash.
claim, but would bene it by rescission of the conveyance Lim v. CA
Therefore, the presumption of payment of prior obligations assuming to the third person;
Whether as a result of private respondent’s failure to eject the
its applicability for argument's sake cannot prevail. Between a proven 4) That the act being impugned is fraudulent; squatters from the land, petitioners lost the right to demand that the
fact and a presumption pro tanto, the former stands, and the latter land be sold to them. We hold that they did not and that the appellate
falls. 5) That the third person who received the property conveyed,
court erred in holding otherwise.
if by onerous title, has been an accomplice in the fraud.
6. Remedies of Creditors for Breach of Obligations An accion pauliana thus presupposes the following: It is true that private respondent undertook to eject the squatters
before the delivery of the property within a certain period and that for
(1) Extrajudicial Remedies; 1) A judgment; her failure to carry out her obligation she could be ordered to refund
(2) Judicial Remedies 2) the issuance by the trial court of a writ of execution for the the earnest money. But whether she would be obliged to do so
satisfaction of the judgment, and depends on petitioners who can waive the condition and opt to
a. Principal Remedies proceed with the sale instead.
3) the failure of the sheriff to enforce and satisfy the judgment
1. Speci ic Performance, Substitute Performance; of the court. Private respondent fails to distinguish between a condition imposed
Equivalent Performance (1165; 1167; 1168; 1170)
Siy v. CA on the perfection of the contract and a condition imposed on the
2. Rescission (Resolution) (1191) performance of an obligation. Failure to comply with the irst
The technical argument that the respondents never prayed for the condition results in the failure of a contract, while failure to comply
b. Subsidiary Remedies rescission of the contracts and that the trial court and the appellate with the second condition only gives the other party the option either
1. Acción subrogatoria; court should never have rescinded the same has no merit. to refuse to proceed with the sale or to waive the condition.
Furthermore, by failing to pay the amount of P12,000.00 and the
2. Accion pauliana. balance of P4,376.00 as stipulated in the contract within the forty- ive In this case, there is already a perfected contract. The condition was
c. Ancillary Remedies (replevin, attachment, garnishment, etc.) (45) days period, the petitioner clearly committed a breach of imposed only on the performance of the obligation. Hence,
contract which suf iciently and justly entitled the respondents to ask petitioners have the right to choose whether to demand the return of
Accion Subrogatoria for the rescission of the contracts. earnest money or to proceed with the sale. They have chosen to
ART 1177. The creditors, after having pursued the property in proceed with the sale and private respondent cannot refuse to do so.
Breach of contract entitles the complainant the right to rescind the
possession of the debtor to satisfy their claims, may exercise
contract OR to ask for its speci ic performance, in either case with In any case, private respondent’s action for rescission is not
all the rights and bring all the actions of the latter for the same
right to demand damages. In the case at bar, respondents chose to warranted. She is not the injured party. The right of resolution of
purpose, save those which are inherent in his person; they may
rescind the contracts after the petitioner repeatedly failed to pay not a party to an obligation under Article 1191 of the Civil Code is
also impugn the acts which the debtor may have done to
only the balance but the initial amount as downpayment in predicated on a breach of faith by the other party that violates
defraud them.
consideration of which the contracts or agreements were executed. the reciprocity between them. It is private respondent who has failed
Accion Pauliana in her obligation under the contract.
Molina v. CA
Deiparine, Jr. v. CA

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Deiparine did not deal with the Carungays in good faith. His breach of
this duty constituted a substantial violation of the contract
correctible by judicial rescission.
Article 1191 was correctly applied by the lower courts because it
relates to contracts involving reciprocal obligations like the subject
construction contract. The construction contract falls squarely under
the coverage of Article 1191 because it imposes upon Deiparine the
obligation to build the structure and upon the Carungays the
obligation to pay for the project upon its completion.
Article 1191, unlike Article 1385, is not predicated on economic
prejudice to one of the parties but on breach of faith by one of
them that violates the reciprocity between them. The violation of
reciprocity between Deiparine and the Carungay spouses, to wit, the
breach caused by Deiparine's failure to follow the stipulated plans
and speci ications, has given the Carungay spouses the right to
rescind or cancel the contract.
While it is true that the stress test was not required in any of the
contract documents, conducting the test was the only manner by
which the owner could determine if the contractor had been faithfully
complying with his prestations under their agreement. When the
structure failed under this test, the Carungay spouses were left with
no other recourse than to rescind their contract.
Sps Velarde v. CA
A substantial breach of a reciprocal obligation, like failure to
pay the price in the manner prescribed by the contract, entitles
the injured party to rescind the obligation. Rescission
abrogates the contract from its inception and requires a mutual
restitution of bene its received.
Petitioners did not perform their correlative obligation of paying the
contract price in the manner agreed upon. Worse, they wanted private
respondents to perform obligations beyond those stipulated in the
contract before ful illing their own obligation to pay the full purchase
price.
Private respondents' right to rescind the contract inds basis in
Article 1191. The breach contemplated in the said provision is the
obligor's failure to comply with an existing obligation.
True, petitioners expressed their willingness to pay the balance of the
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
purchase price one month after it became due; however, this was not
equivalent to actual payment as would constitute a faithful
compliance of their reciprocal obligation.
The breach committed by petitioners was the nonperformance of a
reciprocal obligation, not a violation of the terms and conditions of
the mortgage contract. Therefore, the automatic rescission and
forfeiture of payment clauses stipulated in the contract does not
apply. Instead, Civil Code provisions shall govern and regulate the
resolution of this controversy.
Considering that the rescission of the contract is based on Article
1191, mutual restitution is required to bring back the parties
to their original situation prior to the inception of the contract.
Campos Assets Corp. v. Club X.O. Company
In the case at bar, we ind that although Paragraph VI of the
Memorandum of Agreement employs the prefatory words "in case the
premises shall be deserted or vacated before the expiration of the
Agreement", which would restrict the operation of the clause to
situations wherein the premises are in fact vacated already, and
would therefore imply that the re-entry with the use of force if at all,
is against property only, the stipulation would not proscribe re-taking
by use of force against persons despite the fact that the premises are
still in the actual possession of another, albeit under a questioned
right. Moreover, there is no requirement of notice before re-entry.
Jurisprudence supports the view that when parties to a contract
expressly reserve an option to terminate or rescind a contract upon
the violation of a resolutory condition, notice of resolution must be
given to the other party when such right is exercised.
PNCC v. Mars Construction Enterprises, Inc.
Unilateral rescission of a contract is subject to judicial
determination. Contractual stipulations should be interpreted
together. Ambiguous ones should be construed to conform to
the sense that would result when all the provisions are
comprehended jointly. Moreover, doubts should be settled in
favor of the greatest reciprocity of interests.
By saying that the quantity speci ied in the letter was its last order,
petitioner unilaterally amended its Contract with the respondent. The
act of treating a contract as cancelled or rescinded on account of
infractions by the other contracting party is always provisional; that
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is, contestable and subject to judicial determination. Judicial action
is necessary for its rescission in order to afford the other party
an opportunity to be heard and to determine if the rescission
was proper. When the herein petitioner resolved or rescinded the
Agreement without previous court action, it proceeded at its own
risk. Only the inal judgment of a court will conclusively and inally
settle whether such recourse was correct in law.
When the petitioner exercised its options in case of delay or default
on the part of the respondent, the former waived its right to rescind
and was thus estopped from rescinding the Contract by reason of such
short delivery.
DBP v. CA
Private respondents applied for an injunction in order to prevent
petitioner DBP from rescinding the sale and selling the land to other
interested buyers. They are entitled to such writ because petitioner
DBP had no right to rescind the sale and deprive them of any right of
possession over the property.
In the irst place, there was no substantial breach in the performance
of private respondents' obligation. Rescission of a contract will not
be permitted for a slight or casual breach, but only such
substantial and fundamental breach as would defeat the very
object of the parties in making the agreement. Private
respondents made regular payments to petitioner DBP. Their fault
consisted only of their failure to pay the installments on the dates
stipulated in the contract, for which they were charged additional
interests and penalty charges. In the second place, private
respondents stopped their payments to the DBP only after they had
paid P289,600.00 because of their belief that they had already
complied with their obligation to petitioner. Lastly, notwithstanding
private respondents' delay in paying the amortizations, petitioner
DBP unquali iedly accepted the payments made by them. Hence,
petitioner lost its right to rescind the sale on the basis of such late
payments.
Central Bank v. Bichara
The law speaks of the right of the "injured party" to choose between
rescission or ful illment of the obligation, with the payment of
damages in either case. Respondents aver that they are entitled to
cancel the obligation altogether in view of petitioner's failure to pay
the purchase price when the same became due. Petitioner disputes
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respondent's stand, claiming that if anyone was at fault, it was the
latter who dismally failed to comply with their contractual
obligations. Hence, it was entitled to withhold payment of the
purchase price.
The deed of sale expressly stipulated that the vendors were to
undertake, at their expense, the illing up of the lots with escombro
free from waste material compacted to the street level. This was to be
accomplished upon the signing of the contract and insofar as
petitioner was concerned, respondents' obligation was demandable at
once. Other than his testimony, Alfonso Bichara offered no proof
tending to show that he had complied in the manner agreed upon.
Although he did state that he saw no need to comply with the
stipulation because the parcels of land were already level with the
street, it was still not shown that the same were in a condition
suitable for the construction of petitioner's regional of ice.
Heirs of the late Justice J.B.L. Reyes v. CA
The crux of the case is whether there was a need for judicial
rescission of the contract of lease before respondent MMB, Inc. may
be compelled to move out of the leased premises.
We rule that there is no need for a judicial rescission of the lease
contract between lessors heirs of Justice J.B.L. Reyes, et al. and lessee
MMB, Inc.
We have ruled that "there is nothing wrong if the parties to a lease
contract agreed on certain mandatory provisions concerning their
respective rights and obligations, such as the procurement of the
insurance and the rescission clause. This is what petitioners and
respondent entered into, a lease contract with stipulation that the
contract is rescinded upon violation of its substantial provisions,
which MMB, Inc. does not deny they violated.
Sps Pangilinan v. CA
Article 1592, requiring demand by suit or by notarial act in case the
vendor of realty wants to rescind, does not apply to a contract to sell
but only to contract of sale.
The applicable provision of law in instant case is Article 1191. The
law makes it available to the injured party alternative remedies such
as the power to rescind or enforce ful illment of the contract, with
damages in either case if the obligor does not comply with what is
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
incumbent upon him. There is nothing in this law which prohibits the
parties from entering into an agreement that a violation of the terms
of the contract would cause its cancellation even without court
intervention. The rationale for the foregoing is that in contracts
providing for automatic revocation, judicial intervention is necessary
not for purposes of obtaining a judicial declaration rescinding a
contract already deemed rescinded by virtue of an agreement
providing for rescission even without judicial intervention, but in
order to determine whether or not the rescission was proper. Where
such propriety is sustained, the decision of the court will be merely
declaratory of the revocation, but it is not itself the revocatory act.
Sps Lim v. CA
As the Court sees it, the real issue is not whether the petitioners acted
in good faith but whether there was in fact a prior sale of the same
property to the private respondents. Only if it is established that there
was indeed a double sale of the property will it be necessary to
ascertain if Article 1544 is applicable.
It is true that the contract to sell imposes reciprocal obligations and
so cannot be terminated unilaterally by either party. Judicial
rescission is required under Article 1191 of the Civil Code. However,
this rule is not absolute. We have held that in proper cases, a party
may take it upon itself to consider the contract rescinded and act
accordingly albeit subject to judicial con irmation, which may or may
not be given. It is true that the rescinding party takes a risk that its
action may not be approved by the court.
Goldenrod, Inc. v. CA
In the absence of a speci ic stipulation, may the seller of real estate
keep the earnest money to answer for damages in the event the sale
fails due to the fault of the prospective buyer?
We sustain petitioner. Under Art. 1482 of the Civil Code, whenever
earnest money is given in a contract of sale, it shall be considered as
part of the purchase price and as proof of the perfection of the
contract. Petitioner clearly stated without any objection from private
respondents that the earnest money was intended to form part of the
purchase price. It was an advance payment which must be deducted
from the total price. Hence, the parties could not have intended that
the earnest money or advance payment would be forfeited when the
buyer should fail to pay the balance of the price, especially in the
absence of a clear and express agreement thereon. By reason of its
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failure to make payment petitioner, through its agent, informed
private respondents that it would no longer push through with the
sale. In other words, petitioner resorted to extrajudicial rescission of
its agreement with private respondents.
In UP v. de los Angeles, the right to rescind contracts is not absolute
and is subject to scrutiny and review by the proper court. We held
further, in the more recent case of Adelfa Properties, Inc. v. CA, that
rescission of reciprocal contracts may be extrajudicially rescinded
unless successfully impugned in court. If the party does not oppose
the declaration of rescission of the other party, specifying the grounds
therefor, and it fails to reply or protest against it, its silence thereon
suggests an admission of the veracity and validity of the rescinding
party's claim.
By virtue of the extrajudicial rescission of the contract to sell by
petitioner without opposition from private respondents who, in turn,
sold the property to other persons, private respondent BARRETTO
REALTY, as the vendor, had the obligation to return the earnest
money plus legal interest from the date it received notice of
rescission from petitioner up to the date of the return or payment.
C. Kinds of Obligations
Pure and Conditional
Pure obligations
ART 1179. Every obligation whose performance does not
depend upon a future or uncertain event, or upon a past event
unknown to the parties, is demandable at once.
Every obligation which contains a resolutory condition shall
also be demandable, without prejudice to the effects of the
happening of the event.
Pure obligation is one which is not subject to any condition and no
speci ic date is mentioned for its ful illment and is, therefore,
immediately demandable.
Obligation immediately demandable when it is:
1. Pure (Art 1179[1]);
2. Subject to a resolutory condition (Art 1179[2]); or
3. Subject to a resolutory period (Art 1193[2]).
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Conditional obligations Depends partly upon chance and partly ➔ Potestative — Suspensive in nature and which depends upon
Mixed
upon the will of a 3rd person the sole will of one of the contracting parties.
ART 1181. In conditional obligations, the acquisition of rights,
as well as the extinguishment or loss of those already acquired, ➔ Casual — If the suspensive condition depends upon chance or
Positive Consists in the performance of an act
shall depend upon the happening of the event which Mode upon the will of a third person, the obligation subject to it is
constitutes the condition. Negative Consists in the omission of an act VALID.

A condition is a future and uncertain event, upon the happening ➔ Mixed — VALID if the suspensive condition depends partly
There are several conditions and all upon chance and partly upon the will of a third person.
of which, the effectivity or extinguishment of an obligation (or Conjunctive
must be ful illed
rights) subject to it depends. 3. Impossible conditions — Kinds:
Number
➔ It may refer to a past event unknown to the parties. If it refers to There are several conditions and at (a) Physically — when they, in the nature of things, cannot exist or
Disjunctive
a future event, its very occurrence and the time must be least one must be ful illed cannot be undone; and
uncertain; otherwise, it is not a condition.
Divisible Susceptible of partial performance (b) Legally — when they are contrary to law, morals, good
➔ What is contemplated here is the knowledge to be acquired in Divisibility customs, public order, or public policy.
the future of a past event which at the moment is unknown to Indivisible Not susceptible of partial performance
the parties. This knowledge determines whether to obligation Effects:
will arise or not. b. Kinds of conditional obligations (a) Conditional obligation VOID — Obligor has no intention to
➔ It must not be impossible (Art 1183). comply with his obligation knowing it cannot be ful illed. Rule
1. Suspensive and resolutory
is different in conditional testamentary dispositions.
a. Classi ication of Conditions
Suspensive Resolutory (b) Conditional obligation VALID — If negative condition, i.e. not
Its happening gives rise to the (precedent or antecedent) (subsequent) to do, it is disregarded, rendering the obligation pure and valid.
Suspensive
obligation (c) Only the affected obligation VOID — If divisible obligation, the
Effect Its ful illment will give rise to an Its ful illment will extinguish an
part not affected by the impossible condition is valid.
Its happening extinguishes the obligation obligation already existing.
Resolutory (d) Only the condition VOID — If the obligation is pre-existing,
obligation
If it does not take place, the tie of If it does not take place, tie of and, therefore, does not depend upon the ful illment of the
Express Is clearly stated law does not appear law is consolidated impossible condition, for its existence, only the condition is
Form void.
Implied Merely inferred Acquisition of rights - Until it Loss of rights already acquired -
takes place, existence of Its effect low, but over it, hovers 4. Positive and negative conditions
Capable of ful illment, legally and obligation a mere hope the possibility of termination.
Possible
physically ART 1184. The condition that some event happen at a
Possibility Demandability of the obligation determinate time shall extinguish the obligation as soon as
Not capable of ful illment, legally and is suspended until its happening a) the time expires or
Impossible
physically
2. Potestative, casual and mixed b) if it has become indubitable that the event will not
Depends upon the will of one of the take place.
Potestative ART 1182. When the ful illment of the condition depends upon
contracting parties ART 1185. The condition that some event will not happen at a
the sole will of the debtor, the conditional obligation shall be
Cause/ VOID. If it depends upon chance or upon the will of a third determinate time shall render the obligation effective from
Origin Depends upon chance or upon the will
Casual person, the obligation shall take effect in conformity with the
of a third person a) the moment the time indicated has elapsed, or
provisions of this Code.
b) if it has become evident that the event cannot occur.

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a matter of fact or of law (e.g. a property is lost through

If no time has been ixed, the condition shall be deemed ⭐ART 1189. When the conditions have been imposed with the
prescription). (Art 1262).
ful illed at such time as may have probably been contemplated, intention of suspending the ef icacy of an obligation to give, the
bearing in mind the nature of the obligation. following rules shall be observed in case of the improvement, Deterioration occurs when the value of a thing is reduced or impaired
loss or deterioration of the thing during the pendency of the with or without the fault of the debtor.
c. Constructive ful ilment
condition: Improvement occurs when the value of a thing is increased or
ART 1186. The condition shall be deemed ful illed when the enhanced by nature or time, or at the expense of the debtor or creditor
(1) If the thing is lost without the fault of the debtor, the
obligor voluntarily prevents its ful illment. (Art 1187).
obligation shall be extinguished;
This provision refers to the constructive ful illment of a suspensive
(2) If the thing is lost through the fault of the debtor, he
condition, whose application calls for two requisites, namely: without Obligation is extinguished; debtor
shall be obliged to pay damages; it is understood that
(a) the intent of the obligor to prevent the ful illment of the the thing is lost when it perishes, or goes out of debtor’s fault not liable.
condition, AND commerce, or disappears in such a way that its Loss
existence is unknown or it cannot be recovered; with debtor’s Creditor entitled to demand
(b) the ACTUAL prevention of the ful illment. dault damages (Art 1170)
(3) When the thing deteriorates without the fault of the
Mere intention of the debtor to prevent the happening of the condition,
debtor, the impairment is to be borne by the creditor; without
or to place ineffective obstacles to its compliance, without actually Creditor suffers the impairment.
debtor’s fault
preventing the ful illment, is insuf icient. (4) If it deteriorates through the fault of the debtor, the
creditor may choose between the rescission of the Deterioration
d. Ful illment of obligations Creditor may choose between
obligation and its ful illment, with indemnity for with debtor’s
rescission or ful illment of the
ART 1187. The effects of a conditional obligation to give, once damages in either case; dault
obligation, with damages.
the condition has been ful illed, shall retroact to the day of (5) If the thing is improved by its nature, or by time, the
the constitution of the obligation. Nevertheless, when the improvement shall inure to the bene it of the creditor; By nature or Shall inure to the bene it of the
obligation imposes reciprocal prestations upon the parties, time creditor.
the fruits and interests during the pendency of the condition (6) If it is improved at the expense of the debtor, he shall
shall be deemed to have been mutually compensated. If the have no other right than that granted to the Debtor will have the right granted
obligation is unilateral, the debtor shall appropriate the fruits usufructuary Improvement
to a usufructuary with respect to
and interests received, unless from the nature and At debtor’s
Requisites for Art 1189 to apply improvements made on the thing
circumstances of the obligation it should be inferred that the expense
held in usufruct. (see Arts 562,
intention of the person constituting the same was different. 1. Real obligation; 579, 580).
In obligations to do and not to do, the courts shall 2. Object is speci ic or determinate;
g. Resolutory Conditions
determine, in each case, the retroactive effect of the condition 3. Obligation subject to suspensive condition;
that has been complied with. ART 1190. When the conditions have for their purpose the
4. Condition is ful illed; and
e. Preservation of Rights extinguishment of an obligation to give, the parties, upon the
5. There is loss, deterioration, or improvement of the thing during ful illment of said conditions, shall return to each other what
ART 1188. The creditor may, before the ful illment of the the pendency of the happening on one condition. they have received.
condition, bring the appropriate actions for the preservation of
Kinds of loss In case of the loss, deterioration or improvement of the thing,
his right.
the provisions which, with respect to the debtor, are laid down
1. Physical — when a thing perishes, i.e. house is burned; or
The debtor may recover what during the same time he has paid in the preceding article shall be applied to the party who is
by mistake in case of a suspensive condition. 2. Legal — a thing goes out of commerce or when it heretofore bound to return.
legal becomes illegal; or
f. Rules in case of Loss, Deterioration, or Improvement As for the obligations to do and not to do, the provisions of the
3. Civil — it disappears in such a way that its existence is second paragraph of article 1187 shall be observed as regards
unknown; or even if known, it cannot be recovered, whether as the effect of the extinguishment of the obligation.

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Effect of ful illment of resolutory condition
a) In obligations to give — Obligation is extinguished and both
parties are obliged to return to each other what they have
received under the obligation.
i. There is a return to status quo. Thus, the effect is
retroactive.
ii. Mutual restitution of the thing and its fruits absolute.
iii. In case the thing to be returned is legally in possession
of a third person acting in good faith (Art 1384[2]), the
remedy of the party entitled to restitution is against
the other (not the third person).
iv. If subject to suspensive condition, retroactive only
when the nature and circumstances in unilateral
obligation infer it to be so.
v. If the condition is not ful illed, the rights acquired by a
party become vested.
b) In obligations to do or not to do — Courts shall determine the
retroactive effect of the ful illment of the condition, may it be
resolutory or suspensive.
h. Rescission in Reciprocal Obligations
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 ful illment and the
rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has
chosen ful illment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be
just cause authorizing the ixing 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.
ART 1192. In case both parties have committed a breach of the
obligation, the liability of the irst infractor shall be equitably
tempered by the courts. If it cannot be determined which of the
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
parties irst violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages.
Kinds of obligation according to the person obliged
(1) Unilateral — only one party is obliged with a prestation.
(2) Bilateral — Both parties are mutually bound to each other.
Both are creditors and debtors.
(a) Reciprocal — arise from the same cause. The performance
of one party of his obligation is the equivalent and the
condition to the performance by the other of his own
obligation. General rule: to be performed simultaneously.
Non-ful illment gives a party the right to demand
rescission even if it is not provided in the agreement.
(b) Non-reciprocal — do not impose simultaneous and
correlative performance on both parties. Performance of
one party is not dependent upon the simultaneous
performance by the other.
Choice of remedy in reciprocal obligations
(1) Should there be breach of the obligation, the aggrieved party
may choose between an action for rescission or for speci ic
performance, with damages.
(2) Breach is the obligor’s failure to comply with an existing
obligation, not a failure of a condition to render binding the
obligation.
(3) General rule: previous demand required before the obligor can
be considered in default.
Remedy of rescission
➔ To put an end to the contract in all its parts as though it never
were.
➔ When a party demands rescission he, in effect, treats the
non-ful illment by the other party of his obligation as a
resolutory condition.
Breach of obligation on part of plaintiff
Breach of obligation — failure or refusal without justi iable excuse or
reason to perform, in whole or in part, the obligation or undertaking
which is incumbent upon him. Its existence is a factual matter.
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(1) Guilty party not entitled to sue — Under the rule exceptio non
adimpleti contractus, the party who has not performed his part
is not entitled to sue.
(2) Injured party entitled to rescind even in absence of stipulation
— Only the injured party can rescind a contract without
violating the principle of mutuality of contracts (Art 1308).
Existence of economic prejudice not required
➔ Effect of rescission predicated on breach of faith by one of the
parties.
Effects of rescission
(1) Contract abrogated from its inception;
(2) Mutual restitution of bene its received by each party required;
Court may grant guilty party term for performance
➔ Applies only where the guilty party is willing to comply with
his obligation but needs time to do so and not where he refuses
to perform.
➔ Breach must not be substantial and in bad faith, and there
should be just cause for grant of additional period.
Remedies are alternative
➔ Aggrieved party may only choose one remedy, except when the
ful illment should become impossible. Then, he may also seek
rescission, though he initially chose performance. But should
he choose rescission, he cannot thereafter demand ful illment.
➔ An alternative prayer in the complaint for either ful illment or
rescission is permissible as it cannot be said that plaintiff is
availing of both remedies.
Where contract resolved by non-ful illment or violation of
resolutory condition
(1) Without option to demand ful illment —
(a) Collin Capitant believes the creditor retains his right of
option.
(b) Manresa says that the stipulated resolution of the contract
in case one of the parties does not comply is produced by
force of law, but the option of the injured party disappears.
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(c) Tolentino says that if the creditor could still demand
ful illment, in spite of resolution ipso jure of the contract,
then the resolution would produce its effect when the
creditor noti ied the debtor of his decision. The creditor
may waive any right that might have accrued to him by
virtue of the resolution of the contract.
(d) Jurisprudence supports the view that when parties
expressly reserve an option to terminate or rescind upon
the violation of a resolutory condition, notice of resolution
must be given to the other party when such right is
exercised.
(2) With option to demand ful illment —
(a) In a contract of sale, the non-payment of the price is a
resolutory condition with the seller entitled to either
remedies.
(b) In a sale of immovable property, Art 1191 must be read
together with Art 1592 which applies to instances where
no stipulation for automatic rescission is made because it
says “even though”.
Damages recoverable
(1) In contract of sale, seller is entitled to repossession of the thing
and its fruits should the same have been already delivered. If he
elects speci ic performance, he is entitled to the price with
interest if it has not been paid.
(2) In case of rescission due to non-delivery, purchaser is entitled
to interest on the amount he has paid.
(3) Where the conditional obligation is deemed not to have existed
by reason of the non-ful illment of the suspensive condition,
the award of damages under Art 1191 is unwarranted.
Limitations on right to demand rescission
The right to rescind is not absolute and is always provisional,
contestable, subject to scrutiny and review by the courts.
(1) Resort to the courts —
(a) A counterclaim or cross-claim found in the Answer
could constitute a judicial demand for rescission.
(b) If such party does not oppose extrajudicial rescission,
the same produces legal effects.
(c) Proof of violation by a party of the contract is a
condition precedent to resolution or rescission.
(d) The directive to take “legal steps” does not necessarily
equate to “legal action”.
(e) The law does not require the injured party to irst ile
suit and wait for judgment before taking extrajudicial
steps to protect his interest; otherwise, he will have to
passively sit and watch his damages accumulate
during the pendency of the suit until inal judgment of
rescission is rendered when the law itself requires that
he should exercise due diligence to minimize his own
damages.
(2) Right of third persons — If the thing subject to restitution be
in the hands of a third person who has acted in good faith,
rescission is not a remedy. Injured party may recover damages
from the person responsible for the transfer.
(3) Waiver of right — Right to rescind may be waived, expressly
or impliedly.
(4) Sales of real property and of personal property in installments
— On real property, Art 1592, as amended by RA 6552
governs the right of rescission. On personal property, Art
1484, 1485 and 1486 apply.
(5) Arbitration clause in a contract — The act of treating a
contract as rescinded on account of infractions by the other
contracting party is valid albeit provisional as it can be
judicially assailed. The right cannot be exercised where there
is a valid stipulation on arbitration. Neither party can
unilaterally treat the contract as rescinded.
Rescission of contract without previous judicial decree
(1) Where automatic rescission expressly stipulated — parties may
validly stipulate for automatic rescission should there be
violation of the terms of the contract. Hence, Art 1191 becomes
inapplicable. Simply put, resolution of reciprocal obligations
may be made extrajudicially unless impugned in court.
(2) Where contract still executory — In the absence of a
stipulation, the right to rescind must be invoked judicially.
Procedure where extrajudicial rescission contested
(1) With stipulation for automatic revocation — judicial
intervention is necessary to determine whether rescission was
proper. Where the other party does not contest extrajudicial
rescission, the same shall produce legal effect though subject to
judicial invalidation unless barred from acquiescence,
estoppel, or prescription.
(2) Without stipulation for automatic revocation —
Notwithstanding absence thereof, a contracting party has the
power to extrajudicial rescind a contract, subject to judicial
inquiry from the other.
Action for rescission not required upon
breach of compromise agreement
A compromise is an agreement between two or more persons who, for
preventing or putting an end to a lawsuit, adjust their respective
positions by mutual consent in the way they feel they can live with.
➔ The aggrieved party by the breach of a compromise agreement
(Art 2028) may, enforce or, if he chooses, bring the suit
contemplated or involved in his original demand, as if there
had been any compromise agreement, without bringing an
action for rescission thereof.
Rescission and Termination distinguished
Rescission Termination
Unmaking of a contract, or its End in time or existence; a close,
undoing from the beginning. May cessation or conclusion
be effected mutually or
unilaterally
Agreement is deemed inexistent Agreement deemed valid at its
and the parties are returned to inception.
their status quo ante.
There is mutual restitution of Prior to termination, parties are
bene its. bound to the provisions of the

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contract. Consequences may be
anticipated and provided in the
contract.
Where both parties guilty of breach
(1) First infractor known — Under this provision, the second
infractor is not liable for damages at all. The damages for the
second breach which would have been payable by the second
infractor to the irst infractor, being compensated instead by the
mitigation of the irst infractor’s liability for damages arising
from his earlier breach. The irst infractor, on the other hand, is
liable for damages, but the same shall be equitably tempered
by the courts, since the second infractor also derived or
thought he would derive some advantage by her own act or
neglect. Art 1192 does not really exculpate the second infractor
from liability, as the second infractor is actually punished for
his breach by mitigating the damages to be awarded to him
from the previous breach of the other party. (Ong v. Bogñalbal)
(2) First infractor cannot be determined — Contract shall be
deemed extinguished and both bear the damages sustained.
Pay v. Vda. De Palanca
Whether a creditor is barred by prescription in his attempt to collect
on a promissory note executed more than ifteen years earlier with
the debtor sued promising to pay either upon receipt by him of his
share from a certain estate or upon demand, the basis for the action
being the latter alternative. YES.
The obligation being due and demandable, it would appear that the
iling of the suit after ifteen years was much too late. For again,
according to the Civil Code, the prescriptive period for a written
contract is that of ten years.
Coronel v. CA
Since the condition contemplated by the parties which is the issuance
of a certi icate of title in petitioner’s names was ful illed on February
6, 1985, the respective obligations of the parties under the contract of
sale became mutually demandable, that is, petitioners, as sellers,
were obliged to present the transfer certi icate of title already in their
names to private respondent Alcaraz, the buyer, and to immediately
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
execute the deed of absolute sale, while the buyer on her part, was
obliged to forthwith pay the balance of the purchase price amounting
to P1.19M.
As per Art 1187, the rights and obligations of the parties with respect
to the perfected contract of sale became mutually due and
demandable as of the time of ful illment or occurrence of the
suspensive condition on February 6, 1985. As of that point in time,
reciprocal obligations of both seller and buyer arose.
Rillo v. CA
The respondent court did not err when it did not apply Articles 1191
and 1592 on rescission to the case at bar. The contract between the
parties is not an absolute conveyance of real property but a contract
to sell. In a contract to sell real property on installments, the full
payment of the purchase price is a positive suspensive condition,
the failure of which is not considered a breach, casual or serious, but
simply an event which prevented the obligation of the vendor to
convey title from acquiring any obligatory force.
It was held in Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc.
that there can be no rescission of an obligation that is still
non-existent, the suspensive condition not having happened.
Given the nature of the contract of the parties, the respondent court
correctly applied Republic Act No. 6552. Known as the Maceda Law.
Davies, Inc. v. CA
The enumerated "basic terms and conditions" were prescriptions on
how the obligation was to be performed and implemented. They were
far from being conditions imposed on the perfection of the contract.
In Babasa v. CA, we distinguished between a condition imposed on
the perfection of a contract and a condition imposed merely on the
performance of an obligation. While failure to comply with the irst
condition results in the failure of a contract, failure to comply with
the second merely gives the other party options and/or remedies to
protect his interests.
Baluran v. Navarro
A resolutory condition is one which extinguishes rights and
obligations already existing. The right of "material possession"
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granted in the agreement of February 2, 1964, ends if and when any of
the children of Natividad Paraiso Obedencio (daughter of spouses
Paraiso, party of the First Part) would reside in the municipality and
build his house on the property. Inasmuch as the condition imposed
is not dependent solely on the will of one of the parties to the contract
— the spouses Paraiso — but is partly dependent on the will of third
persons — Natividad Obedencio and any of her children — the same
is VALID.
Trillana v. Quezon Colleges
The need for express acceptance on the part of the Quezon College,
Inc. becomes the more imperative, in view of the proposal of Damasa
Crisostomo to pay the value of the subscription after she had
harvested ish, a condition obviously dependent upon her sole will
and, therefore, facultative in nature, rendering the obligation VOID.
The condition solely is void, because it would have served to
create the obligation to pay, unlike a case, exempli ied by Osmeña v.
Rama (14 Phil., 99), wherein only the potestative condition was held
void because it referred merely to the ful illment of an already
existing indebtedness.
Central Philippine University v. CA
Under Art. 1181, on conditional obligations, the acquisition of rights,
as well as the extinguishment or loss of those already acquired, shall
depend upon the happening of the event which constitutes the
condition. Thus, when a person donates land to another on the
condition that the latter would build upon the land a school, the
condition imposed was not a condition precedent or a suspensive
condition but a resolutory one. It is not correct to say that the
schoolhouse had to be constructed before the donation became
effective, that is, before the donee could become the owner of the
land, otherwise, it would be invading the property rights of the donor.
The donation had to be valid before the ful illment of the condition. If
there was no ful illment or compliance with the condition, such as
what obtains in the instant case, the donation may now be revoked
and all rights which the donee may have acquired under it shall be
deemed lost and extinguished.
When the obligation does not ix a period but from its nature and
circumstances it can be inferred that a period was intended, the
general rule provided in Art. 1197 of the Civil Code applies, which
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provides that the courts may ix the duration thereof because the
ful illment of the obligation itself cannot be demanded until after the
court has ixed the period for compliance therewith and such period
has arrived.
This general rule however cannot be applied considering that more
than a reasonable period of ifty (50) years has already been allowed
petitioner to avail of the opportunity to comply with the condition
even if it be burdensome, to make the donation in its favor forever
valid. But, unfortunately, it failed to do so. Hence, there is no more
need to ix the duration of a term of the obligation when such
procedure would be a mere technicality and formality and would
serve no purpose than to delay or lead to an unnecessary and
expensive multiplication of suits. Moreover, under Art. 1191 of the
Civil Code, when one of the obligors cannot comply with what is
incumbent upon him, the obligee may seek rescission and the court
shall decree the same unless there is just cause authorizing the ixing
of a period. In the absence of any just cause for the court to determine
the period of the compliance, there is no more obstacle for the court
to decree the rescission claimed.
Sps Santos v. CA no Rescission in Contracts to Sell
In view of our inding in the present case that the agreement between
the parties is a contract to sell, it follows that the appellate court
erred when it decreed that a judicial rescission of said agreement was
necessary. This is because there was no rescission to speak of in the
irst place. As we earlier pointed out, in a contract to sell, title
remains with the vendor and does not pass on to the vendee until the
purchase price is paid in full.
Thus, in a contract to sell, the payment of the purchase price is a
positive suspensive condition. Failure to pay the price agreed upon is
not a mere breach, casual or serious, but a situation that prevents the
obligation of the vendor to convey title from acquiring an obligatory
force. This is entirely different from the situation in a contract of sale,
where non-payment of the price is a negative resolutory condition.
Casiño, Jr. v. CA
The breach petitioner committed cannot, by any measure, be
considered as "slight or casual". For sure, petitioner's failure to make
complete delivery and installation way beyond the time stipulated
despite respondent's demands, is doubtless a substantial and
fundamental breach, more so when viewed in the light of the large
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
amount of money respondent had to pay another contractor to
complete petitioner's un inished work.
We thus rule and so hold that respondent acted well within its rights
in unilaterally terminating its contract with petitioner and in entering
into a new one with a third person in order to minimize its losses,
without prior need of resorting to judicial action.
F.F. Cruz & Co., Inc. v. HR Construction Corp. 2012
The right of rescission is statutorily recognized in reciprocal
obligations. The right to rescind, however, may be waived,
expressly or impliedly.
HRCC had no right to rescind the Subcontract Agreement in the guise
of a work stoppage, the latter having waived such right. Hence, in
spite of the existence of dispute or controversy between the parties
during the course of the Subcontract Agreement, HRCC had agreed to
continue the performance of its obligations pursuant to the
Subcontract Agreement. In view of the provision of the Subcontract
Agreement, HRCC is deemed to have effectively waived its right to
effect extrajudicial rescission of its contract with FFCCI. Accordingly,
HRCC, in the guise of rescinding the Subcontract Agreement, was not
justi ied in implementing a work stoppage.
International Hotel Corporation v. Joaquin, Jr. & Suarez 2013
To avoid unjust enrichment to a party from resulting out of a
substantially performed contract, the principle of quantum meruit
may be used to determine his compensation in the absence of a
written agreement for that purpose. The principle of quantum
meruit justi ies the payment of the reasonable value of the services
rendered by him.
Nolasco v. Cuerpo, et al. 2015
IHC only relied on the opinion of its consultant in deciding to transact
with Materials Handling and, later on, with Barnes. In negotiating
with Barnes, IHC had no intention, willful or otherwise, to prevent
Joaquin and Suarez from meeting their undertaking. Such absence of
any intention negated the basis for the CA’s reliance on Article 1186
of the Civil Code.
Wellex Group, Inc. v. U-Land Airlines Co., Ltd. 2015 Leonen, J
Petitioner Wellex and respondent U-Land bound themselves to
negotiate with each other within a 40-day period to enter into a share
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purchase agreement. If no share purchase agreement was entered into,
both parties would be freed from their respective undertakings.
At the lapse of the 40-day period, the parties failed to enter into a
share purchase agreement. This lapse is the irst circumstance
provided for in Article 1185 that gives rise to the obligation.
Applying Article 1185, the parties were then obligated to return to
each other all that they had received in order to be freed from their
respective undertakings.
Rescission, as de ined by Article 1385, mandates that the parties
must return to each other everything that they may have received as a
result of the contract. This pertains to rescission or resolution under
Article 1191, as well as the provisions governing all forms of
rescissible contracts.
For Article 1191 to be applicable, however, there must be reciprocal
prestations as distinguished from mutual obligations between or
among the parties. The failure of one of the parties to comply with its
reciprocal prestation allows the wronged party to seek the remedy of
Article 1191. The wronged party is entitled to rescission or
resolution under Article 1191, and even the payment of damages. It is
a principal action precisely because it is a violation of the original
reciprocal prestation.
Thus, U-Land correctly sought the principal relief of rescission or
resolution under Article 1191. The obligations of the parties gave rise
to reciprocal prestations, which arose from the same cause: the desire
of both parties to enter into a share purchase agreement that would
allow both parties to expand their respective airline operations in the
Philippines and other neighboring countries.
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.
For a contracting party to be entitled to rescission (or resolution) in
accordance with Article 1191, 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.
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contribution as this would constitute unjust enrichment.

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' non-performance of the aforesaid obligation,
that is, to cause such transfer themselves in behalf and at the expense
of petitioners.
No damages shall be awarded to any party in accordance with
the rule under Article 1192 that in case of mutual breach and
the irst infractor of the contract cannot exactly be determined, each
party shall bear his own damages.
Osmeña III, v. PSALM 2016
The failure to execute the share purchase agreement was brought
about by NDC's delay in reviewing the inancial accounts submitted
by Galleon's stockholders. Article 1186 is categorical that a
"condition shall be deemed ful illed when the obligor voluntarily
prevents its ful ilment." Considering NDC's delay, the execution of the
share purchase agreement should be considered ful illed with NDC as
the new owner of 100% of Galleon's shares of stocks.

Fong v. Dueñas 2015 The award of the NPPC-LLA to TPVI further inds justi ication under
Arts. 1181 and 1185. PSALM's obligation to award the contract in
The ultimate effect of rescission is to restore the parties to their TPVI's favor was dependent on the non-occurrence of an event: SPC's With a Period
original status before they entered in a contract. Thus, Fong’s prayer legal and valid exercise of its Right to Top.
for the return of his contribution did not automatically convert the A period is a future and certain event upon the arrival of which the
action to a complaint for a sum of money. The mutual restitution of It has become apparent, however, that such event will never occur.
obligation subject to it either arises or is extinguished.
the parties’ original contributions is only a necessary consequence of SPC can never legally and validly invoke its Right to Top in view of its
their agreement’s rescission. nullity. The condition, therefore, is deemed complied with by When the debtor binds himself to pay when his means permit him to do
operation of law, and the obligation to execute the purchase contracts so, the obligation shall be deemed to be one with a period, subject to the
Fong and Dueñ as’ execution of a joint venture agreement created in favor of TPVI, due and demandable. provisions of Art 1197. (Art 1180)
between them reciprocal obligations that must be performed in
order to fully consummate the contract and achieve the purpose for PEZA v. Pilhino Sales Corp 2016 Leonen, J Period and condition distinguished
which it was entered into.
Jurisprudence has long settled that the restoration of the contracting As to Period Condition
Aside from unilaterally applying Fong’s contributions to his two parties to their original state is the very essence of rescission. Mutual
companies, Dueñ as also failed to deliver the valuation documents of restitution under Article 1191 is, however, no license for the Ful illment Certain to happen sooner or Uncertain
the Danton and Bakcom shares to prove that the combined values of negation of contractually stipulated liquidated damages. later at a date known
their capital contributions actually amounted to P32.5 Million. beforehand, or at an
Article 1191 itself clearly states that the options of rescission and indeterminate time
These acts led to Dueñ as’ delay in incorporating the planned holding speci ic performance come with "with the payment of damages in
company, thus resulting in his breach of the contract. On this basis, either case." The very same breach or delay in performance that Time Refers only to the future May refer to past
Dueñ as’ breach justi ied Fong’s rescission of the joint venture triggers rescission is what makes damages due. events unknown to
agreement under Article 1191. the parties
When courts are, thereafter, confronted with the need to award
However, the Court notes that Fong also breached his obligation in the damages in tandem with rescission, courts must not lose sight of how In luence on Merely ixes the time for the Causes an obligation
joint venture agreement. Fong’s diminution of his capital share to P5 the parties have explicitly stated, in their own language, these the ef icaciousness of the to arise or to cease.
Million also amounted to a substantial breach which occurred before consequences. To uphold both Article 1191 and the parties' will, obligation obligation. If suspensive,
Fong decided to rescind his agreement with Dueñ as. contractually stipulated liquidated damages must, as a rule, be cannot prevent birth of
maintained. obligation in due time; if
As both parties failed to comply with their respective reciprocal resolutory, does not annul,
obligations, we apply Article 1192. DBP v. Sta. Ines Melale Forest Products 2017 Leonen, J even in iction, the fact of its
A condition shall be deemed ful illed when the obligor existence.
Dueñ as must therefore return the P5 Million that Fong initially
contributed since rescission requires mutual restitution. After voluntarily prevents its ful ilment and a debtor loses the right
to make use of the period when a condition is violated, making When left to Empowers the court to ix Invalidates the
rescission, the parties must go back to their original status before
the obligation immediately demandable. debtor’s will the duration thereof (Art obligation (Art
they entered into the agreement. Dueñ as cannot keep Fong’s
1197[2]). 1182).

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As to Effects do not retroact, Has retroactive
retroactivity unless agreed. effect.
of effects
ART 1194. In case of loss, deterioration or improvement of the
thing before the arrival of the day certain, the rules in Article
1189 shall be observed.
Effect of Payment in Advance
ART 1195. Anything paid or delivered before the arrival of the
period, the obligor being unaware of the period or believing
that the obligation has become due and demandable, may be
recovered, with the fruits and interests.
➔ Applies only to obligations to give. Similar to Art 1188[2].
➔ Debtor presumed aware of period
◆ He has the burden of proving that he was unaware of
the period. Where the duration of the period depends
upon the will of the debtor (Art 1197[3]), payment by
him amounts, in effect, to his determination of the
arrival of the period.
◆ The obligor may no longer recover the thing or money
once the period has arrived but he can recover the
fruits or interests thereof from the date of premature
performance to the date of maturity of obligation.
➔ No recovery in personal obligations
◆ No application in obligations to do or not to do.
Bene it of Period
ART 1196. Whenever in an obligation a period is designated, it
is presumed to have been established for the bene it of both the
creditor and the debtor, unless from the tenor of the same or
other circumstances it should appear that the period has been
established in favor of one or of the other.
1. For whose bene it
a) Creditor
➔ Usually, this only exists if there is no stipulation to this effect,
as when the contract provides that no payment should be made
till after a certain given period.
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
➔ Acceptance of partial payment even before the expiration of the
period means a waiver on the part of the creditor of his right to
refuse payment before the end of said period.
b) Debtor
➔ When the loan is without interest; Generally for the bene it of
debtor only. NOTE: This is not absolute. For even if the creditor
receives no interest, still he may have entered into the contract
to protect himself against the sudden decline in the purchasing
power of the currency.
➔ When payment is to be made “within” a certain period from
date of contract.
c) Both
➔ When there is interest stipulated;
➔ When the creditor is interested in keeping his money safely
invested, or when he wants to protect himself from the dangers
of currency depreciation.
2. Effects
Acceleration by debtor of time of payment
➔ Unless the creditor consents, the debtor has no right to
accelerate the time of payment even if the premature tender
included an offer to pay principal and interest in full. Thus, the
creditor could not be obliged to accept payments before the
expiration of the agreed period.
Effect of acceptance by creditor of partial payment
➔ Amounts to a waiver of the period agreed upon during which
payment should not be made.
3. Presumption — Art 1196
(1) Obligation subject to a ixed period — The period is presumed
to have been established to bene it both parties.Before the
expiration of the period, debtor may not ful ill his obligation
and neither may the creditor demand its ful illment without the
consent of the other.
(2) Reciprocal contract — Presumed to bene it both, absent
language showing that the term was deliberately set to bene it
only either party.
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When Court May Fix Period
ART 1197. If the obligation does not ix a period, but from its
nature and the circumstances it can be inferred that a period
was intended, the courts may ix the duration thereof.
The courts shall also ix the duration of the period when it
depends upon the will of the debtor.
In every case, the courts shall determine such period as may
under the circumstances have been probably contemplated by
the parties. Once ixed by the courts, the period cannot be
changed by them.
Court generally without power to ix a period
1. Period is implied
No period ixed but a period intended
➔ If the period ixed is extended by agreement, to be valid the
same must be for a de inite time, although if no precise date is
ixed, it is suf icient that the time can readily be determined. In
case extension is not precise, Art 1197 applies.
Examples:
(1) Debt payable in installments without ixing the period for
payment.
(2) Donation is subject to a condition for the ful illment of which
no period is ixed.
2. Period depends solely on will of debtor
Legal effect where suspensive period/condition
depends upon will of debtor
(1) Existence of obligation — Not affected; It is only the
performance with respect to time that is left to the will of the
debtor.
(2) Validity of obligation — Conditional obligation void.
Action to ix duration of period
(1) Separate action for that express purpose — The only action
that can be maintained is to ask the court irst to determine the
term within which the obligor must comply with his obligation
for the reason that ful illment of the obligation itself cannot be
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demanded until after the court has ixed the period for its
compliance and such has arrived.
(2) Where separate action would be a mere formality — Action
brought for that express purpose separate from action to
enforce payment; but may not be adhered to when a prior and
separate action would be a mere formality and would serve no
other purpose than to delay.
Ultimate facts to be alleged in the complaint
(1) That a contract was entered into, imposing on one of the parties
an obligation/s in favor of another; and
(2) From which an inference may reasonably be drawn, that a
period for performance was intended by the parties.
Period ixed cannot be changed by the courts.
(1) Period agreed upon by the parties;
(2) Period ixed by the court;
(3) Period ixed in a inal judgment — Becomes res judicata.
➔ However, parties may modify the term by a new
agreement.
When debtor loses the right to make use of the period
ART 1198. The debtor shall lose every right to make use of the
period:
(1) When after the obligation has been contracted, he
becomes insolvent, unless he gives a guaranty or
security for the debt;
(2) When he does not furnish to the creditor the
guaranties or securities which he has promised;
(3) When by his own acts he has impaired said guaranties
or securities after their establishment, and when
through a fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in
consideration of which the creditor agreed to the
period;
(5) When the debtor attempts to abscond.
Gaite v. Fonacier
The shipment or local sale of the iron ore is not a condition precedent
(or suspensive) to the payment of the balance of P65,000, but was
only a suspensive period or term. What characterizes a conditional
obligation is the fact that its ef icacy or obligatory force (as
distinguished from its demandability) is subordinated to the
happening of a future and uncertain event; so that if the suspensive
condition does not take place, the parties would stand as if the
conditional obligation had never existed.
Radiowealth Finance Company v. Del Rosario
Respondents theorize that the action for immediate enforcement of
their obligation is premature because its ful illment is dependent on
the sole will of the debtor. Hence, they consider that the proper court
should irst ix a period for payment, pursuant to Articles 1180 and
1197.
This contention is untenable. The act of leaving blank the due date of
the irst installment did not necessarily mean that the debtors were
allowed to pay as and when they could. If this was the intention of the
parties, they should have so indicated in the Promissory Note.
However, it did not re lect any such intention.
On the contrary, the Note expressly stipulated that the debt should be
amortized monthly in installments for twelve consecutive months.
While the speci ic date on which each installment would be due was
left blank, the Note clearly provided that each installment should be
payable each month. We are convinced neither by their avowals that
the obligation had not yet matured nor by their claim that a period for
payment should be ixed by a court.
Alternative and Facultative
ART 1199. A person alternatively bound by different
prestations shall completely perform one of them.
The creditor cannot be compelled to receive part of one and
part of the other undertaking.
Kinds of obligation according to prestation
(1) Simple — there is only one prestation;
(2) Compound — at least two prestations. It may be:
(a) Conjunctive — all are due;
(b) Distributive — one of two or more is due. May be
alternative (Art 1199) or facultative (Art 1206).
An alternative obligation is one wherein various prestations are due but
the performance of one of them is suf iciently determined by the choice
which, as a general rule, belongs to the debtor.
Right of Choice
ART 1200. The right of choice belongs to the debtor, unless it
has been expressly granted to the creditor.
The debtor shall have no right to choose those prestations
which are impossible, unlawful or which could not have been
the object of the obligation.
Limitations to the right of choice rule given to the debtor
1. Prestations that are
(a) Impossible,
(b) unlawful, or
(c) those which could not have been the object of the
obligation, are VOID.
2. When only one prestation is practicable. The obligation thus
becomes simple. ONLY the debtor can exercise this right of
choice.
3. Cannot choose parts of different prestations.
Effect of Notice of Choice
ART 1201. The choice shall produce no effect except from the
time it has been communicated.
(1) Effect of notice — Until the choice is made and communicated, the
obligation remains alternative.
(a) Obligation then becomes simple.
(b) Such choice is irrevocable and cannot be renounced. Creditor
not required to concur with it.
(c) It produces legal effects.

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(2) Proof and form of notice — Burden of proof incumbent upon him
who made the choice. May be written, or oral; expressed, or
implied.
(3) Requisites for The Making of the Choice:
(a) Made properly so that the creditor and his agent will actually
know;
(b) With full knowledge that a selection is indeed being made.
(c) Voluntarily and freely;
(d) In due time, that is, before or upon maturity;
(e) To all the proper persons, i.e. in case of joint creditors;
(f) Without conditions unless agreed to by the creditor;
(g) That it may be waived, expressly or impliedly.
Effect of loss or impossibility of one or all prestations
ART 1202. The debtor shall lose the right of choice when
among the prestations whereby he is alternatively bound, only
one is practicable.
➔ The impossibility of the other prestations, however, must not be
due to the creditor’s acts, for in such case, Art 1203 applies.
➔ This applies only when the debtor has the right to choose. Should
the creditor be granted the right to choose, Art 1205 will apply
when only one prestation remains practicable, either due to
fortuitous event or due to debtor’s fault.
ART 1203. If through the creditor's acts the debtor cannot make
a choice according to the terms of the obligation, the latter may
rescind the contract with damages.
➔ Based on principles of justice. Debtor may also elect to perform
that which remains, because rescission is not automatic, but at his
option.
ART 1204. The creditor shall have a right to indemnity for
damages when, through the fault of the debtor, all the things
which are alternatively the object of the obligation have been
lost, or the compliance of the obligation has become
impossible.
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
The indemnity shall be ixed taking as a basis the value of the
last thing which disappeared, or that of the service which last
became impossible.
Damages other than the value of the last thing or service may
also be awarded.
Effects of loss or becoming impossible of objects of obligation
(1) Some of the objects — Debtor is not liable, even through his
fault, since he has the right of choice and the obligation can still
be performed. This is an exception to Art 1170, regarding
liability for damages arising from negligence.
(2) All of the objects — Creditor shall have the right to indemnity
for damages.
➔ “Or the compliance of the obligation has become impossible” =
obligations to do.
Basis of indemnity Simply put
➔ Value of the last thing which disappeared, or that of the service
which last became impossible. In case of disagreement, it is
incumbent upon the creditor to prove such value, or the
aforementioned. Other damages may also be awarded.
Effect of fortuitous event
➔ If all became impossible due to caso fortuito, obligation
extinguished.
➔ If one or more became impossible due to caso fortuito, and the
last also then becomes impossible due to debtor’s fault, Art
1204 applies: debtor is liable for damages equivalent to the Effect if creditor delays in making the choice
value of the last prestation.
➔ How about if one or more became impossible due to debtor’s
fault, and the last due to caso fortuito? Tolentino is of the view
that debtor is liable to damages equivalent to the last prestation
he caused to become impossible.
ART 1205. When the choice has been expressly given to the
creditor, the obligation shall cease to be alternative from the
day when the selection has been communicated to the debtor. Facultative Obligations
Until then the responsibility of the debtor shall be governed by
the following rules:
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(1) If one of the things is lost through a fortuitous event,
he shall perform the obligation by delivering that
which the creditor should choose from among the
remainder, or that which remains if only one subsists;
(2) If the loss of one of the things occurs through the fault
of the debtor, the creditor may claim any of those
subsisting, or the price of that which, through the fault
of the former, has disappeared, with a right to
damages;
(3) If all the things are lost through the fault of the debtor,
the choice by the creditor shall fall upon the price of
any one of them, also with indemnity for damages.
The same rules shall be applied to obligations to do or not to
do in case one, some or all of the prestations should become
impossible.
Only one becomes
All become impossible
impossible
Fortuitous
Obligation extinguished Any of the remaining item
Event
Any of the item +
Debtor’s Creditor demands the
damages; or Price of lost
Fault price of any + damages
item + damages
➔ Debtor cannot be held in default, notwithstanding the lapse of
maturity. Debtor does not yet know what to deliver. Creditor is
considered to have waived the period through his inaction.
➔ If the debtor wants to relieve himself, he may petition the court
to compel the creditor to accept, in the alternative, at the
reditor’s option, with resultant damages if any.
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without the fault of the debtor does not render him liable. demanded proportionately by the different creditors. (Art
ART 1206. When only one prestation has been agreed upon, but
Reason: thing intended to be the substitute is not yet due. 1208)
the obligor may render another in substitution, the obligation
is called facultative. (2) After substitution — If the principal is lost, the debtor is not 2. Presumption - Art 1207, 1208
The loss or deterioration of the thing intended as a substitute, liable whatever may be the cause, because it is no longer due. If When there is no expressed provision in the contract, joint
through the negligence of the obligor, does not render him the substitute is lost, liability is dependent on the existence of obligation is presumed.
liable. But once the substitution has been made, the obligor is fault on the part of the debtor.
3. Effects - Art 1207, 1208
liable for the loss of the substitute on account of his delay, Supposing loss is due to malice or bad faith
negligence or fraud. a) Extent of liability of debtor;
➔ Tolentino opines that such is immaterial as the debtor could
A facultative obligation is one where only one prestation has been b) Extent of right of creditor;
not have been compelled to perform the substitute even if it
agreed upon but the obligor may render another in substitution.
were possible. To hold the debtor liable in this case would c) In case of novation, compensation, confusion (Art 1277),
Distinguished from Alternative Obligation contravene the very essence of facultative obligations. remission.
Alternative obligations and remedies distinguished Does not extinguish or modify the obligation except with
As to Alternative Facultative
respect to the creditor or debtor affected, without extending its
Alternative obligations Alternative remedies
Contents There are various Only the principal operation to any other part of the debt or of the credit.
of the prestations, all of which prestation constitutes the Mere choice categorically made and then Choice generally Effects of Joint liability
obligation constitute parts of the obligation, the accessory communicated concludes the parties. becomes conclusive
Creditor may not thereafter exercise any only upon the exercise (1) Demand by one creditor upon one debtor, produces the
obligation. Creditor must only a means to facilitate
demand all leaving the payment. Creditor may other option, unless the alternative proves of the remedy. effects of default only with respect to the creditor who
debtor to choose. only demand the principal to be ineffectual due to no fault on his part demanded and the debtor on whom the demand was made,
prestation. but not with respect to the others.
When substitution effective
(2) The interruption of prescription by the judicial demand of
Nullity Nullity of one prestation Nullity of the principal
➔ Analogous with respect to alternative obligations, thus, from one creditor upon a debtor, does not bene it the other
does not invalidate the invalidates the obligation,
the time the debtor communicates to the creditor he elects to creditors nor interrupt the prescription as to the other
obligation. and the creditor cannot
perform the substitute prestation.
demand the substitute debtors. On the same principle, a partial payment or
even when it is valid. acknowledgment made by one of several joint debtors does
Joint and Solidary not stop the running of the statute of limitations as to the
Choice May be given to the Only the debtor can others.
creditor choose the substitute. Kinds of obligation according to the number of parties
(3) The vices of each obligation arising from the personal
(1) Individual — only one obligor and one obligee; and
Effect of Only the impossibility of Impossibility of the defect of a particular debtor or creditor does not affect the
loss all prestations due principal is suf icient to (2) Collective — there are at least two obligors, as well as obligees. obligation or rights of the others.
without fault to the debtor extinguish the obligation. May be joint or solidary. There are two relations: that between
extinguishes the (4) The insolvency of a debtor does not increase the
the opposite parties, and that among the members of same
obligation responsibility of his co-debtors, nor does it authorize a
party.
creditor to demand anything from his co-creditors.
Effect of loss A. Joint Obligations mancomunada simple, pro rata
(5) In the joint divisible obligation, the defense of res judicata
(1) Before substitution — If the principal is lost due to caso 1. Concept — One where the whole obligation is to be paid or is not extended from one debtor to another.
fortuito, the obligation is extinguished; otherwise, the debtor is ful illed proportionately by the different debtors and/or is to be
B. Solidary Obligations mancomunada solidaria, joint and several,
liable for damages. The loss of the intended substitute with or
in solidum

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1. Concept — One where each of the debtors is bound to render,
and/or each one of the creditors has a right to demand entire
compliance with the prestation (Art 1207).
Characteristics, essence, and basis
(1) Unity of object and plurality of ties.
(2) Essence is that each and every creditor can demand and
each of the debtors must satisfy the same prestation, with
the resulting duty on the part of the creditor who received
payment to pay to each of his co-creditors what belongs to
him, and the resulting right on the part of the debtor who
made payment to claim from his co-debtors the share
which corresponds to each (Art 1217).
(3) Basis has something of a legal iction, i.e., that it is a
mutual agency among those interested in the same
obligation.
a) Requisites
(1) Obligation expressly so states; or
(2) Law requires solidarity, i.e. tort, quasi-contracts,
obligations of devisees and legatees, liability of
principal, accomplices, and accessories of a
felony, bailees in commodatum; or
(3) Nature of the obligation requires solidarity, i.e.
liability under Arts 19-22 of NCC. - Common
element: morally wrong; and a moral wrong
cannot be divided into parts; hence, it should be
solidary.
b) Words used to indicate solidary obligations
➔ mancomunada solidaria, joint and several, in solidum,
juntos o suparadamente.
2. Kinds
a) As to source - Art 1208
(1) Legal — Art 1915,1945, 2194; Art 119 R.P.C. Imposed
by law.
Examples:
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
(a) Art 927; Liability for loss or destruction of a
thing in possession of the estate;
(b) Art 911; When agent exceeded authority but
the principal allowed him to act as though he
had full powers;
(c) Arts 1822-1824; Crime or quasi-delict
committed by a partner in a partnership;
(d) Art 1915; Two or more persons appointing an
agent;
(e) Art 1945; Two or more bailees to whom a
thing is loaned in the same contract;
(f) Art 2146[2]; Two or more of icious
managers;
(g) Art 2157; Two or more payees, when there
has been a payment of what is not due;
(h) Art 2194; Quasi-delict;
(i) Arts 143, 146 Family Code; Spouses whose
property regime is separate;
(j) Art 1723; Engineer or architect with the
contractor for damages for any construction
defect;
(2) Passive — Solidarity on the part of debtors, where
(k) Art 110 RPC; Principals, accomplices,
accessories, within their respective class.
(l) Arts 106, 107, 109 Labor Code; Employer
with contractor.
(2) Conventional — Agreed upon by the parties (Art
1306).
(3) Real — Imposed by the nature of the obligation.
b) As to parties bound
(1) Active — Solidarity on the part of creditors, where
anyone of them can demand the ful illment of the
entire obligation. Mutual agency. Juridical effects are
as follows:
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(a) Since it is a reciprocal agency, death of a creditor
does not transmit the solidarity to each of his
heirs but to all of them taken together.
(b) Each creditor represents the others in the act of
receiving payment, and in all other acts which
tend to secure the credit or make it more
advantageous.
(c) One creditor, however, does not represent the
others in such acts as novation, compensation and
remission. Even if the debtor is released, the other
creditors can still enforce their rights against the
creditor who made the novation, compensation or
remission.
(d) The credit and its bene its are divided equally
among the creditors, unless there is an agreement
among them to divide differently.
(e) The debtor may pay to any solidary creditor, but if
a judicial demand is made on him, he must pay
only to the plaintiff.
(f) Each creditor may renounce his right even against
the will of the debtor, and the latter need not
thereafter pay the obligation to the former.
anyone of them can be made liable for the ful illment
of the entire obligation. It is in the nature of a mutual
guaranty. Its effects are as follows:
(a) Each debtor can be required to pay the entire
obligation; but after payment, he can recover from
the co-debtors their respective shares.
(b) The debtor who is required to pay may set up by
way of compensation his own claim against the
creditor, in this case, the effect is the same as that
of payment.
(c) The total remission of the debt in favor of a debtor
releases all the debtors; but when this remission
affects only the share of one debtor, the other
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debtors are still liable for the balance of the
obligation.
(d) All the debtors are liable for the loss of the thing
due, even if such loss is caused by the fault of
only one of them, or by caso fortuito after one of
the debtors has incurred in delay.
(e) The interruption of prescription as to one debtor
affects all the others; but the renunciation by one
debtor of prescription already had does not
prejudice the others, because the extinguishment
of the obligation by prescription extinguishes also
the mutual representation among the solidary
debtors.
(f) The interests due by reason of the delay of one of
the debtors are borne by all of them.
(3) Mixed — Solidarity on the part of the debtors and
creditors, where each one of the debtors is liable to
render, and each one of the creditors has a right to
demand, entire compliance with the obligation.
c) As to uniformity — Kinds of solidary obligation according
to the legal tie
(1) Uniform — Parties are bound by the same
stipulations or clause; or
(2) Varied/Non-uniform - Art 1211 — Parties are
not subject to the same stipulations or clauses;
3. Effects
ART 1216. The creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to
those which may subsequently be directed against the others,
so long as the debt has not been fully collected.
Right of creditor to proceed against any solidary debtor
1. Since the liability is solidary, the other, solidary debtors are not
indispensable parties in a suit iled by the creditor.
2. The bringing of an action against a solidary debtor to enforce
payment of the obligation is not inconsistent with and does not
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
preclude the bringing of another to compel others to ful ill their
obligations. A solidary debtor is also a surety.
3. In case of death of one of the solidary debtors, the creditor may
proceed against the estate of the deceased solidary debtor alone
or against any or all of the surviving solidary debtors whose
liability is independent of and separate from the deceased
debtor, instead of instituting a proceeding for the settlement of
the estate of the deceased debtor wherein his claim could be
iled.
4. The choice is left to the solidary creditor to determine against
whom he will enforce collection.
Prejudicial Acts Prohibited
ART 1212. Each one of the solidary creditors may do whatever
may be useful to the others, but not anything which may be
prejudicial to the latter.
Bene icial Acts Prejudicial Acts
Interrupt The acts of extinguishment, i.e. remission,
prescription; novation, compensation and merger or
constitute debtor confusion, which are prejudicial to the
in default; bring co-creditors, will be valid so as to extinguish
suit so that the the claim against the debtors, but not with
obligation may respect to the co-creditors whose rights
produce interest subsist and can be enforced against the
creditor who performed the act alone.
Assignment of rights not allowed
ART 1213. A solidary creditor cannot assign his rights without
the consent of the others.
GR: Solidary creditor cannot assign his rights.
EXC: Allowed if all the others consent.
Reason: A solidary obligation implies mutual agency and mutual
con idence. Should the assignee or substitute do acts which
would prejudice the others, there is no doubt that the other
creditors’ rights are endangered, hence, the necessity of their
consent.
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ART 1214. The debtor may pay any one of the solidary
creditors; but if any demand, judicial or extrajudicial, has been
made by one of them, payment should be made to him.
➔ The demand has the effect of terminating the mutual agency
among the solidary creditors.
➔ Applicable in active and mixed solidarity. In case of the latter,
the debtor upon whom n demand has been made, may pay any
one of the solidary creditors.
Demand by Several Creditors — If all or several creditors demand
payment separately, the debtor should pay to the one who irst
noti ied him. If they demand at the same time or collectively, the
debtor preserves his right to choose and may pay anyone of those
demanding payment.
ART 1215. Novation, compensation, confusion or remission of
the debt, made by any of the solidary creditors or with any of
the solidary debtors, shall extinguish the obligation, without
prejudice to the provisions of article 1219.
The creditor who may have executed any of these acts, as well
as he who collects the debt, shall be liable to the others for the
share in the obligation corresponding to them.
Liability of solidary creditor in case of novation, compensation,
confusion, or remission — Creditor who executed any of these acts
should be liable to the others for their corresponding shares. (Art
1212).
Effect of extension of time given by creditor to a solidary debtor
➔ Does not amount to novation that will discharge the other
solidary debtors. The latter shall be liable for the whole debt
less the share of the debtor granted the extension (Art 1211).
➔ Upon the expiration of the term, the creditor can demand
payment of the unpaid share from any of the solidary debtors.
ART 1217. Payment made by one of the solidary debtors
extinguishes the obligation. If two or more solidary debtors
offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only
the share which corresponds to each, with the interest for the
payment already made. If the payment is made before the debt
is due, no interest for the intervening period may be demanded.
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When one of the solidary debtors cannot, because of his
insolvency, reimburse his share to the debtor paying the
obligation, such share shall be borne by all his co-debtors, in
proportion to the debt of each.
Effects of payment by a solidary debtor
(1) Between the solidary debtor and creditor(s) —
Extinguishes the obligation. Creditor is given the right to
choose which offer to accept should there be more than one
offer to pay.
(2) Among the solidary debtors — Does not create a real case of
subrogation. Merely entitles the payer to claim reimbursement.
(a) The other debtors do not become by virtue of such
payment solidary debtors of the debtors of the
debtor-payer. Their liability is not based on the
original obligation which has been extinguished, but
upon the payment made by the co-debtor which
creates a joint obligation of reimbursement on the part
of the others (Art 1208). In case on insolvency, the
others assume the share of the insolvent one pro rata
(pars 2, 3).
(b) Reimbursement is not automatic and shall only be
recovered in so far as payment exceeded his share of
the obligation.
(3) Among the solidary creditors — The receiving creditor is
jointly liable to the others for their corresponding shares (Art
1208).
ART 1218. Payment by a solidary debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made
after the obligation has prescribed or become illegal.
Two cases paying debtor may not be reimbursed —When the
obligation has
(1) Prescribed (Art 1231[2]; Art 1424); or
(2) Become illegal (Art 1266).
ART 1219. The remission made by the creditor of the share
which affects one of the solidary debtors does not release the
latter from his responsibility towards the co-debtors, in case
the debt had been totally paid by anyone of them before the
remission was effected.
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER For the 2020/21 #BestBarEver
only as regards that part of the debt for which the latter are
➔ If payment is made irst, the remission or waiver is of no effect.
responsible.
➔ If remission is made previous to the payment and the payment
a) Types
is made, solutio indebiti arises.
(1) Those derived from the nature of the obligation —
➔ Purpose: forestall fraud whereby the debt having been paid, the
Constitutes total defense:
creditor, wo does not stand to suffer any loss or damage, remits
the share of a particular debtor. (a) Lack of consideration or cause;
➔ Secures equality and justice to the paying debtor inasmuch as (b) Absolute simulation;
the payment bene its his co-debtors.
(c) Illegal consideration;
ART 1220. The remission of the whole obligation, obtained by (d) Extinguishment of the obligation
one of the solidary debtors, does not entitle him to
reimbursement from his co-debtors. (e) Non-ful illment of the suspensive condition;
ART 1221. If the thing has been lost or if the prestation has (f) Statute of Frauds;
become impossible without the fault of the solidary debtors, (g) When ALL the debtors were incapacitated to give
the obligation shall be extinguished. consent;
If there was fault on the part of any one of them, all shall be (h) When there are VICES OF CONSENT on the part of ALL
responsible to the creditor, for the price and the payment of the debtors
damages and interest, without prejudice to their action against
the guilty or negligent debtor. (2) Personal defenses — complete defense:
If through a fortuitous event, the thing is lost or the (a) Vitiated consent;
performance has become impossible after one of the solidary (b) Incapacity to give consent;
debtors has incurred in delay through the judicial or
extrajudicial demand upon him by the creditor, the provisions (3) Defenses pertaining to his share — partial defense:
of the preceding paragraph shall apply. (a) Non-ful illment of condition imposed regarding his
Effect of Loss or Impossibility share;
a. If without fault — no liability. (b) Non-arrival of term
(4) Those personally belonging to the other co-debtors —
b. If with fault — there is liability (also for damages and
interest). Only guilty debtor should be liable, not shared Partial defense. Debtor-defendant may also set up defenses
which are personal to his co-debtors.
with co-debtors.
c. Due to caso fortuito AFTER default — there will be b) Effects — Exempts debtor-defendant from payment of the
portions of the obligation corresponding to the other debtors
liability because of the default.
who have such personal defenses.
4. Defenses available to a solidary debtor against the creditor
C. Joint Indivisible Obligations
ART 1222. A solidary debtor may, in actions iled by the
creditor, avail himself of all defenses which are derived from 1. Concept — Obligation is joint because the parties are merely
the nature of the obligation and of those which are personal to proportionately liable. It is indivisible because the object is not
him, or pertain to his own share. With respect to those which physically divisible into parts.
personally belong to the others, he may avail himself thereof 2. Indivisibility distinguished from solidarity
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because there is no cause of action against the debtors who

ART 1210. The indivisibility of an obligation does not are willing to ful ill their promises.
positively and clearly expressed.
necessarily give rise to solidarity. Nor does solidarity of itself
imply indivisibility. b. Contribution of innocent debtors limited to their respective In this case, given that solidarity could not be inferred from the
shares. — Obligation becomes divisible. agreement, the presumption under the law applies—the obligation is
3. Effects joint. This means that Francisco, Ma. Consuelo and Consuelo are
Lafarge Cement Phils. v. Continental Cement Corp., et al.
ART 1209. If the division is impossible, the right of the each entitled to equal shares in the P3,000,000 agreed upon in the
creditors may be prejudiced only by their collective acts, and Obligations arising from tort are, by their nature, always solidary. Amended Compromise Agreement and that payment to Consuelo and
the debt can be enforced only by proceeding against all the Ma. Consuelo will not have the effect of discharging the obligation
debtors. If one of the latter should be insolvent, the others shall The fact that the liability sought against the CCC is for speci ic with respect to Francisco.
not be liable for his share. performance and tort, while that sought against the individual
respondents is based solely on tort does not negate the solidary
a. No creditor can do an act prejudicial to the others; nature of their liability for tortuous acts alleged in the counterclaims.
Article 1211 of the Civil Code is explicit on this point.
Divisible and Indivisible
b. No debtor can be made to answer for the others.
Characteristics The solidary character of respondents’ alleged liability is precisely Divisibility of things
why credence cannot be given to petitioners’ assertion. According to Juridically, a thing is considered indivisible when, if divided by parts,
a. The creditor must proceed against ALL the joint debtors,
such assertion, Respondent CCC cannot move to dismiss the
for compliance is possible only if all the joint debtors its value is diminished disproportionately. A thing is divisible when
counterclaims on grounds that pertain solely to its individual
would act TOGETHER. each one of the parts into which it is divided forms a homogeneous and
co-debtors. In cases iled by the creditor, a solidary debtor may
b. Demand must, therefore, be made on ALL the joint debtors; invoke defenses arising from the nature of the obligation, from analogous object to the other parts as well as to the thing itself.
circumstances personal to it, or even from those personal to its Factors which determine divisibility
c. If any one of the debtors does not comply with his
co-debtors as per Article 1222.
monetary obligation for damages. (Art 1224) (1) Will or intention of the parties, expressed or implied;
d. If any of the joint debtors be insolvent, the others shall not The act of Respondent CCC as a solidary debtor — that of iling a (2) Objective or purpose of the stipulated prestation;
be liable for his share. motion to dismiss the counterclaim on grounds that pertain only to
its individual co-debtors — is therefore allowed (3) Nature of the thing;
e. If there be joint creditors, delivery must be made to all, and
not merely to one, unless that one be speci ically (4) Provisions of law affecting prestation.
International Finance Corporation v. Imperial Textile Mills, Inc.
authorized by the others. Kinds of Division
The terms of a contract govern the rights and obligations of the
f. Each joint creditor is allowed to renounce his contracting parties. When the obligor undertakes to be "jointly and (1) Qualitative — based on quality.
proportionate credit. severally" liable, it means that the obligation is solidary. If solidary (2) Quantitative — based on number.
4. Liability for damages in case of breach liability was instituted to "guarantee" a principal obligation, the law
deems the contract to be one of suretyship. (3) Ideal or intellectual — exists only in the minds of the parties
ART 1224. A joint indivisible obligation gives rise to indemnity
A. Divisible Obligations — The object of which, in its delivery or
for damages from the time anyone of the debtors does not While referring to ITM as a guarantor, the Agreement speci ically
comply with his undertaking. The debtors who may have been stated that the corporation was "jointly and severally" liable. To put performance, is capable of partial ful illment.
ready to ful ill their promises shall not contribute to the emphasis on the nature of that liability, the Contract further stated B. Indivisible Obligation — The object of which, in its delivery or
indemnity beyond the corresponding portion of the price of the that ITM was a primary obligor, not a mere surety. Those stipulations performance, is not capable of partial ful illment.
thing or of the value of the service in which the obligation meant only one thing: that at bottom, and to all legal intents and
consists. purposes, it was a surety. Distinguished from solidary obligations

a. Obligation transformed into one for damages — The

Sps. Ibañez v. James 2017 Indivisibility Solidarity
creditor cannot ask for speci ic performance or rescission
Solidary obligations cannot be inferred lightly. They must be

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Refers to prestations Refers to the juridical or legal tie Effects of partial performance - Debtor who fails to fully perform (1) Generally, to Insure their performance by creating an effective
the work agreed upon, but abandons the same after performing a deterrent against breach, making the consequences of such
Only the debtor guilty of breach All of the debtors are liable for part, cannot recover on quantum meruit for the work already breach as onerous as it may be possible; and
is liable for damages, thereby the breach committed by a inished, because in indivisible obligations, partial performance is (2) To substitute a penalty for the indemnity for damages and the
terminating the agency co-debtor (Art 1221) equivalent to non-performance. payment of interests in case of non-compliance; or
Can exist although there is only There must be at least two Exceptions: (3) To punish the debtor for the non-ful illment or violation of his
one debtor and creditor debtors and creditors. (a) where the obligation has been substantially performed in obligation.
Others are not liable in case of Others are proportionately liable good faith, the debtor may recover as if there had been Principal vs. Accessory Obligation
insolvency of one debtor. complete performance, minus the damages suffered by the
creditor (Art 1234); and ➔ Principal obligation is one which can stand by itself and does
Kinds not depend for its validity and existence upon another
(b) when the creditor accepts performance, knowing its obligation.
a) Natural - Art 1225, par.1 — Nature of the object or prestation incompleteness, and without protest, the obligation is
does not admit of division. ➔ Accessory obligation is one which is attached to a principal
deemed fully performed (Art 1235).
obligation and, therefore, cannot stand alone.
b) Legal - Art 1225, par. 3 — Provision of law declares a naturally Nazareno v. CA Penalty generally resolves question of damages
divisible object as indivisible.
An obligation is indivisible when it cannot be validly performed in ➔ When the purpose is reparation or compensation — penalty an
c) Conventional - Art 1225, par. 3 — The will of the parties parts, whatever may be the nature of the thing which is the object anticipated valuation of the damages which may be suffered
makes a naturally divisible object as indivisible. thereof. The indivisibility refers to the prestation and not to the
should there be breach.
Presumptions object thereof.
➔ When the purpose is punishment — damages may be recovered
a) of indivisibility — Art 1225, par. 1 In the present case, the Deed of Sale supposedly conveyed the six lots in addition to the penalty.
to Natividad. The obligation is clearly indivisible because the
(1) Obligations to give de inite things; NB: Obligations with penal clauses strictly construed
performance of the contract cannot be done in parts, otherwise the
(2) Obligations not susceptible to partial performance; value of what is transferred is diminished. Petitioners are therefore
Distinguished from Conditional Obligations
mistaken in basing the indivisibility of a contract on the number of
(3) As provided by law, though naturally divisible; Obligations with penal clause Conditional Obligations
obligors.
(4) Intended by the parties, though naturally divisible.
There is already an existing There is no obligation before the
b) of divisibility - Art 1225, par.2 — Obligations which: obligation (the principal) from happening of a suspensive
With Penal Clause the very beginning. condition.
(1) Have for their object the execution of a certain number of
days of work. ➔ An obligation with a penal clause is one which contains an It is the accessory obligation The principal obligation is
(2) Have for their object the accomplishment of work by accessory undertaking to pay a previously stipulated which is dependent upon dependent upon an uncertain
metrical units. indemnity in case of breach of the principal prestation intended non-performance of the event.
primarily to induce its ful illment. principal.
(3) By their nature are susceptible of partial performance.
Divisibility and indivisibility of obligations not to do - Art 1225, par. ➔ A penal clause is an accessory undertaking attached to an Distinguished from Alternative Obligations
3 — Character of the prestation in each particular case shall obligation to assume greater liability on the part of the obligor
Obligations with penal clause Alternative Obligations
determine their divisibility. in case of breach of the obligation.
Purposes of penal clause There is only one prestation. Two or more obligations due,
Only when it is not performed performance of either is

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 Civil Law | Obligations and Contracts, LTD, and Torts and Damages
shall the penalty be enforceable.
Impossibility of the principal
extinguishes the penalty.
Debtor cannot choose to pay the
penalty to relieve himself of the
principal, unless that right is
expressly granted to him.
Distinguished from Facultative Obligations
Obligations with penal clause
Payment of the penalty in lieu of
the principal can be made only
by express stipulation.
Creditor may demand both
principal and penalty.
Distinguished from Guaranty
Obligations with penal clause
Both intended to insure performance of the principal obligation.
Both accessory and subsidiary obligations.
Obligation to pay the penalty is
different from the principal.
Principal and penalty can be
assumed by the same person.
Penalty is extinguished by the
nullity of the principal
obligation, except when the penal
clause is assumed by third
persons.
A. Kinds of Penal Clause
1. As to effect
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
suf icient.
Impossibility of one of the
obligations, not due to debtor,
still leaves the other subsisting.
Debtor can choose which
prestation to ful ill.
Facultative Obligations
Power of the debtor to make the
substitution is absolute.
Creditor can never demand both
prestations.
Guaranty
Object of the principal debtor
and guarantor the same.
Principal debtor cannot be the
guarantor of the same obligation
Subsists even when the principal
obligation is voidable or
unenforceable or is a natural one.
REVIEWER For the 2020/21 #BestBarEver
a) Subsidiary or alternative - only the penalty can be b) Where there is no performance — Creditor may ask
enforced; for either the penalty or speci ic performance.
Remedies are alternative and not cumulative or
b) Complementary - both principal and penalty can be
successive, except that the penalty may be enforced, if
enforced. after the creditor has decided to require ful illment,
2. As to source the same should become impossible without his fault
(Art 1191[2]). If there was fraud on the part of the
a) Conventional - stipulated by the parties;
debtor, the creditor may recover the penalty as well as
b) Legal - provided for by law;
damages for non-ful illment (Art 1226).
3. As to purpose 4. Creditor cannot collect other damages in addition to
a) Punitive - punishment for breach; penalty - Art 1226
b) Reparatory or compensatory - penalty takes place of EXC: Damages besides penalty
damages 1. When there is an express provision;
B. Demandability of Penalty - Art 1226, par. 2 2. When the debtor refuses to pay the penalty; and
➔ Enforcement of the penalty can be demanded by the creditor 3. When the debtor is guilty of fraud in the
only when the non-performance is due to the fault or fraud of non-ful illment of the obligation.
the debtor. When penalty may be reduced by the courts
➔ Non-performance gives rise to the presumption of fault. (1) When there is partial or irregular performance - First refers to
➔ To avoid payment of penalty, debtor has burden of proof extent, the latter, the manner.Penalty should be more or less
against fault or fraud. proportionate with the extent of the breach or of the damages
C. Effects of Penal Clause suffered. It is to be presumed that the parties contemplate only
a total breach of contract; or
1. Substitute for indemnity for damages and payment of
(2) When the penalty agreed upon is iniquitous or unconscionable
interest
- Not void, but subject merely to equitable reduction (Art
Generally, penalty takes place of the indemnity for
2227). Factors to be considered are:
damages and the payment of interests in case of
non-compliance. Proof of actual damages suffered by the (a) type, extent, and purpose of the penalty,
creditor is not necessary in order that the penalty may be (b) the nature of the obligation,
enforced (Art 1228).
(c) the mode of breach and its consequences,
2. Not exempt debtor from performance - Art 1227
(d) the supervening realities,
EXC: Only when the right has been expressly reserved
(e) the standing and relationship of the parties,
for the debtor.
(f) the extent of the prejudice to the plaintiff, among
3. Creditor cannot demand both performance and penalty at
others.
the same time - Art 1227
Construction of penal clause where
a) Where there is performance — Generally, penal clause
performance partial or irregular
is subsidiary and not joint.
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(1) Where penalty is punitive - Strict construction against the
enforcement in its entirety of the penalty, where it is clear from
the terms of the contract the amount or character of the
indemnity is ixed without regard to the probable damages
which might be anticipated as a result of the breach of the
terms of the contract.
(2) Where penalty is compensatory - Courts will be slow in
applying Art 1229 where it appears that in ixing the indemnity
the parties had in mind a fair and reasonable compensation for
actual damages anticipated as a result of the breach of the
contract.
Nullity of Principal Obligation or Penal Clause
(a) Effects - Art 1230
➔ Generally, nullity of the principal nulli ies the penalty. Except:
(1) When the penalty is undertaken by a third person precisely
for an obligation which is unenforceable, voidable, or
natural, in which case it assumes the form of a guaranty
valid under Art 2052;
(2) When the nullity of the principal obligation itself gives rise
to liability of the debtor for damages, which may be due to
the fault of the debtor who acted in bad faith. (Arts 10, 19,
20, 21).
(b) Rationale — Principal obligation can stand alone, and the void
penal clause can just be disregarded.
SSS v. Moonwalk Development and Housing Corporation
A penalty is demandable in case of non performance or late
performance of the main obligation. In other words in order that the
penalty may arise there must be a breach of the obligation either by
total or partial non ful illment or there is non ful illment in point of
time which is called mora or delay. The debtor therefore violates the
obligation in point of time if there is mora or delay. Now, there is no
mora or delay unless there is a demand. It is noteworthy that in the
present case during all the period when the principal obligation was
still subsisting, although there were late amortizations there was no
demand made by the creditor, plaintiff-appellant for the payment of
the penalty. Therefore up to the time of the letter of plaintiff-appellant
there was no demand for the payment of the penalty, hence the debtor
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
was no in mora in the payment of the penalty.
The demand made after the extinguishment of the principal obligation
which carried with it the extinguishment of the penal clause being
merely an accessory obligation, was an exercise in futility.
Ligutan v. CA
The question of whether a penalty is reasonable or iniquitous can be
partly subjective and partly objective.
In RCBC v. CA just an example, the Court has tempered the penalty
charges after taking into account the debtor’s pitiful situation and its
offer to settle the entire obligation with the creditor bank. The
stipulated penalty might likewise be reduced when a partial or
irregular performance is made by the debtor. The stipulated penalty
might even be deleted such as when there has been substantial
performance in good faith by the obligor, when the penalty clause
itself suffers from fatal in irmity, or when exceptional circumstances
so exist as to warrant it.
Louh, Jr., et al. v. BPI 2017
A penalty stipulation is not necessarily preclusive of interest, if there
is an agreement to that effect, the two being distinct concepts which
may separately be demanded. What may justify a court in not
allowing the creditor to impose full surcharges and penalties, despite
an express stipulation therefor in a valid agreement, may not equally
justify the non-payment or reduction of interest. Indeed, the interest
prescribed in loan inancing arrangements is a fundamental part of
the banking business and the core of a bank's existence.
Palmares v. CA
The penalty charge of 3% per month and attorney’s fees equivalent to
25% of the total amount due are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30K, the
amount of P16,300.00 had already been paid even before the iling of
D. Extinguishment of Obligations
the present case. Article 1229 provides that the court shall equitably
reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. And, even if there has been
no performance, the penalty may also be reduced if it is iniquitous or
leonine.
Filinvest Land, Inc. v. CA
As a general rule, courts are not at liberty to ignore the freedom of the
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parties to agree on such terms and conditions as they see it as long
as they are not contrary to law, morals, good customs, public order or
public policy. Nevertheless, courts may equitably reduce a stipulated
penalty in the contract in two instances:
(1) If the principal obligation has been partly or irregularly
complied; and
(2) even if there has been no compliance if the penalty is
iniquitous or unconscionable in accordance with Article
1229.
As it is settled that the project was already 94.53% complete and that
Filinvest did agree to extend the period for completion of the project,
which extensions Filinvest included in computing the amount of the
penalty, the reduction thereof is clearly warranted. There has been
substantial compliance in good faith on the part of Pecorp which
renders unconscionable the application of the full force of the penalty
especially if we consider that in 1979 the amount of P15,000.00 as
penalty for delay per day was quite steep indeed.
Since the stipulation on the interest rate is void, it is as if there was no
express contract thereon. Hence, courts may reduce the interest rate
as reason and equity demand. The same is true with respect to the
penalty charge.
In the case at bench, BPI imposed a cumulative annual interest of
114%, plus 25% of the amount due as attorney's fees. Inevitably, the
RTC and the CA aptly reduced the charges imposed by BPI upon the
Spouses Louh. Note that incorporated in the amount of P533,836.27
demanded by BPI as the Spouses Louh's obligation were the higher
rates of inance and late payment charges, which the courts a quo had
properly directed to be reduced.
ART 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
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(4) By the confusion or merger of the rights of Effects of payment to an incapacitated person (Art 1241 par 1)
Payment or Performance
creditor and debtor;
➔ INVALID, unless such person
(5) By compensation; Elements of payment.
(1) kept the thing paid or delivered, or
(6) By novation. (1) Persons, who may pay and to whom payment may be made;
quis (2) was bene ited by the payment.
Other causes of extinguishment of obligations, such as
➔ In the absence of said bene it, debtor may be asked to pay again
annulment, rescission, ful illment of a resolutory condition, (2) Thing or object in which payment must consist; quinam, quid
and prescription, are governed elsewhere in this Code. by the creditor’s guardian, or by the incapacitated person
(3) The cause thereof; causa himslef when he recovers his capacity.
Modes of Extinguishing Obligations Classi ied (4) The mode or form thereof; quo modo ➔ Proof of such bene it is incumbent upon the debtor who paid.
Voluntary
(5) The place and time in which it must be made; ubi, quando ➔ If payment is impossible to be made to a legal representative,
Performance (6) The imputation of expenses occasioned by it; expensae and debtor may relieve himself through consignation (Art 1256
(1) Payment; (7) The special parts which may modify the same and the effects par 1).
(2) Consignation they generally produce. Pacta adjunta Effect of payment to a third person (Art 1241 par 2)
Kinds of payment ➔ INVALID, except insofar as it has redounded to the bene it of
Substitution
(1) Dacion en pago (conveyance for payment) ➔ Normal when the debtor voluntarily performs the prestation. the creditor.
(2) Novation ➔ Immaterial if debtor acted in good faith and by mistake, or
➔ Abnormal when he is forced by means of a judicial proceeding,
through error induced by fraud of a third person if the creditor
either to comply with the prestation or to pay indemnity.
By release agreement is without fault or negligence.
(1) Subsequent to the constitution of the obligation: Burden of proving payment
➔ Proof of bene it to the creditor must be duly established.
(a) Mutual waiver; 1. Burden of proof is the duty of a perty to present evidence of the
(b) Unilateral waiver; ➔ Absence of such proof, the payment thereof in error and in
facts in issue necessary to prove the truth of his claim or
(c) Remission. good faith will not deprive the creditor from demanding
defense by the amount of evidence required by law.
(2) Simultaneous to the constitution of the obligation: payment.
2. Devolves upon the debtor.
(a) Resolutory condition; When bene it to creditor need not be proved by debtor
(b) Extinctive period. 3. When debtor has introduced evidence that the obligation has (Art 1241 par 3)
been extinguished, burden then shifts to the creditor.
(1) Subrogation of the payer in the creditor's rights;
Involuntary 4. A receipt of payment is deemed to be the best evidence of
(2) Rati ication by the creditor;
payment. A voucher is not proof of payment.
By reason of the subject
(3) Estoppel on the part of the creditor.
(1) Confusion; Person to whom payment shall be made (Art 1240)
(2) Death of the contracting parties in personal obligations. ➔ The debtor who, before having knowledge of the assignment of
(1) Creditor or obligee — at the time payment is to be made, not
a credit to a third person, pays the original creditor, shall be
at the constitution of the obligation.
By reason of the object released from the obligation (Art 1626).
(2) Successor-in-interest;
(1) Loss/Impossibility. Payment to the third person in possession of credit (Art 1242)
(3) Any authorized person — either by the creditor or by law, i.e.
By failure to exercise (right of action) ➔ Possession of credit itself, and not a mere instrument thereof.
guardian, executor or administrator of the estate of a deceased,
(1) Extinctive prescription. and assignee or liquidator of a partnership or corporation.

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➔ Payer must act in good faith, which is presumed, that is, in the
honest belief that he is making a valid payment and that the
payee is the owner of the credit.
Examples
1. An heir who enters upon the hereditary estate and collects the
credits thereof, but who is later deprived of the inheritance
because of incapacity to succeed;
2. Assignee of a credit who collects it, but later the assignment is
rescinded or annulled;
3. Holder of an instrument payable to bearer, who merely found it.
When debt considered paid
(1) Integrity of the prestation — complete ful illment thereof.
(2) Identity of the prestation — the very thing or service due
must be delivered or performed.
Time of payment — Generally understood to be on the date stipulated,
regardless if such falls on a Sunday or legal holiday.
Substitution of prestation
➔ Can be made if the obligee consents, i.e. in facultative
obligations (Art 1206).
➔ There may be dation in payment (Art 1245) or novation (Art
1291), in case of waiver by the creditor or substitution is
allowed by stipulation with the consent of the creditor.
Waiver of defects — If creditor expressly so declares, or if, with
knowledge thereof, he accepts the thing without protest or disposes of it
or consumes it.
Rule of the medium quality — A principle of equity wherein the court
steps in whenever there is disagreement whether the contract to deliver
an indeterminate thing has been complied with.
Payment of debts in money payable in PH currency
➔ Refers to money different from that which is the legal tender or
legally current in PH.
➔ Par 1 was modi ied by RA 529, which took effect on June 16,
1950. The law requires payment of domestic obligations in PH
currency, and declares as “against public policy, and null and
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
void, and of no effect” any contractual provision requiring
payments in a currency other than PH one. The obligation
itself is not void.
➔ Sec 1 of RA 529 provides that such an obligation “shall be
discharged upon payment in any coin or currency which at the
time of payment is legal tender for public and private debts.”
➔ Under RA 4100 which took effect on June 19, 1964, and which
in turn amended RA 529, in “import-export and other
international banking, inancial investment and industrial
transactions” the parties’ agreement as to currency in which
obligation will be paid is BINDING.
➔ Ultimately, RA 8183, approved on June 11, 1996, repealed RA
529 which removes any legal impediment to having obligations
or transactions paid in a foreign currency as long as there was a
meeting of the minds between the parties.
Legal Tender in PH
➔ Legal tender is that currency which a debtor can legally compel
a creditor to accept in payment of a debt in money when
tendered by the debtor in the right amount.
➔ In PH, all coins and notes issued by the BSP constitute legal
tender.
➔ Under BSP Circular No 537 (July 18, 2006) which took effect on
August 11, 2006, the maximum amount of coins to be
considered legal is adjusted as follows:
(1) P1,000.00 for 1, 5, and 10 peso coins;
(2) P100.00 for 1, 5, and 25 centavo coins.
Payment by means of instruments of credits
(1) Right of creditor to refuse or accept. — Promissory notes,
checks, bills of exchange and other commercial documents are
not legal tender and, therefore, the creditor can not be
compelled to accept them.
(a) Creditor may choose to accept them, without it
producing the effect of payment. Demandability is
suspended in the meantime until the payment is
actually realized.
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(b) Art 1245 applies when what is involved is the
payment of a judgment obligation.
(2) Payment for purpose of redemption — The right to redeem is
not an obligation but he exercise of a right; nor is it intended to
discharge a pre-existing debt. A mere tender of checks is
suf icient to compel redemption.
(3) Effect on obligation — Payment by means of mercantile
documents does not extinguish the obligation —
(a) Until they have been cashed, by either debtor or a third
person; or
(b) Unless they have been impaired through the fault of
the creditor, executed by a third person. (par 2)
Applicability of impairment clause
(1) Instruments executed by third persons or debtor himself. — Par
2 is applicable to both instruments executed by third persons
and notes executed by the debtor himself.
(2) Only to instruments executed by third persons — The clause
relative to impairment of the negotiable character of
commercial paper by the fault of the creditor is applicable only
to the irst class of instruments, i.e., those executed by third
persons.
(3) Duty of payee accepting a check — Due diligence on the part of
the payee in presenting it for payment. If no such presentment
was made, the drawer cannot be held liable irrespective of loss
or injury sustained by the payee.
Meaning of in lation and de lation
In lation De lation
Sharp sudden increase of money Reduction in volume and
or credit or both without a circulation of the available
corresponding increase in money or credit.
business transactions.
Causes a drop in the value of Decline of the general price level.
money, resulting in the rise of
the general price level.
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ART 1250. In case an extraordinary in lation or de lation of the
currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation shall
be the basis of payment, unless there is an agreement to the
contrary.
Requisites for application of Art 1250
(1) Of icial declaration of extraordinary in lation or de lation
from BSP;
(2) Obligation is contractual; and
(3) Parties expressly agreed to consider the effects of the
extraordinary in lation or de lation.
How payment to be made
➔ A debt shall not be understood to have been paid unless the
thing or service in which the obligation consists has been
completely delivered or rendered, as the case may be. (Art
1233)
GR: Partial Payment NOT allowed; (Art 1248)
EXC: Unless there is an express stipulation to that effect.
When the debt is in part liquidated and in part
unliquidated, the creditor may demand and the debtor
may effect the payment of the former without waiting
for the liquidation of the latter. (Art 1248 par 2)
Other instances where partial performance allowed:
a) When the different prestations are subject to
different conditions or different terms;
b) When a joint debtor pays his share or the
creditor demands the same;
c) When a solidary debtor pays only the part
demandable because the rest are not yet
demandable;
d) In case of compensation, when one debt is
larger than the other;
e) When work is to be done in parts.
Substantial Performance in Good Faith
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
ART 1234. If the obligation has been substantially performed in
good faith, the obligor may recover as though there had been a
strict and complete ful illment, less damages suffered by the
obligee.
➔ Applies only when an obligor admits breaching the contract
after honestly and faithfully performing all the material
elements thereof except for some technical aspects that cause
no serious harm to the obligee. (IHC v. Joaquin, Jr.)
Estoppel
ART 1235. When the obligee accepts the performance,
a) knowing its incompleteness or irregularity, and
b) without expressing any protest or objection,
the obligation is deemed fully complied with.
Where payment is to be made
a) If there is a stipulation — the place designated;
b) If there is NO stipulation
i) If obligation to deliver a determinate speci ic thing —
where the thing is usually or habitually placed at the
time the obligation was constituted.
ii) For any other obligation — domicile of debtor.
Special Forms of Payment
(1) Application of payments;
(2) Dation in payment or adjudicacion en pago, datio in solutum
(Art 1245);
(3) Assignment in favor of creditors or cession;
(4) Tender of payment and consignation.
Application of Payments
It is the designation of the debt to which should be applied a payment
made by a debtor who owes several debts in favor of the same creditor.
Requisites
(a) There must be two or more debts;
(b) The debts must be of the same kind;
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(c) The debts are owed by the same debtor in favor of the same
creditor;
(d) All the debts must be due except:
(i) If the parties so stipulate; or
(ii) When the application of payment is made by the party
for whose bene it the term has been constituted.
(e) The payment is not enough to extinguish all the debts.
Preferential Right of the Debtor — subject to limitations:
(a) If there was a valid prior but contrary agreement, the debtor
cannot choose;
(b) The debtor cannot choose to pay part of the principal ahead of
the interest, unless the creditor consents.
How Made
(a) The debtor makes the designation at the time when payment is
made;
(b) If not, the creditor makes it, by so stating in the receipt that he
issues, “unless there is cause for invalidating the contract;”
(c) If no one made the application or it is invalid, then application
is made by operation of law:
(i) If the debt produces interest, payment of the principal
shall not be deemed to have been made until the
interests have been covered. (Art 1253)
(ii) The debt which is most onerous to the debtor, among
those due, shall be deemed to have been satis ied.
If the debts due are of the same nature and burden, the
payment shall be applied to all of them
proportionately. (Art 1254)
Samples of More Onerous Debts
(a) Older ones in case of running accounts;
(b) Interest-bearing debts, even if the non-interest bearing is older;
(c) That which charges the higher interest;
(d) Debts secured by mortgage or pledge;
(e) Debts with a penalty clause;
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(f) Advances for subsistence are more onerous than cash b) Does not require plurality of b) Requires more than one 4) Obligation must already be due.
advances; creditors; creditor; Essential Requisites for Consignation
(g) Where the debtor is in mora; c) Only the speci ic creditor’s c) Requires the consent of ALL 1) Existence of a valid debt;
(h) An exclusive debt as compared to a solidary one. consent is required; creditors;
2) Valid prior tender, unless excused;
d) May take place during the d) Requires full or partial
Payment by Cession solvency of debtor; insolvency; 3) Prior notice of consignation (before deposit) — may be
e) Transfers ownership upon e) Does not transfer accomplished simultaneously with tender of payment.
ART 1255. The debtor may cede or assign his property to his
creditors in payment of his debts. This cession, unless there is delivery; ownership; 4) Actual consignation (deposit);
stipulation to the contrary, shall only release the debtor from f) More of an act of novation. f) NOT an act of novation. 5) Subsequent notice of consignation.
responsibility for the net proceeds of the thing assigned. The
agreements which, on the effect of the cession, are made Effects if Consignation Has Been Duly Made
Tender of Payment and Consignation
between the debtor and his creditors shall be governed by
(a) The debtor may ask the judge to order the cancellation of the
special laws. ➔ Tender of payment is the act of offering the creditor what is due
obligation;
him together with a demand that the creditor accept the same.
Cession is the process by which a debtor transfers all the properties (b) The running of interest is suspended;
not subject to execution in favor of his creditors so that the latter may If the creditor to whom tender of payment has been made refuses
sell them, and thus apply the proceeds to their credits. without just cause to accept it, the debtor shall be released from (c) Creditor bears the loss if
responsibility by the consignation of the thing or sum due.
Requisites for Voluntary Assignment (i) Consignation is judicially approved;
➔ Consignation is the act of depositing the thing due with the court
(a) More than one debt; (ii) All the essential requisites are present; or
or judicial authorities whenever the creditor cannot accept or
(b) More than one creditor; refuses to accept payment. (iii) Creditor has signi ied his acceptance.

(c) Complete or partial insolvency of debtor; Prior tender of payment is generally required. However, Effects of Withdrawal by Debtor After
Consignation alone shall produce the same effect in the following Consignation Has Been Made
(d) Abandonment of all debtor’s property not exempt from cases:
execution; (a) Obligation remains;
(1) When the creditor is absent or unknown, or does not
(e) Acceptance or consent on the part of creditors. (b) The creditor who authorized the withdrawal loses any
appear at the place of payment;
preference over the thing;
Effect of Voluntary Assignment (2) When he is incapacitated to receive the payment at the
(c) The co-debtors, guarantors, and sureties are released unless
(a) Creditors are merely assignees with authority to sell; time it is due;
they consented.
(b) Debtor is released up to the amount of the net proceeds of the (3) When, without just cause, he refuses to give a receipt;
Filinvest Credit Corporation v. Philippine Acetylene Co.
sale, unless there is a contrary stipulation. The balance remains (4) When two or more persons claim the same right to
collectible; The mere return of the mortgaged motor vehicle by the mortgagor, the
collect;
herein appellant, to the mortgagee, the herein appellee, does not
(c) Creditors will collect credits in the order of preference agreed (5) When the title of the obligation has been lost. (Art 1256) constitute dation in payment or dacion en pago in the absence,
upon. express or implied of the true intention of the parties.
When Creditor Justi ied in Refusing Tender of Payment — if the
Cession distinguished from Dacion en pago tender is invalid. To be valid, the following requisites must concur: In dacion en pago, as a special mode of payment, the debtor offers
Dacion en pago Cession 1) Must be made in legal tender; another thing to the creditor who accepts it as equivalent of payment
of an outstanding debt. The undertaking really partakes in one sense
a) Does not affect ALL a) Generally affects ALL 2) Must include whatever interest is due; of the nature of sale. In the absence of clear consent of appellee to the
properties; properties of the debtor; 3) Must generally be unconditional; proffered special mode of payment, there can be no transfer of

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ownership of the mortgaged motor vehicle from appellant to appellee.
Golez v. Camara
Even the delivery of bills of exchange—and hence, of checks,
shall—pursuant to the second paragraph of Article 1249—"produce
the effect of payment xxxx when they have been cashed".
In right of redemption, no judicial consignation is, however,
necessary. A bona ide tender of payment suf ices.
New Paci ic Timber & Supply Co. v. Seneris
Considering that the whole amount deposited by the petitioner
consisting of Cashier's Check of P50,000.00 and P13,130.00 in cash
covers the judgment obligation of P63,000.00 as mentioned in the
writ of execution, then, We see no valid reason for the private
respondent to have refused acceptance of the payment of the
obligation in his favor. The auction sale, therefore, was uncalled for.
Singson v. Caltex
Like the Serra and Huibonhoa cases, the instant case also raises as
basis for the application of Article 1250 the Philippine economic
crisis in the early 1980s — when, based on petitioner's evidence, the
in lation rate rose to 50.34% in 1984. We hold that there is no legal or
factual basis to support petitioner's allegation of the existence of
extraordinary in lation during this period, or, for that matter, the
entire time frame of 1968 to 1983, to merit the adjustment of the
rentals in the lease contract dated July 16, 1968. Although by
petitioner's evidence there was a decided decline in the purchasing
power of the Philippine peso throughout this period, we are hard put
to treat this as an "extraordinary in lation" within the meaning and
intent of Article 1250.
"Erosion" is indeed an accurate description of the trend of decline in
the value of the peso in the past three to four decades. Unfortunate as
this trend may be, it is certainly distinct from the phenomenon
contemplated by Article 1250. Moreover, this Court has held that the
effects of extraordinary in lation are not to be applied without
an of icial declaration thereof by competent authorities.
CF Sharp and Co., Inc. v. Northwest Airlines, Inc.
Obligations in foreign currency may be discharged in Philippine
currency based on the prevailing rate at the time of payment.
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
Far East Bank and Trust Co. (FEBTC) v. Diaz Realty, Inc.
The rule that the value of the currency at the time of the
establishment of the obligation shall be the basis of payment inds
application only when there is an of icial pronouncement or
declaration of the existence of an extraordinary in lation or de lation.
Lantion v. NLRC
The effects of extraordinary in lation are not to be applied without an
agreement between the parties and without an of icial declaration
thereof by competent authorities.
Aquintey v. Tibong
Roman Catholic Bishop of Malolos, Inc. v. IAC
A inding that the private respondent had suf icient available funds on
or before the grace period for the payment of its obligation does not
constitute proof of tender of payment by the latter for its
obligation within the said period. Tender of payment involves a
positive and unconditional act by the obligor of offering legal tender
currency as payment to the obligee for the former's obligation and
demanding that the latter accept the same. Thus, tender of payment
cannot be presumed by a mere inference from surrounding
circumstances. At most, suf iciency of available funds is only
af irmative of the capacity or ability of the obligor to ful ill his part of
the bargain.
Further, respondent used a certi ied personal check which is not legal
tender nor the currency stipulated, and therefore, can not constitute
valid tender of payment. A check, whether a manager's check or
ordinary check, is not legal tender, and an offer of a check in
payment of a debt is not a valid tender of payment and may be refused
receipt by the obligee or creditor.
Hence, where the tender of payment by the private respondent was
not valid for failure to comply with the requisite payment in legal
tender or currency stipulated within the grace period and as such,
was validly refused receipt by the petitioner, the subsequent
consignation did not operate to discharge the former from its
obligation to the latter.
In view of the foregoing, the petitioner in the legitimate exercise of its
rights pursuant to the subject contract, did validly order therefore the
cancellation of the said contract, the forfeiture of the previous
payment, and the reconveyance ipso facto of the land in question.
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For a valid tender of payment, it is necessary that there be a fusion of
intent, ability and capability to make good such offer, which must be
absolute and must cover the amount due. Though a check is not legal
tender, and a creditor may validly refuse to accept it if tendered as
payment, one who in fact accepted a fully funded check after the
debtor's manifestation that it had been given to settle an obligation is
estopped from later on denouncing the ef icacy of such tender of
payment.
An assignment of credit is an agreement by virtue of which the
owner of a credit, known as the assignor, by a legal cause, such as
sale, dation in payment, exchange or donation, and without the
consent of the debtor, transfers his credit and accessory rights to
another, known as the assignee, who acquires the power to enforce it
to the same extent as the assignor could enforce it against the debtor.
It may be in the form of sale, but at times it may constitute a dation in
payment, such as when a debtor, in order to obtain a release from his
debt, assigns to his creditor a credit he has against a third person.
Dacion en pago is the delivery and transmission of ownership of a
thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation. The requisites for dacion en pago
are:
(1) there must be a performance of the prestation in lieu of
payment (animo solvendi) which may consist in the delivery
of a corporeal thing or a real right or a credit against the third
person;
(2) there must be some difference between the prestation due
and that which is given in substitution (aliud pro alio); and
(3) there must be an agreement between the creditor and debtor
that the obligation is immediately extinguished by reason of
the performance of a prestation different from that due.
All the requisites for a valid dation in payment are present in this
case. Respondent Felicidad assigned to petitioner her credits "to make
good" the balance of her obligation. Felicidad testi ied that she
executed the deeds to enable her to make partial payments of her
account, since she could not comply with petitioner's frenetic
demands to pay the account in cash. Petitioner and respondent
Felicidad agreed to relieve the latter of her obligation to pay the
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balance of her account, and for petitioner to collect the same from
respondent's debtors.
Telengtan Brothers & Sons, Inc. v. United States Lines, Inc.
Even if the price index of goods and services may have risen during
the intervening period, this increase, without more, cannot be
considered as resulting to "extraordinary in lation" as to justify the
application of Article 1250.
Article 1250 clearly provides that the value of the peso at the time of
the establishment of the obligation shall control and be the basis of
payment of the contractual obligation, unless there is "agreement to
the contrary." It is only when there is a contrary agreement that
extraordinary in lation will make the value of the currency at the time
of payment, not at the time of the establishment of obligation, the
basis for payment.
International Hotel Corporation v. Joaquin, Jr. & Suarez 2013
Article 1234 applies only when an obligor admits breaching the
contract after honestly and faithfully performing all the material
elements thereof except for some technical aspects that cause no
serious harm to the obligee. IHC correctly submits that the provision
refers to an omission or deviation that is slight, or technical and
unimportant, and does not affect the real purpose of the contract.
Sps. Bonrostro v. Sps. Luna 2013 supra
When a tender of payment is made in such a form that the creditor
could have immediately realized payment if he had accepted the
tender, followed by a prompt attempt of the debtor to deposit the
means of payment in court by way of consignation, the accrual of
interest on the obligation will be suspended from the date of such
tender. But when the tender of payment is not accompanied by
the means of payment, and the debtor did not take any
immediate step to make a consignation, then interest is not
suspended from the time of such tender.
NPC v. Ibrahim, et al. 2015
Article 1242 is an exception to the rule that a valid payment of an
obligation can only be made to the person to whom such obligation is
rightfully owed. It contemplates a situation where a debtor pays a
“possessor of credit” i.e., someone who is not the real creditor but
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
appears, under the circumstances, to be the real creditor. In such
scenario, the law considers the payment to the “possessor of credit”
as valid even as against the real creditor taking into account the good
faith of the debtor.
Mangondato—being the judgment creditor in Civil Case No. 605-92
and Civil Case No. 610-92 as well as the registered owner of the
subject land at the time—may be considered as a “possessor of
credit” with respect to the rental fees and expropriation indemnity
adjudged due for the subject land in the two cases, if the Ibrahims and
Maruhoms turn out to be the real owners of the subject land. Hence,
petitioner’s payment to Mangondato of the fees and indemnity due for
the subject land as a consequence of the execution of Civil Case No.
605-92 and Civil Case No. 610-92 could still validly extinguish its
obligation to pay for the same even as against the Ibrahims and
Maruhoms.
Sinamban v. China Banking Corporation 2015
A co-maker of a PN who binds himself with the maker "jointly and
severally" renders himself directly and primarily liable with the
maker on the debt, without reference to his solvency.
It is settled that when the obligor or obligors undertake to be "jointly
and severally" liable, it means that the obligation is solidary. In this
case, the spouses Sinamban expressly bound themselves to be jointly
and severally, or solidarily, liable with the principal makers of the
PNs, the spouses Manalastas.
Marquez v. Elisan Credit Corporation 2015
There is a need to analyze and harmonize Article 1176 and Article
1253 of the Civil Code to determine whether the daily payments
made after the second loan's maturity should be credited against the
interest or against the principal.
Article 1176 provides that: "The receipt of the principal by the
creditor, without reservation with respect to the interest, shall give
rise to the presumption that said interest has been paid.xxx."
On the other hand, Article 1253 states: "If the debt produces interest,
payment of the principal shall not be deemed to have been made until
the interests have been covered."
Correlating the two provisions, the rule under Article 1253 that
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payments shall irst be applied to the interest and not to the principal
shall govern if two facts exist:
(1) the debt produces interest (e.g., the payment of interest is
expressly stipulated) and
(2) the principal remains unpaid.
Since the doubt in the present case pertains to the application of the
daily payments, Article 1253 shall apply. Only when there is a
waiver of interest shall Article 1176 become relevant.
Under this analysis, we rule that the respondent properly credited the
daily payments to the interest and not to the principal because:
(1) the debt produces interest, i.e., the promissory note securing
the second loan provided for payment of interest;
(2) a portion of the second loan remained unpaid upon maturity;
and
(3) the respondent did not waive the payment of interest.
Sps. Tan, et al. v. China Banking Corporation 2016
The right of the debtor to apply payment is merely directory in nature
and must be promptly exercised, lest, such right passes to the
creditor.
In the event that the debtor failed to exercise the right to elect the
creditor may choose to which among the debts the payment is applied
as in the case at bar. It is noteworthy that after the sale of the
foreclosed properties at the public auction, Lorenze Realty failed to
manifest its preference as to which among the obligations that were
all due the proceeds of the sale should be applied. Its silence can be
construed as acquiescence to China Bank's application of the payment
irst to the interest and penalties and the remainder to the principal
which is sanctioned by Article 1253.
That they assume that the obligation is fully satis ied by the sale of
the securities does not hold any water. Nowhere in our statutes and
jurisprudence do they provide that the sale of the collaterals
constituted as security of the obligation results in the extinguishment
of the obligation.
Osmeña-Jalandoni v. Encomienda 2017
Jalandoni greatly bene ited from the purportedly unauthorized
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payments. Thus, even if she asseverates that Encomienda's payment
of her household bills was without her knowledge or against her will,
she cannot deny the fact that the same still inured to her bene it and
Encomienda must therefore be consequently reimbursed for it. Also,
when Jalandoni learned about the payments, she did nothing to
express her objection to or repudiation of the same, within a
reasonable time. Even when she claimed that she was prepared with
her own money, she still accepted the inancial assistance and
actually made use of it.
Loss of The Thing Due
Effect of Loss on an Obligation to Deliver Speci ic Thing
GR: Obligation EXTINGUISHED;
EXC: Not extinguished in the following cases:
1) The debtor is at fault;
2) The debtor is made liable for a fortuitous event.
Effect of Loss on an Obligation to Deliver Generic Thing
GR: Obligation NOT EXTINGUISHED — genus never perishes;
EXC: Extinguished in the following cases:
1) If the generic thing is delimited;
2) Has already been segregated or set aside, in which case, it
has become speci ic.
Effect of Loss Through a Fortuitous Event in
Reciprocal Obligations
GR: The obligation that was not extinguished remains;
EXC: Extinguished in the following cases:
1) In the case of lease — if the object is destroyed, both the
lease and obligation to pay rent are extinguished (Art
1655);
2) In contracts for piece of work — If the thing is lost prior
to delivery, the worker cannot ask for the price.
Rebus sic stantibus (Art 1267)
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
➔ This refers to the moral impossibility or impracticability due
to change of certain conditions.
➔ When the service has become so dif icult as to be manifestly
beyond the contemplation of the parties, the obligor may also
be released therefrom, in whole or in part.
➔ It speaks of personal obligations and is thus inapplicable to
real obligations.
➔ The following requisites must concur:
1) The service must become so dif icult that it was
manifestly beyond the contemplation of both parties;
2) One of the parties must ask for relief;
3) The object must be a future service with future
unusual change in conditions.
Naga Telephone Co., et al. v. CA, supra
Article 1267 speaks of “service” which has become so dif icult.
Taking into consideration the rationale behind this provision, the
term “service” should be understood as referring to the
“performance” of the obligation. In the present case, the obligation of
private respondent consists in allowing petitioners to use its posts in
Naga City, which is the service contemplated in said article.
It is not a requirement thereunder that the contract be for future
service with future unusual change. The allegations in private
respondent’s complaint and the evidence it has presented suf iciently
made out a cause of action under Article 1267.
Eastern Telecommunications Philippines, Inc. v. Eastern Telecoms
Employees Union 2012
The parties to the contract must be presumed to have assumed the
risks of unfavorable developments. It is, therefore, only in absolutely
exceptional changes of circumstances that equity demands assistance
for the debtor by applying Art 1267. In the case at bench, the Court
determines that ETPI’s claimed depressed inancial state will not
release it from the binding effect of the 2001-2004 CBA Side
Agreement.
Tagaytay Realty Co., Inc. v. Gacutan 2015
The installment buyer of a subdivision lot has the right to withhold
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payment of his amortizations for the duration that the subdivision
developer has not complied with its contractual undertaking to build
the promised amenities in the subdivision.
Considering that the petitioner's unilateral suspension of the
construction of the amenities was intended to save itself from costs,
its plea for relief from its contractual obligations was properly
rejected because it would thereby gain a position of advantage at the
expense of the lot owners like the respondent. Its invocation of
Article 1267 was factually unfounded.
For Article 1267 to apply, the following conditions should
concur, namely:
(a) the event or change in circumstances could not have been
foreseen at the time of the execution of the contract;
(b) it makes the performance of the contract extremely dif icult
but not impossible;
(c) it must not be due to the act of any of the parties; and
(d) the contract is for a future prestation.
The requisites did not concur herein because the dif iculty of
performance under Article 1267 of the Civil Code should be such that
one party would be placed at a disadvantage by the unforeseen event.
Mere inconvenience, or unexpected impediments, or increased
expenses did not suf ice to relieve the debtor from a bad bargain.
Condonation or Remission of Debt
Condonation or remission is the abandonment by the creditor of his
right.
Essential Requisites
1) There must be an agreement;
2) The parties must be capacitated and must consent;
3) There must be a subject matter;
4) The cause or consideration must be liberality;
5) The obligation remitted must have been demandable;
6) Must not be inof icious;
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7) Formalities of a donation are complied with in case of
express remission;
8) They must be clearly and convincingly shown as they are not
to be presumed generally.
Presumptions
(1) Of Remission — The delivery of a private document
evidencing a credit, made voluntarily by the creditor to the
debtor. (Art 1271);
(2) Of Voluntary Delivery — Whenever the private document in
which the debt appears is found in the possession of the debtor.
(Art 1272);
(3) Of Remission of Pledge — When the thing pledged, after its
delivery to the creditor, is found in the possession of the
debtor, or of a third person who owns the thing. (Art 1274)
Confusion or Merger of Rights
Confusion or merger is the meeting in one person of the qualities of
creditor and debtor with respect to the same obligation.
Essential Requisites
1) It should take place between the principal debtor and creditor;
2) Must be clear and de inite;
3) The very obligation involved must be the same or identical.
Compensation
Compensation is the extinguishment in the concurrent amount of the
obligations of those persons who are reciprocally debtors and creditors
of each other.
Essential Requisites for Legal Compensation
ART 1279. In order that compensation may be proper, it is
necessary:
(1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of
the other;
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind,
and also of the same quality if the latter has been
stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor.
ART 1290. When all the requisites xxx are present,
compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even though
the creditors and debtors are not aware of the compensation.
Compensation of Following are Prohibited
(1) Debts arising from a depositum (Art 1287);
(2) Debts arising from the obligations of a depositary (Art 1287);
(3) Debts arising from the obligations of a bailee in commodatum
(Art 1287);
(4) Debts arising from a claim for future support due by gratuitous
title (Art 1287);
(5) Debts arising in civil liability arising from a penal offense (Art
1288);
(6) Damages suffered by a partnership through the fault of a
partner vis-a-vis pro its and bene its the erring partner may
have earned for the partnership by his industry (Art 1794).
Judicial Compensation or Set-off
ART 1283. 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.
Effect of Assignment on Compensation of Debts (Art 1285)
1) If made with consent of debtor — Compensation CANNOT be
set up except if the right thereto is reserved.
2) With knowledge but without consent or against the will of
debtor — compensation can be set up regarding debts previous
to the assignment.
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3) Without knowledge of debtor — Debtor can set up
compensation as a defense for all debts maturing prior to his
knowledge of the assignment.
Gullas v. PNB
As a general rule, a bank has a right of set off of the deposits in its
hands for the payment of any indebtedness to it on the part of a
depositor.
Starting, therefore, from the premise that the Philippine National Bank
had with respect to the deposit of Gullas a right of set off, we next
consider if that remedy was enforced properly. The fact we believe is
undeniable that prior to the mailing of notice of dishonor, and without
waiting for any action by Gullas, the bank made use of the money
standing in his account to make good for the treasury warrant. At this
point recall that Gullas was merely an indorser and had issued checks
in good faith.
As to a depositor who has funds suf icient to meet payment of a check
drawn by him in favor of a third party, it has been held that he has a
right of action against the bank for its refusal to pay such a check in
the absence of notice to him that the bank has applied the funds so
deposited in extinguishment of past due claims held against him.
Thus, the action of the bank was prejudicial to Gullas. Gullas should
be awarded nominal damages because of the premature action of the
bank against which Gullas had no means of protection.
Garcia v. Lim Chiu Sing
WON it is proper to compensate the defendant-appellant's
indebtedness of P9,105.17, which is claimed in the complaint, with
the sum of P10,000 representing the value of his shares of stock with
the plaintiff entity, the Mercantile Bank of China.
A share of stock or the certi icate thereof is not an indebtedness to the
owner nor evidence of indebtedness and, therefore, it is not a credit.
Stockholders, as such, are not creditors of the corporation. Therefore,
the defendant-appellant Lim Chu Sing not being a creditor of the
Mercantile Bank of China, although the latter is a creditor of the
former, there is no suf icient ground to justify a compensation.
Union Bank of the Philippines v. DBP 2014
Union Bank iled a motion to seek af irmation that legal
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compensation had taken place in order to effectively offset (a) its own
obligation to return the funds it previously received from DBP as
directed under the Writ of Execution with (b) DBP’s assumed
obligations under the Assumption Agreement. However, legal
compensation could not have taken place between these debts for the
apparent reason that requisites 3 and 4 under Article 1279 are not
present.
Since DBP’s assumed obligations to Union Bank for remittance of the
lease payments are – in the Court’s words in its Decision in G.R. No.
155838 – “contingent on the prior payment thereof by [FW] to DBP,”
it cannot be said that both debts are due. Also, in the same ruling, the
Court observed that any de iciency that DBP had to make up for the
full satisfaction of the assumed obligations “cannot be determined
until after the satisfaction of Foodmasters’ obligation to DBP.” In this
regard, it cannot be concluded that the same debt had already been
liquidated, and thereby became demandable.
Novation
ART 1291. Obligations may be modi ied by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
Novation is understood as the substitution or change of an obligation
by another, which extinguishes or modi ies the irst, either changing its
object or principal condition, or substituting another in place of the
debtor, or subrogating a third person in the right of the creditor.
Essential Requisites
1) The old obligation must be valid;
2) The intent to extinguish or modify the old obligation by a
substantial difference;
3) The capacity and consent of all parties except in expromision.
4) The new obligation must be valid.
How Implied Novation Made — by making substantial changes
(1) In the object or subject matter;
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
(2) In the cause or consideration;
(3) In the principal terms or conditions
(a) If a debt subject to a condition is made an absolute
one;
(b) Reduction of the term or period;
(c) When, without consent of some subscribers, the
capital stock of a corporation is increased.
Instances Where there was NO Extinctive Novation
1) When there are only slight alterations or modi ications;
2) When the new contract merely contains supplementary
agreement;
3) When additional interest is agreed upon;
4) When additional security is given;
5) A contract was entered into providing a method of payment;
6) When a guarantor also becomes a principal debtor;
7) When the creditor in the meantime refrains from suing the
debtor, or extends the term of payment;
8) When the place of payment is changed or there is a variation in
the amount of partial payments;
9) When a public instrument is executed to con irm a valid
contract.
Substitution of Debtor (Art 1293)
a) Expromision — the initiative comes from a third person; (Art
1294)
b) Delegacion — the initiative comes from the debtor. Here the
three parties must agree. (Art 1295)
Requisites for Expromision
1) Initiative must come from a third person who will be the new
debtor;
2) The new debtor and creditor must consent;
3) The old debtor must be excused or released from his
obligation.
Requisites for Delegacion
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1) The initiative comes from the old debtor;
2) All parties concerned must consent or agree;
Effect of Insolvency of New Debtor
1) In expromision — If the substitution is without the
knowledge or against the will of the debtor, the new debtor's
insolvency or non-ful illment of the obligations shall not give
rise to any liability on the part of the original debtor. (Art 1294)
2) In delegacion — shall not revive the action of the creditor
against the original obligor,
EXC: when said insolvency was already existing and of public
knowledge, OR known to the debtor, when he delegated his
debt. (Art 1295)
Subrogation
Extinctive subjective novation by change of creditor is the transfer to a
third person of all the rights appertaining to the creditor.
ART 1301. Conventional subrogation of a third person
requires the consent of the original parties and of the third
person.
ART 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is
preferred, even without the debtor's knowledge;
(2) When a third person, not interested in the obligation,
pays with the express or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a
person interested in the ful illment of the obligation
pays, without prejudice to the effects of confusion as
to the latter's share.
Uraca, et al. v. CA
Novation is effected only when a new contract has extinguished an
earlier contract between the same parties.
Petitioners and the Velezes clearly did not perfect a new contract
because the essential requisite of consent was absent, the parties
having failed to agree on the terms of the payment.
Reyes v. CA, et al.
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No new agreement for substitution of creditor was forged among the
parties concerned which would take the place of the preceding
contract. The absence of a new contract extinguishing the old one
destroys any possibility of novation by conventional subrogation.
Well settled is the rule that novation by substitution of creditor
requires an agreement among the three parties concerned - the
original creditor, the debtor and the new creditor. It is a new
contractual relation based on the mutual agreement among all the
necessary parties. Hence, there is no novation if no new contract was
executed by the parties.
Magdalena Estate, Inc. v. Rodriguez
An obligation to pay a sum of money is not novated, in a new
instrument wherein the old is rati ied, by changing only the terms of
payment and adding other obligations not incompatible with the old
one, or wherein the old contract is merely supplemented by the new
one. The mere fact that the creditor receives a guaranty or accepts
payments from a third person who has agreed to assume the
obligation, when there is no agreement that the irst debtor shall be
released from responsibility, does not constitute a novation, and the
creditor can still enforce the obligation against the original debtor.
Pascual v. Lacsamana
If the second instrument was accepted by plaintiff so that the period
for the payment was intended to be postponed, there would still be no
novation because mere extension of payment and the addition of
another obligation not incompatible with the old one is not a
novation thereof.
La Tondeña, Inc. v. Alto Surety & Insurance Co.
In order to extinguish or discharge an obligation by novation the
intent of the parties to do so (animus novandi) must be either
expressed or else clearly apparent from the incompatibility "on all
points" of the old and the new obligations. The act of giving a debtor
more time to pay an obligation is not a novation that will extinguish
the original debt.
Dungo v. Lopeña
Herein petitioner claims that when a third party, Emma R. Santos,
came in and assumed the mortgaged obligation, novation resulted
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
thereby inasmuch as a new debtor was substituted in place of the
original one. In this kind of novation, however, it is not enough that
the juridical relation of the parties to the original contract is extended
to a third person; it is necessary that the old debtor be released from
the obligation, and the third person or new debtor takes his place in
the new relation. Without such release, there is no novation; the third
person who has assumed the obligation of the debtor merely
becomes a co-debtor or surety. If there is no agreement as to
solidarity, the irst and the new debtors are considered obligated
jointly. There was no such release of the original debtor in the
Tri-Party Agreement.
Kabankalan Sugar Co. v. Pacheco
When an easement of right of way is one of the principal conditions
of a contract, and the duration of said easement is speci ied, the
reduction of said period in a subsequent contract, wherein the same
obligation is one of the principal conditions, constitutes a
novation and to that extent extinguishes the former contractual
obligation.
GSIS v. CA
Consent of the creditor is indispensable for a valid novation
consisting of a change of debtor.
Cochingyan, Jr. v. R & B Surety and Insurance Co., Inc.
The Trust Agreement does not expressly terminate the obligation of R
& B Surety under the Surety Bond. On the contrary, the Trust
Agreement expressly provides for the continuing subsistence of that
obligation.
Neither can the petitioners anchor their defense on implied novation.
Absent an unequivocal declaration of extinguishment of a pre-existing
obligation, a showing of complete incompatibility between the old
and the new obligation (and nothing else) would sustain a inding of
novation by implication. But where, as in this case, the parties to the
new obligation expressly recognize the continuing existence and
validity of the old one, where in other words, the parties expressly
negated the lapsing of the old obligation, there can be no novation.
Babst v. CA
There can be implied consent of the creditor to the substitution of
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debtors.
In the case at bar, due to the failure of BPI to register its objection to
the take-over by DBP of ELISCON's assets, at the creditors' meeting
held in June 1981 and thereafter, it is deemed to have consented to the
substitution of DBP for ELISCON as debtor. Hence, there was a valid
novation which resulted in the release of ELISCON from its obligation
to BPI, whose cause of action should be directed against DBP as the
new debtor.
South City Homes, Inc., et al. v. CA
An assignment of credit is an agreement by virtue of which the owner
of a credit, known as the assignor, by a legal cause, such as sale,
dacion en pago, exchange or donation, and without the consent of the
debtor, transfers his credit and accessory rights to another, known as
the assignee, who acquires the power to enforce it to the same extent
as the assignor could enforce it against the debtor. As a consequence,
the third party steps into the shoes of the original creditor as
subrogee of the latter. Petitioners' obligations were not
extinguished.
Philippine Savings Bank v. Manalac, Jr.
The elements of novation are patently lacking in the instant case.
There was no agreement to form a new contract by novating the
mortgage contracts of the Mañ alacs and the Galicias. In accepting the
check, the bank only acceded to Mañ alac’s instruction on whose loan
accounts the proceeds shall be applied but rejected the other
condition that the 4 parcels of land be released from mortgage.
Clearly, there is no mutual consent to replace the old mortgage
contract with a new obligation. The con licting intention and acts of
the parties underscore the absence of any express disclosure or
circumstances with which to deduce a clear and unequivocal intent
by the parties to novate the old agreement.
Neither can Mañ alac be deemed substitute debtor within the
contemplation of Article 1293. In order to change the person of the
debtor, the old one must be expressly released from the obligation,
and the third person or new debtor must assume the former’s place in
the relation. Mañ alac has not shown by competent evidence that they
were expressly taking the place of Galicia as debtor, or that the latter
were being released from their solidary obligation. Nor was it shown
that the obligation of the Galicias was being extinguished and
replaced by a new one.
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Odiamar v. Valencia 2016 incompatible with the new.

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. 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.
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.
Ever Electrical Manufacturing, Inc. v. Philippine Bank of
Communications 2016
Under the terms of the agreement, Vicente is an additional person
who would ensure that the loan of Ever to PBCom would be paid.
Under the rules of novation, the mere act of adding another person to
be personally liable, who in this case is Vicente, did not constitute
novation since there was no agreement to release Ever from its
responsibility to PBCom.
Figuera v. Ang 2016
Figuera based her claim on the third type of subrogation. She
claims that as the EIDC's new owner, she is interested in ful illing
Ang's obligation to pay the utility bills. Since the payment of the bills
was long overdue prior to the assignment of business rights to
Figuera, the failure to settle the bills would eventually result in "the
disconnection of the electricity and telephone services, ejectment
from the of ice premises, and resignation by some, if not all, of the
company's employees with the possibility of subsequent labor
claims for sums of money." These utilities are obviously necessary
for the continuation of Figuera's business transactions.
A person interested in the ful ilment of the obligation is one who
stands to be bene ited or injured in the enforcement of the obligation.
The Court agrees with Figuera that it became absolutely necessary for
her to pay the bills since Ang did not do so when the obligation
became due.
The consent or approval of the debtor is required only if a third
person who is not interested in the ful ilment of the obligation pays
such. On the other hand, no such requirement exists in cases of
payment by a creditor to another creditor who is preferred, and by a CONTRACTS
person interested in the ful ilment of the obligation. Notably, Article
1302 (1) and (3) does not require the debtor's knowledge. A. General Provisions
Therefore, legal subrogation took place despite the absence of 1. Principles
Ang's consent to Figuera's payment of the EIDC bills. Figuera is now Liberty or Autonomy of Contracts
deemed as Ang's creditor by operation of law.
Mutuality of Contracts
Liam v. UCPB 2016 Relativity of Contracts
The transaction between UCPB and PPGI was an assignment of credit Consensuality of Contracts
and not subrogation. Obligatory Force of Contracts
The crucial distinction between assignment and subrogation actually 2. Stages
deals with the necessity of the consent of the debtor in the original Negotiation
transaction. In an assignment of credit, the consent of the debtor is
Perfection
not necessary in order that the assignment may fully produce legal
effects. What the law requires in an assignment of credit is not the Consummation
consent of the debtor but merely notice to him as the assignment 3. Classi ication
takes effect only from the time he has knowledge thereof.
4. Essential Requisites
Meanwhile, subrogation requires an agreement among the three Consent
parties concerned - the original creditor, the debtor, and the new
creditor. It is a new contractual relation based on the mutual Object
agreement among all the necessary parties. Cause
B. Form of Contracts
The MOA and the Deed of Sale/Assignment clearly state that UCPB
became an assignee of PPGI's outstanding receivables of its C. Reformation of Instruments
condominium buyers. D. Interpretation of Contracts
SM Systems Corporation v. Camerino, et al. 2017 E. Defective Contracts
1. Rescissible Contracts
The compromise agreements executed by and between SMS and
four of the farmers are valid, thus, a novation of the judgment in the 2. Voidable Contracts
redemption case. 3. Unenforceable Contracts
SMS' obligation to allow redemption of the three parcels of land was 4. Void or Inexistent Contracts
superseded by the terms of the compromise agreements executed 5. Distinguish: resolution and rescission of contracts
with the four farmers. SMS' new obligation consisted of the payment
of P300,000.00 each to the four farmers who, in turn, waived their
redemption rights. Novation, thus, arose as the old obligation became

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A. General Provisions
ART 1305. A contract is a meeting of minds between two
persons whereby one binds himself, with respect to the other,
to give something or to render some service.
(1) Binding force — Has the force of law and neither of the parties
may without the consent of the other, renege therefrom. It
should not be contrary to law, morals, good customs, public
order, or public policy. (Art 1306).
(a) Mere proof of existence of a contract and the failure of its
compliance justify, prima facie, a corresponding right of
relief.
(b) In law, whatever fairly puts a person on inquiry is
suf icient notice. Thus, one cannot later feign ignorance.
(c) Any defect as reason for invalidating a contract must be
proven by convincing evidence. (Art 1308). Every
contracting party is presumed to have known the contents
Sps Pascual v. Ramos
of a contract before signing and agreeing to it.
(d) Although a contract is law between the parties, provisions
of positive law which regulate such contracts are deemed
included and shall limit and govern the relations
between the parties.
(e) A compromise agreement is immediately executory and
not appealable, except for vices of consent (Art 1330) or
forgery. It must have the requisites of consent, object,
and cause (Art 1318). It may be extrajudicial (to prevent
litigation) or judicial (to end a litigation).
(2) Requirements of a valid contract — Must be valid and
enforceable (Art 1403), with all the essential elements (Art
1318) and is not contrary to law, morals, good customs, public
order, and public policy. A void contract does not exist. A
Cuizon v. CA
contract may be valid but unenforceable (Arts 1317, 1403).
(3) Where contract requires approval by the government —
Such contract becomes the law between the parties only when
approved and its validity must be sustained.
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
(4) Compliance in good faith — No party is permitted to change
his mind or disavow or go back upon his own acts, or proceed
contrary thereto, to the prejudice of the other party.
(5) Liability for breach of contract — Our law on contracts
recognizes the principle that actionable injury inheres in every
contractual breach (Arts 1170, 1191).
(6) Unreasonable delay in demanding performance — May
render the contract ineffective where it does not provide for the
period within which performance may be demanded but the
parties did not contemplate that the same could be made
inde initely.
(7) Preservation of interest of promisee — The effect of every
infraction is to create a new duty, that is, to make recompense
to the one who has been injured by the failure of another to
observe his contractual obligation unless he can show
extenuating circumstances.
It is a basic principle in civil law that parties are bound by the
stipulations in the contracts voluntarily entered into by them. Parties
are free to stipulate terms and conditions which they deem
convenient provided they are not contrary to law, morals, good
customs, public order, or public policy.
The interest rate of 7% per month was voluntarily agreed upon by
RAMOS and the PASCUALs. There is nothing from the records and, in
fact, there is no allegation showing that petitioners were victims of
fraud when they entered into the agreement with RAMOS. Neither is
there a showing that in their contractual relations with RAMOS, the
PASCUALs were at a disadvantage on account of their moral
dependence, ignorance, mental weakness, tender age or other
handicap, which would entitle them to the vigilant protection of the
courts as mandated by Article 24 of the Civil Code.
It is well settled that in construing a written agreement, the reason
behind and the circumstances surrounding its execution are of
paramount importance to place the interpreter in the situation
occupied by the parties concerned at the time the writing was
executed.
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1. Principles
(a) Freedom to Stipulate or Autonomy or Liberality — The
contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public
order, or public policy. (Art 1306)
(b) Mutuality — The contract must bind both contracting parties;
its validity or compliance cannot be left to the will of one of
them. (Art 1308)
(c) Relativity — Contracts take effect only between the parties,
their assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. (Art
1311)
(d) Consensuality — Contracts are perfected by mere consent xxx
(Art 1315)
(e) Obligatory Force — xxx Parties are bound not only to the
ful illment 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. (Art 1315)
Liberty or Autonomy of Contracts
Banco Filipino Savings and Mortgage Bank v. Navarro
What should be resolved is whether BANCO FILIPINO can increase
the interest rate on the LOAN from 12% to 17% per annum under the
Escalation Clause. It is our considered opinion that it may not. It is
clear from the stipulation between the parties that the interest rate
may be increased "in the event a law should be enacted increasing the
lawful rate of interest that may be charged on this particular kind of
loan." The Escalation Clause was dependent on an increase of rate
made by "law" alone. CIRCULAR No. 494, although it has the effect of
law, is not a law.
From March 17, 1980, escalation clauses to be valid should
speci ically provide:
(1) that there can be an increase in interest if increased by law or
by the Monetary Board; and
(2) in order for such stipulation to be valid, it must include a
provision for reduction of the stipulated interest "in the
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event that the applicable maximum rate of interest is reduced
by law or by the Monetary Board."
Cui v. Arellano University
In order to declare a contract void as against public policy, a court
must ind that the contract as to consideration or the thing to be done,
contravenes some established interest of society, or is inconsistent
with sound policy and good morals, or tends clearly to undermine the
security of individual rights.
Scholarships are awarded in recognition of merit not to keep
outstanding students in school to bolster its prestige. In the
understanding of that university scholarships award is a business
scheme designed to increase the business potential of an educational
institution. Thus conceived it is not only inconsistent with sound
policy but also good morals.
Capitol Medical Center v. CA
Whether a school that, after due notice to the Secretary of Education,
Culture and Sports, closed at the end of the irst semester of the
school year 1987-1988, because its teachers and students declared a
strike, refusing to hold classes and take examinations, may be forced
to reopen by the courts at the instance of the striking students.
NO. The contract between the college and a student who is enrolled
and pays the fees for a semester, is for the entire semester only, not
for the entire course. The law does not require a school to see a
student through to the completion of his course. If the school closes
or is closed by proper authority at the end of a semester, the student
has no cause of action for breach of contract against the school.
Sy Suan v. Regala
The intervention of intermediaries, such as herein respondent,
would be unwarranted and uncalled for, as such intervention would
not render an unmeritorious application deserving, nor undeserving
applications meritorious, but would serve no other purpose than to
in luence, or possibly corrupt, in unmeritorious cases, the judgment
of the public of icial or of icials performing an act or service
connected with the issuance of Import license or quota allocation
— an eventuality Which the law precisely sought to avoid.
Tee v. Tacloban Electric and Ice Plant Co.
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
Plaintiff's alleged contract to work for the approval of the foreign
exchange application in question and the services he claims to have
performed in pursuance of this contract are inconsistent with the law
(Republic Act No. 265, as amended) creating the Central Bank. In
short, said contract is "in-existent and void from the beginning." In
short, said contract is "in-existent and void from the beginning."
Besides, the agreement under consideration is contrary to good
customs and public order, for public interest demands that
applications for foreign exchange be considered, acted upon and
disposed of strictly on the basis of the merits and demerits of each
case.
Under the principles relating to the doctrine of public policy, as
applied to the law of contracts, courts of justice will not recognize or
uphold any transaction which, in its object, operation, or tendency, is
calculated to be prejudicial to the public welfare, to sound morality,
or to civic honesty. The test is whether the parties have
stipulated for something inhibited by the law or inimical to, or
inconsistent with, the public welfare. An agreement is against
public policy if it
a) is injurious to the interests of the public,
b) contravenes some established interest of society,
c) violates some public statute,
d) is against good morals,
e) tends to interfere with the public welfare or safety, or
f) is at war with the interests of society and
g) is in con lict with the morals of the time.
Industrial Personnel and Management Services, Inc. v.
De Vera, et al. 2016
The general rule is that Philippine laws apply even to overseas
employment contracts. This rule is rooted in the constitutional
provision of Section 3, Article XIII that the State shall afford full
protection to labor, whether local or overseas.
As an exception, the parties may agree that a foreign law shall govern
the employment contract subject to the following requisites:
1. That it is expressly stipulated in the overseas employment
contract that a speci ic foreign law shall govern;
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2. That the foreign law invoked must be proven before the
courts pursuant to the Philippine rules on evidence;
3. That the foreign law stipulated in the overseas employment
contract must not be contrary to law, morals, good customs,
public order, or public policy of the Philippines; and
4. That the overseas employment contract must be processed
through the POEA.
The Court is of the view that these four (4) requisites must be
complied with before the employer could invoke the applicability of a
foreign law to an overseas employment contract.
Further, these strict terms are pursuant to the jurisprudential doctrine
that "parties may not contract away applicable provisions of law
especially peremptory provisions dealing with matters heavily
impressed with public interest," such as laws relating to labor.
Mutuality of Contracts
Garcia v. Rita Legarda, Inc.
There must be mutuality between the parties based on their essential
equality to which is repugnant to have one party bound by the
contract leaving the other free therefrom Its ultimate purpose is to
render void a contract containing a condition which makes its
ful illment dependent exclusively upon the uncontrolled will of one
of the contracting parties.
The questioned stipulation merely gives the vendor "the right to
declare this contract cancelled and of no effect" upon ful illment of
the conditions therein set forth. It does not leave the validity or
compliance of the contract entirely "to the will of one of the
contracting parties."
Allied Banking Corporation v. CA
Whether a stipulation in a contract of lease to the effect that the
contract "may be renewed for a like term at the option of the lessee"
is void for being potestative or violative of the principle of mutuality
of contracts under Art. 1308.
NO. The fact that such option is binding only on the lessor and can be
exercised only by the lessee does not render it void for lack of
mutuality. After all, the lessor is free to give or not to give the option
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to the lessee. And while the lessee has a right to elect whether to
continue with the lease or not, once he exercises his option to
continue and the lessor accepts, both parties are thereafter bound by
the new lease agreement. Their rights and obligations become
mutually ixed, and the lessee is entitled to retain possession of the
property for the duration of the new lease, and the lessor may hold
him liable for the rent therefor. The lessee cannot thereafter escape
liability even if he should subsequently decide to abandon the
premises. Mutuality obtains in such a contract and equality exists
between the lessor and the lessee since they remain with the same
faculties in respect to ful illment.
PNB v. CA
P.D. No. 1684 and C.B. Circular No. 905 no more than allow
contracting parties to stipulate freely regarding any subsequent
adjustment in the interest rate that shall accrue on a loan or
forbearance of money, goods or credits. In ine, they can agree to
adjust, upward or downward, the interest previously stipulated.
However, contrary to the stubborn insistence of petitioner bank, the
said law and circular did not authorize either party to unilaterally
raise the interest rate without the other's consent.
We cannot countenance petitioner bank's posturing that the
escalation clause at bench gives it unbridled right to unilaterally
upwardly adjust the interest on private respondents' loan. That would
completely take away from private respondents the right to assent to
an important modi ication in their agreement, and would negate the
element of mutuality in contracts.
Buenaventura v. MBTC 2016
A contract of adhesion is so-called because its terms are prepared by
only one party while the other party merely af ixes his signature
signifying his adhesion thereto. As a rule, it is no different from any
other contract. Its interpretation still aligns with the literal meaning
of its terms and conditions absent any ambiguity, or with the
intention of the parties. The terms and conditions of the promissory
notes involved herein, being clear and beyond doubt, should then be
enforced accordingly. It does not exempt the parties from compliance
with what was mutually agreed upon by them.
Relativity of Contracts
Exceptions
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
(a) Where the rights and obligations arising from the contract are
not transmissible by their nature, or by stipulation or by
provision of law;
(b) Stipulation pour autrui — if a contract should contain some
stipulation in favor of a third person;
(c) Tortious interference — Where a third person induces
another to violate his contract, he shall be liable for damages to
the other contracting party; (Art 1314)
So Ping Bun v. CA laid out the elements of tortious
interference:
(1) existence of a valid contract;
(2) knowledge on the part of the third person of the
existence of contract; and
(3) interference of the third person is without legal
justi ication or excuse. (see Excellent Essentials v.
Extra Excel, 2018)
(d) Where third persons may be adversely affected by a contract
where they did not participate;
(e) Accion directa — Where the law authorizes the creditor to sue
on a contract entered into by his debtor.
Florentino v. Encarnacion
A stipulation pour autrui is a stipulation in favor of a third
person conferring a clear and deliberate favor upon him, and which
stipulation is merely a part of a contract entered into by the parties,
neither of whom acted as agent of the third person, and such third
person may demand its ful illment provided that he communicates
his acceptance to the obligor before it is revoked. The requisites are:
(1) there must be a stipulation in favor of a third person.
(2) the stipulation must be a part, not the whole of the contract.
(3) the contracting parties must have clearly and deliberately
conferred a favor upon a third person, not a mere incidental
bene it or interest.
(4) the third person must have communicated his acceptance to
the obligor before its revocation.
(5) neither of the contracting parties bears the legal
representation or authorization of the third party.
By RGL
For the 2020/21 #BestBarEver
The fairest test to determine whether the interest of third person in a
contract is a stipulation pour autrui or merely an incidental interest,
is to rely upon the intention of the parties as disclosed by their
contract. In applying this test, it matters not whether the stipulation is
in the nature of a gift or whether there is an obligation owing from the
promisee to the third person. That no such obligation exists may in
some degree assist in determining whether the parties intended to
bene it a third person.
We ind that the trial court erred in holding that the stipulation,
arrangement or grant is revocable at the option of the co-owners.
While a stipulation in favor of a third person has no binding effect in
itself before its acceptance by the party favored, the law does not
provide when the third person must make his acceptance. As a rule,
there is no time limit; such third person has all the time until the
stipulation is revoked. Here, We ind that the Church accepted the
stipulation in its favor before it is sought to be revoked by some of
the co-owners.
Coquia v. Fieldmen's Insurance Co.
Although, in general, only parties to a contract may bring an action
based thereon, this rule is subject to exceptions, one of which is found
in the second paragraph of Article 1311.
The policy under consideration is typical of contracts pour autrui,
this character being made more manifest by the fact that the deceased
driver paid ifty percent (50%) of the corresponding premiums,
which were deducted from his weekly commissions. Under these
conditions, it is clear that the Coquias - who, admittedly, are the sole
heirs of the deceased - have a direct cause of action against the
Company, and, since they could have maintained this action by
themselves, without the assistance of the Insured, it goes without
saying that they could and did properly join the latter in iling the
complaint herein.
Constantino v. Espiritu
That the contract involved contained a stipulation pour autrui
ampli ies this settled rule only in the sense that the third person for
whose bene it the contract was entered into may also demand its
ful illment provided he had communicated his acceptance thereof to
the obligor before the stipulation in his favor is revoked.
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Sps Pontigon, et al v. Heirs of Sanchez 2016
The principle of relativity of contracts dictates that contractual
agreements can only bind the parties who entered into them, and
cannot favor or prejudice third persons, even if he is aware of such
contract and has acted with knowledge thereof.
As a general rule, the heirs of the contracting parties are precluded
from denying the binding effect of the valid agreement entered into by
their predecessors-in-interest. This is so because they are not deemed
"third persons" to the contract within the contemplation of law. It is
then immaterial that the Extrajudicial Settlement executed by Flaviana
was not properly notarized for the said document to be binding on her
heirs
Consensuality of Contracts
ABS-CBN v. CA, et al.
Contracts that are consensual in nature are perfected upon mere
meeting of the minds. Once there is concurrence between the offer
and the acceptance upon the subject matter, consideration, and terms
of payment a contract is produced.
The offer must be certain. To convert the offer into a contract, the
acceptance must be absolute and must not qualify the terms of the
offer; it must be plain, unequivocal, unconditional, and without
variance of any sort from the proposal. A quali ied acceptance, or
one that involves a new proposal, constitutes a counter-offer and is
a rejection of the original offer. Consequently, when something is
desired which is not exactly what is proposed in the offer, such
acceptance is not suf icient to generate consent because any
modi ication or variation from the terms of the offer annuls the offer.
Palattao v. CA, et al.
While it is true that private respondent informed petitioner that he is
accepting the latter’s offer to sell the leased property, it appears that
they did not reach an agreement as to the extent of the lot subject of
the proposed sale.
Private respondent’s acceptance of petitioner’s offer was not absolute,
and will consequently not generate consent that would perfect a
contract.
DBP v. Perez
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
There was no evidence showing that the respondents signed the new
promissory note through mistake, violence, intimidation, undue
in luence, or fraud. The respondents merely alleged that they were
forced to restructure their loan for fear of having their mortgaged
properties foreclosed. However, it is axiomatic that this would not
amount to vitiated consent. The last paragraph of Article 1335
speci ically states that a threat to enforce one’s claim through
competent authority, if the claim is just or legal, does not vitiate
consent. Foreclosure of mortgaged properties in case of default in
payment of a debtor is a legal remedy afforded by law to a creditor.
Hence, a threat to foreclose the mortgage would not, per se, vitiate
consent.
Contracts of adhesion are not invalid per se; they are not entirely
prohibited. The one who adheres to the contract is in reality free to
reject it entirely; if he adheres, he gives his consent.
Archbishop Capalla v. Comelec 2012
In this jurisdiction, public bidding is the established procedure in the
grant of government contracts. The award of public contracts, through
public bidding, is a matter of public policy. The parties are, therefore,
not at full liberty to amend or modify the provisions of the contract
bidded upon. The three principles of public bidding are:
(1) the offer to the public;
(2) an opportunity for competition; and
(3) a basis for the exact comparison of bids.
A winning bidder is not precluded from modifying or amending
certain provisions of the contract bidded upon. However, such
changes must not constitute substantial or material amendments that
would alter the basic parameters of the contract and would constitute
a denial to the other bidders of the opportunity to bid on the same
terms.
Obligatory Force of Contracts
(1159; 1305; 1315; 1266-1267)
Laguna Tayabas Bus v. Manabat
Where a person by his contract charges himself with an
obligation possible to be performed, he must perform it, unless
the performance is rendered impossible by the act of God, by the law,
By RGL
For the 2020/21 #BestBarEver
or by the other party, it being the rule that in case the party desires to
be excused from the performance in the event of contingencies
arising, it is his duty to provide therefor in his contract. Hence,
performance is not excused by subsequent inability to perform, by
unforeseen dif iculties, by unusual or unexpected expenses, by
danger, by inevitable accident, by the breaking of machinery, by
strikes, by sickness, by failure of a party to avail himself of the
bene its to be had under the contract, by weather conditions, by
inancial stringency, or by stagnation of business. Neither is
performance excused by the fact that the contract turns out to be hard
and improvident, unpro itable or impracticable, ill-advised, or even
foolish, or less pro itable, or unexpectedly burdensome.
National Marketing Corp. v. Atlas Development Corp.
Where, therefore, legal relations arise from a letter of credit, such
letter contains the entire contract of the parties, and their resulting
obligations should be measured by its provisions.
2. Stages
A contract undergoes three stages:
(a) preparation, conception, or generation, which is the period of
negotiation and bargaining, ending at the moment of
agreement of the parties;
(b) perfection or birth of the contract, which is the moment
when the parties come to agree on the terms of the contract;
and
(c) consummation or death, which is the ful illment or
performance of the terms agreed upon in the contract.
Negotiation
Perfection
Consummation
3. Classification
(a) According to perfection or formation
(i) Consensual;
(ii) Real — perfected by delivery.
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nominate contracts, and by the customs of the place.

(1) Depositum; 3) There must be no vitiation of consent;
(Art 1307)
(2) Pledge; 4) There must be no con lict between what was expressly
(1) Do ut des — I give that you may give;
declared and what was really intended;
(3) Commodatum. (Art 1316)
(2) Do ut facias — I give that you may do;
5) The intent must be declared properly.
(iii) Formal or Solemn — where special formalities are
(3) Facio ut des — I do that you may give;
essential before perfection. Requisites for the Meeting of the Minds
(4) Facio ut facias — I do that you may do.
(1) Donation inter vivos of real property requires 1) An offer that must be certain; and
for its validity a public instrument. (f) According to the risk of ful illment
2) An acceptance that must be unquali ied and absolute.
(b) According to cause or equivalence of the value of (i) Commutative — real ful illment is contemplated;
Offer Ineffective
prestations
(ii) Aleatory — the ful illment is dependent upon chance,
(i) Onerous — there is an interchange of equivalent e.g. insurance contract.
ART 1323. An offer becomes ineffective upon the death, civil
valuable consideration; interdiction, insanity, or insolvency of either party before
(g) According to the time of performance or ful illment acceptance is conveyed.
(ii) Gratuitous or lucrative — one party receives no
(i) Executed — obligations are all complied with; Option Contracts
equivalent prestation;
(ii) Executory — the prestations are to be complied with ART 1324. When the offerer has allowed the offeree a certain
(iii) Remunerative — one prestation is given for a service
at some future time. period to accept, the offer may be withdrawn at any time before
or bene it that had been rendered previously.
(h) According to subject matter — contracts involving acceptance by communicating such withdrawal, except when
(c) According to importance or dependence of one upon the option is founded upon a consideration, as something paid
another (i) Things — e.g. sale; or promised.
(i) Principal — the contract may stand alone, e.g. sale, (ii) Rights or credits — e.g. usufruct, assignment of An option is a preparatory contract in which one party grants to the
lease; credits; other, for a ixed period and under speci ied conditions, the power to
(ii) Accessory — depends for its existence upon another (iii) Services — e.g. agency, lease of services, common decide whether or not to enter into a principal contract.
contract, e.g. mortgage; carriage. It binds the party who has given the option, not to enter into the
(iii) Preparatory — not an end by itself but as a means for 4. Essential Requisites principal contract with any other person during the period designated,
future transactions or contracts, e.g. agency, and, within that period, to enter into such contract with the one to
partnership. ART 1318. There is no contract unless the following requisites whom the option was granted, if the latter should decide to use the
concur: option.
(d) According to the parties obligated
(1) Consent of the contracting parties; It is a separate agreement distinct from the contract which the parties
(i) Unilateral — only one party has an obligation, e.g. may enter into upon the consummation of the option. (Carceller v. CA)
commodatum; (2) Object certain which is the subject matter of the
contract; Option Money distinguished from Earnest Money
(ii) Bilateral — both parties are required to render
reciprocal prestations. Option Money Earnest Money
(3) Cause of the obligation which is established.
(e) According to their name or designation Given as a distinct consideration Part of purchase price
Consent
(i) Nominate;
Requisites of Consent Applies to a sale not yet Given only where there is
(ii) Innominate — shall be regulated by the stipulations perfected already a sale
of the parties, by the provisions on Obligations and 1) There must be two or more parties;
Contracts, by the rules governing the most analogous 2) The parties must be capable or capacitated; Not required to buy When given, buyer is bound to

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pay the balance
Persons Incapacitated to Give Consent (Art 1327)
(a) Unemancipated minors;
(b) Insane or demented persons, unless entered into during lucid
intervals (Art 1328);
(c) Deaf-mutes who do not know how to write.
Persons Specially Disquali ied
➔ Here, the transaction is VOID because the right itself is restricted.
➔ However, if there is mere legal incapacity, such as when only the
exercise of the right is restricted, then the transaction is merely
VOIDABLE.
(a) Generally, spouses cannot sell to each other (Art 1490), nor can
they donate to each other (Art 134). Transactions are VOID, but
only those prejudiced can assail the validity of the transaction.
(b) Insolvents before they are discharged cannot make payments.
(c) Persons disquali ied because of iduciary relationship. (Art
1491)
ART 1491. The following persons cannot acquire by purchase,
even at a public or judicial auction, either in person or through
the mediation of another:
(1) The guardian, the property of the person or persons
who may be under his guardianship;
(2) Agents, the property whose administration or sale
may have been intrusted to them, unless the consent of
the principal has been given;
(3) Executors and administrators, the property of the
estate under administration;
(4) Public of icers and employees, the property of the
State or of any subdivision thereof, or of any GOCC or
institution, the administration of which has been
intrusted to them; this provision shall apply to judges
and government experts who, in any manner
whatsoever, take part in the sale;
(5) Justices, judges, prosecuting attorneys, clerks of
superior and inferior courts, and other of icers and
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER For the 2020/21 #BestBarEver
employees connected with the administration of
themselves from compliance with the obligation assumed by them or
justice, the property and rights in litigation or levied
to seek their annulment.
upon an execution before the court within whose
jurisdiction or territory they exercise their respective
De Braganza v. De Villa Abrille
functions;
From the minors' failure to disclose their minority in the same
This prohibition includes the act of acquiring by
promissory note they signed, it does not follow as a legal
assignment and shall apply to lawyers, with respect
proposition, that they will not be permitted thereafter to assert it.
to the property and rights which may be the object of
They had no juridical duty to disclose their inability.
any litigation in which they may take part by virtue of
their profession; Being minors, Rodolfo and Guillermo Braganza could not be legally
(6) Any others specially disquali ied by law. bound by their signatures. Their promise to pay P10,000 can not
be enforced since they were minors incapable of binding themselves.
Yuviengco v. Dacuycuy
Frias v. Esquivel
WON the plaintiffs have alleged facts adequately showing the
existence of a perfected contract of sale between herein petitioners Inasmuch as Perpetua P. Zaragoza does not appear to have been
and the occupants represented by respondent Yao King Ong. appointed a judicial guardian of her minor children with the power to
sell their property, the aforesaid deed of conveyance insofar as
NO. Yao King Ong's telegram simply says "we agree to buy property".
Alvaro, Jr. and Reynaldo are concerned is, therefore,
It does not necessarily connote acceptance of the price but instead
suggests that the details were to be subject of negotiation. Instead of
unenforceable. Articles 1403 (1) and 1317 both specify that
"absolutely" accepting the "certain" offer - if there was one - of the unless rati ied by the person on whose behalf it has been executed, a
petitioners, respondents still insisted on further negotiation of contract entered into in the name of another by one who has no
details. authority or legal representation, or who has acted beyond his
powers, is unenforceable. In the case at bar, there are no real and
Sanchez v. Rigor de inite traces of rati ication made by the said minors of the
disposition of their interest in the disputed lot which their mother
The option did not impose upon plaintiff the obligation to purchase made in their behalf.
defendant's property. Annex A is not a "contract to buy and sell." It
merely granted plaintiff an "option" to buy. With regard to Ricardo Esquivel, the CA found him to be insane at the
time of the execution of the deed of conveyance. This inding shows
Since there may be no valid contract without a cause or consideration, that the said deed is void as to him for there was lack of authority on
the promisor is not bound by his promise and may, accordingly, the part of his mother Perpetua to sell his portion, she not having
withdraw it. Pending notice of its withdrawal, his accepted promise been appointed judicial guardian of said Ricardo
partakes, however, of the nature of an offer to sell which, if accepted,
results in a perfected contract of sale.
Vices of Consent (Arts 1330-1344)
Parties and Capacity ART 1330. A contract where consent is given through
mistake, violence, intimidation, undue in luence, or
Hermosa v. Zobel
fraud is VOIDABLE.
The sale of real estate, effected by minors who have already passed
Requisites for MISTAKE to Vitiate Consent
the ages of puberty and adolescence and are near the adult age when
they pretend to have already reached their majority, while in fact they 1) The error must be substantial regarding
have not, is valid, and they cannot be permitted afterwards to excuse
a) The object of the contract;
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b) The conditions which principally moved or induced
one of the parties;
c) Identity or quali ications if such were the principal
cause.
2) The error must be excusable and not caused by negligence;
3) The error must be a mistake of fact, and not of law.
Requisites for MUTUAL ERROR to Vitiate Consent
1) There must be mutual error;
2) The error must refer to the legal effect of the agreement;
3) The real purpose of the parties is frustrated.
Requisites for VIOLENCE to Vitiate Consent
1) Employment of serious or irresistible force;
2) It must have been the reason why the contract was entered into.
Requisites for INTIMIDATION to Vitiate Consent
1) Reasonable and well-grounded fear
2) Of an imminent and grave evil
3) Upon his person, property, or upon the person or property of
his spouse, descendants or ascendants
4) It must have been the reason why the contract was entered into
5) The threat must be of an unjust act, an actionable wrong.
Requisites for UNDUE INFLUENCE to Vitiate Consent
1) Improper advantage;
2) Power over the will of another;
3) Deprivation of the latter’s will of a reasonable freedom of
choice.
Requisites of Dolo Causante under Art 1338
1) The fraud must be material and serious that it really induced
the consent. (Art 1344)
2) The fraud must have been employed by only one of the parties.
3) There must be a deliberate intent to deceive or to induce. (Art
1343)
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
4) The other party must have relied on the untrue statement and
must himself not be guilty of negligence in ascertaining the
truth.
Failure to Disclose Facts
ART 1339. Failure to disclose facts, when there is a duty to
reveal them, as when the parties are bound by con idential
relations, constitutes fraud.
Caveat Emptor
ART 1340. The usual exaggerations in trade, when the other
party had an opportunity to know the facts, are NOT in
themselves fraudulent.
Mere Expression of an Opinion
ART 1341. A mere expression of an opinion does not signify
fraud, unless made by an expert and the other party has
relied on the former's special knowledge.
Misrepresentation
ART 1342. Misrepresentation by a third person does not
vitiate consent, unless such misrepresentation has created
substantial mistake and the same is mutual.
ART 1343. Misrepresentation made in good faith is not
fraudulent but may constitute error.
Requisites for FRAUD to Vitiate Consent
1) The fraud must be serious;
2) The parties must NOT be in pari delicto.
Pangadil v. CFI
Assuming that the execution of the deed of rati ication was attended
by fraud, such circumstance would only make the contract voidable
or annullable (Art. 1309), and not an inexistent and void contract in
accordance with Article 1409. The action to annul a voidable contract
is not imprescriptible, unlike in the case of an inexistent contract. If
the action to annul a voidable contract is based on fraud, as in the
case herein, it prescribes in four years from the time of the discovery
of the fraud.
Constantino v. CA
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When respondents af ixed their signatures on the deed, it was still
incomplete since petitioner who caused it to be prepared left several
spaces blank, more particularly as regards the dimensions of the
property to be sold. The heirs were persuaded to sign the document
only upon the assurance of petitioner that respondent Roque,
pursuant to their understanding, would be present when the property
would be surveyed after obtaining permission from the Bureau of
Lands. As it surfaced, the supposed understanding was merely a ruse
of petitioner to induce respondents to sign the deed without which
the latter would not have given their conformity thereto. Apparently,
petitioner deceived respondents by illing the blank spaces in the
deed, having the lots surveyed and subdivided, and then causing the
issuance of transfer certi icates of title without their knowledge,
much less consent.
Thus all the elements of fraud vitiating consent for purposes of
annulling a contract concur:
(a) It was employed by a contracting party upon the other;
(b) It induced the other party to enter into the contract;
(c) It was serious; and,
(d) It resulted in damages and injury to the party seeking
annulment.
Rural Bank of Caloocan City v. CA
As a result of the fraud upon Castro and the misrepresentation to the
bank in licted by the Valencias, both Castro and the bank committed
mistake in giving their consents to the contracts. In other words,
substantial mistake vitiated their consents given. For if Castro had
been aware of what she signed and the bank of the true quali ications
of the loan applicants, it is evident that they would not have given
their consents to the contracts.
A contract may be annulled on the ground of vitiated consent if deceit
by a third person, even without connivance or complicity with one of
the contracting parties, resulted in mutual error on the part of the
parties to the contract.
Tankeh v. DBP 2013 Leonen, J
Fraud refers to all kinds of deception -- whether through insidious
machination, manipulation, concealment or misrepresentation -- that
would lead an ordinarily prudent person into error after taking the
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circumstances into account.
There are two types of fraud contemplated in the performance of
contracts: dolo incidente or incidental fraud and dolo causante or
fraud serious enough to render a contract voidable.
The irst, or causal fraud referred to in Article 1338, are those
deceptions or misrepresentations of a serious character employed by
one party and without which the other party would not have entered
into the contract.
Dolo incidente, or incidental fraud which is referred to in Article
1344, are those which are not serious in character and without which
the other party would still have entered into the contract.
Dolo causante determines or is the essential cause of the consent,
while dolo incidente refers only to some particular or accident of the
obligation. The effects of dolo causante are the nullity of the contract
and the indemni ication of damages, and dolo incidente also obliges
the person employing it to pay damages.
In order to constitute fraud that provides basis to annul contracts, it
must ful ill two conditions.
1. First, the fraud must be dolo causante or it must be fraud in
obtaining the consent of the party.
2. Second, this fraud must be proven by clear and
convincing evidence.
The misrepresentation constituting the fraud must be established by
full, clear, and convincing evidence, and not merely by a
preponderance thereof. The deceit must be serious. The fraud is
serious when it is suf icient to impress, or to lead an ordinarily
prudent person into error; that which cannot deceive a prudent
person cannot be a ground for nullity. The circumstances of each case
should be considered, taking into account the personal conditions of
the victim.
Simulation of Contracts (Arts 1345-1346)
➔ It is the process of intentionally deceiving others by producing
the appearance of a contract that really does not exist
(absolute) or which is different from the true agreement
(relative).
Requisites for Simulation
1) An outward declaration of will different from the will of the
parties;
2) The false appearance must have been intended by mutual
agreement;
3) The purpose is to deceive third persons.
Kinds of Simulated Contracts
(a) Absolute — parties do not intend to be bound; VOID
(b) Relative — parties conceal their true agreement. They are then
bound to the real or true agreement except
(i) If the contract should prejudice third persons; or
(ii) If the purpose is contrary to law, morals, good
customs, public order, or public policy.
Sps Ladanga v. CA
A contract of sale is void and produces no effect whatsoever where
the price, which appears therein as paid, has in fact never been paid
by the purchaser to the vendor. Such a sale is inexistent and cannot be
considered consummated.
It was not shown that Clemencia intended to donate the Paco property
to the Ladangas. Her testimony and the notary's testimony destroyed
any presumption that the sale was fair and regular and for a true
consideration.
Object
Requisites
1) The thing or service must be within the commerce of man;
2) Must be transmissible;
3) Must not be contrary to law, morals, good customs, public
order, or public policy;
4) Must not be impossible (Art 1348);
5) Must be determinate as to its kind or determinable without the
need of a new contract or agreement (Art 1349).
De Belen Vda. De Cabalu v. Tabu & Laxamana 2012
Domingo was not yet the owner of the property. Even if Benjamin died
sometime in 1960, Domingo in 1975 could not yet validly dispose of
the whole or even a portion thereof for the reason that he was not the
sole heir of Benjamin.
Paragraph 2 of Article 1347, characterizes a contract entered into
upon future inheritance as VOID. The law applies when the following
requisites concur:
(1) the succession has not yet been opened;
(2) the object of the contract forms part of the inheritance; and
(3) the promissor has, with respect to the object, an expectancy
of a right which is purely hereditary in nature.
In this case, at the time the deed was executed, Faustina’s will was not
yet probated; the object of the contract, the 9,000 square meter
property, still formed part of the inheritance of his father from the
estate of Faustina; and Domingo had a mere inchoate hereditary right
therein.
Cause
A consideration, in the legal sense of the word, is some right,
interest, bene it, or advantage conferred upon the promisor, to which he
is otherwise not lawfully entitled, or any detriment, prejudice, loss, or
disadvantage suffered or undertaken by the promisee other than to such
as he is at the time of consent bound to suffer.
Requisites
1) Must be present at the time the contract was entered into;
2) Must be true;
3) Must be lawful.
Motive distinguished from Cause
Motive Cause
May vary although he enters into Always the same
the same contract
May be unknown to the other Always known
Dif icult to separate from cause Its absence cannot be cured by
presence of motive

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Lesion — It is the inadequacy of cause.
GR: Lesion does NOT invalidate a contract.
EXC:
(a) When there has also been fraud, mistake or undue in luence;
(b) In cases expressly provided by law:
(i) Those which are entered into by guardians whenever
the wards whom they represent suffer lesion by more
than one-fourth of the value of the things which are
the object thereof; (Art 1381[1])
(ii) Those agreed upon in representation of absentees, if
the latter suffer the lesion stated in the preceding
number; (Art 1381[2])
(iii) In partition, when any one of the co-heirs received
things whose value is less, by at least one-fourth,
than the share to which he is entitled. (Art 1098)
Liguez v. CA
While motive differs from cause, still a contract that is conditioned
upon the attainment of an immoral notice should be considered
VOID, for here motive may be regarded as cause when it
predetermines the purpose of the contract.
Vda de Rodriquez v. Rodriquez
The consideration need not be paid at the time of the promise. What
would invalidate the conveyances now under scrutiny is the fact that
they were resorted to in order to circumvent the legal prohibition
against donations between spouses.
Phil. Banking Corp. v. Lui She
The case involves a scheme to circumvent the Constitutional
prohibition against the transfer of land of aliens. The illicit purpose
then becomes the illegal cause rendering the contracts void.
Mactal v. Melegrito
The consideration for the promise was, therefore, the aforesaid
pre-existing debt of Melegrito, not the dismissal of the estafa case
Ong v. Ong
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
It is not unusual, however, in deeds of conveyance adhering to the
Anglo-Saxon practice of stating that the consideration given is the sum
of P1.00, although the actual consideration may have been much
more. Moreover, assuming that said consideration of P1.00 is
suspicious, this circumstance, alone, does not necessarily justify the
inference that Reyes and the Abellas were not purchasers in good faith
and for value. Neither does this inference warrant the conclusion that
the sales were null and void ab initio. Indeed, bad faith and
inadequacy of the monetary consideration do not render a
conveyance inexistent, for the assignor's liberality may be
suf icient cause for a valid contract.
Cojuangco, Jr. v. Republic 2012
The presumption that a contract has suf icient consideration
cannot be overthrown by the bare uncorroborated and self-serving
assertion of petitioners that it has no consideration. To overcome the
presumption of consideration, the alleged lack of consideration must
be shown by preponderance of evidence.
The rule is that the party who stands to pro it from a declaration of
the nullity of a contract on the ground of insuf iciency of
consideration—which would necessarily refer to one who asserts
such nullity—has the burden of overthrowing the presumption.
The presumption of a valid consideration cannot be discarded on a
simple claim of absence of consideration, especially when the
contract itself states that consideration was given.
Inadequacy of the consideration, however, does not render a contract
void under Article 1355. While one may posit that the PCA-Cojuangco
Agreement puts PCA and the coconut farmers at a disadvantage, the
facts do not make out a clear case of violation of any law that will
necessitate the recall of said contract.
While consideration is usually in the form of money or property, it
need not be monetary. This is clear from Article 1350.
Sta. Fe Realty Inc., et al. v. Sison 2016
Gross inadequacy of price does not even affect the validity of a
contract of sale, unless it signi ies a defect in the consent or that the
parties actually intended a donation or some other contract.
Inadequacy of cause will not invalidate a contract unless there has
been fraud, mistake or undue in luence.
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Petitioners are assailing the deeds of sale for being absolutely
simulated and for inadequacy of the price. However, these two
grounds are incompatible. If there exists an actual consideration
for transfer evidenced by the alleged act of sale, no matter how
inadequate it be, the transaction could not be a simulated sale.
B. Form of Contracts
Form for Convenience
ART 1358. The following must appear in a public
document:
(1) Acts and contracts which have for their object the
creation, transmission, modi ication or
extinguishment of real rights over immovable
property; sales of real property or of an interest
therein are governed by articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains;
(3) The power to administer property, or any other
power which has for its object an act appearing or
which should appear in a public document, or should
prejudice a third person;
(4) The cession of actions or rights proceeding from an
act appearing in a public document.
All other contracts where the amount involved exceeds ive
hundred pesos must appear in writing, even a private one. But
sales of goods, chattels or things in action are governed by
articles, 1403, No. 2 and 1405
Dauden-Hernaez v. De los Angeles
In general, contracts are valid and binding from their perfection
regardless of form, whether they be oral or written. This is plain
from Articles 1315 and 1356.
Article 1356 establishes only two exceptions, to wit:
(a) Solemn Contracts. — Contracts for which the law itself
requires that they be in some particular form (writing) in
order to make them valid and enforceable. Of these the
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typical examples are
(i) the donation of immovable property that the law
(Article 749) requires to be embodied in a public
instrument in order "that the donation may be
valid", i. e., existing or binding;
(ii) the donation of movables worth more than
P5,000.00 which must be in writing, "otherwise the
donation shall be void" (Article 748);
(iii) contracts to pay interest on loans (mutuum) that
must be "expressly stipulated in writing" (Article
1956); and
(iv) the agreements contemplated by Articles 1744,
1773, 1874 and 2134.
(b) Contracts that the law requires to be proved by some
writing (memorandum) of its terms, as in those covered by
the old Statute of Frauds, now Article 1403(2). Their
existence not being provable by mere oral testimony (unless
wholly or partly executed), these contracts are exceptional in
requiring a writing embodying the terms thereof for their
enforceability by action in court.
The contract sued upon by petitioner herein, compensation for
services, does not come under either exception. It is true that it
appears included in Article 1358, last clause, providing that "all other
contracts where the amount involved exceeds ive hundred pesos
must appear in writing, even a private one". But Article 1358
nowhere provides that the absence of written form in this case
will make the agreement invalid or unenforceable. On the
contrary, Article 1357 clearly indicates that contracts covered by
Article 1358 are binding and enforceable by action or suit despite the
absence of writing.
PNB v. IAC
While Article 1358 requires that the revocation of Alcedo's Special
Power of Attorney to mortgage his property should appear in a public
instrument, nevertheless, a revocation embodied in a private writing
is valid and binding between the parties.
The legalization by a public writing and the recording of the same in
the registry are not essential requisites of a contract entered into, as
between the parties, but mere conditions of form solemnities which
the law imposes in order that such contract may be valid as against
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
third persons, and to insure that a publicly executed and recorded
agreement shall be respected by the latter.
Manotok Realty v. CA
The alleged sale made by Legarda to Lucero should have been
embodied in a public instrument in accordance with Article 1358
and should have been duly registered with the Register of Deeds to
make it binding against third persons.
C. Reformation of Instruments
➔ Reformation is that remedy in equity by means of which a
written instrument is made or construed so as to express or
conform to the real intention of the parties.
➔ An action for reformation is in personam, not in rem, xxx even
when real estate is involved. xxx It is merely an equitable relief
granted to the parties where through mistake or fraud, the
instrument failed to express the real agreement or intention of
the parties. While it is a recognized remedy afforded by courts
of equity it may not be applied if it is contrary to well-settled
principles or rules.
➔ May prosper only upon the concurrence of the following
requisites:
(1) there must have been a meeting of the minds of the
parties to the contact;
(2) the instrument does not express the true intention of
the parties; and
(3) the failure of the instrument to express the true
intention of the parties is due to mistake, fraud,
inequitable conduct or accident.
➔ The onus probandi is upon the party who insists that the
contract should be reformed.
➔ It must be brought within the period prescribed by law,
otherwise, it will be barred by the mere lapse of time. The
prescriptive period for actions based upon a written contract
and for reformation of an instrument is ten (10) years under
Article 1144.
➔ Under Section 1, Rule 64, an action for the reformation of an
instrument is instituted as a special civil action for
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declaratory relief. Since the purpose of an action for
declaratory relief is to secure an authoritative statement of the
rights and obligations of the parties for their guidance in the
enforcement thereof, or compliance therewith, and not to settle
issues arising from an alleged breach thereof, it may be
entertained only before the breach or violation of the law
or contract to which it refers.
When Instrument may be Reformed
(1) When a mutual mistake of the parties causes the failure of the
instrument to disclose their real agreement; (Art 1361)
(2) If one party was mistaken and the other acted fraudulently or
inequitably in such a way that the instrument does not show
their true intention; (Art 1362)
(3) When one party was mistaken and the other knew or believed
that the instrument did not state their real agreement, but
concealed that fact; (Art 1363)
(4) When through the ignorance, lack of skill, negligence or bad
faith on the part of the person drafting the instrument or of the
clerk or typist, the instrument does not express the true
intention of the parties; (Art 1364)
(5) If two parties agree upon the mortgage or pledge of real or
personal property, but the instrument states that the property is
sold absolutely or with a right of repurchase. (Art 1365)
When Reformation NOT Allowed
(1) Simple donations inter vivos wherein no condition is imposed;
(2) Wills;
(3) When the real agreement is void; (Art 1366)
(4) When one of the parties has brought an action to enforce the
instrument; (Art 1367)
City of Cabanatuan v. Lazaro
Every party to a contract has a clear interest that the instrument
embodying its terms should conform to the actual and true agreement
had by and between the contracting parties. Hence, if by accident or
mistake, as expressly pleaded in the complaint, the document does
not conform to or re lect the actual agreement, either party can ask for
the reformation of the instrument as provided by Article 1359.
Huibonhoa v. CA
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Huibonhoa having failed to discharge that burden of proving that the
true intention of the parties has not been accurately expressed in the
lease contract sought to be reformed, the trial court correctly held that
no clear and convincing proof warrants the reformation thereof.
On account of her failure to prove what costly mistake allegedly
suppressed the true intention of the parties, Huibonhoa honestly
admitted that there was an oversight in the drafting of the contract by
her own counsel. By such admission, oversight may not be attributed
to all the parties to the contract and therefore, it cannot be considered
a valid reason for the reformation of the same contract. In fact,
because it was Huibonhoa's counsel himself who drafted the contract,
any obscurity therein should be construed against her.
By bringing an action for the reformation of subject lease contract,
Huibonhoa chose to reform the instrument and not the contract
itself. She is thus precluded from inserting stipulations that are not
extant in the lease contract itself lest the very agreement embodied in
the instrument is altered.
Sarming v. Dy, et al.
There was a meeting of the minds between the parties to the contract
but the deed did not express the true intention of the parties due to
mistake in the designation of the lot subject of the deed. There is no
dispute as to the intention of the parties to sell the land to Alejandra
Del ino but there was a mistake as to the designation of the lot
intended to be sold.
Bentir v. Leanda
Whether the complaint for reformation of instrument has prescribed.
YES. Respondent corporation had ten (10) years from 1968, the time
when the contract of lease was executed, to ile an action for
reformation. Sadly, it did so only on May 15, 1992 or twenty-four (24)
years after the cause of action accrued, hence, its cause of action has
become stale, hence, time-barred.
The prescriptive period of ten (10) years provided for in Art. 1144
applies by operation of law, not by the will of the parties.
Therefore, the right of action for reformation accrued from the date of
execution of the contract of lease in 1968.
NIA v. Gamit, et al.
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
As a general rule, parol evidence is not admissible for the purpose of
varying the terms of a contract. However, when the issue that a
contract does not express the intention of the parties and the proper
foundation is laid therefor — as in the present case — the court
should hear the evidence for the purpose of ascertaining the true
intention of the parties.
The lower court erred in not conducting a trial for the purpose of
determining the true intention of the parties. It failed to appreciate the
distinction between interpretation and reformation of contracts.
While the aim in interpretation of contracts is to ascertain the true
intention of the parties, interpretation is not, however, equivalent to
reformation of contracts.
Since the complaint in the case at bar raises the issue that the contract
of lease does not express the true intention or agreement of the
parties due to mistake on the part of the plaintiff (private respondent)
and fraud on the part of the defendant (petitioner), the court a quo
should have conducted a trial and received the evidence of the parties
for the purpose of ascertaining the true intention of the parties when
they executed the instrument in question.
D. Interpretation of Contracts
➔ The "interpretation" of a contract is the determination of
the meaning attached to the words written or spoken which
make the contract.
Kasilag v. Rodriguez
The cardinal rule in the interpretation of contracts is to the effect that
the intention of the contracting parties should always prevail because
their will has the force of law between them.
Another fundamental rule in the interpretation of contracts is to the
effect that the terms, clauses and conditions contrary to law, morals
and public order should be separated from the valid and legal contract
when such separation can be made because they are independent of
the valid contract which expresses the will of the contracting parties.
UP v. Gabriel
The stipulation in the sub-contract is clear and leaves no doubt as to
the intention of the contracting parties. Consequently, the literal
meaning of the stipulation shall control. This is the irst rule in the
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interpretation of contracts (Article 1370).
Sy v. CA
It is a basic and fundamental rule in the interpretation of contract that
if the terms thereof are clear and leave no doubt as to the intention of
the contracting parties, then the literal meaning of the stipulations
shall control but when the words appear contrary to the evident
intention of the parties, the latter shall prevail over the former. In
order to judge the intention of the parties, their contemporaneous and
subsequent acts shall be principally considered.
Angeles v. Calasang
The contract to sell, being a contract of adhesion, must be construed
against the party causing it. We agree with the observation of the
plaintiffs-appellees to the effect that "the terms of a contract must be
interpreted against the party who drafted the same, especially where
such interpretation will help effect justice to buyers who, after having
invested a big amount of money, are now sought to be deprived of the
same thru the prayed application of a contract clever in its
phraseology, condemnable in its lopsidedness and injurious in its
effect which, in essence, and in its entirety is most unfair to the
buyers."
Century Properties, Inc. v. Babiano, et al 2016
The rule is that where the language of a contract is plain and
unambiguous, its meaning should be determined without reference to
extrinsic facts or aids. The intention of the parties must be gathered
from that language, and from that language alone.
Thus, in the interpretation of contracts, the Court must irst determine
whether a provision or stipulation therein is ambiguous. Absent any
ambiguity, the provision on its face will be read as it is written and
treated as the binding law of the parties to the contract.
Werr International Corporation v. Highlands Prime, Inc. 2017
Deemed incorporated into every contract are the general provisions
on obligations and interpretation of contracts found in the Civil Code.
In previous cases, we applied Articles 1234 and 1376 in
construction agreements to determine whether the project owner is
entitled to liquidated damages. We held that substantial completion
of the project equates to achievement of 95% project completion
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which excuses the contractor from the payment of liquidated ➔ Rescission implies a contract which, even if initially valid, (4) Those which refer to things under litigation if they
damages. produces a lesion or pecuniary damage to someone that have been entered into by the defendant without the
justi ies its invalidation for reasons of equity. knowledge and approval of the litigants or of
It was error for the CA to immediately dismiss the application of competent judicial authority;
industry practice on the sole ground that there is an existing ➔ The action for rescission is subsidiary; it cannot be
agreement as to liquidated damages. As expressly stated under instituted except when the party suffering damage has no other (5) All other contracts specially declared by law to be
Articles 1234 and 1376, and in jurisprudence, the construction legal means to obtain reparation for the same. (Art 1383) subject to rescission.
industry's prevailing practice may supplement any ambiguities or ➔ The acquisition by a third person of the property subject of the Requisites for an Accion Pauliana to Accrue (Par 3 of Art 1381)
omissions in the stipulations of the contract. contract is an obstacle to the action for its rescission where 1) That the plaintiff asking for rescission has a credit prior to
it is shown that such third person is in lawful possession of the the alienation, although demandable later;
E. Defective Contracts subject of the contract and that he did not act in bad faith.
2) That the debtor has made a subsequent contract conveying a
The Four Kinds of Defective Contracts in decreasing validity ➔ The kinds of rescissible contracts, according to the reason for patrimonial bene it to a third person;
their susceptibility to rescission, are the following:
Validity Reason for Defect Rati iable 3) That the creditor has no other legal remedy to satisfy his
irst, those which are rescissible because of lesion or claim, but would bene it by rescission of the conveyance to the
Rescissible Valid until Extrinsic, consisting of ✘ prejudice; third person;
rescinded economic damage or second, those which are rescissible on account of fraud or bad
lesion 4) That the act being impugned is fraudulent;
faith; and
5) That the third person who received the property conveyed, if by
Voidable Valid until Intrinsic, as in vitiated ✔ third, those which, by special provisions of law, are onerous title, has been an accomplice in the fraud.
annulled consent susceptible to rescission.
An accion pauliana presupposes the following:
Requisites for Rescission
Unenforceable Has no Lack of authority; ✔ 1) A judgment;
effect for Failure to comply with 1) There must be at the beginning either a valid or voidable
now Statute of Frauds; Both contract; 2) the issuance by the trial court of a writ of execution for the
parties lack consent satisfaction of the judgment, and
2) But there is an economic prejudice to a party or third person;
3) the failure of the sheriff to enforce and satisfy the judgment of
Void or No effect Various, see Art 1409 ✘ 3) Requires mutual restitution. (Art 1385) the court.
Inexistent at all
Enumeration of Rescissible Contracts The following successive measures must be taken by a creditor before
ART 1381. The following contracts are rescissible: he may bring an action for rescission of an allegedly fraudulent sale:
1. Rescissible Contracts (1) Those which are entered into by guardians whenever (1) exhaust the properties of the debtor through levying by
the wards whom they represent suffer lesion by more attachment and execution upon all the property of the debtor,
➔ Rescission is a remedy granted by law to the contracting than one-fourth of the value of the things which are except such as are exempt from execution;
parties and even to third persons, to secure reparations for the object thereof; (2) exercise all the rights and actions of the debtor, save those
damages caused to them by a contract, even if this should be (2) Those agreed upon in representation of absentees, if personal to him (accion subrogatoria); and
valid, by means of the restoration of things to their condition at the latter suffer the lesion stated in the preceding (3) seek rescission of the contracts executed by the debtor in fraud
the moment prior to the celebration of said contract. number; of their rights (accion pauliana).
➔ It is a relief allowed for the protection of one of the contracting (3) Those undertaken in fraud of creditors when the Premature Payments Made in a State of Insolvency (Art 1382)
parties and even third persons from all injury and damage the latter cannot in any other manner collect the claims
contract may cause, or to protect some incompatible and due them; Two requisites must concur:
preferent right created by the contract.
1) The debtor-payer must have been insolvent;

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2) The debt was not yet due and demandable.
Presumptions of Fraud (Art 1387)
(a) In case of gratuitous alienations — when the debtor did not
reserve suf icient property to pay all debts contracted before
the donation.
(b) In case of onerous alienations — when made by persons
against whom
(i) some judgment has been rendered in any instance; or
(ii) some writ of attachment has been issued.
The decision or attachment need not refer to the property
alienated, and need not have been obtained by the party seeking
the rescission.
Badges of Fraud
In the early case of Oria v. Mcmicking, the Supreme Court considered the
following instances as badges of fraud:
1. The fact that the consideration of the conveyance is ictitious
or is inadequate.
2. A transfer made by a debtor after suit has begun and while it is
pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor,
especially when he is insolvent or greatly embarrassed
inancially.
6. The fact that the transfer is made between father and son,
when there are present other of the above circumstances.
7. The failure of the vendee to take exclusive possession of all
the property.
Rosencor Development Corporation v. Inquing, et al.
May a contract of sale entered into in violation of a third party's right
of irst refusal be rescinded in order that such third party can exercise
said right? YES.
The prevailing doctrine is that a contract of sale entered into in
violation of a right of irst refusal of another person, while valid, is
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
rescissible.
There is, however, a circumstance which prevents the application of
this doctrine in the case at bench. In the cited cases, the Court ordered
the rescission of sales made in violation of a right of irst refusal
precisely because the vendees therein could not have acted in good
faith as they were aware or should have been aware of the right of irst
refusal granted to another person by the vendors therein.
Under Article 1381(3), a contract validly agreed upon may be
rescinded if it is "undertaken in fraud of creditors when the latter
cannot in any manner collect the claim due them." Moreover, under
Article 1385, rescission shall not take place "when the things which
are the object of the contract are legally in the possession of third
persons who did not act in bad faith."
The right of irst refusal involved in the instant case was an oral one.
As such, in order to hold that petitioners were in bad faith, there must
be clear and convincing proof that petitioners were made aware of the
said right of irst refusal. However, there were none.
The acquisition by Rosencor of the property subject of the right of
irst refusal is an obstacle to the action for its rescission where, as in
this case, it was shown that Rosencor is in lawful possession of the
subject of the contract and that it did not act in bad faith.
Guzman, Bocaling and Co., Inc. v. Bonnevie
Respondents’ remedy is not an action for the rescission of the Deed of
Absolute Sale but an action for damages against the heirs of the
spouses Tiangco for the unjusti ied disregard of their right of irst
refusal
Khe Hong Cheng v. CA
When did the four (4) year prescriptive period as provided for in
Article 1389 for respondent Philam to ile its action for rescission of
the subject deeds of donation commence to run?
Ada v. Baylon 2012
Since this provision of law is silent as to when the prescriptive period
would commence, the general rule, i.e, from the moment the cause of
action accrues, therefore, applies.
Article 1383 provides that an action for rescission is subsidiary; it
cannot be instituted except when the party suffering damage has no
other legal means to obtain reparation for the same. It is thus
apparent that an action to rescind or an accion pauliana must be of
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last resort, availed of only after all other legal remedies have been
exhausted and have been proven futile.
To count the four year prescriptive period to rescind an allegedly
fraudulent contract from the date of registration of the conveyance
with the Register of Deeds, as alleged by the petitioners, would run
counter to Article 1383 as well as settled jurisprudence. It would
likewise violate the third requisite to ile an action for rescission of
an allegedly fraudulent conveyance of property, i.e., the creditor has
no other legal remedy to satisfy his claim.
Philam only learned about the unlawful conveyances made by
petitioner Khe Hong Cheng in January 1997 when its counsel
accompanied the sheriff to Butuan City to attach the properties of
petitioner Khe Hong Cheng. There they found that he no longer had
any properties in his name. It was only then that respondent
Philam's action for rescission of the deeds of donation accrued
because then it could be said that respondent Philam had exhausted
all legal means to satisfy the trial court's judgment in its favor. Since
respondent Philam iled its complaint for accion pauliana against
petitioners on February 25, 1997, barely a month from its discovery
that petitioner Khe Hong Cheng had no other property to satisfy the
judgment award against him, its action for rescission of the subject
deeds clearly had not yet prescribed.
The respondent court correctly held that the Contract of Sale was not
voidable but rescissible. Under Article 1380 to 1381(3) of the Civil
Code, a contract otherwise valid may nonetheless be subsequently
rescinded by reason of injury to third persons, like creditors. The
status of creditors could be validly accorded the Bonnevies for they
had substantial interests that were prejudiced by the sale of the
subject property to the petitioner without recognizing their right of
irst priority under the Contract of Lease.
The actions of partition and rescission cannot be joined in a single
action. An action for partition is a special civil action governed by
Rule 69 while an action for rescission is an ordinary civil action
governed by the ordinary rules of civil procedure.
Contracts which refer to things
subject of litigation is rescissible
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pursuant to Article 1381(4). Basis is lesion Basis is vitiated consent or (a) The action to annul is extinguished (Art 1392);
incapacity to consent
Contracts which are rescissible due to fraud or bad faith include those (b) Cleanses the contract from all its defects from the moment it
which involve things under litigation, if they have been entered into was constituted. (Art 1396)
Defect is external or intrinsic Defect is intrinsic
by the defendant without the knowledge and approval of the litigants Rati ication; Requisites
or of competent judicial authority. Subsidiary action Principal action
1) The contract must be voidable;
The rescission of a contract under Article 1381(4) only requires the Remedy Sanction 2) The person ratifying must know the reason for the contract
concurrence of the following: being voidable;
1) irst, the defendant, during the pendency of the case, enters Private interest governs Public interest governs
3) The cause must not exist or continue to exist anymore at the
into a contract which refers to the thing subject of litigation;
Equity predominates Law predominates time of rati ication;
and
2) second, the said contract was entered into without the 4) Must have been made expressly or by an act implying a
Plaintiff may be a party or third Plaintiff must be a party whether waiver of the action to annul;
knowledge and approval of the litigants or of a competent
person bound principally or
judicial authority. 5) The person ratifying must be the injured party.
subsidiarily
Here, at the time they were gratuitously conveyed by Rita, Lot No. There Must be Mutual Restitution, Except
There must be damage to Damage to plaintiff immaterial
4709 and half of Lot No. 4706 are among the properties that were the
plaintiff ART 1399. When the defect of the contract consists in the
subject of the partition case then pending with the RTC. Rita did not
inform nor sought the approval from the petitioners or of the RTC incapacity of one of the parties, the incapacitated person is
If plaintiff indemni ied, cannot Indemnity is no bar to action not obliged to make any restitution
with regard to the donation inter vivos.
prosper
Exception to the exception
Rescission under Article 1381(4) is not preconditioned upon the
judicial determination as to the ownership of the thing subject of Compatible with the perfect A defect is presupposed except insofar as he has been bene ited by the thing or price
litigation. validity of contract received by him.

Rati ication is NOT required to Rati ication required to prevent Bael v. IAC
prevent rescission annulment Under Article 1391, the prescriptive period for annulment of
2. Voidable Contracts contracts based on intimidation, violence, undue in luence is four
Prescriptive Period (Art 1391)
(4) years from the time the defect of the consent ceases while in
ART 1390. The following contracts are voidable or annullable, The action for annulment shall be brought within four years. This case of mistake or fraud, the period of prescription commences to run
even though there may have been no damage to the contracting period shall begin: from the discovery of the same.
parties:
Ground From the time
(1) Those where one of the parties is incapable of giving
consent to a contract; In cases of intimidation, violence the defect of the consent ceases 3. Unenforceable Contracts
(2) Those where the consent is vitiated by mistake, or undue in luence
violence, intimidation, undue in luence or fraud. Kinds of Unenforceable Contracts
In case of mistake or fraud of discovery of same
These contracts are binding, unless they are annulled by a (a) Unauthorized contracts;
proper action in court. They are susceptible of rati ication. Entered into by minors or other the guardianship ceases
(b) Those that fail to comply with the Statute of Frauds;
incapacitated persons
Rescission distinguished from Annulment
(c) Those where both parties are incapable of giving consent to a
Rescission Annulment Rati ication; Effects contract.

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ART 1403. The following contracts are unenforceable, unless
they are rati ied:
(1) Those entered into in the name of another person by
one
(a) who has been given no authority or legal
representation, or
(b) who has acted beyond his powers;
(2) Those that do not comply with the Statute of
Frauds as set forth in this number. In the following
cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some
note or memorandum, thereof, be in writing, and
subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence
of its contents:
(a) An agreement that by its terms is not to be
performed within a year from the making
thereof;
(b) A special promise to answer for the debt, default,
or miscarriage of another;
(c) An agreement made in consideration of
marriage, other than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or
things in action, at a price not less than ive
hundred pesos, unless the buyer accept and
receive part of such goods and chattels, or the
evidences, or some of them, of such things in
action or pay at the time some part of the
purchase money; but when a sale is made by
auction and entry is made by the auctioneer in his
sales book, at the time of the sale, of the amount
and kind of property sold, terms of sale, price,
names of the purchasers and person on whose
account the sale is made, it is a suf icient
memorandum;
(e) An agreement for the leasing for a longer period
than one year, or for the sale of real property
or of an interest therein;
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER For the 2020/21 #BestBarEver
(f) A representation as to the credit of a third 1403, par. 2(e) presupposes the existence of a perfected, albeit
person. unwritten, contract of sale. A right of irst refusal, such as the one
involved in the instant case, is not by any means a perfected contract
(3) Those where BOTH parties are incapable of giving
of sale of real property. At best, it is a contractual grant, not of the sale
consent to a contract.
of the real property involved, but of the right of irst refusal over the
General Rules of Application Concerning Statute of Frauds property sought to be sold
(1) Applies only to executory contracts where no performance
Carbonell v. Poncio
has yet been made.
The Statute of Frauds is applicable only to executory contracts
(2) Cannot apply if the action is neither (Facturan v. Sabanal, 81 Phil., 512), not to contracts that are totally or
partially performed.
(a) for damages because of the violations of an agreement
nor
If a contract has been totally or partially performed, the exclusion of
(b) for the speci ic performance of said agreement. parol evidence would promote fraud or bad faith, for it would enable
the defendant to keep the bene its already derived by him from the
(3) Exclusive — applies only to the agreements or contracts
transaction in litigation, and, at the same time, evade the obligations,
enumerated above.
responsibilities or liabilities assumed or contracted by him thereby.
(4) The defense of the Statute of Frauds may be waived.
(5) A personal defense — a contract infringing it cannot be assailed Western Mindanao Lumber Co. v. Medalle
by third persons. (Art 1408) An agreement creating an easement of right-of-way is not one of those
contracts covered by the statute of frauds since it is not a sale of real
(6) A Rule of Exclusion — oral evidence might be relevant to the
agreement and might therefore be admissible were it not for the property or of an interest therein.
fact that the law excludes said oral evidence.
(7) Concerns itself with the admissibility of evidence and not its
credibility or weight. 4. Void or Inexistent Contracts
(8) Does not apply if it is claimed that the contract does not
Voidable distinguished from Void Contracts
express the true agreement of the parties.
Voidable Void
Rati ication of Contracts Infringing the Statute of Frauds (Art
1405
May be rati ied Cannot be rati ied
(a) By the failure to object to the presentation of oral evidence to
prove the same, or Produces effects until annulled Generally, effects are not
produced at all
(b) By the acceptance of bene it under them.
Rosencor Development Corporation v. Inquing, et al, supra Defect is due to incapacity or Ordinarily, public policy is
vitiated consent militated against
WON a right of irst refusal akin to "an agreement for the leasing of a
longer period than one year, or for the sale of real property or of an Valid until annulled Generally, no action required to
interest therein" as contemplated by Article 1403, par. 2(e). set aside, unless has already been
performed
NO. A right of irst refusal is not among those listed as unenforceable
under the statute of frauds. Furthermore, the application of Article
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May be cured by prescription Cannot be cured by prescription Lone Instance Where Recovery Can Be Had
Even in the Presence of Pari Delicto The illegality lies only as to the prestation to pay the stipulated
Defense may be invoked only by Defense may be availed of by interest; hence, being separable, the latter only should be deemed
the parties or their successors in anybody whose interest is ART 1414. When money is paid or property delivered for an void, since it is the only one that is illegal.
interest and privies directly affected (Art 1421) illegal purpose, the contract may be repudiated by one of the
parties Article 1413, in speaking of "interest paid in excess of the interest
Relative or conditional nullity Absolute nullity allowed by the usury laws" means the whole usurious interest; that
a) before the purpose has been accomplished, or
is, in a loan of P1,000, with interest of P20% per annum or P200 for
Unenforceable distinguished from Void Contracts b) before any damage has been caused to a third person. one year, if the borrower pays said P200, the whole P200 is the
usurious interest, not just that part thereof in excess of the interest
Unenforceable Void In such case, the courts may, if the public interest will thus be
allowed by law. It is in this case that the law does not allow division.
subserved, allow the party repudiating the contract to recover
The whole stipulation as to interest is void, since payment of said
May be rati ied Cannot be rati ied the money or property.
interest is the cause or object and said interest is illegal. The only
Contracts Merely Prohibited change effected, therefore, by Article 1413, is not to provide for the
There is a contract but cannot be No contract at all recovery of the interest paid in excess of that allowed by law, which
enforced by a court action ➔ Those forbidden because of private interests, as opposed to
the Usury Law already provided for, but to add that the same can be
those that are illegal per se that are forbidden due to public
recovered "with interest thereon from the date of payment."
Cannot be assailed by third Can be assailed by anybody interests.
parties directly affected
➔ Recovery is permitted, provided that: DBP v. Perez, supra
Enumeration of Void Contracts a) The contract in not illegal per se; In usurious loans, the entire obligation does not become void because
of an agreement for usurious interest; the unpaid principal debt still
ART 1409. The following contracts are inexistent and void from b) The prohibition is designed for the protection of the
stands and remains valid, but the stipulation as to the usurious
the beginning: plaintiff; and
interest is void. Consequently, the debt is to be considered without
(1) Those whose cause, object or purpose is contrary to c) Public policy would be enhanced by allowing the stipulation as to the interest. In the absence of an express stipulation
law, morals, good customs, public order or public recovery. as to the rate of interest, the legal rate (6% p.a.) shall be imposed.
policy; Castillo v. Galvan
Ras v. Sua
(2) Those which are absolutely simulated or ictitious; The allegations of the complaint show, however, that the plaintiffs'
The right to seek the declaration of the inexistence of a contract, for
(3) Those whose cause or object did not exist at the action is to declare void and inexistent the deed of sale upon the
being in violation of law, is imprescriptible.
time of the transaction; grounds that (a) there is fraud in securing the signatures of the
vendors in said deed of sale; and (b) there was no consideration given Considering that the aim of the government in allowing the
(4) Those whose object is outside the commerce of at the time of the transaction. In other words, the plaintiffs are
men; distribution or sale of disposable public lands to deserving
seeking a judicial declaration that the deed of sale in question is void applicants is to enable the landless citizens to own the land they
(5) Those which contemplate an impossible service; ab initio, which action is imprescriptible. could work on, and the reversion of these lands to the government is
(6) Those where the intention of the parties relative to penal in character, reversion cannot be construed to be implied from
Angel Jose Warehousing v. Chelda Enterprises the provision making certain acts prohibited. Where, as in this case,
the principal object of the contract cannot be
ascertained; As stated in Article 1411, the rule of pari delicto applies where a the interest of the individual outweighs the interest of the public,
contract's nullity proceeds from illegality of the cause or object of strict construction of a penal provision is justi ied.
(7) Those expressly prohibited or declared void by law.
said contract. However, appellants fail to consider that a contract of
ART 1416, as an exception to the pari delicto rule, provides that
These contracts cannot be rati ied. Neither can the right to set loan with usurious interest consists of principal and accessory
when the agreement is not illegal per se but is merely prohibited, and
up the defense of illegality be waived. stipulations; the principal one is to pay the debt; the accessory
the prohibition by the law is designed for the protection of the
stipulation is to pay interest thereon.
plaintiff, he may, if public policy is thereby enhanced, recover what

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 Civil Law | Obligations and Contracts, LTD, and Torts and Damages
he has paid or delivered.
Phil. Banking Corp. v. Lui She, supra
It does not follow that because the parties are in pari delicto they will
be left where they are, without relief. For one thing, the original
parties who were guilty of a violation of the fundamental charter have
died and have since been substituted by their administrators to whom
it would be unjust to impute their guilt.
Marin v. Adil
It is evident from the deed of exchange that the intention of the
parties relative to the lots, which are the objects of the exchange,
cannot be de initely ascertained. We hold that this circumstance
renders the exchange VOID or inexistent (Art. 1378, 2nd par. and Art.
1409[6], Civil Code).
The instant rescissory action may be treated as an action to declare
void the deed of exchange.
Razon, Inc. v. PPA
The Management Contract under consideration was executed by and
between petitioner E. Razon, Inc., and respondent PPA. By petitioners'
own admission, at the time of the execution of the Management
Contract, petitioner E. Razon, Inc. was controlled by Alfredo "Bejo"
Romuldez, brother-in-law of deposed President Marcos. Under
Section 5 of the Anti-Graft and Corrupt Practices Act (R.A. No. 3019),
Romualdez, by reason of his relationship with the then President of
the Philippines, was prohibited from intervening, directly or
indirectly, in any transaction or business with the government. Thus,
the Management Contract, entered into by E. Razon, Inc., ostensibly
owned by petitioner Enrique Razon, but in fact controlled by Alfredo
Romualdez as 60% equity owner thereof, is null and void and of no
effect, being one expressly prohibited by law (par. [7], Art. 1409).
The transfer of the control of petitioner E. Razon, Inc. from petitioner
Enrique Razon to Alfredo “Bejo” Romualdez, which We have resolved
to be null and void, served as the direct link to petitioner company's
obtaining the Management Contract. Being the direct consequence and
result of a previous illegal contract, the Management Contract itself is
null and void as provided in Article 1422 of the Civil Code.
Elementary in the law of contracts is the principle that no judicial
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
action is necessary for the annulment of a void contract. Any such
action would be merely declaratory. Thus, it was well within the
rights of respondent PPA to unilaterally cancel and treat as avoided
the Management Contract and no arbitrariness may be attached to its
exercise of this right.
Homena v. Casa
The plaintiffs’ supposed cause of action rests upon the deed of sale
executed by defendants in their favor wherein the latter sold a
two-hectare portion of the homestead which they were applying for to
the plaintiffs on the understanding that the actual conveyance of the
said portion to plaintiffs would be made only after the lapse of the
ive-year period during which, under the Public Land Act, the
homestead owner was prohibited from transferring his rights. The
agreement is clearly illegal and void ab initio; it is intended to
circumvent and violate the law. As parties to a void contract, the
plaintiffs have no rights which they can enforce and the court can not
lend itself to its enforcement.
Sps Abella v. Sps Abella 2015 Leonen, J
The imposition of an unconscionable interest rate is void ab initio for
being "contrary to morals, and the law."
Sps Jonsay, et al. v. Solidbank Bank Corp 2016
An escalation clause in a loan agreement granting the lending bank
authority to unilaterally increase the interest rate without prior notice
to and consent of the borrower is VOID.
Peña v. Delos Santos, et al 2016
The judicial action over the subject lots was still in the appellate
proceedings stage when they were conveyed to Jesus and Rosita's
counsel, Atty. Robiso.
Clearly then, the deeds of conveyance executed by the latter are
deemed inexistent. Under Article 1409, contracts which are
expressly prohibited or declared void by law are considered
inexistent and void from the beginning. There is no need to bring a
separate action for the declaration of the subject deeds of conveyance
as void.
The need to bring a separate action for declaration of nullity applies
only if the void contract is no longer fully executory. If the void
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contract is still fully executory, no party needs to bring an action to
declare its nullity; but if any party should bring an action to enforce
it, the other party can simply set up the nullity as a defense.
Guillermo, et al. v. PIA 2017 Leonen, J
The Complaint attempts to establish a contract that involves
expenditure of public funds. As pointed out by respondents, contracts
involving the expenditure of public funds have additional requisites
to be valid.
The Administrative Code of 1987 expressly prohibits the entering into
contracts involving the expenditure of public funds unless two prior
requirements are satis ied. First, there must be an appropriation law
authorizing the expenditure required in the contract. Second, there
must be attached to the contract a certi ication by the proper
accounting of icial and auditor that funds have been appropriated by
law and such funds are available. Failure to comply with any of these
two requirements renders the contract VOID.
The Complaint, however, completely ignored the foregoing requisites
for the validity of contracts involving expenditure of public funds.
Thus, the RTC could not order the enforcement of the alleged contract
on the basis of the Complaint, and the Complaint was properly
dismissed for failure to state a cause of action.
5. Distinguish: resolution and rescission of contracts
Resolution is a principal action based on a breach by a party under
Article 1191, while rescission under Article 1383 is a subsidiary
action limited to cases of rescission for lesion under Article 1381. (Sps
Poon v. Prime Savings Bank 2016)
Rescission Resolution
Based on lesion or fraud upon Based on non-performance or
creditors non-ful illment of obligation
Instituted by either of the parties Instituted only by injured party
or by third persons
Courts cannot grant a period or Courts may grant a term
term within which to comply
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Non-performance of other party Non-performance of other party
is immaterial is important
NATURAL OBLIGATIONS
Notes
1. Natural obligations, not being based on positive law but on
equity and natural law, do not grant a right of action to enforce
their performance, but after voluntary ful illment by the
obligor, they authorize the retention of what has been delivered
or rendered by reason thereof. (Art 1423)
2. Voluntary ful illment means that the debtor complied with
the same even if he knew that he could not have been legally
forced to do so.
3. Natural Obligations in Wills and Succession:
a. When a testate or intestate heir voluntarily pays a debt
of the decedent exceeding the value of the property
which he received by will or by the law of intestacy
from the estate of the deceased, the payment is valid
and cannot be rescinded by the payer. (Art 1429)
b. When a will is declared void because it has not been
executed in accordance with the formalities required
by law, but one of the intestate heirs, after the
settlement of the debts of the deceased, pays a legacy
in compliance with a clause in the defective will, the
payment is effective and irrevocable. (Art 1430)
ESTOPPEL
Notes
1. Estoppel is a bar which precludes a person from denying or
asserting anything to the contrary of that which has, in
contemplation of law, been established as the truth, either by
the acts of judicial or legislative of icers or by his own deed or
representation, either expressed or implied.
2. May be in pais or by deed (Art 1433).
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
3. Estoppel in pais or Equitable Estoppel arises when one,
by his
a. acts,
b. representations or admissions, or
c. by his silence when he ought to speak out,
intentionally or through culpable negligence, induces another
to believe certain facts to exist, and such other rightfully relies
and acts on such belief, so that he will be prejudiced if the
former is permitted to deny the existence of such facts.
4. Estoppel by laches or the unreasonable delay in bringing a
court action requires four elements
a. conduct on the part of the defendant, or of one under
whom he claims, giving rise to the situation of which
complaint is made and for which the complaint seeks
a remedy;
b. delay in asserting the complainant's rights, the
complainant having had knowledge or notice of the
defendant's conduct and having been afforded an
opportunity to institute a suit;
c. lack of knowledge or notice on the part of the
defendant that the complainant would assert the right
on which he bases his suit; and
d. injury or prejudice to the defendant in the event
relief is accorded to the complainant, or the suit is not
held to be barred.
5. Estoppel by deed or Technical Estoppel is a bar which
precludes a party to a deed and his privies from asserting as
against the other and his privies any right or title in derogation
of the deed, or from denying the truth of any material fact
asserted in it.
6. Sale of After-acquired Property. When a person who is not
the owner of a thing sells or alienates and delivers it, and later
the seller or grantor acquires title thereto, such title passes by
operation of law to the buyer or grantee. (Art 1434)
7. Estoppel by Record. Only applies as between the same parties
or their privies and can neither be used against strangers.
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Estoppel by record, to the extent that they bind parties, will
also bind their privies; but they can exist only as between
the same parties or those in legal privity with them, and can
be used neither by nor against strangers.
The rule of estoppel by record bars a second action
between the same parties on an issue necessarily raised and
decided in the irst action; so, an issue of ownership of
property and its incidents thus adjudicated cannot be
relitigated in a second action between the same parties.
(Beltran v. Escudero)
8. Agency by Estoppel. For an agency by estoppel to exist, the
following must be established:
(1) the principal manifested a representation of the agent's
authority or knowingly allowed the agent to assume
such authority;
(2) the third person, in good faith, relied upon such
representation;
(3) relying upon such representation, such third person
has changed his position to his detriment.
An agency by estoppel, which is similar to the doctrine of
apparent authority, requires proof of reliance upon the
representations, and that, in turn, needs proof that the
representations predated the action taken in reliance. (Litonjua,
Jr. v. Eternit Corporation)
SPECIAL CONTRACTS
A. SALES
1. General provisions
2. Parties
3. Obligations of the vendor
4. Obligations of the vendee
5. Transfer of ownership
6. Risk of loss
7. Documents of title
8. Warranties
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9. Breach of contract ownership. Sale by itself does not transfer or affect ownership;
4. An undivided interest in a thing may be sold by the sole
the most that sale does is to create the obligation to transfer
10. Performance of contract owner which results in a co-ownership. (Art 1463)
ownership. It is tradition (delivery as a consequence of sale)
11. Extinguishment that actually transfers ownership. [San Lorenzo Dev. Corp. v. The full owner may sell the usufruct of his land, leaving the
B. TRUSTS CA, 449 SCRA 99 (2005)] naked ownership to himself.

C. AGENCY Elements 5. Things subject to a resolutory condition may be the object of

the contract of sale. (Art 1465)
D. COMPROMISE 1) Essential —
Provisions as to Price
E. LOAN a) Consent or Meeting of the Minds;
1. Loan 1. If the consideration of the contract consists partly in money,
b) Determinate subject matter;
and partly in another thing, the transaction shall be
2. Commodatum c) Price certain in money or its equivalent. characterized by the manifest intention of the parties.
3. Simple loan 2) Natural — If such intention does not clearly appear, it shall be considered
4. Interests on loan a barter if the value of the thing exceeds the amount of the
a) Warranty against eviction;
F. DEPOSIT money or its equivalent; otherwise, it is a sale. (Art 1468)
b) Warranty against hidden defects;
G. LEASE 2. In order that the price may be considered certain, it shall be
3) Accidental — those which may be present or absent in the suf icient that it be so with reference to another thing certain,
stipulation. or that the determination thereof be left to the judgment of a
A. SALES special person or persons. (Art 1469)
Provisions as to Subject Matter
1. General provisions The price must be certain; otherwise, there is no true consent
1. The thing must be licit and the vendor must have a right to
between the parties.
transfer the ownership thereof at the time it is delivered. (Art
De inition
1459) 3. Gross inadequacy of price does not affect a contract of sale,
ART 1458. By the contract of sale one of the contracting parties The seller must be the owner of the subject sold. Nemo dat
except as it may indicate a defect in the consent, or that the
obligates himself to transfer the ownership and to deliver a parties really intended a donation or some other act or
quod non habet. But the seller only needs to be the owner
determinate thing, and the other to pay therefor a price certain contract. (Art 1470)
upon delivery, and not necessarily upon perfection of the
in money or its equivalent. contract of sale. 4. If the price is simulated, the sale is VOID, but the act may be
A contract of sale may be absolute or conditional. shown to have been in reality a donation, or some other act or
2. A thing is determinate if at the time the contract is entered
contract. (Art 1471)
Essential Characteristics into, the thing is capable of being made determinate without the
necessity of a new or further agreement between the parties. 5. The ixing of the price can never be left to the discretion of one
(a) Consensual; (Art 1460) of the contracting parties. However, if the price ixed by one of
(b) Bilateral reciprocal; the parties is accepted by the other, the sale is perfected. (Art
3. Goods may be existing or future goods. Future goods are those
1473)
(c) Onerous; still to be
6. Where the price cannot be determined, the contract is
(d) Generally, commutative; a. Manufactured or printed;
inef icacious. However, if the thing or any part thereof has
(e) Principal; b. Raised, or future agricultural products; been delivered to and appropriated by the buyer he must pay a
reasonable price therefor. (Art 1474)
(f) Nominate; c. Acquired by seller after perfection of contract, or
after-acquired property; Formation of the Contract of Sale
(g) Title and not Mode — A mode is the legal means by which
dominion or ownership is created, transferred or destroyed, d. Things whose acquisition depends upon a contingency 1. Letter of Intent to Buy and Sell is just that—a manifestation of
but title is only the legal basis by which to affect dominion or that may or may not happen. (Art 1462) offeror’s intention to sell the property and offeree’s intention to

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acquire the same—which is neither a contract to sell nor a
conditional contract of sale. [Muslim and Christian Urban Poor
Assn. v. BRYC-V Dev’t Corp., 594 SCRA 724 (2009)]
2. Option Contract. An option is a preparatory contract in
which one party grants to the other, for a ixed period and under
speci ied conditions, the power to decide, whether or not to
enter into a principal contract. It binds the party who has given
the option, not to enter into the principal contract with any
other person during the period designated, and, within that
period, to enter into such contract with the one to whom the
option was granted, if the latter should decide to use the option.
It is a separate agreement distinct from the contract of sale
which the parties may enter into upon the consummation of the
option.
An option imposes no binding obligation on the person holding
the option aside from the consideration for the offer. Until
accepted (exercised), it is not treated as a sale.
If the option is without any consideration, the offeror may
withdraw his offer by communicating such withdrawal to the
offeree at any time before acceptance. If it is founded upon a
consideration, the offeror cannot withdraw his offer before the
lapse of the period agreed upon. [Tuazon v. Del Rosario-Suarez,
637 SCRA 728 (2010)]
3. Right of First Refusal. A right of irst refusal cannot be the
subject of speci ic performance, but breach on the part of the
promissor would allow a recovery of damages.
Right of irst refusal contained in a Contract of Lease, when
breached by promissor allows enforcement by the promisee by
way of rescission of the sale entered into with the third party,
pursuant to Arts. 1381(3) and 1385. But not against a
purchaser for value and in good faith.
A right of irst refusal in a lease in favor of the lessee cannot be
availed of by the sublessee.
A right of irst refusal simply means that should lessor decide
to sell the leased property during the term of the lease, such
sale should irst be offered to the lessee; and the series of
negotiations that transpire between lessor and lessee on the
basis of such preference is a compliance even when no inal
purchase agreement is perfected between the parties. The
lessor was then at liberty to offer the sale to a third party who
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
paid a higher price, and there is no violation of the right of the
lessee.
Right of irst refusal clause does not apply to this situation
where the owner ejects the tenant on the ground that the former
needs the premises for residential purposes. [Estanislao v.
Gudito, 693 SCRA 330 (2013)]
4. Policitacion is a unilateral promise to buy or to sell which is
not accepted. It produces no juridical effect, and creates no
legal bond. It is a mere offer, and has not yet been conversed
into a contract.
5. Mutual Promises to Buy and Sell in Art 1479. Mutual
promises to buy and sell a certain thing for a certain price gives
parties a right to demand from the other the ful illment of the
obligation; even in this case the certainty of the price must also
exist, otherwise, there is no valid and enforceable contract to
sell.
A contract of sale is consummated only upon delivery and
payment, whereas in a bilateral promise to buy and sell gives
the contracting parties rights in personam, such that each has
the right to demand from the other the ful illment of their
respective undertakings. Cause of action under a mutual
promise to buy and sell is 10 years.
6. Sale by Auction. Owner’s terms and conditions for the sale of
property under auction are binding on all bidders, whether or
not they knew of them.
An auction sale is perfected by the fall of the hammer or in
other customary manner and it does not matter that another
was allowed to match the bid of the highest bidder. [Province of
Cebu v. Heirs of Ru ina Morales, 546 SCRA 315 (2008)]
7. Earnest Money in Art 1482. Earnest money given by the
buyer shall be considered as part of the price and as proof of
the perfection of the contract. It constitutes an advance
payment to be deducted from the total price.
In a potential sale transaction, prior payment of earnest money
even before the owner can agree to sell his property is irregular,
and cannot be used to bind the owner to the obligations of a
seller under an otherwise perfected contract of sale. Property
owner/prospective seller may not be legally obliged to enter
into a sale with a prospective buyer through the latter's
employment of questionable practices which prevent the
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owner from freely giving his consent to the transaction. [First
Optima Realty Corp. v. Securitron Security Services, 748 SCRA
534 (2015)]
Where parties merely exchanged offers and counter-offers,
there being no perfection of a contract of sale yet, money given
as deposit cannot be considered earnest money since such
term applies only to a perfected sale. [Starbright Sales
Enterprises v. Philippine Realty Corp., 663 SCRA 326 (2012)]
Application of Statute of Frauds
1. Sale of Real Property – Cannot be proven by means of
witnesses, but must necessarily be evidenced by a written
instrument, duly subscribed by party charged, or by secondary
evidence of the contents of such document.
2. Agency to Sell or to Buy – As contrasted from sale, agency to
sell does not belong to any of the categories of contracts
covered by Arts. 1357 and 1358 and not one enumerated under
the Statutes of Frauds in Art. 1403. [Lim v. CA, 254 SCRA 170
(1996)]
3. Rights of First Refusal – Are not covered since Art.
1403(2)(e) presupposes the existence of a perfected, albeit
unwritten, contract of sale; a right of irst refusal, is not by any
means a perfected sale. [Rosencor Dev. Corp. v. Inquing, 354
SCRA 119 (2001).]
4. Right to Repurchase – Deed and verbal agreement allowing
the right of repurchase should be considered as an integral
whole; the deed of sale is itself the note or memorandum
evidencing the contract. [Mactan Cebu Int’l Airport Authority v.
CA, 263 SCRA 736 (1996)]
5. Equitable Mortgage – Statute does not stand in the way of
treating an absolute deed as a mortgage, when such was the
parties’ intention, although the agreement for redemption or
defeasance is proved by parol evidence.
Simulated Sales
1. Badges of Simulation
a. Non-payment of the stipulated consideration, absence
of any attempt by the buyers to assert their alleged
rights over the subject property. [Villa lor v. CA, 280
SCRA 297 (1997)]
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b. Failure of alleged buyers to collect rentals from
alleged seller. [Santiago v. CA, 278 SCRA 98 (1997)];
but not when there appears a legitimate lessor-lessee
relationship between the vendee and the vendor.
[Union Bank v. Ong, 491 SCRA 581 (2006)]
c. Although agreement did not provide for absolute
transfer ownership of the land to buyer, that did not
amount to simulation, since delivery of TCT and
execution of deed of absolute sale were expressly
stipulated as suspensive conditions, which gave rise
to the corresponding obligation on part of buyer to pay
the last installments. [Villa lor v. CA, supra]
d. When signature on a deed of sale is a forgery, [Fidel v.
CA, 559 SCRA 186 (2008)]; but bare assertions that the
signature appearing on the Deeds of Sale is not enough
to allege simulation, since forgery is not presumed; it
must be proven by clear, positive and convincing
evidence. [R.F. Navarro & Co. v. Vailoces, 361 SCRA
139 (2001)]
e. Simulation of contract and gross inadequacy of price
are distinct legal concepts, with different effects – the
concept of a simulated sale is incompatible with
inadequacy of price. When the contracting parties do
not really intend to be bound by it, the contract is
simulated and void. Gross inadequacy of price by
itself will not result in a void contract, and it does not
even affect the validity of a contract of sale, unless it
signi ies a defect in the consent or that the parties
actually intended a donation or some other contract.
[Bravo-Guerrero v. Bravo, 465 SCRA 244 (2005)]
2. When Motive Nulli ies the Sale – In sale, consideration is, as
a rule, different from the motive of parties, and when the
primary motive is illegal, such as when the sale was executed
over a land to illegally frustrate a person's right to inheritance
and to avoid payment of estate tax, the sale is void because
illegal motive predetermined purpose of the contract.
[Olegario v. CA, 238 SCRA 96 (1994).]
Where the parties to a contract of sale agreed to a
consideration, but the amount re lected in the inal Deed of Sale
was lower, their motivation being to pay lower taxes on the
transaction, the contract of sale remains valid and enforceable
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
upon the terms of the real consideration. Although illegal, the
motives neither determine nor take the place of the
consideration. [Heirs of Spouses Balite v. Lim, 446 SCRA 54
(2004)]
2. Parties
1. Sales by and between Spouses. Under Art. 124 of Family
Code, sale by husband of a conjugal property without the wife’s
consent is VOID, not merely voidable, since the resulting
contract lacks one of the essential elements of “full consent”.
[Guiang v. CA, 291 SCRA 372 (1998)]
A wife af ixing her signature to a Deed of Sale as a witness is
deemed to have given her consent. [Pelayo v. Perez, 459 SCRA
475 (2005)]
As an exception, husband may dispose of conjugal property
without wife’s consent if such sale is necessary to answer for
conjugal liabilities mentioned in Articles 161 and 162. [Abalos
v. Macatangay, Jr., 439 SCRA 64 (2004)]
Sales between spouses who are not governed by a complete
separation of property regime are VOID, not just voidable.
[Medina v. Collector, 1 SCRA 302 (1960)]
Since the spouses cannot validly sell property to one another
under Art. 1490, then policy consideration and the dictates of
morality require that the prohibition should apply also to
common-law relationships. [Matabuena v. Cervantes, 38
SCRA 284 (1971)]
Sale by husband of conjugal land to his concubine is VOID for
being contrary to morals and public policy and “subversive of
the stability of the family, a basic social institution which
public policy cherishes and protects.” [Calimlim-Canullas v.
Fortun, 129 SCRA 675 (1984)]
The in pari delicto doctrine would not apply to the
spouses-parties under Art. 1490, since only the heirs and the
creditors can question the sale’s nullity, [Modina v. CA, 317
SCRA 696 (1999)]; nevertheless, when the property is re-sold
to a third-party buyer in good faith and for value, reconveyance
is no longer available. [Cruz v. CA, 281 SCRA 491 (1997)]
There are two instances under Art 1490 that spouses can sell
property to each other:
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(1) When a separation of property was agreed upon in the
marriage settlements; or
(2) When there has been a judicial separation of property.
2. Relative Incapacity under Art 1491. Contracts entered into in
violation of Arts. 1491 and 1492 are not merely voidable, but
are NULL AND VOID.
The relative prohibition applies to sales in legal redemption,
compromises and renunciations. (Art 1492)
a. Guardians, Administrators and Agents
Hereditary rights are not included in the prohibition
insofar as administrator or executor of the estate of the
deceased. [Naval v. Enriquez, 3 Phil. 669 (1904)]
No more need to comply with the requirement in
[Rodriguez v. Mactal, 60 Phil. 13 (1934)] to show that
a third party bought as conduit/nominee of the buyer
disquali ied under Art. 1491; rather, the presumption
now is that such disquali ied party obtained the
property in violation of said article. [Philippine Trust
Co. v. Roldan, 99 Phil. 392 (1956)]
Prohibition against agents does not apply if the
principal consents to the sale of the property in the
hands of the agent. [Distajo v. CA, 339 SCRA 52 (2000)]
b. Attorneys
(1) Prohibition Against Attorneys Applies:
Even though litigation is not adversarial in nature,
[Rubias v. Batiller, 51 SCRA 120 (1973)]; or a
certiorari proceeding that has no merit, [Valencia v.
Cabanting, 196 SCRA 302 (1991)]
Sale pursued while litigation is pending. [Director of
Lands v. Ababa, 88 SCRA 513 (1979)]
Only to a lawyer of record, and does not cover
assignment of the property given in judgment made by
a client to an attorney, who has not taken part in the
case. [Municipal Council of Iloilo v. Evangelista, 55
Phil. 290 (1930)]
(2) Prohibition Does Not Apply To:
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A lawyer who acquired property prior to the time he
intervened as counsel in the suit involving such
property. [Del Rosario v. Millado, 26 SCRA 700 (1969)]
Sale of the land acquired by a client to satisfy a
judgment to his attorney as long as the property was
not the subject of the litigation. [Daroy v. Abecia, 298
SCRA 172 (1998).]
Contingency fee arrangement granting the lawyer
proprietary rights to the property in litigation since
the payment of said fee is not made during the
pendency of litigation but only after judgment has
been rendered. [Fabillo v. IAC, 195 SCRA 28 (1991)]
c. Judges
Even when the main cause is a collection of a sum of
money, the properties levied are still subject to the
prohibition. [Gan Tingco v. Pabinguit, 35 Phil. 81
(1916)]
A judge who buys property in litigation before his
court after the judgment becomes inal does not
violate Art. 1491, but he can be administratively
disciplined for violation of the Code of Judicial Ethics.
[Macariola v. Asuncion, 114 SCRA 77 (1982)]
3. Obligations of the vendor
(a) To transfer ownership;
(b) To deliver with fruits and accessories;
(c) To warrant the object sold; (waivable since this is not an
essential element)
(d) To preserve the thing from perfection to delivery, otherwise
he can be held liable for damages.
4. Obligations of the vendee
1. Pay the Price (Art 1582)
When seller cannot show title to the subject matter, then he
cannot compel the buyer to pay the price. [Heirs of Severina
San Miguel v. CA, 364 SCRA 523 (2001)]
Mere sending of a letter by the buyer expressing the intention to
pay without the accompanying payment is not considered a
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
valid tender of payment and consignation of the amount due
are essential in order to extinguish the obligation to pay and
oblige the seller to convey title. [Torcuator v. Bernabe, 459
SCRA 439 (2005)]
When Buyer May Suspend the Payment of the Price
(a) If there is a well-grounded fear.
(b) The fear is because of:
(i) A vindicatory action or action to recover, or
(ii) A foreclosure of mortgage. (Art 1590)
2. Accept Delivery of the Subject Matter (Arts 1582-1585)
a. Buyer’s Right to Inspect Before Acceptance (Arts
1481 and 1584[1]);
Except: When Carrier Delivers under COD Terms
b. When Buyer Refuses to Accept (Art 1588) — Since
delivery of subject matter is an obligation on the part
of the seller, the acceptance thereof by the buyer is
not a condition for the completeness of delivery.
[La Fuerza v. CA, 23 SCRA 1217 (1968)]
If the refusal is justi ied, the buyer has no duty to
return the goods to the seller; mere notice to seller of
the refusal will suf ice. The buyer may make himself a
voluntary depositary. (Art 1587)
c. When There is Acceptance (Art 1585)
i. Express acceptance;
ii. When buyer does an act which only an owner
can do;
iii. Failure to return after reasonable lapse of
time.
5. Transfer of ownership
ART 1477. The ownership of the thing sold shall be transferred
to the vendee upon the actual or constructive delivery
thereof.
ART 1478. The parties may stipulate that ownership in the thing
shall not pass to the purchaser until he has fully paid the
price.
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Notes on Tradition Doctrines
1. Nemo Potest Nisi Quod De Jure Potest — “No man can do
anything except what he can do lawfully.” — When the sale is
void, even when there is delivery, no valid title over the subject
matter can be conveyed to the buyer.
2. Nemo Dat Quod Non Habet — “No man can give that which
he does not have.” Even when the sale is valid, if the seller had
no ownership over the subject matter at the time of delivery, no
valid title can pass in favor of the buyer.
A tax declaration by itself is not considered conclusive
evidence of ownership; it is merely an indicium of a claim of
ownership. [Daclag v. Macahilig, 560 SCRA 137 (2008)];
nevertheless, when at delivery there is no proof that seller had
ownership and property’s tax declaration was in the name of
another person, then there was no transfer of ownership by
delivery. [Heirs of Severina San Miguel v. CA, 364 SCRA 523
(2001)]
One can sell only what one owns or is authorized to sell, and
the buyer can acquire no more than what the seller can transfer
legally. [Daclag v. Macahilig]
A contract to sell, or a conditional contract of sale where the
suspensive condition has not happened, even when found in a
public document, cannot be treated as constituting constructive
delivery, especially when from the face of the instrument it is
shown that the seller “was not yet the owner of the property
and was only expecting to inherit it.” [Heirs of Arturo Reyes
v. Socco-Beltran, 572 SCRA 211 (2008)]
Notes on Delivery
1. Delivery contemplates the absolute giving up of the control
and custody of the property on the part of the vendor, and the
assumption of the same by the vendee.
Non nudis pactis sed traditione dominia rerum transferantur.
There is delivery if and when the thing sold “is placed in the
control and possession of the vendee.”
2. “Delivery” in sales refers to the concurrent transfer of two
things:
a. possession and
b. ownership.
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If the vendee is placed in actual possession of the property, but
by agreement of the parties ownership of the same is retained
by the vendor until the vendee has fully paid the price, the mere
transfer of the possession of the property subject of the sale is
not the “delivery” contemplated in the Law on Sales or as used
in Art. 1543 of the Civil Code. [Cebu Winland Dev. Corp. v. Ong
Siao Hua, 588 SCRA 120 (2009)]
Kinds of Delivery or Tradition
(1) Actual or real — when the thing sold is placed in the control
and possession of the vendee. (Art 1497)
(2) Constructive or legal —
(a) Legal formalities — execution of public instrument
is deemed delivery. (Art 1498 par 1);
Issuance of an acknowledgment receipt of partial
payment, when it is not a public instrument does not
convey title. [San Lorenzo Dev. Corp. v. CA, 449 SCRA
99 (2005)]
(b) Tradition simbolica — delivery of the keys of the
place or depository where movable property is stored
or kept. (Art 1498 par 2);
(c) Traditio longa manu — by the mere consent or
agreement of the contracting parties, if the thing sold
cannot be transferred to the possession of the vendee
at the time of the sale. (Art 1499);
(d) Traditio brevi manu — if the buyer already had the
possession of the object even before the purchase. (Art
1499);
(e) Traditio constitutum possessorium — possession
as owner changed to possession as a lessee, for
example.
(3) Quasi-tradition — delivery of rights, credits,
incorporeal property, made by:
(a) placing of the titles of ownership in the possession of
the vendee or
(b) the use by the vendee of his rights, with the vendor's
consent. (Art 1501)
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
In the sale of shares of stock, delivery of a stock certi icate is
one of the essential requisites for the transfer of ownership of
the stocks purchased. Seller’s failure to deliver the stock
certi icates representing the shares of stock amounted to a
substantial breach which gave rise to a right to rescind the
sale. [Raquel-Santos v. CA, 592 SCRA 169 (2009)]
Customary Steps in Selling Immovables
Customarily, in the absence of a contrary agreement, the submission by
an individual seller to the buyer of the following papers would complete
a sale of real estate:
(1) owner’s duplicate copy of the Torrens title;
(2) signed deed of absolute sale;
(3) tax declaration; and
b.
(4) latest realty tax receipt.
The buyer can retain the amount for the capital gains tax and pay it upon
authority of the seller, or the seller can pay the tax, depending on the
agreement of the parties. [Chua v. CA, 401 SCRA 54 (2003)]
Execution of notarized deed of sale and the delivery of the owner’s
duplicate copy of the original certi icate of title to the buyer is
tantamount to constructive delivery of the object of the sale. [Kings
Properties Corp. v. Galido, 606 SCRA 137 (2009)]
Special Rules on Completeness of Delivery
1. In Case of Movables (Arts 1522 and 1537, 1480)
When the contract does not provide for the measuring or
weighing of a sold speci ic mass, and the price agreed upon
was not based on such measurement, then the subject matter of
the sale is, therefore, a determinate object, the mass, and not
the actual number of units or tons contained therein, so that all
that is required of seller was to deliver in good faith to his
buyer all of those found in the mass, notwithstanding that the
or
quantity delivered is less than the amount estimated in the
contract. [Gaite v. Fonacier, 2 SCRA 831 (1961)]
a. Sale on Approval, Trial or Satisfaction (Art 1502)
In a “sale or return,” the ownership passes to the
buyer on delivery pursuant to a perfected contract of
sale; and the subsequent return of the goods reverts
ownership back to the seller. In such case, tradition as
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a mode of acquiring ownership must be in
consequence of a contract.
In a “sale on approval” (also called “sale on
acceptance, “sale on trial” or “sale on satisfaction”),
the delivery of the object does not transfer ownership
to the buyer since the delivery was not for purposes of
transferring ownership, since the prestation to effect a
meeting of the minds to give rise to a valid contract is
incumbent on the buyer.
For a sale to be a “sale or return” or a “sale on
approval,” there must be a clear agreement to either
of such effect, otherwise, the provisions of Art. 1502
of Civil Code governing such sales cannot be invoked
by either party to the contract.
Sale by Description and/or Sample (Art 1481)
There is a sale by sample
a) when a small quantity is exhibited by the
seller as a fair specimen of the bulk,
b) which is not present and there is no
opportunity to inspect or examine the same;
and
c) the parties treated the sample as the standard
of quality and
d) that they contracted with reference to the
sample
e) with the understanding that the product to be
delivered would correspondent with the
sample.
Even in sales by description and/or sample, buyer will
not be released from his obligation to accept and pay
for the goods by deviations on the part of the seller
from the exact terms of the contract, if buyer had
acquiesced to such deviations after due notice thereof.
When the machine delivered is in accordance with the
description stated in the sales contract, the buyer
cannot refuse to pay the balance of the purchase price
and the cost of installation if it proves that the
machine cannot be used satisfactorily for the purposes
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for which he bought it when such purpose was not
made known to the seller.
6. Risk of loss
Loss of Object Before Sale
ART 1493. If at the time the contract of sale is perfected, the
thing which is the object of the contract has been entirely
lost, the contract shall be without any effect.
But if the thing should have been lost in part only, the vendee
may choose between
a) Rescission — withdrawing from the contract and
b) Speci ic Performance — demanding the remaining
part, paying its price in proportion to the total sum
agreed upon
Loss of Speci ic Goods
ART 1494. Where the parties purport a sale of speci ic goods,
and the goods without the knowledge of the seller have
perished in part or have wholly or in a material part so
deteriorated in quality as to be substantially changed in
character, the buyer may at his option treat the sale:
(1) As avoided; or
(2) As valid in all of the existing goods or in so much
thereof as have not deteriorated, and as binding the
buyer to pay the agreed price for the goods in which
the ownership will pass, if the sale was divisible.
Risk of Loss
ART 1504. Unless otherwise agreed, the goods remain at the
seller's risk until the ownership therein is transferred to the
buyer, but when the ownership therein is transferred to the
buyer the goods are at the buyer's risk whether actual delivery
has been made or not, except that:
(1) Where delivery of the goods has been made to the
buyer or to a bailee for the buyer, in pursuance of the
contract and the ownership in the goods has been
retained by the seller merely to secure performance
by the buyer of his obligations under the contract, the
goods are at the buyer's risk from the time of such
delivery;
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REVIEWER For the 2020/21 #BestBarEver
(2) Where actual delivery has been delayed through the 5. Warranties in Negotiation or Transfer
fault of either the buyer or seller the goods are at the
a. That the document is genuine;
risk of the party in fault.
b. That he has a legal right to negotiate or transfer it;
7. Documents of title
c. That he has knowledge of no fact which would impair
Arts 1507-1520 the validity or worth of the document; and
1. What document of title includes d. That he has a right to transfer the title to the goods
a. any bill of lading, and that the goods are merchantable or it for a
particular purpose, whenever such warranties would
b. dock warrant, have been implied if the contract of the parties had
c. "quedan," or been to transfer without a document of title the goods
represented thereby. (Art 1516)
d. warehouse receipt or order for the delivery of goods,
or 8. Warranties
e. any other document used in the ordinary course of 1. Conditions. Failure to comply with condition imposed upon
business in the sale or transfer of goods, as proof of perfection of the contract results in failure of a contract, while
the possession or control of the goods, or authorizing the failure to comply with a condition imposed on the
or purporting to authorize the possessor of the performance of an obligation only gives the other party the
document to transfer or receive, either by indorsement option either to refuse to proceed with sale or waive the
or by delivery, goods represented by such document. condition. [Laforteza v. Machuca, 333 SCRA 643 (2000)]
(Art 1636)
The condition in the contract of sale of buyer’s assumption of
2. Through a document of title, seller is allowed by iction of law the mortgage constituted on the subject matter is deemed
to deal with the goods described therein as though he had ful illed when the seller prevented its ful illment by paying his
physically delivered them to the buyer; and buyer may take the outstanding obligation to the bank and taking back the
document as though he had actually taken possession and certi icates of title without even notifying the buyer. [De Leon v.
control over the goods described therein. Ong, 611 SCRA 381 (2010)]
3. Negotiable Document of Title — document is negotiable if 2. Express Warranty. A warranty is a statement or
representation made by the seller of goods, contemporaneously
a. The goods are deliverable to bearer; or
and as part of the contract of sale, having reference to the
b. If the goods are deliverable to the order of a certain character, quality or title of the goods, and by which he
person. promises or undertakes to insure that certain facts are or shall
be as he then represents them. [Ang v. CA, 567 SCRA 53
4. How Negotiated
(2008).]
a. Mere delivery;
Breach of an express warranty makes seller liable for
i. If deliverable to bearer; damages. The following requisites essential to establish an
express warranty:
ii. If deliverable to the order of a certain person
and that person has indorsed it in blank or a. it must be an af irmation of fact or any promise by
indorsed it to bearer. the seller relating to the subject matter of the sale;
b. Indorsement + Delivery. b. natural tendency of such af irmation or promise is to
induce the buyer to purchase the thing; and
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c. buyer purchases the thing relying on such af irmation
or promise thereon. [Carrascoso, Jr. v. CA, 477 SCRA
666 (2005)]
3. Implied Warranties
a. That seller has the right to sell;
b. Against Eviction (Arts 1548 - 1560)
Seller must be summoned in the suit for eviction at the
instance of the buyer (Art 1558), and be made a
co-defendant or a third-party defendant (Art 1559)
A dacion en pago is governed by the law of sales, and
contracts of sale come with warranties, either express or
implied. The implied warranty in case of eviction is
waivable and cannot be invoked if the buyer knew of the
risks or danger of eviction and assumed its consequences.
[Luzon Dev. Bank v. Enriquez, 639 SCRA 332 (2011)]
No Warranty Against Eviction When Execution Sale — In
voluntary sales, vendor can be expected to defend his title
because of his warranty to the vendees but no such
obligation is owed by the owner whose land is sold at
execution sale. [Santiago Land Dev. Corp. v. CA, 276 SCRA
674 (1997)]
However, under Art 1552, the judgment debtor is also
responsible for eviction in judicial sales, unless it is
otherwise decreed in the judgment. Also in Art 1570, the
judgment debtor in judicial sales shall not be liable for
damages in view of the compulsory nature of the sales.
The prescriptive period to ile a breach thereof is six (6)
months after the delivery. Mere noti ication not
suf icient.
A breach of this warranty requires the concurrence of the
following circumstances:
(1) The purchaser has been deprived of the whole or
part of the thing sold;
(2) This eviction is by a inal judgment;
(3) The basis thereof is by virtue of a right prior to
the sale made by the vendor; and
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
(4) The vendor has been summoned and made
co-defendant in the suit for eviction at the
e.
instance of the vendee.
c. Against Non-Apparent Servitudes (Art 1560)
Remedy is rescission + damages if made within one year
from execution of deed.
But if one year has already lapsed, remedy is only for
damages.
d. Against Hidden Defects (Arts 1561, 1566-1580)
Requisites to recover because of Hidden Defects:
(1) Defect must:
(a) be hidden;
(b) exist at perfection of contract;
(c) ordinarily have been excluded from the
contract; and
f.
(d) be important to render the thing un it or
considerably decreases itness; and
g.
(2) Action must be instituted within the statute of
limitations.
Redhibitory Defect — a defect that renders a thing useless
or so diminishes its usefulness or value that it must be
presumed that the buyer would not have bought it or
would have paid a lesser price if aware of the defect.
Remedies:
(1) Withdrawal or rescission (accion redhibitoria) +
damages;
Prescriptive period generally 6 months from
delivery except if involving defects of animals, 40
days.
(2) Proportionate reduction in the price (accion
quanti minoris) + damages.
(3) If due to the hidden defect the the thing sold
should be lost:
(a) If seller aware — Return the price + refund
expenses of contract + damages;
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(b) If not aware — same except for damages.
As to Fitness or Quality of Goods (Arts 1562, 1565,
1599)
In order to enforce the implied warranty that the goods are
reasonably it and suitable to be used for the purpose
which both parties contemplated, the following must be
established:
(1) that the buyer sustained injury because of the
product;
(2) that the injury occurred because the product was
defective or unreasonably unsafe; and inally
(3) the defect existed when the product left the hands
of the petitioner.
Merchantable Quality — Fit for the general purpose of a
thing, and not necessarily the particular purpose for which
it has been acquired.
Sale of Goods by Sample (Art 1565) — there is a
warranty of merchantability.
Additional Warranties for Consumer Products in RA
7394
Warranties in Supply of Services. —
a) There is an implied warranty that the service will
be rendered with due care and skill and that any
material supplied in connection with such
services will be reasonably it for the purpose for
which it is supplied.
b) Where the consumer, expressly or by implication,
makes known to the seller the particular purpose
for which the services are required, there is an
implied warranty that the services supplied under
the contract and any material supplied in
connection therewith will be reasonably it for
that purpose or are of such a nature or quality that
they might reasonably be expected to achieve that
result, unless the circumstances show that the
consumer does not rely or that it is unreasonable
for him to rely, on the seller's skill or judgment.
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by reason of the dishonor of the instrument, the

4. Effects and Prescription of Warranties (Art 1599) – A (1) Obtaining actual possession;
insolvency of the buyer, or otherwise. (Art 1525)
breach in the warranties of the seller entitles the buyer to a
(2) Giving notice of the claim. — either to
proportionate reduction of the purchase price. [PNB v. 2. Rights of an Unpaid Seller
Mega Prime Realty and Holding Corp., 567 SCRA 633 (2008). (a) The person in actual possession; or
a. Possessory lien, in the nature of a pledge — while still
The prescriptive period for instituting actions based on a in possession. (b) His principal.
breach of
b. Right of stoppage in transitu — if seller has parted The consequential effects are
a) express warranty is that speci ied in the contract, with the possession;
(1) The goods are no longer in transitu;
and in the absence of such period, the general rule on
c. To Resale;
rescission of contract, which is 4 years, while for (2) The contract of carriage ends; the carrier now becomes
d. To Rescind the sale. a bailee;
b) implied warranty, the prescriptive period is 6
months from the date of the delivery of the thing sold. 3. Possessory Lien. (3) The carrier should not deliver anymore to the buyer;
[Ang v. CA, 567 SCRA 53 (2008)] otherwise, he will be liable for damages;
a. Where the goods have been sold without any
9. Breach of contract stipulation as to credit; (4) The carrier must deliver to, or according to the
directions of, the seller.
Remedies of Seller b. Where the goods have been sold on credit, but the
term of credit has expired; 5. Right of Resale.
1. If Buyer Refuses to Pay — maintain an action against buyer for
the price of the goods. (Art 1595) c. Where the buyer becomes insolvent. a. Where the goods are of perishable nature, or

2. If Buyer Refuses to Accept and Pay — action for damages, The seller may exercise his right of lien notwithstanding that b. where the seller expressly reserves the right of resale
measured as the estimated loss directly and naturally resulting he is in possession of the goods as agent or bailee for the buyer. in case the buyer should make default, or
in the ordinary course of events from the buyer's breach. (Art (Art 1527)
c. where the buyer has been in default in the payment of
1596) The unpaid seller of goods loses his lien thereon: the price for an unreasonable time,
3. When Seller May Totally Rescind — Where (1) When he delivers the goods to a carrier or other bailee an unpaid seller having a right of lien or having stopped the
a. the goods have not been delivered to the buyer, and for the purpose of transmission to the buyer without goods in transitu may resell the goods.
reserving the ownership in the goods or the right to
b. the buyer He shall not thereafter be liable to the original buyer upon the
the possession thereof;
contract of sale or for any pro it made by such resale, but may
i. has repudiated the contract of sale, or (2) When the buyer or his agent lawfully obtains recover from the buyer damages for any loss occasioned by
ii. has manifested his inability to perform his possession of the goods; the breach. (Art 1533)
obligations thereunder, or (3) By waiver thereof. (Art 1529) Is notice of an intention to resell essential? NO. But where the
iii. has committed a breach thereof. (Art 1597) right to resell is not based on the perishable nature of the goods
Although possessory lien may be lost, lien is still maintained
or upon an express provision of the contract of sale, the giving
Unpaid Seller of Goods (Arts 1524-1535) where the unpaid seller is considered a preferred creditor
or failure to give such notice shall be relevant in any issue
with respect to the price of the speci ic goods sold.
1. A seller is unpaid involving the question whether the buyer had been in default
4. Right of Stoppage in Transitu. — available to the unpaid for an unreasonable time before the resale was made.
a. When the whole of the price has not been paid or seller if
tendered; 6. Right to Rescind. Applies in case there has been
a. He has parted with the possession of goods; and
b. When a bill of exchange or other negotiable instrument a. Express stipulation or reservation;
has been received as conditional payment, and the b. If the buyer is or becomes insolvent. (Art 1530 par 1)
b. Unreasonable default.
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There must be notice to the buyer or there must be an overt act
showing an intention to rescind. (Art 1534)
Remedies of Buyer in case of Breach of Warranty
The buyer may, at his election:
(1) Accept or keep the goods and set up against the seller, the
breach of warranty by way of recoupment in diminution or
extinction of the price;
(2) Accept or keep the goods and maintain an action against the
seller for damages for the breach of warranty;
(3) Refuse to accept the goods, and maintain an action against the
seller for damages for the breach of warranty;
(4) Rescind the contract of sale and refuse to receive the goods
or if the goods have already been received, return them or
offer to return them to the seller and recover the price or any
part thereof which has been paid. (Art 1599)
Recto Law (Articles 1484 - 1486)
ART 1484. In a contract of sale of personal property the
price of which is payable in installments, the vendor may
exercise any of the following remedies:
(1) Speci ic Performance — Exact ful illment of the
obligation, should the vendee fail to pay;
(2) Rescission — Cancel the sale, should the vendee's
failure to pay cover two or more installments;
(3) Foreclosure — Foreclose the chattel mortgage on the
thing sold, if one has been constituted, should the
vendee's failure to pay cover two or more
installments.
In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any
agreement to the contrary shall be VOID.
1. Recto Law prevents mortgagee from seizing mortgaged
property, buying it at foreclosure sale for a low price and then
bringing the suit against the mortgagor for a de iciency
judgment. The almost invariable result was that the mortgagor
found himself minus the property and still owing practically
the full amount of his original indebtedness. [Magna Financial
Services Group v. Colarina, 477 SCRA 245 (2005)]
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
2. When is there “Installment Sale”? At least two (2) stipulated
payments in the future, whether or not there is a downpayment.
3. When rentals in a “lease” are meant to be installment payments
to an underlying sale contract, despite the nomenclature given
by the parties, it is a sale by installments and governed by
Recto Law. [Filinvest Credit Corp. v. CA, 178 SCRA 188 (1989)]
4. In a case, mortgagor-buyer never bought the subject vehicle
from the inancing company but from a third party, and merely
sought inancing from the mortgagee for its full purchase price.
Consequently, Art 1484 does not apply against inancing
company. [Equitable Savings Bank v. Palces, 787 SCRA 260
(2016)]
5. Purported Lease with Option to Buy. Where a lease
agreement over equipment is without an express option to
purchase, but nevertheless when a inal demand is given prior
to suit, the demand letter indicates clearly it was within the
option of the lessee to fully pay the balance of the unpaid
rentals and would be able to keep the equipment, then the real
contract between the parties was a sale of movable on
installment disguised as a lease agreement. [PCI Leasing and
Finance v. Giraffe-X Creative Imaging, 527 SCRA 405 (2007)]
6. Generally, mutual restitution is required in case of rescission.
As a way of exception, a stipulation that the installments or
rents paid shall not be returned to the vendee or lessee shall be
valid insofar as the same may not be unconscionable under the
circumstances. (Art 1486)
Maceda Law: Sales of Residential Realty on Installments
1. Maceda Law recognizes in conditional sales of all kinds of real
estate seller’s right to cancel the contract upon non-payment of
an installment by the buyer, which is simply an event that
prevents the obligation of the vendor to convey title from
acquiring binding force.
2. How Cancellation of Contract Can Be Effected. The
cancellation of the contract under the Maceda Law must follow
the following steps:
a. First, seller should extend the buyer a grace period of
at least 60 days from the due date of the
installments.
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b. Second, at end of grace period, seller shall furnish
buyer with a notarial notice of cancellation or
demand for rescission, effective 30 days from
buyer’s receipt thereof; a mere notice or letter, would
not suf ice. [McLaughlin v. CA, 144 SCRA 693 (1986)]
c. Third, for contracts covering more than two years of
payments, there must be return to the buyer of the
cash surrender value. [Villdara, Jr. v. Zabala, 545
SCRA 325 (2008)]
d. Until and unless seller complies with these mandatory
requirements, contract to sell remains valid and
subsisting. [Communities Cagayan v. Nanol, 685 SCRA
453 (2012)]
3. Important Features.
a. After having paid installment for at least two (2)
years, the buyer is entitled to a mandatory grace
period of one month for every year of installment
payments made, to pay the unpaid installments
without interest.
If the contract is cancelled, the seller shall refund to
the buyer the cash surrender value equivalent to
50% of the total payments made, and after ive years
of installments, an additional 5% every year but not to
exceed 90% of total payment made. Thus, if
installment paid
1) <= 5 years — 50%;
2) > 5 years — 50% + 5% for every year.
3) But in no case shall exceed 90%.
b. In case the installments paid were less than two
years, the seller shall give the buyer a grace period of
not less than 60 days.
If the buyer fails to pay the installments due at the
expiration of the grace period, the seller may cancel
the contract after 30 days from receipt by the buyer
of the notice of cancellation or demand for rescission
by notarial act.
4. Formal letter demand upon buyer to vacate the premises is not
the same as the notice of cancellation or demand for rescission
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by a notarial act required by R.A. No. 6552. Evidently, the case
of unlawful detainer iled by petitioner does not exempt him
from complying with the said requirement. [Pagtulunan v. Dela
Cruz Vda. De Manzano, 533 SCRA 242 (2008)]
5. Where buyers under a contract to sell offers to pay the last
installment a year and a half after the stipulated date, that was
beyond the sixty-day grace period under Section 4 of the
Maceda Law. The buyers cannot use the second sentence of
Section 4 of the Maceda Law against the sellers’ alleged failure
to give an effective notice of cancellation or demand for
rescission because the sellers merely sent the notice to the
address supplied by the buyers in the Contract to Sell. [Garcia
v. CA, 619 SCRA 280 (2010)]
Sale for a Lump Sum
6. Under the Maceda Law, the right of the buyer to refund accrues
only when he has paid at least two years of installments.
[Manuel Uy & Sons v. Valbueco, Inc., 705 SCRA 537 (2013)]
10. Performance of contract
Sale Per Unit of Measure (Arts 1539 and 1540)
In a unit price sale, the statement of the area of immovable is not
conclusive and the price may be reduced or increased depending on
Double Sales under Art 1544
the area actually delivered.
If the vendor delivers less than the area agreed upon, the vendee
may
a) oblige the vendor to deliver all that is stated in the contract
or
b) demand for the proportionate reduction of the purchase
price if delivery is not possible.
If the vendor delivers more than the area stated in the contract, the
vendee has the option
a) to accept only the amount agreed upon or
b) to accept the whole area, provided he pays for the
additional area at the contract rate. [Rudolf Lietz, Inc. v. CA,
478 SCRA 451 (2005)]
Where parties agreed at a rate of a certain price per unit of measure
and not one for a lump sum, it is Art. 1539 and not Art. 1542
which is the applicable law—buyer is entitled to the relief afforded
to him under Article 1539, that is, either a proportional reduction
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
of the price or the rescission of the contract. [Cebu Winland Dev.
Corp. v. Ong Siao Hua, 588 SCRA 120 (2009)]
EXC: A buyer of land, when sold in gross or with the description
“more or less” or similar words in designating quantity, covers only
a reasonable excess of de iciency. In the case at bar an area of “644
square meters more” is not reasonable excess or de iciency, to be
deemed included in the deed of sale. [Roble v. Arbasa, 362 SCRA 69
(2001)]
EXC to EXC: When buyer, who has been occupying the land for two
years as lessee, actually is deemed to take risk on the actual size of
the property bought at lump sum. [Garcia v. Velasco, 72 Phil. 248
(1941)]
(“A cuerpo cierto or por precio alzado”) (Art 1542) – In a sale of
land in a mass, the speci ied boundaries must control over any
statement with respect to the area contained within its boundaries.
[Salinas v. Faustino, 566 SCRA 18 (2008)]
The actions arising from Arts 1539 and 1542 shall prescribe in six
(6) months, counted from the day of delivery. (Art 1543)
ART 1544. If the same thing should have been sold to different
vendees, the ownership shall be transferred to the person who
may have irst taken possession thereof in good faith, if it
should be movable property.
Should it be immovable property, the ownership shall belong
to the person acquiring it who in good faith irst recorded it in
the Registry of Property.
Should there be no inscription, the ownership shall pertain to
the person who in good faith was irst in the possession; and,
in the absence thereof, to the person who presents the oldest
title, provided there is good faith.
Notes
1. Rules of Preference
a. Personal property — possessor in good faith;
b. Real property —
i. Registrant in good faith;
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ii. Possessor in good faith;
iii. Person with the oldest title in good faith.
2. Requisites for Double Sale Rule to Apply
a. There Must Be Two Different Valid Sales;
Applies even if one of the sales is an auction sale.
[Gopiao v. Metrobank, 731 SCRA 131 (2014)]
But not to contracts to sell.
b. Exact Same Subject Matter;
c. Exact Same Seller for Both Sales.
3. Registration in Good Faith. — The annotation of adverse
claim can qualify as the registration mandated under the rules
on double sale.
Registration means any entry made in the books of the
registry, including both registration in its ordinary and strict
sense, and cancellation, annotation, and even marginal notes. It
is the entry made in the registry which records solemnly and
permanently the right of ownership and other real rights.
In a situation where a party has actual knowledge of the
claimant’s actual, open and notorious possession of a disputed
property at the time of registration, the actual notice and
knowledge are equivalent to registration, because to hold
otherwise would be to tolerate fraud and the Torrens system
cannot be used to shield fraud.
4. Possession in Good Faith in the Absence of Registration.
a. possession mentioned in Art. 1544 includes not only
material but also symbolic possession;
b. possessors in good faith are those who are not aware
of any law in their title or mode of acquisition;
c. buyers of real property that is in the possession of
persons other than the seller must be wary – they
must investigate the rights of the possessors; and
d. good faith is always presumed, upon those who allege
bad faith on the part of possessors rests the burden of
proof.
5. Purchaser in Good Faith Must Have Paid Price in Full — A
purchaser in good faith is one who buys property without
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notice that some other person has a right to, or interest in, such
property, and pays a full and fair price for the same at the time
of such purchase, or before he has notice of claim or interest of
some other person in the property. [Locsin v. Hizon, 735 SCRA
547 (2014)]
A purchaser in good faith is one who buys with the
well-founded belief that the person from whom he receives the
property had title to it and had the capacity to convey it. In this
case, the buyers bought. [Heirs of Soliva v. Soliva, 757 SCRA 26
(2015); Bliss Dev. Corp./HGC v. Diaz, 765 SCRA 453 (2015)]
A purchaser cannot close his eyes to facts which should put a
reasonable man upon his guard, and then claim that he acted in
good faith under the belief that there was no defect in the title
of the vendor. [Heirs of Nicolas S. Cabigas v. Limbaco, 654 SCRA
643 (2011)]
6. Instances When There is No Good Faith
a. Being In Business on Realty — A mortgagee who
eventually ended buying the property at the public auction,
cannot claim to be a buyer in good faith when his business
in the constructing and selling townhouses and extending
credit to the public, including real estate loans; for he is
charged with greater diligence that ordinary buyers or
encumbrances for value, because it would be standard in
his business, as a matter of due diligence required of banks
and inancing companies, to ascertain whether the
property being offered as security for the debt has already
been sold to another to prevent injury to prior innocent
buyers. [Expresscredit Financing Corp. v. Velasco, 473
SCRA 570 (2005)]
A bank is expected to exercise due diligence before entering
into a mortgage contract, and the ascertainment of the
statute or condition of a property offered to it as security
for a loan must be a standard and indispensable part of
operations; and it cannot simply rely upon reviewing
the title to the property offered for mortgage. [Tio v.
Abayata, 556 SCRA 175 (2008)]
b. Close Relationship — The sale to one’s daughter and sons
will give rise to the conclusion that the buyers, not being
really third parties, knew of the previous sales and cannot
be considered in good faith. [Pilapil v. CA, 250 SCRA 566
(1995)]
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
c. Gross Inadequacy of Price — Mere inadequacy of price is
not ipso facto a badge of lack of good faith—to be so, the
price must be grossly inadequate or shocking to the
conscience such that the mind revolts against it and such
that a reasonable man would neither directly or indirectly
be likely to consent to it.
d. Obligation to Investigate or To Follow Leads — A
purchaser who is aware of facts which should put a
reasonable man upon his guard cannot turn a blind eye and
later claim that he acted in good faith, such as —
Buyer of a registered land would be in bad faith when he
purchases without asking to see the owner’s copy of the
title and/or without visiting the land where he would then
have seen the irst buyer occupying the same. [Santiago v.
CA, 247 SCRA 336 (1995)]
When there are occupants to the land being bought, since it
is the common practice in the real estate industry, an
ocular inspection of the premises involved is a safeguard a
cautious and prudent purchaser usually takes. [Martinez v.
CA, 358 SCRA 38 (2001)]
Any person engaged in business would be wary of buying
from a company that is closing shop, because it may be
dissipating its assets to defraud creditors. Such buyer is
bound to inquire whether the owners had unsettled
obligations encumbrance that could burden the property.
[Samson v. CA, 238 SCRA 397 (1994)]
Property was titled and transferred with undue haste, “plus
the fact that the subject property is a vast tract of land in a
prime location, should have, at the very least, triggered
petitioner’s curiosity.” [Eagle Realty Corp v. Republic, 557
SCRA 77, 94 (2008)]
e. Land in Adverse Possession — Where land sold is in the
possession of a person other than vendor, purchaser must
go beyond the certi icate of title and make inquiries
concerning the actual possessor. Without such inquiry, the
buyer cannot be said to be in good faith and cannot have
any right over the property. [Tio v. Abayata]
f. Existence of Lis Pendens or Adverse Claim — Registration
of an adverse claim places any subsequent buyer of the
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registered land in bad faith. [Kings Properties Corp. v.
Galido, 606 SCRA 137 (2009)]
However, when knowledge of lis pendens was acquired at
the time there was order to have it cancelled [Po Lam v. CA,
347 SCRA 86 (2000)], a buyer cannot be in bad faith when
it was shown that at the time of purchase the notice of lis
pendens was already being ordered cancelled and the
cancellation of the notice terminated the effects of such
notice. [Pudadera v. Magallanes, 633 SCRA 332 (2010)]
g. Annotation of Lien in Settlement of Estate — An
annotation on CTC issued pursuant to the distribution and
partition of a decedent’s real properties is a warning to
third persons on the possible interest of excluded heirs or
unpaid creditors in these properties—where a buyer
purchases the real property despite the annotation, he
must be ready for the possibility that the title be subject to
the rights of excluded parties. [Tan v. Benolirao, 604 SCRA
36 (2009)]
h. Banks Are Vested with Public Interest and Obligation to
Exercise Extraordinary Diligence — One of the
protections afforded by P.D. 957 to buyers is the right to
have her contract to sell registered with the Register of
Deeds to bind on third parties. Nonetheless, despite such
non-registration, the mortgagee bank cannot be considered,
under the circumstances, an innocent purchaser for value
of the lot when it accepted the latter (together with other
assigned properties) as payment for the mortgagor
developer’s obligation—the bank was well aware that the
assigned properties were subdivision lots and therefore
within the purview of P.D. 957. [Luzon Dev. Bank v.
Enriquez, 639 SCRA 332 (2011)]
When inancial institutions exercise extraordinary
diligence in determining the validity of the certi icates of
title to property being sold or mortgaged to them and still
fail to ind any defect or encumbrance upon the subject
properties after said inquiry, they should be protected
like any other innocent purchaser for value if they paid
a full and fair price at the time of the purchase or before
having notice of some other person’s claim on or interest
in the property. [Ty v. Queen’s Row Subdivision, 607 SCRA
324 (2009)]
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11. Extinguishment
Conventional Redemption
Notes
1. Conventional redemption shall take place when the
vendor reserves the right to repurchase the thing sold. (Art
1601)
2. When a Pacto de Retro Sale Presumed an Equitable
Mortgage.
a. When the price of a sale with right to repurchase is
unusually inadequate;
b. When the vendor remains in possession as lessee or
otherwise;
c. When upon or after the expiration of the right to
repurchase another instrument extending the period
of redemption or granting a new period is executed;
d. When the purchaser retains for himself a part of the
purchase price;
e. When the vendor binds himself to pay the taxes on
the thing sold;
f. In any other case where it may be fairly inferred that
the real intention of the parties is that the transaction
shall secure the payment of a debt or the performance
of any other obligation. (Art 1602)
3. Equitable Mortgage. — one although lacking in some
formality, or form or words, or other requisites demanded by a
statute, nevertheless reveals the parties’ intention to charge real
property as security for a debt, and contains nothing
impossible or contrary to law. For equitable mortgage to arise,
two requisites must concur:
(1) that the parties entered into a contract denominated as
a sale; and
(2) the intention was to secure an existing debt by way of
mortgage.
Equitable mortgage favors the least transmission of rights and
interest over a property in controversy, since the law seeks to
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
prevent circumvention of the law on usury and the prohibition
against pactum commissorium provisions.
An equitable mortgage is a voidable contract. It may be
annulled within four (4) years from the time the cause of
action accrues. [Ayson, Jr. v. Paragas, 557 SCRA 50 (2008)]
Although Art 1605 which allows for the remedy of
reformation, nothing therein precludes an aggrieved party
from pursuing other remedies to effectively protect his interest
and recover his property, such as an action for declaration of
nullity of the deed of sale and speci ic performance.
4. Pactum Commissorium (Art 2088) — A stipulation which
enables the mortgagee to acquire ownership of the mortgaged
properties without need of any foreclosure proceedings—it is a
nullity, [Lumayag v. Heirs of Jacinto Nemeño, 526 SCRA 315
(2007)]; and has been repeatedly declared as contrary to
morals and public policy, [Solitarios v. Jaque, 740 SCRA 226
(2014)]
In a pactum commissorium there should be:
(1) a property mortgaged by way of security for the
payment of the principal obligation, and
(2) a stipulation for automatic appropriation by the
creditor of the thing mortgaged in case of non-payment
of the principal obligation within the stipulated
period.
That the questioned contracts were freely and voluntarily
executed by the parties is of no moment, pactum
commissorium being VOID for being prohibited by law. [Ong v.
Roban Lending Corp., 557 SCRA 516 (2008)]
5. The right of redemption, in the absence of an express
agreement, shall last four years from the date of the contract.
Should there be an agreement, the period cannot exceed ten
years.
However, the vendor may still exercise the right to repurchase
within thirty days from the time inal judgment was rendered
in a civil action on the basis that the contract was a true sale
with right to repurchase. (Art 1606)
Sellers in a sale judicially declared as pacto de retro may not
exercise the right to repurchase within the 30-day period
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under Art 1606, although they have taken the position that the
same was an equitable mortgage, if it is shown that there was
no honest belief thereof since none of the circumstances under
Art 1602 were shown to exist.
If they truly believed the sale to be an equitable mortgage, as a
sign of good faith, they should have consigned with the
amount representing their alleged loan, on or before the
expiration of the right to repurchase. [Abilla v. Gobonseng, 374
SCRA 51 (2002)]
6. How Is Redemption Effected? (Art 1616)
In order to exercise the right to redeem, only tender of
payment is suf icient; consignation is not required after
tender is refused. When tender is not possible, consignation
should be made.
A formal offer to redeem accompanied by a tender of
redemption price is not essential where the right is exercised
through a judicial action within the redemption period and
simultaneously depositing the redemption price. [Lee Chuy
Realty Corp. v. CA, 250 SCRA 596 (1995)]
7. Redemption Price (Art 1616)
A stipulation in a sale a retro requiring as part of the
redemption price interest for the cost of money, is not in
contravention with Art 1616, since the provision is not
restrictive nor exclusive, and does not bar additional amounts
that the parties may agree upon, since the article itself provides
“and other stipulations which may have been agreed upon.”
Article 448 on the rights of a builder in good faith is
inapplicable in contracts of sale with right of repurchase —
where the true owner himself is the builder of the works on his
own land, the issue of good faith or bad faith is entirely
irrelevant. The right to repurchase may be exercised only by the
vendor in whom the right is recognized by contract or by any
person to whom the right may have been transferred. In a sale
with right of repurchase, the applicable provisions are Articles
1606 and 1616 of the Civil Code, and not Article 448. [Narvaez
v. Alciso, 594 SCRA 60 (2009)]
8. Fruits – Article 1617 on the disposition of fruits of property
redeemed applies only when the parties failed to provide a
sharing arrangement thereof; otherwise, the parties contractual
stipulations prevail. [Almeda v. Daluro, 79 SCRA 327 (1977)
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9. Effect When No Redemption Made (Art 1607):
Consolidation
Art 1607 abolished automatic consolidation of ownership in
the vendee a retro upon expiration of the redemption period by
requiring the vendee to institute an action for consolidation
where the vendor a retro may be duly heard.
If the vendee succeeds in proving that the transaction was
indeed a pacto de retro, the vendor is still given a period of
thirty days from the inality of the judgment within which to
repurchase the property.
Once vendor fails to redeem the property within the stipulated
period, irrevocable title shall be vested in the vendee by
operation of law. [Vda. de Rigonan v. Derecho, 463 SCRA 627
(2005)]
Under a sale a retro, failure of buyer to consolidate his title
under Art 1607 does not impair such title and ownership
because the method prescribed thereunder is merely for the
b.
purpose of registering and consolidating titles to the property.
In fact, failure of a seller a retro to exercise the redemption
right within the period agreed upon or provided for by law,
vests upon the buyer a retro absolute title and ownership over
the property sold by operation of law. Consequently, after the
effect of consolidation, the mortgage or re-sale by the seller a
retro of the same property would not transfer title and
ownership to the mortgagee or buyer, as the case may be, under
the Latin maxim nemo dat quod non habet. [Cadungog v. Yap,
469 SCRA 561 (2005)]
Legal Redemption
Notes
1. Legal redemption is in the nature of a privilege created by
law partly for reasons of public policy and partly for the bene it
and convenience of the redemptioner, to afford him a way out
of what might be a disagreeable or an inconvenient association
into which he has been thrust.
It is intended to minimize co-ownership. (Art 1619)
2. Under the Civil Code
a. Among Co-Heirs (Art 1088)
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
Redemption right pertain to disposition of right to inherit,
and not when there is a sale of a particular property of the
estate. [Plan v. IAC, 135 SCRA 270 (1985)]
When heirs have partitioned the estate among themselves
and each have occupied and treated de inite portions
thereof as their own, co-ownership has ceased even though
the property is still under one title, and sale by one of the
heirs of his de inite portion cannot trigger the right of
redemption in favor of the other heirs. [Vda. De Ape v. CA,
456 SCRA 193 (2005)]
Heirs who actually participated in the execution of the
extrajudicial settlement, which included the sale to a third
person of their pro indiviso shares in the property, are
bound by the same; while the co-heirs who did not
participate are given the right to redeem their shares
pursuant to Art. 1088. [Cua v. Vargas, 506 SCRA 374
(2006)]
Among Co-Owners (Art 1620)
When seller a retro dies, right to redeem cannot be
exercised by a co-heir alone, since the right belonged in
common to all the heirs. [De Guzman v. CA, 148 SCRA 75
(1987)]
The right of redemption may be exercised by a co-owner
only when part of the community property is sold to a
stranger, not when sold to another co-owner because a new
participant is not added to the co-ownership. [Fernandez
v. Tarun, 391 SCRA 653 (2002)]
For the right of redemption to be exercised, co-ownership
must exist at the time the conveyance is made by a
co-owner and the redemption is demanded by the other
co-owner or co-owners. [Avila v. Barabat, 485 SCRA 8
(2006)]
Redemption by co-owner redounds to the bene it of all
co-owners; and 30-day redemption period, even when
such right has been recognized to exist in a inal and
executory court decision, does not begin from the entry of
judgment, but from written notice served by seller to the
party entitled to exercise such redemption right, [Guillen v.
CA, 589 SCRA 399 (2009)]
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The requisites for the exercise of legal redemption are as
follows:
1) there must be co-ownership;
2) one of the co-owners sold his right to a stranger;
3) the sale was made before the partition of the
co-owned property;
4) the right of redemption must be exercised by one
or more co-owners within a period of thirty days
to be counted from the time he or they were
noti ied in writing by the co-owner vendor; and
5) the vendee must be reimbursed the price of the
sale. [Calma v. Santos, 590 SCRA 359 (2009)]
c. Among Adjoining Owners (Arts 1621 and 1622)
Right of redemption covers only “resale” and does not
cover exchanges or barter of properties [De Santos v. City
of Manila, 45 SCRA 409 (1972)]
When there is no issue that adjoining lands involved are
both rural lands, right to redeem can be exercised and the
only exemption provided is when the buyer cannot show
that he did not own any other rural land. [Primary
Structures Corp. v. Valencia, 409 SCRA 371 (2003)]
a) Rural Land — The owners of adjoining lands shall
also have the right of redemption when a piece of rural
land, the area of which does not exceed one hectare,
is alienated, unless the grantee does not own any rural
land.
If two or more adjoining owners desire to exercise the
right of redemption at the same time,
(1) the owner of the adjoining land of smaller
area shall be preferred; and
(2) should both lands have the same area, the one
who irst requested the redemption. (Art
1621)
b) Urban Land — Whenever a piece of urban land which
is
i) so small and
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ii) so situated that a major portion thereof
cannot be used for any practical purpose
within a reasonable time,
iii) having been bought merely for speculation,
iv) is about to be re-sold,
the owner of any adjoining land has a right of
pre-emption at a reasonable price.
If the resale has been perfected, the owner of the
adjoining land shall have a right of redemption, also at
a reasonable price.
When two or more owners of adjoining lands wish to
exercise the right of pre-emption or redemption, the
owner whose intended use of the land in question
appears best justi ied shall be preferred.
d. Sale of Credit in Litigation (Art 1634) — 30 Days from
Notice of Demand to Pay.
For debtor to be entitled to extinguish his credit by
reimbursing the assignee under Art 1634, the following
requisites must concur:
(a) there must be a credit or other incorporeal right;
(b) the credit or other incorporeal right must be in
litigation;
(c) credit or other incorporeal right must be sold to
an assignee pending litigation;
(d) assignee must have demanded payment from the
debtor;
(e) debtor must reimburse the assignee for the price
paid, judicial costs incurred and interest on the
price from the day on which the same was paid;
and
(f) reimbursement must be done within 30 days from
the date of the assignee’s demand. [Situs Dev.
Corp. v. Asiatrust Bank, 677 SCRA 495 (2012)]
3. When Period of Legal Redemption Begins (Art 1623)
The 30-day period for the commencement of the right to
exercise the legal redemption right, even when such right has
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
been recognized to exist in a inal and executory court decision,
does not begin from the entry of judgment, but from the
written notice served by the seller to the party entitled to
exercise such redemption right. [Guillen v. CA]
Interpretation of Art 1623 where there is a need for notice in
writing, should always tilt in favor of redemptioner and
against buyer, since the purpose is to reduce the number of
participants until the community is terminated. [Hermoso v.
CA, 300 SCRA 516 (1998)]
The 30-day period does not begin to run in the absence of
written noti ication coming from the seller. [Cua v. Vargas, 506
SCRA 374 (2006)]; and it must be a written notice of a perfected
sale. [Sps Doromal v. CA, 66 SCRA 575 (1975)]
Written notice of sale is mandatory, notwithstanding
actual knowledge of a co-owner, in order to remove all
uncertainties about the sale, its terms and conditions, as well
as its ef icacy and status. [Verdad v. CA, 256 SCRA 593 (1996)]
Neither the registration of the sale, [Cabrera v. Villanueva, 160
SCRA 627 (1988)]; nor the annotation of an adverse claim,
[Vda. De Ape v. CA, 456 SCRA 193 (2005)]; nor notice being
given by the city treasurer, [Verdad v. CA, 256 SCRA 593
(1996)]; comply with the written notice required under Art
1623 to begin the tolling of the 30-day period of redemption.
Notice required under Art 1623 is deemed to have been
complied with when other co-owner has signed Deed of
Extrajudicial Partition which embodies the disposition of part
of the property owned in common. [Fernandez v. Tarun, 391
SCRA 653 (2002)]
Francisco v. Boiser, 332 SCRA 305 (2000), summarized the
case-law on Art. 1623, and with de initiveness declared:
1. For the 30-day redemption period to begin to run,
notice must be given by seller; notice given by the
buyer or even by the Register of Deeds is not
suf icient.
2. When notice is given by the proper party (seller), no
particular form of written notice is prescribed under
Art 1623, so that the furnishing of the copies of the
deeds of sale to the co-owner would be suf icient.
3. Af irmed ruling in Alonzo v. IAC, 150 SCRA 259 (1987),
that iling of suit for ejectment or collection of rentals
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against a co-owner actually dispenses with the written
notice, and commences running of period to exercise
the right of redemption, since iling of the suit
amounted to actual knowledge of the sale.
Rare Exceptions — When sale to the buyer was effected
through the co-owner acting as broker, and never indicated that
he would exercise his right to redeem. [Distrito v. CA, 197 SCRA
606 (1991)]
When buyers took possession of the property immediately
after the execution of the deed of sale in their favor and lived in
the midst of the other co-owners who never questioned the
same. [Pilapil v. CA, 250 SCRA 560 (1995)]
B. TRUSTS
Notes on Trusts
1. Trust is the right to the bene icial enjoyment of property, the
legal title to which is vested in another.
It is a iduciary relationship concerning property which obliges
the person
2. Trusts are either express or implied.
a. Express trusts are created by the intention of the
trustor or of the parties.
b. Implied trusts come into being by operation of law.
(Art 1441) There are two kinds:
i. Resulting trust — There is an intent to
create a trust but it is not effective as an
express trust.
ii. Constructive trust — No intention to create
a trust is present. i.e.
If property is acquired through mistake or
fraud, the person obtaining it is, by force of
law, considered a trustee of an implied trust
for the bene it of the person from whom the
property comes. (Art 1456)
3. Instances of Implied Trust
a. When property is sold, and the legal estate is granted
to one party but the price is paid by another for the
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purpose of having the bene icial interest of the
property. (Art 1448) [Resulting Trust]
However, if the person to whom the title is conveyed
is a child, legitimate or illegitimate, of the one paying
the price of the sale, no trust is implied by law, it being
disputably presumed that there is a gift in favor of the
child.
b. When a donation is made to a person but it appears
that although the legal estate is transmitted to the
donee, he nevertheless is either to have no bene icial
interest or only a part thereof. (Art 1449) [Resulting
Trust]
c. If the price of a sale of property is loaned or paid by
one person for the bene it of another and the
conveyance is made to the lender or payor to secure
the payment of the debt. (Art 1450) [Constructive
Trust]
d. When land passes by succession to any person and he
causes the legal title to be put in the name of another.
(Art 1451) [Resulting Trust]
e. If two or more persons agree to purchase property and
by common consent the legal title is taken in the name
of one of them for the bene it of all. (Art 1452)
[Resulting Trust]
f. When property is conveyed to a person in reliance
upon his declared intention to hold it for, or transfer it
to another or the grantor. (Art 1453) [Resulting Trust]
g. If an absolute conveyance of property is made in order
to secure the performance of an obligation of the
grantor toward the grantee. (Art 1454) [Constructive
Trust]
h. When any trustee, guardian or other person holding a
iduciary relationship uses trust funds for the
purchase of property and causes the conveyance to be
made to him or to a third person. (Art 1455)
[Constructive Trust]
i. If property is acquired through mistake or fraud. (Art
1456) [Constructive Trust]
4. How Trust be Proven
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REVIEWER For the 2020/21 #BestBarEver
a. No express trusts concerning an immovable or any The basis of agency is representation. One factor which most
interest therein may be proved by parol evidence. (Art clearly distinguishes agency from other legal concepts is control:
1443) the agent agrees to act under the control or direction of the
principal.
b. An implied trust may be proved by oral evidence. (Art
1457) No contract of agency exists where a common carrier leases the
trucks of another carrier, for there is no power of representation by
5. Prescription of Trusts
one with respect to the other and neither was there any authority to
a. Express trusts are IMPRESCRIPTIBLE unless there represent the other by the terms of the arrangements. [Loadmasters
has been repudiation of the trust. Customs Services v. Glodel Brokerage Corp., 639 SCRA 69 (2011)]
The same rule applies for Resulting trusts. 5. Essential Characteristics of Agency
b. Constructive trusts do prescribe. a. Nominate and Principal
Acts done by one person in behalf of another who authorized
C. AGENCY such acts is the essential nature one of agency—it will be an
agency whether or not parties understood the exact nature of
General Provisions the relation.
1. De inition of “Agency”; Parties in an Agency Relationship Even when the Agreement provides that the manager shall be
considered an independent contractor and not an agent,
Under Article 1868, a contract of agency is one whereby “a nonetheless since the manager is expressly authorized to
person binds himself to render some service or to do something in solicit and remit offers to purchase interments spaces, it covers
representation or on behalf of another, with the consent or an agency arrangement. [Manila Memorial Park Cemetery, Inc.
authority of the latter.” v. Linsangan, 443 SCRA 377 (2004)]
2. Objectives. Underlying principle of the contract of agency is to b. Unilateral and Primarily Onerous (Art 1875)
accomplish results by using the services of others—to do a great
variety of things. Agency is presumed to be for compensation; when agent
performs services for principal at latter’s request, principal’s
Its aim is to extend the personality of the principal or the party for intent to compensate the agent will be inferred from the
whom another acts and from whom he or she derives the authority principal's request for the agent’s service. [Urban Bank v. Peña,
to act. [Westmont Investment Corp. v. Francis, Jr., 661 SCRA 787 659 SCRA 418 (2011)]
(2011)]
c. Consensual (Arts 1869 and 1870)
3. Elements of the Contract of Agency
Such a relationship can only be effected with the consent of the
(a) Consent, express or implied, of the parties to establish the principal, which must not, in any way, be compelled by law or
relationship; by any court.
(b) Object, which is theExecution of Juridical Acts in Relation An agency may be expressed or implied from the principal’s
to Third Parties; act, from his silence or lack of action, or failure to repudiate the
(c) Agent acts as a representative and not for himself; and agency. [Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006)]
(d) Agent acts within the scope of his authority. d. Personal, Representative and Derivative (Art 1868)
4. Subject Matter — Service – Execution of Juridical Acts in Behalf Agency is basically personal, representative, and derivative in
of Principal and Within the Scope of Authority nature. The authority of the agent emanates from the powers
granted to him by his principal; his act is the act of the
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principal if done within the scope of the authority. Qui facit per
alium facit per se. “He who acts through another acts himself.”
Consequently, agency is extinguished by the death of the
principal or agent. [Rallos v. Felix Go Chan & Sons Realty Corp.,
81 SCRA 251 (1978)]
Basis for agency is representation, and therefore every person
dealing with an agent is put upon inquiry and must discover
upon his peril the authority of the agent. [Sa ic Alcan & Cie. v.
Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001)]
Consequently:
Art. 1897 reinforces the doctrine that an agentis not personally
liable to the party with whom he contracts; it is the principal
who is liable on the contracts of the agent. [Eurotech Industrial
Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007)]
When an agent purchases the property in bad faith, the
principal is deemed a purchaser in bad faith. [Caram, Jr. v.
Laureta, 103 SCRA 7 (1981)]
Under principle that knowledge of agent is knowledge by
principal, spouses cannot contend lack of knowledge of the
rules upon which they received their tickets from the airline
company since their travel agent, who handled their travel
arrangements, was duly informed by the airline
representatives. [Air France v. CA, 126 SCRA 448 (1983)]
e. Fiduciary and Revocable
The relations of an agent to his principal are iduciary and in
regard to the property forming the subject matter thereof, he is
estopped from acquiring or asserting a title adverse to that of
the principal.
Agency is generally revocable as it is a personal contract of
representation based on trust and con idence reposed by the
principal on his agent. As the power of the agent to act depends
on the will and license of the principal he represents, the power
of the agent ceases when the will or permission is withdrawn
by the principal. Thus, generally, the agency may be revoked by
the principal at will. [Republic v. Evangelista, 466 SCRA 544
(2005)]
f. Agency Is a “Preparatory Contract.”
6. Doctrine of “Ef icient Procuring Cause” — In agencies to sell
where the entitlement of the commission is subject to the
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
successful consummation of the sale with the buyer located by the
agent, said agent would still be entitled to the commission on sales
consummated after the expiration of his agency when the facts
show that the agent was the “ef icient procuring cause in bringing
about the sale”. [Pratts v. CA, 81 SCRA 360 (1978)]
7. Agency Distinguished from Agricultural Tenancy. There is no
agency relationship existing in a tenancy arrangement over
agricultural land: the tenant farmer, who has possession of the land,
and has sole discretion in all matters of agricultural production,
acts for his sole bene it and not under the control of the landowner,
whose only right under the set-up is to demand annually the
delivery of the agreed number of cavans of palay, without any
concern about how the cultivation could be improved in order to
yield more produce. [Jusayan v. Sombilla, 746 SCRA 437 (2015)]
8. How Agency May be Constituted (Art 1869)
a. From Side of the Principal (Art 1869)
Where buyers failed for several years to clear their title to
property purchased and allowed seller-a-retro to remain in
possession in spite of expiration of redemption period,
execution of memorandum of repurchase by buyers’
son-in-law, which stood for years unrepudiated, constituted an
implied agency under Art 1869, from their silence or lack of
action, or their failure to repudiate the agency. [Conde v. CA,
119 SCRA 245 (1982)]
Where the principal has acquiesced in the act of his agent for a
long period of time, and has received and appropriated to his
own use the bene its resulting from the acts of his agent, courts
cannot declare the acts of the agent null and void.
b. From Side of the Agent (Arts 1870, 1871 and 1872)
Whether or not an agency has been created is determined by
the fact that one is representing and acting for another. The law
makes no presumption of agency; proving its existence, nature
and extent is incumbent upon the person alleging it. [Urban
Bank v. Peña, 659 SCRA 418 (2011)]
c. From Side of Third Parties (Arts 1873 and 1408; 1921 and
1922)
i. Agency Is Not Presumed to Exist
Persons dealing with an agent must ascertain not only the
fact of agency, but also the nature and extent of the agent’s
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authority. A third person with whom the agent wishes to
contract on behalf of the principal may require the
presentation of the power of attorney, or the instructions
as regards the agency. According to Article 1990, insofar
as third persons are concerned, an act is deemed to have
been performed within the scope of the agent’s authority, if
such as is within the terms of the power of attorney, as
written. [Salvador v. Rabaja, 749 SCRA 654 (2015)]
ii. Agency by Estoppel With Respect to Third Parties
Registered owner who placed in the hands of another an
executed deed of transfer of the registered land, has
effectively represented to a third party that the holder of
such document is authorized to deal with the property.
When the law irm has allowed for quite a period the
messenger of another of ice to receive mails and
correspondence on their behalf, an implied agency had
been duly constituted, specially when there is no showing
that counsel had objected to such practice or took steps to
put a stop to it. [Equitable PCI-Bank v. Ku, 355 SCRA 309
(2001)]
An agency by estoppel, which is similar to the doctrine
of apparent authority, requires proof of reliance upon
the representations, and that, in turn, needs proof that the
representations predated the action taken in reliance.
[Country Bankers Insurance v Keppel Cebu Shipyard, 673
SCRA 427 (2012)]
9. Kinds of Agency
a. Based on Business or Transactions Encompassed (Art
1876): General or Universal vs Special or Particular
i. Universal agent is authorized to do all acts for his
principal which can lawfully be delegated to an agent; such
an agent may be said to have universal authority.
ii. General agent is authorized to do all acts pertaining to a
business of a certain kind or at a particular place, or all
acts pertaining to a business of a particular class or series.
He has usually authority expressly conferred in general
terms or in effect made general by the usages, customs or
nature of the business which he is authorized to transact.
iii. Special agent is authorized to do some particular act or to
act upon some particular occasion; he acts usually in
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accordance with speci ic instructions or under limitations
necessarily implied from the nature of the act to be done.
b. Whether It Covers Legal Matters: Attorney-at-Law vs
Attorney-in-Fact
The relation of attorney and client is in many respects one of
agency, and the general rules of agency apply to such relation;
the acts of an agent are deemed the acts of the principal only if
the agent acts within the scope of his authority. Therefore, only
the employee-client, not his counsel, can impugn the
consideration of the compromise as being unconscionable. On
the other hand, although a client has undoubtedly the right to
compromise a suit without the intervention of his lawyer, the
same cannot be done to defraud the lawyer of the earned
attorney’s fees. [J-Phil Marine v. NLRC, 561 SCRA 675 (2008)]
An attorney cannot, without a client’s authorization, settle the
action or subject matter of the litigation, even when he believes
that such a settlement will best serve his client’s interest. [Phil.
Aluminum Wheels, Inc. v. FASGI Enterprises, Inc., 342 SCRA 722
(2000)]
10. General Powers of Attorney (Art 1877)
Agency couched in general terms comprises only acts of
administration, even if the principal should state that he
withholds no power or that the agent may execute such acts as
he may consider appropriate, or even though the agency should
authorize a general and unlimited management. [Yoshizaki v.
Joy Training Center of Aurora, Inc., 702 SCRA 631 (2013)]
“Acts of Administration” means to perform acts which the
principal himself may pursue in the ordinary course of the
business, thus:
➔ When agent has been given general control and
management of the business, he is deemed to have power
to employ such agents and employees as are usual and
necessary in the conduct of the business, and needs no SPA
for such purpose.
➔ A co-owner who is made an attorney-in-fact, with the same
power and authority to deal with the property which the
principal might or could have had if personally present,
may retain the services of legal counsel to preserve the
ownership and possession of the principal’s property.
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
➔ Admissions obtained by agent from the adverse party prior
to the formal amendment of complaint that included
principal as a party, can be availed of by the principal,
since an agent may do such acts as may be conducive to
the accomplishment of the purpose of the agency,
admissions secured by the agent within the scope of the
agency ought to favor the principal. [Bay View Hotel v. Ker
& Co., 116 SCRA 327 (1982)]
➔ Power of administration does not include dispositions or
encumbrances which are acts of strict ownership.
Authority to dispose cannot proceed from authority to
administer, and vice versa, for the two powers may only be
exercised by an agent by following the provisions Arts
1876 to 1878. [Aggabao v. Parulan Jr., 629 SCRA 562
(2010)]
11. Special Powers of Attorney
Although the document is entitled “Special Power of Attorney,” its
wordings show that it sought only to establish an agency that
comprises all the business of the principal within the designated
locality, but couched in general terms, and consequently was
limited only to acts of administration. A general power permits the
agent to do all acts for which the law does not require a special
power, and only covers acts of administration. [Dominion
Insurance Corp. v. CA, 376 SCRA 239 (2002).
Even when the instrument's title is “General Power of Attorney,”
but its operative clause contains an authority to sell, it constituted
the requisite special power of attorney to sell a piece of land. Thus,
there was no need to execute a separate and special power of
attorney since the general power of attorney had expressly
authorized the agent or attorney in fact the power to sell the subject
property. [Veloso v. CA, 260 SCRA 593 (1996)]
12. Cases Where SPA Necessary (Art 1878)
Article 1878 does not state that an SPA must be in writing. As long
as the mandate is express, such authority may be either oral or
written. The requirement under Art 1878 refers to the nature of the
authorization and not to its form. Be that as it may, the authority
must be duly established by competent and convincing evidence
other than the self-serving assertion of the party claiming that such
authority was verbally given. [Patrimonio v. Gutierrez, 724 SCRA
636 (2014)]
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a. With Respect to Matters Involved in Litigation Involving
the Principal
(a) To Compromise;
(b) To Submit Questions to Arbitration;
(c) To Renounce the Right to Appeal from a Judgment;
(d) To Waive Objections to the Venue of an Action;
(e) To Abandon a Prescription Already Acquired.
Power to Compromise Excludes Power to Submit to
Arbitration; Vice Versa (Art 1880)
b. With Respect to Money or Funds of the Principal
(a) To Make Payments that “Are Not Usually Considered
as Acts of Administration”
The payment of claims by the area manager of an
insurance company is not an act of administration, and
that since the settlement of claims was not included among
the acts enumerated in the SPA issued by the insurance
company, nor is of a character similar to the acts
enumerated therein, then a special power of attorney was
required before such area manager could settle the
insurance claims of the insured.
Consequently, the amounts paid by the area manager to
settle such claims cannot be reimbursed from the principal
insurance company. [Dominion Insurance Corp. v. CA]
(b) To Collect or Receive Payments on Behalf of the
Principal
The right of an agent to indorse check will not be lightly
inferred. A salesman with authority to collect money for
his principal does not have the implied authority to
indorse checks received in payment. Any person taking
checks made payable to a corporation which can act only
by agents does so at his peril, and must abide by the
consequence if the agent who indorses the same is without
authority. [Insular Drug v. PNB, 58 Phil. 684 (1933)]
(c) To Loan or Borrow Money
EXC: Agent may borrow money when it is urgent and
indispensable for the preservation of the things
which are under administration
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An SPA is necessary for an agent to borrow money, unless
it be urgent and indispensable for the preservation of
the things which are under administration. [Yasuma v.
Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006)]
Entrusting by the principal of blank pre-signed checks to
the agent, does not give the agent the implied authority to
enter into a loan in the name of the principal. The contract
of agency and the special iduciary relationship inherent in
this contract must exist as a matter of fact. [Patrimonio v.
Gutierrez]
c. With Respect to Obligations Due to/From the Principal
(a) To Effect Novations Which Put an End to Obligations
Already in Existence at the Time the Agency Was
Constituted;
(b) To Waive Any Obligation Gratuitously;
(c) To Ratify or Recognize Obligations Contracted Before
the Agency.
d. With Respect to Immovable Properties
(a) To Enter Into Any Contract by Which Ownership of an
Immovable Is Trans-mitted or Acquired, Gratuitously
or For a Valuable Consideration
(b) Sale of a Piece of Land or Interest Therein (Art 1874)
Express mandate required by Art 1874 is for power of
attorney to expressly empower the agent “to sell land”
belonging to the principal. It need not contain a speci ic
description of the land to be sold, such that giving the
agent the power to sell “any or all tracts, lots, or parcels” of
land belonging to the principal is adequate. [Domingo v.
Domingo, 42 SCRA 131 (1971)]
Where SPA primarily empowered the agent of the
corporation to bring an ejectment case against the occupant
and also “to compromise . . . so far as it shall protect the
rights and interest of the corporation in the
aforementioned lots,” and that the agent did execute a
compromise in the legal proceedings iled which sold the
lots to the occupant, the compromise agreement is void for
the power to sell by way of compromise could not be
implied to protect the interests of the principal to secure
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
possession of the properties. [Cosmic Lumber v. CA, 265
SCRA 168 (1996)]
The rule under Art 1874 applies when the sale of a
corporate piece of land is pursued through an of icer
without written authority. [City-Lite Realty Corp. v. CA, 325
SCRA 385 (2000)]
Art 1878 provides that an SPA is necessary to enter into
any contract by which the ownership of an immovable is
transmitted or acquired either gratuitously or for a
valuable consideration, or to create or convey real rights
e.
over immovable property, or for any other act of strict
dominion.
Any sale of real property by one purporting to be the agent
of the registered owner without any authority therefore in
writing from the said owner is null and void; declarations
of the agent alone are generally insuf icient to establish the
fact or extent of her authority.” [Litonjua v. Fernandez]
However, we apply the estoppel principle to enforce the
sale with respect to the principal. [Pahud v. CA, 597 SCRA
13 (2009)]
As a general rule, an agency may be oral; however, Art
1874 provides that the contract of agency must be written
for the validity of the sale of a piece of land or any interest
therein; otherwise, the sale shall be void. A related
provision, Art 1878 states that special powers of attorney
are necessary to convey real rights over immovable
properties. [Yoshizaki v. Joy Training Center of Aurora, Inc]
(c) Agents Cannot Buy Property of Principal Unless
Authorized (Art 1491[2])
Prohibition against agents purchasing property held for
sale or management is not absolute; when so authorized by
principal, an agent is not disquali ied from purchasing
property held under an agency to sell. [Olaguer v.
Purugganan, Jr., 515 SCRA 460 (2007)]
(d) Power to Sell Excludes Power to Mortgage, Vice Versa
(Art 1879)
In order to bind the principal by a mortgage on real
property executed by an agent, it must upon its face
f.
purport to be made, signed and sealed in the name of the
13. Doctrine of Implied Powers Emanating from Express Powers
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principal, otherwise, it will bind the agent only. [Gozun v.
Mercado, 511 SCRA 305 (2006)]
(e) To Lease Real Property for More Than One Year
Art 1878 expresses that a special power of attorney is
necessary to lease any real property to another person for
more than one year, for such is considered not merely an
act of administration but an act of strict dominion or of
ownership. [Shopper’s Paradise Realty v. Roque, 419 SCRA
93 (2004)]
With Respect to Speci ic Contracts “Deemed Personal” to
the Principal
(a) To Accept or Repudiate an Inheritance;
(b) To Make Gifts;
(c) To Bind the Principal to Render Some Service Without
Compensation;
(d) To Bind the Principal in a Contract of Partnership;
(e) To Obligate the Principal as a Guarantor or Surety.
When the principal empowered his agent to mortgage his
property, as well as a contract of surety, but the agent only
entered into a contract of mortgage, no inference can be
made to make the principal liable as a surety. [Wise and
Co. v. Tanglao, 63 Phil. 372 (1936)]
SPA to approve loans does not carry power to bind the
principal to a guaranty even to the extent of the amount for
which a loan could have been granted by agent. “Guaranty
is not presumed, it must be expressed and cannot be
extended beyond its speci ied limits (Director v. Sing Juco,
53 Phil. 205). Where a wife gave her husband power to
loan money, such fact did not authorize him to make her
liable as a surety for the payment of the debt of a third
person. [BA Finance v. CA, 211 SCRA 112 (1992)]
A power of attorney authorizing agent to bind principal to a
surety bond to a particular entity, cannot be relied upon as
suf icient authority to a surety bond issued to other
persons or entity. [Country Bankers Insurance v Keppel
Cebu Shipyard, 673 SCRA 427 (2012)]
Any Other Act of Strict Dominion
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Speci ic grants of “Powers of Dominion” necessarily includes
those implied powers or those necessary to ful ill those powers of
ownership granted, thus:
➔ Empowering the agent to sell hemp in a foreign country, carries
with it implied power to make and enter into the usual and
customary contract for its sale, which may provide for
settlement of issues by arbitration. [Robinson Fleming v. Cruz,
49 Phil 42 (1926)]
➔ An SPA to make an assignment of credits, hire lawyers to take
2.
charge of actions necessary or expedient for principal’s
interests, and defend suits brought against principal,
necessarily implies authority to pay for professional services
thus engaged, which includes assignment of the judgment
secured for the principal in settlement of outstanding fees.
3.
[Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930)]
➔ SPA to sell “for such price or amount” is broad enough to cover
exchange in the Deed of Assignment between the properties and
the corresponding corporate shares in a corporation, with the
latter replacing the cash equivalent of the option money
initially agreed to be paid by the corporation under the MOA.
[Hernandez-Nievera v. Hernandez, 642 SCRA 646 (2011)]
14. Express Power of Attorney Excludes Powers of Administration
(e.g., General Power of Attorney)
Instrument which grants agent power “To follow-up, ask, demand,
collect and receipt for my bene it indemnities or sum due me
relative to the sinking of M.V. NEMOS in the vicinity of El Jadida,
Casablanca, Morocco on the evening of February 17, 1986,” are
SPAs, and exclude any intent to grant a GPA or to constitute a
universal agency.
Being SPAs, they must be strictly construed, and cannot be read to
give power to the attorney-in-fact “to obtain, receive, receipt from”
the insurance company the proceeds arising from the death of the
seaman-insured, especially when the commercial practice for group
insurance of this nature is that it is the employer-policyholder who
took out the policy who is empowered to collect the proceeds on
behalf of the covered insured or their bene iciaries. [Pineda v. CA,
226 SCRA 754 (1993)]
Powers and Duties of the Agent
1. General Obligation of Agent Who Accepts the Agency
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
Agent is bound to carry agency to its completion for the bene it of
principal (Art 1884); otherwise, the agent will be liable for damages
which the principal may suffer through his non-performance.
Agent who withdraws from the agency (Art 1929) must continue to
act until principal takes necessary steps to meet the situation.
In the event of death of principal (Art 1919[3]), agent must inish
business already begun should delay entail any danger – even if the
principal's death extinguishes the agency.
Obligation of Agent Who Declines Agency Who Has Custody of
Goods
Agent must observe due diligence in the custody and preservation
of the goods until new agent appointed (Art 1885).
d.
Duty of Obedience
a. Agent Must Act “In the Name of the Principal, Within the
Scope of His Authority” (Art 1881)
i. Act deemed to have been performed within the scope of
agent’s authority, if such act is within the terms of the
written power of attorney, even if in fact the agent exceeded
the limits of the authority according to the private
understanding with the principal. (Art 1900)
ii. Authority of agent shall not be deemed exceeded if
performed in a manner more advantageous to principal.
(Art 1882)
b. Primary Obligation of Agent Is to Carry Out Agency in
Accordance with Principal’s Instructions (Art 1887)
➔ If agent followed instructions, principal cannot set-up
agent’s ignorance or circumstance which principal
was/ought to have been aware of. (Art 1899)
When bank of icers, acting as agents, had not only gone against
the instructions, rules and regulations of the bank in releasing
loans to numerous borrowers who were not quali ied, then
such bank of icers are liable personally for the losses
sustained by the bank. That bank had also iled suits against
the borrowers to recover the amounts given does not amount to
e.
rati ication of the acts done by the bank of icers. [PNB v.
Bagamaspad, 89 Phil. 365 (1951)]
c. Effects of Acts Done Within the Scope of Agent’s Authority:
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Valid, and Principal Is the One Liable; Agent Is Not
Personally Liable (Art 1881)
Under Art 1881, when agent acts within the scope of authority,
principal is bound by acts effected in his behalf, whether or not
third person dealing with the agent believes that the agent has
actual authority. [Sargasso Const. & Dev. Corp. v. PPA, 623 SCRA
260 (2010)]
The legal impact of Art.1881 is that the agent is granted the
right “to affect the legal relations of his principal by the
performance of acts effectuated in accordance with the
principal's manifestation of consent.” [Paci ic Rehouse Corp. v.
EIB Securities, Inc., 633 SCRA 214 (2010)]
Effects When Agent’s Act Beyond the Scope of His
Authority:
Unenforceable, Not Void; Unless Principal Rati ies, which
Make it Valid (Arts 1317, 1403 and 1898)
Under Art 1898, acts of an agent beyond the scope of his
authority do not bind the principal, unless the latter rati ies the
same expressly or impliedly. When third person knows that the
agent was acting beyond his power or authority, the principal
cannot be held liable for the acts of the agent. If the said third
person is aware of the limits of the authority, he is to blame,
and is not entitled to recover damages from the agent, unless
the latter undertook to secure the principal’s rati ication.
Even when an attorney-at-law in forging a compromise
agreement, had exceeded his authority in inserting a penalty
clause, same is not void but merely unenforceable, i.e., capable
of being rati ied. Client’s failure to question the inclusion of the
penalty clause despite several opportunities to do so and with
the representation of new counsel, was tantamount to
rati ication. [Borja, Sr. v. Sulyap, Inc., 399 SCRA 601 (2003)]
Contracts entered in the name of another person by one who
has been given no authority or legal representation or who has
acted beyond his powers are unauthorized contracts and are
unenforceable, unless they are rati ied. [Gozun v. Mercado]
Effects When Agent Acts in His Own Name (Art 1883):
➔ Principal Has No Right Against Third Person Contracting
with Agent
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➔ Agent Is Directly Bound to Third Person as If the
Transaction Were His Own
EXC: When Contract Involves Things Belonging to
Principal
Under Art 1883, if agent acts in his own name, principal has no
right of action against the persons with whom he has
contracted; neither have such persons against the principal. In
such case, agent is directly bound in favor of the person with
whom he has contracted, as if the transaction were his own,
except when the contract involves things belonging to the
principal. [Smith Bell v. Sotelo Matti, 44 Phil. 874 (1922);
Marimperio Cia. Naviera, S.A. v. CA, 156 SCRA 368 (1987).]
Where a co-owner transfers the entirety of the mining claim to
the buyer, who knew that it included the one-half share
pro-indiviso of the other co-owner, the transaction may be
considered as one where the disposing co-owner acted as agent
of the other co-owner. Consequently, under Art 1883, such
other co-owner may sue the person with whom the agent dealt
with in his (agent’s) own name, when the transaction involves
things belonging to the principal. [Goldstar v. Lim, 25 SCRA 597
(1968)]
When a commission agent enters into a shipping contract in his
own name to transport NFA grains on a vessel owned by a
shipping company, NFA cannot claim it is not liable to the
shipping company under Art 1883 when things belong to the
principal are dealt with, agent is bound to the principal
although he does not assume the character of such agent and
appears acting in his own name. If the principal can be obliged
to perform his duties under the contract, then it can also
demand the enforcement of its rights arising from the contract.
[NFA v. IAC, 184 SCRA 166 (1990)]
4. Duty of Diligence
a. Agent Must Exercise Due Diligence in the Pursuit of the
Principal’s Business
b. Agent Should Not Act If It Would Manifestly Result in
Damage to Principal (Art 1888)
c. Agent Also Liable Personally (with the Principal) for Fraud
and Negligence Committed in Pursuit of the Principal’s
Affairs (Arts 1884 and 1909)
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
What Shall Aggravate or Mitigate Liability Arising Out of
Negligence — Whether Agency Was for a Compensation or
Was Gratuitous
Where holder of an exclusive and irrevocable power of attorney to
make collections, failed to collect the sums due to principal and
thereby allowed the allotted funds to be exhausted by other
creditors, such agent has failed to act with the care of a good father
of a family required under Art 1887 and became personally liable
for the damages which the principal may suffer through his
non-performance. [PNB v. Manila Surety, 14 SCRA 776 (1965)]
In stressing that it was acting only as a collecting agent, Metrobank
seems to be suggesting that as a mere agent it cannot be liable to the
principal; this is not exactly true. On the contrary, Art 1909 clearly
c.
provides that ”the agent is responsible not only for fraud, but also
for negligence.” [Metrobank v. CA, 194 SCRA 169 (1991)]
Provision in mortgage contract that in the event of accident or loss,
inance company shall make a proper claim against insurance
company, was in effect an agency, and that under Art 1884, the
inance company was bound by its acceptance to carry out the
agency ,and in spite of the instructions of the borrowers to make
such claims instead insisted on having the vehicle repaired but
eventually resulting in loss of the insurance coverage, the inance
company had breached its duty of diligence, and must assume the
damages suffered by the borrowers, and consequently can no longer
collect on the balance of the mortgage loan secured thereby. [BA
Finance v. CA, 201 SCRA 157 (1991)]
Well-settled is the rule that an agent is also responsible for any
negligence in the performance of its function (Art 1909) and is
liable for the damages which the principal may suffer by reason of
its negligent act. (Art 1884) [British Airways v. CA, 285 SCRA 450
(1998)]
5. Duty of Loyalty
a. Agent Shall Be Liable for Damages Sustained by the
Principal Where in Case of Con lict-of-Interests Situations,
He Should Prefer His Own Interest (Art 1889)
b. Agent Is Prohibited from Buying Property Entrusted to
Him for Administration or Sale Without Principal’s
Consent (Art 1491[2]).
When an agent is involved in the perpetration of fraud upon his
principal for his extrinsic bene it, he is not really acting for the
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principal but is really acting for himself, entirely outside the
scope of his agency – the basic tenets of agency rest on the
highest consideration of justice, equity and fair play, and an
agent will not be permitted to pervert his authority to his own
personal advantage. [Cosmic Lumber v. CA, 265 SCRA 168
(1996)]
Relation of agent to his principal is iduciary and, an agent is
estopped from acquiring or asserting a title adverse to that of
the principal—a position analogous to that of a trustee—he
cannot, consistently with the principles of good faith, be
allowed to create in himself an interest in opposition to that of
his principal or cestui que trust. [Hernandez v. Hernandez,
645 SCRA 24 (2011)]
Agent Obliged to Render an Accounting to the Principal of
All Matters Relating Agency (Art 1891)
➔ Stipulation Exempting Agent from Obligation to Render an
Accounting Is Void
➔ Agent Must Deliver to Principal Whatever Is Received by
Virtue of Agency
➔ Obligation Arises and Becomes Demandable at the Time
Agency Ends.
There is an essential distinction between the possession by a
receiving teller of funds received from third persons paid to the
bank, and an agent who receives the proceeds of sales of
merchandise delivered to him in agency by his principal.
In the former case, payment by third persons to the teller is
payment to the bank itself; the teller is a mere custodian or
keeper of the funds received, and has no independent right or
title to retain or possess the same as against the bank. An agent,
on the other hand, can even assert, as against his own principal,
an independent, autonomous, right to retain money or goods
received in consequence of the agency; as when the principal
fails to reimburse him for advances he has made, and
indemnify him for damages suffered without his fault.
[Chua-Burce v. CA, 331 SCRA 1 (2000)] Consequently:
➔ An insurance agent is guilty of estafa for failing to deliver
sums of money paid to him as agent for the account of his
employer.
➔ A travelling sales agent who misappropriated or failed to
return to his principal the proceeds of the things or goods
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he was commissioned or authorized to sell, is liable for
estafa.
➔ Whereas, a bank teller or cash custodian, being merely an
7.
employee of the bank, cannot be held liable for estafa, but
rather for theft. Chua-Burce v. CA, infra.
As a necessary consequence of such breach of trust, an agent
must then forfeit his right to the commission and must return
the part of the commission he received from his principal.
[Domingo v. Domingo, 42 SCRA 131 (1971)]
Submission by administrator of four letter reports during the
entire 18 years that he was administering the property can
hardly be considered as suf icient to keep the principal
informed and updated of the condition and status of the latter’s
properties. [Sazon v. Vasquez-Menancio, 666 SCRA 707 (2012)]
d. Rule If Agent Is Empowered to Borrow/Lend Money (Art
1890)
➔ If Empowered to Borrow Money, He May Be the Lender at
Current Interest Rates;
➔ If Empowered to Lend Money, He Cannot Borrow Without
Principal’s Consent.
When power granted to agent was only to borrow money and
mortgage principal’s property to secure the loan, it cannot be
interpreted to include the authority to mortgage the properties
to support the agent’s personal loans and use the proceeds
thereof for his own bene it. [Hodges v. Salas and Salas, 63 Phil.
567 (1936)]
e. Agent Is Liable to the Principal For Interests (Art 1896)
➔ On Sums He Applied to His Own Use (from the Time He
Used Them)
➔ On Sums Owing the Principal (from the Time Agency Is
Extinguished)
6. Agent Has No Obligation to Advance Funds (Art 1886)
It is principal’s obligation to advance the funds, but principal to pay
interest on advances made by agent from day advances made. (Art
1912)
EXC:
(1) If Stipulated in the Agency Agreement;
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
(2) Principal Is Insolvent; Insolvency Extinguishes the Agency
(Art 1919[3])
Power of Agent to Appoint a Sub-Agent (Art 1892)
a. GR: Agent must act himself, but may appoint a
not-prohibited substitute. Agent is responsible for acts of
substitute when:
➔ Agent was not expressly given the power to appoint a
substitute;
➔ Agent was given the power, but without designating the
person and the substitute was notoriously incompetent or
was insolvent.
Law on Agency allows the appointment by an agent of a
substitute or sub-agent in the absence of an express agreement
to the contrary between the agent and the principal.
Therefore, an agent who receives jewelry for sale or return
cannot be charged with estafa for there was no
misappropriation when she delivered the jewelry to a sub-agent
under the sale terms which the agent received it, but a client of
the sub-agent absconded with them and could no longer be
recovered. The appointment of a sub-agent and delivery of the
jewelry, in the absence of a prohibition, does not amount to
conversion or misappropriation as to constitute estafa; but the
agent remains civilly liable for the value of the jewelry to the
principal. [Serona v. CA, 392 SCRA 35 (2002)]
The legal maxim potestas delegata non delegare potest, a
power once delegated cannot be re-delegated, while applied
primarily in political law to the exercise of legislative power, is
a principle of agency — for another, a re-delegation of the
agency would be detrimental to the principal as the second
agent has no privity of contract with the former. [Baltazar v.
Ombudsman, 510 SCRA 74 (2006)]
Under Art 1892, when a special power of attorney to sell a
piece of land does not contain a clear prohibition against the
agent in appointing a substitute, the appointment by the agent
of a substitute to execute the contract is within the limits of the
authority given by the principal, although the agent then would
have to be responsible for the acts of the sub-agent.[Escueta v.
Lim, 512 SCRA 411 (2007)]
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b. All Acts of Substitute Appointed Against Principal’s
Prohibition Are VOID as to the Principal.
Where the SPA to sell a piece of land contains a prohibition to
appoint a substitute, but agent appoints a substitute who
executes the deed of sale in name of the principal, while the
agent may have acted outside the scope of his authority, that
did not make the sale void, but merely unenforceable under the
second paragraph of Art 1317. And only the principal denied
the sale, his acceptance of the proceeds thereof are tantamount
to rati ication thereof. [Escueta v. Lim]
c. Rights of Principal Against Substitute (Art 1893)
Principal is liable upon a sub-agency contract entered into by
its selling agent in the name of the principal, where it appears
that the general agent was clothed with such broad powers as
to justify the interference that he was authorized to execute
contracts of this kind, and it not appearing from the record
what limitations, if any, were placed upon his powers to act for
his principal, and more so when the principal had previously
acknowledged the transactions of the subagent.
8. Liability When Two Or More Agents Appointed by the Same
Principal: Responsibility of Agents NOT Solidary (Art 1894)
EXC: Where Two or More Agents Agree to Be Solidarily Bound
(Art 1895)
Compare: Two Principals with Common Agent – Principals
Solidarily Liable (Art 1915).
9. Rule on Liability Rules to Third Parties: Agent Not Bound to
Third Parties; It Is the Principal Who Is Bound by the
Contracts Entered Into By the Agent (Art 1897)
A resident agent, as a representative of the foreign insurance
company, is tasked only to receive legal processes on behalf of its
principal and not to answer personally for the any insurance
claims. [Smith Bell v. CA, 267 SCRA 530 (1997)]
Where buyer effects payment of part of purchase price to one of
seller’s creditors pursuant to the terms of the deed of sale, there is
no subrogation that takes place, as the buyer then merely acts as an
agent of seller effecting payment that was due to the seller in favor
of a third-party creditor. [Chemphil Export v. CA, 251 SCRA 217
(1995)]
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Agents who have been authorized to sell parcels of land cannot
claim personal damages in the nature of unrealized commission
where the buyer refuses to proceed with the sale. The rendering of
such service did not make them parties to the contracts of sale
executed on behalf of the latter. Since a contract may be violated
only by the parties thereto as against each other, the real
parties-in-interest, either as plaintiff or defendant, in an action upon
that contract must, generally, either be parties to said contract. [Uy
v. CA, 314 SCRA 69 (1999)]
A person acting as a mere representative of another acquires no
rights whatsoever, nor does he incur any liabilities arising from the
said contract between his principal and another party. [Angeles v.
PNR, 500 SCRA 444 (2006)]
Since, as a rule, the agency, as a contract, is binding only between
the contradicting parties, then only the parties, as well as the third
person who transacts with the parties themselves, may question the
validity of the agency or the violation of the terms and conditions
found therein. [Villegas v. Lingan, 526 SCRA 63 (2007)]
a. Except: When Agent Expressly Binds Himself (Art 1897)
Under Art 1897, an agent who expressly binds himself to the
contract entered into on behalf of the principal becomes
personally bound thereto. But the doctrine is not applicable
vice–versa, since everything agreed upon by the principal to be
binding on himself is not legally binding personally on the
agent. Thus, when the previous agent of the union bound itself
personally liable on the contracts of the union, the new agent is
not bound by the assumption undertaken by original agent.
[Benguet v. BCI Employees, 23 SCRA 465 (1968)]
b. Except: When Agent Exceeds Authority Without Giving
Notice of Limited Powers (Art 1897) – Only the Agent Is
Liable, Principal Is Not Liable Unless He Rati ies.
Under Art 1897 when an agent acts in behalf of the principal, he
cannot be held liable personally, except when he acts outside
the scope of his authority.
Art 1897 does not hold that in cases of excess of authority, both
the agent and the principal are liable to the other contracting
party. [Phil. Products Co. v. Primateria Societe Anonyme, 15
SCRA 301 (1965)]
Where an agent de ies the instructions of its principal in New
York not to proceed with the sale due to non-availability of
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
carriage, it has acted without authority or against its principal’s
instructions and holds itself personally liable for the contract it
entered into with the local company. [National Power v.
NAMARCO, 117 SCRA 789 (1982)]
c. Except: When Agent Acts with Fraud or Negligence:
Solidarily Bound with Principal
Under Art 1897, if third person dealing with an agent is
unaware of the limits of the authority conferred by the
principal and third person has been deceived by the
non-disclosure thereof by the agent, then the latter is liable for
damages to him. The rule is founded upon the supposition that
there has been some wrong or omission on his part either in
misrepresenting, or in af irming, or concealing the authority
under which he assumes to act. [DBP v. CA, 231 SCRA 370
(1994)]
Every principal is subject to liability for loss caused to another
by the latter’s reliance upon a deceitful representation by an
agent in the course of his employment
(1) if the representation is authorized;
(2) if it is within the implied authority of the agent to
make for the principal; or
(3) if it is apparently authorized, regardless of whether the
agent was authorized by him or not to make the
representation. [Pahud v. CA, 597 SCRA 13 (2009)]
d. Agent Is Criminally Liable for Crime Committed in the
Pursuit of the Agency
The Law on Agency has no application in criminal cases, and
no man can escape punishment when he participates in the
commission of a crime upon the ground that he simply acted as
an agent of any party. [People v. Chowdhury, 325 SCRA 572
(2000)]
10. Obligation Rules for Commission Agents: Sales on
Consignment Arrangements
a. Commission Agent Responsible for Goods Received
According to Terms and Conditions and as Described in
Consignment (Art 1903)
EXC: When Has Made Written Statement of Damage/
Deterioration (Art 1903)
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In sale on consignment, as a form of agency,
consignee-agent is relieved from his liability to return the
goods received from the consignor-principal when it is shown
by preponderance of evidence in the civil case brought that the
goods were taken from the custody of the consignee by
robbery, and no separate conviction of robbery is necessary to
avail of the exempting provisions under Art 1174 for force
majeure. [Austria v. CA, 39 SCRA 527 (1971)]
b. Agent Handling Various Goods for Different Owners (Art
1904): He Must Distinguish Them by Countermarks If Goods of
Same Kind and Mark
Purpose: To Prevent Con lict of Interest Among Owners.
Compare: Contracts of Deposit under Art. 1976:
Depositary May Commingle Grain or Other Articles of Similar
Nature and Quality – Ownership pro-rata.
c. Commission Agent Cannot Sell on Credit Without
Principal’s Consent (Art 1905)
Otherwise: Considered as Cash Sales.
Under Art 1905, without the express or implied consent of
principal, commission agent cannot sell on credit; should it do
so principal may demand from him payment in cash. [Green
Valley v. IAC, 133 SCRA 697 (1984)]
d. When With Principal’s Authority to Sell on Credit (Art
1906)
➔ Inform the Principal with Statement of Buyer’s Names;
➔ Effect of Non-Compliance – Considered Cash Sale.
e. Effect When Agent Receives Guaranty or Del Credere
Commissions (Art 1907)
➔ He Shall Bear the Risk of Collection;
➔ He Shall Pay Principal the Proceeds on Same Terms Agreed
with Purchaser.
f. Liability for Failure to Collect Principal’s Credit When Due
(Art 1908)
➔ Liability for Damages;
➔ Unless Due Diligence Proven.
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Obligations of the Principal
1. Obligations of Principal With Third Parties with Whom the
Agent Contracts
a. The Principal Is Bound By the Contracts Entered Into by
the Agent:
➔ Entered Into in the Name of the Principal (Art 1883);
➔ Done Within Agent’s Scope of Authority (Art 1897);
➔ And Even When the Agent Acts with Negligence or Fraud
(Art 1909).
Where authorized agent failed to indicate in the mortgage that
she was acting for and on behalf of her principal; and the Real
Estate Mortgage explicitly shows on its face that it was signed
by agent in her own name and in her own personal capacity.
Thus, consistent with the law on agency, the principal cannot
be bound by the acts of the agent. The third-party bank has no
one to blame but itself: Not only did it act with undue haste
when it granted and released the loan in less than three days, it
also acted negligently in preparing the Real Estate Mortgage as
it failed to indicate that agent was signing it for and on behalf of
principal. [Bucton v. Rural Bank of El Salvador, Inc.,717 SCRA
278 (2014)]
As a general rule, the mismanagement of the business by his
agents does not relieve said party-principal from the
responsibility that he had contracted with third persons.
[Commercial Bank & Trust Co. v. Republic Armored Car
Services Corp., 8 SCRA 425 (1963)]
Principal is responsible for the acts of the agent, done within
the scope of his authority, and should bear the damages caused
upon third parties. If the fault or oversight lies on the agent
bank, petitioners are free to sue said bank for damages
occasioned thereby. [Lopez v. Alvendia, 12 SCRA 634 (1964)]
b. Agent’s Written Power of Attorney, Insofar as Concerns
Third Persons, Governs on Questions Whether Agent
Acted Within Scope of Authority Even if it Exceeds
Authority According to Understanding Between Principal
and Agent (Art 1900)
As far as third persons are concerned, an act is deemed to have
been performed within the scope of the agent’s authority, if
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
such is within the terms of the power of attorney, as written,
even if the agent has in fact exceeded the limits of his authority
according to an understanding between the principal and his
agent. [Eugenio v. CA, 239 SCRA 207 (1994)] Consequently:
➔ Spouses Rabaja did not recklessly enter into a contract to
sell with Gonzales. They required her presentation of the
power of attorney before they transacted with her
principal. And when Gonzales presented the SPA to
Spouses Rabaja, the latter had no reason not to rely on it.
[Salvador v. Rabaja, 749 SCRA 654 (2015)]
➔ Where memorial park company authorized its agent to
solicit and remit offers to purchase internment spaces
obtained on forms provided therefore, then the terms of the
offer to purchase, therefore, are contained in such forms
and, when signed by the buyer and an authorized of icer of
the company, becomes binding on both the company and
said buyer.
Any arrangement, term or condition outside of those
provided in the form do not bind the principal, since the
same were made obviously outside the agent’s
authority. When the power of the agent to sell is governed
by the written form, it is beyond the authority of the agent
as a fact that is deemed known and accepted by the third
person, to offer terms and conditions outside of those
provided in writing. [Manila Memorial Park Cemetery v.
Linsangan, 443 SCRA 377 (2004)]
It is a settled rule that third persons dealing with an assumed
agent, whether the assumed agency be a general or special one,
are bound at their peril if they would hold the principal liable,
to act with ordinary prudence and reasonable diligence to
ascertain (i) not only the fact of agency, (ii) but also the
nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to establish it.
Consequently:
➔ Where a bank accepted a letter of guarantee signed by a
mere credit administrator on behalf of the inance
company, the burden was on the bank to satisfactorily
prove that the credit administrator with whom they
transacted acted within the authority given to him by his
principal. [BA Finance v. CA, 211 SCRA 112 (1992)]
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➔ When one knowingly deals with the sales representative of
a car dealer company, it is incumbent upon such person to
know the extent of the sales representative’s authority as
an agent in respect of contracts to sell the vehicles. Such
person ought to know that he is dealing with an agent,
normal business practice does not warrant a sales
representative to have power to enter into a valid and
binding contract of sale for the company. [Toyota Shaw,
Inc. v. CA, 244 SCRA 320 (1995)]
➔ Mere representation or declaration of one that he is
authorized to act on behalf of another cannot of itself serve
as proof of his authority to act as agent or of the extent of
his authority as agent. [Yu Eng Cho v. PANAM, 328 SCRA
717 (2000)]
➔ That the person applying for the loan is other than the
registered owner of the real property being mortgaged
should have already raised a red lag with the Bank and
which should have induced it to make inquiries into and
con irm Santos’ authority to mortgage.
A person who deliberately ignores a signi icant fact that
could create suspicion in an otherwise reasonable person
is not an innocent purchaser for value. [Bank of Commerce
v. San Pablo, Jr., 522 SCRA 713 (2007)]
➔ Undue haste in granting the loan without inquiring into the
ownership of the subject properties being mortgage, as
well as the authority of the supposed agent to constitute
the mortgages on behalf of the owners, bank accepting the
mortgage cannot be deemed a mortgagee in good faith.
[San Pedro v. Ong, 569 SCRA 767 (2008)]
Ignorance of a person dealing with an agent as to the scope of
the latter’s authority is no excuse to such person and the fault
cannot be thrown upon the principal. The principal, on the
other hand, may act on the presumption that third persons
dealing with his agent will not be negligent in failing to
ascertain the extent of his authority as well as the existence of
his agency. [Manila Memorial Park Cemetery, Inc. v.
Linsangan]
c. Principal Not Bound to Contracts Entered Into By Agent
Outside of His Authority (Arts 1898 and 1910)
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i. When Principal Rati ies, Expressly or Impliedly (Art
1901)
In agency, rati ication is the adoption or con irmation by
ii.
the principal of an act performed on his behalf by another
without authority—the substance of the doctrine is
con irmation after conduct, amounting to a substitute for a
prior authority.
For rati ication to take place, it is required that the
principal must have full knowledge at the time of
rati ication of all the material facts and circumstances
relating to the unauthorized act of the person who assumed
to act as agent; and that is such material facts were
suppressed or unknown, there can be no valid rati ication.
Nevertheless, this principle does not apply if the
principal’s ignorance of the material facts and
circumstances was willful, or that the principal chooses
to act in ignorance of the facts. Only the principal can
ratify; the agent cannot ratify his own unauthorized acts.
Moreover, the principal must have knowledge of the acts
he is to ratify. [Manila Memorial Park Cemetery, Inc. v.
Linsangan]
iii.
Even when the agent exceeds his authority, the principal is
still solidarily liable together with the agent if the
principal allowed the agent to act as though the agent had
full powers. In other words, the acts of an agent beyond the
Doctrine of Apparent Authority
scope of his authority do not bind the principal, unless the
principal rati ies them, expressly or impliedly. Innocent
third persons should not be prejudiced if the principal
failed to adopt the needed measures to prevent
misrepresentation, much more so if the principal rati ied
his agent’s acts beyond the latter’s authority. [Filipinas Life
Assurance Co. v. Pedroso, 543 SCRA 542 (2008)]
Under Arts 1898 and 1910, agent’s act done beyond the
scope of authority may bind principal if he rati ies them,
whether expressly or tacitly. Only the principal, and not the
agent, can ratify the unauthorized acts, which the
principal must have knowledge of. Thus, where the
special power of attorney that an agent for the insurance
company provides clearly the limit of the entities to whom
he can issue a surety bond, as well as the limit of the
amounts that it can cover, an insured who does not fall
within such authority cannot claim good faith as to make
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
the surety issued outside of the scope of authority binding
on the insurance company. [Country Bankers Insurance v.
Keppel Cebu Shipyard (2012)]
Third Person Cannot Set-up Facts of Agent’s Exceeding
Authority Where Principal Rati ied or Signi ied
Willingness to Ratify Agent’s Acts (Art 1901)
➔ Principal Should Be the One to Question Agent’s
Lack/Excess of Authority;
➔ Power of Attorney (Must) Be Required by Third Party
(Art 1902);
➔ Private or Secret Orders of Principal Do Not Prejudice
Third Persons Who Relied Upon Agent’s Power of
Attorney or Principal’s Instruction (Art 1902).
In an expropriation proceeding, the State cannot raise the
alleged lack of authority of the counsel of the owner to
bind his client in a compromise agreement because such
lack of authority may be questioned only by the principal
or client. [Commissioner of Public Highways v. San Diego,
31 SCRA 617 (1970)]
Where Agent Acts in Excess of Authority, But the
Principal Allowed Agent to Act as Though Agent Had
Full Powers (Art 1911)
Where bank, by its acts and failure to act, has clearly
clothed its manager with apparent authority to sell a piece
of land in the normal course of business, it is legally
obliged to con irm the transaction by issuing a board
resolution to enable the buyers to register the property in
their names. [Rural Bank of Milaor v. Ocfemia, 325 SCRA
99 (2000)]
The doctrine of apparent authority focuses on two
factors:
irst the principal’s manifestations of the existence of
agency which need not be expressed, but may be
general and implied; and
second, is the reliance of third persons upon the
conduct of the principal or agent.
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Under the doctrine, the question in every case is whether
the principal has by his voluntary act placed the agent in
such a situation that a person of ordinary prudence,
conversant with business usages and the nature of the
particular business, is justi ied in presuming that such
agent has authority to perform the particular act in
question. [Professional Services, Inc. v. CA, 544 SCRA 170
(2008); 611 SCRA 282 (2010)]
Easily discernible from the foregoing is that apparent
authority is determined only by the acts of the
principal and not by the acts of the agent. The principal
is, therefore, not responsible where the agent’s own
conduct and statements have created the apparent
authority. [Sargasso Construction & Dev. Corp. v. PPA, 623
SCRA 260 (2010)]
There can be no apparent authority of an agent without acts
or conduct on the part of the principal, which must have
been known and relied upon in good faith as a result of the
exercise of reasonable prudence by a third party claimant,
and which must have produced a change of position to the
third party’s detriment. There is no basis to apply the
doctrine where there is no evidence showing manner by
which the supposed principal has “clothed” or “held out”
its branch manager as having the power to enter into an
agreement, as claimed by petitioners. [Banate v. Philippine
Countryside Rural Bank, 625 SCRA 21 (2010)]
Agency by Estoppel
By opening a branch of ice with the appointment of its
branch manager and honoring several surety bonds issued
in its behalf, insurance company induced the public to
believe that its branch manager had authority to issue such
bonds. Insurance company was estopped from pleading
against a regular customer thereof, that the branch manager
had no authority. [Central Surety & Insurance Co. v. C.N.
Hodges, 38 SCRA 159 (1971)]
Even when agent of real estate company acts unlawfully
and outside the scope of authority, the principal can be
held liable when by its own act it accepts without protest
the proceeds of the sale of the agents which came from
double sales of the same lots, as when learning of the
misdeed, it failed to take necessary steps to protect the
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buyers and failed to prevent further wrong from being
committed when it did not advertise the revocation of the
authority of the culprit agent. In such case the liabilities of
both the principal and the agent is solidary. [Manila
4.
Remnants v. CA, 191 SCRA 622 (1990)]
For one to successfully claim the bene it of estoppel on the
ground that he has been misled by the representations of
another, he must show that he was not misled through his
own want of reasonable care and circumspection. [Country
Bankers Insurance v. Keppel Cebu Shipyard (2012)]
2. Rights of Persons Who Contracted for Same Thing, One With
Principal and the Other With Agent (Art 1916)
➔ That of Prior Date Is Preferred;
➔ If a Double Sale Situation – Art. 1544 Governs.
In Which Case: the Liability to Third Person Whose Contract Must
Be Rejected Shall Be as Follows (Art 1917)
➔ If Agent in Good Faith – Principal Liable
➔ If Agent in Bad Faith – Agent Alone Liable
3. Liability of Principal to Third Persons for Acts of the Agent’s
Employees
That the employee of the airline company’s agent has committed a
tort is not suf icient to hold the airline company liable—there is no
vinculum juris between the airline company and its agent's
employees and the contractual relationship between the airline
company and its agent does not operate to create a juridical tie
between the airline company and its agent’s employees.
Article 2180 of the Civil Code does not make the principal
vicariously liable for the tort committed by its agent’s employees
and the principal-agency relationship per se does not make the
principal a party to such tort; hence, the need to prove the
principal’s own fault or negligence. [Sps Viloria v. Continental
Airlines, Inc., 663 SCRA 57 (2012)]
Compare: With regard to the delivery of the petroleum, Villaruz
was acting as the agent of Petron for a fee, he delivered the
petroleum products on its behalf; and notably, Petron even imposed
a penalty clause in instances when there was a violation of the
hauling contract, wherein it may impose a penalty ranging from a
written warning to the termination of the contract. Therefore, as far
as the dealer was concerned with regard to the terms of the
dealership contract, acts of Villaruz and his employees are also acts
of Petron. [Petron Corp. v. Spouses Cesar Jovero & Erma F. Cudilla,
663 SCRA 172 (2012)]
5.
Obligations of the Principal Within the Agency Arrangement
a. Obligation to Pay Agent’s Compensation (Art 1875)
b. Obligation to Advance Sums Requested for Execution of
Agency (Art 1912)
i. Agent has right to reimbursement for expenses advanced
including interest from the day it was advanced.
Compare: Where Agent Consents and Is Bound to Advance
the Sums as Stipulated (Art 1886)
ii. Where principal not liable to agent for expenses incurred
(Art 1918)
However, while Agency Law prohibits the area manager from
obtaining reimbursement, his right to recover may still be
justi ied under the general law on obligations and contracts,
particularly Article 1236 on payment by a third party of the
obligation of the debtor, allows recovery “only insofar as the Extinguishment
payment has been bene icial to the debtor.” Thus, to the extent
1.
that the obligation of the insurance company has been
extinguished, the area manager may demand for
reimbursement from his principal. To rule otherwise would
result in unjust enrichment of petitioner. [Dominion Insurance
Corp. v. CA, 376 SCRA 239 (2002)]
c. Obligation to Indemnify Agent for Damages Sustained in
Pursuing Agency (Art 1913)
Compare: Liability for Damages for Non-Performance of
Agency (Art. 1884)
d. Agent’s Right To Retain Object as Pledge for Advances and
Damages (Art 1914)
i. Agent bound to deliver to principal everything received,
even if not due the principal (Art 1891). 2.
ii. Thing pledged may be sold only after demand of amount
due (Art 2122):
➔ Public auction to take place within one (1) month after
demand
➔ Debtor may demand return of not sold within this
period
Two or More Principals Appoint Agent for Common
Transactions (Art 1915)
a. Obligation of the Principals Is Solidary Because of Their
Common Interest
Compare: Two or More Agents with One Principal – Agents’
Obligation NOT Solidary, unless otherwise expressed. (Art
1894)
b. Any of the Principal May Validly Revoke Agent’s Authority
(Art 1925)
When the law expressly provides for solidarity of the
obligation, as in the liability of co-principals in a contract of
agency, each obligor may be compelled to pay the entire
obligation. The agent may recover the whole compensation
from any one of the co-principals, as in this case. [De Castro v.
CA, 384 SCRA 607 (2002)]
How and When Agency Extinguished (Art 1919)
a. By Principal’s Revocation (Express or Implied) of the Agency;
b. By Agent’s Withdrawal from the Agency;
c. By Death, Civil Interdiction, Insanity or Insolvency of the
Principal or the Agent;
d. By Dissolution of the Juridical Entity Which Entrusted or
Accepted the Agency;
e. By the Accomplishment of the Object or Purpose of the
Agency;
f. By the Expiration of the Period for Which Agency Was
Constituted.
Express Revocation: The Principal May Revoke an “Agency at
Will”
a. In which case, principal may compel agent to return the
document evidencing the agency (Art 1920).

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 Civil Law | Obligations and Contracts, LTD, and Torts and Damages
b. In case of multiple principals, any of the principals can revoke
the authority of their common agent, without the consent of the
others (Art 1925).
c. Rulings on Power of Principal to Revoke the Agency
Revocation of a special power of attorney, although embodied
in a private writing is valid and binding between the parties.
[PNB v. IAC, 189 SCRA 680 (1990)]
When the terms of the agency contract allowed the agent “to
dispose of, sell, cede, transfer and convey until all the subject
property as subdivided is fully disposed of,” the agency is one
with a period and it is not extinguished until all the lots have
been disposed of. Consequently, if the contract is terminated by
the principal before all the subdivision lots have been disposed
of, there is a breach for which the principal would be liable for
damages. [Dialosa v. CA, 130 SCRA 350 (1984)]
We set aside the portion of the decision reinstating Orient Air
as general sales agent of American Air, even when the
revocation was done without proper cause, for courts are
without authority to reinstate an agency arrangement that has
been revoked or terminated by the principal. [Orient Air
Services v. CA, 197 SCRA 645, 656 (1991)]
4.
3. Implied Revocation
a. Appointment of New Agent for Same Business/
Transaction (Art 1923)
➔ Impliedly Revoked as to Agent Only
➔ As to Third Persons, Notice to Them Is Necessary (Art
1922)
b. Principal Directly Manages Business Entrusted to Agent
(Art 1924)
Where purported agent was given only authority to “follow up”
the purchase of ire truck with municipal government, there
was no authority to sell nor was he empowered to make a sale
for and in behalf of the seller. But even if purported agent is
considered to have been constituted as an agent to sell the ire
truck, such agency would have been deemed revoked upon
resumption of direct negotiations between
seller-principal and the municipality, the purported agent
having in the meantime abandoned all efforts to secure the deal
in the seller’s behalf. [Guardex v. NLRC, 191 SCRA 487 (1990)]
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
The act of contractor, who, after executing an SPA in favor
another to collect whatever amounts may be due to him from
the Government, and thereafter demanded and collected from
the government the money the collection of which he entrusted
to his attorney-in-fact, constituted revocation of the agency in
favor of the attorney-in-fact. [New Manila Lumber Co., Inc. v.
Republic, 107 Phil. 824 (1960)]
Damages are generally not awarded to the agent for the
revocation of the agency, and the case at bar is not one falling
under the exception mentioned, which is to evade the payment
of the agent’s commission. [CMS Logging v. CA, 211 SCRA 374
(1992)]
c. General Power of Attorney Is Revoked by a Special One
Granted to Another Agent, As Regards the Special Matter
Involved in the Latter (Art 1926)
A special power of attorney giving the son the authority to sell
the principals properties is deemed revoked by a subsequent
general power of attorney that does not give such power to the
son, and any sale effected thereafter by the son in the name of
the father would be VOID. [Dy Buncio and Co. v. Ong Guan Ca,
60 Phil 696 (1934)]
Cases of Irrevocable Agencies (Art 1927): “Agency Coupled with
Interest”
a. When a Bilateral Contract Depends Upon the Continued
Existence of the Agency
An exception to the revocability of a contract of agency is when
it is coupled with interest, i.e., if a bilateral contract depends
upon the agency. The reason for its irrevocability is because the
agency becomes part of another obligation or agreement. It is
not solely the rights of the principal but also that of the agent
and third persons which are affected.[Republic v. Evangelista,
466 SCRA 544 (2005)]
b. When It Is the Means of Ful illing an Obligation Already
Contracted
Unlike simple SPAs, an agency coupled with interest cannot
be revoked at will, since it had been created for the mutual
interest of the agent and the principal. It appears that Lina
Sevilla is a bona ide travel agent herself, and had acquired an
interest in the business entrusted to her: she had assumed a
personal obligation for the operation thereof, holding herself
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solidarily liable for the payment of rentals; she used her own
name in pursuing the business, after Tourist World had stopped
further operations. Her interest, obviously, is not limited to the
commissions she earned as a result of her business
transactions, but one that extends to the very subject matter of
the power of management delegated to her. It is an agency that
cannot be revoked at the pleasure of the principal. [Sevilla v.
CA,160 SCRA 171 (1988)]
The respondents cannot state that the agency relationship
between Valenzuela and Philamgen is not coupled with interest.
There may be cases in which an agent has been induced to
assume a responsibility or incur a liability, in reliance upon the
continuance of the authority under such circumstances that, if
the authority be withdrawn, the agent will be exposed to
personal loss or liability. [Valenzuela v. CA, 191 SCRA 1
(1990)]
Relationship between NASUTRA/SRA and PNB when the former
constituted the latter as its attorney-in-fact is not a simpIe
agency, because NASUTRA/SRA has assigned and practically
surrendered its rights in favor of PNB for a substantial
consideration. To reiterate, NASUTRA/SRA executed
promissory notes in favor of PNB every time it availed of the
credit line. The agency established is one coupled with interest
which cannot be revoked at will by any of the parties.
[National Sugar Trading v. PNB, 396 SCRA 528 (2003)]
There is no question that the SPA executed is a contract of
agency coupled with interest. But in this case, we agree with
the CA that although the revocation was done in bad faith,
respondents did not act in a wanton, fraudulent, reckless,
oppressive or malevolent manner. They revoked the SPA
because they were not satis ied with the amount of the loan
approved. Thus, petitioners are not entitled to exemplary
damages. [Ching v. Bantolo, 687 SCRA 134 (2012)]
Indeed, even an agency coupled with interest may indeed
be revoked on the ground of fraud committed by the agent,
which is really an act of rescission, the same must be proven.
[Bacaling v. Muya, 380 SCRA 714 (2002)]
c. Unjusti ied Removal of a Managing Partner — Revocation
Needs the Vote of Controlling Partners (Art 1800)
A power of attorney coupled with interest in a partnership can
be revoked for a just cause, such as when the attorney-in-fact
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betrays the interest of the principal. The irrevocability of the
6.
power of attorney may not be used to shield the perpetration of
acts in bad faith, breach of con idence, or betrayal of trust, by
the agent for that would to authorize the agent to commit frauds
against the principal. [Coleongco v. Claparols, 10 SCRA 577
(1964)]
5. Effects of Revocation on Third Parties
a. Agency Created With Reference to Speci ied Third Parties,
Revocation Affects Such Third Parties Only When So
Noti ied (Art 1921)
Where the land’s principal owner executes an SPA giving agent
7.
the power to mortgage the same, even when there has been a
revocation thereof, but the same has not been made known to
third parties, then those who receive a mortgage on the
properties in good faith will be protected pursuant to principle
embodied in Art 1921 that if an agency has been entrusted for
the purpose of contracting with speci ied persons, its
revocation shall not prejudice the latter if they were not given
notice. [Lustan v. CA, 266 SCRA 663 (1997)]
b. Revocation of Agent’s General Powers Effective Against
Third Persons (Art 1922)
➔ Refers to agency created to deal with the general
public;
➔ Revocation will not prejudice third persons who deal
with the agent in good faith and without knowledge of
revocation;
➔ However, notice of revocation in a newspaper of
general circulation is suf icient warning;
While Art 1358 requires that the contracts involving real
property must appear in a proper document, a revocation of a
special power of attorney to mortgage a parcel of land,
embodied in a private writing, is valid and binding between the
parties, such requirement of Article 1358 being only for the
convenience of the parties and to make the contract effective as
against third persons. [PNB v. IAC, 189 SCRA 680 (1990)]
In a case covering a power of attorney to deal with the general
public, the fact that the revocation was advertised in a
newspaper of general circulation would be suf icient warning
to third persons. [Rammani v. CA, 196 SCRA 731 (1991)]
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
Right of Agent to Withdraw from Agency (Art 1928)
➔ By giving due notice to principal;
➔ Agent to indemnify principal should he suffer any damage;
Unless, withdrawal is due to impossibility of continuing agency
without grave detriment to agent.
➔ Even if agent withdraws from the agency for a valid reason, he
must continue to act until the principal has had reasonable
opportunity to take necessary steps to meet the situation (Art
1929)
Death of the Principal Extinguishes the Agency (Arts 1919[3],
1931)
By reason of the very nature of the relationship between principal
and agent, agency is extinguished by the death of the principal or
the agent. [Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251
(1978)]
Death of a client divests his lawyer of authority to represent him as
counsel. [Lavina v. CA, 171 SCRA 691 (1988)]
a. When the Agency Continues Despite Death of Principal
(Art 1930):
➔ If It Was Constituted for Common Interest of Principal and
Agent; or
➔ In Favor of Third Person Who Accepted Stipulation in His
Favor.
The death of the principal-debtor did not extinguish the power
of the Bank to sell the property at a public sale; the power to
foreclose is not an ordinary agency that contemplates
exclusively the representation of the principal by the agent but
is primarily an authority conferred upon the mortgagee for the
latter’s own protection. [Perez v. PNB, 17 SCRA 833 (1966)]
Agency is extinguished by principal’s death; exception is when
it has been constituted in the common interest of the latter and
of the agent, or in the interest of a third person who has
accepted the stipulation in his favor. [Sasaba v. Vda. de Te, 594
SCRA 410 (2009)]
b. Acts Done by Agent Without Knowledge of Principal’s
Death (Art 1931) — Acts Are Valid Provided:
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➔ Agent Does Not Know of Death or Other Cause of
Extinguishment of Agency;
➔ Third Persons Must Also Be in Good Faith (Not Aware of
Death or Other Cause).
Under Art 1931, we must uphold the validity of the sale of the
land effected by the agent only after the death of the principal,
when no evidence was adduced to show that at the time of sale
both the agent and the buyers were unaware of the death of the
principal. [Bauson v. Panuyas, 105 Phil 795 (1959); Herrera v.
Uy Kim Guan, 1 SCRA 406 (1961)]
8. Death of the Agent Extinguishes the Agency (Art 1932):
Obligation of Agent’s Heirs in Case of Agent’s Death:
➔ Notify Principal;
➔ Adopt Measures as Circumstances Demand in Principal’s
Interest.
A contract of management entered into by the Municipality
with a private individual which authorizes the latter to sell
forest products is one of agency, and is extinguished by the
death of the agent, and his rights and obligations arising from
the contract of agency are not transmittable to his heirs.
[Terrado v. CA, 131 SCRA 373 (1984)]
D. COMPROMISE
ART 2028. A compromise is a contract whereby the parties,
by making reciprocal concessions, avoid a litigation or put an
end to one already commenced.
ART 2030. Every civil action or proceeding shall be
suspended:
(1) If willingness to discuss a possible compromise is
expressed by one or both parties; or
(2) If it appears that one of the parties, before the
commencement of the action or proceeding, offered to
discuss a possible compromise but the other party
refused the offer.
xxxx
Generally No Compromise on Criminal Aspect
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ART 2034. There may be a compromise upon the civil liability Ignorance of a judgment which may be revoked or set aside is Subject Non-consumable, must Money or consumable,
arising from an offense; but such compromise shall not not a valid ground for attacking a compromise. matter be returned the equivalent is to be
extinguish the public action for the imposition of the legal Effect if Compromise Agreement Not Ful illed returned
penalty.
ART 2041. If one of the parties fails or refuses to abide by the Nature Essentially gratuitous May be onerous, as
1. In some crimes, however, such as in crimes against chastity
compromise, the other party may either when interest is agreed
and violations of the NIRC, compromise may be entered into
but must be made PRIOR to the iling of information in court. a) enforce the compromise or upon
Compromise Prohibited b) regard it as rescinded and insist upon his original
Purpose For use or temporary For consumption
demand.
ART 2035. No compromise upon the following questions possession
shall be valid: 1. There is no need for a judicial rescission.
(1) The civil status of persons; 2. A party to a compromise cannot ask for rescission after it has Property Any Only personal
enjoyed its bene its.
(2) The validity of a marriage or a legal separation; Risk of loss Bailor retains ownership Ownership transmitted
(3) Any ground for legal separation; E. LOAN to bailee

(4) Future support; Time of Returnable before end of Not returnable until end
1. Loan
(5) The jurisdiction of courts; payment period in case of urgent of period
➔ By the contract of LOAN, one of the parties delivers to another
(6) Future legitime. need
a non-consumable or consumable thing upon the condition that
Res Judicata Effect of Compromise it be returned or that the same amount of the same kind and Character of Purely personal Not personal
quality be paid. contract
ART 2037. A compromise has upon the parties the effect and
authority of res judicata; but there shall be no execution except Kinds of Loan
in compliance with a judicial compromise. A. Commodatum — where one of the parties (bailor) delivers to
As to Loan Deposit
Effect of Discovery of Documents another (bailee) something not consumable so that the latter
may use the same for a certain time and thereafter returns it.
ART 2039. When the parties compromise generally on ALL Purpose Use of thing Safekeeping; generally,
differences which they might have with each other, the B. Mutuum — where money or other consumable thing is depositary cannot use
discovery of documents referring to one or more but not to all delivered by the lender to the borrower subject to the condition the thing
of the questions settled shall not itself be a cause for that the same amount of the same kind and quality shall be
annulment or rescission of the compromise, unless said paid. Time of Generally, at the end of Can demand return at
documents have been concealed by one of the parties. payment period any time
Characteristics
But the compromise may be annulled or rescinded if it refers
only to ONE thing to which one of the parties has no right, as (1) Real — perfected upon delivery and not by mere consent. Compensation Compensation of credits Not applicable to things
shown by the newly-discovered documents. (2) Unilateral — the borrower has the obligation to return either applicable deposited
Compromise Entered Into in Ignorance of a Final Judgment the same thing or its equivalent.
Juridical One of lender and One of depositor and
ART 2040. If after a litigation has been decided by a FINAL Distinctions relations borrower; creditor and depositary
judgment, a compromise should be agreed upon, either or both debtor
As to Commodatum Mutuum
parties being unaware of the existence of the inal judgment,
the compromise may be rescinded.

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2. Commodatum
Commodatum is essentially gratuitous
Republic v. Bagtas (1962)
➔ The loan by the appellee to the late defendant Jose V. Bagtas of the
three bulls for breeding purposes for a period of one year from 8
May 1948 to 7 May 1949, later on renewed for another year as
regards one bull, was subject to the payment by the borrower of
breeding fee of 10% of the book value of the bulls. The appellant
contends that the contract was commodatum and that, for that
reason, as the appellee retained ownership or title to the bull it
should suffer its loss due to force majeure. A contract of
commodatum is essentially gratuitous. If the breeding fee be
considered a compensation, then the contract would be a
LEASE of the bull.
Kinds
(1) Ordinary — the bailor can not just demand the return of the
thing at will because there is a period agreed upon.
(2) Precarium — bailor may demand return of thing loaned at
will under the following conditions:
(a) If neither the duration of the contract nor the use to
which the thing loaned should be devoted, has been
stipulated; or
(b) If the use of the thing is merely tolerated by the owner.
If neither the duration of the contract nor the use of the thing
loaned is stipulated
Quintos v. Beck (1939)
➔ The contract entered into between the parties is one of
commodatum, because under it the plaintiff gratuitously granted the
use of the furniture to the defendant, reserving for herself the
ownership thereof; by this contract the defendant bound himself to
return the furniture to the plaintiff, upon the latter's demand. The
obligation voluntarily assumed by the defendant to return the
furniture upon the plaintiff's demand, means that he should return
all of them to the plaintiff at the latter's residence or house. The
defendant did not comply with this obligation when he merely
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER For the 2020/21 #BestBarEver
placed them at the disposal of the plaintiff, retaining for his bene it (a) If he devotes the thing to any purpose different from that for
the three gas heaters and the four electric lamps. which it has been loaned;
Pactum de commodando (Art 1934) (b) If he keeps it longer than the period stipulated, or after the
An accepted promise to deliver something by way of commodatum or accomplishment of the use for which the commodatum has
been constituted;
simple loan is binding upon parties, but the commodatum or simple
loan itself shall not be perfected until the delivery of the object of the (c) If the thing loaned has been delivered with appraisal of its
contract. value, unless there is a stipulation exempting the bailee from
Requisites responsibility in case of a fortuitous event;
(a) Capacity (d) If he lends or leases the thing to a third person, who is not a
member of his household;
(b) Object
(e) If, being able to save either the thing borrowed or his own
(c) Consideration
thing, he chose to save the latter.
(d) Form
➔ The bailee does not answer for the deterioration of the thing loaned
Characteristics due only to the use thereof and without his fault.
(a) Real — perfected upon delivery of thing by the bailor to the ➔ The bailee cannot retain the thing loaned on the ground that the
bailee. bailor owes him something, even though it may be by reason of
(b) Principal — its existence does not depend upon another expenses. However, the bailee has a right of retention for
contract. damages due to hidden defects.
(c) Gratuitous — if any compensation is payable for use of thing, ➔ When there are two or more bailees to whom a thing is loaned in
it ceases to be commodatum. the same contract, they are liable solidarily.
(d) Personal — consequently Effect of failure to return
(i) Death of either party extinguishes the contract; Catholic Vicar v. CA (1988)
(ii) Bailee can neither lend nor lease the object of the ➔ Private respondents were able to prove that their predecessors'
contract to a third person. house was borrowed by petitioner Vicar after the church and the
However, the members of the bailee's household may convent were destroyed. They never asked for the return of the
make use of the thing loaned, unless house, but when they allowed its free use, they became bailors in
commodatum and the petitioner the bailee.
(1) there is a stipulation to the contrary, or
The bailees' failure to return the subject matter of commodatum to
(2) the nature of the thing forbids such use.
the bailor did not mean adverse possession on the part of the
Obligations of the Bailee (Arts 1941-1945) borrower. The bailee held in trust the property subject matter of
(1) To pay for the ordinary expenses for the use and preservation of the commodatum. The adverse claim of petitioner came only in 1951
thing loaned. when it declared the lots for taxation purposes. The action of
petitioner Vicar by such adverse claim could not ripen into title by
(2) Liable for the loss of the thing, even if it should be through a
way of ordinary acquisitive prescription because of the absence of
fortuitous event:
just title.
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De los Santos v. Jarra (1910) (b) Claim of the lender — Lender has urgent need of the thing ➔ Private respondent agreed to deposit his money in the savings
➔ The carabaos loaned or given on commodatum to the now loaned, in which case, he may demand its account of Sterela speci ically for the purpose of making it appear
deceased Magdaleno Jimenea were ten in number; that they, or at (i) Return, or “that said irm had suf icient capitalization for incorporation, with
any rate the six surviving ones, have not been returned to the owner the promise that the amount shall be returned within thirty (30)
(ii) Temporary use — commodatum is suspended.
thereof, Felix de los Santos, and that it is not true that the latter sold days.” Private respondent merely “accommodated” Doronilla by
(c) Destruction of the thing lending his money without consideration, as a favor to his good
to the former three carabaos that the purchaser was already using;
therefore, as the said six carabaos were not the property of the (d) Death of parties friend Sanchez. It was however clear to the parties to the transaction
deceased nor of any of his descendants, it is the duty of the that the money would not be removed from Sterela’s savings
(e) Ingratitude of the borrower
administratrix of the estate to return them or indemnify the owner account and would be returned to private respondent after thirty
(i) If the bailee should commit some offenses against the (30) days.
for their value.
person, honor or property of the bailor or of his wife
➔ The carabaos delivered to be used not being returned by the Mutuum vs Barter
or children under his parental authority.
defendant upon demand, there is no doubt that she is under
(ii) If the bailee imputes any criminal offense, or any act As to Mutuum Barter
obligation to indemnify the owner thereof by paying him their
involving moral turpitude, even though he should
value. Subject Money or other fungible Non-fungible things
prove it, unless the crime or the act has been
Obligations of the Bailor (Arts 1946 - 1952) committed against the bailee himself, his wife or matter things
(a) To pay extraordinary expenses of preservation. The bailor children under his authority; and
Nature May be onerous Always onerous
shall refund the extraordinary expenses during the contract for (iii) If the bailee unduly reuses the bailor support when the
the preservation of the thing loaned, provided the bailee brings bailee is legally or morally bound to do so. Effect There is transfer of In effect a mutual sale
the same to the knowledge of the bailor before incurring them,
3. Simple loan ownership, but no sale
except when they are so urgent that the reply to the noti ication
cannot be awaited without danger. Mutuum vs Commodatum
Return of Same thing after No return after mutual
If the extraordinary expenses arise on the occasion of the actual Chee Kiong Yam v. Malik (1979) thing expiration of period. exchange
use of the thing by the bailee, even though he acted without ➔ It can be readily noted that in simple loan (mutuum), as contrasted
fault, they shall be borne equally by both the bailor and the to commodatum, the borrower acquires ownership of the money, Mutuum vs Lease
bailee, unless there is a stipulation to the contrary. goods or personal property borrowed. Being the owner, the
As to Mutuum Lease
(b) To answer for damages to the borrower borrower can dispose of the thing borrowed and his act will not be
considered misappropriation thereof.
The bailor who, Ownership Transferred to borrower No transfer, only
Producers Bank v. CA (2003) temporary
(1) knowing the laws of the thing loaned,
➔ Thus, if consumable goods are loaned only for purposes of relinquishment of
(2) does not advise the bailee of the same, possession to lessee
exhibition, or when the intention of the parties is to lend
shall be liable to the latter for the damages which he may suffer consumable goods and to have the very same goods returned at the
by reason thereof. end of the period agreed upon, the loan is a commodatum and not a Nature Unilateral Bilateral
(i) The bailor cannot evade liability by abandonment mutuum.
Subject Consumable Non-consumable
of the thing. ➔ The rule is that the intention of the parties thereto shall be accorded Matter
Termination primordial consideration in determining the actual character of a
contract. In case of doubt, the contemporaneous and subsequent Juridical Lender and Borrower Lessor and Lessee
(a) Expiration of time or use stipulated
acts of the parties shall be considered in such determination. relations

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Tolentino v. Gonzalez Sy Chiam (1927)
➔ A contract of "rent" is a contract by which one of the parties
delivers to the other some non-consumable thing, in order that the
latter may use it during a certain period and return it to the former;
whereas a contract of "loan," as that word is used in the statute,
signi ies the delivery of money or other consumable things upon
condition of returning an equivalent amount of the same kind or
quantity, in which cases it is called merely a "loan."
Mutuum vs Agency
Liwanag v. CA (1997)
➔ Neither can the transaction be considered a loan, since in a contract
of loan once the money is received by the debtor, ownership over
the same is transferred. Being the owner, the borrower can dispose
of it for whatever purpose he may deem proper.
➔ In the instant petition, however, it is evident that Liwanag could not
dispose of the money as she pleased because it was only delivered
to her for a single purpose, namely, for the purchase of cigarettes,
and if this was not possible then to return the money to Rosales.
Since in this case there was no transfer of ownership of the money
delivered, Liwanag is liable for conversion under Art. 315, par. 1(b)
of the Revised Penal Code.
Kinds of Mutuum
(1) Gratuitous;
(2) Onerous — with interest.
Requisites
(1) Consent of parties;
(2) Object certain; and
(3) Cause of the obligation
(4) Delivery - for perfection.
Accepted promise to deliver something by way of simple loan
Saura v. DBP (1972)
➔ There was undoubtedly offer and acceptance in this case: the
application of Saura, Inc. for a loan of P500K was approved by
resolution of the defendant, and the corresponding mortgage was
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
executed and registered. But this fact alone falls short of resolving
the basic claim that the defendant failed to ful ill its obligation and
that the plaintiff is therefore entitled to recover damages.
➔ The action thus taken by both parties was in the nature of mutual
desistance — what Manresa terms "mutuo disenso" — which is a
mode of extinguishing obligations. It is a concept that derives from
the principle that since mutual agreement can create a contract,
mutual disagreement by the parties can cause its extinguishment.
Obligation of the Borrower
(a) To return the thing or amount borrowed
(i) Rule if thing borrowed is money
(1) The payment of debts in money shall be made in the
currency stipulated, and if it is not possible to deliver such
currency, then in the currency which is legal tender in the
Philippines.
(2) The delivery of promissory notes payable to order, or bills
of exchange or other mercantile documents shall produce
the effect of payment only when they have been cashed, or
when through the fault of the creditor they have been
impaired.
(3) In case an extraordinary in lation or de lation of the
currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation
shall be the basis of payment, unless there is an agreement
to the contrary.
Rono v. Gomez (1949)
➔ But he is not paying interest. Precisely the contract says that the
money received "will not earn any interest." Furthermore, he
received four thousand pesos; and he is required to pay four
thousand pesos exactly. The increased intrinsic value and
purchasing power of the current money is consequence of an event
(change of currency) which at the time of the contract neither party
knew would certainly happen within the period of one year. They
both elected to subject their rights and obligations to that
contingency. If within one year another kind of currency became
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legal tender, Gomez would probably get more for his money. If the
same.
Nepomuceno v. Narciso (1949)
➔ It will be noted that the original contract of mortgage provided for
interest at 8 per cent per annum and that the principal together with
the interest was payable within the period of seven years from
November 14, 1938. But by mutual agreement of the parties that
term was modi ied on September 30, 1943, by reducing the interest
to 6 per cent per annum from December 8, 1941, until the end of the
war and by stipulating that the mortgagor shall not pay off the
mortgage while the war went on.
➔ We ind nothing immoral or violative of public order in that
stipulation. The mortgagees apparently did not want to have their
prewar credit paid with Japanese military notes, and the mortgagor
voluntarily agreed not to do so in consideration of the reduction of
the rate of interest.
➔ It was a perfectly equitable and valid transaction.
Equitable PCI v. Ng Sheung Ngor (2007)
➔ For extraordinary in lation (or de lation) to affect an obligation, the
following requisites must be proven:
1. that there was an of icial declaration of extraordinary in lation
or de lation from the Bangko Sentral ng Pilipinas (BSP);
2. that the obligation was contractual in nature; and
3. that the parties expressly agreed to consider the effects of the
extraordinary in lation or de lation
➔ Despite the devaluation of the peso, the BSP never declared a
situation of extraordinary in lation. Moreover, although the
obligation in this instance arose out of a contract, the parties did
not agree to recognize the effects of extraordinary in lation (or
de lation). The RTC never mentioned that there was a such
stipulation either in the promissory note or loan agreement.
Therefore, respondents should pay their dollar-denominated loans
at the exchange rate ixed by the BSP on the date of maturity.
(ii) If not money
(1) The debtor owes another thing of the same kind, quantity
and quality, even if it should change in value.
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(2) In case it is impossible to deliver the same kind, its value
at the time of the perfection of the loan shall be paid.
(b) To pay interest
Requisites
Pan Paci ic Service v. Equitable PCI (2010)
➔ Payment of monetary interest is allowed only if:
(1) there was an express stipulation for the payment of
interest; and
(2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required
for the payment of monetary interest.
➔ We agree with petitioners' interpretation that in case of default, the
consent of the respondent is not needed in order to impose interest
at the current bank lending rate.
4. Interests on loan
Stipulation for legal interest but higher rate is charged
Espiritu v. Landrito (2007)
➔ The omission of the Spouses Espiritu in specifying in the contract
the interest rate which was actually imposed, in contravention of
the law, manifested bad faith.
➔ In declaring void the stipulations authorizing excessive interest and
charges, the Court declared that although the Usury Law was
suspended by Central Bank Circular No. 905, s. 1982, effective on 1
January 1983, and consequently parties are given a wide latitude to
agree on any interest rate, nothing in the said Circular grants lenders
carte blanche authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their
assets.
➔ The debt due is to be considered without the stipulation of the
excessive interest. A legal interest of 12% per annum will be added
in place of the excessive interest formerly imposed.
Liability for contractual/monetary interest after maturity of note
Jardenil v. Solas (1942)
➔ Is defendant-appellee bound to pay the stipulated interest only up to
the date of maturity as ixed in the promissory note, or up to the
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
date payment is effected? This question is, in our opinion,
controlled by the express stipulation of the parties.
➔ Defendant-appellee has, therefore, clearly agreed to pay interest
only up to the date of maturity, or until March 31, 1934. As the
contract is silent as to whether after that date, in the event of
non-payment, the debtor would continue to pay interest, we cannot,
in law, indulge in any presumption as to such interest; otherwise,
we would be imposing upon the debtor an obligation that the
parties have not chosen to agree upon. Article 1755 of the Civil Code
provides that "interest shall be due only when it has been expressly
stipulated."
Prisma v. Menchavez (2010)
➔ Whether the parties agreed to the 4% monthly interest on the loan.
If so, does the rate of interest apply to the 6-month payment period
only or until full payment of the loan?
➔ In the present case, the respondent issued a check for P1M. In turn,
Pantaleon, in his personal capacity and as authorized by the Board,
executed the promissory note quoted above. Thus, the P1M loan
shall be payable within six (6) months, or from January 8, 1994 up
to June 8, 1994. During this period, the loan shall earn an interest of
P40,000.00 per month, for a total obligation of P1,240,000.00 for
the six-month period. We note that this agreed sum can be
computed at 4% interest per month, but no such rate of
interest was stipulated in the promissory note; rather a ixed
sum equivalent to this rate was agreed upon.
➔ We ind that the interest of P40,000.00 per month corresponds only
to the six (6)-month period of the loan, or from January 8, 1994 to
June 8, 1994, as agreed upon by the parties in the promissory note.
Thereafter, the interest on the loan should be at the legal interest
rate of 12% per annum, consistent with our ruling in Eastern
Shipping Lines, Inc. v. Court of Appeals.
Effect if interest is paid even if not stipulated
If the borrower pays interest when there has been no stipulation
therefor, the provisions of this Code concerning solutio indebiti, or
natural obligations, shall be applied, as the case may be.
(1) If there was a mistake in payment of interest, return the
interest paid.
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(2) If borrower deemed it an obligation to pay interest, even if not
stipulated, the payment of interest is valid.
Siga-an v. Villanueva (2009)
➔ Interest is a compensation ixed by the parties for the use or
forbearance of money. This is referred to as monetary interest.
➔ Interest may also be imposed by law or by courts as penalty or
indemnity for damages. This is called compensatory interest.
➔ The right to interest arises only by virtue of a contract or by virtue
of damages for delay or failure to pay the principal loan on which
interest is demanded.
➔ The case at bar involves petitioner's claim for monetary interest.
➔ The principle of solutio indebiti applies where
(1) a payment is made when there exists no binding relation
between the payor, who has no duty to pay, and the person who
received the payment; and
(2) the payment is made through mistake, and not through
liberality or some other cause.
We have held that the principle of solutio indebiti applies in case of
erroneous payment of undue interest.
➔ It was duly established that respondent paid interest to petitioner.
Respondent was under no duty to make such payment because
there was no express stipulation in writing to that effect. There was
no binding relation between petitioner and respondent as regards
the payment of interest. The payment was clearly a mistake. Since
petitioner received something when there was no right to demand
it, he has an obligation to return it.
Interest payable in kind
In the determination of the interest, if it is payable in kind, its value
shall be appraised at the current price of the products or goods at the
time and place of payment.
Compounding of interest
GR: Interest due and unpaid shall not earn interest. However, the
contracting parties may by stipulation capitalize the interest
due and unpaid, which as added principal, shall earn new
interest.
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CIR v. Isabela Cultural (2007)
➔ Anent the purported understatement of interest income from the
promissory notes of Realty Investment, Inc., we sustain the indings
of the CTA and the Court of Appeals that no such understatement
exists and that only simple interest computation and not a
compounded one should have been applied by the BIR. There is
indeed no stipulation between the latter and ICC on the application
of compounded interest. Under Article 1959 of the Civil Code,
unless there is a stipulation to the contrary, interest due
should not further earn interest.
Effect of usurious/unconscionable interest
Carpo v. Chua (2005)
➔ In a long line of cases, this Court has invalidated similar
stipulations on interest rates for being excessive, iniquitous,
unconscionable and exorbitant.
➔ In the case at bar, the stipulated interest rate is 6% per month, or
72% per annum. By the standards set in the above-cited cases, this
stipulation is similarly invalid.
➔ The Court's ultimate af irmation in the cases cited of the validity of
the principal loan obligation side by side with the invalidation of
the interest rates thereupon is congruent with the rule that a
usurious loan transaction is not a complete nullity but
defective only with respect to the agreed interest.
What is not considered as interest
Sentinel Insurance v. CA (1990)
➔ While interest forms paid of the consideration of the contract itself,
damage dues (penalties, and so forth) are usually made payable
only in case of default or nonperformance of the contract. Also,
although interest is subject to the provisions of the Usury Law, there
is no policy or provision in such law preventing the enforcement of
damage dues although the effect may be to increase the sum payable
beyond the prescribed ceiling rates.
➔ Petitioner's assertion that respondent court acted without authority
in appending the award of damage dues to the judgment of the trial
court should be rejected. As correctly pointed out by private
respondent, the opening sentence of Paragraph 1(a) of the
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
dispositive portion of the lower court's decision explicitly ordered
petitioner to pay private respondent "the amount of P198,602.41 as
principal obligation including interest and damage dues," which is a
clear and unequivocal indication of the lower court's intent to
award both interest and damage dues.
F. DEPOSIT
Bank Deposits
Nature of bank deposits
Gopoco Grocery v. Paci ic Coast Biscuit (1938)
➔ The deposits on current account of the appellants in the bank under
liquidation, with the right on their part to collect interest, have not
created and could not create a juridical relation between them
except that of creditors and debtor, they being the creditors and the
bank the debtor.
Central Bank v. Morfe (1975)
➔ It should be noted that ixed, savings, and current deposits of
money in banks and similar institutions are not true deposits.
They are considered simple loans and, as such, are not preferred
credits.
Serrano v. Central Bank (1980)
➔ Bank deposits are in the nature of irregular deposits. They are
really loans because they earn interest. All kinds of bank deposits,
whether ixed, savings, or current are to be treated as loans and are
to be covered by the law on loans. Current and savings deposits are
loans to a bank because it can use the same. The petitioner here in
making time deposits that earn interests with respondent Overseas
Bank of Manila was in reality a creditor of the respondent Bank and
not a depositor. The respondent Bank was in turn a debtor of
petitioner. Failure of the respondent Bank to honor the time deposit
is failure to pay its obligation as a debtor and not a breach of trust
arising from a depositary's failure to return the subject matter of the
deposit.
Liability for failure to return savings deposit
Guingona v. City Fiscal of Manila (1984)
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➔ The failure of the Bank to return the amount deposited will not
constitute estafa through misappropriation punishable under
Article 315, par. 1(b) of the Revised Penal Code, but it will only give
rise to civil liability over which the public respondents have no
jurisdiction.
Bank as proper party in complaint for quali ied theft
People v. Puig (2008)
➔ It is beyond doubt that tellers, Cashiers, Bookkeepers and other
employees of a Bank who come into possession of the monies
deposited therein enjoy the con idence reposed in them by their
employer. Banks, on the other hand, where monies are deposited,
are considered the owners thereof.
➔ The allegations in the Information that such employees acted with
grave abuse of con idence, to the damage and prejudice of the Bank,
without particularly referring to it as owner of the money deposits,
as suf icient to make out a case of Quali ied Theft.
➔ In summary, the Bank acquires ownership of the money deposited
by its clients; and the employees of the Bank, who are entrusted
with the possession of money of the Bank due to the con idence
reposed in them, occupy positions of con idence. The Informations,
therefore, suf iciently allege all the essential elements constituting
the crime of Quali ied Theft.
1. Deposit in General and its Different Kinds
Characteristics
(1) Real;
(2) Naturally gratuitous;
(3) Primarily for custody.
Effect if foreign currency deposited is sold by the bank
BPI v. IAC (1988)
The document which embodies the contract states that the
US$3,000.00 was received by the bank for safekeeping. The
subsequent acts of the parties also show that the intent of the parties
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was really for the bank to safely keep the dollars and to return it to
Zshornack at a later time.
The above arrangement is that contract de ined under Article 1962,
which reads:
Art 1962. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of
safely keeping it and of returning the same. If the safekeeping of
the thing delivered is not the principal purpose of the contract,
there is no deposit but some other contract.
The document and the subsequent acts of the parties show that they
intended the bank to safekeep the foreign exchange, and return it later
to Zshornack, who alleged in his complaint that he is a Philippine
resident. The parties did not intend to sell the US dollars to the
Central Bank within one business day from receipt. Otherwise, the
contract of depositum would never have been entered into at all.
Nature of rental of safety deposit box
CA Agro-Industrial v. CA (1993)
Is the contractual relation between a commercial bank and another
party in a contract of rent of a safety deposit box with respect to its
contents placed by the latter one of bailor and bailee or one of lessor
and lessee?
The contract for the rent of the safety deposit box is not an ordinary
contract of lease as de ined in Article 1643 of the Civil Code.
However, the same is NOT a contract of deposit, but a special kind
of deposit.
Under the latter, the prevailing rule is that the relation between a bank
renting out safe-deposit boxes and its customer with respect to the
contents of the box is that of a bailor and bailee, the bailment being
for hire and mutual bene it.
The respondent Bank's exoneration cannot, contrary to the holding of
the Court of Appeals, be based on or proceed from a characterization
of the impugned contract as a contract of lease, but rather on the fact
that no competent proof was presented to show that respondent
Bank was aware of the agreement between the petitioner and
the Pugaos to the effect that the certi icates of title were
withdrawable from the safety deposit box only upon both parties' (4) Either unilateral or bilateral
joint signatures, and that no evidence was submitted to reveal (5) Non-use by depositary of the thing deposited
that the loss of the certi icates of title was due to the fraud or
(6) Object of contractual deposit.
negligence of the respondent Bank.
Kinds
(1) Extrajudicial - may either be voluntary or necessary
Sia v. CA (1993) or Judicial - brought about by the attachment or seizure of a
With respect to property deposited in a safe-deposit box by a property by court order.
customer of a safe-deposit company, the parties, since the relation is (2) Regular - thing deposited can not be used by depositary
a contractual one, may by special contract de ine their respective or Irregular - thing may be used by depositary.
duties or provide for increasing or limiting the liability of the deposit
(3) Voluntary - by the will of the parties
company, provided such contract is not in violation of law or public
policy. It must clearly appear that there actually was such a special or Necessary - it is made in compliance with a legal obligation
contract, however, in order to vary the ordinary obligations implied OR takes place on the occasion of any calamity.
by law from the relationship of the parties; liability of the deposit Deposit vs Commodatum and Mutuum
company will not be enlarged or restricted by words of doubtful
meaning. As to Deposit Commodatum Mutuum
The company, in renting safe-deposit boxes, cannot exempt itself
from liability for loss of the contents by its own fraud or negligence Purpose Principally for Use of thing Consumption of
or that of its agents or servants, and if a provision of the contract may safekeeping thing
be construed as an attempt to do so, it will be held ineffective for the
purpose. Although it has been held that the lessor of a safe-deposit Nature May be onerous1 Always May be onerous
box cannot limit its liability for loss of the contents thereof through gratuitous
its own negligence, the view has been taken that such a lessor may
limit its liability to some extent by agreement or stipulation. Object Only movables2 Any Money or
SBTC was guilty of negligence. SBTC’s negligence aggravated the fungible thing
injury or damage to the petitioner which resulted from the loss or
destruction of the stamp collection. SBTC was aware of the loods of Demand At will Lapse of period Lapse of period
1985 and 1986; it also knew that the loodwaters inundated the room
where Safe Deposit Box No. 54 was located. In view thereof, it should
have lost no time in notifying the petitioner in order that the box 1. A deposit is a gratuitous contract, except when there is an
could have been opened to retrieve the stamps, thus saving the same agreement to the contrary, or unless the depositary is engaged
in the business of storing goods.
from further deterioration and loss. In this respect, it failed to
exercise the reasonable care and prudence expected of a good 2. In extra-judicial deposits.
father of a family, thereby becoming a party to the aggravation of
the injury or loss.
2. Voluntary Deposit

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Kinds
(1) Deposit by will of depositor;
(2) Deposit by two or more claimants.
Requisites
(1) Capacity of the parties;
(a) If the depositary is capacitated while the depositor is
not, the former shall be subject to all the obligations of
a depositary, and may be compelled to return the thing
by the guardian, or administrator, of the depositor, or
by the latter himself if he should acquire capacity.
(b) If the depositor is capacitated while the depositary is
not, the depositor shall only have an action to recover
the thing deposited while it is still in the possession of
the depositary, or to compel the latter to pay him the
amount by which he may have enriched or bene ited
himself with the thing or its price. However, if a third
person who acquired the thing acted in bad faith, the
depositor may bring an action against him for its
recovery.
(2) Object;
(3) Formalities — may be entered into orally or in writing.
Obligations of the Depositary (Arts 1972-1991)
(1) To preserve the thing
➔ If the deposit is gratuitous, this fact shall be taken into account
in determining the degree of care that the depositary must
observe.
➔ Unless there is a stipulation to the contrary, the depositary
cannot deposit the thing with a third person. If deposit with a
third person is allowed, the depositary is liable for the loss if
he deposited the thing with a person who is manifestly careless
or un it. The depositary is responsible for the negligence of his
employees.
➔ The depositary may change the way of the deposit if under the
circumstances he may reasonably presume that the depositor
would consent to the change if he knew of the facts of the
situation. However, before the depositary may make such
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
change, he shall notify the depositor thereof and wait for his
decision, unless delay would cause danger.
➔ The depositary holding certi icates, bonds, securities or
instruments which earn interest shall be bound to collect the
latter when it becomes due, and to take such steps as may be
necessary in order that the securities may preserve their value
and the rights corresponding to them according to law.
➔ Unless there is a stipulation to the contrary, the depositary may
commingle grain or other articles of the same kind and quality,
in which case the various depositors shall own or have a
proportionate interest in the mass.
➔ The depositary cannot make use of the thing deposited without
the express permission of the depositor.
➔ Otherwise, he shall be liable for damages.
➔ However, when the preservation of the thing deposited requires
its use, it must be used but only for that purpose.
➔ When the depositary has permission to use the thing deposited,
the contract loses the concept of a deposit and becomes a loan
or commodatum, except where safekeeping is still the principal
purpose of the contract.
➔ The permission shall not be presumed, and its existence must
be proved.
➔ The depositary is liable for the loss of the thing through a
fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's
permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself
may have been authorized to use the same.
(2) To return the thing
To whom. To the depositor, or to his heirs and successors, or to the
person who may have been designated in the contract.
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If the depositor should lose his capacity to contract after having made
the deposit, the thing cannot be returned except to the persons who may
have the administration of his property and rights.
What is to be returned. The thing deposited shall be returned with
all its products, accessories and accessions.
Should the deposit consist of money, the depositary owes interest on
the sums he has applied to his own use from the day on which he did
so, and on those which he still owes after the extinguishment of the
contract of deposit.
If the depositary by force majeure or government order loses the thing
and receives money or another thing in its place, he shall deliver the
sum or other thing to the depositor.
The depositor's heir who in good faith may have sold the thing which he
did not know was deposited, shall only be bound to return the price he
may have received or to assign his right of action against the buyer in
case the price has not been paid to him.
Form or Manner of Return. When the thing deposited is delivered
closed and sealed, the depositary must return it in the same condition,
and he shall be liable for damages should the seal or lock be broken
through his fault.
Fault on the part of the depositary is presumed, unless there is proof to
the contrary.
As regards the value of the thing deposited, the statement of the
depositor shall be accepted, when the forcible opening is imputable to
the depositary, should there be no proof to the contrary. However, the
courts may pass upon the credibility of the depositor with respect to the
value claimed by him.
When the seal or lock is broken, with or without the depositary's fault,
he shall keep the secret of the deposit.
Place of Return. If at the time the deposit was made a place was
designated for the return of the thing, the depositary must take the thing
deposited to such place; but the expenses for transportation shall be
borne by the depositor.
If no place has been designated for the return, it shall be made where the
thing deposited may be, even if it should not be the same place where
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the deposit was made, provided that there was no malice on the part of
the depositary.
Time of Return. The thing deposited must be returned to the
depositor upon demand, even though a speci ied period or time for such
return may have been ixed.
This shall not apply when the thing is judicially attached while in the
depositary's possession, or should he have been noti ied of the
opposition of a third person to the return or the removal of the thing
deposited. In these cases, the depositary must immediately inform the
depositor of the attachment or opposition.
Set off
Right of a bank to apply a deposit to the debt of a depositor
Gullas v. PNB (1935)
As a general rule, a bank has a right of set off of the deposits in its
hands for the payment of any indebtedness to it on the part of a
depositor. We have decided to adopt the general rule. We next
consider if that remedy was enforced properly.
As to a depositor who has funds suf icient to meet payment of a
check drawn by him in favor of a third party, it has been held that he
has a right of action against the bank for its refusal to pay such a
check in the absence of notice to him that the bank has applied the
funds so deposited in extinguishment of past due claims held against
him. The decision cited represents the minority doctrine, for on
principle it would seem that notice is not necessary to a maker
because the right is based on the doctrine that the relationship is that
of creditor and debtor. However this may be, as to an indorser the
situation is different, and notice should actually have been given him
in order that he might protect his interests.
We accordingly are of the opinion that the action of the bank was
prejudicial to Gullas.
Liability for failure to return bank deposit
Associated Bank v. Tan (2004)
While banks are granted by law the right to debit the value of a
dishonored check from a depositor’s account, they must do so with
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER
the highest degree of care, so as not to prejudice the depositor
unduly.
Whether or not the petitioner, which is acting as a collecting bank,
has the right to debit the account of its client for a check deposit
which was dishonored by the drawee bank.
Right of Setoff
A bank generally has a right of setoff over the deposits therein for the
payment of any withdrawals on the part of a depositor. The right of a
collecting bank to debit a client’s account for the value of a
dishonored check that has previously been credited has fairly been
established by jurisprudence. To begin with, Article 1980 of the
Civil Code provides that “[f]ixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the
provisions concerning simple loan.”
Hence, the relationship between banks and depositors has been held
to be that of creditor and debtor. Thus, legal compensation under
Article 1278 of the Civil Code may take place “when all the requisites
mentioned in Article 1279 are present.”
The liability of petitioner in this case ultimately revolves around
the issue of whether it properly exercised its right of setoff.
The determination thereof hinges, in turn, on the bank’s role and
obligations, irst, as respondent’s depositary bank; and second, as
collecting agent for the check in question.
Did petitioner treat respondent’s account with the highest degree of
care? From all indications, it did not.
It is undisputed -- nay, even admitted -- that purportedly as an act of
accommodation to a valued client, petitioner allowed the withdrawal
of the face value of the deposited check prior to its clearing. That act
certainly disregarded the clearance requirement of the banking
system.
Guingona v. City Fiscal of Manila, supra
It must be pointed out that when private respondent David invested
his money on time and savings deposits with the aforesaid bank, the
By RGL
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contract that was perfected was a contract of simple loan or mutuum
and not a contract of deposit.
While the Bank has the obligation to return the amount deposited, it
has, however, no obligation to return or deliver the same money that
was deposited. And, the failure of the Bank to return the amount
deposited will not constitute estafa through misappropriation
punishable under Article 315, par. 1(b) of the Revised Penal Code, but
it will only give rise to civil liability over which the public
respondents have no jurisdiction.
Earnest Money
Obligation if sale did not materialize
Compania Maritima v. CA (1985)
The return of P15,000.00 ordered by the Trial Court and af irmed by
the Appellate Court was but just and proper. As this Court found, that
sum was tendered to REPUBLIC which together with its
(PAN-ORIENTAL's) alleged expenses already made on the vessel,
cover 25% of the cost of the vessel, as provided in the option granted
in the bareboat contract (Exhibit "C"). This amount was accepted by
the Administration as deposit x x x ." Since the purchase did not
eventually materialize for reasons attributable to REPUBLIC, it
is but just that the deposit be returned. It is futile to allege that
PAN-ORIENTAL did not plead for the return of that amount since its
prayer included other reliefs as may be just under the premises.
Courts may issue such orders of restitution as justice and equity may
warrant.
Obligations of the Depositor (Arts 1992-1995)
(1) If the deposit is gratuitous, the depositor is obliged to
reimburse the depositary for the expenses he may have
incurred for the preservation of the thing deposited.
(2) To pay the compensation agreed upon as consideration for the
deposit.
(3) The depositor shall reimburse the depositary for any loss
arising from the character of the thing deposited, unless at the
time of the constitution of the deposit the former was not aware
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of, or was not expected to know the dangerous character of the ➔ The hotel-keeper is not liable for compensation if the loss is
Under Art 1170 of the CC, those who, in the performance of their
thing, or unless he noti ied the depositary of the same, or the due to the acts of the guest, his family, servants or visitors, or if
obligations, are guilty of negligence, are liable for damages. As to
latter was aware of it without advice from the depositor. the loss arises from the character of the things brought into the
who shall bear the burden of paying damages, Art 2180 par 4 of the
Security of the Depositary. The depositary may retain the thing in hotel.
same Code provides that owners and managers of an establishment
pledge until the full payment of what may be due him by reason of the or enterprise are likewise responsible for damages caused by their ➔ The hotel-keeper cannot free himself from responsibility by
deposit. employees in the service of the branches in which the latter are posting notices to the effect that he is not liable for the articles
employed or on the occasion of their functions. Also, this Court has brought by the guest. Such shall be VOID.
Extinguishment
ruled that if an employee is found negligent, it is presumed that the ➔ The hotel-keeper has a right to retain the things brought into the
(a) General causes
employer was negligent in selecting and/or supervising him for it is hotel by the guest, as a security for credits on account of
(i) Loss or destruction of thing; hard for the victim to prove the negligence of such employer. lodging, and supplies usually furnished to hotel guests.
(ii) Death of party, in case of gratuitous deposit. Thus, given the fact that the loss of McLoughlin's money was
Durban Apartments v. Pioneer Insurance and Surety (2011)
(b) Other causes consummated through the negligence of Tropicana's employees in
allowing Tan to open the safety deposit box without the guest's In this case, respondent substantiated the allegations in its
(i) Expiration of period agreed upon;
consent, both the assisting employees and YHT Realty Corporation complaint, i.e., a contract of necessary deposit existed between the
(ii) Demand at will of depositor; itself, as owner and operator of Tropicana, should be held solidarily insured See and petitioner.
(iii) Mutual withdrawal from contract; liable pursuant to Article 2193. Article 1962, in relation to Article 1998, of the Civil Code de ines a
(iv) Ful illment of the purpose of deposit; TAs to whether the "Undertaking For The Use of Safety Deposit Box" contract of deposit and a necessary deposit made by persons in
executed by McLoughlin, the same to be null and void. Article 2003 hotels or inns.
(v) Ful illment of resolutory condition.
is controlling, thus: The insured See deposited his vehicle for safekeeping with petitioner,
3. Necessary Deposit
Art 2003. The hotel-keeper cannot free himself from through the latters employee, Justimbaste. In turn, Justimbaste issued
responsibility by posting notices to the effect that he is not liable a claim stub to See. Thus, the contract of deposit was perfected from
Kinds
for the articles brought by the guest. Any stipulation between the See's delivery, when he handed over to Justimbaste the keys to his
(1) In compliance with legal obligations; vehicle, which Justimbaste received with the obligation of safely
hotel-keeper and the guest whereby the responsibility of the
(2) On the occasion of a calamity; former as set forth in Articles 1998 to 2001 is suppressed or keeping and returning it. Ultimately, petitioner is liable for the loss of
(3) By transients — The keepers of hotels or inns shall be diminished shall be VOID. Sees vehicle.
responsible for them as depositaries, provided that notice was
Rules Regarding Hotels and Inns (4) In common carriers.
given to them, or to their employees, of the effects brought by
the guests and that, on the part of the latter, they take the ➔ The hotel-keeper is liable for the vehicles, animals and articles 4. Sequestration or Judicial Deposit
precautions which said hotel-keepers or their substitutes which have been introduced or placed in the annexes of the
advised relative to the care and vigilance of their effects. Judicial Deposit (Arts 2005-2009)
hotel.
Takes place when an attachment or seizure of property in litigation is
YHT Realty v. CA (2005) ➔ The responsibility shall include the loss of, or injury to the
ordered.
personal property of the guests caused by the servants or
Whether a hotel may evade liability for the loss of items left with it Special Rules
employees of the keepers of hotels or inns as well as strangers;
for safekeeping by its guests, by having these guests execute written
but not that which may proceed from any force majeure. (1) Rule 57 on Preliminary Attachment
waivers holding the establishment or its employees free from blame
for such loss in light of Article 2003 of the Civil Code which voids such ➔ The act of a thief or robber, who has entered the hotel is not (2) Rule 59 on Receivership
waivers. NO. deemed force majeure, unless it is done with the use of arms or
(3) Rule 60 on Replevin
through an irresistible force.

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(4) Rule 127 for attachment in criminal cases.

Must be Lessor need not be the Seller must be the owner property which is
Distinguished from Extra-judicial Deposit owner owner at the time the property registered, or is for more
is delivered than one year.
As to Judicial Extra-judicial
Price of Distinguished from rent, Usually mentioned Creator of May or may not be the Owner, or by his duly
Source By court order Will of parties
object usually not mentioned right owner authorized agent
Purpose To secure owner’s rights For safekeeping
Created only by contract,
Lease Mutuum except as to tacita By law, contract, will, or
Object Any Personal Property Origin
reconduccion which is prescription.
Loses
Cause Remuneratory Generally gratuitous ✘ ✔ by law.
ownership

Possession For bene it of owner For bene it of depositor Cause More or less ACTIVE More or less PASSIVE
Relationship Lessor-Lessee Obligor-Obligee

Termination When controversy ends Generally, when Usufructuary has the

Governed by Lessee generally has no
depositor claims back ✘ ✔ Repairs
duty to pay for repairs
duty to make ordinary
Usury Law
repairs
Principles CC + Rules of Court Civil Code If what is leased is real
applicable Statute of Usufructuary pays for
property for more than ✘ Taxes
Lessee generally pays
annual charges and taxes
Frauds
one year NO taxes
on the fruits
G. LEASE
Property Real and Personal Personal only
Lessee cannot constitute
Notes Usufructuary may lease
Other things a usufruct on the
the property to another.
1. Lease is a consensual, bilateral, onerous, and commutative Lease Commodatum property leased
contract by which one person binds himself to grant
temporarily the use of a thing or the rendering of some service Onerous ✔ ✘ 4. In the lease of things, one of the parties binds himself
to another who undertakes to pay some rent, compensation, or a. to give to another the enjoyment or use of a thing
price. Personal ✘ ✔ b. for a price certain, and
2. The contract of lease may be of things, or of work and service.
(Art 1642) Consensual ✔ ✘ c. for a period which may be de inite or inde inite.
3. Distinctions between Lease and other contracts However, no lease for more than ninety-nine (99) years shall
be valid. (Art 1643)
Lease Sale Lease Usufruct
5. In the lease of work or service, one of the parties binds
What is Only use or enjoyment Ownership Only a particular or himself
transferred Extent Covers all fruits and uses
speci ic use a. to execute a piece of work or

Transfer is Temporary Permanent b. to render to the other some service

Nature of Personal, unless it
Always a real right c. for a price certain,
right pertains to lease of real

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from the nature of the thing leased, according to the

d. but the relation of principal and agent does not exist Sublessee does not have any Assignee has direct action against
custom of the place;
between them. (Art 1644) direct action against lessor lessor
c. To pay expenses for the deed of lease. (Art 1657)
Lease of Services Contract for a Piece of Work
Allowed even without Requires consent of lessor NB: This is different from a contract of sale wherein it
The important object here is the The important object here is the permission of lessor, unless there is the seller who generally pays the expenses for the
labor performed for the lessor. work done, the result of the is an express prohibition deed of sale.
labor d. To notify lessor in case of usurpation or need for
4. Accion Directa. Lessor may directly bring an action against a
repairs; otherwise, lessee will be liable for damages
sublessee even though the latter is not a party to the lease
The result is generally NOT The result is generally important; which the lessor would suffer. (Art 1663)
contract.
important the price is not payable until the e. To return the thing leased, upon the termination of
work is completed. 5. Subsidiary Liability of Sublessee. However, the sublessee
the lease, as he received it. (Art 1665)
shall not be responsible beyond the amount of rent due from
Laborer is entitled to be paid Price cannot generally be him, in accordance with the terms of the sublease, at the time 9. When Lessee May Suspend Rental Payment. In case the
of the extrajudicial demand by the lessor. (Art 1652) lessor fails
even if there is destruction of the lawfully demanded if the work is
work through a fortuitous event. destroyed before it is inished 6. Obligations of Lessor. The lessor is obliged: a. to make the necessary repairs or
and accepted. a. To deliver the thing which is the object of the contract b. to maintain the lessee in peaceful and adequate
in such a condition as to render it it for the use enjoyment of the property leased. (Art 1658)
Lease of Rural and Urban Lands intended;
10. In case of non-ful illment of duties, aggrieved party may seek
Notes b. To make on the same during the lease all the
a. Rescission + Damages; or
necessary repairs in order to keep it suitable for the
1. Those disquali ied to buy are also disquali ied to become b. Damages only, leaving the contract in force — speci ic
use to which it has been devoted, unless there is a
lessees of things. (Art 1646) performance. (Art 1659)
stipulation to the contrary;
2. If a lease is to be recorded in the Registry of Property, the 11. Should there be a need for urgent repairs, the lessee may ask for
c. To maintain the lessee in the peaceful and adequate
following persons cannot constitute the same without proper proportionate reduction of rent only if the repairs last 40 days
enjoyment of the lease for the entire duration of the
authority: or more. (Art 1662)
contract. (Art 1654)
a. the husband with respect to the wife's paraphernal real 12. If lessor fails to make urgent repairs. Lessee may
7. Effect of Total or Partial Destruction. If the thing leased is
estate,
totally destroyed by a fortuitous event, the lease is
a. Order the repairs at the lessor’s cost, in order to avoid
b. the father or guardian as to the property of the minor extinguished.
imminent danger;
or ward, and
If the destruction is partial, the lessee may choose between
b. Sue for damages;
c. the manager without special power. (Art 1647)
a. a proportional reduction of the rent and
c. Suspend payment of rent;
3. Sublease vs Assignment
b. a rescission of the lease. (Art 1655)
d. Ask for rescission, in case of substantial damage.
Sublease Assignment
8. Obligations of Lessee. The lessee is obliged:
13. Trespass in fact — perturbación de mere hecho. When an
Lessee retains an interest in the Lessee makes an absolute a. To pay the price of the lease according to the terms intruder or trespasser claims no right whatsoever, the lessor is
lease; he remains a party to the transfer of his interest; he thus stipulated; not liable to the lessee. The lessee instead has a direct action
against the intruder. (Art 1664)
contract dissociates from the original b. To use the thing leased as a diligent father of a
contract family, devoting it to the use stipulated; and in the 14. Tacita Reconduccion — Implied New Lease. If at the end of
absence of stipulation, to that which may be inferred the contract the lessee

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a. should continue enjoying the thing leased for ifteen Should the lessor refuse to reimburse said amount, i. all the time necessary for the gathering of the
days the lessee fruits which the whole estate leased may
yield in one year, or
b. with the acquiescence of the lessor, and i. may remove the improvements,
ii. which it may yield once, although two or
c. unless a notice to the contrary by either party has ii. even though the principal thing may suffer
more years have to elapse for the purpose.
previously been given, damage thereby.
(Art 1682)
it is understood that there is an implied new lease, not for the He shall not, however, cause any more impairment
period of the original contract, but for the time established in upon the property leased than is necessary.
Articles 1682 and 1687.
QUASI-CONTRACTS
b. With regard to ornamental expenses, the lessee
The other terms of the original contract shall be revived. (Art shall not be entitled to any reimbursement, but he may Quasi-contracts are lawful, voluntary, and unilateral acts which
1670) remove the ornamental objects, provided no damage is generally require a person to reimburse or compensate another in
caused to the principal thing, and the lessor does not accordance with the principle that no one shall be unjustly enriched or
Acceptance of rentals beyond the original term does not signify
choose to retain them by paying their value at the time bene ited at the expense of another.
acquiescence. There is thus no implied renewal of lease.
the lease is extinguished. (Art 1678)
[Torres v. CA (1992)] Unjust Enrichment
17. Special Provisions for Lease of Rural or Product-Producing
15. Causes for Judicial Ejectment. For the rule on unjust enrichment to apply, two conditions must concur:
Land.
a. When the period agreed upon, or that which is ixed 1) A person is unjustly bene ited; and
a. When does the lessee have the right to a reduction of
for the duration of leases under Articles 1682 and
rent? 2) Such bene it is derived at another’s expense or damage.
1687, has expired;
In case of the loss of more than one-half of the fruits Included in the Concept of Implied Contracts
b. Lack of payment of the price stipulated;
through extraordinary and unforeseen fortuitous
c. Violation of any of the conditions agreed upon in the events. Quasi-contracts fall within the concept of implied contracts that must
contract; be included in the claims required to be iled with the judicial
Extraordinary fortuitous events are understood to settlement of the deceased’s estate under Section 5, Rule 86 of the Rules
d. When the lessee devotes the thing leased to any use or be: ire, war, pestilence, unusual lood, locusts, of Court. (MBTC v. Absolute Management, 2013)
service not stipulated which causes the deterioration earthquake, or others which are uncommon, and
thereof; or if he does not observe the requirement in which the contracting parties could not have A. Negotiorum Gestio
No. 2 of Article 1657, as regards the use thereof. (Art reasonably foreseen.
1673) ART 2144. Whoever voluntarily takes charge of the agency or
b. Instances where lessee has no right to a reduction: management of the business or property of another, without
16. Rules on Useful Improvements and Ornamental Expenses. any power from the latter, is obliged to continue the same until
i. on account of the sterility of the land leased,
a. If the lessee makes, in good faith, useful or the termination of the affair and its incidents, or to require the
improvements person concerned to substitute him, if the owner is in a
ii. by reason of the loss of fruits due to position to do so. xxxx
i. which are suitable to the use for which the ordinary fortuitous events.
lease is intended, Essential Requisites
iii. if the fruits are lost after they have been
ii. without altering the form or substance of the separated from their stalk, root or trunk. (Art 1) No meeting of the minds;
property leased, 1681) 2) Taking charge of another’s business or property;
the lessor upon the termination of the lease shall pay c. Duration of Rural Lease. When duration has not 3) The property or business must have been abandoned or
the lessee one-half of the value of the improvements been ixed, period is understood to have been for neglected;
at that time.
Otherwise, the rule on unauthorized contracts would apply.

Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo By RGL 107 of 138
 Civil Law | Obligations and Contracts, LTD, and Torts and Damages
4) The of icious manager must NOT have been expressly or
implicitly authorized;
Otherwise, the rules on agency would apply.
5) The of icious manager must have voluntarily taken charge.
Notes
1. The of icious manager shall perform his duties with all the
diligence of a good father of a family. (Art 2145)
2. GR: The responsibility of two or more of icious managers
shall be solidary
EXC: Unless the management was assumed to save the thing or
business from imminent danger. (Art 2146)
3. The rati ication of the management by the owner of the
business produces the effects of an express agency, even if
the business may not have been successful. (Art 2149)
4. Generally, the owner should have been bene ited for him to be
liable to the gestor. There are instances when there is still
liability even if there have been no bene it derived:
a. When the management had for its purpose the
prevention of an imminent and manifest loss; (Art
2150 par 2) and
b. Even though there has been no imminent and manifest
danger to the property or business:
i. The of icious manager has acted in good faith,
and
ii. The property or business is intact, ready to be
returned to the owner. (Art 2151)
Liability for Fortuitous Events
The of icious manager shall be liable for any fortuitous event:
(1) If he undertakes risky operations which the owner was not
accustomed to embark upon;
(2) If he has preferred his own interest to that of the owner;
(3) If he fails to return the property or business after demand by
the owner;
(4) If he assumed the management in bad faith; (Art 2147)
Based on the Lectures of Dean Monteclar, Atty. Gravador, and Atty. Largo
REVIEWER For the 2020/21 #BestBarEver
(5) If he is manifestly un it to carry on the management; LAND TITLES AND DEEDS
(6) If by his intervention he prevented a more competent person
from taking up the management. A. TORRENS SYSTEM
For 5 and 6, except when the management was assumed to 1. Concept and background
save property or business from imminent danger. (Art 2148) 2. Certi icate of title
Extinguishment of Of icious Management B. AGRARIAN TITLES AND ANCESTRAL LANDS AND DOMAINS
(1) When the owner repudiates it or puts an end thereto; 1. Concept and registration of agrarian titles
(2) When the of icious manager withdraws from the management; 2. Concept and registration of ancestral lands and domains
C. CITIZENSHIP REQUIREMENT
(3) By the death, civil interdiction, insanity or insolvency of the
owner or the of icious manager. 1. Individuals
B. Solutio Indebiti 2. Corporations
D. ORIGINAL REGISTRATION
Solutio indebiti is the quasi-contract that arises when a person is
obliged to return whatever was received by him through error or 1. Who may apply
mistake or received by him although there was no right to demand it. 2. Registration process and requirements
The responsibility of two or more payees is solidary. (Art 2157) 3. Remedies
4. Cadastral registration
If payee is in bad faith, he shall be liable for interests, or fruits and for
fortuitous events. (Art 2159) E. SUBSEQUENT REGISTRATION
Essential Requisites 1. Voluntary dealings
1) Receipt of something; 2. Involuntary dealings
2) There was no right to demand it; (Art 2154) F. NON-REGISTRABLE PROPERTIES
3) The undue delivery was because of mistake, either of fact, or of G. DEALINGS WITH UNREGISTERED LANDS
law, which may be doubtful or dif icult. (Art 2155)
Liability of a Payee in Good Faith A. TORRENS SYSTEM
(a) In case of impairment or loss — only to the extent of bene it;
Torrens System is a system of registration of land under which, upon
(b) In case of alienation — price to be reimbursed; the landowner’s application, the court may, after appropriate
proceedings, direct the issuance of a certi icate of title.
(c) In case of credit — the same should be assigned
Torrens Title is a certi icate of ownership issued under the Torrens
When Mistake Presumed
System, through the Register of Deeds, naming and declaring the owner
ART 2163. It is presumed that there was a mistake in the of the real property described therein, free from all liens and
payment if something which had never been due or had already encumbrances except such as may be expressly noted there or
been paid was delivered; but he from whom the return is otherwise reserved by law.
claimed may prove that the delivery was made out of liberality
or for any other just cause.
By RGL 108 of 138