Oblicon Sta. Maria Gaw

OBLIGATIONS & CONTRACTS
Atty. Melencio Sta. Maria

The Definitive Guide to the Sacred Text
PRESCRIPTION
CHAPTER 1. GENERAL PROVISIONS
Art. 1106. Prescription Defined.
By prescription, one acquires ownership & other real rights through the
lapse of time in the manner & under the conditions laid down by law.
In the same way, rights & actions are lost by prescription.
Definition of Prescription
A statute of repose
Object is to suppress fraudulent and stale claims from springing up
at great distances of time & surprising the parties or their
representatives when the facts have become obscure from the
lapse of time or the defective memory or death or removal of
witnesses
An implied trust is subject to prescription in certain cases
Kinds of Prescription
Acquisitive
o The acquisition of a right by the lapse of time (Art. 1106,
par. 1)
o Looking at the acts of the possessor (the claimant in
possession)
o Other names: adverse possession & usucapcion
Extinctive
o Rights and actions are lost by the lapse of time (Arts.
1106, par. 2 and 1139)
o Looking at the neglect of the owner out of possession
o Other name: limitation of action
Laches
Doctrine of stale demands
Based upon grounds of public policy which requires, for the peace
of society, and the discouragement of stale claims
Applies independently of prescription
o Can be successfully interposed even if a shorter time had
elapsed & prescriptive period has not expired
o Can bar the filing or prosecution of a suit
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Requisites of laches (CDLI)

1) Conduct on the part of the defendant, or of one under whom he
claims
o Giving rise to the situation of which complaint is made &
for which the complaint seeks a remedy
2) Delay in asserting the complainants rights
o The complainant having knowledge or notice of the
defendants conduct & having been afforded an
opportunity to institute a suit
3) Lack of knowledge or notice on the part of the defendant that
the complainant would assert the right on which he bases his
suit
4) Injury or prejudice to the defendant
o In the event relief is accorded to the complainant or the
suit is not barred
Laches
Effect of delay
A question of inequity founded on
the condition of the property or
relation of the parties
Not statutory
Applies at equity
Not based on fixed time
Prescription
Fact of delay
Matter of time
Statutory
Applies at law
Based on fixed time
CASE: Z.E. Lotho, Inc. v. Ice & Cold Storage

Lesson: Laches applies independently of prescription.
Facts:
o Plaintiff filed a complaint because respondent had been
operating in plaintiffs franchise area since 1948,
according to plaintiffs knowledge.
o Plaintiffs material records of the period had already been
lost & it made no genuine effort to stop the defendant
before he filed suit in 1957.
Held: Plaintiff had knowledge since 1948 & failed to assert its
rights earlier, thus making it difficult for respondent to controvert
the correctness of the damages sought & to avoid further liability.
Even if the prescriptive period of 10 years (for written contracts)
had not yet passed, & even if, assuming the use of the prescriptive
period of 4 years (for injury to the rights of the plaintiff) the period
had already passed, SC ruled that the case dismissed on the
ground of laches.
CASE: Catholic Bishop of Balanga v. CA

Lesson: Even a registered landowner can lose his right to recover
possession of his registered property by reason of laches, even
where prescription fails.
Facts:
o Alleged landowner questioned the donation of its
representative to the donee, who already possessed the
property peacefully & adversely for 49 years.
o He claims that the fact that the property is registered bars
the effect of prescription.
Held:
o There was laches for failure to act on the part of the donor.
Art. 1107. Acquisition by Capable Persons & Minors.
Persons who are capable of acquiring property or rights by other legal
modes may acquire the same by means of prescription.
Minors & other incapacitated persons many acquire property or rights by
prescription, either personally or through their parents, guardians or legal
representatives.
Examples of Other Legal Modes
! Donation, sale, inheritance
Acquisition of Minors
If through parents or guardian completely valid
If acquired personally, without assistance of parents or guardian
annullable or voidable
o When minor comes of age, he can ratify the acquisition
! Age of emancipation 18 years old
! Termination of parental authority over child;
qualifies him for all acts of civil life
Art. 1108. Persons Exempt from Prescription.
Prescription, both acquisitive & extinctive, runs against:
(1) Minors & other incapacitated persons who have parents, guardians
or other legal representatives;
(2) Absentees who have administrators, either appointed by them
before their disappearance, or appointed by the courts;
(3) Persons living abroad, who have managers or administrators;
(4) Juridical persons, except the State & its subdivisions.
Persons who are disqualified from administering their property have a right
to claim damages from their representatives whose negligence have been
the cause of prescription.
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General Rule
Prescription does not run against the ff.: (MAPSS)
1) Minors & incapacitated persons unless they have parents,
guardians or other legal representatives
o If A is insane & has no guardian, prescription does not run
against him
o The general rule for minors is that prescription runs
against them, because there is a presumption that they
have parents
o CASE: Vda. De Alberto v. CA An illegitimate child,
represented by his natural mother, filed for
acknowledgement & partition more than 4 years after the
surviving legitimate heirs executed a partition already.
However, SC ruled that the period had already prescribed,
& there can be no claim of immunity for the illegitimate
child because he had a surviving parent (his mother).
2) Absentees unless they have administrators, either selfappointed prior to disappearance, or court-appointed
o Cannot manage his affairs because he cant go back to his
domicile
o IF the absentee CAN go back to his domicile but
intentionally does not want to return, prescription will lie
against him
o Art. 381, CC: A judge, at the instance of an interested
party, relative or friend, may appoint a person to represent
an absentee when he appointed no one or the power he
has conferred has expired
3) Persons living abroad unless they have managers or
administrators
o It must be shown that they cannot return to their domicile
within the period when prescription should have run
4) State and its subdivisions unless not acting in their sovereign
capacity; acting in a proprietary character
o Generally, juridical persons are endowed by law with
attributes of a natural person, & can be subject to
prescription (State & its subdivisions are the exception)
o HOWEVER, State or subdivision must be acting in
sovereign capacity; when it is running a business or acting
in a proprietary manner, it can be subject to prescription.
o CASE: Republic v. PNB AFP filed a case for recovery of a
sum of money that PNB negligently paid to unauthorized
persons. SC ruled that prescription did not run, as this was
a case against the State, acting through its instrumentality,

the AFP.
CASE: NDC v. Tobia NDC is a GOCC filing a collection
case. SC ruled that action had already prescribed because
it was a GOCC; even if it was made to serve a public
purpose, it is still a business corporation.
Art. 1109. Between Husband & Wife, Children & Guardian.

Prescription does not run between husband & wife, even though there be a
separation of property agreed upon in the marriage settlements or by
judicial decree.
Neither does prescription run between parents & children, during the
minority or insanity of the latter, & between guardian & ward during the
continuance of the guardianship.
Husband & Wife
General rule: prescription does not apply between the husband &
wife unless the law otherwise provides
Exceptions can be validly provided by law
CASE: Pacio v. Billion
Lesson: There is no prescription between husband & wife, whether
acquisitive or extinctive
Facts:
o A husband made a donation to his 1st wife during their
marriage, which is not considered valid by law
o The children of the 1st wife, hoping to resist the claims of
the children of their father with his 2nd wife, claimed that,
though the donation was void, their mother had already
acquired the lot by prescription because she possessed
the property for 29 years already
Held: SC rejected the contention of the children of the 1st wife.
There is no prescription between husband & wife.
Exceptions for Husband & Wife to General Rule in the Family Code
Legal separation must be filed within 5 years from occurrence of
the cause
Annulment is filed 5 years from the particularly starting point
provided by law
o Example: If the ground is impotency, it must be filed 5
years from the marriage ceremony
Parent & Child
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General rule: No prescription between parent & child during the

latters insanity or minority
o Natural bond of filiation parents are the natural
guardians of the child without need of court appointment
Exceptions may be provided by law, like those in the Family Code
o A husband may impugn the legitimacy of the child of his
wife on grounds provided by law within 1, 2 or 3 years from
his knowledge of the birth of the child or its recording in
the civil registry, depending on residence of husband &
place of birth of child
Guardian & Ward

General rule: No prescription during the period of guardianship
Gives adequate remedy to the ward for abuses of guardian
Art. 1110. Married Woman.
Prescription, acquisitive & extinctive, runs In favor of, or against a married
woman.
Art. 1111. Co-Owner or Co-Proprietor.
Prescription obtained by a co-proprietor or co-owner shall benefit the others.
Example of Co-Ownership
! Art. 147/148 of Family Code
! When a person dies, those who inherit his estate co-own their
proper portion of the inheritance
Co-Ownership
When the ownership of an undivided thing or right (e.g. house,
business) belongs to different persons
Example:
o A, B & C co-own a particular land & all reside in the same.
o If B also occupies a portion of land adjoining the co-owned
property, & acquires it by prescription through public,
peaceful, continuous, adverse possession, his acquisition
will benefit himself, A & C.
Art. 1112. Renunciation.
Persons with capacity to alienate property may renounce prescription
already obtained, but not the right to prescribe in the future.
Prescription is deemed to have been tacitly renounced when the
renunciation results from acts which imply the abandonment of the right
acquired.
CASE: DBP v. Adil

Lesson: Where a party acknowledges the correctness of a debt and
promises to pay it after the same has prescribed and with full
knowledge of the prescription he thereby waives the benefit of
prescription
o The statutory limitation bars the remedy but does not
discharge the debt
Facts:
o Feb. 10, 1940: A husband & wife obtain an agricultural
loan from DBP, evidenced by a promissory note which
states they will pay in 10 equal yearly amortizations
o Even after the lapse of the 10-year period, the obligation
remained unpaid
o April 11, 1961: Couple executed a 2nd promissory note
expressly acknowledging the debt & promising to pay on or
before June 15, 1961.
! The note also said that upon failure to pay upon
said date, DBP can foreclose on the couples
mortgage
o Sept. 11, 1970: DBP filed a complaint demanding
payment.
Held: The couple expressly waived their right to prescription when
they made the 2nd promissory note expressly acknowledging their
debt.
o SC said the note was not a mere case of
acknowledgement, but a new promise to pay the debt
o The consideration of the new promissory note is the preexisting obligation under the first promissory note
Personal Note: This seems to imply that the period will start
running, this time from the April 11, 1961 debt, until the 10-year
period.
Art. 1113. Subjects of Prescription.
All things which are within the commerce of men are susceptible of
prescription, unless otherwise provided. Property of the State or any of its
subdivisions not patrimonial in character shall not be the object of
prescription.
CASE: Director of Forest Administration v. Fernandez
Lesson: Forestland cannot be acquired by prescription or
registered.
Facts:
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An application was filed for the registration of a particular

forest & timber on the ground of prescription
Held: It is axiomatic that forest lands of the public domain cannot
be acquired by prescription; its possession however long cannot
ripen into private ownership. It is not registerable & can never vest
a person with title.
o
CASE: Lovina v. Moreno

The ownership of a navigable stream or of its bed is not acquired by
prescription
CASE: Republic v. CA
Lesson: A particular area adjacent to a bay, which was at times
covered by water due to rain & not due to the rising of the tide, can
be registered & subject to prescription.
Facts:
o A parcel of land by the bay is covered with water 4-5
months a year due to the rain.
o Director of Lands refuses to register the title to said land,
claiming it is part of the lake bed or foreshore land
o Art. 74 of the Law of Waters of 1866 a lake bed is the
ground covered by their waters when at their highest
ordinary depth
Held: SC ruled for registry of title. The phenomenon is not a regular
daily occurrence in the case of the lake & has nothing to do with
high tides or low tides. The rise & ebbing is caused by the rainy
season.
o The land is not foreshore land (which would have been part
of public dominion)
o Applicant could also trace his right of title to a public
instrument of sale in favor of his father, from whom he
inherited the land, & has tax declarations & tax receipts
! Tax receipts are merely declarations of ownership,
but become strong evidence of ownership
acquired by prescription when accompanied by
proof of actual possession of the property
Land Registration under the Torrens System
NOT the acquisition of lands but only the registration of title which
the applicant already possesses over the land
NOT a means of acquiring ownership
Even if the land sought to be registered is public land, one can still
be entitled to a judicial confirmation of an imperfect title, if he has
also satisfied the requirements of the Public Land Act

(Commonwealth Act No. 141 as amended by Republic Act No.
1942). Sec. 48 of said Act enumerates as among the persons
entitled to judicial confirmation of imperfect title, the following:
o Those who, by themselves or through their predecessorsin-interest, have been in the open, continuous, exclusive,
and notorious possession and occupation of agricultural
lands of the public domain, under bona fide claim of
ownership, for at least thirty years immediately preceding
the filing of the application for confirmation of title.
Things of Public Dominion
Those which, under existing legislation, are not subject to private
ownership & are reserved for public purposes
Art. 240, Civil Code lists the property which are of public dominion:
o Those intended for public use
! Examples: rivers, roads, canals, torrents, bridges
constructed by the State, etc.)
o Those which belong to the State without being for public
use
! For public service or development of national
wealth
Art. 502, Civil Code also lists more:
o Rivers, continuous & intermittent waters of springs, waters
rising continuously or intermittently on lands of public
domain, lakes & lagoons
Art. 1116. Transition.
Prescription already running before the effectivity of this Code shall be
governed by laws previously in force; but if since the time this Code took
effect the entire period herein required for prescription should elapse, the
present Code shall be applicable, even though by the former laws a longer
period might be required.
Rules on Transitory Period for Civil Code
Effectivity Date: Aug. 30, 1950
1) If the prescriptive period provided under the old law has already
lapsed before the effectivity of the Civil Code, such prescriptive
period shall apply;
2) If the prescriptive period under the old law is still running upon
the effectivity of the Civil Code which however provides for a
different period for the same situation
The Civil Code shall prevail provided that such period

counted from the effectivity of the Civil Code has already
lapsed, although under the old law the period has not yet
lapsed.
o If under an old law previous to the effectivity of the Civil
Code, X has thirty years within which to file a particular suit
and by the time the 1950 Civil Code takes effect his
remaining time, pursuant to the period provided by the old
law, is only 12 years, he cannot file the case on the 12th or
even on the 11th year if the 1950 Civil Code provides only
10 years as prescriptive period for exactly the same kind of
case.
3) If the prescriptive period under the old law is still running upon
the effectivity of the Civil Code and the remaining balance of such
period since the effectivity of the Civil Code is shorter than that
provided in the Civil Code for exactly the same situation, the old
prescriptive period will apply.
o In the example given in No. 2, if the balance of the period
which started under the old law is 12 years counted from
the time of the effectivity of the Civil Code and the latter
provides for 15 years as the prescriptive period for exactly
the same case, the prescriptive period under the old law
will prevail.
o
CHAPTER 2. PRESCRIPTION OF OWNERSHIP & OTHER REAL RIGHTS

Art. 1117. Acquisitive Prescription.
Acquisitive prescription of dominion & other real rights may be ordinary or
extraordinary.
Ordinary acquisition requires possession of things in good faith & with just
title for the period of time fixed by law.
Kinds of Acquisitive Prescription
Ordinary uninterrupted possession in good faith & with just title
for the required statutory period
Extraordinary uninterrupted possession for the required statutory
period, without good faith or just title on possessors part
CASE: Godinez v. CA
Lesson: When one is in open, public, continuous adverse
possession of a piece of land for more than the period of time
prescribed by law, & acquired such land in good faith & with just
title, acquisitive prescription can apply despite a registered title.
Facts:
o
o
Felix divided his lot 665 to his 7 children.

The judge ordered the adjudication of the lot for a 1/6
share instead of the 1/7 share through a clerical error
o 5/7 of the land (Lot 665-A) was sold to the Igot spouses
while 2/7 (Lot 665-B) of the land remained with Felixs
heirs
o 39 years later, the judge corrected the original clerical
error, & title to the land of Lot 665 was officially issued as
OCT. 8.
o The heirs of Felix once again claimed that Lot 665-A was
theirs due to the title granted in OCT. 8
Held: The Igots had been in open & continuous possession for more
than half a century after they bought the land from the
Magsumbols, who had bought the land from the heirs. The laws as
well as common sense favored the Igots. OCT. 8 did not nullify the
original sale.
Article 1118. Possession.

Possession has to be in the concept of an owner, public, peaceful and
uninterrupted.
Characteristics of Possession (OPPU)
1. In the concept of owner (concepto de dueo) possessor asserts
dominion on the property to the exclusion of all others
o Must be an adverse possession
o Acts of possessory character executed due to license or by
mere tolerance of the owner are inadequate (e.g. as
usufructuary, trustee, an agent, lessee or mortgagee)
o Mere possession with a juridical title cannot ripen into
ownership by acquisitive prescription
! Unless juridical title is expressly repudiated & such
repudiation has been communicated to the other party
o CASE: Ramirez v. CA an antichretic creditor cannot ordinarily
acquire by prescription the land surrendered to him by the debtor,
because his possession is not in the concept of owner
o CASE: Republic v. CA the U.S. Navys possession of a property for
recreational purposes only, resembling commodatum,1 can never
translate to acquisitive prescription
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He who lends to another a tiling for a definite time, to be enjoyed and used under certain
conditions, without any pay or reward (loaning or borrowing)
Ones ownership of a thing may be lost through

prescription by reason of anothers possession, provided
that such possession is under a claim of ownership, & not
where the possession is only intended to be transient
o CASE: Ramos v. CA SC ruled that acquisitive prescription had set
in, especially when the possessor has undertaken acts clearly
showing his claim of ownership, such as paying taxes evidenced by
tax declarations & receipts for several years
! In this case, SC further stated that the period for
acquisitive prescription began to run upon the issuance of
a certificate of title in the name of the possessor
exclusively on May 12, 1934, & action to recover said
property prescribed after 10 years, thus barring the
petitioners plea completely, given that he filed his case in
1973.
! Registration of deed of sale in the Office of the Registry of
Deeds serves as constructive notice to the whole world of
its contents & interests, legal & equitable, included therein
2. Public there must be a notorious holding of the property known to
the community
o Not of surreptitious character, because it must be in the concept of
owner
3. Peaceful - there must be no valid interference from others claiming
or asserting the right to the property for the period of time required
by law for acquisitive prescription to apply
4. Uninterrupted possession must be continuous
!
Art. 1119. Possession Through License or Tolerance

Acts of possessory character executed by virtue of license or by mere
tolerance of the owner shall not be available for the purposes of possession.
Possession by Consent of Owner
That possessor holds a property by the consent of the owner shows
that he acknowledges that somebody else owns the property
Produces no effect with respect to possession or prescription
CASE: Coronado v. CA
Lesson: When there is proof that a possessor expressly
acknowledged the ownership of another, & he never categorically
claims ownership over the property in question, he cannot have
acquired said property by prescription.
Facts:
Monterola executed a deed of donation in favor of

Coronado, acknowledging that the boundary owner of the
property conveyed to her was Juana.
o During the lifetime of the late Monterola, Juana was always
allowed to enter & reap the produce of said property.
o After Monterola died in 1970, Coronado prohibited Juanas
entry to the property.
Held: Even if Monterola was indeed in continuous possession of the
said property for over ten years, said possession is insufficient to
constitute basis for prescription. Possession must be under claim
of title (en concepto de dueo); it must be adverse. Acts of
possessory character performed by mere tolerance of the owner
are clearly not en concepto de dueo, & such possessory acts, no
matter how long so continued, do not start the running of the
period of prescription.
o
Art. 1120. Interruption.

Possession is interrupted for the purposes of prescription, naturally or civilly.
Interruption
Possession must be uninterrupted
There must be a continuity in the holding of the property to
strengthen the adverse right of the possessor
Ways of Interruption Prescription:
o Natural if through any cause it shall cease for more than
1 year
o Civil produced by judicial summons to the possessor
Art. 1121. Natural Interruption.
Possession is naturally interrupted if through any cause it should cease for
more than 1 year.
The old possession is not revived if a new possession be exercised by the
same adverse claimant.
Art. 1122. Exemption to Rule on Natural Interruption.
If the natural interruption is for 1 year or less, the time elapsed shall be
counted in favor of prescription.
Example for Natural Interruption
A is in possession of an unregistered property in the concept of an
owner in good faith & with a just title. The land used to be owned by
B.
B goes broke, & the property is sold in a public auction due to Bs

indebtedness from the government.
o A had already been in possession of the land for 4 years
Z appears and claims that the property is his. Z requests A to
vacate the premises so that he will not be entangled in a possible
suit.
o A leaves to avoid further complications.
HOWEVER, Z was a defrauderM is the one who previously
purchased the property from B before A made his purchase.
o When A learns this, he returns to the property after 2 years
o A continues to stay in the said lot for 7 years, making his
total time spent actually living in the lot 11 years.
o The law requires 10 years of adverse, public, peaceful &
uninterrupted possession in the case of real property.
M comes & asserts his claim, requesting that A leave the place.
Can A invoke acquisitive prescription to counter Ms claim?
o NO. When A left the property for 2 years, his subsequent
possession of 7 years cannot be added to his previous 4
years. In effect, the period material for purposes of
prescription is the subsequent 7 years only.
o HOWEVER, if A only left the place for 1 year or less,
prescription would already have set inif he had left only
for 1 year, he would already have stayed there for 12 years
in the eyes of the law.
Art. 1123. Civil Interruption.

Civil interruption is produced by judicial summons to the possessor.
Art. 1124. Exceptions to Rule on Civil Interruption.
Judicial summons shall be deemed not to have been issued & shall not give
rise to interruption:
(1) If it should be void for lack of legal solemnities.
(2) If the plaintiff should desist from the complaint or should allow the
proceedings to lapse.
(3) If the possessor should be absolved from the complaint.
In all these cases, the period of the interruption shall be counted for the
prescription.
General Rule: Civil Interruption
Interrupted upon receipt of the possessor of the judicial summons
after the filing of the complaint
When the possessor receives the judicial summons & the

copy of the complaint, because only then does the court
acquire jurisdiction over the person
Does NOT start upon the filing of the complaint in court
o
Exceptions
Judicial summons shall be deemed not to have been issued, & will
give no rise to interruption, when:
1) Summons is void for lack of legal solemnities
o If the summons is served by a person not authorized by the
court, it shall be deemed as not issued; prescription for
possession will continue to run uninterrupted
2) When the plaintiff desists from the complaint or allows the
proceedings to lapse
o Desistance voluntarily having the case dismissed
3) When the possessor is absolved from the complaint
o Absolution the complaint has not been fully
substantiated to support any adverse claim by the
complainant
o Presumption of good faith on part of possessor if there is
lack of proof
Art. 1125. Possessors Recognition of Owners Right.
Any express or tacit recognition which the possessor may make of the
owners right also interrupts possession.
Recognition
Possession must always be in the concept of an owner to the
exclusion of all others
o One cannot consider himself possessing a property
adversely in the concept of an owner if he recognizes
somebody else as having a superior right
CASE: Dioso v. CA
Lesson: When there is a redemption period, acquisitive prescription
only begins to run after the expiry of said redemption period
Facts:
o The seller & the buyer executed a contract of sale in April
6, 1940 giving the seller the right to repurchase the
property on or before April 6, 1950
o The buyer immediately took possession of the property
o In 1952, the buyer filed a suit for recovery, asserting
ownership over the property
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Held: The possession of the buyer under the sale a retro2 did not
actually become adverse until the expiration of the redemption
period, since until then he recognized the superior right of the
vendor to oust him, & his claim of ownership was not absolute.
Since the redemption period expired only in 1950, & the case was
filed in 1952, there was no acquisitive prescription yet.
Art. 1126. Titles.

Against a title recorded in the Registry of Property, ordinary prescription of
ownership or real rights shall not take place to the prejudice of a 3rd person,
except by virtue of another title also recorded; & the time shall begin to run
from the recording of the latter.
As to lands registered under the Land Registry Act, the provisions of that
special law shall govern.
Notes
If theres a title, there can be no acquisition by adverse possession.
CASE: Dimayuga v. CA
Lesson: No title to registered land in derogation to that of the
registered owner shall be acquired by prescription or adverse
possession.
Facts:
o A couple acquired a 13-hectare household registered
under the Torrens System in 1928
o The illegitimate children claimed 1/2 of the same on the
ground that they acquired it by acquisitive prescription
having been in the property since 1948
Held: No portion of the homestead, a registered land, may be
acquired by prescription
CASE: Reyes v. CA
Lesson: No prescription when parcel of land is titled property; it
belongs to the registered owner & his successors-in-interest
Facts:
o The registered property was acquired through a forged
document by the petitioner
o Said petitioner claimed acquisitive prescription against the
heirs of the original owners
Held: The parcel of land in dispute is titled property, i.e., titled in the
name of the late Bernardino Reyes, the father of both the petitioner
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Sale with a right to repurchase
Florentino & the private respondents. This fact, petitioners do not

deny. Hence, even if they allege adverse possession that would
ripen into ownership due to acquisitive prescription, their title
cannot defeat the real rights of private respondents who stepped
into the shoes, as it were, of their father as successors-in-interest.
As it is, petitioners cannot even claim adverse possession as they
admit that the private respondents likewise resided and continue to
reside on the subject property.
Case: Catholic Bishop of Balanga v. CA
Lesson: Although prescription will not apply to registered property,
the doctrine of laches is applicable.
Facts:
o The petitioner donated registered property to a person
who, including his successors-in-interest, took possession
of the same adversely, continuously, publicly and
peacefully for 49 years.
o Thereafter, the petitioner filed a case to recover the
property contending that the donation is invalid, & that, in
either case, the property is registered
Held: Even if there is no prescription due to the registered title, the
petitioner was guilty of laches.
o Laches is an impediment to the assertion or enforcement
of a right which has become, under the circumstances,
inequitable or unfair to permit.
o In this case, 49 years had lapsed since the supposedly
void donation & there is no explanation for the long delay.
Even if petitioner is registered under the Torrens system,
he has lost his right to recover the possession by reason of
laches.
Article 1127. Good Faith.
The good faith of the possessor consists in the reasonable belief that the
person from whom he received the thing was the owner thereof, and could
transmit his ownership.
Article 1128. Other Conditions of Good Faith.
The conditions of good faith required for possession in Articles 526, 527,
528 & 529 of this Code are likewise necessary for the determination of
good faith in the prescription of ownership and other real rights.
Civil Code Provisions on Good Faith
Art. 526. Who is a possessor in good faith?
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One who is not aware that there exists in his title or mode
of acquisition any flaw which invalidates it.
! One who is aware of any flaw is in bad faith
o HOWEVER, mistake upon a doubtful or difficult question of
law may be the basis of good faith.
Art. 527. Presumption of good faith
o Good faith is always presumed
o The one who alleges bad faith on the part of the possessor
has the burden of proving his allegations
Art. 528. When possession in good faith is lost
o In the case & from the moment facts exist which show that
the possessor is not unaware that he possesses the thing
improperly or wrongfully
Art. 529. It is presumed that possession continues to be enjoyed in
the same character in which it was acquired, unless the contrary is
provided
o
CASE: Negrete v. CFI Marinduque

Lesson: When the possessor is unaware of any flaw in his
possession, such as when the deed of sale giving him right involves
a different property from the one he possesses, he is in bad faith &
cannot acquire by ordinary acquisition the property in question
Facts:
o A person claimed a particular property by virtue of ordinary
acquisitive prescription of ten years based on a deed of
sale which he knew involved a different property
Held: SC denied that there was ordinary prescription. The deed of
sale in covers a parcel of land patently different from the disputed
land owned by petitioner as to area, location & boundary owners.
o If said position were to be sustained, it would be easy for
anyone to acquire ownership of an untitled land belonging
to another person in 10 years on the basis of a document
of sale covering a distinct parcel executed by a person who
is a stranger to the land.
CASE: Reyes v. CA
Lesson: Knowingly using a forged document to base ones just title
for purposes of acquisitive prescription is an act of bad faith
Facts:
o The petitioners forged the deed of sale & simulated the
signatures of the private respondents.
o The land is titled.
Held: Petitioners cannot justify their ownership and possession of

the subject parcel of land since they are in bad faith.
o The forged Deed containing private respondents
simulated signatures is a nullity & cannot serve as a just
title.
o The land is also titled, which means it cannot be acquired
by ordinary acquisitive prescription.
CASE: Magtira v. CA
Lesson: Good faith cannot be invoked if the claimant has actual or
constructive notice of the legal & valid rights of possession of
another during the prescriptive period.
o In other words, if there is constructive notice via Registry
that another person was occupying a lot he claims to be
his, but fails to file a case within 10 years to defend his
right, he cannot invoke good faith.
Facts:
o Zacarias filed an Affidavit of Consolidation of ownership
with the Registry of Deeds in 1945 & enjoyed
uninterrupted, adverse, public & peaceful possession of
the litigated property in the concept of owner which
ripened into acquisition by ordinary prescription by the
time Sofia filed the complaint in 1956.
Held: Contrary to Sofias claim, the period of prescription should be
reckoned not merely from the time when she allegedly came to
know of the claim of ownership of Zacarias during the cadastral
survey in 1955, but from the date of registration of the Affidavit for
Consolidation with the Register of Deeds because registration of an
instrument in the Office of the Register of Deeds constitutes
constructive notice to the whole world.
Article 1129. Just Title.
For the purposes of prescription, there is just title when the adverse
claimant came into possession of the property through one of the modes
recognized by law for the acquisition of ownership or other real rights, but
the grantor was not the owner or could not transmit any right.
Article 1130. True & Valid Title.
The title for prescription must be true and valid.
Article 1131. Just Title Must Be Proved.
For the purposes of prescription, just title must be proved; it is never
presumed.
10
True & Valid Title

NOT actually titulo verdadero y valido the equivalent of a title
which is sufficient to transfer ownership without the necessity of
the lapse of the prescriptive period
Actually refers to a colored title (titulo colorado)
o When a person buys a thing, in good faith, from one whom
he believes to be the owner
o Acts for acquisition required by law are performed, but
there is a flaw in that the grantor was not the owner &
could not transmit the right
NOT merely a putative title (as opposed to colored title) one which
is supposed to have preceded the acquisition of a thing, although in
fact it did not, as might happen when one is in possession of a
thing in the belief that it had been bequeathed to him
CASE: Doliendo v. Biarnesa
Lesson: Acquiring a property through a public auction, which was
actually already sold by the owner to another person prior to the
auction, unbeknownst to the buyer from the auction, is an example
of just title.
Facts:
o A person bought property in a valid public auction &
continued possession of the property thereafter for more
than 10 years
o Prior to the sale made in the public auction, there was a
first purchaser of the property previous to the death of the
original owner
! The officer in charge still listed the property as one
to sell in the public auction
Held: Even should it be prove that the land in question was not
lawfully included in the list, still the defendants title by prescription
must be sustained, since it is clear that the sale at public auction
did take place, that the transaction was in good faith, & that the
defendant bought the land from one whom he believed to have the
right to sell.
CASE: Solis v. CA
Lesson: A donation propter nuptias is sufficient to create or
establish just title of the possessors of the land as donees.
o Even a void donation may be the basis of a claim of
ownership. Thus, prescription can apply on void donations.
The right given by ordinary acquisitive prescription is not

dependent upon, & has no necessary connection, with the
validity of the claim under which the possession is held.
This is different from the Catholic Bishop case, because there, the
contention was more about the fact that the property was
registered. If the property is registered, prescription cannot apply,
but laches can apply.
o
Article 1132. Acquisition of Movables or Personal Property.

The ownership of movables prescribes through uninterrupted possession for
4 years in good faith.
The ownership of personal property also prescribes through uninterrupted
possession for 8 years, without need of any other condition.
With regard to the right of the owner to recover personal property lost or of
which he has been illegally deprived, as well as with respect to movables
acquired in a public sale, fair, or market, or from a merchants store the
provisions of Articles 559 & 1505 of this Code shall be observed.
Acquisitive Prescription for Movables
Ordinary 4 years
o Good faith
o In the concept of owner, public, adverse & uninterrupted
Extraordinary 8 years
o Uninterrupted possession
o No other conditions
CASE: Dirag v. Tanega
Lesson: Good or bad faith is irrelevant in acquisitive prescription of
movables if 8 years have already passed.
Facts:
o A & B were partners in a printing business.
o B borrowed money from A, pledging some of his stocks to
A, but neglected to pay his obligations, even after demand
to pay by A
o A thus conducted himself as the absolute owner of the
printing equipment of the partnership
! A assumed ownership of the stocks pledged by the
delinquent partner in connection with his
obligations
o B filed a case for accounting of the partnership only after
14 years from the time A conducted himself as the owner
of the shares & equipment
11
Held: SC rejected the claim of the delinquent partner that a trust

relationship existed between B & A, because A already acquired the
movables by acquisitive prescription.
Art. 559 & 1505 of the Civil Code

Both statutes apply in the ff. cases:
1) The right of the owner to recover personal property lost
2) The right of the owner to recover that which he has been
illegally deprived
3) The right of the owner over movables acquired in a public sale,
fair, market or merchants store
Art. 559 Possession of a movable property acquired in good faith
is equivalent to a title
o If one who has lost any movable or has been unlawfully
deprived thereof may recover it from the person in
possession of the same
! If the possessor said movable lost is acquired it in
good faith at a public sale, the owner cannot
obtain its return without reimbursing the price
paid therefor
Art. 1505 When goods are sold by a person who is NOT the owner
thereof, without authority or consent of the owner, the buyer
acquires no better title to the goods than the seller had
o UNLESS the owner of the goods is, by his conduct,
precluded from denying the sellers authority to sell
o HOWEVER, this Title shall not affect:
(1) The provisions of any factors acts, recording laws, or
any other provisions of law enabling the apparent owner of
goods to dispose of them as if he were the true owner
thereof;
(2) The validity of any contract of sale under statutory
power of sale or under the order of a court of competent
jurisdiction;
(3) Purchases made in a merchants store, or in fairs, or
markets, in accordance with the Code of Commerce and
special laws.
Article 1133. Movables from a Crime.
Movables possessed through a crime can never be acquired through
prescription by the offender.
Movables from a Crime
No one must benefit by illegal acts
Example: If A stole Bs car, A can never acquire title over the

property, even if prescription already lapsed, & even if B did not
make a demand for the return of the car
CASE: Tan v. CA
Lesson: When a movable possessed through a crime is passed on
to another person, whether the latter is in good or bad faith,
prescription begins to run. Furthermore, the act of possession must
be through a crime, & not simply unsubstantiated fraud & bad faith.
Facts:
o A claims that, through bad faith & fraud, he was led to
assign his shares of stocks in 1977 to 3 corporate entities
o In 1987, A filed a case to reconvey the shares
Held: The action is barred by prescription; Art. 1133 does not apply.
There is nothing in this case that shows the bad faith was criminal.
Note: The benefits of prescription may be denied to the offender,
but if the thing was in the meanwhile passed to a subsequent
holder, prescription begins to run (4 or 8 years, depending on
existence of good faith).
Art. 1134. Acquisition of Immovables.
Ownership and other rights over immovable property are acquired by
ordinary prescription through possession of 10 years.
Ordinary Prescription of Immovables
10 years of possession by the adverse claimant
o Must be by virtue of a just & valid title
o Must be in the concept of owner, uninterrupted, adverse &
public
Art. 1135. Mistake in Area.
In case the adverse claimant possesses by mistake an area greater, or less,
than that expressed in his title, prescription shall be based on the
possession.
Actual Possession
Extent of property subject to the prescription shall be the one
actually possessed or held by the claimant
o Regardless of size indicated or described in the title
When someone buys or sells a property, they do so as they see it, in
its actual setting & in its physical metes & bounds, not by the lot
number in the certificate of title
12
Art. 1136. Wartime Possession.

Possession in wartime, when the civil courts are not open, shall not be
counted in favor of the adverse claimant.
Possession During Wartime When Civil Courts are Closed
Possession of adverse claimant during wartime will not count in
acquisitive prescription
o Because when the civil courts are closed, there is no way
by which any person claiming title over a certain property
can file a case to recover the same
If there is a war BUT courts are functioning, possession of adverse
claimant will be counted in his favor
Article 1137. Extraordinary Possession of Immovables.
Ownership and other real rights over immovables also prescribe through
uninterrupted adverse possession thereof for thirty years, without need of
title or of good faith.
Extraordinary Prescription of Immovables
30 years of uninterrupted adverse possession
No need for just title or good faith
CASE: Parcotilo v. Parcotilo
Lesson: Even if an invalid will was not executed with all the
requisites for a valid will or donation, the said document can still
supply the basis for extraordinary prescription to begin to run.
Facts: A man had adverse possession over a particular land by
virtue of an invalid will for 30 years
Held: Extraordinary prescription had set in despite the invalid will,
as the man had uninterrupted adverse, continuous possession for
30 years.
CASE: Heirs of Celso Amarente v. CA
Lesson: Alienable public land held by a possessor, personally or
through his predecessors-in-interest, openly & continuously for the
prescribed statutory period of 30 years under the Public Land Act,
is converted into PRIVATE PROPERTY by the merely lapse of time or
completion of said period.
Facts:
o Petitioners were forcibly driven off by the local barangay
claiming the land was agricultural land of the public
domain
Held:
o
Petitioners ancestor occupied the particular alienable

public land where he planted several trees, & where his
grandchildren (herein petitioners) had all grown up in, until
the trees were already 70 years old, as demonstrated by
the circumference of their trunks.
The petitioners are already the owners of the lot, even
before the formal confirmation of their title under the
below provision, because they acquired it by vested right.
! Sec. 48(b) of Commonwealth Act No. 141, as
amended by Republic Act No. 1942 (Public Land
Act) provides:
Filipino citizens occupying lands of public
domain, but whose titles have not been
perfected, may apply to the CFI of the
province where the land is located for
confirmation of their claims & issuance of
a certificate of title under the Land
Registration Act, to wit:
o Those who by themselves or
through their predecessors in
interest have been in open,
continuous, exclusive and
notorious possession &
occupation of agricultural lands
of the public domain, under a
bona fide claim of acquisition of
ownership, for at least 30 years
immediately preceding the filing
of the application for
confirmation of the title except
when prevented by war or force
majeure. These shall be
conclusively presumed to have
performed all the conditions
essential to a Government grant,
and shall be entitled to a
certificate of title.
Conversion of land from private to public will only be
confirmed by the granting of the certificate of title, as such
an effect has been provided by the law.
Art. 1138. Computation of Prescription.

13
In the computation of time necessary for prescription the ff. rules shall be
observed:
(1) The present possessor may complete the period necessary for
prescription by tacking his possession to that of his grantor or
predecessor in interest;
(2) It is presumed that the present possessor who was also the
possessor at a previous time, has continued to be in possession
during the intervening time, unless there is proof to the contrary;
(3) The first day shall be excluded and the last day included.
Rules for Computation of Time
(1) The present possessor may complete the period necessary for
prescription by tacking his possession to that of his grantor or
predecessor in interest
o Transfer in a manner provided by law of property from one
person to another
o Ex.: B donated a property to A
! Previously, property was already in Bs possession for 8
years
! A can make use of the 8 years for purposes of prescription
! If A stays for another 3 years, his period of possession will
already be 11 years
o CASE: South City Homes, Inc. v. Republic
! Lesson: Tacking possession is allowed only when there is a
privity of contract or relationship between the previous &
present possessors
o If there is no privity, the possession of the new
occupant is counted only from the time it actually
began; it cannot be lengthened by connecting it
with the possession of the former possessors
! Facts:
o Possessor X acquired Lot A by purchase & Lot B by
assignment in 1981
o X wants to claim possession of a strip of land
designated as Lot C, which is adjacent to, but not
included in, Lots A & B
! There was no previous owner of Lot C
! X continued to occupy Lot C, believing it
was included in Lot A & B
o He claimed in a case in 1983 that the possession
of the previous owners of Lot A, B & C should be
tacked onto his possession.
Held: For Lot A & B, there is no need to tack on possession

because it was acquired ownership by assignment & by
purchase; & such ownership naturally includes the right of
possession. As for Lot C, however, it was never transferred
by any previous possessor, & cannot therefore have the
possession of any previous owner tacked onto it.
o A deed, in itself, creates not privity as to the land it
calls, nor is privity created by the bare taking of
possession of land previously occupied by the
grantor. Thus, where a grantor conveys a specific
piece of property, the grantee may not tack onto
the period of his holding an additional piece of
property the period of his grantors occupancy
thereof to make up the statutory period. His
grantor did not convey such property or his
interest therein, and there is no privity.
o Further example:
! A acquires 40 acres by deed & 40 acres by purchase &
adverse possession
o Conveyance by him of the 40 acres acquired by
deed would NOT carry with it the title to the one
acquired by purchase & adverse possession
o Art. 1135 (on possession by mistake of an area greater or
lesser than that expressed in the title) in relation to Art. 1138
! Possession should be limited only to that of the successorin-interest
(2) Presumption that the present possessor who was also the
possessor at a previous time, have continued to be in possession
during the intervening time, unless there is proof to the contrary.
o Presumption must proceed from a set of facts.
! There must be a prior showing of the FACT that the person
presently possessing the property was the same who
possessed it before the intervening time.
o Ex.: X possessed the property in 1997. It was shown he also
possessed it n 1988.
! It is presumed that he was in possession from 1989 to
1996.
o Presumption can be destroyed if evidence can be adduced to
show that he was not in possession during the interval.
(3) First day shall be excluded and the last day included.
o Ex.: If a person possessed a property in Jan. 1, 1980 up to Jan.
15, 1990, then the counting of the period starts from Jan. 2,
1980 up to Jan. 15, 1990.
!
14
Summary Chart for Acquisitive Prescription
Notes: Uninterrupted possession is always a requisite for all forms of

acquisitive prescription.
CHAPTER 3. PRESCRIPTION OF ACTIONS
Art. 1139. Lapse of Time.
Actions prescribe by the mere lapse of time fixed by law.
Prescription of Actions
Also known as the statute of limitations
Law fixes the time within which an action may be filed
o If prescribed time lapses, action cannot be filed anymore
Art. 1140. Prescription of Movables.
Actions to recover movables shall prescribe 8 years from the time the
possession thereof is lost, unless the possessor has acquired the ownership
by prescription for a less period, according to Art. 1132, & without prejudice
to the provisions of Art. 559, 1505 & 1133.
Rules on Movable Property
A person can recover lost personal or movable property which he
claims belong to him within 8 years.
o HOWEVER, if all the requisites for ordinary acquisitive
prescription of movable property are present, the
possessor of the same becomes the owner only after 4
years
CASE: Tan v. CA
o Lesson: There are 2 periods for purposes of extinctive
prescription, vis-a-vis movables:
1) 4 years, if possessor is in good faith
2) 8 years, in all other cases
*Exception: When loss is due to a crime, the offender can

never acquire the movable by prescription. Action to
recover from him is imprescriptible.
o Facts: Petitioner claims that he, through bad faith & fraud,
was led to assign his shares in 1977 to 3 corporate
entities; he filed a case for reconveyance on 1987.
o Held: Action had already prescribed, because the petitioner
had at most 8 years to recover the property. Legal basis is
found in Art. 1140 in relation to Art. 1132 & 1133.
! Ordinary acquisitive prescription for movables is
only 4 years & 8 years for extraordinary
prescription
! SC did not rule that there were actions criminal in
character in the 1977 transaction
CASE: Dira v. Tanega
o Lesson: Shares to a company are movables; bad faith or
good faith is irrelevant in extraordinary acquisitive
prescription, & the right to recover property prescribes
together with the title in such a case.
o Facts:
! Partner X took possession of the shares of copartner Y who refused to pay his obligations &
participate in the partnership. X kept the
uninterrupted, adverse possession, of the shares
from 1947 to 1961.
! Y seeks to recover the shares, & claims that only a
trust relationship was created in the intervening
period.
o Held: Action has prescribed; this is a case of extraordinary
acquisitive prescription.
Other Rules Governing Prescription of Actions

Art. 559 Possession of movable property in good faith is equal to
title.
o But a person who loses his movable or is unlawfully
deprived of it may recover it from the person in possession
of the same
o But the owner has to reimburse the new possessor for the
price he paid if the movable was acquired:
(1) In good faith or
(2) In a public sale
15
Art. 1505 When goods are sold by a person who is NOT the owner
thereof, without authority or consent of the owner, the buyer
acquires no better title to the goods than the seller had
o UNLESS the owner of the goods is, by his conduct,
precluded from denying the sellers authority to sell
o HOWEVER, this Title shall not affect:
(1) The provisions of any factors acts, recording laws, or
any other provisions of law enabling the apparent owner of
goods to dispose of them as if he were the true owner
thereof;
(2) The validity of any contract of sale under statutory
power of sale or under the order of a court of competent
jurisdiction;
(3) Purchases made in a merchants store, or in fairs, or
markets, in accordance with the Code of Commerce and
special laws.
Art. 1133 Movables possessed through crime can never be
acquired by prescription.
Art. 1141. Prescription of Immovables.

Real actions over immovable prescribe after 30 years.
This provision is without prejudice to what is established for the acquisition
of ownership & other real rights by prescription.
Rules on Immovable Property
Prescriptive period 30 years
o IF within 30 year period, all the requisites for ordinary
acquisitive prescription are already present in favor of
possessor, the possessor becomes the owner after 10
years
o If its extraordinary acquisitive prescription, the right to sue
prescribes with the acquisition of the title
Art. 1142. Prescription of Mortgages.
A mortgage action prescribes after 10 years.
Mortgage
Secures a debt, so that if a debtor fails to pay the principal
obligation, the creditor can foreclose on the mortgage by selling the
same in a public sale or bidding; the proceeds will pay off the
principal debt & interest if any
o If there is any deficiency after the bidding, the creditor can
still go after the debtor
Considered as an accessory contract
CASE: DBP v. Tomeldan

Lesson: A suit for recovery of the deficiency after the foreclosure of
a mortgage is in the nature of a mortgage action & prescribes after
10 years after the date of extra-judicial foreclosure
Facts:
o The creditor extra-judicially foreclosed the property of the
debtor on Sept. 15, 1967.
! He filed suit in March 14, 1977 to claim the
deficiency.
o Debtor claims that the action already prescribed.
Held: Action has not prescribed, because the prescriptive period
was 10 years from the time the cause of action accrued, which was
on Sept. 16, 1967.
Art. 1143. Rights Not Extinguished by Prescription.
The ff. rights, among others specified elsewhere in this Code, are not
extinguished by prescription:
(1) To demand a right of way, regulated in Art. 649;
(2) To bring an action to abate a public or private nuisance.
Actions Which Do Not Prescribe
(1) To demand a right of way, as regulated in Art. 649
(2) To abate a public or private nuisance
(3) To declare a contract null & void
(4) To quiet title initiated by a person having possession of the property
(5) To partition a property among co-heirs (intestate)
(6) Implied trusts, unless when expressly repudiated by the trustee
Art. 1144. 10 Years.
The ff. actions must be brought within 10 years from the time the right of
action accrues:
(1) Upon a written contract;
(2) Upon an obligation created by law;
(3) Upon a judgment.
Contracts in Writing
To fall under this article, agreement must be in writing
Ex: Written contract of sale
o Barring applicability of laches, the purchaser has 10 years
to file a case for delivery of the property
16
Cause of action accrues when a breach or violation of the

contract occurs
Right of Action
Accrues when there exists a cause of action, which consists of 3
elements:
1) A right in favor of the plaintiff, by whatever means & under
whatever law it arises or is created
2) An obligation on the part of such defendant to respect such
right
3) An act or omission on the part of such defendant violative of
the right of the plaintiff
o It is only when this last element occurs that it can be said
in law that a cause of action has arisen
CASE: Espanol v. Philippine Veterans Association (PVA)
Lesson: When it comes to laws or policies of government, right of
action against them only begins when they are declared by courts
to be invalid
Facts:
o PVA issued an administrative policy
! As a result, the pension of a veterans widow,
which she received under RA65, was cancelled on
Nov. 1, 1951
o SC struck down said policy as invalid on June 27, 1973
o Widow filed the complaint for collection on Feb. 25, 1974
o PVA claims the action has already prescribed
Held: Action has not prescribed. The contention that the action had
already prescribed because it was filed more than 10 years from
the date of cancellation is without merit. It was only when SC
invalidated the questioned policy on June 27, 1973 that the
petitioner in this case had a cause of action.
Implied Trusts
Art. 1450: a situation where a person, using his own funds, buys
property on behalf of another, who in the meantime may not have
the funds to purchase it title to the property is for the time being
placed in the name of the trustee, the person who pays for it, until
he is reimbursed by the beneficiary, the person for whom the
trustee bought the land
An implied trust, whether a constructive or resulting one, is
normally NOT subject to prescription.
o HOWEVER, if the trustee openly & adversely repudiates the
trust, it is only from that time when prescription can set in.
Period: 10 years from the repudiation of the trust

o An implied trust is an offspring of the law, & so is the
corresponding obligation to convey the property & title to
the true owner
o Counted from date of registration of the deed or the date
of issuance of the certificate of title over the property
Cestui que trust - a person who has the equitable and beneficial
interest in property the legal interest in which is vested in a trustee
Before the period of prescription can start, it must be shown that:
1) The trustee performed unequivocal acts of repudiation
amounting to an ouster of the cestui que trust
2) Such positive acts have been made known to the cestui que
trust
3) Evidence thereon is clear & convincing
Art. 1145. 6 Years.

The ff. must be commenced within 6 years:
(1) Upon an oral contract;
(2) Upon a quasi-contract.
Oral Contracts
Must be commenced within 6 years from the time the cause of
action accrues
Ex.: A orally borrowed P2,000 from B to be paid on June 1, 1997
o B failed to pay on the date despite demand from A
o A has 6 years from June 1, 1997 to file a case of collection
against B
Quasi-Contracts
Certain lawful, voluntary & unilateral acts give rise to the juridical
relation of quasi-contracts such that no one shall be unjustly
enriched at the expense of another
Governed by Book IV, Title XVII, Chapter 1 of Civil Code
Examples:
o Solutio indebiti when something is received when there
is no right to demand it, & it has been delivered through
mistake
! Gives rise to the obligation to return what has
been unduly received
! Ex.: When a taxpayer mistakenly pays an amount
which is not due, prescriptive period is 6 years as
it is a quasi-contract of solution indebiti
17
Art. 1146. 4 Years.

The ff. actions must be instituted within 4 years:
(1) Upon an injury to the rights of the plaintiff;
(2) Upon quasi-delict.
CASE: Virgilio Callanta v. Carnation Phil., Inc.
Lesson: Injury to rights of plaintiff includes illegal dismissal cases
filed by employees who were unjustly dismissed by employers
Facts:
o Employee was illegally dismissed by his employer on June
1, 1979 & filed a case with NLRC for illegal dismissal on
July 5, 1982
o NLRC dismissed the case on the ground that it had
prescribed, as the Labor Code provides that such claim
should be filed within 3 years
Held: Prescriptive period is 4 years, not 3. Ones employment is
also considered a property right. Employee has 4 years from June
1, 1979 to file a case for illegal dismissal.
o Also, action cannot be barred by laches when the employer
threatened to file a case of estafa against the employee
this justifies the delay
Quasi-Delict
Art. 2176: Whoever by act or omission causes damage to another,
where there is no pre-existing contractual relation between them
there being fault or negligence, shall pay for the damage done
Governed by Book IV, Title XVII, Chapter 2 of the Civil Code
Ex.: The fault or negligence resulting in the liability of
manufacturers & processors of foodstuffs, drinks, toilet articles &
similar goods
o They are liable for death or injuries caused by any noxious
or harmful substances used, although no contractual
relations exist when them & the consumer
CASE: Coca-Cola Bottlers Philippines, Inc. v. CA
Lesson: The period for quasi-delict begins to run from the day the
quasi-delict occurred or is committed.
Facts:
o A restaurant filed a complaint on May 7, 1990 against
Coca-Cola, because of the reckless & negligent
manufacture of some Coke bottles, which contained fiberlike matter & other foreign substances in them.
The restaurant had served the drinks to customers on

August 1989, damaging its reputation, as the students
who drank them suffered sickness
o Coca-Cola contends that action had prescribed, since the
period should be 6 months from the delivery of the thing
sold pursuant to Art. 1571 of the Civil Code
Held: Action had not yet prescribed. Allegations in the complaint
established a quasi-delict which prescribed in 4 years.
o
Kramer, Jr. v. CA
Lesson: Determination of administrative body not necessary for
filing a case for quasi-delict; the period for prescription still begins
from the day the quasi-delict is committed, regardless of the date of
the issuance of the related administrative ruling
Facts:
o 2 vessels collided.
o The aggrieved party did not for the determination by the
Board of Marine Inquiry (an administrative body) that the
collision was caused by the fault or negligence of the other
party before filing for damages & immediately filed suit.
Held: The aggrieved party need not wait for the determination of the
Board to file suit, & for the 4-year period to begin running.
Allied Banking Corp. v. CA
Lesson: A tortious interference is a quasi-delict & action accrues
from the time the act which causes the damage occurs (in this
case, the order of the Central Bank)
Facts:
o The debtor filed a 3rd-party complaint on June 17, 1987,
alleging that by reason of the tortious interference by the
Central Bank with the affairs of GENBANK, private
respondent was prevented from performing his obligation
under the loan such that he should not be held liable
o The tortious interference was the Central Banks ordering
GENBANK on March 25, 1980 to desist from doing
business
Held: The complaint was barred by prescription, because cause of
action accrued on March 25, 1980, & from then on there were only
4 years left to file the case.
Art. 1147. 1 Year.
The ff. actions must be filed within 1 year:
(1) For forcible entry;
18
(2) For defamation.

CASE: Vda. de Borromeo v. Pogoy
Lesson: The period for filing actions for forcible entry & detainer is 1
year, & is counted from demand to vacate the premises
Facts:
o X made the letter demand on August 28, 1982, while the
complaint for ejectment was filed on Sept. 16, 1982
o X did not avail of the barangay conciliation process
required, but justified such omission by citing PD 1508,
which allows the direct filing of an action in court where
the same may otherwise be barred by the Statute of
Limitations
Held: Such excuse is unsatisfactory, because the process would
have only taken 60 days. The respondent would have had ample
time within which to bring his case before the court should the
conciliation fail, because there were at least 11 months between
the letter-demand & the complaint for ejectment.
Art. 1148. Code of Commerce & Special Laws.
The limitations of action mentioned in Articles 1140 to 1142, & 1144 to
1147 are without prejudice to those specified in other parts of this Code, in
the Code of Commerce, and in special laws.
Without Prejudice
In proper cases, the prescriptive period in this chapter may be
availed of notwithstanding other special provisions in the Civil
Code, Code of Commerce & special laws
o A statute of limitation extinguishes the remedy only.
o Although the remedy to enforce a right may be barred, that
right may be enforced by some other available remedy
when it is not barred.
CASE: Virginio Callanta v. Carnation Phil., Inc. SC applied
prescription period in Art. 1146 (4 years for injury to the rights of
the plaintiff) for a case of illegal dismissal even if the Labor Code
provided for a shorter period (3 years)
Art. 1149. No Fixed Period = 5 Years.
All other actions whose periods are not fixed in this Code or in other laws
must be brought within 5 years from the time the right of action accrues.
Art. 1150. When to Count Prescriptive Periods.
The time for prescription for all kinds of actions, when there is no special
provision which ordains otherwise, shall be counted from the day they may
be brought.
CASE: Tolentino v. CA
Lesson: In civil cases, when there is no special provisions, the
general rule for prescription is 5 years. All actions, unless an
exception is provided, have a prescriptive period.
o The use of someone elses surname is not a crime, &
therefore is not imprescriptible.
Facts:
o C is the 2nd spouse of B.
o C filed an acton in 1971 against A, Bs former spouse, to
prevent A from using the surname of her husband.
! C knew about the use of the name since 1951.
Held: Action had already prescribed. The mere fact that the
supposed violation of Cs right is continuous, in that A constantly
uses Bs name, does not change the principle that the moment the
breach of duty occurs, the right of actions accrues & the action
from that moment can be legally instituted.
Art. 1151. Prescription for Actions Regarding Payment.
The time for the prescription of actions which have for their object the
enforcement of obligations to pay principal with interest or annuity runs
from the last payment of the annuity or of the interest.
Art. 1152. Prescription of Actions Declared by Judgment.
The period of prescription of actions to demand the fulfillment of obligations
declared by a judgment commences from the time the judgment becomes
final.
Actions Regarding Payment
From the last payment of the annuity or interest
Final Judgment
The prescription period is not counted from the time the judgment
was rendered but from the time it became final
Revival of Judgment gives the creditor a new right of enforcement
from the date of revival
o Prevents wily debtors who conceal assets to evade
attachment until statute of limitations sets in
Art. 1153. Prescription for Accounting.
19
The period for prescription of actions to demand accounting runs from the
day the persons who should render the same cease in their functions.
The period for the action arising from the result of the accounting runs from
the date when said result was recognized by agreement of the interested
parties.
Actions in relation to Accounting
Actions to demand accounting from the day the person who
should render the same cease in their functions
Actions arising from the result of accounting from the date when
the result was recognized by agreement of the interested parties
CASE: Dira v. Tanega
Lesson: Right to demand accounting by one partner to another
begins when the other partner stops allowing the demanding
partner to make use of the shares & operates the business as his
own.
Facts:
o Partner X took possession of the shares of co-partner Y,
who refused to pay his obligations & participate in the
partnership despite repeated demands.
o X kept the uninterrupted, adverse possession, of the
shares from 1947 to 1961, & managed the business on
his own.
o Y seeks to recover the shares, & claims that only a trust
relationship was created in the intervening period.
Held: Action has prescribed in 1947, when X began to operate the
business exclusively as his own.
Art. 1154. Fortuitous Event.
The period during which the obligee was prevented by a fortuitous event
from enforcing his right is not reckoned against him.
Fortuitous Event
Unseen event or seen event which is inevitable; an act of God
When, due to some fortuitous event, prescription is interrupted, an
entirely new one will commence when there is no longer a
fortuitous event
o In other words, past period is not presumed
o Opposite of suspension in this aspect
CASE: Provident Savings Bank v. CA
Lesson: When prescription starts anew, it will be an entirely new

one
Facts:
o A loan was granted to debtors by a bank, collateralized by
their properties
o The bank was placed under receivership from 1972 until
1981 by the Monetary Board & was prohibited from
transacting business, including foreclosure of properties
o The debtors failed to pay the obligation, but promised to;
meanwhile, they sold the property to a purchaser who
assumed the mortgage
o On Aug. 16, 1986, the purchaser informed the bank that
he is the judgment creditor & wanted to release the
mortgage by paying the indebtedness. He filed a case to
compel the release.
o On Aug. 21, 1986, the debtors wrote a letter to the bank
asking If they could pay their debt through payment
eceived in the Deed of Sale
Held: Action for bank to foreclose the mortgage did not prescribe
yet, because of the fortuitous event of the prohibition by the
Monetary Board between 1972-1981. The prescriptive period ran
anew in 1981. The bank thus had until 1991 to file a case to
foreclose on the mortgage.
o The express acknowledgement by the debtors of the debt
also estopped them from setting up prescription.
CASE: Tan v. CA
Lesson: Martial Law & the period from Sept. 21 1972-Feb. 25
1986 cannot be seen as a fortuitous event which tolled
prescription for all obligations; effect of fortuitous events on
prescription must be seen from a case-to-case basis
Facts:
o During the Marcos Regime, Tan was detained for several
offenses, & during that time sold his shares in a particular
bank in 1977, claiming he only did it due to fraud & bad
faith
o Tan sought to recover the shares by filing suit for
reconveyance in 1987, claiming legal standing based on
fortuitous event.
Held: Action did not prescribe due to a fortuitous event. The effect
of fortuitous events on an individual & on prescription should be
seen on a case-to-case basis. In this case, while in detention, Tan
was still able to file multiple suits through his counsel. Thus,
20
detention was not a fortuitous event that served as an impediment

to a judicial challenge for Tan.
Art. 1155. Interruption of Prescription of Actions.
The prescription of actions is interrupted when they are filed before the
court, when there is a written extra-judicial demand by the creditors, & when
there is any written acknowledgment of the debt by the debtor.
Interruption of Prescription
1) When they are filed before the court
o The dismissal or voluntary abandonment by the plaintiff of a
civil action takes no time out of the period of prescription,
because it would be as if no action had been commenced at all
o The prescriptive period is interrupted from the date of filing,
regardless of the date when the summons is received
2) When there is a written extra-judicial demand by the creditors
3) When there is any written acknowledgment of the debt by the
debtor
o Not all acts of acknowledgment of a debt interrupt prescription;
the acknowledgment must be written
o Examples: a letter acknowledging the validity of a deed of sale
& promising to comply with its commitments interrupts the
period & begins it anew for another 10 years (written contract)
o Payment interrupts the running of the prescription period.
! But if acknowledgment is written BUT payment is not
accompanied by communication signed by the payor,
payment would not interrupt the running of the
prescription period
CASE: Ledesma v. CA
Lesson: A written extrajudicial demand wipes out the period that
has already elapsed & starts anew the prescriptive period. Said
period starts to commence anew from the receipt of the demand.
o Same rule for a written acknowledgement of debtthe full
period of prescription commences to run anew from the
date of interruption.
o Also, when it comes to the filing of cases, the filing arrests
the period of suspension, & the interruption lasts until the
time that the dismissal becomes final. Then, the full time
for the prescription must be reckoned from the date of the
cessation of the interruption.
! While case is pending, prescription is interrupted.
Facts:
Aug. 21, 1980 RCBC filed a civil case against X to

enforce the terms of a Trust Receipt Agreement executed
on April 1, 1974 which X failed to comply with
o Mar. 3, 1981 - Summons could not be served to X, so case
was dismissed without prejudice to any future proceedings
o Dec. 2, 1988 RCBC filed another case against X for the
same cause of action & subject matter
o X contends that the second action filed by RCBC already
prescribed
Held: Action did not prescribe, because the filing of the first action
interrupted the period. The period began to run again on Mar 3.
1981, when the case was dismissed.
o
Summary Charts for Extinctive Prescription
Obligation
A legal bond whereby constraint is laid upon a person or group of
persons to act or forebear on behalf of another person or group of
persons
Persons both natural & juridical
Requisites for the existence of an obligation: (JOS)
1) Juridical tie (vinculum juris) the efficient cause established by
the various sources of obligations (e.g. law, contracts, quasicontracts)
2) Object the prestations or conduct required to be observed (to
give, to do or not to do)
3) Subject-persons viewed from demandability:
a. Active obligee
b. Passive - obligor
Art. 1157. Sources of Obligation.
Obligations arise from:
(1) The law
(2) Contracts
(3) Quasi-contracts
(4) Acts or omissions punished by law (delicts)
(5) Quasi-delicts
Sources
List is exclusive no other sources of obligations
Kinds:
1) Civil give a right of action to compel their performance
2) Natural not based on positive law, but on equity & natural law
o Does not grant a right of action to enforce their
performance
o BUT after voluntary fulfillment by the obligor, they authorize
the retention of what has been delivered or rendered by
reason thereof
BOOK IV: OBLIGATIONS AND CONTRACTS

TITLE I. OBLIGATIONS
CHAPTER 1. GENERAL PROVISIONS
Art. 1156. Obligation Defined.
An obligation is a juridical necessity to give, to do or not to do.
21
Art. 1158. Law as a Source of Obligation.

Obligations derived from law are not presumed. Only those expressly
determined in this Code or in special laws are demandable, & shall be
regulated by the precepts of the law which establishes the; & as to what has
not been foreseen, by the provisions of this Book.
Law
Most important source of obligation
An exaction or command that is forced upon you; not dependent on

the will of the parties
Basis must be clear & cannot be presumed
o The payment of taxes must be specifically directed by tax
statutes
o Parents & children are obliged to support each other
o Even a 1-page labor contract contains the entire Labor
Code
o Do not kill NOT an obligation in as understood in
OBLICON
Existing law enters into & forms part of a valid contract without
need for the parties expressly making references thereto
o A contract is understood to incorporate therein the
provisions of law specifying the obligations of the parties
under the contract
o All other forms of obligations also have underlying statutes
governing them
according to their nature, may be in keeping with good faith, usage

& the law
Art. 1159. Contract as a Source of Obligation.

Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
CASE: Perla Compania de Seguros, Inc v. CA

Lesson: Contracts have the force of law between the parties, & the
court cannot change its stipulations & substitute the content with
its own interpretation, even if some provisions seem unfair, for as
long as the essential requisites for validity are present
Facts:
o There was an insurance contract which stipulated that the
insurers liability for all damages arising out of death or
bodily injury by one person was limited to P12,000
o It also said that, before the insured enters into a contract
with the injured party, the express written consent of the
insurer must be obtained
o CA substituted these provisions with their own
interpretation of equity
Held: CA was mistaken. Contracts are the private laws between the
contracting parties & should be fulfilled according to the literal
sense of their stipulations, for as long as the stipulations are clear
& leave no room for doubt as to the intention of the parties
Components of a Contract
1) Complying in good faith - unwritten; implied
2) Observing the stipulations in the contract expressly written
Art. 1160. Quasi-contract as a Source of Obligation.

Obligations derived from quasi-contracts shall be subject to the provisions
of Chapter 1, Title XVII, of this Book.
Contracts
There are express, implied, oral & written contracts
A meeting of the minds between 2 persons whereby one binds
himself, with respect to another, to give something or to render
some service
o May involve more than 2 persons
o May involve mutual & reciprocal obligations & duties
between & among the parties
Force of law between contracting parties = obligatory nature of a
binding & valid agreement
o Willful non-fulfillment may involve sanctions
o Binding between the parties so long as they are not
contrary to law, morals, good customs, public policy or
public order
Once a contract is perfected, the parties are bound not only by what
is expressly stipulated, but also to all the consequences which,
Quasi-contracts
Certain lawful, voluntary & unilateral acts to the end that no one
shall be unjustly benefited or enriched at the expense of another
Examples:
o Solutio indebiti obligation to return what was obtained by
mistake
!
When something is received when there is no
right to demand it & it was unduly delivered by
mistake, the obligation to return it arises
22
Art. 1161. Delicts as Sources of Obligation.

Civil obligations arising from criminal offenses shall be governed by the
penal laws, subject to the provisions of Art. 2177, & of the pertinent
provisions of Ch. 2, Preliminary Title, on Human Relations, & of Title XVIII of
this Book, regulating damages.
Requisites of Obligations in Relation to Delicts
1. Juridical Tie crime committed

2. Prestation to give damages
3. Subject obligor (offender); obligee (victim)
Civil Liability in Criminal Liability
Civil liability attaches to any individual who is found to be criminally
liable
Civil Code Statutes on Damages:
o Art. 2176 defines quasi-delicts: whoever by act or
omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done
! Art. 2177 - the plaintiff shall not be entitled to
recover damages twice for the same act or
omission of the defendant even if the negligence
may constitute an entirely different cause of
action
o Art. 19-36 which give a person or persons cause of action
for filing damage suits (requires only preponderance of
evidence)
! Art. 29 When accused is acquitted because he
is not proved guilty beyond reasonable doubt, civil
action for the same act may be instituted
If the judgment of acquittal is based on
reasonable doubt, the court shall so
declare or it may be inferred from the text
of the decision
! Art. 30 When a separate civil action is brought
arising from a criminal offense & no criminal
proceedings are filed during the pendency of the
civil case
! Art. 32 Violation of enumerated constitutional
rights can make one liable for damages, whether
or not the act constitutes a criminal offense
Exempition: when the crime is committed
by a judge, unless his act is a violation of
the Penal Code or other penal statutes
! Art. 33 An entirely separate & distinct action
from the criminal case can be filed for civil
damages in cases of:
Defamaton
Fraud
Physical Injuries
23
Art. 34 When a member of a city or municipal

police force refuses or fails to render aid or
protection to any person in case of danger to life
or property
Title XVIII of the Civil Code the rules covering damages
! Rules laid down in other laws shall likewise apply
so long as they are not inconsistent with the Civil
Code
!
Art. 1162.
Obligations derived from quasi-delicts shall be governed by the provisions of
Chapter 2, Title XVII of this Book & by special laws.
Quasi-delicts
Whoever by act or omission causes damage to another, there being
fault or negligence & no pre-existing contractual relation, is obliged
to pay for the damage done.
CHAPTER 2. NATURE & EFFECT OF OBLIGATIONS.
Art. 1163.
Every person obliged to give something is also 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 parties requires another standard of care.
Determinate Object
Art. involves prestation to give
Something refers to a determinate object which is definite,
known & has already been distinctly decided & particularly
specified as the matter to be given from among the same things
belonging to the same kind
Ex.: Computer with serial no. 7777 (not just any kind of computer)
Good Father of a Family
Once the determinate thing is specified as the object of the
prestation, the person whose duty is to give the object must take
care of it
Synonymous with ordinary diligence
If the law or contract does not state the diligence required, the
diligence of a good father of a family is required
o Varies if the law or stipulation requires another standard of
care
In case of a contrary stipulation, it CANNOT be one

contemplating the relinquishment or waiver of the
most ordinary diligence
Ex.: Common carriers persons, corporations, firms or
associations engaged in the business of carrying or
transporting passengers or good or both, by land, water or
air, for compensation, offering their services to the public
Bound to observe extraordinary
diligence in the vigilance over the goods
& passengers
Generally, negligence must be proven.
But in cases requiring extraordinary
diligence, negligence is presumed.
!
SITUATION
Facts: X has to deliver an apple to Y with Xs name on it & Xs spit,
as promised. Lightning struck & the apple with the spit was
destroyed.
Answer: The obligation is extinguished, because the apple was a
specific object (Xs apple with his name & spit) that was destroyed
by a fortuitous event.
Reverse: If the apple was just an apple then obligation is not
extinguished, because it is generic.
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 acquire no real right over it until the
same has been delivered to him.
Real & Personal Right
The Art. involves a prestation to give
Personal right the power of one person to demand from another,
as a definite passive subject, the fulfillment of a prestation to give,
to do or not to do.
o Begins when the right to deliver the object of the prestation
has risen in favor of the creditor
o Enforceable only against the debtor under obligation to
give
o With a passive, definite debtor
o Can be defeated by a 3rd person in good faith who has
innocently acquired the property prior to the scheduled
delivery
24
W/N the right to the delivery has accrued in favor

of the creditor is irrelevant
! The aggrieved creditor can go against the debtor
for damages
! Even personal right grants a demandable right
Real right The power belonging to a person over a specific thing,
without a passive subject individually determined, against whom
such right may be personally exercised.
o Prior to the delivery of the object, there is no real right yet
for the future receiver
o Enforceable & binding against the whole world over the
objects & its fruits in favor of the person to whom it should
be given
o No definite debtor; passive subject
o Will prejudice anybody claiming the same object of the
prestation.
o General rule: delivery creates real right
!
Kinds of Fruits
Natural things that naturally grow
Civil rentals
Industrial hard work, labor
SITUATION
Facts: X & Y signed a contract where Y will give X a pen. The
contract is valid & perfected. Who owns it now?
Answer: Still Y, because the pen was not yet delivered to X.
SITUATION
Facts: B sold Lot Z to C. After having done so, B then sold the same
Lot Z to D. Who has the real right over Lot Z?
Answer: Neither C or D, because delivery was still not made to
either.
Note: When it comes to real property, whoever registers it has the
better right.
SITUATION
Facts:
o
Feb. 1 A buys a mango orchard from X, to be delivered on

March 1
! On March 1, A shall have the right to the fruits of
the mango orchard
If the property is delivered only on April 1, A can still ask for

the fruits accruing since March 1
! If X sells the fruits on March 20 to B who does not
know of the previous sale to A & who immediately
takes possession of the fruits, B shall have the
better right over the fruits
Reason: There is still no delivery of the
property to A on March 20, so A has no
real right over it
As remedy is to seek damages from X
! If the mango orchard has already been delivered
as of March 20, A has a real right over the fruits
If X sells the fruits to B after delivery to A,
A can recover from B
B can seek damages from X
Art. 1165.
When what is to be delivered is a determinate thing, the creditor, in addition
to the right granted him by Art. 1170, may compel the debtor to make the
delivery.
If the thing is indeterminate or generic, he may ask that the obligation be
complied with at the expense of the debtor.
If the obligor delays, or has promised to deliver the same thing to 2 or more
persons who do not have the same interest, he shall be responsible for any
fortuitous event until he has effected the delivery.
Generic & Determinate Objects
Provision involves the prestation to give; object can be
determinate or generic
Generic any object belonging to the same kind/class/species
o In the event of non-delivery, the creditor can have it
accomplished in any legal way & charge the debtor
o Creditor can ask 3rd party to deliver the same thing of the
same kind with all expenses paid by debtor
Determinate an object that is definite, known & has already been
distinctly decided & particularly specified as the matter to be given
from among the same things belonging to the same kind
o Remedy in case of non-delivery is to file an action for
specific performance to compel the debtor to make the
delivery
o If the debtor is guilty of delay, fraud, negligence or
contravention in the performance of the obligation, the
creditor can seek damages
25
SITUATION
Facts: For P50, X will give Y a fruit. Is there a contract?
Answer: NO. The object must be either generic or determinate. A
fruit is neither, so no contract is formed.
o The fruit must at least be a species of its ownan apple,
for instanceto be considered generic
Fortuitous Events
An event which could not be foreseen, or which though foreseen,
was inevitable
General rule: debtors are relieved from obligation to give if the
object is lost through a fortuitous event
HOWEVER, a fortuitous event will not excuse the obligor from the
obligation:
1) If the obligor delays, or
2) If he has promised to deliver the same thing to 2 or more
persons who do not have the same interest
In both exceptions, the obligor will be liable. He will either:
o Be liable for damages, or
o Will be bound to replace the lost object of the prestation in
cases when the obligee agrees to the replacement
Art. 1166.
The obligation to give a determinate thing includes that of delivering all its
accessions & accessories, even though they may not have been mentioned.
Explanation
The principal always includes its accessories & accessions
Accession something produced by the object of an obligation
(pregnant dogs producing puppies)
Accessories something joined to the object (radio in a car)
Art. 1167. Obligations To Do.
If the 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 obligations. Furthermore, it may be decreed that what has been
poorly done be undone.
Art. 1168. Obligations Not to Do.
When the obligation consists in not doing & the obligor does what has been
forbidden, it shall also be undone at his expense.
Rules on To Do
The creditor can ask any 3rd person to perform the obligation due
should the debtor fail to do it
o Debtor will be liable for all the expenses thereof
When the debtor poorly undertook the obligation, the creditor has
the right to have everything undone at the expense of the debtor
Not to Do
If he performs the act despite the obligation, it can be undone at
his own expense
CASE: Chaves v. Gonzales
Lesson: The remedies of a person who has hired another to do
something, such as to repair a typewriter, when such is done poorly
or not done at all:
1) Damages
2) File a suit
3) Have it executed at the others cost
Facts:
o X was hired to repair Ys typewriter
o When Y demanded for his typewriter, X returned it with
missing parts & without having it repaired
o Y had another company fix the typewriter, then sued X to
obligate him to pay for the repair
Held: X is liable & must pay for the cost of the execution of the
obligation, which is the cost of the labor expended on the repair of
the typewriter. He is also liable for the cost of the missing parts,
because he was also bound to return the typewriter in the same
condition it was when he received it.
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 fulfillment 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 declares;
(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
26
(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 fulfills his obligation, delay
by the other begins.
Provision Breakdown
Par. 1 general rule
Par. 2 exceptions
Par. 3 reciprocal obligations
Par. 2 & 3 require no judicial or extrajudicial demand
Par. 1 & 2 usually, to be performed at different times (e.g.
purchaser pays carpenter in advance to go to his house & repair
later)
Par. 3 simultaneous; normal, everyday transactions (e.g. buying
pens from a store)
o When you buy something, it is immediately given to you
Delay
Kinds of delay:
o Mora solvendi delay or default committed by debtor
o Mora accipiendi delay or default in acceptance
committed by creditor
! Debtor can consign whatever is due to the creditor
in court if the circumstances warrant
Delay in the performance of an obligation must be either malicious
or negligent
o If the delay was due only to inadvertence without malice or
negligence, the obligor is not liable under Art. 1170
General rule: delay begins from the moment the creditor demands
the performance of the obligation
o Without judicial (e.g. commencement of a suit) or
extrajudicial (e.g. notice) demand, the effects of default will
not arise
Demand
General rule: for an obligation to become due, there must be a
demand
Must be a DEMAND
o Ex.: We request for you to pay is not a demand
o Absent express demand, one cannot make another party
liable for damages
27
An obligor is liable for damages for delay not from the time the
object is to be delivered, but from the time of extra-judicial or
judicial demand
o Damages for delay accrue from time of demand, not
delivery date
o Ex.: X was supposed to deliver a house to Y on Nov. 19, but
doesnt. Is X liable for delay?
! NO, there must still be judicial or extrajudicial
demand
Art. 1169 applies only in obligations to do something other than the
payment of money
o In obligations to pay money, Art. 2209 applies
! When the debtor incurs in delay, the indemnity for
damages, absent any contrary stipulations, will be
the payment of the interest agreed upon
! If there is no stipulation, the legal interest of 6%
per annum will apply
o The interest replaces the damages
o Default begins after extrajudicial or judicial demand
! UNLESS the contract stipulates from what time
interest will be counted
Interest will become payable from such
time, & not the date of the filing of the
complaint
! If no interest is stipulated or a date is not given,
interest will begin to run only from demand
Extrajudicial demand is not a prerequisite for filing an action
o An action can be filed at anytime after the non-compliance
of the other party because the cause of action of will
always start from such time.
o HOWEVER, damages or interest shall start to run only after
judicial or extra-judicial demand.
o Ex.: If the obligation is due on Mar. 1, 1998, the aggrieved
party can file suit for specific performance immediately
after Mar. 1, 1998
! If, without any extrajudicial demand from the
obligor, suit is filed on Apr. 15, 1998, damages
will be reckoned only from Apr. 15
! If, however, extrajudicial demand was made on
Mar. 15 & suit subsequently field on Apr. 15,
damages will be reckoned from Mar. 15
2 cases where an extrajudicial demand should first be made prior
to filing a civil suit:
1) Ejectment cases before a lessor ejects a lessee, the

lessor must first make an extrajudicial demand for the
lessee to vacate the premises
o Without extrajudicial demand, suit will be dismissed
2) Consignment cases the debtor must first make an
extrajudicial demand for the creditor to accept payment
o If creditor unjustifiably refuses to accept payment, the
debtor can now consign the amount in court to
extinguish his obligation
o If there is no extrajudicial demand, the consignment
case will be dismissed
! UNLESS tender of payment prior to consignment
need not be made pursuant to the law
In Delay means In Default
When the law uses the phrase in delay, it means in default
o Mere delinquency in payment does not necessary mean
delay in the legal concept
To be in default involves the beginning of a special condition or
status which has its own peculiar results & effects
Requisites of Default
1) Obligation is demandable & already liquidated
2) The debtor delays performance
3) Creditor requires the performance judicially or extrajudicially
o Default generally begins from the moment the creditor
demands the performance of the obligation
When Demand is Not Necessary
1) When the obligation expressly so declares
o Ex.: When a promissory note providing payment shall be made
on a particular date without necessity of demand makes the
debtor in default upon his failure to pay on a particular date
o Ex.: Law expressly declares that taxes to be paid to the
government should be made on a particular date
2) When time is of the essence in a particular contract
o Ex.: In stock market transactions made in the stock exchange,
time is of the essence such that there is no need of demand
before the delivery of the shares of stock ought to be made by
the seller.
o Ex.: If a contract stipulates that a special car is to be delivered
to the obligee to be used solely for a particular parade at a
particular time, such as an exhibit in a one-day car fair to be

held on a particular date
o CASE: Bargaza v. CA
! Lesson: Time is of the essence when the supplier is
aware that that an item is to be used for a specific
date for a specific purpose
! Facts:
o A contract was entered into in time for the
delivery of materials on Dec. 22, 1990, in
time to construct a niche for the petitioners
wifes grave.
o The wife had expressed that she wanted to be
buried before Christmas day.
o The supplier, despite knowing the timetable &
having been paid, failed to make the delivery
despite pleas & earnest follow-ups of the
widower
o As a result, the crypt could not be constructed
on time for Christmas
! Held: Supplier is liable for both the delay & the breach
3) When it would be useless, as when the obligor has rendered it
beyond his power to perform
o Ex. A debtor promised to constitute his house as a collateral for
a particular loan which is payable at a particular date. But
before the debtor could make the mortgage, he donates the
house to his friend.
! Demand from the creditor to constitute the house as a
collateral would now be useless. In this case, the
debtors obligation becomes immediately demandable
considering that he loses his right to the period within
which to pay the loan
The obligation of one is a resolutory3 condition of the

obligation of the other, the non-fulfillment of which entitles
the other party to rescind the contract
o Ex.: A contract of loan the promise of the borrower to pay
is the consideration of the obligation of the bank to furnish
the loan
o Ex.: Contract of sale, lease
Where one of the parties to a contract does not perform the
undertaking which he is bound by the terms of the agreement to
perform, he is NOT entitled to insist upon the performance of the
other party
o For failure of the other party to assume & perform the
obligation imposed upon him, the other party does not
incur in delay
CASE: Binalbagan Tech., Inc. v. CA
o Facts:
! Buyer X purchased a house from seller Y.
! Through no fault of seller Y, a third party-claimant,
Z, through a court order, evicted X from the said
place
As a result, X was not able to take
possession of the property that he bought
from the seller for 8 years
X also did not pay the balance of the
purchase price during the 8-year period
! The judicial decree of eviction was later reversed
by the court, allowing the buyer to retake
possession of the property
o Held: Y cannot rescind the contract for failure of the X to
pay
! Even if the eviction was not Ys fault, Y was not in
a legal position to demand compliance of the
prestation of X to pay the price. Ys right to
demand payment was suspended during that
period.
o CASE: Agcaoili v. GSIS
! Facts:
GSIS & Agcaoili entered into a contract of
sale of a government housing unit on the
o
Reciprocal obligations
Those created & established at the same time, out of the same
cause
Results in the mutual relationship of creditor & debtor between the
parties
In reciprocal obligations, the performance of one is conditioned
upon the simultaneous fulfillment of the other
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3 Rights & obligations come into existence immediately upon agreement between the parties. If
a resolutory condition is fulfilled, the operation of the rights & obligations cease.
!
28
29
condition that Agcaoili should occupy the

same within 3 days from receipt of the
notice.
o Failure to immediately occupy
contractually allowed the GSIS to
terminate the contract.
Agcaoili, upon receipt of the notice,
immediately went to the place & found a
house in a state of incompleteness that
civilized occupation was not possible, &
that even basic amenities were nonexistent.
Agcaoili paid the 1st monthly installment,
but refused to make further payments
until the housing unit was complete
GSIS cancelled the award & told him to
vacate the premises.
! Held: GSIS had no right to rescind the same
because it failed to do its part in the obligation. It
demanded the buyers immediate occupation, yet
the basic amenities were not even ready.
To say, 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. By any
objective interpretation of its terms, the
contract can only be understood as
imposing on the GSIS an obligation to
deliver to Agcaoili a reasonably habitable
dwelling in return for his undertaking to
pay the stipulated price.
CASE: Tanguilig v. CA
! Facts:
X & Y entered into a contract for the Xs
construction of a windmill for P60,000
with 1-year guaranty
After completion X sued Y for nonpayment of the balance
o Y did not pay because the
windmill collapsed due to the
defects in the construction
X also insists that Y bear his own

loss
Held: When the windmill failed to function properly
it became incumbent upon petitioner to institute
the proper repairs in accordance with the guaranty
in the contract. Thus, Y cannot be said to have
incurred in delay; instead, it is X who should bear
the expenses for the reconstruction of the
windmill
o
Art. 1170. Sources of Liability.

Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, & those who in any manner contravene the tenor
thereof, are liable for damages.
Awarding of Damages
Sources of Liability:
o Fraud
o Negligence
o Delay
o Contravention of the tenor of the obligation
If any of the 4 co-exist with a fortuitous event or aggravates the loss
caused by a fortuitous event, the obligor cannot be excused from
being liable on his obligation
CASE: Bargaza v. CA
o Facts:
! A contract was entered by a widower into in time
for the delivery of materials on Dec. 22, 1990, in
time to construct a niche for the petitioners wifes
grave.
! The wife had expressed that she wanted to be
buried before Christmas day.
! The supplier, despite knowing the timetable &
having been paid, failed to make the delivery
despite pleas & earnest follow-ups of the widower
for
The employees were also feckless when
reminded by the widower, indicating gross
negligence on the part of the owner
! The things were delivered 2 days later; as a
result, the crypt could not be constructed on time
for Christmas
o Held: Supplier is liable for both the delay & the breach
Supplier was considered negligence, & also

incurred in delay
NOTE: Inadvertent non-compliance will not lead to delay & damages
o Ex.: Forgetting one check out of a series of checks
!
Art. 1171.
Responsibility arising from fraud is demandable in all obligations. Any
waiver of an action for future fraud is void.
Fraud
When a party complies with or performs an obligation fraudulently,

he is liable for damages
Ex.: A buys a car from B worth P50,000. After the delivery of the car
by B, A paid B counterfeit money on due date. A is liable for
damages.
o If the contract of sale stipulated that any fraudulent act by
the other in the performance of his obligation shall not be
a ground for to file a suit against the other for fraud is a
void stipulation.
BUT the dolo or fraud which is committed to induce a party to enter
into a contract is not covered in Art. 1171.
o In such a case, the contract would be annullable
In Art. 1171, the contract is valid, but in the performance of the
same, fraud is committed
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 consists in the omission of that
diligence which is required by the nature of the obligation & corresponds
with the circumstances of the persons, of the time & of the place. When
negligence shows bad faith, the provisions of Articles 1171 & 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.
Negligence
30
The omission of that diligence which is required by the nature of the

obligation & corresponds with the circumstances of the persons, of
the time & of the place
The want of care required by the circumstances
In the absence of stipulation, the diligence required is that of a
good father of a family (ordinary diligence)
Relative or comparative, rather than an absolute term
o Its application depends on the situation of the parties
o Liability can be regulated by the courts depending on the
circumstances
General rule: negligence must always be proven
Tantamount to FRAUD when there is bad faith (gross negligence)
CASE: Syquia v. CA
Lesson: Liability for negligence is dependent on the nature &
circumstances of a situation; if one thing is done to prevent another
evil, then there is no negligence
Facts:
o The personnel of a memorial park company, with the
consent of the latter, bore a hole on the grave of the
deceased X during a rainy day to prevent the vault from
falling, consequently preventing the earth from caving in
and filling-up the grave
! However, the hole made possible the entry of
more water and soil than was natural had there
been no hole, damaging the vault.
Held: The memorial company was not negligence. Had the company
decided not to bore the hole, the vault would have been caved into
the earth
CASE: PNB v. CA
Lesson: Banks must be extremely diligent with the accounts of their
depositors. While a banks negligence may not have been attended
with malice and bad faith, nevertheless, if it caused serious anxiety,
embarrassment and humiliation to a depositor, the depositor can
be awarded reasonable moral damages
Facts:
o The bank negligently dishonored the check of the depositor
Held: This Court has ruled that a bank is under obligation to treat
the accounts of its depositors with meticulous care whether such
account consists only of a few hundred pesos or of millions of
pesos.
A customers check can be wrongfully refused payment

without some impeachment of his credit which must in fact
be an actual injury, although he cannot, from the nature of
the case, furnish independent & distinct proof thereof
Bad Faith
A state of mind affirmatively operating with furtive design or with
some motive of ill will
Not merely bad judgment or negligence
Synonumous with fraud; involves a design to mislead or deceive
another, not prompted by honest mistake as to ones rights &
duties
Art. 1171 (on fraud) applies in cases where negligence concurs
with bad faith
o Pursuant to Art. 2201, par. 2 obligor shall be responsible
for all damages which may be reasonably attached to the
non-performance of the obligation
Art. 1174. Fortuitous Events.
Except in cases expressly specified by the law, or when it is otherwise
declared by stipulation, or when the nature of the obligation requires the
assumption of risk, no person shall be responsible for those events which,
could not be foreseen, or which, though foreseen, were inevitable.
Fortuitous Events
Events which could not be foreseen, or which though foreseen,
were inevitable
Major casus est, cui humana infirmitas resistere non potest - "no
one shall be liable for events which could not be foreseen, or which
having been foreseen were inevitable, with the exception of the
cases expressly mentioned in the law or those in which the
obligation so declares
Nemo tenetur ad impossibilia Nobody can be forced to do the
impossible
An Act of God an accident due directly & exclusively to natural
causes without human intervention, which no amount of foresight,
pains or care or reasonable expectation, could have been
prevented
o When the effect, the cause of which is to be considered, is
found to be in part the result of the participation of man,
whether it be from active intervention or neglect, or failure
to act, the whole occurrence is thereby humanized, as it
31
were, and removed from the rules applicable to the acts of

God
o This is true even if the immediate cause of damage is the
act of God
General rule: No one should be held liable to account for fortuitous
events
Elements of a Fortuitous Event (Nakpil v. CA)

1) The cause of the breach of the obligation must be independent of
the will of the debtor.
2) The event must be either unforeseeable or unavoidable.
3) The event must be such as to render it impossible for the debtor to
fulfill his obligation in a normal manner.
4) The debtor must be free from any participation in, or aggravation of
the injury.
o If event concurs with fraud, negligence, delay or violation in any
manner of the tenor of the obligation, the obligor cannot
escape liability
Lesson: The negligence of a party can be implied given the
circumstances, & from there liability can arise even when coupled
with fortuitous events
Facts:
o The contractor construct a windmill, which collapsed due to
a typhoon
o The contractor was sued for the destruction of the
windmill, & he resisted liability by invoking that the
collapse was due to a fortuitous event
Held: SC ruled that the fact of the typhoon was not proven, due to
there only being proof of strong winds; also, windmills are
constructed to withstand strong winds. It would not have collapsed
had there not been an inherent defect.
CASE: Sia v. CA
Lesson: Failing to inform a party of a fortuitous event the one is
aware of that may lead to an aggravation of said partys loss, when
given such a responsibility, is tantamount to negligence.
Facts:
o A bank failed to notify its client that there was flooding in a
safety deposit box containing the clients valuable stamp
collection
The bank already had 2 previous incidents of flooding in

the same deposit box
o The bank was supposedly guarded 24 hours a day
Held: The bank was negligent & aggravated the injury of the
petitioner, failing to exercise the prudence of a good father of a
family.
o
CASE: Dioquino v. Laureano

Lesson: The essential element of a fortuitous event is that there is
some extraordinary circumstance independent of the will of the
obligor. If such exists, then there is no required diligence beyond
what human care & foresight can provide
Facts: X gave his car to Y, who was going to register the car.
o As Y drove the car to the place of registration, some
mischievous boys threw stones at the car of X, causing
damage to the car
Held: The throwing of the stone was a fortuitous event which could
not be foreseen by Y, or which, though foreseen, was inevitable; Y
cannot be held liable for damages.
CASE: Victorias Planters Assoc. Inc. v. Victorias Milling Co.
Lesson: Fortuitous event relieves the obligor from fulfilling a
contractual obligation. Parties cannot extend a previous contract by
adding to the number of years written in the original contract
agreed upon because a fortuitous event prevented fulfillment of the
original period.
Facts:
o The contract between the parties stipulated that, in the
event of a fortuitous event, the period provided in the
contract for the delivery of certain products shall be
suspended
o The contract was suspended for 6 years due to the war
o The central mill wanted to add 6 more years to the contract
to make up for the 6-year suspension period
Held: SC ruled that extending the contract 6 more years was not
allowed given that the suspension was caused by a fortuitous
event. The period of time when the contract was suspended
CANNOT be deducted from the term of the contract because, to add
the said years upon the resumption of the contract would in effect
be an extension of the contract
o The stipulation that in the event of force majeure, the
contract shall be deemed suspended during said period,
does not mean that the happening of those events stops
32
the running of the period agreed upon. It only relieves the

parties from the fulfillment of their respective obligations
during that time the planters from delivering sugar cane
and the central from milling it
To entitle the central to demand the fulfillment of the other
party of their part in the contract, the latter must have
been ABLE to perform, but FAILED to do so, not prevented
by a fortuitous event
SITUATION
Facts: If a contracts ends on Nov. 19, 1996, but for 2 months it was
impossible to perform the object of the contract because of a
fortuitous event, when will the contract end?
Answer: Still on Nov. 19, 1996. The requirement to comply to an
obligation need not be done during the period of a fortuitous event.
CASE: Ace-Agro Development Co. v. CA
Lesson: A contract of employment cannot be extended
even if the laborer was not able to perform some tasks due
to a fortuitous event.
Facts:
o X was engaged by Company Y to clean its bottles
& repair wooden shells inside its plant from
January 1, 1990 up to December 31, 1990
o Due to the burning on April 25, 1990 of the said
plant, the work of X was suspended
o X sought an extension of the contract period,
refusing to work without such extension
Held: Extension cannot be granted.
o The period during which work was suspended did
not justify an extension of the term.
o The contract was subject to a resolutory period
which relieved the parties of their respective
obligations but did not stop the running of the
period of their contract.
Generic Prestations & Fortuitous Events
When the object is generic (e.g. the payment of money), the debtor
cannot avail of the benefit of a fortuitous event
o Ex. If the object is the payment of money as a
consequence of a loan contract, debtor cannot avail of the
benefit of fortuitous event even if the object for which the
loaned money is used, such as the construction of a

factory, is wiped out by a typhoon
No fortuitous event as an excuse for money obligations
Exception to Rule on Fortuitous Events

One can still be held liable for fortuitous events when:
1) The law so requires
o Art. 1165, par. 3 when obligor delays, or promises to
deliver the same thing to 2 or more persons who do not
have the same interest
o Art.1268 when the debt of a determinate thing proceeds
from a criminal offense, the debtor shall not be exempted
from the payment of its price, whatever may be the cause
for the loss, unless the thing having been offered by him to
the person who should receive it, the latter refused without
justification to accept it
o Art. 552 a possessor in bad faith shall be liable for
deterioration or loss in every case, even if caused by a
fortuitous event
o Art. 129(6), Family Code - unless the owner had been
indemnified from whatever source, the loss or
deterioration of movables used for the benefit of the
family, belonging to either spouse, even due to fortuitous
event, shall be paid to said spouse from the conjugal funds
o Art. 1919 if a depository, by force majeure or
government order loses the thing & receives money or
another thing in its place, he shall deliver the sum or other
thing to the depositor
o Art. 1935 the bailee4 of a commodatum is liable for the
loss of the thing, even if it should be through a fortuitous
event, when:
(1) He devotes the thing to any purpose different from
that for which it was loaned
(2) He keeps it longer than the period stipulated, or
after the accomplishment of the use for which the
commodatum has been constituted
(3) The thing loaned has been delivered with appraisal
of its value unless there is a stipulation exempting
the bailee from responsibility in case of a
fortuitous event
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
One who acquires the use of a thing but not its fruits; if the bailee must pay compensation,
the contract ceases to be a commodatum; it is a loan of chattels (personal property) to be
returned without payment for their use
33
(4) He lends or leases the thing to a 3rd person who is

not a member of his household
(5) In applicable situations, being able to save either
the thing borrowed or his own thing, he chose to
save the latter
2) The stipulation of the parties expressly so stipulates
o Ex. A contract provides that the obligor shall, within 10
days, deliver a computer with serial number 2222 & shall
be liable if the computer shall be destroyed by an Act of
God for the value of the same.
3) When the nature of the obligation so requires (assumption of
risk)
o CASE: Republic v. Luzon Stevedoring
! Lesson: The mere difficulty to foresee the
happening of an event is not the same as
impossibility to foresee the same. An event must
be impossible to foresee & avoid to constitute a
fortuitous event. When precautions are set up by a
company, it could be used as a sign that the event
was, in fact, foreseeable
! Facts:
o A towed barge, which usually traversed
the river passing the Nagtahan bridge,
rammed against one of the wooden piles
of the bridge, smashing the post &
causing the bridge to list
o The river was swollen at the time & the
currents were swift due to heavy
downpour in Manila
o The barge owner contended that it should
not be held liable for the damage on the
bridge as such damage was caused by
fortuitous event
! He also contended that there
were many precautions taken &
that the bridges construction
was misplaced
! Held: These very precautions completely destroy
the appellants defense. For caso fortuito or force
majeure 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.
o There was an assumption of risk, because
it knew the perils of the swollen river &
currents
Article 1175. Usurious Transactions.
Usurious transactions shall be governed by special laws.
Usurious Transactions
Not regulated or prohibited by the Civil Code; the Usury Law is
currently suspended
Higher interest rates than that normally set
o Ex.: A 35% per annum interest rate is not against the law,
though it may be iniquitous in character
A special law may regulate, prohibit or allow usurious interest

Article 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.
Presumptions
Presumptions always arise from a set of facts
To have probative value, presumptions must be provided by law
o Once facts are proven, then the presumption of law will
attach
o Will hold as true unless rebutted
Presumptions in Art. 1176
When an obligation consists in the payment of principal with
interest
o Fact giving rise to presumption payment of principal
without reservation as to the interest
o Presumption made interest has already been paid
o Burden of proof creditor must show interest has not
been paid
! Can be rebutted by strong evidence to the contrary
(e.g. it can be shown that the payment of the
34
principal was made because the debtor requested

the creditor to apply the payment to the principal
first)
The payment of the later installment shall give rise to the
presumption that prior installments have already been paid.
o Fact giving rise to the presumption payment of later
installment
o Presumption made prior installments have been paid
o Installment must clearly indicate that it indeed is the latest
installment
o Burden of proof creditor must overturn by showing clear
& strong evidence to the contrary
! CASE: Manila Trading & Supply Co. v. Medina
Lesson: Receipts should always explicitly
state date of payment to give rise to
presumption that prior installments have
been paid (e.g. This payment is for Jan.
1945)
Facts:
o X made a purchase from Y,
paying by installment.
o X presented numerous receipts
to prove his payments, some of
which, according to the court,
were partly spurious & partly
genuine
o X insists that, even if some
receipts are spurious, the
receipts found to be genuine
were allegedly made in Jan.
1957, after the issuance of the
spurious receipts; thus, the
presumption that the prior
installments had been paid
already should arise
Held: SC rejected this contention, stating
that this might be true if such receipts
recited that they were issued for the
installments corresponding to the month
of Jan., 1957; but nowhere does that fact
appear
o Also, it would just give rise to a
presumption, which could be
overturned by clear evidence that

the payments made do not
correspond to the installments
falling due on the dates of the
genuine receipts
Article 1177.
The creditors, after having pursued the property in the possession of the
debtor to satisfy their claims, may exercise all the rights and bring all the
actions of the latter for the same purpose, save those which are inherent in
his person; they may also impugn the acts which the debtor may have done
to defraud them.
Protection of Creditors
The law protects creditors
Civil obligations are demandable & enforceable in the court of law
Law gives all possible remedies to creditors to satisfy the
obligations of the obligor
o The creditor, after exhausting all the means to satisfy his
claim, is given the opportunity to bring all actions which the
obligor can institute against his own debtors to protect &
satisfy his claims against said obligor
o Ultimately, if all else fails, the creditor may also have the
contract rescinded
Successive measures (remedies) that must be taken by a creditor
before he may bring an action for rescission of an allegedly
fraudulent sale:
1) Exhaust the properties of the debtor through levying by
attachment & execution upon all the property of the debtor,
except such as are exempt by law from execution
2) Exercise all the rights & actions of the debtor, save those
personal to him (accio subrogatoria)
3) Seek rescission of the contracts executed by the debtor in
fraud of their rights (accion pauliana)
o Art 1381(1): a contract entered into by the debtor is
rescissible if it were made in fraud of creditors when the
latter cannot in any other manner collect the claim due
them
! CASE: Adorable v. CA Unless a debtor acted in
fraud of his creditor, the creditor has no right to
rescind a sale made by the debtor to someone on
the mere ground that such sale will prejudice the
35
creditors rights in collecting later on from the

debtor
o Creditors right is still a personal right to receive
payment for the loan
o A deed of sale would be the transfer of a real right
BUT the creditor cannot bring those which are inherent in the
person of the obligor
o Action for support the creditor cannot file an action on
behalf of the obligor to claim support from the latters
parents to satisfy the indebtedness
SITUATION
Facts: X borrowed money from Y. To secure the indebtedness, X mortgages
his house. But X was going to sell his lot to Z. Y files an injunction suit to
stop me from selling the house. Will it prosper?
Answer: No. The contract between X & Y is merely a contract of loan. There
must first be exhaustion. The first move of Y should be to demand from X
extrajudicially or judicially before filing a case for foreclosure.
Art. 1178. Transmissibility of Obligations.
Subject to the laws, all rights acquired in virtue of an obligation are
transmissible, if there has been no stipulation to the contrary.
Transmissibility
General rule: rights growing out of an obligation are transmissible
o Ex.: The transferee of an educational insurance plan,
originally obtained by a transferor, acquires all the rights of
the transferor under said plan
! Transferee can avail of all the bonuses provided
by the plan if the child of the transferee graduates
with distinction if such right is provided in the
contract
HOWEVER, the person who transmits the right CANNOT transmit
greater rights than he himself has by virtue of the obligation
o Person to whom it is received also receives no greater
rights than the transferor had at the time of the
transmission of the rights
May be limited, or altogether prohibited by stipulation of the
parties.
o Ex.: A contract may stipulation that the assignment of any
or all rights granted is prohibited.
o Ex.: A less prohibitive provision not allowed unless the
parties consent
ALSO, no transmission of a particular right can be made if the

personal qualifications or circumstances of the transferor are the
material ingredient in the obligation
o Ex.: An author who specializes in horror stories written in a
very distinct style & who has been engaged by a publisher
to write his (the authors) kind of horror stories for his
magazine cannot transmit his rights arising from such
obligation to anybody else
Must be subject to the pertinent laws
o Ex.: If the law prohibits the alienation of homesteads within
5 years from the issuance by the government of the
patent, any transmission of rights of dominion over the
same within the prohibitory period shall be void
General rule on real & personal rights
o Real rights transmissible
o Personal rights not transmissible
SITUATION
Facts: A lessee to a condominium unit has children. The lessee dies. The
lessor tries to eject the kids. Will the case prosper?
Answer: No. Being a lessee is a real & not a personal right, making a
contract of lease transmissible.
CHAPTER 3. DIFFERENT KINDS OF OBLIGATIONS
SECTION 1. PURE & CONDITIONAL 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.
Special Notes
The end point of an obligation is extinguishment.
o Ex.: If X gives Y a pen & Y gives X money, then there will be
no more obligation.
The law should really say future & uncertain, because for
something that happens in the future to be a condition, it should be
unknown
Kinds of Obligations
36
1) Pure obligation an unqualified obligation which is demandable

immediately
o Performance does not depend upon a future or uncertain
event, or past even unknown to the parties
o Ex.: Bank depositor & bank
o CASE: Pay v. Vda. de Palanca
! Lesson: Action to demand compliance to the obligation
prescribes if the creditor fails to make a demand within the
proper prescriptive period & the contract contains the
phrase upon demand
! Facts:
The debtor issued a promissory note to the creditor to
pay a sum of money payable upon receipt of a
particular sum of money from the estate of a certain
deceased person or upon demand
The case for collection on the basis of said note was
filed 15 years after the execution of the promissory
note
! Held: The action can no longer prosper, since the
prescriptive period for filing the action based on a written
document was 10 years & considering that the promissory
notes payment constituted a pure obligation & thus
demandable at once.
o Though there is nothing to indicate the 1st
condition occurred, the 2nd provides upon
demand, which was made much too late
2) Conditional obligation opposite of a pure obligation
A condition - an act or event, other than a lapse of time, which,
unless the condition is excused, must occur before a duty to
perform a promise in the agreement arises or which discharges
a duty of performance that has already arisen
o The performance depends upon a future or uncertain
event or upon a past event unknown to the parties
Its efficacy or obligatory force is subordinated to the happening
of a future or uncertain event.
Kinds of Conditions
1) Resolutory Condition
Once the condition is established and acknowledged, the right
immediately exists; the obligation concomitant to the right can
be demanded at once
Once the future or uncertain event happens which constitutes
the condition, it discharges the obligation
Obligation is extinguished by operation of law

BUT such resolution can be made effective at some
later date if the parties so stipulate in their contract,
such as when the parties stipulate that resolution
becomes effective only from the date written notice
thereof is sent
Examples:
o When the contract provides that a purchaser can
obtain a refund of their money for as long as the
government continues to allow refunds of such a
character
! In such a case, the purchaser could have
immediately asked for a refund
! But as soon as the government creates a law
disallowing the refund, the purchaser can no
longer do so
o Reciprocal obligations the obligation of one is a
resolutory condition of the obligation of the other; the
non-fulfillment of which entitles the other party to
rescind the contract
o Contract of sale when there is a breach, there is an
option to rescind
o You have the right to drive. But the law states that a
constant violator of traffic laws can have the right of
his license revoked.
o When a person donates land to another on the
condition that the latter would build upon the land a
school, the condition imposed is a resolutory condition
! NOT suspensive in character the school did
not have to be constructed for the condition to
be effective
! The donation had to be valid before the
fulfillment of the condition. If there was no
fulfillment, the donation may now be revoked
& all rights which the donee may have
acquired under it shall be deemed lost &
extinguished
o Obligations where there is the power to rescind are
resolutory
2) Suspensive Condition
Can be demanded only upon the happening of the future or
unknown event or a past event unknown to the parties, which
constitutes the condition
o
o
37
NOT demandable at once

Gives rise to the performance of the obligation
o If the condition does not take place, the parties would
stand as if the conditional obligation never existed
Examples:
o Contract to sell - where, in a purchase of property in
installment, it is expressly provided in the contract that
title remains vested on the seller until after the last
payment of the installment is made by the buyer.
! Payment = positive suspensive condition
! There is no consent relative to the transfer of
ownership yet, because the seller expressly
reserve the transfer of title until the
happening of the suspensive condition
Seller given the unilateral right to
terminate the contract in case of nonpayment of the price
! Provides a positive suspensive condition
Failure to pay is not a breach, causal
or serious; it is simply an event which
prevented the obligation of the owner
to convey title from acquiring binding
force
! Prior to the last payment, the purchaser has
no title to the property.
! However, once the future event, which is the
payment of the last installment, occurs, the
obligation of the seller to execute the final
deed of sale & to transfer title arises. It is
from that time that the purchaser can
demand transfer of the title.
o Conditional contract of sale - where the seller may
likewise reserve title to the property subject of the sale
until the fulfillment of a suspensive condition
! Non-payment = negative resolutory condition
! There is already consent regarding the
transfer (unlike in a contract to sell), although
it is conditioned upon the happening of a
contingent event which may or may not occur.
If the suspensive condition is not fulfilled, the

perfection of the contract is abated
! Further examples:
Contract to sell There is a building
being developed by Y. Y executes a
contract to sell with X. This means
that if building is finished (suspensive
condition), X & Y can negotiate for a
possible sale. After negotiations,
there will be a contract to sell.
When an obligor promises to give an obligee a book if
it rains the next day, which is an uncertain event
! Obligation arises once it really rains the next
day
CASE: Javier v. CA
! Lesson: When a contract is subject to a
suspensive condition, its birth or effectivity
can take place only if & when the event which
constitutes the condition happens or is
fulfilled.
! Facts: In consideration of rights to a timber
license, the obligor undertook to pay the sum
of P30,000 to the obligee as soon as the
additional area for forest concession has
been obtained by the obligee & approved by
the government. The obligee never obtained
the additional area.
! Held: Obligor was not liable, as it involves the
non-happening of the suspensive condition
the approval by the government of the new
area.
!
When the debtor binds himself to pay when his means permit him to do so,
the obligation shall be deemed to be one with a period, subject to the
provisions of Art. 1197.
Differences
If the
suspensive
condition is
fulfilled
Transfer of
Ownership
Conditional Contract of Sale

The contract of sale is
perfected
Contract to Sell
Upon full payment of the
purchase price, contract is not
perfected
If there was already previous

delivery of the property,
ownership automatically
transfers to the buyer by
operation of law without any
further act by the seller
Ownership will not

automatically transfer to the
buyer although the property
may have been previously
delivered to him. The
prospective seller still has to
convey title to the prospective
buyer by entering into a
contract of sale
Effect if Sold to
a 3rd Person
Not a Party to
the Contract
Despite
Fulfillment of
the Condition
The fulfillment of the

suspensive condition will
affect the sellers title
thereto, & the seller will no
longer have any title to
transfer to 3rd third person.
No double sale, since title will

only transfer to the buyer after
registration; a 3rd person
buying such property despite
the fulfillment of the
suspensive condition such as
the full payment of the
purchase price, cannot be
deemed a buyer in bad faith;
the prospective buyer cannot
seek the relief of
reconveyance of the property.
Similarities between Pure & Resolutory Conditions

Both are demandable at once
ILLUSTRATIONS
Obligations with a Period Ill give you a pen when X dies.
Obligations with a Condition Ill give you a pen if X dies on
Monday.
Art. 1180. Means Permit Him To Do So.
38
Reconveyance
Art. 1544 (Civil Code) - such

2nd buyer of the property
cannot be a registrant in
good faith who may have:
Had actual or
constructive
knowledge of such
defect in the
sellers title, or
Was charged with
the obligation to
discover the defect.
Such 2nd buyer cannot defeat
the first buyers title.
1st buyer can seek for
reconveyance
1st buyer cannot seek the relief

of reconveyance of property
Meaning
By its nature, means permit him to do so is suspensive &
potestative
o If the law did not exist, it would be void
When the debtor binds himself to pay when his means permit him
to do so, the law presumes that the debtor really intends to satisfy
his obligation, but payment, on the part of the creditor, becomes an
uncertain event
o Thus, the law classifies this as an obligation with a period
Art. 1197 The parties may ask the court to fix the duration of the
period within which the payment is to be made especially when the
period depends upon the will of the debtor
Art. 1181. Conditional Obligations.
In 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.
Terminology
A suspensive condition is also called a condition precedent
o An act or event, other than a lapse of time, which must
exist or occur before a duty to perform a promised
performance arises
o If the condition does not occur & is not excused, the
promised performance need not be rendered
o Suspends efficacy of contract
A resolutory condition is also called a condition subsequent
o An event, the existence of which, by agreement of the
parties, operates to discharge a duty of performance that
has arisen
o Demandable at once
Art. 1182. Suspensive Potestative Condition.
When the fulfillment of the condition depends upon the sole will of the
debtor, the conditional obligation shall be void. If it depends upon chance or
upon the will of a third person, the obligation shall take effect in conformity
with the provisions of this Code.
Suspensive Potestative Condition
When the fulfillment of the condition in an obligation depends upon
the sole will of the debtor
o Whether or not the debtor will fulfill the obligation is a
future & uncertain event
39
o This type of condition is VOID

Leads to the stipulation (only) being declared void
o HOWEVER, the entire contract could be declared void if the
birth of the obligation depends on the sole will of the
debtor (GENERAL RULE)
! Ex.: if the fulfillment of the suspensive conditions
leads to the birth of a new contract of lease, or a
new contract of sale
When the fulfillment of the condition connotes a suspensive
character of the prestation
o The expectation of the existence or accomplishment of a
duty to give or to render some service in the future
Ex. Ill pay you when I hold the book.
o The condition when I hold the book is void, but main
obligation to pay subsists
CASE: Lao Lim v. CA

Lesson: A stipulation which states that a lessee will continue
staying in the premises as long as he wants, as long as he pays rent
is void for being a suspensive potestative condition that leads to
the birth of the obligation, because it leaves to the lessees the sole
power to determine the continuation of the lease. The entire
contract is therefore void.
Facts:
o A stipulation provides that the lease contract shall subsist
for as long as the defendant needs the premises & can
meet & pay said increases
o The contracts also states that a renewal of the 3-year lease
period constitutes a new contract of lease although with
the same terms & conditions as those in the expired lease.
Held: This stipulation & entire obligation is void.
o It is a purely potestative condition, leaving the effectivity of
leasehold rights to the exclusive will of the lessee. It is
likewise a suspensive condition because the renewal of
the said lease, which gives rise to a new lease depends
upon said condition.
! The said condition is not resolutory because it is
not a condition that terminates the lease contract.
The lease contract is for a definite period of 3
years upon the expiration of which the lease
automatically terminates.
If this condition were to be allowed, the owner

would never be able to discontinue it if the lessees
kept paying
Furthermore, because the renewal or birth of the new
lease also depends on the debtor, the entire obligation &
not just the stipulation is void.
!
Birth of an Obligation through Potestative Condition

Art. 1380 When the birth of the new lease contract (renewal)
depends upon the sole will of the lessee, the whole contract is
INVALID & not just that stipulation.
o HOWEVER, if the potestative condition is imposed not on
the birth of the obligation but on its fulfillment, only the
condition is avoided, leaving obligation valid
CASE: Trillana v. Quezon College
Lesson: When the condition is imposed upon the birth or creation of
the obligation, the entire contract& not just the stipulationwould
be void.
Facts: The full payment of the shares in a certain school was to be
made only after the obligor harvested fish.
o Note: Similar to the conditional contract of sale, no
contract is created yet because the full payment awaits the
debtors performance of the harvesting of the fish.
Held: The condition & obligation itself is solely based on the will of
the obligor. Thus, the whole obligation is void.
Resolutory Potestative Conditions
If a condition is both facultative & resolutory, it may be valid,
though dependent on the will of the debtor.
Ex. If a person promises to put in the possession of his friend a
house while he (the giver) is abroad but requires that the house be
returned to his possession in the event that he returns to the
Philippines, the condition is valid as it is resolutory in nature.
CASE: Ducusin v. CA
o Facts: The lease contract provides that the term of the
contract shall be on a month-to-month basis commencing
on February 19, 1975 until terminated by mutual
agreement or terminated by the lessor on the ground that
his children need the premises for their own use.
o Held: Stipulation is valid. The happening of the condition is
not dependent solely on the will of the lessor but on the
40
happening of the condition dependent upon 3rd persons

the children.
Potestative, Based on Fulfillment of Condition
The condition alone is voided, but not the obligation
The potestative condition is not on its birth, but on its fulfillmentin
this situation, there is an acknowledgment of indebtedness already;
its not just a possibility.
CASE: Osmea v. Ramos
Lesson: Where there is an acknowledgment of indebtedness, there
is not just the possibility of a birth of an obligation, but an actual
obligation alreadythus, a suspensive potestative condition in
relation to said obligation may be void, but the obligation itself
remains valid.
Facts: A promissory note stated: On this date, I hereby promise
that, if the house of strong material in which I live in Q.C. is sold, I
will pay my indebtedness to Don Tomas Osmea as set forth in this
document.
Held: The suspensive potestative condition is void, but the
obligation to pay subsists.
CASE: Security Bank & Trust Company v. CA
Lesson: Sometimes, the fact that the condition is a suspensive
potestative condition is not so clear, as when the contract states
that the condition is the mutual agreement of the parties, but in
practice, it becomes dependent on the sole will of one party.
Facts:
o A contractor spent more than the cost construction
contemplated in the contract. It applied with the owner to
adjust the contract price.
o The owner did not act upon the adjustment on the ground
that there was no mutual agreement of both parties
pursuant to the contractual provision. The provisions
states:
! If, at anytime prior to the completion of the work
to be performed, increase in prices of construction
materials or labor supervene through no fault on
the part of the contractor, or any act of the
government and its instrumentalities which
directly or indirectly affects the increase of the
cost of the project, OWNER shall equitably make
the appropriate adjustment on mutual agreement

of both parties.
Held: SC ruled against the owner, requiring it to pay & fulfill its
obligation. The mutual agreement stipulated is in effect a condition
dependent on the owners will, since the contractor would naturally
give consent to such an agreement which would allow him recovery.
Effect of Void Stipulation

When a condition is declared void but the obligation subsists, the
obligation will become one with a period. (Patente v. Omega)
o Reason: converting it into a pure obligation may result in
an arrangement which was not in the contemplation of the
parties
The creditor can ask the court to fix the period.
SITUATION
Facts: X & Y have an agreement, where X borrowed money from Y. X
tells Y later that he is still unable to pay, & says, Ill pay you when I
swim in the Pasig river. Is this valid?
Held: The obligation still stands, but the condition is void. The
obligation is transformed to one with a period.
Mixed Obligations
Those which depend not only upon the will of the debtor, but also
upon chance & some other factors.
CASE: Romero v. CA
o Facts: A contract stipulates that the downpayment made
by the buyer to the seller regarding the sale of the property
shall be returned in the event that the seller shall not be
able to remove the squatters from the property within 60
days from the execution of the contract.
o Held: This is not a potestative condition & is valid. It is a
mixed condition, dependent not only on the will of the
debtor but on 3rd persons, like the squatters & the
government.
CASE: Naga Telephone Inc. v. CA
Lesson: When there are other causal conditions governing (chance,
hazards or the will of a 3rd person) a stipulation which is also
potestative, it is a mixed condition, & it is valid.
Facts: X & Y stipulated that X can use the electrical posts of Y for as
long as it needed the post but the contract can nevertheless be
terminated should Y be forced to stop or abandon operations.
41
Held: The stipulation is valid. It is true that it is a potestative

condition, since the condition depends on the sole will of X (for as
long as it is needed), but there are other factors validating the
obligation, which is that I will also cease when Y is forced to stop
or abandon its operations.
o The latter is a causal condition, dependent on chance,
hazard or the will of a 3rd person.
QUESTION
Is a suspensive potestative condition ALWAYS void? Yes.
4 Cases Where Legal Treatment Transforms to a Period (Court)
1. When only a suspensive potestative condition, not the obligation
itself, is void.
2. When the debtor will pay when his means permit him to do so.
3. When the Court finds there is a just cause for fixing a period.
4. Doesnt fix a period, but from its nature & circumstances it can be
inferred a period was intended.
Valid Potestative Conditions
Art. 1180 when the debtor will pay when his means permit him to
do so
All RESOLUTORY conditions (e.g. X will give Y a pen, provided that Y
will always stay in the Philippines)
Art. 1183. Impossible Conditions.
Impossible conditions, those contrary to good customs or public policy and
those prohibited by law shall annul (Note: VOID) the obligation which
depends upon them. If the obligation is divisible, that part thereof which is
not affected by the impossible or unlawful condition shall be valid.
The condition not to do an impossible thing shall be considered as not
having been agreed upon.
Impossible Conditions
The condition & the obligation will be void.
Ex. An obligation to give money as a loan only if it snows in the
Philippines is void. The condition makes the prestation void.
Also true of cases that are against (1) good customs, (2) public
policy or are (3) prohibited by law.
Condition Not to Do an Impossible Thing
Useless stipulation
Art. 1184. Extinguishment of Obligations with Time-Based Conditions.

The condition that some event happen at a determinate time shall
extinguish the obligation as soon as the time expires or if it has become
indubitable that the event will not take place.
Extinguishment of Obligations with Time-Based Conditions.
When the condition consists of some event that must happen at a
particular time, the obligation is extinguished should the condition
not happen within the said period.
Ex.: Y will give X a particular car (the prestation) if X is elected
President on or before 1998.
o Once Mr. X becomes the president prior to 1998 or on
1998, the obligor has to give the car.
The same situation applies if there is doubt that the event will occur
in the given time.
o In the same example, if X dies before he even files his
candidacy, it is clear that his becoming president will not
happen anymore on or before 1998. This will immediately
extinguish the obligation to give the car.
Art. 1185.
The condition that some event will not happen at a determinate time shall
render the obligation effective from the moment the time indicated has
elapsed, or if it has become evident that the event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such
time as may have probably been contemplated, bearing in mind the nature
of the obligation.
Condition Will Not Happen
Ex.: Again, the condition is the election of X as president on or
before 1998 & the prestation is the giving of a particular car by Y &
the effect is the effectivity of the obligation when the condition does
NOT happen.
o Once X does not become the president prior to 1998 or on
1998, Y has to give the car.
o If X becomes president on or before 1998, then the car
should not be given.
o If Mr. X dies before he even files his candidacy, it is clear
that his becoming president will not happen anymore on or
before 1998. This will immediately give rise to the
obligation to give the car.
No Time is Fixed
42
Ex.: The condition is simply the non-election of Mr. X.

o If the law provides that elections are to be held on August
1998 & August 1998 passes without X being elected, the
condition is deemed fulfilled.
Art. 1186. Constructive Fulfillment.

The condition shall be deemed fulfilled when the obligor voluntarily prevents
its fulfillment.
CLASS QUESTION
Q: What is the implied term of the contract?
A: Must be complied with in GOOD FAITH; otherwise, there are
consequences such as the doctrine of constructive fulfillment.
Constructive Fulfillment: Act of Prevention
The good-faith obligation includes an implied term on the part of
the said parties not to impede, hinder, obstruct or prevent the
fulfillment of the obligation.
o Undertaking these preventive acts constitutes breach of
contract.
Construct fulfillment - If obligor voluntarily prevents the fulfillment
of the condition in an obligation, the law states that the obligation
shall be deemed fulfilled.
o Within penumbra of good faith duty; contemplates things
that are not in the contract that could happen
Ex. X will give to a school a brand new computer if the school will
donates its old computer to charity.
o If X voluntarily destroys the old computer, the condition will
be considered as having been fulfilled. He is now bound to
deliver a new computer to the school.
CASE: Tayag v. CA
Lesson: In reciprocal obligations, both parties are the debtors &
creditors of each other; thus, either one of them can carry out
constructive fulfillment of the condition & prevent the other from
fulfillment of the obligation.
Facts:
o As a condition of a contract of sale of real property, the
buyer, X, was required to pay the balance of a particular
loan which was collateralized by the property subject of the
sale so that the said property can be delivered to him.
o The seller prematurely paid the loan, thereby preventing
the buyer to fulfill the condition.
The seller claims that Art. 1186 cannot apply, because

they are the obligees while the proviso speaks of the
obligor.
Held: Art. 1186 applies.
o In a reciprocal obligation like a contract of purchase, both
parties are mutually obligors & also obligees.
! Any of the contracting parties may, upon nonfulfillment by the other privy of his part of the
prestation, rescind the contract or seek fulfillment.
o It is puerile for petitioners to say that they are the only
obligees since they are also bound as obligors to permit X
to assume the loan, & would also be obliged to execute the
final deed of sale.
o
CLASS QUESTION
Q: There is a BUYER & a SELLER. Who is the debtor & who is the
creditor?
A: The question is irrelevant if the obligation is a reciprocal
obligations.
o As a general rule, all contracts are reciprocal, because
both give each other something.
o Ex.: lessor & lessee, mortgagor & mortgagee (unless the
lender is also the mortgagee, like a bank, which these days
happens more often).
Art. 1187. Effect of Fulfillment of Conditions.
The effects of a conditional obligation to give, once the condition has been
fulfilled, shall retroact to the day of the constitution of the obligation.
Nevertheless, when the obligation imposes reciprocal prestations upon the
parties, the fruits & the interests during the pendency of the condition shall
be deemed to have been mutually compensated. If the obligation is
unilateral, the debtor shall appropriate the fruits & interests received,
unless from the nature & circumstances of the obligation it should be
inferred that the intention of the person constituting the same was different.
In obligations to do & not to do, the courts shall determine, in each case,
the retroactive effect of the condition that has been complied with.
Suspensive Condition
Resolutory condition Art. 1187 is NOT relevant. Here, the
fulfillment of the event extinguishes the obligation.
Suspensive condition Art. 1187 applies only to suspensive
condition, where the efficacy of the obligation is merely suspended
until the condition is fulfilled.
43
When the suspensive condition occurs, the effect of a

conditional obligation to give retroacts to the day of the
constitution of the obligation.
Ex. On Feb. 1996, X, the obligor, promises to give Y a specific car in
the event it rains on the June 1, 1996. It rains on June 1, 1996.
o X must give Y the accessories of the car as of Feb. 1996.
o The obligor is duty bound to take care of the car & its
accessories from the time the obligation has been
constituted.
o
Unilateral Obligations
The debtor keeps the fruits & interests received
o UNLESS from the nature & circumstances of the obligation
it should be inferred that the parties intended differently.
o Ex. Following the same example provided above, if Xs car
is chosen as a special car in a competition & wins a prize
after Feb. 1996 but before June 1996, the prize obtained
by X belongs to X.
Reciprocal Obligations
The fruits & interests during the pendency of the condition shall be
deemed to have been mutually compensated.
o Ex. X promises to give a mango orchard to Y & Y promises
to give X P50,000. Both obligations shall take effect only if
it rains on June 1.
! Any fruit of the orchard & any interest on the
money shall mutually compensate each other. X
will not get the interest on the money, & Pedro will
not get the fruits of the orchard once the condition
is fulfilled, even though technically their right to
the fruits & interest retroacts to the date the
obligation has been constituted.
SITUATION
Facts: X is buying from Y a farm for P100,000 if it rains on Tuesday
next month. They signed a contract & it is perfected, but X & Y hold
it in abeyance. Ys farm is growing abundantly, but Xs money is
decreasing in value. It rains on Tuesday. Who will have a personal
right to the fruits & instruments?
Answer: X technically has personal rights to the fruits. However, the
law provides that in a reciprocal obligation, the fruits & interests
during the pendency of the condition shall be deemed mutually
compensated. Thus, X & Ys fruits & interests will compensate one

another instead.
Obligations To Do & Not To Do
The courts shall determine, in each case, the retroactive effect of
the condition that has been complied with.
Art. 1188.
The creditor may, before the fulfillment of the condition, bring the
appropriate actions for the preservation of his right.
The debtor may recover what during the same time he has paid by mistake
in case of a suspensive condition.
Preserving Rights
The law allows the creditor to protect his interest even if the
condition has not yet been fulfilled.
o Thus, a creditor can file an injunction suit to stop the
debtor from alienating his property, if it is supposed to be
given to the creditor once a particular condition is fulfilled.
If, prior to the happening of the suspensive condition, the debtor
pays the creditor by mistake, the debtor can recover the payment.
o The obligation is not yet due & demandable.
o The condition may not be fulfilled, in which case he will
never be liable.
SITUATION
Facts: An employer & employee enter into a contract. In their CBA,
the employer agreed that an employee who had served
continuously for 10 years until the age of 50. But all the employees
have the same birthdays, & all turn 50 at the same time. What can
the employee do to protect his right?
Answer: The employee may, before the fulfillment of the condition,
bring the appropriate actions for the preservation of his right
pursuant to Art. 1188.
Art. 1189. Improvement, Loss & Deterioration in Suspensive Conditions.
When the conditions have been imposed with the intention of suspending
the efficacy of an obligation to give, the ff. rules shall be observed in case of
the improvement, loss or deterioration of the thing during the pendency of
the condition:
(1) If the thing is lost without the fault of the debtor, the obligation
shall be extinguished;
44
(2) If the thing is lost through the fault of the debtor, he shall be
obliged to pay damages; it is understood that the thing is lost when
it perishes, or goes out of commerce, or disappears in such a way
that its existence is unknown or it cannot be recovered;
(3) When the thing deteriorates without the fault of the debtor, the
impairment is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may
choose between the rescission of the obligation & its fulfillment,
with indemnity for damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement
shall inure to the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other
right than that granted to the usufructuary.
Suspensive Condition
When the performance of something is held in abeyance
Usually entails a retroactive effect of personal rights
While still unfulfilled, the obligation has not yet arisen & the
determinate thing is usually in the possession or control of the
debtor.
Different Ways of Losing the Object
1) It perishes.
o Ex. When, during the pendency of the suspensive condition, the
object, a car, is hit by a bomb & explodes
2) It goes out of commerce.
o Ex. If the car has been discovered to have historical value & is
deemed a national treasure and the government prohibits the
sale of the car
3) It disappears in such a way that its existence is unknown or it
cannot be recovered.
o Ex. If the car is transported from Mindanao to Luzon by ship, &
the ship has been lost at sea & cannot be found
Fault of the Debtor
To be understood in relation to the Sources of Liability (Art. 1170),
which constitute breach of the obligation:
o Negligence
o Delay
o Fraud
o Contravention of the tenor of the obligation
Effect of Loss
If the thing is lost without the fault of the debtor, the obligation is
extinguished unless of course the thing to be given is not
determinate but generic.
o If it is generic, the obligation still stands
o Implies a fortuitous event
If the thing is lost through the fault of the debtor, he shall be liable
for damages.
Deterioration
If the thing deteriorates without fault of the debtor, any impairment
is to be borne by the creditor.
If the deterioration is caused by the debtor, the creditor can choose
between (1) rescission of the obligation and its (2) fulfillment, with
damages in either case.
If the object has deteriorated so badly that the creditor no longer
sees use for the object, he could choose to rescind the obligation
plus damages. It could be considered lost.
o Ex. During the pendency of the suspensive condition, the
debtor uses the car, which he is supposed to give to the
creditor upon the happening of the condition, in a racing
event which causes its deterioration.
! The creditor can seek rescission of the obligation
& damages in the amount equivalent to the
deterioration of the car.
! If, however, the creditor believes that he can still
make use of the car, the creditor can seek
fulfillment with damages.
Choice of the remedies to be pursued, whether rescission plus
damages or fulfillment plus damages, belongs to the creditor,
regardless of the degree of deterioration caused by the debtor.
o Even if the object, through the fault of the debtor,
deteriorated but the same can still be used, the creditor
can still choose rescission plus damages.
o The debtor cannot say that the remedy chosen by the
creditor should have been fulfillment plus damages.
Improvements
! If it improves (1) by nature or (1) by time, such shall inure to the
benefit of the creditor.
! If it is improved at the expense of the debtor, his only right would be
that of a usufructuary.
45
Usufruct - gives a right to enjoy the property of another with

the obligation of preserving its form & substance unless
the title constituting it or the law otherwise provides.
Art. 1190. Fulfillment of Resolutory Condition.

When the conditions have for their purpose the extinguishment of an
obligation to give, the parties, upon the fulfillment of said conditions, shall
return to each other what they have received.
In case of the loss, deterioration or improvement of the thing, the provisions
which, with respect to the debtor, are laid down in Art. 1189 shall be applied
to the party who is bound to return.
As for obligations to do and not to do, the provisions of the 2nd par. of Art.
1187 shall be observed as regards the effect of the extinguishment of the
obligation.
Fulfillment of Resolutory Condition
Extinguishes the obligation
There must be restitution of what has been obtained
Ex. X & Y promised that X (the debtor) will continue having
possession over a particular car, provided that X will watch TV.
o If X watches TV, his right to the possession of the car is
extinguished, & the obligation of Y to allow X the
possession is also extinguished.
o If, while the resolutory condition has not yet been fulfilled:
1) If car is destroyed without the fault of the debtor X, the
obligation to return is extinguished.
2) If the car is lost through the fault of the debtor, he
shall be liable for damages.
3) If the car deteriorates without the fault of the debtor,
the impairment is to be borne by the creditor.
4) If the car deteriorates through the fault of the debtor,
the obligee may choose between the rescission &
fulfillment, with indemnity for damages in either case.
5) If the car is improved by its nature, or by time, the
improvement shall inure to the benefit of the obligee.
6) If the car improves at the expense of the debtor, he
shall have no other right than that granted to the
usufructuary.
In obligations to do and not to do, the court shall determine the
effect of the extinguishment of the obligation.
Art. 1191.
The power to rescind obligations is implied in reciprocal ones, in case one of

the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment & the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who
have acquired the thing, in accordance with Art. 1385 & 1388 & the
Mortgage Law.
Two Options
To rescind
To fulfill
Either way, with damages (Sources of Liability)
Reciprocal Obligations
Those that:
o Arise from the same cause &
o In which each party is a debtor & a creditor of the other,
such that the obligation of one is dependent upon the
obligation of the other
The obligation of one is a resolutory condition of the obligation of
the other; the non-fulfillment one of entitles the other to rescind.
Ex. In a contract of sale, the non-payment of the balance of the
price by the buyer gives rise to the sellers right to rescind.
In case of non-compliance, the aggrieved party has an implied
power to rescind or resolve the contract.
o Termination in Art. 1911 is more appropriately called
resolution & not rescission (but they are used
interchangeably here)
Rescinding a Contract
Rather than just to terminate the contract & to release the parties
from further obligations, it means to:
o Abrogate the contract from the beginning &
o Restore the parties to their relative positions as if no
contract has been made
Similar to declaring the contract void at its inception
Generally, with rescission, one must always go to court if one wants
damages
46
Exception: if there is a stipulation in the contract giving a

party the unilateral power to rescind the contract
Predicated on the breach of faith by any of the parties, violating
reciprocity between them.
o Must be SERIOUS & SUBSTANTIAL
o No breach of faith = no rescission
Ex. A property that was subject of a contract of sale was already
transferred to the buyer.
o The buyer cancelled the deeds of sale, on the valid ground
that there was negation of the cause of the contract, as
the properties turned out to be unsuitable for the purpose
for which they were acquired without fault of the seller.
o This cancellation of contract is NOT rescission in Art. 1911.
! No breach of faith on the part of any party.
! The seller complied & the buyer did not suffer
direct injury.
o
CASE: Philippine Amusement Enterprises, Inc. v. Natividad

Lesson: A mere causal breach does not justify rescission.
Facts: The lessee of a jukebox sought rescission of the contract of
lease of the said machine because there were times the machine
did not work.
Held: There can be NO rescission.
o Rescission is ordered only when the breach is substantial
as to defeat the object of the parties in entering into the
agreement.
o Occasional failure is not frequent enough to render it
unsuitable.
o There was also no claim of any damage on the part of
lessee, like a drop of income.
CASE: Tan v. CA
Lessons:
o W/N a breach is substantial depends upon the attendant
circumstances
o Slight delay when time is not of the essence is not
considered substantial breach.
o Where the fulfillment of the condition does not depend on
the will of the obligor, but on that of a 3rd person, the
obligors part of the contract is complied with if he does all
that is in his power & it then becomes incumbent upon the
other contracting party to comply with all the terms of the
contract.
Facts:
o
A buyer bought a piece of legally-obtained public land from

a seller. The buyer tasked the seller with clearing the land
& with cancelling the mortgage on the property in favor of
DBP, giving the seller earnest money to cancel the
mortgage.
o The seller failed to clear the lot for a few days & failed to
cause the cancellation of the mortgage as it took DBP
some time to process the papers on the date set for the
execution of the deed of sale, & were delayed for 12 days.
! He also failed to get the DENR permit.
! HOWEVER, he already did everything to effect the
cancellation.
! Notice of levy & execution had also already been
filed by the seller, though it was not yet cancelled
by the Registry of Deeds.
o DBP delayed the cancellation of the contract until 12 days
after it was due.
Held: There was substantial compliance on the part of the seller to
clear the property; there can be no rescission.
o There were only slight delays, & time was not of the
essence in the contract.
o The interest in the land was already conveyed to the buyer.
o Even not yet getting the DENR permit can be considered as
substantial breach.
! Prior approval by the DENR is required only in case
of sale & encumbrance of public land:
During the pendency of the application

by the purchaser &
Before his compliance with the
requirements of the law.
o The seller here already properly conveyed title to buyer.
CASE: Velarda v. CA
Lesson: Even if delay is only slight & time is not of the essence,
when the existing obligation is repudiated because the debtor
imposes pre-conditions for payment, or makes it a qualified offer to
pay, there can be rescission.
Facts:
o The debtor delayed paying the obligation for 1 month.
o The debtor imposed upon the creditor pre-conditions for
the payment, making the payment a qualified offer to pay.
o The debtor claims this slight delay is only a causal breach.
47
Held: Rescinding is valid. While a delay of 20 days, 1 week or even

a month may be causal provided that time is not of the essence,
the totality of the whole case shows that the qualified offer to pay
was a repudiation of the existing obligation, which was legally due &
demandable under the contract of sale.
o The creditor was left with no other legal option but to
validly rescind the contract.
Rescinding due to Non-Compliance

Remedy is either fulfillment or rescission, with damages either way
CASE: Areola v. CA
o Facts:
! X was insured under an insurance company.
! X had a rightful claim which the company did not
comply with, because of an erroneously canceled
insurance policy on the part of the company.
! X was successful in seeking the enforcement of
the erroneously canceled insurance policy by
seeking the reinstatement of the same.
! The insurance company stated that, because X
sought the reinstatement of the same, X in effect
chose the fulfillment of the obligation (as opposed
to rescission) & thus need not be paid damages.
o Held: Whether the party demands fulfillment or rescission,
he is entitled to damages.
Injured party may seek rescission even after he has chosen
fulfillment, if the latter should become impossible.
CASE: Ayson Simon v. Adamos
o Facts:
! The buyer of a lot filed a case against the seller for
delivery.
! HOWEVER, a case was previously filed by the heirs
of the deceased original owner against the seller
for delivery of the same properties to them.
! Both the heirs & the buyer won their cases against
the seller.
HOWEVER, the delivery to the buyer had
become impossible, because the
properties were already validly possessed
by the heirs.
! The buyer filed another suit for rescission &
damages.
Held: The buyer was correct to file the rescission case,

because fulfillment had become impossible.
HOWEVER, the law does not authorize the injured party to rescind
the obligation & at the same time seek partial fulfillment in the
guise of recovering damages.
o Thus, the Court has disallowed the recovery of penalty
charges stipulated in a contract which was also sought to
be rescinded.
o
Express Contracts
The power to rescind can also be expressly stipulated in the
contract.
o Unilateral extra-judicial stipulation
The law does not prohibit parties from entering into an agreement
providing that the violation of the terms of the contract shall cause
the cancellation, termination or rescission thereof even without
court intervention.
The stipulation is in the nature of a facultative5 resolutory condition
HOWEVER, notice must always be given to the defaulter before
rescission can take effect.
Still provisional, & subject to scrutiny & review by the courts
o If the other party does not believe rescission to be justified,
it can result to judicial action
o If the court, after due hearing, decides that the rescission
was not warranted, the responsible party will be sentenced
to damages
o In the contrary case, the resolution will be affirmed, &
consequent indemnity will be awarded to the party
prejudiced.
The party who deems the contract violated may consider it
rescinded & act accordingly, without previous court action, but it
proceeds at its own risk.
o Only final judgment of the court will conclusively settle
whether the action taken was or was not correct in law.
o BUT the party who believes itself injured need not file suit
first & wait for a judgment before taking extra-judicial steps
to protect its interest.
! The law itself requires that he should exercise due
diligence to minimize its own damages.
If there is an express stipulation of rescission, any court decision
adjudging its propriety extra-judicially made is NOT the revocatory
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
5
Contingent; may or may not happen
48
act of rescission but merely declaratory or an affirmation of the

revocation.
Requisites for Effectivity of Expressly Stipulated Rescission:
o Agreement providing that the violation of the terms shall
cause the rescission without court intervention
o Notice to be given to defaulter
Implied Power of Rescission

The court shall decree the rescission claimed
o UNLESS there is just cause authorizing the fixing of a
period.
CASE: Roman v. CA
o Facts:
! The contract stipulated that the buyer shall pay
the purchase price within 60 days from receipt of
the notice that the properties have already been
titled.
! Notice was sent on Oct. 11, 1958. Payment
however was not made. An action was filed for
rescission.
! The buyer claimed that he was not given notice &
prayed for a period within which to pay.
o Held: There would be no just cause for fixing a period. After
institution of the action against him, what the buyer should
have done, which he did not do, was to pay the seller
within 60 days after service of summons (the notice).
CASE: Central PH University v. CA
o Facts: The donee failed to comply with the resolutory
condition provided in the deed of donation.
o Held: There was no just cause for the fixing of a period,
since a more than a reasonable period of 50 years had
already been allowed the donee to comply with the
condition, even if the condition is burdensome.
! The fixing of a period would be a mere technicality
& formality & would serve no purpose than to
delay or lead to an unnecessary and expensive
multiplication of suits.
Valid Rescission
Creates an obligation to return the things which were the object of
the contract
o Designed to restore parties to their former situations
Can only be made when the one who demands the rescission can
return what he is obliged to return
If one of the parties has already paid the price in a contract, but
has not received what should be delivered to him, he has nothing to
restore.
o He is entitled to the return of what he has paid.
Contract to Sell v. Contract of Sale

Contract to sell the seller is given the unilateral right to terminate
the contract in case of non-payment of the purchase price
o Vendor remains the owner as long as the vendee has not
fully complied with the purchase price
o Termination is NOT a rescission under Article 1191 but an
enforcement of the contract
! Because title remains with the vendor & does not
pass to the vendee until full payment of price
! If the vendor ejects the vendee for failure to meet
the condition, he is just enforcing the contract, not
rescinding it
o Payment positive suspensive condition
o Failure to pay is NOT a mere breach, causal or serious
! It PREVENTS the obligation of the vendor to
convey title from applying obligatory force
Contract of sale non-payment is a negative resolutory condition
o The vendor has lost ownership of the thing sold & cannot
recover it, unless the contract of sale is rescinded
CASE: Palay, Inc. v. Clave
Lesson: There must always be notice before rescission, even when
there is an express stipulation of rescission without notice in a
contract between two parties.
Facts:
o The parties entered into a contract to sell a parcel of land
where it was expressly stipulated that the seller shall have
the right to declare this contract canceled & of no effect
without notice to the buyer in case the latter fails to pay
his installment.
o The seller did indeed cancel the contract without notice
upon failure of the buyer to pay the installment.
Held: Cancellation is invalid, since there was no notice to the
defaulter informing him of the termination.
o The stipulation allowing no notice was disregarded by the
Supreme Court.
49
RA No. 6552
An Act to Provide Protection to Buyers of Real Estate on
Installment Payments
Effectivity Date: September 14, 1972
Highlights importance of making a notice of cancellation regarding
real estate sold in installment
o The actual cancellation of the contract shall take place 30
days from receipt by the buyer of notice of cancellation or
demand for rescission of the contract by a notarial act &
o Upon full payment of the cash surrender value to the buyer
CLASS DISCUSSION
General rule in rescission you must always go to court if you want
to claim damages
o Exception if there is express stipulation in the contract
! Unilateral power give to a party to rescind the
contract
What is the operative act that revokes the contract in court?
o The court decision
o Gives it finality
o In reciprocal obligations, there is always an implied power
to revoke.
! The courts decision is just the revocatory act.
What is the operative act of rescission in a stipulation?
o Notice for express stipulations
o But party can go to Court still to determine if there really
was substantial breach
! The decision will affirm the validity of the decision
made
Art. 1192.
In case both parties have committed a breach of the obligation, the liability
of the first shall be equitably tempered by the courts. If it cannot be
determined which of the parties first violated the contract, the same shall
be deemed extinguished, & each shall bear his own damages.
Violation of Both Parties
1st violator is penalized only - if, in fact or by evidence, such first
violator can be determined.
o The subsequent violator will not be held liable.
o The liability of the 1st violator shall be equitably tempered
by the court as the injury to the 2nd violator might not have
been so great had it not for the subsequent infraction of

the 2nd party-violator.
st
When 1 violator cannot be determined - obligation shall be
deemed extinguished, & each shall bear his own damages.
o CASE: Camus vs. Price, Inc.
! Facts:
The lessor did not comply with his
obligation to increase the elevation of the
low portion of the lot
The lessee also did not comply with his
obligation to cover the building with
insurance
It could not be determined with
definiteness which party committed the
1st infraction of the terms of the contract
! Held: The parties are actually in pari delicto6 & the
contract deemed extinguished, with the parties
suffering their respective losses.
CLASS DISCUSSION
When there is mutual negligence, they cancel each other out; it is
not mitigating.
o This is still subject to the doctrine of unjust enrichment.
SECTION 2. OBLIGATIONS WITH A PERIOD.
Art. 1193.
Obligations for whose fulfillment a day certain has been fixed, shall be
demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon
arrival of the day certain.
A day certain is understood to be that which must necessarily come,
although it may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation
is conditional, & it shall be regulated by the rules of the preceding Section.
Obligations with a Period
Period - designates a particular time which is certain to happen
o The moment when the obligation will either be effective or
be extinguished.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
6
In equal fault
50
Kinds of Periods
Suspensive period - gives rise to effectivity of obligation
o Ex. On Dec. 1, 1997, X promises to sing at Ys nightclub
starting March 1, 1998.
! While the obligation is constituted earlier, its
effectivity only commences on a certain future
period of time, March 1, 1998.
o CASE: Gaite vs. Fonacier
! Facts: The contract provided that the balance of
the purchase price will be paid from & out of the
first letter of credit covering the first shipment of
iron ores &/ or the first amount derived from the
local sale of iron ore made by the Larap Mines
Co., Inc.
! Held: The stipulation is a suspensive period, NOT a
suspensive condition, because they express no
contingency in the obligation to pay, even if there
is no exact date given.
By the very terms of the contract, the
existence of the obligation to pay is
recognized; only its maturity or
demandability is deferred.
Resolutory period extinguishes the obligation
o Ex. X promises to sing at Ys nightclub as soon as the
contract is signed on Dec. 1, 1997 up to March 1, 1998
! Obligation to sing can be demanded at once by
the obligee but the obligation shall be
extinguished on a day certain, March 1, 1998.
A Day Certain
That day which must necessarily come, although it may not be
known when.
o If the uncertainty consists in whether the day will come or
not, it is a condition.
Ex: An obligor commits to deliver immediately a lollipop to his
sisters 6-year-old son son when the sons temporary front tooth
naturally falls off, it is not known when the temporary tooth will falloff or be removed but it is certain to happen.
o The condition above refers to a period.
o HOWEVER, if the stipulation is that the candy will be given
when he passes the entrance examination at the Ateneo, a
condition exists because its happening is uncertain.
Art. 1194.
In case of loss, deterioration, or improvement of the thing before the arrival
of the day certain, the rules in Art. 1189 shall be observed.
Applicability of Art. 1189
Applies to obligations subject to suspensive or resolutory periods.
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 &
demandable, may be recovered with the fruits and interests.
Payment by Mistake
In a suspensive period, the obligation to give will not take effect
until the arrival of the period.
The creditor has no right to obtain the thing until the arrival of the
period.
o UNLESS the debtor & the creditor, with full knowledge of
the period, decide to give & accept the thing to be
delivered or the payment.
Right to Recovery
Debtors right to recover includes the fruits & interest for said
period he mistakenly paid.
Ex. X, on Oct. 1, promises to deliver to Y a mango orchard on Dec.
1. However, on Nov.1, X delivers the orchard believing that it is due
& demandable on that date.
o He can recover what he has delivered together with fruits
and interest.
o Prior to Dec. 1, Y obviously has no right to possess the
Mango orchard.
o However, if Y is in the possession of the mango orchard by
Dec. 1, John can only recover the fruits & interest from the
time he delivered the property (Nov. 1) up to Dec. 1.
Article 1196.
Whenever in an obligation a period is designated, it is presumed to have
been established for the benefit of both the creditor & 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.
For the Benefit of Both Parties
51
Always presumed, absent any language showing that the period

was set for the debtor or creditor alone
CASE: Abesamis v. Woodcraft Works, Inc.
Lesson: When a fortuitous event occurs prior to the arrival of the
period in an obligation with a period, the loss cannot be borne by
the debtor.
Facts:
o X promised Y a shipment of logs, & promises he will make
the shipment before the end of July, but not earlier than
April with the option to make partial shipment depending
on the availability of logs & vessels. Y would furnish the
vessel.
o A storm swept away almost all the logs awaiting shipment
sometime in May.
o Y demands damages from X because of the loss of the
logs.
Held: X cannot be held liable for damages. The obligation is one
with a period, intended for the benefit of both parties.
o The obligation between the parties was a reciprocal one, Y
to furnish the vessel & X to furnish the logs.
o The obligation being reciprocal & with a period, neither
party could demand performance nor incur in delay before
the expiration of the period.
o Consequently, when the typhoon struck in May, there was
yet no delay on the part of X. Y must shoulder the
corresponding loss.
Waiver
The benefit of the period may be waived by the person in whose
favor it was constituted
CASE: Abesamis v. Woodcraft Works, Inc.
o Facts: X bound himself to deliver logs to Y before the end
of July 31. However, X informed Y that he will make an
earlier delivery of these subject portions of the shipment
on July 25. X failed to make delivery.
o Held: X was made liable for the logs due on July 25,
because he waived his right to make use of the period by
his explicit notice to Y of earlier delivery.
SCENARIO
Facts: X loans P10M from Y, payable at the year 2020, with interest
of 10% per annum. 5 years later, X wants to back out. X tells Y he
wants to pay the P10M now, but Y refuses. Is Ys refusal justified?
Answer: YES. A period is fixed for the benefit of both parties.

o Normal lenders (not banks) often use have a penalty for
pre-payment, though Congress did not allow this in banks.
o
o
Art. 1197.
If the obligation does not fix a period but from its nature & the
circumstances it can be inferred that a period was intended, the courts may
fix the duration thereof.
The courts shall also fix 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 fixed
by the courts, the period cannot be changed by them.
The Two-Step Process
1) The Courts must first determine that:
o The obligation does not fix a period, or
o That the period is made to depend upon the will of the
debtor
But from the nature & circumstances it can be inferred that a
period was intended.
2) If the 1st step is satisfied, the court must decide what period was
probably contemplated by the parties.
o This period must not be arbitrary, & must be based on the
nature & circumstances of the case.
CASE: Gregorio Araneta, Inc. vs. Phil. Sugar Estates Development Co., Ltd.
Lesson:
o The court cannot fix a period merely because in its
opinion it is reasonable; it must set the time that the
parties are shown to have intended.
o The period in an obligation with a period may be
indefinite, as long as it is not uncertain.
Facts:
o X bound himself to deliver a piece of land to Y, but both
were aware that there were squatters occupying the lot at
the time.
o The court set a period of 2 years for the obligation of X.
Held: There is no justification for setting the date of performance
at any other time than that of the eviction of the squatters. The
circumstances in the contract admit no other view, even if such
period is indefinite.
52
The parties knew that they must resort to legal processes

to evict the squatters; they realized that the duration of the
suits to be brought would not be under their control.
The conclusion: the parties must have intended to defer
the performance of the obligations under the contract until
the squatters were duly evicted
CASE: Radiowealth Finance Company vs. Del Rosario

Lesson: The act of leaving the exact date in a promissory note
blank does 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.
o It is enough that the note specifies that payment shall be
made, for example, in equal installments for 12 months.
Facts:
o X owes Y some money, evidenced in a promissory note, to
be paid in monthly installments as agreed upon by the
parties, though the exact dates were left blank.
o Y allowed X to apply Xs promotion services in payment of
Xs promissory note.
o Y made a demand for the payment when Xs check
payment to Y bounced.
o X contended that, since the date was left in blank, it
signified that, before their debt would be due, the court
should first fix a period of payment considering that the
payment was dependent upon the sole will of X.
Held: X was liable to Y.
o While the specific date on which each installment would be
due was left blank, the Note clearly provided that each
installment should be payable each month.
o It also provided for an acceleration clause & a late
payment penalty, which showed the intention of the parties
that the debt should be paid at a definite date.
o X already tried to pay Y for the month, which further reveals
their intentions.
No Changing
Once the court fixes a period, the parties cannot change it
anymore.
Article 1198.
The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes

insolvent, unless he gives a guaranty or security for the debt;
(2) When he does not furnish to the creditor the guaranties or
securities which he has promised;
(3) When by his own acts he has impaired said guaranties or securities
after their establishment, & 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.
Instances When Debtor Loses Right to Make Use of the Period
1) When the debtor becomes insolvent, becomes insolvent, unless he
gives a guaranty or security for the debt.
o If a debtor has been given up to Jan. 8 to pay his obligation
& he becomes insolvent, the creditor need not wait up to
Jan. 8, 1996 to demand payment
! HOWEVER, if the debtor has asked a 3rd person to
guarantee his debt, or if the debtor puts up his
house as collateral, he will again have the benefit
of the period
o Insolvency need not be judicially declared.
2) When the debtor does not furnish the creditor the guaranties or
securities he has promised
o Usually, when the debtor fails to pay & the creditor has
exhausted all avenues to satisfy his claim without any
favorable result, the creditor can turn to the guarantor for
payment
! If the guarantor has committed himself solidarily,
the creditor can even go against the guarantor
immediately without going against the debtor.
o Securities can take the form of real-estate mortgages or
pledges.
! If the loan is collateralized through the mortgage
of a house & the debtor does not pay, the
mortgage will be foreclosed. The house will be
sold in a public bidding & a sufficient amount of
the proceeds to satisfy the indebtedness will go to
the creditor.
3) When, by his own acts, the debtor impairs said guaranties or
securities after their establishment, & when through a fortuitous
53
event they disappear, unless he immediately gives new ones

equally satisfactory
o CASE: Gaite v. Fonacier
! Facts:
Payment was secured through 2 security
bondsone with a mining company & another
with a bonding company.
The obligor was obliged to pay the
indebtedness from the time it received the
proceeds of the sale of iron ore.
The obligor failed to renew the surety bond
with the bonding company, prior to the arrival
of the period for delivery, & did not replace it
with an equivalent guarantee.
! Held: The obligor lost the right to make use of the
period, because he had impaired 1 of the security
bonds by failing to renew it.
The obligees acceptance of the surety
companys bond with full knowledge that on
its face it would automatically expire within
one year does not amount to a waiver of the
renewal after the expiration date.
o The debtor loses the benefit of the period even if the
guaranties or securities disappear through a fortuitous
event
! UNLESS new ones equally satisfactory are
immediately given
! Ex. If the house used as collateral is hit by
lightning, the debtor will still lose the right to the
period unless he gives another house of the same
quality as collateral
4) When the debtor violates any undertaking, in consideration of
which the creditor agreed to the period
o Ex. If X convinces Y to allow him to pay his indebtedness on
May 7, instead of Jan. 30 & Y agrees because X, who is a
singer, promises to sing in Ys nightclub for 3 nights for only
half the talent fee, & the debtor fails to sing as promised,
the debtor loses his right to the period
o Ex. If, through the act of the owner in a construction
contract, the contractor has been prevented from finishing
the works on the contractual completion date, the owner is
deemed to have waived the time limit & the contractor is
bound only to finish the construction within a reasonable

time.
! If there are liquidated damages provided for in the
contract in case of delay, a claim for such damages
cannot be sustained;
! The liquidated damages cant be restored & made
applicable to an unreasonable length of time.
5) When the debtor attempts to abscond
o If the debtor attempts to flee from his obligations, or to
move away to evade payment of his indebtedness, the debt
can be demanded from him immediately.
CLASS DISCUSSION
In this provision, it does not matter if the period was fixed to benefit
just the debtor or both parties.
In reciprocal obligations, the word debtor in this provision would
be irrelevant, because the parties are the creditors & debtors of
each other.
Insolvency person still has assets, but his liabilities exceed his
assets assuming that he pays of all his debts at the same time
o Insolvent is required to leave with the Court all his
properties
SECTION 3. ALTERNATIVE OBLIGATIONS.
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 & part of the other
undertaking.
Complete Performance
Partial performance of the different prestations cannot be
considered fulfillment of the obligation & cannot be done
o UNLESS the creditor accepts such partial performance as
complete performance.
Ex. If the debtor can either give a house & a car or paint two
murals to satisfy his obligation, he cannot give the car & one mural.
o The creditor cannot even be compelled to accept it; it is
considered an incomplete satisfaction.
o The debtor must choose to either deliver the house & car
or the painting of two murals.
54
NOTE
The obligation will not be satisfied through partial fulfillment of

several prestations.
If all but one of the alternatives become legally impossible to fulfill,
the obligation will no longer be alternative.
o Ex. Where a loan was payable in PHP or USD, the
alternative obligation ceased to exist when, at the time the
amount became due during the Japanese Occupation,
payment in USD was prohibited.
In alternative obligations, the prestations need not be the same,
but they could be the same
Art. 1200.
The right of choice belongs to the debtor, unless expressly reserved by 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.
Debtors Choice
The choice is given to the debtor by law
o EXCEPT when expressly reserved by or granted to creditor
o Any doubt as to who chooses must always be interpreted in
favor of the debtor
Debtor cannot choose impossible or unlawful prestations, or those
which could not have been the object of the obligation.
o Ex. if for the accomplishment of the obligation, the debtor
can either give a car, fly to the moon, or not join the army,
he has all the three prestations as alternatives, namely: to
give, to do & not to do.
! The 1st & the last alternatives are possible &
lawful while the second, which is to fly to the
moon, is impossible. The debtor therefore has no
right to choose this second alternative.
o Ex. If the alternatives are: to give opium, to sing a song or
not to join the navy,
! The 1st alternative is clearly unlawful, so the
debtor has no right to choose this prestation.
o Ex. If the alternatives in a modeling contract are: to deliver
the dresses, to act as model or to engage in prostitution
! Not only is the last alternative illegal but it could
not have been the object of the prestation.
Article 1201.
The choice shall produce no effect except from the time it has been
communicated.
Right of Notification of Creditor
Communication to the creditor gives effect to the choice.
o The manner of communication can vary, provided that it
clearly conveys the unmistakable choice of the debtor.
When the alternatives are all possible, lawful or consistent with the
object of the obligation, the creditor cannot oppose the choice.
HOWEVER, if some of the prestations are impossible, unlawful or
which could not have been the object of the obligation, the creditor
can relay his objection so that the debtor will know
o BUT anyway, the debtor has no right to choose such
proscribed alternatives.
Article 1202.
The debtor shall lose the right of choice when among the prestations
whereby he is alternatively bound, only one is practicable.
Only One Practicable
Generally, whether only one, some, or a majority are practicable is
irrelevant to the rights of the creditor.
o It is generally the debtors choice which prevails.
If only one is practicable, the creditor has no right to complain,
because it is the debtor who will lose his right of choice.
o The creditor must accept this single choice, unless it is
unlawful or inconsistent with the object of the obligation.
Practicable - capable of being done; feasible.
o Prestations that are not practicable may also include
lawful, possible prestations but, because of some special
attendant circumstances, they cannot be done.
Ex. If the debtor has the following alternatives: to kiss a highly
contagious leper, to sing a song, or not to pay taxes, it is clear that
the last alternative is not only impracticable but also unlawful. The
first alternative, although not unlawful & not impossible, is
nevertheless not practicable because it will endanger the debtors
health. In this case therefore, the debtor loses his right of choice
because only one prestation is practicable which is to sing.
Article 1203.
55
If through the creditors acts the debtor cannot make a choice according to
the terms of the obligation, the latter may rescind the contract with
damages.
Rescission in Alternative Obligations
Ex. If the debtor has three alternatives: to give a particular car, to
sing at a particular night club, or not to resign from his job, & the
creditor burns the particular nightclub where he should sing, the
debtor has effectively been prevented from making a choice from
the 3 alternatives, due to the fault of the creditor.
o The debtor can ask for the rescission with damages.
o If, despite, the act of the creditor, the debtor still wants to
maintain the contract, the debtor can select from the
remaining choices.
Article 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.
The indemnity shall be fixed 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.
Liability for Debtors
The debtor will not be liable in any way for reducing the alternatives
from 3 to 2 alternatives, provided what remains are lawful,
practicable, possible or consistent with the object of the obligation.
o The debtor will also not even be liable for converting his
alternative obligation to one where there is only 1 lawful &
possible prestation.
o The debtor may even cause the loss of the thing, or render
the service impossible.
The debtor must be responsible for losing ALL alternative
prestations to entitle the creditor to damages.
Ex. If the debtor has the ff. alternative prestations: to give a car
worth P50,000 or to paint a portrait in a special canvass worth
P25,000, the debtor will be liable for damages if he willfully
destroys the car & willfully destroys the special, rendering both
alternatives impossible.
o If the special canvass were first destroyed & thereafter the
car, the damages to be paid to the creditor will be the
value of the last thing which disappearedthe car worth

P50,000.
The indemnity shall be fixed, taking as a basis the value of the last
thing which disappeared, or that of the service which last become
impossible.
o Also, damages other than the value of the last thing or
service may also be awarded.
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.
Until then the responsibility of the debtor shall be governed by the following
rules:
(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.
Creditors Choice
When the choice is given to the creditor, the conferment must
always be express.
o Once the choice of the creditor has been communicated to
the debtor, the obligation ceases to be alternative.
o If the debtor has 3 alternative prestations, once he
receives the selection of the creditor, the debtor is bound
to deliver the choice properly.
The debtor is 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
parties requires another standard of care.
Pre-Selection Rules
1) Thing is lost through fortuitous event the debtor deliver that
which the creditor should choose from among the remainder, or
that which remains if only one subsists.
56
If the car, the truck & the boat were lost because of a
fortuitous event, the obligation is extinguished.
o If only the car were lost, then the creditor can choose
between the 2. If only the boat remains, then the obligation
becomes simple & creditor can demand the delivery.
2) Thing is lost 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.
o If the debtor destroys the car, the creditor still has 3
choices, the truck, the boat or the price of the car. In
addition, the creditor shall be entitled to damages
regardless of which alternative he chooses.
3) Things are lost through the fault of the debtor - creditor can choose
based on the price of any one of them, also with indemnity for
damages.
o If the car, the truck and the boat were all lost through the
fault of the debtor, the creditor still has 3 choices: the price
of the car, the price of the truck or the price of the boat. In
all cases, the creditor shall be entitled to 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.
o
Article 1206.
When only one prestation has been agreed upon, but the obligor may render
another in substitution, the obligation is called facultative.
The loss or deterioration of the thing intended as a substitute, through the
negligence of the obligor, does not render him liable. But once the
substitution has been made, the obligor is liable for the loss of the
substitute on account of his delay, negligence or fraud.
Facultative-Alternative Obligation.
Ex. If the debtor is obliged to give a car, such prestation is the
principal obligation.
o It becomes facultative if, in lieu of the car, he can
undertake another prestation like the painting of a mural.
Undertaking the substitute prestation is NOT mandatory in the
event that the principal prestation is NOT performed as the creditor
only agrees that it may be given as a substitute.
If the substitute however is given, the creditor cannot refuse it
unless it is unlawful.
o However, there is nothing to prevent the parties from
agreeing that the giving of the substitute prestation is
mandatory in the event the principal obligation cannot be

performed.
Effect of Loss
If the substitute is lost through the negligence of the debtor, it does
not affect the principal obligation & debtor will not be liable.
If there is bad faith on the part of the debtor, it depends:
o If the substitute prestation was one of the main reasons
why the creditor was induced the creditor to enter into the
contract with the debtor, but the latter did not really intend
to constitute it as a substitute, this could be an act of fraud
on the part of the debtor, which could make the whole
contract voidable.
Ex. A debtor promises to give a particular car to the creditor.
o The debtor negotiates so that he can give a boat to the
creditor instead of a particular car, which is preferred by
the creditor.
o The creditor resists but he agrees on the promise of the
debtor to give not 1 but 2 cars of the same type, which the
debtor represents as owned by him, as substitute
prestation in the event that the principal prestation is not
performed.
o Here, the creditor would not have agreed without this
substitute prestation.
o After the signing of the contract & before the fulfillment of
the main prestation, the creditor learns that the debtor
does not own the cars.
The act of the debtor may constitute fraud & the whole contract
may be annulled.
o If the creditor does not try to annul the contract & accepts
the giving of the boat, he can no longer assail the contract
as his acceptance cured the defect of said voidable
contract.
o HOWEVER, if the promise to the creditor relative to the 2
substitute cars does not constitute the reason for which
the creditor entered into the contract, the debtor would not
be liable for his bad faith if the principal obligation can still
be performed.
Once the substitution has been made, the obligor is liable for the
loss of the substitute on account of his delay, negligence or fraud.
SECTION 4. JOINT & SOLIDARY OBLIGATIONS.
57
Art. 1207.
The concurrence of two or more creditors or of two or more debtors in one &
the same obligation does not imply that each one of the former has a right
to demand, or that each one of the latter is bound to render, entire
compliance with the prestation. There is solidary liability only when the
obligation expressly so states, or when the law or the nature of the
obligation requires solidarity.
Solidary Obligation
Gives anyone, some or all of the creditors the right to demand from
anyone, some or all of the debtors the satisfaction of the total
obligation, not merely the share of each debtor in the debt
Exists only:
o When the obligation expressly so states, or
o When the law or the nature of the obligation requires it.
Surety v. Guarantor
Surety an insurer of debt; binds himself to pay the obligation of
the debtor when it becomes due.
o Becomes a solidary debtor; the creditor need not go
against the principal debtor first before the creditor can
collect from the surety, either the whole amount of the
indebtedness or for such amount as the surety was made
liable by contract.
Guarantor an insurer of solvency; subsidiarily liable for the debt
of the debtor.
o Can be required to pay the indebtedness of the principal
debtor only after the creditor has unsuccessfully exhausted
all means to collect from the debtor.
o Not considered solidarily or even jointly liable.
o HOWEVER, by stipulation of the parties, the guarantor can
make himself solidarily liable for the indebtedness.
CASE: Sesbreo v. CA
Lesson: Custodianship does not equate to solidary liability.
Facts:
o Y was indebted to Z.
o X company issued a promissory note in favor of Y for the
amount of P300K, assigning such to Z as security for the
payment of Ys indebtedness to Z.
o The note was placed under the custody of Pilipinas Bank,
which informed Z via Denominated Custodian Receipt
that it possessed the promissory note & that upon Zs
written instructions, the bank would undertake physical

delivery of the above securities fully assigned to Z.
Held: The banks statement does not make it a solidary debtor.
There was no express assumption of solidary liability.
CASE: PNB v. Sta. Maria

Lesson: Special power of attorney does not grant the attorney the
authority to bind himself solidarily with the principal on any loan the
attorney might thereunder secure.
Facts: The principal, in a special power of attorney, empowered his
agent to borrow money & mortgages of real estate to the creditor.
Said agent indeed borrowed money, but executed a mortgage not
on the account of his principal but in his own name. The lower court
ruled that this would make the obligation joint & several.
Held: Such a scenario does not create a solidary obligation.
Express Stipulation for Solidary Liability
Parties can expressly stipulate solidary liability.
CASE: Pacific Banking Corp. v. IAC
o Lesson: It is not the title of the document, but its content,
that determines what type of obligation it is.
o Facts: The document was denominated as a Guarantors
Undertaking but the provision therein stated that the
guarantor jointly & severally shall pay the bank any & all
indebtedness of the principal debtor.
o Held: Since the undertaking expressly stipulated the joint &
several obligation of the debtor, the nature of the
obligation was clearly solidary.
The ff. phrases that there is a solidary obligation:
o Individually & jointly liable
o Collectively, separately, distinctly, respectively or
severally
o Individually liable
o Several obligation
o Juntos o separadamente
o Mancomun o insolidum
o Jointly & severally guaranteed
The ff. scenarios also display solidary obligation:
o Where the contract reads I promise, or I hereby bind
myself, & is signed by two or more promisors
o Where it reads: I promise to pay & is signed by one
person at the bottom & by another on the back thereof.
58
o
o
An agreement between 3 creditors of a bankrupt, that it

should have a 1/3 of any dividend paid on a claim filed by
2 of the debtors, has been held joint & several contract.
Such expressions as we or either of us, or we jointly and
severally promise
The Use of I
It counts as a solidary obligation when the debtors who were
referred merely as I were not identified in the body or content of
the document itself.
HOWEVER, if I promise to pay were worded differently in that it
identified the particular person referred to as I, then even if there
were a number of signatures in the note, the others cannot be held
liable as solidary debtors because only 1 person as identified
expressly in the promissory note made the promise to pay.
o The others who sign are witnesses & cannot even be held
liable as joint debtors.
Ex. The promissory note reads: I, Mr. X, promise to pay Mr. J
P1,000 on or before Jan. 1, 2003. The signatures of Mr. X (the
debtor) and Mr. J (the creditor) appear.
o At the lower portion of this document, the signatures of Mr.
M & Mr. N appear, it can never be presumed that Mr. M
and Mr. N also signed as solidary debtor or creditor.
o This is so because:
!
The law does not make such a presumption.
! There is no fact in the wording of the document
from where such a presumption could arise.
! The names of the only debtor & the only creditor
were exactly identified in the body of the
document, as Mr. X was identified in the body of
the document immediately preceding the word I
& he signed it.
! Even the nature of the obligation (simple loan)
does not give rise to a solidary obligation.
Once the terms of an agreement have been reduced into writing, it
is deemed to contain all the terms agreed upon by the parties & no
evidence of such terms other than the contents of the written
agreement shall be admissible
Effect of Judicial Decision
Even if the parties stipulated in their contract that the obligation of
the obligor is solidary but such contract was superseded by a
judicial decision declaring the obligation to be merely joint, the said

decision must be enforced in a joint manner.
ALSO, if a decision does not state that the obligation of the
judgment debtors is solidary, the writ of execution enforcing such a
decision cannot be implemented in a solidary manner among the
judgment debtors.
Law & Solidary Obligations

Art. 94 & 121, last par., Family Code If the ACP/CPG is
insufficient to cover the liabilities for which the ACP/CPG is liable,
the spouses shall generally be solidarily liable for the unpaid
balance with their separate properties
Art. 145, Family Code - If the property arrangement of the spouses
is the separation of property, the liability of the spouses to creditors
for family expenses shall be solidary.
Art. 927, Civil Code In inheritance, if 2 or more heirs take
possession of the estate (of the deceased), they shall be solidarily
liable for the loss or destruction of a thing devised or bequeathed,
even though only one of them should have been negligent.
Art. 1824, Civil Code - All partners are solidarily liable with the
partnership for everything chargeable to the partnership in cases in
Art. 1822 & 1823 of the Civil Code.
Art. 1894, Civil Code - 2 or more agents may agree to bind
themselves solidarily
o Art. 1895, Civil Code If solidarity is agreed upon, each of
the agents is responsible for the non-fulfillment of the
agency, & for the fault or negligence of his fellow agents,
except in the latter case when the fellow agents acted
beyond the scope of their authority
Art. 1945, Civil Code - With respect to bailees in commodatum,
when there are 2 or more bailees to whom a thing is loaned in the
same contract, they are liable solidarily.
Art. 2146, Civil Code - In the quasi-contract negotiorum gestio,
pertinently provides that the responsibility of 2 or more officious
managers shall be solidary, unless the management was assumed
to save the thing or business from imminent danger.
Art. 2157 - The responsibilities of 2 or more payees, when there is
payment of what is not due, is solidary.
Art. 2194 - The responsibility of two or more persons who are liable
for quasi-delict is solidary.
Nature of the Obligation & Solidarity
59
Some provisions in the Preliminary Title, Ch. 2 on Human Relations

of the Civil Code, particularly Articles 19-22, though not expressly
providing for solidary liability, nevertheless should give rise to
solidary obligations if violated by 2 or more persons.
Art. 1208.
If from the law, or the nature or the wording of the obligations to which the
preceding article refers the contrary does not appear, the credit or debt
shall be presumed to be divided into as many equal shares as there are
creditors or debtors, the credits or debts being considered distinct from one
another, subject to the Rules of Court governing the multiplicity of suits.
Joint Obligations
Presumption of law - an obligation is always joint.
In the absence of a finding of facts that debtors made themselves
individually liable for the debt incurred, they are obliged to pay only
their share in the indebtedness.
o Creditors can only claim their share in the credit in
proportion to own & owe.
It is only when the (1) law, or (2) the nature or (3) the wording of the
obligation clearly provides for solidary liability will the obligation be
such.
Unless otherwise specified, the creditors & debtors in a joint
obligation shall be entitled or shall make payment in equal
proportions.
o If A & B are indebted to C & D for P1,000:
! C can collect from A & B P250 each.
! D can likewise collect from A & B P250 each
If in the same P1,000 obligation, A owes only 1/3 of the
indebtedness & B owes 2/3 while creditor C owns 1/5 of the credit
& D owns 4/5:
o A is obliged to pay C only P66.67 & D only P266.67.
! A owes only 1/3 of P1,000 which is P333.33.
! C & D can collect only from that share of A.
! Since C only owns 1/5 of P333.33, he can only
collect P66.67 from A.
! Since D owns 4/5 of P333.33, he can only collect
P266.67 from A.
! B is obliged to pay P133.33 to C & to D only
P533.33.
! Following the same principle, B only owes 2/3 of
the P1,000 indebtedness which is P666.67. C & D
can collect only from that share of B.
!
!
Since C only owns 1/5 of P666.67, he

can only collect P133.33 from B.
Since D owns 4/5 of P666.67, he can
only collect P533.33 from B.
Art. 1209.
If the division is impossible, the right of the creditors may be prejudiced only
by their collective acts, & the debt can be enforced only by proceeding
against all the debtors. If one of the latter should be insolvent, the others
shall not be liable for his share.
Effect of Impossible Division
If the division of the obligation is impossible & the obligation is
joint, the creditors must act collectively.
Ex. If the joint obligation is to give a house to 3 creditors, one of the
creditors cannot undertake an act which will prejudice the others.
o A waiver of the obligation cannot be made by anyone of the
creditors UNLESS such waiving-creditor has been
authorized by the others to undertake such act.
o If there is no such authority & a waiver is to be made, ALL
the creditors must waive the obligation.
If there are 3 debtors obliged to give a single house, all of the
debtors must be sued if they renege on their obligation.
o If 1 of the 3 debtors refuses to deliver the house, the
obligation will be converted into a claim for damages.
! A joint indivisible obligation gives rise to indemnity
for damages from the time any of the debtors
does not comply with the undertaking.
! The debtors who were ready to fulfill their
promises shall not contribute to the indemnity
beyond the corresponding portion of the value of
the thing or service in which the obligation
consists.
o Ex. If the house is worth P150,000, the creditors can file a
case for damages against the 3 debtors in the amount of
P150,000. Each of the debtors will be liable for P50,000.
! The debtor who refuses to deliver or who is, in
effect, responsible for the suit by the creditor may
be liable for additional damages.
! Those who were willing shall not contribute to the
indemnity beyond their corresponding debt.
Where One Debtor is Insolvent
60
Since the obligation is joint, the debtors shall not be responsible for
the share of a debtor who is insolvent.
Art. 1210.
The indivisibility of an obligation does not necessarily give rise to solidarity.
Nor does solidarity of itself imply indivisibility.
Solidary v. Indivisibility
Solidary obligation - refers to the nature of the obligation attaching
to the obligor & obligee
Indivisibility - refers to the nature of the object of the prestation
Art. 1211.
Solidarity may exist although the creditors & the debtors may not be bound
in the same manner & by the same periods & conditions.
Creditors & Debtors Need Not be Bound in the Same Manner
A solidary obligation refers to the nature of the obligation.
o It can exist even if the creditors & debtors are not bound in
the same manner & by the same periods & conditions.
o The creditor, for example, can collect an amount owed by
solidary debtors at the time when the periods imposed on
the particular debtors have been fulfilled.
Ex. If A, B & C are solidarily indebted to D in the amount of
P15,000, D can collect from anyone of the debtors the whole
amount of the indebtedness. A is required to pay only on Aug. 1,
1997, B only on May 1, 1998 & C immediately.
o If D demands payment from C on Jan. 6, 1997, he can pay
only P5,000 which pertains to his share. The liability of A &
B have not yet matured.
o On August 2, 1997, creditor D can still demand payment of
the balance from C who can legally pay only P5,000
representing As share considering that Bs liability has not
yet matured.
CLASS DISCUSSION
Solidary debt can be enforced as JOINT in relation to obligations
with a period (Art. 1211 & 1212).
o You can collect from anyone, but only the share that is due.
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.
All for One, One for All

Even just one of the solidary creditors can file a suit for recovery of
the entire indebtedness from the solidary debtors.
o But when he does something prejudicial to the other
creditors, the action of said creditor is not necessarily void.
CASE: Quiombong v. CA
o Facts: Only one of the solidary creditors filed suit for
collection against the solidary debtors. The debtors moved
for the dismissal of the suit on the ground that the other
solidary creditor should have been included in the case.
o Held: Recovery of the contract price was surely a useful act
& can be done even by one solidary creditor.
! The question as to who should sue on a solidary
obligation for the collection of the price was a
personal issue between the solidary creditors, & it
did not matter who as between them filed the
complaint, since the debtors were liable to either
of them for the whole obligation.
If one of the solidary creditors makes an extrajudicial demand for
the debtor to pay, this will benefit also the other creditors.
o The demand will make the prescriptive period for the
fulfillment of the obligation run anew.
HOWEVER, a solidary creditor should NOT do anything which may
be prejudicial to the other solidary creditors.
o Ex. If the solidary obligation has become due & the debtor
decides to make complete payment to one of the solidary
creditors, such solidary creditor must accept payment.
! Non-acceptance is prejudicial to the other solidary
creditors, as it would lead to a delay on the part of
the creditors for which they all may be liable.
o Ex. If one of the solidary creditors remits the obligation in
favor of one of the solidary debtors, the whole obligation is
extinguished.
! The extinguishment can no longer be invalidated.
! Their remedy is to collect their share of the
indebtedness from the solidary creditor who made
the remission.
! They can likewise ask for damages for what ever
they may have lost as a result of the remission,
such as interest which should have been earned
had it not for the remission.
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Art. 1213.
A solidary creditor cannot assign his rights without the consent of the
others.
Mutual Trust
Ideally, the relationship between & among solidary creditors is one
of mutual trust.
Thus, a solidary creditor cannot assign his rights without the
consent of the others.
Art. 1214.
The debtors 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.
Payment to the Creditor Who Makes the Demand
Generally, a debtor may pay any of the solidary creditors.
BUT if one of them makes an extrajudicial or judicial demand,
payment must be made to such creditor.
Two Views
Once a court case has been filed by one solidary creditor, the
debtor cannot pay the other solidary creditor who is not included in
the case.
The effect of paying a different creditor has led to 2 views:
1) If payment is made to a creditor who is not a party to the suit or
did not make the demand, the payment is INVALID.
o Based on the view that, as soon as one of the creditors
make the demand, the mutual representation of the
creditors with respect to each other momentarily
ceases
o When the case terminates & demanding-creditor
accepts partial payment with a reservation as to the
balance or, if after extra-judicial demand, the
demanding-creditor accepts partial payment with
reservation as to the balance, the other creditors can
now again seek payment from the debtor.
2) The payment made to the other creditors is VALID (the Sta.
Maria opinion).
o Art. 1214 does not provide for invalidity, so the answer
should be what is most beneficial to the creditors.
o Payment to the demanding creditor must be seen as a
preference only.
o
o
If the non-demanding creditors accept the payment,

the demanding creditor will not be prejudiced because
the case for collection pending in court will not
necessarily be dismissed. There will still be interest,
damages or attorneys fees to talk of, unless the
creditor waives them.
The same should apply in extrajudicial demand.
Consistent with Art. 1222 where a solidarity debtor
may avail himself of all the defenses which are derived
from the nature of the obligation & those personal to
him, or pertain to his own share.
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 Art. 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.
Modes of Extinguishing an Obligation
1) Novation the change of creditors, debtors or the principle
condition of the contract
o MUST clearly release the solidary obligation of debtors
2) Compensation when 2 persons, in their own right, are creditors &
debtors of each other
3) Confusion - the merger of the characters of the creditor & debtor in
the same person
4) Remission the condonation of an obligation
Illustrative Example
NOTE: The entire obligation is extinguished, not just the debt of
the debtor whose debt was expressly extinguished.
A, B & C are solidary debtors of D, E & F in the amount of P1,500.
Novation: If A informs D that X is paying the debt provided that A is
released from the obligation, & X & D agree to the change, there is
a novation in the person of A, one of the debtors.
o Because of this novation, not only As obligation, but also
Bs and Cs are extinguished.
Compensation: If A becomes the creditor of D, also for P1,500, &
said amount is also due, there is compensation between A & D.
o The compensation extinguishes not only the obligation of A
but also that of B and C.
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Confusion: If D issues a promissory note to X in the amount of

P1,500 & X endorses it to A who endorses it to D, there is a merger.
o The debt has been extinguished because of creditor D
without creditors E and F being benefited.
So as not to prejudice the other solidary creditors, D must pay each
of them P500.
o The creditor who may have executed any of these acts of
novation, compensation, merger or confusion, as well as
he who collects the debt, shall be liable to the others for
the share in the obligation corresponding to them.
CLASS DISCUSSION
In Art. 1215, despite the prejudice to the unknowing creditor, the
obligation is nevertheless extinguished.
All other modes of extinguishment by one creditor will have the
same effect as those mentioned in Art. 1215, which will also still
apply.
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.
CASE: Imperial Insurance, Inc. v. David
Lesson: A solidary debtor of a deceased co-debtor can be
proceeded against by the creditor for the enforcement of the debt,
even if the creditor did not participate in the intestate proceedings.
Facts:
o A husband & wife bound themselves jointly & severally in
favor of the obligee for a sum of money.
o When the husband died, the obligee demanded payment
from the wife who resisted payment, claiming that the
obligees claim is barred by its failure to file a claim in the
intestate proceeding of the deceased husband.
Held: The obligee can properly claim from the wife, as the obligation
is solidary.
o If husband and wife bound themselves jointly& severally, in
case of his death her liability is independent of & separate
from her husbands; she may be sued for the whole debt. It
is wrong to hold that the claim against her & her husband
should be made in the decedents estate.
CASE: Guererro v. CA
Lesson: Compromise is not the same as novation; thus when a
compromise agreement between the creditor & one solidary debtor
fails, the creditor can still seek payment from the other debtor.
Facts:
o The creditor filed a suit against one of the solidary debtors.
The suit was compromised without novating the solidary
debt.
o The said solidary debtor defaulted in making payment,
resulting in the creditor demanding payment from the
other solidary debtor.
o The other solidary debtor claimed that there was already a
waiver by the creditor to go against him considering that he
already compromised the case with his other solidary
debtor.
Held: There was no waiver. The fact that in the compromise
agreement the creditor chose to go after the 1st debtor did not
imply waiver of its right to proceed against any of the solidary
debtors or some or all of them simultaneously.
o Demand made against one of them is not an obstacle to
demands which may subsequently be directed against the
others so long as the debt or any part of it remains
outstanding & unpaid.
Partial Payment
The solidary creditor has a right not to accept partial payment from
the solidary debtors.
o AND if he accepts partial payment from some, he is not
prevented from claiming from those who have not yet paid
If a claim from one of the solidary debtors has been dismissed by a
court on grounds other than the extinguishment of the whole
obligation or prescription, it does not necessarily mean that the
solidary indebtedness cannot be claimed against the other solidary
debtors who were (1) not impleaded in the case or against those
who were (2) impleaded but whose liability was found by the court
as proper.
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.
63
If the payment is made before the debt is due, no interest for the
intervening period may be demanded.
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.
Creditors Choice
Creditor can choose whom he will enforce payment
Creditor may also choose which offer to accept when 2 or more
solidary debtors offer him payment
Ex. A, B & C are solidarily indebted to D for P1,500 on May 1.
o A, B & C offered to pay D on the due date.
! D can choose whose payment to accept.
o If D accepts payment from A, the obligation is totally
extinguished.
! A then has the right to claim P500 each from B &
C (their respective shares in the indebtedness).
o If A paid interest on the indebtedness, B & C must also
share in the payment of the interest.
! NOTE: If payment is made before the debt is due,
no interest for the intervening period may be
demanded.
o If A pays the indebtedness on Feb. 1, no interest can be
claimed by A for the period beginning Feb. 1 up to May 1,
the due date of the obligation.
o If C cannot pay because he is insolvent, his share shall be
borne by A & B in proportion to the debt of each.
! A is liable for P250 & so is B. Since A paid the
entire obligation, A can ask reimbursement of said
P250 (Cs share) from B.
CLASS DISCUSSION
When a solidary debtor pays for the entire debt of his co-debtors &
his own & has a right to reimbursement from his fellow debtors, the
debt of the debtors becomes JOINT, not solidary.
SCENARIO
o Facts: A, B & C are solidarily indebted to X for P200. A told X that he
would pay X partially, P110, with reservation that the balance was
still due. What happens next?
o Answer: A has paid more than his share & now has the right to
collect from B & C.
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.
No Reimbursement for Payment Made by a Co-Debtor When:
(1) Payment is made after the obligation has prescribed
(2) Payment is made after the obligation has become illegal
Illustrative Example: Prescription
An action based on a written agreement must be brought within 10
years from the time the cause of action accrues.
Hence, if A & B, solidary debtors pursuant to a written loan
agreement, are bound to pay C on May 2, 199Y. On the said date,
the creditor makes a demand on them, but does not collect until
after 12 years from the demand.
o The claim clearly has prescribed.
However, if A pays the creditor despite prescription, B can refuse to
pay A his share because technically the debt has prescribed.
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.
Art. 1220.
The remission of the whole obligation, obtained by one of the solidary
debtors, does not entitle him to reimbursement from his co-debtors.
Effects of Remission
Depends when the remission was in fact given by the creditor
Ex. A, B and C are solidary debtors of D in the amount of P1,500. A
persuades D to condone the debt.
o A cannot collect reimbursement from B or C because the
remission by D of As debt extinguishes the entire
obligation.
o HOWEVER, if C, after the debt becomes due, pays the
whole indebtedness & A only convinces D to condone the
debt after Cs payment, remission has no effect.
! By the time the remission was made, Ds credit
has already been extinguished. C can still claim
from A, the latters share of the indebtedness.
64
Only ONE Creditor in Art. 1219

Article 1219 is applicable only when there is one creditor.
If there are many solidary creditors involved, remission of the debt
by one of them without the consent of the others will be prejudicial
to the other solidary creditors & is now allowed (Art. 1219).
o If the remission is done, the solidary creditor who made the
remission shall be liable for the share which the other
creditors should answer for damages which the other
solidary creditors may suffer as a result of the remission.
Ex. A, B & C are solidary creditors of X, who owes them P1,500
payable on Dec. 30, 2001 with interest of 15% per annum. B
condoned the debt on April 1, 2001 just one day after it was
incurred.
o B shall be liable to A for P500 & C for P500, plus damages
equivalent to the interest which A & C would have gotten
had the obligation not been condoned & had it been paid
on Dec. 30; thus, interest from April 1-Dec. 30, 2001.
Art. 1221.
If the thing has been lost or if the prestation has become impossible without
the fault of the solidary debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all shall be responsible to
the creditor, for the price & the payment of damages & interest, without
prejudice to their action against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the performance has
become impossible after one of the solidary debtors has incurred in delay
through the judicial or extrajudicial demand upon him by the creditor, the
provisions of the preceding paragraph shall apply.
When Thing is Lost
Obligation is extinguished & debtors are not liable when lost or
when the prestation becomes impossible without their fault
When there is fault or delay on the part of any of the solidary
debtors before it is lost or becomes impossible, all the solidary
debtors will still be held liable.
Art. 1222.
A solidary debtor may, in actions filed by the creditor, avail himself of all
defenses which are derived from the nature of the obligation and of those
which are personal to him, or pertain to his own share. With respect to those
which personally belong to the others, he may avail himself thereof only as
regards that part of the debt for which the latter are responsible.
Scenario
Ex. A, B & C are indebted to G in the amount of P1,500, but B shall
only pay if he passes the bar exam for lawyers in 1996 & C shall
pay only on Jan. 2, 1997, & A when he reaches the age of 18.
o If G sues B in 1996 after he passes the bar, B can set up
the defense that Cs obligation is subject to a period which
has not yet arrived, & also the defense that As contract is
voidable since he was a minor at the time he (A)
contracted the solidary obligation.
o If B is successful in claiming said defenses, he will
nevertheless pay the amount of P500 which pertains to his
share because there is no impediment in collecting the
same from him.
CLASS DISCUSSION
There is always a choice in delay & other faults of debtors:
o Specific performance
o Damages
Divisible obligation easy to demand from each joint obligor

payment of his respective share
Indivisible each debtor must coordinate with the rest of the
debtors for the fulfillment of the obligation
Ex. If A, B & C are jointly bound to deliver a computer worth
P30,000 to D & the latter, on due date, demands payment from
them, all of them must fulfill the obligation.
o If A & B are ready to deliver but C, for no justifiable reason,
refuses to deliver, said debtors joint obligation is
converted into a claim for damages on the part of the
aggrieved creditor, who can file a case against all them for
the amount of the computer. He can also demand for
damages he suffered due to the non-delivery of the
computer, such as exemplary damages, moral damages, or
attorneys fees.
o A & B however should not be held liable for these other
damages as they were willing to deliver the computer. It
will only be C who should shoulder these other damages.
Divisibility or Indivisibility
The nature& effect of obligations do not affect the divisibility or
indivisibility of the things that are the objects of the obligations in
which is only 1 debtor & 1 creditor.
Art. 1225.
For the purposes of the preceding articles, obligations to give definite things
& those which are not susceptible of partial performance shall be deemed
to be indivisible.
When the obligation has for its object the execution of a certain number of
days of work, the accomplishment of work by metrical units, or analogous
things which by their nature are susceptible of partial performance, it shall
be divisible.
However, even though the object or service may be physically divisible, an
obligation is indivisible if so provided by law or intended by the parties.
In obligations not to do, divisibility or indivisibility shall be determined by the
character of the prestation in each particular case.
Art. 1224.
A joint indivisible obligation gives rise to indemnity for damages from the
time anyone of the debtors does not comply with his undertaking. The
debtors who may have been ready to fulfill their promises shall not
contribute to the indemnity beyond the corresponding portion of the price of
the thing or of the value of the service in which the obligation consists.
Indivisible Obligations
An obligation which is not susceptible of partial performance
o Ex. a contract stipulating that an actor has to sing & dance
simultaneously, is also indivisible.
An obligation to give definite things.
o Ex. an obligation to give a particular house.
Joint Debtors
Bound only to perform their respective portion in a particular
indebtedness.
Divisible Obligations
When the obligation has for its object the execution of a certain
number of days of work
SECTION 5. DIVISIBLE & INDIVISIBLE OBLIGATIONS.

Art. 1223.
The divisibility or indivisibility of the things that are the object of obligations
in which there is only one debtor & only one creditor does not alter or modify
the provisions of Ch. 2 of this Title.
65
When the object is the accomplishment of work by metrical units, or

analogous things, which by their nature are susceptible of partial
performance
Example of a divisible obligation projects with phases (like

subdivisions)
SECTION 6. OBLIGATIONS WITH A PENAL CLAUSE.
Express Stipulation
Despite the nature of the obligation, the parties themselves may
stipulate whether or not the object or service shall, for purposes of
their contract, be divisible or indivisible.
The wording of the contract therefore will be material to show the
characterization of the obligation.
CASE: Government vs. CFI
o
o Lesson: Words like in proportion & stages are
indicative of the divisible nature of the obligation.
o Facts: The compromise agreement stated, among others,
that the work was to be done in stages to be determined
by the City Engineer, that the contractor was to advance
the necessary amount needed for each stage of the work
to be reimbursed by the Pasay City Government, & that the
contractor was to furnish in favor of the Pasay City
Government a new performance bond in the amount
required by law & regulations in proportion to the
remaining value or cost of the unfinished work of the
construction per approved plans and specifications.
o Held: The provisions in the compromise agreement read
together clearly show a divisible obligation.
! If the parties really intended the legal rate of 20%
performance bond to refer to the whole unfinished
work, then the provisions should have required
the plaintiff contractor to submit & file a new
performance bond to cover the remaining
value/cost of the unfinished work of the
construction. Using the words in proportion then
significantly changed the meaning of the
paragraph to ultimately mean a performance bond
equal to 20% of the next stage of the work to be
done.
Obligations To Do or Not To Do
Divisibility or indivisibility shall be determined by the character of
the prestation in each particular case
CLASS DISCUSSION
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Art. 1226.
In obligations with a penal clause, the penalty shall substitute the indemnity
for damages & the payment of interests in case of non-compliance, if there
is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.
The penalty may be enforced only when it is demandable in accordance with
the provisions of this Code.
Penal Clause
GENERALLY, Obligation is extinguished when penalty is paid.
An accessory obligation which the parties attach to a principal
obligation for the purpose of insuring the performance thereof by
imposing on the debtor a special prestation (generally consisting in
the payment of a sum of money) in case the obligation is not
fulfilled or is irregularly or inadequately fulfilled
If the principal obligation has been complied with, the penal clause
has lost its efficacy or enforceability
Application may be governed by the parties
o If there is nothing stipulated as to how it shall be applied,
then the law applies: the penalty substitutes the indemnity
for damages & interest in case of non-compliance
In some foreign jurisdictions (United Kingdom, Australia, New
Zealand and some states in the United States), a penalty is
different from liquidated damages.
o Penalty - there is need of proof of loss
o Liquidated damages - may be made without proof of loss
HOWEVER, in the Philippines, there is no difference between them
legally, though they may differ as a matter of language.
o In either case, the creditor is entitled to recover the sum
stipulated without the necessity of proving damages.
o It is meant to be harsh.
Generally, imposition of the liquidated for breach of contract, such
as in a building contract, bars any award for additional damages at
large for the same breach.
o HOWEVER, if the parties stipulate that the award of the
penalty pursuant to the penalty clause will not bar recovery
of damages or interest, then it shall be so.
The penalty may be in any form, which is determined or liquidated

The creditor in an obligation with a penal clause shall still be
entitled to damages when:
o The debtor is guilty of fraud;
o The debtor refuses to pay the penalty;
o When stipulated by the parties
The penalty may be enforced only when it is demandable.
o An obligor is in delay only upon judicial or extra-judicial
demand unless legally excused as provided by law.
o Hence, the penalty may be claimed only when there is
demand, whether judicial or extrajudicial, unless the law,
the stipulation of the parties or the nature of the contract
(time is of the essence) otherwise demands.
CLASS DISCUSSION
3 Exceptions to the General Rule on Penalties Replacing Damages:
1) When parties stipulate in the contract that both are still
demandable.
2) When there is fraud on the part of the person who must pay
3) When the debtor refuses to pay the penalty
Penalty may or may not extinguish the obligation, especially when
the contract says: penalty for each & every day of delay
Can creditors/debtors manipulate the penalty clause to their liking?
Generally, yes.
Is penalty a substitute for non-compliance? Yes.
Art. 1227.
The debtor cannot exempt himself from the performance of the obligation
by paying the penalty, save in the case where this right has been expressly
reserved for him. Neither can the creditor demand the fulfillment of the
obligation & the satisfaction of the penalty at the same time, unless this
right has been clearly granted him. However, if after the creditor has
decided to require the fulfillment of the obligation, the performance thereof
should become impossible without his fault, the penalty may be enforced.
Performance of the Principal Obligation
Penalty is merely an accessory obligation. It is not the principal
obligation.
o The debtor CANNOT substitute the performance of the
principal obligation by the mere payment of the penalty.
o HOWEVER, the parties can stipulate otherwise.
Likewise the creditor CANNOT demand fulfillment of the obligation
& payment of the penalty at the same time.
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Once the obligation has been complied with &

extinguished, the penal clause has lost its raison detre.
GENERAL RULE: When the penalty is paid, the obligation is
extinguished.
o HOWEVER, the parties CAN stipulate that payment of the
penalty & satisfaction of the obligation can be demanded
at the same time.
In the event that (1) the creditor demands fulfillment of the
obligation & (2) it has become impossible without his fault, the
penalty may be enforced.
o Ex. A is to deliver a particular computer to B on May 7,
1997. It was stipulated that in the event he fails to deliver
on time, he shall be liable for liquidated damages in the
amount of P200,000. B demands delivery of the particular
computer on the due date but A fails to deliver. Thereafter,
the computer is hit by lightning after his default. B can
demand payment of the P200,000 penalty.
o
CLASS DISCUSSION
The debtor still owes the performance of the main obligation even if
he pays the penalty, though the creditor cannot ask simultaneously
for penalty & fulfillment
Art. 1228.
Proof of actual damages suffered by the creditor is not necessary in order
that the penalty may be demanded.
Proof of Damages Not Necessary
Because the particular penalty in the penalty clause is already
specified & hence liquidated
The person will perform the penalty in the agreement for as long as
there is irregular or no compliance with the principal obligation
regardless of whether or not the person seeking it suffers damages
CASE: Allen v. Province of Albay:
o If through the act of the owner in a contract, the contractor
will be prevented from finishing the works on the
contractual completion date:
1) The owner shall be deemed to have waived the
time limit or the time period
2) The contractor is bound only to finish the
construction within a reasonable time
3) If there are liquidated damages provided for in

case of delay, a claim for such damages cannot be
sustained.
4) Neither could the liquidated damages be restored
to be made applicable to an unreasonable length
of time.
CLASS DISCUSSION
The principal is extinguished when you pay the penalty.
This rule on actual damages applies because the amount for the
penalty has already been pre-determined
General Damages:
o Compensatory/actual damage cost of object
o Moral damages sleepless nights, anguish
o Exemplary damages extreme breach in bad faith
! Moral & exemplary bigger than actual damage
o Bad faith = further damages
There CAN be breach of contract in good faith.

o In such a case, only actual damages is paid.
Art. 1229.
The judge shall equitably reduce the penalty when the principal obligation
has been partly or irregularly complied with by the debtor. Even if there has
been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.
Equitable Reduction
A contract is a source of obligation.
o Law between the parties
o Neither the law nor the courts will extricate a party from an
undesirable contract he entered into with all the required
formalities & with full awareness of its consequences
Exception to the general rule: PENALTIES
o If a penalty is unconscionable, the court may (1) temper,
(2) reduce or, in some cases, (3) delete it.
Situations when court modified the penalty:
o The court reduced the 25% penalty charge to cover the
attorneys fees & collection fees, which was in addition to
the 12% annual interest, to 10% for being manifestly
exorbitant
o The court reduced a subdivision lot buyers liability from
the stipulated P12K to P1.5K after finding that he had
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partially performed his obligation to complete at least 50%

his house within 2 years, having done so a month after
deadline.
CASE: Palmares v. CA
! Facts: There was a penalty interest of 3% per
month on the total amount due but unpaid in a
contract. The total amount owed was P5,000 &
there was partial payment of P8,600 on due date.
There was also a heavy compensatory interest
separate from the penalty interest.
! Held: The Court eliminated the penalty charge for
being excessive & unwarranted under the
circumstances.
CASE: Jison v. CA
! Lesson: When there has been partial or irregular
compliance with a contract for special
indemnification in the event of failure to comply
with its terms, the courts will rigidly apply the
doctrine of strict construction & against the
enforcement in its entirety of the indemnification
where said indemnity is essentially a mere penalty
having for its principal object the enforcement of
compliance with the contract
! Facts:
o The contract price was originally P55K.
o The contract states that, in case the
contract is cancelled, the amounts
already paid shall be forfeited in favor of
the vendor as liquidated damages.
o The amount already paid, P47K, was
forfeited as per the contract stipulation
when said contract was cancelled.
! Held: While the resolution of the contract & the
forfeiture of the amounts already seen were seen
as valid & binding, the Court reduced the penalty
from P47K to P23K. Furthermore, since the
contract was cancelled, the lot reverts back to the
owner.
Invalid Penalty Clause

If the penalty clause, construed against the one enforcing it, is so
unconscionable that its enforcement constitutes an undue
deprivation or confiscation of the property of the obligor, the courts

can strike it down.
SCENARIO
Question: The car is valued at P1,000 & the penalty for failure to
deliver is P1M. Can the debtor complain when he is in delay &
made to pay the penalty?
Answer: NO. The amount is pre-determined damage. This would be
the same if the car value is P1M & the penalty is P1,000.
o BUT the debtor has a remedy: he can go to the courts.
Article 1230.
The nullity of the penal clause does not carry with it that of the principal
obligation.
The nullity of the principal obligation carries with it that of the penal clause.
Principal Obligation & Penal Clause
The penal clause, being merely an accessory obligation, does not
invalidate the principal obligation in the event that such penal
clause is void or without effect.
The nullity of the principal obligation carries with it that of the penal
clause.
CHAPTER 4 EXTINGUISHMENT OF OBLIGATION

GENERAL PROVISIONS
Art. 1231. Modes of Extinguishing Obligations.
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;
(4) By the confusion or merger of the rights of creditor & debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment,
rescission, fulfillment of a resolutory condition, & prescription, are governed
elsewhere in this Code.
Ways of Extinguishing an Obligation:
(1) Payment or performance
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(2)
(3)
(4)
(5)
(6)
(7)
(8)
Loss of the thing due

Condonation or remission of the debt
Confusion or merger of the right of the creditor & debtor
Compensation
Novation
Annulment
Rescission cancellation of the creditor due to substantial noncompliance (breach of trust)
(9) Fulfillment of a Resolutory Condition
(10) Prescription
Effect of Death of a Party
Does not extinguish an obligation unless said obligation is:
o Personal in nature
o Intransmissible
Heirs The lessors heirs who inherit the leased property from the
deceased lessor cannot set up the claim that the obligation to allow
the property under the lease contract in the possession of the
lessee has been & eject the lessee under the deceased lessors
contract
o Death of a party does not excuse non-performance of a
contract which involves a property right
o Rights thereunder pass to the personal representatives of
the deceased
o Nonperformance is also not excused by death
Crime When there is civil liability for the commission of a crime,
the death of the offender generally extinguishes the crime & the
civil liability.
o CASE: People v. Jose
! Facts: The accused forcibly abducted & raped the
victim & was convicted, with obligation to pay
moral & exemplary damages. He appealed the
decision, but before the judgment of conviction
could become final, he died.
! Held: The case was dismissed & he & his heirs
were relieved from all penalties.
o HOWEVER, if the civil liability neither solely nor originally
springs from the crime, the liability shall persist despite the
extinction of the criminal liability.
! CASE: Torrijos v. CA
Facts: A person bought a property from
the accused, & thereafter the accused
again sold the property to another person.
The accused was charged & convicted of

the crime of estafa & was made to pay
damages. The accused died while the
appeal was pending.
Held: While his criminal liability was
extinguished, his civil liability was not. His
civil liability did not arise solely or
originally from the crime itself, but from a
contract of sale of property not
implemented due to his deceitful acts.
CLASS DISCUSSION
Technically speaking, when X pays Y with a check, that is NOT
payment. When paying through a check, the MONEY is not yet
delivered.
SECTION 1. PAYMENT OR PERFORMANCE.
Art. 1232.
Payment means not only the delivery of money but also the performance, in
any other manner, of an obligation.
Obligation to Pay
Not limited to the delivery of money
Any manner of performing the obligation with the end in view of
extinguishing it.
o Ex. A purchases a car from seller B. A can pay not only in
money, but also In services, provided that B agrees.
There are presumptions made by law in favor of payment.
o 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.
o The receipt of a later installment of a debt, without
reservation as to prior installments, shall likewise give rise
to the presumption that such installments have been paid.
o These presumptions can be rebutted by evidence.
! If presumptions are overturned, the burden of
proving there has been payment rests on the
obligor.
o It has been consistently held that the burden of proof to
show payment once the debt has been fully established by
evidence is on the debtor
! CASE: Biala v. CA
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Lesson: Promissory notes in the hands of

the creditor are proofs of debt rather than
proofs of payment.
Facts: X presented promissory notes
showing Ys debts. But there were no
receipts or other satisfactory evidence to
prove Ys alleged payment to X.
Held: The Court upheld Ys indebtedness.
The burden of proof to show the
obligation has been extinguished due to
payment is on the debtor Y.
CLASS DISCUSSION
Payment is an active mode of extinguishing an obligation.
o Some of the modes are passive.
In reciprocal obligations, both parties always pay:
o If X pays Y to sing.
! X pays Y with money.
! Ys singing is payment.
o If X gives Y a piano, Y will give him P10,000.
! Both parties are PAYING.
! X pays through the piano.
! Y pays by giving P10,000.
Art. 1233.
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.
Complete Delivery
FULL satisfaction of the debt or obligation
Must comprise everything that is necessary to satisfy the obligation
consistent with the object of the same
o Ex. Determinate things must include the delivery of all
accessories & accessions, even if not mentioned; payment
of loan with stipulated interest is only complete when
money is given with interest
Anything less may be considered a breach of the obligation
CASE: PNB v. CA
o Lesson: Debtor must also be able to prove that payment
was made to the correct person or representative.
o
o
Facts: PNB paid an alleged attorney-in-fact of the creditor,

but there was no proof that the alleged attorney-in-fact was
the representative of the creditor.
Held: Payment was not effective. A check was never
delivered to the creditor.
Art. 1234. Doctrine of Substantial Performance.

If the obligation has been substantially performed in good faith, the obligor
may recover as though there had been a strict and complete fulfillment, less
damages suffered by the obligee.
Obligor May Recover
Obligor may be paid, minus damages
The part that was not performed must not destroy the value of the
purpose of the contract & there must be good faith
Doctrine of Substantial Performance
NOT complete performance
Constitutes a breach of the obligation if not for the legal treatment
that when such occurs, the obligor may recover as though there
had been strict & complete fulfillment, less damages suffered by
the obligee
o HOWEVER, breach should NOT be a material one enough
to compel the obligee to rescind the whole obligation
o The part unperformed must NOT destroy the value or
purpose of the contract
o It must also be done in good faith
! Conscious departure from the contract will not
necessarily defeat recovery. The pertinent inquiry
is not whether the breach was willful but whether
the behavior of the party in default comports with
the standards of good faith & fair dealing.
! Even an adverse conclusion on this point is not
decisive but is to be weighed by other factors,
such as the extent to which the owner will be
deprived of a reasonably expected benefit & the
extent to which the builder may suffer forfeiture, in
deciding whether there has been substantial
performance.
CASE: Pagsibigan v. CA
Lesson: There is substantial compliance when the debtor, due to
the interest charged, technically already paid much more than the
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actual debt. This can merit the release of a mortgage, or prevent a

creditor from rescinding the contract.
Facts:
o The debtor had already paid the creditor more than the
original amount of loan, which had a security of mortgage,
due to the imposition of a high interest rate plus penalty
charges.
o The debtor, as payment of the remaining balance of
P3,558.20, had in effect paid P8,650.00 in addition to the
P1,000 it also paid
Held: The mortgage could be released because there was already
substantial compliance. However, the debtor was still required to
pay some penalties.
Damages
The obligor may recover as though there had been a strict &
complete fulfillment, less damages suffered by the obligee.
o Obligor may be compensated for the work performed.
Examples:
o The difference between the value of the house as built
&the value it would have had had it been constructed
strictly according to the contract is the measure of
damages in such a contract.
o The defaulting party will be allowed to recover the contract
price less the cost of correction of the defects of the
unfinished work.
CASE: JM Tuason & Co. Inc. v. Javier
Lesson: The obligor may ask for a reasonable extension to pay all
his obligations to the obligee.
Facts:
o The obligor had been religiously satisfying the monthly
installments after the execution of the contract for a period
of almost 8 years.
o The total aggregate amount the obligor has paid to the
obligee, when including interests, already exceeds the
original loan.
Held: The obligor was allowed time to pay his debts, taking into
account the circumstances of his case.
CLASS DISCUSSION
General rule: COMPLETE compliance is required
Exceptions: Doctrine of Substantial Compliance (where

there is a breach, but it is substantially complete)
! Art. 1234 Good faith no waiver of damages
! Art. 1235 Irregularity is accepted waiver of
damages
Magdalena case just pay what is lacking if there is substantial
compliance; no more extinguishment
If the payment is still with the obligor, the object of the contract
(e.g. a car) is still with the obligor.
Art. 1235.
When the obligee accepts the performance knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is
deemed fully complied with.
Waiver
The substantial compliance in Art. 1235 connotes the waiver of the
obligee of damages arising from the breach of the contract which
resulted in the incompleteness or irregularity
By not expressing any protest or objection, the obligee accepts the
performance of the obligation as fully complied with despite his
knowledge of such irregularity.
CASE: Esguerra v. Villanueva
o Lesson: The law does not require the protest of the creditor
to be made in a particular manner or at a particular time.
So long as the acts of the creditor, at the time of the
incomplete payment by the debtor, or within a reasonable
time thereafter, evince that the former is not satisfied with
said payment, the obligation is still not fully extinguished.
o Facts:
! The debtor claimed that, because the creditor
received his partial payments of P800 & P1,400,
the creditor was to be considered to have
accepted the incompleteness of the performance.
! The day immediately following the first payment of
P800, the creditor asked the judge to issue the
corresponding writs of execution in the case.
o Held: The debtor is wrong. The creditor patently manifested
his dissatisfaction in relation to the 1st payment of the
P800 when he filed the case the next day. Even the debtor
impliedly acknowledged the dissatisfaction when, after the
suit was filed against them already, they paid the creditor
P1,400. Receipt is NOT the same as acceptance.
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Accepting agreeing or acceding to an incomplete

or irregular performance
CASE: Tayag v. CA
Facts: The sellers accepted from the purchaser numerous
payments in installment of the purchase price of a particular piece
of land after due date & posterior the grace periods provided in the
contract without any protest as to the delayed payments. The
purchaser filed a case for specific performance relative to the sale,
& consigned at the same time the balance of the purchase price
Held: The actuation of the sellers was clearly a waiver of his right to
rescind the contract. Also, on the basis of Art. 1235, he was
likewise estopped from reneging their commitment on account of
acceptance of benefits arising from overdue accounts of the
purchaser.
No Objection to Invoice
If a party fails to interpose any objection to the entries in an invoice
furnished to him by the other party, such failure can be considered
as implied acceptance & he will be liable to pay the amount stated
SCENARIO
Facts: X owes Y P1M. X offers to pay P900K. Y can legally refuse it,
but should he?
Held: No. Y should just take it. But he MUST protest & say, Give me
the 900K, but you still owe me for the rest.
o Y should give a receipt for the amount received & the
balance that is still due.
CLASS DISCUSSION
If obligee says nothing about a defect upon acceptance, the
obligation is deemed fulfilled.
o HOWEVER, acceptance (agreeing with the payment) is not
the same as receipt (receiving the object)
Objection can be done reasonably after the receipt; the
concurrence of the receipt & the objection is not necessary.
o Ex. X owes Y P100K. X pays only P90K. Y did not protest
during receipt, but after seeing the missing money, Y went
immediately to the sheriff to enforce the mortgage. This
objection is valid even if it occurred after receipt of P90K.
Failure to interpose objection = estoppel within reasonable time.
Article 1236.
The creditor is not bound to accept payment or performance by a 3rd person

who has no interest in the fulfillment of the obligation, unless there is a
stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid,
except that if he paid without the knowledge or against the will of the
debtor, he can recover only insofar as the payment has been beneficial to
the debtor.
Article 1237.
Whoever pays on behalf of the debtor without the knowledge or against the
will of the latter, cannot compel the creditor to subrogate him in his rights,
such as those arising from a mortgage, guaranty, or penalty.
Article 1238.
Payment made by a 3rd person who does not intend to be reimbursed by the
debtor is deemed to be a donation, which requires the debtors consent. But
the payment is in any case valid as to the creditor who has accepted it.
Payments Made by a 3rd Person
Payment made by a third person & accepted by the creditor
extinguishes the obligation in ALL CASES as to the original creditor.
o The difference lies in the rights of the new creditor,
depending on the knowledge of the debtor. With regard to
the old creditor, the obligation is extinguished either way.
The good faith or bad faith of 3rd person is immaterial.
W/N the one who paid completely acquires the rights of the creditor
as against the debtor depends on W/N the payment has been
made without knowledge or against the will of the debtor.
1) 3rd Person Pays without Knowledge or Against the Will of the Debtor
3rd person can only recover from the debtor to the extent that the
debtor has been benefited.
As to what is beneficial to the debtor can be invoked only by such
debtor & not the creditor.
o W/N it is beneficial to the debtor is determined by the law
& not the will of the debtor.
o The beneficial effects must be determined at the time the
payment was made.
The 3rd person cannot compel the creditor to subrogate him in his
rights, such as those arising from a mortgage, guaranty or penalty.
o Ex. A is indebted to B for P500,000 secured by a real
estate mortgage on the house of A, & X pays B the said
indebtedness in the amount of P500,000 without the
knowledge or against the will of A.
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X can only recover the amount of P500,000 but

he cannot compel the creditor to transfer the
mortgage to him.
! In case A does not pay X, X cannot foreclose on
the mortgage to satisfy his claim.
HOWEVER, if the third party who paid is interested in the obligation,
such as a guarantor, surety, or co-debtor, legal subrogation is
presumed.
o Such interested third party-payor can have the right even
as to the accessory obligations such as a mortgage.
o HOWEVER, the presumption is rebuttable.
Legal subrogation - transfers to the person subrogated the credit
with all the rights thereto appertaining, either against the debtor or
against 3rd persons, be they guarantors, or possessors of
mortgages.
!
2) 3rd Person Pays the Creditor with the Knowledge of the Debtor, but
Debtor Objects
Effect is the same as in #1
3) When 3rd Person Pays the Creditor with Knowledge & Consent of Debtor
3rd person can recover from the debtor the amount paid to the
creditor!
3rd person can also compel the creditor to transfer to him any
mortgage, guaranty or penalty there is legal subrogation!
Ex. from No. 1: X can recover P500,000.!
o X can compel the creditor to transfer to him the real estate
mortgage of A so that if A does not pay, X can foreclose on
the mortgage to satisfy his claim.!
4) When the Creditor Accepts Payment Due to Contract
When the contract between the debtor & creditor states that a 3rd
person can make the payment, the effect is the same as #3.
5) When 3rd Person Pays the Creditor without Intending to be Reimbursed
Obligation is extinguished whether or not the consent of the debtor
is obtained.
However, payment will be treated as a donation, which requires the
consent of the debtor.
Ex. A is indebted to B. X pays B the said indebtedness without
intending to be paid back by A. This will be treated as a donation &
hence A should accept the payment made by X.
If A does not consent, the obligation nevertheless will be

extinguished in so far as B is concerned.
Lesson: There must be an agreement between the 3rd party & the
original creditor regarding the payment of the debtors debts for
this provision to even apply.
Facts:
o X was supposed to pay Y because Y built a windmill for X.
o X claimed he made payment to another contractor who
built the well to which the windmill system was connected
& such payment must be credited as payment to Y.
Held: X is incorrect. The only contract that existed between X & Y
was the construction of a windmill & therefore any payment to the
contractor of the deep well was ineffective.
o X cannot claim the benefit of the law concerning
payments made by a 3rd person. The provisions do not
apply because no creditor-debtor relationship between Y
(the creditor) & the 3rd party has been established
regarding the construction of the deep well. Specifically,
the 3rd party did not testify that he entered into a contract
with Y for the construction of Xs deep well. If 3rd party was
really commissioned by Y to construct the deep well, an
agreement particularly to this effect should have been
entered into.
Article 1239.
In obligations to give, payment made by one who does not have the free
disposal of the thing due & capacity to alienate it shall not be valid, without
prejudice to the provisions of Art. 1427 under the Title on Natural
Obligations.
Incapacity
General rule: One has the free disposal of the thing due & capacity
to alienate it only if he is the owner of the thing or at least he has
been given authority by the owner to use the property as payment
for the obligation to give.
Without prejudice to the provisions of Article 1427 under the Title
on Natural Obligations.
o When a minor between 18 & 21, who has entered into a
contract without the consent of the parent or guardian,
voluntarily pays a sum of money or delivers a fungible thing
in fulfillment of the obligation, there shall be no right to
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recover the same from the obligee who has spent or

consumed it in good faith.
o Ages here have been REPEALED. A minor is now below 18
years of age.
o If ever, this applies to only minors who are below 18.
Minors do not have free disposal; contracts entered into by them
are annullable.
o Even if a minor owns something, especially those which
have significant value, he does not, on his own, have the
free disposal of it without the consent of his parents & the
courts.
Article 1240.
Payment shall be made to the person in whose favor the obligation has
been constituted, or his successors-in-interest, or any person authorized to
receive it.
Payment should only be made to:
1) The creditor or the obligee
2) His successors-in-interest
3) Any person authorized to receive it - not only a person authorized by
the same creditor, but also a person authorized by law, such as a
guardian, executor or administrator of estate of a deceased, &
assignee or liquidator of a partnership or corporation, as well as
any other who may be authorized to do so by law
Rules on Payment
No consideration for good faith or bad faith
o Payment to a stranger would be generally invalid even with
good faith
CASE: Panganiban v. Cuevas - Payment made to a 3rd person, even
through error & in good faith, shall not release the debtor of the
obligation to pay & will not deprive the creditor of his right to
demand payment.
o If it becomes impossible to recover what was unduly paid,
any loss resulting is borne by the deceived debtor, who is
the only one responsible for his own acts unless there is a
stipulation for the wrongful payment.
CASE: PNB v. CA - Where payment was made to one claiming to be
the attorney-in-fact of the creditor but no evidence of his authority
was presented, the Court ruled that payment was not effected.
CASE: BPI v. CA
Lesson: The relationship between a bank & its depositor, was one
of creditor and debtor (the depositor being the creditor & the bank
being the debtor), & any withdrawal by the depositor was in effect
payment of a debt by a bank
o Payment made by the creditor to the wrong party does not
extinguish the obligation as to the creditor who is without
fault or negligence, even if the debtor acted in utmost good
faith & by mistake as to the person of the creditor, or
through error induced by fraud of a 3rd person.
Facts:
o BPI was aware of the dispute involving the ownership of a
certain deposit; despite this, it allowed the withdrawal of
the said deposit by the heirs of the deceased.
o They claimed the deposit was that of their deceased father
o They also successfully obtained a judicial resolution from the
probate court allowing the withdrawal of the said money,
although said resolution did not specifically order the bank to
release the money
o BPI, relying on the judicial resolution, released in good faith the
money which turned out as belonging to another.
Held: The debt herein was paid to persons who were not the
creditors or at least successors-in-interest of the same, therefore
no payment extinguished the obligation as the withdrawal was not
proper.
o Because the ownership of the deposit remained
undetermined, BPI had no right to pay persons other than
those in whose favor the obligation was constituted or
whose right is indisputable. The payment of the money
deposited with BPI that will extinguish its obligation to the
creditor-depositor is payment to the person of the creditor
or to one authorized by him or by law to receive it.
Article 1241.
Payment to a person who is incapacitated to administer his property shall
be valid if he has kept the thing delivered, or insofar as the payment has
been beneficial to him.
Payment made to a 3rd person shall also be valid insofar as it has
redounded to the benefit of the creditor. Such benefit to the creditor need
not be proved in the ff. cases:
(1) If after the payment, the 3rd person acquires the creditors rights;
(2) If the creditor ratifies the payment to the 3rd person;
(3) If by the creditors conduct, the debtor has been led to believe that
the 3rd person had authority to receive payment.
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Rules for Payment to an Incapacitated Person

Incapacitated person minor, insane
Generally, for an incapacitated person to be able to administer his
property & transact business, he must have a court-appointed
guardian handle his affairs.
o However, the father and the mother shall be the legal
guardian of the property of the unemancipated common
child without the necessity of a court appointment.
Payment should be made to the guardians of the incapacitated
person. If it is made directly to the incapacitated person, said
payment is voidable.
Payment made to a 3rd person is also valid if it redounds to the
benefit of the incapacitated person/creditor
o BUT the benefit must be proven
HOWEVER, if payment is made to an incapacitated person, it is
effective in two situations:
1) When he has kept the thing delivered
o If payment is made to a minor, he must keep it in
his possession until he reaches the age of majority
for such payment to be valid.
o This act of still holding on to the thing delivered as
payment at the time when the person is already
capacitated can be considered as ratification of
the payment, curing the irregularity of the same
2) In so far as the payment is beneficial to him.
o If the minor uses the payment for activities
beneficial to him (e.g. to pay school tuition fees),
then the payment is valid to the extent that he has
been benefited
In paying an incapacitated person under a voidable contract, the
capacitated person, who may have even acted in good faith, is at a
disadvantage.
o Generally, the capacitated person CANNOT ask for the
annulment of the contract on the basis of the incapacity of the
other party
o In the event that the contract is annulled, the incapacitated
person is not obliged to make restitution except in so far as he
has been benefited by the thing or price received by him.
SITUATION
Q: X pays Y, a 13-year-old, P100,O00. Y heads to PAGCOR & spends all
the money. When Y hits 18, is the payment valid?
A: NO. Payment is only valid when it benefited the minor, or he has kept
it.
Payment to Someone Who Is Not Creditor

Payment to a stranger is general invalid even if made in good faith,
though this Art. provides exceptions
Payment made to a person who is not the creditor, his successor-ininterest, or a person authorized to receive payment is not effective
payment which will bind the creditor.
o HOWEVER, if such payment nevertheless benefits the creditor,
such payment shall be effective in so far as it has redounded to
the benefit of the creditor.
Ex. A is the debtor of Mr. B. A, instead of paying B directly, pays of the
indebtedness to Bs brother, whom B never authorized to receive
payment. This payment is NOT valid.
o HOWEVER, if the brother of B uses the money to pay Bs
indebtedness to somebody, then the payment will become
valid. It will extinguish As indebtedness in so far as the
payment has redounded to the benefit of B which, in this case,
is of the indebtedness.
Exception to Proving Benefit of Creditor
The benefit to the creditor for payment made by the debtor to a 3rd
person must always be proven except in 3 cases:
1) If after payment, the 3rd person acquires the creditors
rights.
o Ex. A is indebted to B for P1,000. A does not pay B
on due date despite proper demand, such that the
stipulated interest on the indebtedness accrues in
the amount of P100.
! If A (the debtor) pays X (3rd person) the
principal amount, such payment is not
effective.
! HOWEVER, if there is concrete proof that
interest has not yet been paid, & later B (the
real creditor) empowers X to also collect the
interest of P100 for himself (X) & not for B,
then the benefit to the creditor need not be
proven.
o The fact that X acquires the creditors right to collect
the interest is enough to show that payment to the
3rd person X benefited the creditor B. The P1,000
principal indebtedness therefore must be
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considered extinguished. If A pays the interest to X,

the totality of the obligation is extinguished.
2) When the creditor ratifies the payment to the originally
unauthorized 3rd person (ratification).
o Creditor need not be benefited.
o In the same example, if B, after learning that
payment was made to X approves of the payment to
the latter, the debt is extinguished.
3) When, by the creditors conduct, the debtor has been led
to believe that the 3rd person has authority to receive the
payment (estoppel).
o In the same example, if B tells A that he can
transact any business or any of his concerns with X,
including the P1,000 indebtedness,& later A pays X
the indebtedness, the obligation is extinguished, as
B cannot disclaim the payment to X. By his
representation to A, B is estopped from claiming
that X had no authority to accept payment.
CLASS DISCUSSION
To accept payment, & for said payment to be valid, it must be made
under Special Power of Attorney
o SPA must be very specific
o To mortgage would not be the same as to buy
Article 1242.
Payment made in good faith to any person in possession of the credit shall
release the debtor.
Possession of Credit
A person in possession of the credit is presumed to own the credit.
o A debtor who pays the possessor in good faith is released
from the debt.
o Whether the creditor willfully, unintentionally or negligently
allowed a 3rd person to possess the credit does not matter
in so far as the debtor who paid in good faith is concerned.
The risk is always on the creditor provided payment is made by the
debtor in good faith.
o If payment is made to a person who is not in possession of
the credit, the debtor will not be released from his
obligation regardless of whether or not payment was made
in good faith.
CLASS DISCUSSION
Promissory Notes a negotiable instrument; if a completely
random stranger picks this up, he can have the amount already
o There are always at least 2 parties in a promissory note
o Can be endorsed at the back to other persons, making the
debtor liable to pay said 3rd person
FRONT
o I promise to pay X P1,000 on May 1, 2015.
o Signature of debtor (maker of the note)
o To order or To bearer
BACK
o Endorsed to M
Dation in payment, whereby property is alienated to the creditor in

satisfaction of a debt in money, shall be governed by the law on sales.
Article 1243.
Payment made to the creditor by the debtor after the latter has been
judicially ordered to retain the debt shall not be valid.
Requisites for Valid Dation in Payment (Caltex v. IAC):

(1) There must be performance of the prestation in lieu of payment
(animo solvendi)
o May consist in the delivery of a corporeal thing or a real
right or a credit against the 3rd person
(2) There must be some difference between the prestation due &
that which is given in substitution (aliud pro alio)
(3) There must be an agreement between the creditor & debtor that
the obligation is immediately extinguished by reason of the
performance of a prestation different from that due.
Payment After Judicial Order to the Contrary

To prevent any transaction which might be intended to defraud said
creditors, the debtor is prohibited from paying a particular
creditor during the effectivity of a court order prohibiting him to
make such payment to that particular creditor.
In the event that the debtor makes such payment, it shall not
extinguish the obligation as the law considers such payment
as invalid.
Article 1244. No Substitution.
The debtor of a thing cannot compel the creditor to receive a different one,
although the latter may be of the same value as, or more valuable than that
which is due.
In obligations to do or not to do, as act or forbearance cannot be substituted
by another act or forbearance against the obligees will.
No Substitution
A debtor cannot pay by giving a particular car if the agreement is to
give a particular jeep even if the car is more expensive than the
jeep.
Likewise, if one has been engaged to sing for one night in exchange
for an airplane ticket, the obligor cannot fulfill the obligation by
dancing for one week even if such dancing is worth more than the
singing.
Article 1245. Dation in Payment.
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Dation in Payment (Dacion en Pago)

The delivery or transmission of ownership of a thing by the debtor
to the creditor as an accepted equivalent of the performance of an
obligation.
o PURPOSE to transfer ownership
NOT mortgage or security - mere repossession of certain machinery
& equipment for purposes of securing payment of an obligation &
not for the purpose of transferring ownership is NOT dation in
payment
CASE: Caltex v. IAC

Lesson: Dation in payment is not total extinguishment of an
obligationit extinguishes the obligation up to the value of the thing
delivered. The obligation is totally extinguished only when the
parties, by agreement, express or implied, or by their silence,
consider the thing as equivalent to the obligation, in which case the
obligation is totally extinguished.
Facts:
o The debtor assigned to the creditor its receivables from the
Special Fund Import Payments due from the National
Treasury of the Philippines to be applied as payment of the
amount of P4,072,683.13 it owed to the creditor.
! The amount actually received from the Special Fund
by the debtor was more than P4,072,683.13.
o Their Deed of Assignment said:
! Debtor has outstanding obligation of
P4,072,683.13, plus any applicable interest on
overdue account.
Debtor hereby irrevocably assigns & transfers to the

creditor any & all funds paid by the Special Fund
Import Payments, including all rights & benefits
accruing to the same, plus any applicable interest
charges, & other avturbo fuel lifting & deliveries that
debtor may from time to time receive from the
creditor.
o After the creditor sought the excess of the amount obtained,
the debtor released some of the excess minus P510,550.63
which the debtor claimed as interest on the indebtedness.
o CA ruled that this was a dacion en pago case which
completely extinguished the obligation of the debtor & that
P510,550.63 should be returned to the creditor.
Held: SC reversed the CA. Obligation was not totally extinguished,
as the contract between the parties contemplated other
obligations.
o There are 3 obligations in this case based on the contract:
! The outstanding obligation of P4,072,683.13
! The applicable interest charges on overdue
accounts
! The other avturbo fuel lifting & deliveries that the
debtor may from time to time receive from creditor
o Had the parties intended to limit respondents obligation to
P4,072,682.1, they should have said so, & there would have
been no need for them to qualify the statement of the
amount with clauses.
! The literal meaning of the Deed of Assignment
should control
o Furthermore, even after the payment of money, the
creditor continued to charge the debtor for interest & the
debtor made requests to lower the interest.
! In order to judge the intention of the contracting
parties, their contemporaneous & subsequent
acts shall be principally considered (Art. 1253,
Civil Code).
!
Dacion en Pago v. Pactum Commisorium

Transfer of
Ownership of
Property After
Default
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Dacion en Pago
Before the creditor
becomes the owner of the
collateralized property, an
intervening agreement
Pactum Commisorium
The parties agree,
generally in one single
contract, that, in the
event that the debtor
subsequent & independent

from the original contract
of the parties is executed
to have the property
collateralized in the original
agreement as payment of
the debt, thereby
extinguishing the
obligation.
fails to pay the debt,

the mortgaged or
pledged property of the
debtor shall
automatically be
appropriated or owned
by the creditor.
Valid & provided for by law
Void (Art. 2088 of the

Civil Code: The
creditor cannot
appropriate the things
given by way of pledge
or mortgage, or dispose
of them. Any stipulation
to the contrary is null &
void. Any property
made as a security to a
loan must 1st undergo
public bidding.
Elements of Pactum Commisorium:

1) There must be a debtor-creditor relationship between the parties;
2) The property of the debtor was used as security for the loan, either
as a mortgage or pledge; &
3) There was automatic appropriation of the property upon failure of
the debtor to pay the obligation as provided in their agreement.
CASE: Bustamante v. Rosel
Lesson: One example of pactum commisorium is when the debtor &
creditor agree to sell the mortgage to the creditor himself & such is
as stipulation in their original loan agreement.
Facts: A debtor & creditor entered into a loan agreement where it
was stipulated that, in case of the default of the debtor, the creditor
has the option to buy the collateral for a total consideration of
P200,000 inclusive of the borrowed amount & interest thereon.
Held: This stipulation is void. The intent of the creditor appears to
be evident, for the debtor is obliged to dispose of the collateral at
the pre-agreed consideration amounting to practically the same
amount as the loan. In effect, the creditor acquires the collateral in
the event of non-payment of the loan. This is within the concept of

pactum commissorium. Such stipulation is void.
CASE: DBP v. CA
Facts: The debtor executed a deed of assignment of leasehold
rights of certain properties.
Held: These are simply mortgages.
o NOT dacion en pago because the leasehold rights were not
designed to extinguish the obligation, but merely to
constitute a security;
o NOT pactum commissorium, as they did not provide for the
automatic ownership of the properties in case of nonpayment;
o NOT payment by cession because there was only one
creditor.
Art.1246.
When the obligation consists in the delivery of an indeterminate or generic
thing, whose quality & circumstances have not been stated, the creditor
cannot demand a thing of superior quality. Neither can the debtor deliver a
thing of inferior quality. The purpose of the obligation & other circumstances
shall be taken in consideration.
Delivery with Generic Objects
If an obligor, who is not rich, is bound to deliver any rented car to be
used at a very simple wedding ceremony & the obligee knows his
financial capacity, such obligee cannot demand that the obligor
deliver a multi-million Rolls Royce which could only be rented at
such amount which the obligor cannot afford.
On the other hand, the obligor cannot deliver a car which is so old
that it would not start unless it is pushed.
Art. 1247.
Unless it is otherwise stipulated, the extrajudicial expenses required by the
payment shall be for the account of the debtor. With regard to judicial costs,
the Rules of Court shall govern.
Extrajudicial & Judicial Costs
The creditor usually benefits from the obligation. It is always in his
favor that the debtor gives, does some service or not do some
service.
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Debtor pays for the extrajudicial expenses for the payment or

performance of the obligation, unless the parties otherwise
stipulate.
With respect to judicial cost, the Rules of Court shall apply.
Art. 1248.
Unless there is an express stipulation to that effect, the creditor cannot be
compelled partially to receive the prestation in which the obligation consists.
Neither may the debtor be required to make partial payments.
However, when the debt is in part liquidated & in part unliquidated, the
creditor may demand & the debtor may effect the payment of the former
without waiting for the liquidation of the latter.
CASE: Nasser v. Cuevas
Lesson: A creditor cannot be compelled partially to receive the
prestations in which the obligation consists unless there is an
express stipulation to that effect.
Facts:
o On the basis of a compromise agreement, a number of
obligors agreed to pay a lawyer his legal fees by way of real
property & cash.
o For this purpose, it was expressly stipulated that a
charging lien for attorneys fees would be established on
the properties to secure payment of the legal fees
provided that upon full payment of the corresponding
liability of a party, the lien on his/her share is
extinguished.
o Upon demand of the lawyer for payment, the obligors
contended that the aforequoted clause gave them the right
to pay in installment.
Held: This interpretation is wrong. The clause simple means that
the lien will be extinguished when the heirs pay, & do not expressly
grant the right to pay in partial installments.
Partial Payment When Allowed
1) If there is an express stipulation by the parties allowing the same or
2) If the debt is partially liquidated and partially unliquidated.
o Ex. A debtor is bound to perform an obligation by paying
the amount of P1,000 & by also delivering whatever
money he will get from the estate of his already deceased
father.
! The creditor may demand & the debtor may pay
the P1,000 without waiting for the determination
of the amount of money the debtor will get from

the deceased fathers estate.
No Express Stipulation Still Allowed
Even if there is no express stipulation, partial payment can likewise
be effective if the creditor accepts it & benefits from it.
A creditor cannot be considered in delay if he refuses to accept
partial performance because, unless otherwise provided by law or
stipulated by the parties, a creditor cannot be compelled to accept
partial performance.
o HOWEVER, the creditor will incur in delay if he does not
accept such partial performance if:
(1) Good faith necessitates acceptance or
(2) The creditor abuses his right in not accepting.
Art. 1249. Currency Stipulated & Currency of PH.
The payment of debts in money shall be made in the currency stipulated, &
if it is not possible to deliver such currency, then in the currency which is
legal tender in the Philippines.
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.
In the meantime, the action derived from the original obligation shall be
held in abeyance.
Currency
Uniform Currency Act (RA 529) It was prohibited to use foreign
currency in connection with certain contracts in PH
o Has been repealed by RA 8183
o Though the stipulation for the use of foreign currency is
void, the contract is nevertheless valid.
RA 8183 effective on July 6, 1996
o All monetary obligations shall be settled in Philippine
currency which is legal tender in the Philippines.
o HOWEVER, the parties may agree that the transaction shall
be settled in any other currency at the time of payment.
Negotiable Instruments
Promissory note - a document where a promise to pay is made by
the debtor to the creditor
o An unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand
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or at a fixed or determinable future time, a sum certain in

money to order or to bearer
Bills of exchange - an unconditional order in writing addressed by
one person to another signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order to bearer
o Check a bill of exchange drawn on a bank payable on
demand
! Not considered legal tender or valid tender of
payment
! An offer to pay in check may be refused by the
obligee or creditor
! HOWEVER, if payment by way of a fully-funded
check were offered & the obligee accepts the
check as payment after the obligor manifests that
it was given to settle an obligation, he shall be
estopped from later on denouncing the efficacy of
such payment.
Specific rule of law - in fulfillment of an obligation by payment of
money, only payment in cash will extinguish the obligation
o Thus, if promissory notes, bills of exchange or checks are
given to pay a debt, such debt will NOT be extinguished
unless these mercantile documents are encashed.
Negotiable instruments only a substitute for money, & not money
itself
Impairment by the Creditor

When through the fault of the creditor they have been impaired
o Applicable only to instruments executed by 3rd persons &
delivered by the debtor to the creditor
! Ex. Someone elses account suddenly runs out;
process of endorsement
o DOES NOT apply to instruments executed by the debtor (as
drawer) himself & delivered to the creditor.
Checks must be presented within a reasonable time after its
issue; otherwise, the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay.
o Normal banking practice - a check becomes stale if it has
not been presented to the bank for a period of 6 months
from the date of the said check.
o HOWEVER, if a creditor allows his checks to become stale,
it does not mean that the debtor who drew the check will
necessarily be discharged from his debt, or that his

obligation will be extinguished.
! It is only when the creditor does not present the
check for payment & thereafter the bank upon
which the check has been drawn collapses or fails
to the point that it cannot meet demands for
payment, will the debtor be discharged.
! If the bank is still in good credit & is able to pay
the check, if the drawer, at the date of the check
or at the time of the presentment of it for payment
& dishonor, has withdrawn his funds, the drawer
would remain liable to pay the check,
notwithstanding the lapse of time.
In case an extraordinary inflation or deflation of the currency stipulated

should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there
is an agreement to the contrary.
SCENARIO
Q: X gave Y a check. Y kept it in his drawer for a year & forgot about
it. The bank dishonored the check when Y tried to deposit it. What
are Ys remedies?
A: Y can still ask X for money, following prescriptive period
requirements (within 10 years for written, 6 years for oral)
So what does the law mean about the creditor impairing the check?
o Phrase only applies if check was issued by a 3rd person
Extraordinary Inflation
Applies only in contractual obligations
Exists when there is a decrease or increase in the purchasing
power of the PH currency which is unusual or beyond the common
fluctuation in the value of said currency & such decrease or
increase could not have been reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of
the establishment of the obligation.
o Ex. Hyperinflation of the German mark, from 4.2 to 62 to
the USD within a year
Mere decline in purchasing power is not inflation
There MUST be an official declaration by competent authorities,
such as the Central Bank, Dept. of Finance of BSP
The law envisions contractual obligations only
Tort & expropriations by the government of property in the exercise
of eminent domain powers are NOT included
o In eminent domain, the value at establishment of the
obligation is the value of the peso at the time of the taking
of the property, as this is when the obligation of the
Government to pay arises
Value of the currency purchasing power of money
o Also know as par value, legal exchange rate, or par of
exchange
Par value - the amount it takes one currency (for example, based on
gold) to buy a unit in another currency (also based on gold) that is,
how pieces of the one unit (or their gold content) are necessary to
equal the gold content of the other unit
o Value as officially defined in terms of gold or, under the
silver standard, where there was such a standard, in terms
of silver.
o The par of exchange therefore applies only between
countries having a fixed metallic content for their currency
unit. It would be possible to define a currencys par value
in terms of another currency such as the dollar or pound
sterling, but usage confines the meaning of par to the
official value in terms of gold.
Art. 1250. Extraordinary Inflation.
Art. 1251. Place of Payment.
CLASS DISCUSSION
Checks are another form of negotiable instruments
o Type of bill of exchange
o Debtor drawer
o Creditor payee
o Bank drawee
Cashiers/Managers Check
o Drawer is the drawee
o Not legal tender
o Considered as good as cash, though it is not cash
o Checks take 3 days to process (before it turns into actual
cash, or payment)
o Usually stale in 6 months
General rule: Payment must be in cash to be considered as legal
payment
o Exception: Check can be considered payment if parties so
stipulate, but the check must be fully funded
Is money always legal tender? It depends! It should be in peso.
81
Payment shall be made in the place designated in the obligation.

There being no express stipulation & if the undertaking is to deliver a
determinate thing, the payment shall be made wherever the thing might be
at the moment the obligation was constituted.
In any other case the place of payment shall be the domicile of the debtor.
If the debtor changes his domicile in bad faith or after he has incurred in
delay, the additional expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.
Place of Payment
The parties can agree as to where the payment shall be made.
If there is no stipulation & the obligation is to give a determinate
thing, payment shall be made in the place where the thing is
located at the time of the constitution of the obligation.
In any other case, the place of payment is the domicile of the
debtor.
o Domicile - For the exercise of civil rights & the fulfillment of
civil obligations, the domicile of natural persons is the
place of their habitual residence.
The additional expenses attendant in making payment shall be
borne by the debtor if:
o He changes his domicile in bad faith, such as if the change
was made precisely for the creditor not to locate him, or
o After he has incurred in delay.
CLASS DISCUSSION
Place of Payment:
1) Agreement, or if none;
2) Determinate place where thing is found at obligations
constitution; generic house of debtor
SUBSECTION 1. - APPLICATION OF PAYMENTS.
Art. 1252.
He who has various debts of the same kind in favor of one & the same
creditor, may declare at the time of making the payment, to which of them
the same must be applied. Unless the parties so stipulate, or when the
application of payment is made by the party for whose benefit the term has
been constituted, application shall not be made as to debts which are not
yet due.
If the debtor accepts from the creditor a receipt in which an application of
payment is made, the former cannot complain of the same, unless there is
a cause for invalidating the contract.
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Art. 1252-1254
Apply to a person owing several debts of the same kind to a single
creditor
Like in alternative obligations, the choice as to which debt the
payment is to be applied is given to the debtor.
o The debtor must make a declaration as to which debt
should the payment be applied.
Must conform to the general rules of payment from Art. 1232-1251
o Art. 1233 Payment must be completely delivered
o Art. 1248 The creditor cannot be compelled partially to
receive the prestation in which the obligation consists
! If the debtor makes a declaration as to the
particular debt (from among a number of debts) to
which his payment is to be applied, the creditor
can validly refuse such application if the payment
is to be applied to a debt which will only partially
pay a particular indebtedness.
Debts Not Yet Due
Application of payment cannot be made on debts not yet due
o Unless the parties agree or
o When the application of payment is made by the party,
which may either be the debtor or the creditor, for whose
benefit the term has been constituted.
Ex. A is indebted to B in the amount of P1,000, P2,000 & P900
which will not earn interest if paid on Jan. 2, 1997 but will earn
interest from Feb. 2, 1997, the latter date being the 2nd due date if
the debtor chooses not to pay on Jan. 2, 1997.
o Clearly the period prior to Jan. 2, 1997 is for the benefit of
the debtor. Thus, if he decides to give B P500 before Jan.
2, 1997, the choice of application belongs to him.
o If the creditor is agreeable to being partially paid, the
debtor can apply the P500 to the P1,000, P2,000 or P900
depending on his choice even if the indebtedness is not yet
due.
o It is clear that in such a case, whether he pays it on or
before Jan. 2, 1997 will not make any difference in so far
as the debtor or creditor is concerned because no interest
is imposed.
Receipt
Gives rise to doctrine of substantial compliance presumption that

payment has been made
o To avoid this, creditors should also state in the receipt on
what account the payment is considered applied & also
state, balance is still existing & demandable
Estoppel - If the debtor accepts from the creditor a receipt in which
an application of payment is made, the debtor cannot complain of
the same, unless there is a cause for invalidating the contract.
o The debtor must not only merely receive the receipt but he
must accept the receipt.
Ex. A is indebted to B for P1,000, P2,000, & P900. A pays B P500
without mentioning as to which debt the P500 will be applied. B,
the creditor, is agreeable to any partial payment, & issues a receipt
indicating therein that the P500 shall be applied to the P1,000
debt, & A readily accepts the said receipt.
o A cannot later complain that the P500 should have been
applied to the P2,000 debt unless there exists a cause to
invalidate the contract in connection with the indebtedness
in the amount of P1,000.
However, if the indebtedness has been obtained through fraud or
intimidation which is a cause to annul the contract, the debtor is
not estopped from questioning the application.
CLASS DISCUSSION
Consignment an ordinary court case
o 2nd notice case has been filed against you
o One of the instances when extrajudicial demand is a
requisite
o There must be notice before consignment--I demand that
you accept my payment, & if you do not, I will take this to
court.
! HOWEVER, if you staple a check as payment, this
is not counted, as payment is the delivery of
money
SCENARIO
Facts: X has 3 debts, P1,000, P5,000 & P10,000. X gives Y P1,000
& asks Y to apply this to the P5,000. Can Y say no?
Answer: Yes, because applying the P1,000 to P5,000 would only be
partial performance, which the creditor can validly object to.
Article 1253.
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If the debt produces interest, payment of the principal shall not be deemed
to have been made until the interests have been covered.
Principal First
Art. 1253 is merely directory & not mandatory.
Although interest only attaches to the principal, the payment of
both principal and interest, in effect, constitutes two payments by
the debtor.
o The receipt of the principal by the creditor without
reservation with respect to the interest, shall give rise to
the presumption that the interest has been paid
! This presumption is rebuttable
In a contract involving installment payments with interest
chargeable against the remaining balance of the obligation, it is the
duty of the creditor to inform the debtor of:
o The amount of interest that falls due &
o That he is applying the installment payments to cover said
interest. Otherwise, the creditor cannot apply the payments
to the interest & then hold the debtor in default for nonpayment of installments on the principal.
CASE: Pagsibigan v. CA
o Lesson:
o Facts: The creditor, in receiving numerous partial payments
from the debtor, applied the said payments to the
principal, interest & penalties with the principal getting the
bulk of the application. Even in some of the recent partial
payments, the said payments were applied to the principal
despite the fact that the creditor knew that interest was
still due.
o Held: The creditor waived his rights under Art. 1253.
CASE: Magdalena Estates, Inc. v. Rodriguez
Lesson: When a surety makes the payment, it cannot claim the
applicability of Art. 1253 & thereby raise the presumption in said
provision.
Facts:
o A surety only bound himself solidarily liable to the extent of
P5,000 only & paid such an amount to the creditor when
the debtor defaulted.
o The creditor still claimed interest from the debtor who
resisted paying such interest on the ground that, in
accepting payment of the principal from the surety in the
amount only of P5,000, the creditor waived his right to

Article 1253.
Held: The creditor is still entitled to the interest.
o Article 1253 is not applicable here, as the liability of the
surety does not extend beyond the terms of the
agreement.
o The provision on application of payment cannot be made
applicable to a person whose obligation as a mere surety is
both contingent & singular.
o The suretys liability is confined to such obligation, & he is
entitled to have all payments made applied exclusively to
said application and to no other.
Article 1254.
When the payment cannot be applied in accordance with the preceding
rules, or if application cannot be inferred from other circumstances, the
debt which is most onerous to the debtor, among those due, shall be
deemed to have been satisfied.
If the debts due are of the same nature & burden, the payment shall be
applied to all of them proportionately.
Application of the Debt in Other Cases
If there is no indication which debt is t to be paid first, it will be
applied to the most onerous debt.
o Most onerous - the indebtedness which exacts the heavier
burden from among many.
! NOT based on the amount of the debts
! A debt with interest as opposed to simple debt
! A debt with an acceleration clause enabling the
creditor to demand payment of the whole
obligation if the debtor defaults in even one
amortization or installment is more onerous than a
debt payable in installment but without an
acceleration clause.
Acceleration clause payment made in
installments; if theres a failure to pay 1,
then the entire amount can be demanded
! A debt secured by a mortgage is more onerous
than one without security.
Examples:
o A owes G a due debt of P30,000 with an interest rate of
12% per annum, another due debt of P22,000 without
interest but secured by his silver watch, & lastly P24,000
84
collateralized by As house & payable in equal installment

with the first installment already due & with an
acceleration clause.
! If A makes a payment of P600 without any
indication where the latter amount should be
applied & the creditor agrees to any partial
payment, it will be applied to the most onerous
debt which in this case is the P24,000 because,
aside from the imposition of an interest rate it has
an acceleration clause which will make the whole
amount due.
o Between indebtedness resulting from unpaid back rentals
for the condominium unit a debtor was occupying, or to his
obligation arising from his contract to pay the purchase
price of such condominium unit which he decided to buy,
the unpaid back rentals are more onerous.
If the debts due are of the same nature & burden, the payment
shall be applied to all of them proportionately.
o Ex. A owes B 3 due debts each of which amounts to
P30,000, a payment of P9,000.00 by A, without any
indication as to where it is to be applied & where the
creditor agrees to partial payment, shall be equally applied
to each of the debts. Hence, each debt will be reduced by
P3,000 each.
o But if A owes B 3 due debts of P10,000.00, P20,000.00 &
P30,000 & the creditor agrees to partial payment, a
payment of P6,000 will be applied in the proportion of
1:2:3. Thus, P1,000 will be applied to the P10,000 debt;
P2,000 to the P20,000 debt; and P3,000 to the P30,000
debt.
SUBSECTION 2. PAYMENT BY CESSION.
Article 1255. Cession.

The debtor may cede or assign his property to his creditors in payment of his
debts. This cession, unless there is stipulation to the contrary, shall only
release the debtor from responsibility for the net proceeds of the thing
assigned. The agreements which, on the effect of the cession, are made
between the debtor & his creditors shall be governed by special laws.
Cession
Transfer of possession, NOT of ownership (unlike subrogation)
Refers to a situation where the debtor owes 2 or more creditors
At least, there must be as many debts as there are

creditors
o There can be more debts than the number of creditors
when, from among the many creditors, the debtor may owe
any of them 2 or more debts.
Also extinguishes debt in an extrajudicial way
Presupposes financial difficulties on the part of the debtor
Ceding or assigning property refers to ALL of the properties of the
debtor which are susceptible of & not exempted by law from being
alienated.
o NOT only the cession of one or a number of properties
Family home - generally exempted by law from being executed or
sold
o HOWEVER, it may be sold provided that it strictly follows
the requirements of law, such as the procurement of the
written consent to the sale of the person who constituted
the home as a family home & the latters spouse & a
majority of the beneficiaries of legal age of the family
home.
o
Creditors Agreement
Creditors MUST agree to the cession.
o Among the creditors, they must likewise agree as to which
debt will be paid 1st or as to the proportioning of the
payment of the money obtained through cession for the
payment of debt.
If there is no agreement, the applicable law on preference of credit
will apply.
The creditors will administer the totality of the ceded property
without the ownership being transferred to them.
o Authorized to sell or alienate the property for purpose of
obtaining enough money to pay off their respective debts.
Extinguishment
Once cession is made, the obligation of the debtor shall only be
extinguished up to the extent that the proceeds are able to satisfy
the claims of the creditors.
o It is possible that the money obtained from the alienation
of the property is not enough to satisfy the claims of the
creditors.
In such case, the creditors can still demand payment for the
deficiency. The agreements on the effect of the cession made
85
between the debtor & his creditors shall be governed by special

laws.
o Ex. Insolvency Law - if applicable, shall place the assets of
the debtor for judicial liquidation for the purpose of paying
off his obligations.
CLASS DISCUSSION
Cession presupposes the ff.:
o Debtor is under financial difficulties
o There are 2 or more creditors
o There are as many debts due as there are creditors (the
minimum rule)
Insolvency & Cession are not the same
o Insolvency requires a court proceeding; whatever the
court decides, thats it. The creditors can no longer get the
remaining amounts.
o Cession no proceeding; creditors pay among themselves
! Transfer is only of possession, not of title
! ALL properties are transferred
! The creditors can still get the remaining amount of
debt from debtor
SUBSECTION 3. TENDER OF PAYMENT.
Art. 1256. Tender of Payment without Creditors Acceptance.
If the creditor to whom tender of payment has been made refuses without
just cause to accept it, the debtor shall be released from responsibility by
the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the
place of payment;
(2) When he is incapacitated to receive the payment at the time it is
due;
(3) When, without just cause, he refuses to give a receipt;
(4) When 2 or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.
Art. 1257. Announcement to Parties Concerned.
In order that the consignation of the thing due may release the obligor, it
must first be announced to the persons interested in the fulfillment of the
obligation.
The consignation shall be ineffectual if it is not made strictly in consonance
with the provisions which regulate payment.
Art. 1258. Deposit to Judicial Authority.

Consignation shall be made by depositing the things due at the disposal of
judicial authority, before whom the tender of payment shall be proved, in a
proper case, & the announcement of the consignation in other cases.
The consignation having been made, the interested parties shall also be
notified thereof.
Tender of Payment & Consignation
Apply in all contracts where there is an obligation to pay
In a contract to sell, the requisites of a valid tender must be
complied with.
o Involves the performance of an obligation, not merely a
right or a privilege
o Mere sending of letter by the vendee expressing the
intention to pay, without the accompanying payment, does
not extinguish the obligation
o Valid tender of payment is also different from consignment
! A mere tender of payment is NOT sufficient for a
seller to deliver the property & execute the deed of
absolute sale.
! It is consignation which is essential in order to
extinguish petitioners obligation to pay the
balance of the purchase price.
o Consequently, for a contract to sell, performance may be
effected not by tender of payment alone but by both tender
& consignation.
Consignation
Act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment
& it generally requires a prior tender of payment.
An ordinary court case
Cases When Consignation is Not Necessary:
(1) Option contract
(2) Legal redemption
(3) Sale with right to repurchase
Explanation for Exemptions:
o Consignation is not necessary because these cases involve
an exercise of a right or privilege (to buy, redeem, or
repurchase) rather than the discharge of an obligation
o Tender of payment would be sufficient to preserve the right
or privilege.
86
Provisions on consignment are NOT applicable when there

is no obligation to pay.
CASE: Vda. De Quirino v. Palarca

Lesson: An option contract is not a consignment contract.
Facts: The lessee was given the right & option to buy the leased
premises for P12,000.
Held: The consignation in Art. 1256 is inapplicable. Said provision
refers to consignation as one of the means for the payment or
discharge of a debt, whereas the lessee was not indebted to the
lessor for the price of the leased premises. The lessee merely
exercised a right of option and had no obligation to pay said price
CASE: Badayos v. CA
Lesson: Redemption contracts also cannot be consigned.
Facts: X was trying to exercise his right of redemption.
Held: In the exercise of the right of redemption, consignation is not
necessary for the reason that the relationship that existed between
vendor and vendee a retro, was not one of debtor-creditor.
o The vendor a retro is exercising a right, not discharging an
obligation, hence a mere tender of payment is sufficient to
preserve the right of a vendor.
CASE: Far East Bank & Trust Co.
Lesson: A check is not tender, but creditor may nonetheless be
estopped from claiming that there was no payment if he accepts it.
Facts: The court was asked to rule on whether or not a check can
be considered valid tender of payment.
Held: For a valid tender of payment, it is necessary that there be (1)
a fusion of intent, ability & capability to make good such offer,
which must be (2) absolute & must (3) cover the amount due.
o Though a check is not legal tender, & a creditor may validly
refuse to accept it if tendered as payment, one who
accepts a fully funded check after the debtors
manifestation that it had been given to settle an obligation
is estopped from later on denouncing the efficacy of such
tender of payment.
Requisites of Law for Effective Tender of Payment & Consignation:
If one is missing, consignation will not be effective.
The debtor must show that:
1) That there was a debt due.
2) That the consignation of the obligation had been made

because the creditor to whom tender of payment was
made refused to accept it, or because he was absent or
incapacitated, or because several persons claimed to be
entitled to receive the amount due
3) That previous notice of the consignation had been given to
the person interested in the performance of the obligation
(1st notice).
o Without this 1st notice, the consignation as
payment is void
o Gives the creditor the opportunity to reconsider his
unjustified refusal & to accept payment thereby
avoiding consignation & subsequent litigation
o Essential to the validity of the consignation
4) That the amount due was placed at the disposal of the
court.
5) That after the consignation had been made the person
interested was notified thereof (2nd notice).
o Enables the creditor to withdraw the goods or
money deposited.
o Unjust for him to suffer the deterioration,
depreciation or loss of such goods or money due to
lack of knowledge of the consignation
Tender of Payment
Tender of payment must be distinguished from consignation.
o Tender is the antecedent of consignation; an act
preparatory to the consignation, which is the principal
o That from which are derived the immediate consequences
which the debtor desires or seeks to obtain.
o An extrajudicial, private settlement before proceeding to
the solemnities of consignation (which is judicial)
Must be made in lawful currency.
Tender of a check is NOT valid tender of payment
o Payment in check may be acceptable as valid if no prompt
objection to said payment is made, BUT the fact that in
previous years payment in check was accepted does not
place its creditor in estoppel from requiring the debtor to
pay his obligation in cash.
Tender of Payment
Act precedent to
consignment, an attempt
87
Consignment
The principal act which
extinguishes the obligation
to make a private
settlement
Extrajudicial
Not yet considered
delivery of property
Judicial
Sufficient equivalent to
delivery of property
CASE: De Mesa v. CA
Lesson: It is valid notice when the court allows the debtor to
consign of multiple installments & send one notice informing the
creditor of all the installments in the court.
Facts:
o The debtor in the trial court filed a motion to allow it to just
consign all future quarterly installments (12th to 20th) without
need of formal tender of payment and service of notices to
the creditor who was duly notified of such motion.
o The creditor now argues that there was no notice to her of
debtors consignation of the amounts for the 12th to 20th
quarterly installments.
Held: Court ruled that the circumstances of the case & the order of
the court granting the motion can be considered substantial
compliance with the requirement of notice to the creditor.
When Consignation without Tender of Payment Produces the Same Effect:
1) When the creditor is absent or unknown, or does not appear at the
place of payment
o If A is indebted to B for P1,000 payable on April 11, 1997
at Manila Hotel, & on said date, A is ready to pay, but B is
not at the Manila Hotel, then consignation can immediately
be made in court without need of looking for B & tendering
payment.
2) When the creditor is incapacitated to receive the payment at the
time it is due
3) When, without just cause, the creditor refuses to give a receipt
o A receipt is proof of payment.
! Debtor must protect himself with receipt, which he
can demand from the creditor upon payment as
evidence of the fact of payment.
o HOWEVER, if there is just cause for the creditor not to issue
the receipt, tender of payment must still be made.
! Ex. If the debtor insists that the creditor issue a
receipt for the full amount of indebtedness & the
creditor refuses to issue such a receipt because
there was no full payment, there is justifiable
ground for the creditor not to issue the receipt.

Therefore, tender of payment is still necessary.
4) When two or more persons claim the same right to collect
o There is no use tendering payment to any of the 2 or more
persons who claim the right to collect because it may turn
out that the person to whom payment is given might not be
lawfully entitled to the payment
5) When the title of the obligation has been lost
o To protect the debtor, he may immediately go to court if
title is lost
o It is better for the court to declare that the obligation has
been extinguished than just pay the creditor without
recovering the title to the debt or at least without declaring
or annotating in the said title that the debt is already
ineffective because of the payment
Art. 1259.
The expenses of consignation, when properly made, shall be charged
against the creditor.
Creditor Pays for Consignation
The creditor pays expenses of consignation because it was his
failure to accept payment that led to the consignation
CASE: Miranda v. Reyes
o Facts:
! X (the debtor) tendered payment of the price for
redeeming the property to the Y a few days before the
period of redemption was to expire
! Y immediately accepted the tender & sent his letter of
acceptance by mail
! X, still waiting for the reply, filed a case for
consignation
! Y, instead of just withdrawing the money deposited in
court, filed an answer claiming that there was no need
of consignation as X accepted the tender and
consequently litigated the case
o Held: Consignation was VALID.7
! It is true that Y sent his letter of acceptance on Sept.
24, but it was not received by X until Sept. 29.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
The law must be reasonably interpreted & the realities of the situation in each case taken into
account so that the purpose of the law may not be defeated.
88
In the meantime the redemption period was about to

expire. X, therefore, did the most prudent thing under
the circumstances by filing the action & depositing the
redemption money in court.
Y bewails this step as unduly dragging him to an
expensive & protracted litigation.
Y has nobody to blame but himself, because all
Y had to do the 1st time was to withdraw the
amount deposited, without going through the
contesting the validity of the deposit just
because there had been no unjustified refusal
to accept the said tender.
Art. 1260.
Once the consignation has been duly made, the debtor may ask the judge to
order the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial
declaration that the consignation has been properly made, the debtor may
withdraw the thing or the sum deposited, allowing the obligation to remain
in force.
Court Ruling
Once there is already a finding that the consignation is proper, the
debtor is released from the obligation.
o He can ask the court to order the cancellation of the
obligation.
The court will order that the creditor accepts the money or thing
consigned as payment.
The consignation has a retroactive effect.
o The payment is deemed to have been made at the time of
the deposit of the money in court or when it was placed at
the disposal of the judicial authority
CASE: Gambas v. Tan
Lesson: Partial acceptance is considered as rejection by the
creditor in a consignment case; the debtor can withdraw his
payment before the creditor accepts.
Facts:
o The debtor filed a case for consignation & deposited the
amount of money offered as payment to the creditor who
previously refused to accept.
o The court granted the withdrawal of the amount deposited
upon motion of the debtor.
The creditor, aware of the said withdrawal, filed an answer

stating that the money was not enough, & that he was
willing to accept the money as partial payment. He also
sought the nullification of the withdrawal as he was not
given notice of the same.
Held: The withdrawal was proper. Art. 1260, par. 2 gives the
depositor the right to withdraw the amount deposited at any time
before the creditor accepts it.
o Such right is clear in this case, because the statement of
the creditor came late, &, what is more, the acceptance
was partial. This last consideration renders unnecessary to
discuss the effect of failure to give the creditor any notice
of withdrawal, since the statement was practically a
rejection of the offer of payment.
o
In this case, both debtor & creditor, in effect, agreed to

revive the indebtedness.
The creditor, due to his consent, will lose preference to the thing
previously deposited to specifically pay-off his debt.
o Anybody who has an interest in it can also go after it & the
creditor cannot anymore say that it has been precisely
consigned to answer for the credit in his favor.
Moreover, the solidary debtors, guarantors & sureties [of the
debtor] shall be released as they likewise benefit from the
extinguishment of the obligation & the debtor cannot unilaterally
revive the obligation without their consent.
o DOES NOT APPLY to joint obligations
o
SECTION 2. LOSS OF THE THING DUE.
With Reservation
An acceptance with reservation is valid, as long as it is done prior to
the withdrawal of the amount by the debtor.
o The creditors acceptance of the consigned amount but
with an express reservation that he is not admitting the
correctness of the obligation & therefore he is also
reserving his right to claim the balance in accordance with
what is prayed for in his answer & counterclaims is valid.
The reservation did NOT completely extinguish the obligation.
o If there is no reservation made, it means that the creditor
waives his other claims under the contract.
Effect of Declaration of Court
Upon the declaration of the court that the consignation is valid, the
debtor cannot anymore claim that he is the owner of the said
amount. He cannot withdraw it anymore.
Art. 1262. Loss of Determinate Things.

An obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor,
and before he has incurred in delay.
When by law or stipulation, the obligor is liable even for fortuitous events,
the loss of the thing does not extinguish the obligation, & he shall be
responsible for damages. The same rule applies when the nature of the
obligation requires the assumption of risk.
Art. 1261.
If, the consignation having been made, the creditor should authorize the
debtor to withdraw the same, he shall lose every preference which he may
have over the thing. The co-debtors, guarantors and sureties shall be
released.
CASE: Fed. of United Namarco Distributors Inc. v. NAMARCO

Lesson: Dont delay, because if you do, you pay for any loss,
damage or deterioration of the object of the prestation.
Facts:
o X (the debtor) promised to deliver 2,000 boxes of oranges
to Y. Y demanded the boxes from X when they were due in
May 1, 1995, but X refused for no valid reason.
o Y filed a case ordering X not to dispose of the boxes & kept
asking for the boxes to be delivered to him.
o When at last X decided to deliver, after already being in
delay, the oranges in 1,500 boxes began to spoil. Y
refused to accept these boxes.
Finding of Court & Creditors Actions

When the court has found proper consignation & the obligation has
been cancelled, creditor MUST obtain from the court the payment.
However, if the obligation having been extinguished, the debtor
decides to withdraw the thing deposited with the creditors consent,
there is thus nothing which the creditor can obtain from the court.
89
Effect of Loss
Determinate object - the debtor shall be excused from performing
his obligation if such thing is lost without his fault.
H0WEVER, if it is (1) his fault or if it has been (2) lost after the
debtor has incurred in delay, the debtor shall answer for the
resulting damages.
X claims that under their contract, Y was supposed to bear

the expenses for handling & storage. Thus, Y should
shoulder the burden of the 1,500 boxes.
Held: X bears the risk of the loss, because he was in delay.
o
Fortuitous Event & Assumption of Risk

As discussed in Art. 1174.
Because the thing is lost already, damages can be obtained from
the debtor.
o Ex. If the specific & particular car to be delivered by the
debtor is worth P500,000, & it is lost through a fortuitous
event, but the parties stipulate that the debtor, even
under such circumstances, will still be liable, the creditor
cannot insist on the delivery of the specific car because it
has already been lost, but he can seek damages in the
amount of P500,000, the value of the car.
Art. 1263. Loss of Generic Things.
In an obligation to deliver a generic thing, the loss or destruction of anything
of the same kind does not extinguish the obligation.
Generic Thing
Cannot really be lost or destroyed unless the whole class of said
thing is destroyed; the obligation subsists despite the loss or
destruction of one thing in the said class.
o Ex. If the debtor is bound to deliver a ball without any
specification, he may deliver any kind of ball. If he buys
one & subsequently loses it through a fortuitous event, his
obligation is not extinguished. The debtor simply has to buy
another ball.
Art. 1264. Partial Loss Tantamount to Total Loss.
The courts shall determine whether, under the circumstances, the partial
loss of the object of the obligation is so important as to extinguish the
obligation.
Partial Loss
If the loss is complete, Articles 1262 & 1263 will apply.
If the loss is partial & the circumstances so warrant, the court may
consider it as a complete loss which extinguishes the obligation.
o Only happens if the partial loss is so important so as to
totally affect the whole object of the obligation.
90
HOWEVER, if it is considered as a complete loss, then the rules

under Art. 1262 & 1263 must apply.
o Ex. If the debtors obligation is to deliver a specific
computer, consisting of the CPU with specific drives &
particular hard disks together with a very specialized
screen peculiarly made for the said computer, with a
special keyboard made to respond only to said screen, &
the said screen is lost through a fortuitous event before
the debtor has incurred in delay, there is clearly a partial
loss which renders the computer system totally useless. In
this case, the debtor can go to court and declare that the
partial loss has extinguished his obligation to deliver the
computer.
Art. 1265.
Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, unless there is proof to the
contrary, & without prejudice to the provisions of Art. 1165. This
presumption does not apply in case of earthquake, flood, storm, or other
natural calamity.
Loss during Possession of Debtor
General rule: presumption that the loss of the thing is due to the
fault of the debtor who possesses it.
o The presumption arises from the fact that it was lost while
it is in the possession of the debtor.
o If the debtor is NOT in the possession of the thing when it
is lost, the presumption does not arise.
If the presumption applies, the debtor MUST prove that the loss is
not through his fault or it has been caused by a fortuitous event.
o HOWEVER, he is still liable for a fortuitous event if:
! It has been so stipulated by the parties
! The law so states
! The nature of the obligation involves an
assumption of risk
! The obligor delays
! The obligor has promised the same thing to 2 or
more persons who do not have the same interest.
The presumption does NOT apply even if the loss happens at the
time the thing is in the possession of the debtor if, at the time of
the loss, an earthquake, storm, or other natural calamity exists.
Art. 1266.
The debtor in obligations to do shall also be released when the prestation

becomes legally or physically impossible without the fault of the obligor.
CASE: PNCC v. CA
Lesson: Art. 1266 applies only to obligations to do
Facts:
o The lessee in a lease contract sought its release from
paying the rentals & from the said contract itself invoking
Art. 1266.
o The lessee claimed that, due to the change in political
climate after the EDSA revolution & change in financial
condition, it was not able to use the property for the
purpose for which it intended to utilize it, i.e., to use the
leased premises as a site of a rock crushing plant
Held: Lessee cannot rely on Art. 1266, because it applies only in
obligations to do & not to give
o Additionally, the unforeseen event & causes mentioned by
the lessee are not the impossibilities contemplated
Obligations To Do
When the prestation becomes legally or physically impossible
without the fault of the obligor, it shall be considered a loss which
extinguishes the obligation.
o Legal impossibility - If the obligor is bound to build a fence
along the property of the obligor & the said property is
expropriated by the government which bars everybody from
entering the same,
o Physical impossibility - a debtor was bound to do a concert
& to provide musical bands exclusively in a particular
Music Hall & the parties contracted on the basis of the
continued existence of the said Music Hall, which burned
down, without the fault of either the debtor or the creditor,
before the concert could begin. The obligation of the
debtor to render a concert has become physically
impossible to perform & therefore the same was
extinguished.
Art. 1267.
When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in
whole or in part.
Difficulty Beyond Contemplation of Parties
91
Difficulty alone does not excuse the debtor from fulfilling his
prestation.
o Subjective impossibility - a promissors duty is never
discharged by the mere fact that the supervening events
deprive him of the ability to perform, if they do not also
deprive other persons of the ability to render such a
performance.
Art. 1267 - a new norm providing that when the service has become
so difficult as to be manifestly beyond the contemplation of the
parties, the obligor may be released therefrom, in whole or in part.
o Still within the rule on impossibility of performance,
although it may not be necessarily be impossible.
Enunciates doctrine of unforeseen events
Requisites for Application of Art. 1267

1) The prestation has become so difficult to render
2) The service has become manifestly beyond the contemplation of
the parties.
*These requirements must exist together.
An obligor is bound to deliver 40 cases of mangoes from the
Philippines to South Africa by ship at the cost of $30,000 on or
before April 11, 1997.
The usual route in going to South Africa has been suddenly closed
prompting the obligor to look & eventually pass through another
route, which is likewise closed, again leaving the obligor with no
other choice but to attempt passing through another alternative
route 4 times longer than the usual route, & which route could be
traversed by its vessel without damaging itself & without entailing
enormous additional and unreasonable cost (i.e., the obligor would
have to charter other vessels for the continuing voyage), & also
without subjecting the fruits to possible harm as they would most
likely spoil along such a long trip.
The obligation in this case has clearly become so difficult to do & is
manifestly beyond their contemplation. The obligation should be
deemed extinguished.
Rebus Sic Stantibus
The basis of Art. 1267
o Under this theory, the parties stipulate in the light of
certain prevailing conditions
Once these conditions cease to exist, the contract also

ceases to exist
Change in conditions which can extinguish obligations
HOWEVER, Art. 1267 is NOT an absolute application of this theory,
because such would endanger the security of contractual relations
o 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.
o
CASE: PNCC v. CA
Lesson: Rebus sic stantibus does not apply to turmoil in Marcos era
& EDSA Revolution; only in absolutely exceptional circumstacnes
Facts: The lessee in a lease contract sought its release from paying
the rentals & from the said contract itself invoking Art. 1266 &
rebus sic stantibus, claiming that, due to the change in political
climate after the EDSA revolution & change in financial condition, it
was not able to use the property for the purpose for which it
intended to utilize it, i.e., to use the leased premises as a site of a
rock crushing plant
Held: Rebus sic stantibus does not apply here; the petitioners were
quite aware of all the political turmoil when they entered into the
contract in Nov. 18, 1985, days after Marcos declared Martial Law.
o Also, anent petitioners alleged poor financial condition,
mere pecuniary inability to fulfill an engagement does not
discharge a contractual obligation, nor does it constitute a
defense to an action for specific performance.
CASE: Naga Telephone City, Inc. v. CA
Lesson:
o To fall under Art. 1267, it is not a requirement that the
contract be for future service with future unusual change.
Considering the practical needs & the demands of equity &
good faith, the disappearance of the basis of a contract
gives rise to a right to relief in favor of the party prejudiced.
o Art. 1267 cannot be used to modify contracts, only to
extinguish them.
Facts:
o Petitioner X & respondent Y entered into a contract where
they agreed that X shall use the electrical posts of Y in
Naga City free of charge, but the contract can be
terminated if Y is forced to stop its business. As
92
consideration, X agreed to install free of charge 10

telephone connections to Y.
o At the time of the execution of the contract, it was the
contemplation of the parties that the posts were only to be
used in Naga City because, at that time the capability of Y
was very limited. This was so even if at that time there
were many subscribers in Naga City for telephone lines,
who cannot be served because of this contemplated
limited capability.
o After 11 years of the effectivity of the contract, the contract
became so burdensome to Y. This fact was shown by the
following: the telephone cables strung by X had become
heavier with the increase in the volume of their
subscribers, worsened by the fact that their linemen bore
holes through the posts at which points those posts were
broken during typhoons, & that a post costs as much as
P2,630. While there was an increased use of the posts,
there was no corresponding increase in the telephone
connections to Y. X also began using Ys telephone posts
outside Naga City. The contract became so one-sided to
the prejudice of Y.
o X contends that, because the contract did not involve the
rendition of service or a personal prestation & it was not
for future service with future unusual change, Art. 1267
should not apply & therefore the ruling in the Occena vs.
Jabson should be followed.
Held: Art. 1267 was applicable & the obligation was extinguished.
The continued enforcement of the contract had manifestly gone
beyond the contemplation of the parties so much so that the Y
should be released from the contract to avoid Xs unjust
enrichment at Ys expense.
o A reading of Art. 1267 will show that the term service
should be understood as referring to the performance of
the obligation
o The use of the telephone lines is the service
contemplated in Art. 1267
o In Occena, the Court did not allow Art. 1267 to apply to a
petition praying for modification of terms in a contract by
fixing the proper shares that should pertain to them out of
the gross proceeds from the sales of subdivided lots. Here,
the parties did not want to be released from the obligation,
but for the contract to be modified. The case was
dismissed for lack of cause of action, as Art. 1267 is for

extinguishment, & not modifications of contracts.
CASE: Magat, Jr. v. CA
Lesson: When one cannot perform a particular obligation because
of government prohibition or non-issuance by the government of
the permit due to certain supervening events, the obligation can
also be deemed extinguished with Art. 1267 as basis.
Facts:
o X won a bidding to operate taxis with radio transceivers.
For this purpose, X ordered certain transceivers through Y.
Y ordered from Japan.
o It was agreed that the radio transceivers will be delivered
within 60-90 days notice from X of the assigned radio
frequency taking note of government regulations.
! The radio frequency was assigned but later the
government, because of the imposition of martial
law, denied the application for a permit to import
the radio transceivers.
o Due to this denial, X was likewise unable to obtain the
necessary letter of credit. X did not continue with the
contract.
Held: Court rejected the case of Y for breach of contract.
o X testified that a permit to import the transceivers from
Japan was denied by the Radio Control Board. He stated
that he & Y personally went to the Radio Control Office, &
were denied a permit to import. They also went to the
Office of the President, where Secretary Zamora explained
that radios were banned like guns because of martial
law. X testified that this prevented him from securing a
letter of credit from the Central Bank.
o Xs inability to secure a letter of credit & to comply with his
obligation was a direct consequence of the denial of the
permit to import. For this X cannot be faulted.
If A stole a watch from B & was criminally charged for said offense,
& the watch was lost through a fortuitous event, A must still pay the
price of the watch.
o The loss will not excuse him from being responsible; he did
not have the right to possess the same in the first place.
If A however offered back the watch to B, & the latter refused to
accept, the risk of loss of the watch would be on B except if there
was justifiable reason not to accept it as, for example, it had
already been severely damaged.
Art. 1269.
The obligation having been extinguished by the loss of the thing, the creditor
shall have all the rights of action which the debtor may have against 3rd
persons by reason of the loss.
Rights of Action Open to Creditor
If A buys a house from G, & the house, which is insured, is
accidentally burned by a fortuitous event prior to the demand for its
delivery by A, the obligation of G to deliver the house is
extinguished.
o However, in the event that A has already paid the price of
the house, he can seek reimbursement of the insurance
proceeds due from the insurance company.
SECTION 3. CONDONATION OR REMISSION OF THE DEBT.
Art. 1270.
Condonation or remission is essentially gratuitous, and requires the
acceptance by the obligor. It may be made expressly or impliedly.
One & the other kind shall be subject to the rules which govern inofficious
donations. Express condonation shall, furthermore, comply with the forms of
donation.
Art. 1268.
When the debt of a thing certain & determinate proceeds from a criminal
offense, the debtor shall not be exempted from the payment of its price,
whatever may be the cause for the loss, unless the thing having been
offered by him to the person who should receive it, the latter refused
without justification to accept it.
Condonation or Remission of a Debt

An act of liberality; a donation of the obligees credit in favor of the
debtor
Connotes that there is a previous demandable obligation but the
creditor decides not to enforce the debtors prestation anymore.
o Requires the implied or express consent of the obligor. In
effect
Governed by the rules on inofficious donation
Criminal Offense
Rules on Inofficious Donation
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A donation is inofficious if it turns out that the thing or amount

donated (remitted or condoned) encroaches or infringes on the
legitime or successional rights of the heirs of the condoning
creditor.
To combat inofficious donation, one must prove payment & not
condonation, because payment is not revocable as inofficious
donation
Ex. A creditor condones the debt of a debtor in the amount of P50K.
o Later on, the creditor gives birth to a child at a time when
her properties are worth only P10,000.
o Her over-all estate (including the remitted P50,000) at the
time of the birth of the child is therefore P60,000.
! The legitime of the child is 1/2 of the estate
which, in this case, is P30,000.
! The free portion which can be given to any person
not necessarily an heir is also P30,000.
o Thus, since the child will only get P10,000 because this is
the only existing property out of an estate of P60,000, the
remission in favor of the debtor is inofficious to the extent
of P20,000. The remission clearly infringes on the legitime
of the child.
o The debtor must therefore be made to pay P20,000 out of
the P50,000 remitted debt. Hence, the child shall get
P20,000 + P10,000, completing his legitime.
Related Provisions Inofficious Donations

Art.750 The donation may include all the present property of the
donor, or part thereof, provided he reserves, in full ownership or in
usufruct, sufficient means to support himself & all relatives who, at
the time of the acceptance of the donation, are by law entitled to be
supported by the donor.
o Without such reservation, the donation shall be reduced on
petition of any person affected.
Art.771 - Donations which in accordance with Art. 752, are
inofficious, bearing in mind the estimated net value of the donors
property at the time of his death, shall be reduced with regard to
the excess
o BUT the reduction shall not prevent the donations from
taking effect during the life of the donor
o NOR shall it bar the donee from appropriating the fruits.
Art. 772 - Only those who at the time of the donors death have a
right to the legitime & their heirs & successors in interest may ask
for the reduction of inofficious donations.
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Said persons cannot renounce their right during the

lifetime of the donor, either by express declaration, or by
consenting to the donation.
o The donees, devisees & legatees, who are not entitled to
the legitime & the creditors of the deceased can neither
ask for the reduction nor avail themselves thereof.
Art. 773 - If, there being 2 or more donations, the disposable
portion is not sufficient to cover all of them, those of the more
recent date shall be reduced with regard to the excess.
Art. 760 - Every donation inter vivos, made by a person having no
children or descendants, legitimate or legitimated by subsequent
marriage, or illegitimate, may be revoked or reduced as provided in
the next article, by the happening of any of these events:
(1) If the donor, after the donation, should have legitimate
or legitimated or illegitimate children, even though they be
posthumous;
(2) If the child of the donor, whom the latter believed to be
dead when he made the donation, should turn out to be
living;
(3) If the donor should subsequently adopt a minor child.
Art. 761 - In cases referred to in the preceding article, the donation
shall be revoked or reduced insofar as it exceeds the portion that
may be freely disposed of by will, taking into account the whole
estate of the donor at the time of the birth, appearance or adoption
of a child.
Art. 762 - Upon the revocation or reduction of the donation by the
birth, appearance or adoption of a child, the property affected shall
be returned, or its value if the donee has sold the same.
o If the property is mortgaged, the donor may redeem the
mortgage, by paying the amount guaranteed, with a right to
recover the same from the donee.
o When the property cannot be returned, it shall be
estimated at what it was worth at the time of the donation.
Art. 763 - The action for revocation or reduction on the grounds set
forth in Art. 760 shall prescribe after 4 years from:
o The birth of the 1st child, or from his legitimation,
recognition or adoption or
o From the judicial declaration of filiation, or
o From the time information was received regarding the
existence of the child believed dead.
o This action cannot be renounced, & is transmitted, upon
the death of the donor, to his legitimate & illegitimate
children & descendants.
o
Rules on Forms of Donations

Art.748 - The donation of a movable may be oral or in writing.
o Oral donation - requires simultaneous delivery of the thing
or of the document representing the right donated.
o If the value of the personal property donated exceeds
P5,000, the donation & the acceptance shall be made in
writing. Otherwise, the donation shall be void.
Art. 749 - In order that the donation of an immovable may be valid,
it must be made in a public document, specifying
o The property donated &
o The value of the charges which the donee must satisfy.
o The acceptance may be made in the same deed of
donation or in a separate public document, but it shall not
take effect unless it is done during the lifetime of the
donor.
o If the acceptance is made in a separate instrument, the
donor shall be notified thereof in an authentic form, & this
step shall be noted in both instruments.
Art. 1271.
The delivery of a private document evidencing a credit, made voluntarily by
the creditor to the debtor, implies the renunciation of the action which the
former had against the latter.
If in order to nullify this waiver it should be claimed to be inofficious, the
debtor & his heirs may uphold it by proving that the delivery of the
document was made in virtue of payment of the debt.
Private Document Evidencing a Credit
Promissory note the most common private document evidencing
a credit
o A promissory note in the hands of the creditor is proof of
indebtedness rather than proof of payment.
If a creditor delivers a promissory note to the debtor, the creditor, in
effect, furnishes the debtor the evidence which could prove the
indebtedness of such debtor in his favor.
o Implies that the creditor is no longer interested in the debt.
o The law provides that such act will be considered a
renunciation.
o The presumption created is that the debt was condoned,
NOT that there was payment
Ex. A owes B P1,000, evidenced by a promissory note executed by
A, which is in the possession of B.
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If B later voluntarily gives it to A, such delivery implies a

renunciation of the debt.
o HOWEVER, in the event that the remission of the P1,000 is
claimed to be void because it is inofficious, the heirs of A
can show that As possession of the promissory note is
NOT a result of a remission made by A but a result of As
payment of the obligation.
In case of PAYMENT, the promissory note is always taken by the
debtor.
o
CLASS DISCUSSION
Donations take effect during the lifetime of the donor & the donee
gets the fruits during the period in which he holds the property
Art. 1272.
Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it
voluntarily, unless the contrary is proved.
Presumption in Art. 1272
Document evidencing the debt in the possession of the debtor
gives rise to the refutable presumption that such document has
been delivered by the creditor voluntarily.
However, this presumption can be overturned by clear evidence to
the contrary.
Art. 1273.
The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force.
Principal & Accessory Obligations
Existence of the accessory obligation depends on the existence of
the principal obligation.
o BUT the existence of the principal obligation does NOT
depend on the accessory obligation.
! If the principal obligation is extinguished, it carries
with it the extinguishment of the accessory
obligation but not vice-versa.
Ex. If A is indebted to B, & the indebtedness is guaranteed by X, & B
told X that he will not anymore claim on Xs guarantee as the said
creditor is renouncing the same, X is released but the principal
obligation of A still subsists.
o B can still collect from A.
However, if B renounces the indebtedness of A, B cannot

go against X because the latters guarantee, being an
accessory obligation, is extinguished with that of the
principal obligation.
Art. 1274.
It is presumed that the necessary obligation of pledge has been remitted
when the thing pledged, after its delivery to the creditor, is found in the
possession of the debtor, or of a 3rd person who owns the thing.
Pledge
Involves a movable property constituted by the owner of such
property who has free disposal of it, to secure the fulfillment of a
principal obligation
Such contract is perfected only upon the delivery of the thing
pledged to the creditor.
o A pledge is an accessory contract.
o A person may even pledge his property not for his own
indebtedness but for the indebtedness of another person.
In a contract of pledge, the creditor must be in possession of the
thing pledged.
o If it is in possession of the debtor or of the 3rd person who
owns it, there is a presumption that the accessory
obligation has been condoned or remitted. However, this is
a refutable presumption.
CLASS DISCUSSION
Movable security pledge
Real estate security mortgage
With securities, if D cannot pay his debt to C, the pledge/mortgage
will be sold at public auction & proceeds given to C
SECTION 4. CONFUSION OR MERGER OF RIGHTS
Art. 1275. Confusion or Merger of Rights.
The obligation is extinguished from the time the characters of creditor &
debtor are merged in the same person.
Confusion or Merger
The obligation is extinguished from the time the characters of
creditor & debtor are merged in the same person.
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Ex. A son owes his father P10,000. His father dies leaving
as part of his estate, inherited by the son, the amount of
P10,000 owed by the son to his father.
CASE: Chittick vs. Court of Appeals
o Facts: A woman filed a complaint against her father for
support in arrears & for her share in the conjugal
partnership. After the she was substituted in the case by
her children upon her death, the father likewise died.
o Held: Chittick children as heirs of the creditor (their
mother) are also the heirs of the debtor (their grandfather),
the obligation sued upon had been extinguished by the
merger in their persons of the character of creditor &
debtor of the same obligation.
o
Art. 1276. Guarantee & Merger.

Merger which takes place in the person of the principal debtor or creditor
benefits the guarantors. Confusion which takes place in the person of any of
the latter does not extinguish the obligation.
Guarantee
An indebtedness by a debtor & guaranteed by a 3rd person is
extinguished if there is a merger of the characters of debtor &
creditor.
o The extinguishment of the principal obligation extinguishes
the accessory obligation of guarantee.
o Guarantee when a guarantor binds himself to pay the
remaining indebtedness of a debtor after the creditor has
exhausted all other available remedies.
HOWEVER, the ff. merely extinguishes the accessory obligation:
o Merger of the persons of guarantor & creditor
o Merger of the characters of debtor & guarantor
Art. 1277. Confusion & Joint Obligations.
Confusion does not extinguish a joint obligation except as regards the share
corresponding to the creditor or debtor in whom the two characters concur.
Joint Obligations
Joint debtors owe the creditor only their share in the whole
indebtedness & the creditor can only collect from each debtor his
share in the total indebtedness.
If A, B & C jointly owe X P3,000 & there is a merger of the
characters of X & C, the obligation is extinguished in so far as the
P1,000 share of C in the indebtedness is concerned but not as to

the rest.
o X can still collect P1,000 each from A & B.
Solidary Obligations (same example as above)
If the obligation is solidary & there is merger of the characters of
C & X, the obligation is extinguished.
o HOWEVER, if A pays the whole indebtedness to X prior to
the merger of the characters of C & X, A can still collect
from X & likewise from B their respective shares in the
indebtedness which is P1,000 each
SECTION 5. COMPENSATION.
Art. 1278.
Compensation shall take place when 2 persons, in their own right, are
creditors & debtors of each other.
Art. 1279.
In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, & that he be at
the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, & also of the same quality if
the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated & demandable;
(5) That over neither of them there be any retention or controversy,
commenced by 3rd persons & communicated in due time to the
debtor.
Compensation
At least 2 contracts are involved
Can be total or partial
o Unlike with payment, which generally must be complete
Compensation by operation of law
Mode of extinguishing an obligation whereby the parties are
mutually debtors & creditors of each other.
o If they owe each other exactly the same amount & the
requisites under Art. 1279 are present, they do not have to
make actual payment to each other, i.e. they do not have
to hand money or the things due to each other, as payment
is made by operation of law.
97
o
o
Hence, if A owes B P2,000, & B, in turn, owes A P2,000, &

both indebtedness are due without any 3rd person claiming
the same, the obligation is extinguished.
If they mutually owe each other the unequal amounts, then
there is compensation up to the extent that the amounts
are covered by their mutual outstanding obligations.
Requisites for Legal Compensation:

1) Each one of the obligors is bound principally & each of them is at
the same time a principal creditor of the other
o The obligors must be mutual creditors & debtors of each other
o CASE: Soriano v. General de Tabacos de Filipina
! Facts:
X extended a crop loan to Y who secured payment
of the loan by, among others, the sugarcane crops
that would be planted & harvested.
X, after receipt of some export sugar from Y,
shipped the same to the United States for Xs own
account & benefit.
o Later on, X resisted the claim of Y to be
credited an amount of P51,528.01,
representing the amount of the sugar it
delivered to X.
X invoked automatic compensation because Y was
Xs debtor due to his crop loan account, & at the
same time a creditor of X for the proceeds of the
sale of Ys sugar.
! Held: The parties were NOT mutual debtors & creditors
of each other considering the fact that, by Xs own
admission, the sugar was sold not for the account of Y
but for the account of X & therefore X could not have
been a debtor of Y.
o CASE: Republic v. Mambulao Lumber Co.
! Lesson: No set-off is admissible against demands for
taxes levied for general or local governmental
purposes.
! Facts: A company contended that the reforestation
charges collected under RA 115 & not used in the
area subject of its timber license, could be applied in
compensation of the sum due from it as forest charges
! Held: The reforestation charges were in the nature of
taxes & can never be refunded even if the they were
not actually used in the area subject of its timber

license, &, because they were taxes, the reforestation
charges were not debts for purposes of legal
compensation to make the parties therein mutual
creditors & debtors of each other
2) Both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, & also of the same quality if
the latter has been stated
o There can be no compensation if one debt involves the
payment of money & the other the delivery of a particular thing.
o HOWEVER, there can be compensation involving things which
are determined such as any computer, but not a specific
determinate thing such as a computer with serial number
10325.
! Consumable means fungible (generic)
o CASE: Ong v. CA
! Facts: Compensation is sought for an obligation of a
debtor to deliver a sum of money to a creditor &
another obligation of creditor to deliver zippers to the
debtor.
! Held: The debts, even admitting that the delivery of the
zippers to the debtor is a debt, do not both consist in a
sum of money nor are they of the same quality & kind
3) The 2 debts are due
o The debts need not be incurred at the same time.
o A debt cannot be demanded if it is not yet due.
! HOWEVER, the parties can agree that compensation
can be made even as to the debts which are not yet
due.
o CASE: Perez v. CA
! Facts:
A finance company was indebted to an investor
with respect to 2 debts due originally on Aug. 6,
1974 & Aug. 13, 1974 respectively
The debts were rolled-over so that their maturity
dates were extended to Oct. 4, 1974 & Oct. 11,
1974, respectively.
The finance company was the creditor with
respect to a certain obligation to mature on Aug.
5, 1994 as against company X to whom the 2
credits of the investor, which were to mature on
Oct. 4 & 11, 1974 respectively, were assigned on
Sept. 9, 1974
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Held: There is no legal compensation, as both debts

have to be due & demandable for compensation to
take place.
On the respective dates of maturity, specifically,
Aug. 6 & Aug. 13, 1974, respectively, the investor
was still the holder of those bills, it can be safely
assumed that it was he who had asked for the rollovers on the said dates. Company X was bound by
the roll-overs since the assignment to it was made
only on Sept. 9, 1974. The inevitable result of the
roll-overs of the principals was that the debts were
not yet due & demandable as of the date of their
assignment by the investor to Company X on Sept.
9, 1974, nor as of Oct. 3, 1974 when Company X
surrendered the Bills to the finance company.
CASE: PNB Madecor v. Uy
! Facts: One of the debts was payable only upon
demand & there was no demand made
! Held: There can be no legal compensation because
the debt is not yet due
!
CLASS SCENARIO
Facts: A owes B P1K. B owes A P1K. Both are payable on March 1.
Can compensation arrive at March 5?
Answer: NO. There must be a demand for payment for them to be
considered due & demandable.
4) The debts are liquidated & demandable.
o The debt must be determined & certain.
! Compensation cannot take place where one of the
debts is not liquidated, as when there is a running
interest still to be paid thereon.
o CASE: Compania Maritima v. CA
! Facts:
X owed Y the sum of P40,797.54. There was
legal interest payable from Feb. 3, 1951 on
said debt, representing useful expenses. It
was stipulated that the interest would not
stop accruing until the expenses are fully
paid.
Meanwhile, Y also owed X P59,500, for
rentals payable.
X now claims there should be legal

compensation for the P40,797.54 debt, so
that they would owe only P18,702.46.
! Held: There can be no compensation, because the
amount is not liquidated. Since there was still legal
interest to be paid until the expenses are fully paid,
there is still some debt which is not liquidated.
o CASE: Miailhe v. Halili
! Facts:
o SC reduced the liability in favor of the X
resulting, among others, in an excess amount
of P2,004.28, which consequently became
payable to Y.
o X did not want to return the said amount on
the ground that he had the right to retain the
same considering that, in another case, which
was on appeal, the lower court had rendered
judgment against Y & in favor of X for the sum
of P2,004.28.
! Held: There can be no compensation because the
amount of P2,004.28 awarded to X in another case
was still under litigation & therefore still being
disputed. It was a requirement for compensation to
take place that the amount involved be certain &
liquidated.
5) Over neither of them there be any retention or controversy,
commenced by 3rd persons & communicated in due time to the
debtor.
o Due time the period before legal compensation was
supposed to take place, considering that legal compensation
operates so long as the requisites concur, even without any
conscious intent on the part of the parties.
! A controversy communicated to the parties after that
time CANNOT undo the compensation that had taken
place by force of law, lest the law concerning legal
compensation be for naught.
o Ex. A owes B P1,000, due on May 3, 1999. B is likewise
indebted to A in the same amount due on May 23, 1999. Legal
compensation therefore could set in on May 23, 1999.
! D filed suit against A & obtained a favorable resolution
from the court garnishing all money & credits of A,
including the indebtedness of B in As favor. If it were
only on June 1, 1999 that B was able to know of the
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garnishment, legal compensation has already set in. D

cannot anymore make use of the credits of A against B
to satisfy As obligation in his (Ds) favor.
HOWEVER, if B were notified on May 20, 1999, there
can be no compensation of the mutual debts of A & B
against each other as the controversy commenced by
D, a 3rd person, was duly communicated at a time
before legal compensation could set in
SCENARIO
Facts: Company X owes Y P10,000 which Company X borrowed
from Y. Y, on the other hand, owes X for a share of stocks from Y
that he hasnt paid fully yet. Can there be compensation?
Answer: NO. A person buying stocks from a company is not
indebtedness on the part of the buyer of the stocks. Thus, there
can be no legal compensation, because the law defines it as a
situation where 2 persons are mutually creditors & debtors of each
other.
CLASS DISCUSSION
The contract should at least be voidable for compensation to take
place
Article 1280.
Notwithstanding the provisions of the preceding article, the guarantor may
set up compensation as regards what the creditor may owe the principal
debtor.
Guarantor
Exception to general rule; here, the 1st element is missing (principal
creditors & debtos to each other)
A person who promises to pay the creditor in the event that the
principal debtor fails to pay the indebtedness.
o Before the creditor can go against a guarantor, the creditor
must first exhaust all possible ways to collect the debt from
the principal debtor
! UNLESS the guarantor binds himself solidarily with
the principal debtor.
o If the creditor goes against the guarantor, the latter can
resist payment by invoking compensation between the
creditor & the principal debtor.
Notwithstanding the provisions of the preceding article
Even if the guarantor & the principal creditor are not

mutual debtors & creditors of each other, the obligation of
the guarantor can be extinguished by invoking
compensation in so far as the principal debtor is
concerned.
Art. 1281.
Compensation may be total or partial. When the two debts are of the same
amount, there is a total compensation.
Total & Partial Compensation
Total compensation - when the mutual debts of the parties to each
other are equal.
Partial compensation - when the debts are not equal, in which case,
the debts are extinguished to the concurrent amount.
Hence, if A owes Z P2,000 & Z owes A P500, compensation can
occur but only on a partial basis. Zs indebtedness will be
extinguished, but As indebtedness will subsist but partially
extinguished to the extent of P500, reducing liability to of P1,500.
Art. 1282.
The parties may agree upon the compensation of debts which are not yet
due.
Happens when one of the parties to a suit over an obligation has a

claim for damages against the other
A files a collection case against B for P1,000.
o B can file a counterclaim in the same amount claiming
damages arising from the same or different transaction &
requesting the court to just set-off the damages.
o If the court agrees, then there can be compensation.
CASE: Ong v. CA
o Lesson: For judicial set-off to apply, the amount of
damages or the claim sought to be compensated must be
duly proven
o Facts: X owed Y money, & X deposited zippers with Y,
though it was not shown that Y had asked for the zippers
or even needed it for business.
o Held: X has not proved the right to any damage as a result
of the claimed retention of the zippers by Y. There was also
no proof of the amount of such damages as X could not
even say how many of the zippers had been earlier
withdrawn by him.
Art. 1284.
When one or both debts are rescissible or voidable, they may be
compensated against each other before they are judicially rescinded or
avoided.
When Not Yet Due

General rule - compensation can only occur when the debts are due
& demandable (legal compensation)
o HOWEVER, the parties may agree upon the compensation
of debts which are not yet due. (contractual compensation)
Hence, if A owes Z P1,000 due on April 11, 1997 & Z is indebted to
A in the same amount but due on May 7, 1997, there can be no
compensation on April 11, 1997.
o HOWEVER, Z & A can agree that, even if May 7, 1997 has
not yet arrived, their mutual indebtedness compensate
each other so that their respective obligations are
extinguished.
Rescissible Debt
Valid up to the time it is rescinded or annulled.
If all the requisites for a valid compensation are present before a
contract is rescinded, the compensation can occur by operation of
law.
Ex. If A is indebted to B for P1,000 & the latter is likewise indebted
to A for the same amount which are both due & demandable,
compensation will occur even if the loan obtained by B from A was
procured through force & intimidation, therefore making the same
voidable, for as long as such debt has not yet been annulled.
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.
Art. 1285. Assignment of Rights by Debtor & Effect on Compensation.

The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.
Judicial Set-Off
100 | Katrina Gaw | Block C 2018
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous
to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set
up the compensation of all credits prior to the same & also later ones until
he had knowledge of the assignment.
Cession
In this Art., this involves transfer of title, like a sale or donation
Valid even without consent of debtor
Another exception to the rule that only the principal creditors &
debtors can claim from each other
There is a novationa change in the person of the creditor
3 Cases When the Debtor Assigns His Credit to a 3rd Person
1) When the debtor has consented to the assignment of rights made
by a creditor in favor of a 3rd person, the debtor cannot set up
against the assignee the compensation which would pertain to him
against the assignor, unless the assignor was notified by the debtor
at the time he gave his consent, that he reserved his right to the
compensation
o Ex. X owes Z P1,000 due on Apr. 12, 1997. Z is likewise
indebted to X in the same amount due on May 6, 1997. On Apr.
14, 1997, Z assigned his credit to O with the consent of X who
does not make any reservation as to his right of compensation
which could occur on May 6, 1997.
! On May 7, 1997, O demands payment from X the
amount of P1,000 which has been assigned to him by
Z. X CANNOT resist payment by invoking that the
amount of indebtedness of Z in his favor may be
applied in compensation of the said amount of P1,000
assigned by Z to O.
! HOWEVER, if at the time X gives his consent to the
assignment, he reserves his right to the compensation,
he can validly invoke that the obligation has been
extinguished through compensation.
o CASE: Perez v. CA
! Facts:
A finance company issued to an investor 2
promissory notes to mature originally on Aug. 6 &
Aug. 13, 1974, respectively. The commercial
papers were rolled-over so that their maturity
dates were extended to Oct. 4 & Oct. 11, 1974
respectively.
The same finance corporation was the creditor

with respect to a certain obligation to mature on
Aug. 5, 1994 as against Company X to whom the 2
credits of the investor, which were to mature on
Oct. 4 & 11, 1974, respectively, were assigned on
Sept. 9, 1974.
Compensation was being claimed on the basis of
the Art. 1285, par. 3.
! Held: There can be no compensation, applying Art.
1285, par. 1. The debtor cannot claim that he had no
knowledge of the assignment in view of the special
nature of money market transactions
The impersonal character of the money market
device overlooks the individuals or entities
concerned.
o Implied knowledge of free assignment
(& consent)
The issuer of a commercial paper in the money
market necessarily knows in advance that it would
be expeditiously transacted & transferred to any
investor/lender without need of notice to said
issuer.
In practice, non-notification is given to the
borrower or issuer of commercial paper of the sale
or transfer to the investor.
2) When the creditor communicated the cession to the debtor but the
debtor did not consent thereto, the latter may set up the
compensation of debts previous to the cession, but not of
subsequent ones
o X owes Y P1,000 due on Apr. 12, 1997 & P2,000 due on May
10, 1997. Y also owes X P1,000 due on May 6, 1997 &
P2,000 due on May 9, 1997.
! On May 7, 1997, Y assigns all his credits to O but X
does not consent to the assignment.
! On June 1, 1997, O demands payment from X of the
first P1,000 & the 2nd P2,000 assigned to him by Y. X
can resist payment of the P1,000 on the ground that
compensation has taken place because the 1st debts
became due before the cession, but he cannot set up
compensation as to the P2,000 which has become
due after the cession.
3) When the assignment is made without the knowledge of the debtor,

he may set up the compensation of all credits prior to the same &
also later ones until he has knowledge of the assignment.
o Ex. from 2nd case: If X is informed by Y only on May 15, 1997
that he has assigned all his credits to O, & the latter demands
payment of the 1st P1,000 & the 2nd P2,000 on June 1, 1997,
X can invoke that all the indebtedness have been extinguished
because compensation has set in.
o CASE: Sesbreo v. CA
! Lesson: It is the time that the debtor learns of the
assignment that is determinative, rather than the time
it is actually assigned.
o Art. 1626 The debtor who, before having
knowledge of the assignment, pays his
creditor shall be released from the
obligation.
o If a man pays his debt before notice of the
assignment, the law exonerates him. It is the
duty of the person who has acquired a title by
transfer to give his debtor notice to demand
payment of debt.
! Facts: Philfinance was indebted to Delta, evidenced by
promissory note 1. The latter was likewise indebted to
the former evidenced by promissory note 2.
Philfinance assigned promissory note 1 to Sesbreo,
one of Philfinances creditors, who only notified Delta
of such assignment after the indebtedness of Delta in
favor of Philfinance & the indebtedness of Philfinance
in favor of Delta both became mutually due. Despite
the said maturities of said debts, Sesbreo decided to
claim from Delta on the basis of the assigned credit
made to him by Philfinance.
! Held: Sesbreo could no longer claim from Delta
because he notified Delta of his rights as assignee
after compensation had taken place by operation of
law, even if he received the promissory note 1 prior to
the co-terminal maturity date.
o Co-terminal maturity means maturity on the
same date, giving way to compensation
o No man is bound to remain a debtor: he may
pay to him with whom he contracted to pay;
and if he pays before notice that his debt has
been assigned, the law holds him exonerated,
for the reason that it is the duty of the person

who has acquired a title by transfer to
demand payment of the debt, to give his
debtor notice.
Art. 1286.
Compensation takes place by operation of law, even though the debts may
be payable at different places, but there shall be an indemnity for expenses
of exchange or transportation to the place of payment.
Operation of Law
If all the requisites under Art. 1279 are present, compensation
takes place by operation of law.
o The parties need not notify each other that they intend to
have their debts compensated.
Indemnity for expenses of exchange or transportation to the place
of payment can arise only if there is partial compensation.
o Ex. If A owes B P1,000 payable in Davao but B owes A
P500 in Marikina, then there is only partial compensation.
A has to go to Marikina for him to receive the payment of B
for the balance of P500. A, the creditor, should be
reimbursed by the debtor the amount of transportation
expenses A has incurred in going to Marikina because,
under Article 1247, the extrajudicial expenses required for
payment shall be for the account of the debtor, unless it is
otherwise stipulated.
BUT if there is complete compensation, the parties need not do
anything as the obligations are completely extinguished.
o Ex. If A owes B P1,000 payable in Davao & B owes A the
same amount payable in Marikina & both are due, A and B
do not have to go to the places of payment as the
compensation here is complete and therefore both
obligations are totally extinguished.
Art. 1287.
Compensation shall not be proper when one of the debts arises from a
depositum or from the obligations of a depository or of a bailee in
commodatum.
Neither can compensation be set up against a creditor who has a claim for
support due by gratuitous title, without prejudice to the provisions of par. 2
of Art. 301.
Art. 1288.
Neither shall there be compensation if one of the debts consists in civil

liability arising from a penal offense.
No Compensation in the ff. cases even if there is Technically a Loan:
1) Debts arising from a depositum or from the obligations of a
depository
o A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of
safely keeping it & of returning the same
o Ex. If A owes B P1,000 due on Apr. 11, & A deposited with
B P1,000 only for safekeeping to be returned on Apr.11,
1977, there can be no compensation come Apr. 11, 1997
as the obligation of B to return the P1,000 arises from the
obligations of a depository
2) Debts arising from the obligations of a bailee in commodatum.
o The bailee in commodatum acquires the use of the thing
loaned but not its fruits
o Bailee is obliged to pay the ordinary expenses for the use &
preservation of the thing loaned
o Bailee cannot retain the thing loaned on the ground that
the bailor owes him something, even though it may be by
reason of expenses.
o However, the bailee has the right of retention for damages
mentioned in Art. 1951
3) Debts arising from duty to support.
o Compensation cannot likewise apply if the other obligation
is one of support to the other party
! Ex. A father, who is required to give support to his son,
cannot claim that he need not give the support
considering that his son owes him the same amount of
money.
o HOWEVER: Support in arrears can be compensated or
renounced (Art. 301, par. 1 of the Civil Code)
! Ex. If the father has not given his son P4,000 which is
equivalent to the previous four months of unremitted
financial support, but the same son owes the father
P4,000, there can be compensation in his case.
! The application of Art. 301, par. 2 doubtful because it
has already been deleted by the New Family Code
4) Debts consisting of a civil liability arising from a penal offense
o Ex. If A is indebted to B by virtue of a contract of loan & B is
indebted to A by virtue of an award of civil damages in
favor of A as a result of Bs conviction in inflicting physical
injuries on A, there can be no compensation.
A criminal violation of the Trust Receipt Law which makes

the obligor financially & civilly liable to the contracting bank
to the extent indicated in the Trust Receipt contract cannot
be extinguished by a claim of compensation of the amount
of deposit which the obligor has with the bank even if,
under the law, a person who opens a deposit account in a
bank is technically a creditor of that bank
Art. 1289.
If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the
order of the compensation.
Rules on Application of Payment
If A owes X P3,000 due on April 11, 1997, & X owes A P3,000
without interest, & another P3,000 with interest at 12% per annum
in case of non-payment, all due on April 11, 1997, there can be
compensation.
o If X does not designate the indebtedness to which
compensation will apply, it will be applied to the most
onerous debt which is the interest-bearing P3,000 debt.
This is the most onerous because the payment of the
interest is necessarily most burdensome.
Art. 1290.
When all the requisites mentioned in Art. 1279 are present, compensation
takes effect by operation of law, & extinguishes both to the concurrent
amount, even though the creditors and debtors are not aware of the
compensation.
Automatic Extinguishment
Most expedient way of extinguishing an obligation.
Automatic & occurs even though the creditors & debtors are not
aware of the compensation
CASE: Mindanao Portland Cement v. CA
Lesson: Civil liabilities arising from civil obligations in 2 different
suits featuring the same persons can compensate one another.
Facts: A creditor was able to obtain in a civil case an award of
attorneys fees in the amount of P10,000 from the debtor, & the
latter was also able to obtain a judgment in another civil case for
attorneys fees in the same amount from the former
Held: Compensation has taken place.
CASE: Pioneer Insurance & Surety Co. v. CA

Lesson: The stipulation in the indemnity agreement allowing the
surety to recover even before it paid the creditor is enforceable. In
accordance therewith, the surety may demand from the
indemnitors even before paying the creditors.
Facts:
o In Sept. 8, 1987, X, a surety company, issued general
warehousing bonds in favor of the Bureau of Customs for
importation of raw materials in the total amount of
P6,500. The bonds were issued on behalf of Company Y &
its president, Z.
o To secure X against any & all damages & losses of
whatever kind which X may incur as a consequence of its
becoming a surety upon the bonds, Z & Y executed jointly
& severally in favor of X indemnity agreements for said
bonds, promising to pay their debts to the Bureau.
! The indemnities shall be paid to X as soon as
demand is received from the Bureau or as soon
as it becomes liable to make payment of any sum
under the terms of the bond, its renewal,
extensions or substitutions whether the said sum
has actually been paid or not
o Y & Z failed to pay for their debt; thus the Bureau
demanded payment from X the amount of P6,390,259.
This amount eventually reached P9,031,000 in 1983.
! In response to Xs demand letter, Y & Z promised
to pay. The Bureau agreed with Y & Z for monthly
installment payments of their obligation on
condition that Y & Z will make an initial payment
of P500,000 & thereafter P400,000 monthly until
fully paid pursuant to the 1st endorsement by the
Bureau, dated Sept. 22, 1976. However, other
than the initial payment of P500,000 did not pay.
o In 1979, a fire gutted the Ys factory destroying materials
insured with X in the amount of P1,144,744. Y demanded
from X payment of the proceeds of the insurance policy
but X refused to pay claiming that said proceeds must be
applied by way of partial compensation against its liability
with the Bureau arising from the warehousing bonds.
o Y argued that they were not the creditors of X & the
demands to pay made by the Bureau did not create any
liability & even if they did, the liability under the
warehousing bonds in favor of the Bureau of Customs was

the liability of X, that petitioner did not pay the Bureau & Y
has nothing to reimburse.
Held: There is legal compensation.
o X owes Y the amount representing the proceeds of the
insurance policy. Y & Z, however, try to negate their liability
by claiming that they have no more liability because of the
fortuitous event. At the same time however, Y & Z admit
liability when they argued that X was released from the
same upon their agreement with the Bureau of Customs to
make staggered payments. Finally, Y & Z argue that since
X has not made any payment yet regarding the amount
demanded by the Bureau of Customs, there is nothing for
which the X should be reimbursed.
! It is needless to emphasize that at the time the
fire occurred, Y & Z with X had already incurred
liability on the warehousing bonds with the
Bureau of Customs, as Y & Z failed to comply with
the provisions of their undertaking. It is therefore,
clear that as far as the P9,031,000 is concerned,
X, Y & Z were already liable to the Bureau when
the fire happened.
! Neither can Y & Z claim that X was released from
liability when they made arrangements with the
Bureau of Customs for staggered payments since
the facts will bear out that other than the
P500,000 payment, no further payment was
made by Y & Z, leading the Bureau of Customs to
go after X again.
o Clearly, X can demand reimbursement from the
respondents even before it has actually paid its obligation
to the Bureau of Customs.
! It can, in principle, be held liable under the
warehouse bonds even before actual payment to
the Bureau of Customs. The liability has been
fixed. What remains is simply its liquidation. The
respondents who defaulted on the agreement to
make staggered payments thereby causing Xs
liability to the Bureau of Customs cannot refuse
the set-off.
! Consequently, legal compensation can take place
between X, Y & Z, that is, X can partially set-off the
insurance proceeds in the amount of
P1,144,744.49 against its liability under the

warehousing bonds which has been computed in
the amount of P9,031,000.00 as of 1983.
From the records, it is seen that the last demand letter of
the Bureau of Customs asking the petitioner to pay the
value of the bonds was on 1981. The records are silent on
whether or not the Bureau of Customs sued either of the
parties to enforce liability under the warehousing bonds. It
may be noted that the petitioner admits its liability under
the warehousing bonds. Since the issue is legal
compensation & in order to avoid any miscarriage of
justice, the Court refers the issue on the enforcement of
liability under the bonds to the Bureau of Customs.
SECTION 6. - NOVATION.
Art. 1291. Novation.
Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a 3rd person in the rights of the creditor.
Novation
Extinctive (not modificatory) novation
o Extinguishes the totality of the contract
It is NEVER presumed; must be expressly agreed about by the
parties that the previous obligation is extinguished & the new one
replaces it
Must be EXPRESS
o Exception implied total incompatibility in all aspects,
on every point
Changing their object objective
Substituting the person of the debtor subjective
Unlike the other forms of extinguishment, it is a juridical act with a
dual function:
o It extinguishes the obligation
o It creates a new one in lieu of the old
CASE: Ajax Marketing & Development Co. v. CA
Lessons:
o To effect an objective novation it is imperative that the new
obligation expressly declare that the old obligation is
thereby extinguished, or that the new obligation be on

every point incompatible with the new one.
To effect a subjective novation by a change in the person
of the debtor it is necessary that the old debtor be
released expressly from the obligation, & the 3rd person or
new debtor assumes his place in the relation.
There is no novation without such release as the 3rd person
who has assumed the debtors obligation becomes merely
a co-debtor or surety.
Facts:
o
Petitioners 3 debts (secured by continuing real estate

mortgages also intended to secure future indebtedness,
including renewals & extensions) were consolidated into 1
debt with the original debtors incorporating themselves
into a corporation for purposes of the consolidated debt.
o The original debtors claimed that there was novation
considering the resulting consolidation, & the change in
the person of the debtor; they also claimed the mortgaged
property had been discharged.
Held: There was no subjective or objective novation.
o No Objective Novation:
! There was nothing to show the unequivocal intent
of the parties to novate the 3 loan agreements
when they consolidated
! The new promissory note still states secured by
REM (real estate mortgage)
! The new agreement merely restructured the
previous 3 loans
o No Subjective Novation:
! The bare fact of the from a partnership to a
corporation, without sufficient evidence, either
testimonial or documentary, that the debtors were
expressly released from their obligations, did not
make the new corporate personality, a 3rd person
or new debtor within the context of a subjective
novation.
! If at all, the new company only became a codebtor or surety. Without express release of the
debtor from the obligation, any third party who
may thereafter assume the obligation shall be
considered merely as co-debtor or surety.
Kinds of Novation
1) Subject - occurs when there is a change of either the person of the

debtor, or of the creditor in an existing obligation
o The old debtor MUST be released expressly from the
obligation, & 3rd person or new debtor assumes his place in
the relation
! No novation without such release as the 3rd
person who has assumed the debtors obligation
becomes merely a co-debtor or surety
2) Objective - occurs when there is a change of the object or principal
conditions of an existing obligation
o The new obligation MUST expressly declare that the old
obligation is thereby extinguished, or that the new
obligation be on every point incompatible with the new one
3) Mixed - when the change of the object or principal conditions of an
obligation occurs at the same time with the change of either the
person of the debtor or creditor
No Form Necessary
General rule: No form of words or writing is necessary to give effect
to a novation
Ex. An oral lease agreement can validly novate a contract to sell
provided that it can be shown that:
o The intent to novate was present &
o The terms are truly incompatible in every respect
CLASS DISCUSSION
From lump sum to installment no novation
From mortgage to pledge no novation, since these are just
accessories
Shortening a period of lease novation
Granting extension to original lease no novation, because the
contract has expired
Quinto v. People incompatibility just in the essential elements
of the contract (object, principal condition, cause & consent)
Article 1292. Requisites of Novation.
In order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or
that the old & the new obligations be on every point incompatible with each
other.
2 Distinct, Successive Contracts
ALL parties must consent
No novation unless two distinct & successive binding contracts take

place, with the later one designed to replace the preceding
convention.
There is NO novation when:
o A subsequent contract is designed to novate a previous
contract, but not all parties to the original contract
consented to or are made parties in the subsequent
contract
o Modifications are introduced before a bargain becomes
obligatory.
Ex. Dacion en pago is a form of novation in which a change takes
place in the object (originally a payment in money, substituted for
something else) involved in the original contract.
Kinds of Novation
Express - It so expressly declares in certain terms
o Expressly - the contracting parties incontrovertibly
disclose that their object in executing the new contract is
to extinguish the old one
o Ex. If an old promissory note is replaced by a new
promissory note which expressly states that the new note
is meant to cancel the old one
o Ex. If a contract to sell of a condominium unit was
executed after the lessor & the lessee executed their lease
contract, the former does NOT necessarily novate the latter
absent any clear expression of the intention to novate
Implied - When the old obligation is completely incompatible with
the new obligation in every aspect
o No specific form required
o Irreconcilabe incompatibility between the old & new
obligation
o Acts which are too clear & unequivocal to be mistaken
Test of incompatibility Whether or not the 2 obligations can stand
together, each one having its independent existence
o Changes must be essential in nature & not merely
accidental
o Must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions
thereof
! OTHERWISE, the change would be merely
modificatory in nature & insufficient to extinguish
the original obligation
4 Essential Elements of Novation

1) A previous valid obligation
2) The agreement of all the parties to the new contract (consent)
3) The extinguishment of the old contract
4) Validity of the new one
CASE: Garcia, Jr. v. CA

Lesson: An extension of deadline for a loan is not novation.
Facts: The creditor granted an extension of the deadline for the
loan, among other new conditions, in a newly executed contract.
The debtor now claims there has been novation.
Held: No novation. An obligation to pay a sum of money is NOT
novated in a new instrument by changing the term of payment &
adding other obligations not incompatible with the old one.
o The new terms must be completely irreconcilable to be
called novation.
CASE: Guerrero v. CA
Lesson: There is no novation when a new agreement is executed
between the creditor & 1 of the solidary debtors regarding the
payment of a solidary debt. The creditor can definitely still go after
the other solidary debtors.
Facts:
o X, Y & Z executed an agreement of counter-guaranty in
favor of a surety corporation binding themselves solidarily
for any claim the surety may have against them
o Upon default in the payment of the obligation, the surety
corporation sued X & consequently obtained a favorable
judgment on the basis of a compromise agreement
directing X to pay the whole obligation
o Upon failure to satisfy the judgment, the surety corporation
filed a case against Y for the collection of the same
amount of money
o Y resisted on the ground that the previous judgment in the
civil case against X novated the contract of indemnity &
therefore released Y from its obligation
Held: There was no novation. The agreement of counter-guaranty
is not irrevocably irreconcilable with the compromise agreement.
o The choice of the creditor to first attempt to get payment
from just X does not mean that the debt of Y & Z had been
novated.
CASE: Magdalana Estates, Inc. v. Rodriguez
Lesson: An obligation to pay a sum of money is not novated, in a

new instrument wherein the old is ratified by:
o Changing only the terms of payment & adding other
obligations not incompatible with the old one, or
o Wherein the old contract is merely supplemented by the
new one
Facts:
o X bought a property from Y, & issued a promissory note
with interest. X also procured a bond from a surety
company for the payment of the principal.
o Y accepted without reservation the agreement set forth in
the surety bond which however did not make provisions on
the interest.
o X contended that the surety bond novated his obligation
with respect to the interest.
Held: No novation.
o The mere fact that the creditor receives a guaranty or
accepts the payments from a 3rd person who has agreed to
assume the obligation, when there is no agreement that
the 1st debtor shall be released form responsibility, does
not constitute a novation, & the creditor can still enforce
the obligation against the original debtor
o The surety is just an accessory obligation of the promissory
note.
CASE: Cochingyan v. R&B Surety & Insurance Co.

Lesson: Where the parties to the new obligation expressly recognize
the continuing existence & validity of the old one, & where, in other
words, the parties expressly negated the lapsing of the old
obligation, there can be no novation. The issue of implied novation
is not reached at all.
Facts:
o In a trust agreement, the trustor bound itself to pay to the
creditor-beneficiary whatever amount the debtors have to
pay to the creditor-beneficiary
o The principal loan involved in the trust agreement was
previously secured by a bond issued by a surety company
Held: The trust agreement did NOT novate the surety agreement,
since it did not expressly terminate the obligation under the surety.
o The trust merely brought in other persons to assume the
same obligation directly, since the trustor in this case was
already previously bound subsidiarily when it secured the
bond issued by the surety.
It is not unusual in business for a stranger to a contract to

assume obligations thereunder (e.g. a contract of
suretyship or guarantee). The legal effect is the increase of
the number of persons liable to the obligee, & not the
extinguishment of the liability of the 1st debtor
CASE: Fortune Motors Inc. v. CA

Lesson: A surety & financing agreement, where the financing
agreement merely details the nuances of the surety, cannot novate
one another.
Facts:
o A surety agreement was executed between petitioners &
respondents, with the respondent-surety absolutely,
unconditionally & solidarily guaranteeing the full, faithful
and prompt performance, payment & discharge of all
obligations of petitioners; there were no qualifications or
conditions therein.
o A new financing agreement was executed, & now the
petitioners claim that the new financing agreement contain
onerous obligations not contemplated in the surety
undertakings, thus changing the principal term thereof &
effecting a novation.
Held: The financing agreement merely detailed the obligations of
one of the parties without changing the nature of the previous
agreement.
o They can stand together without conflict because one is
accessory to the other.
CASE: Security Bank & Trust v. Cuerva
Lesson: The case provides several indicators for novation.
Facts:
o There was a 1980 credit accommodation, followed by a
1989 loan agreement. In the terms of the 1989
agreement, it was stated that it would be applied to
liquidate the principal portion of the Borrowers present
total outstanding indebtedness in the Lender (the
Indebtedness) while the 2nd Loan shall be applied to
liquidate the past due interest & penalty portion of the
indebtedness.
o There was also testimony of an officer of the bank that the
proceeds of the 1989 Loan Agreement were used to payoff the original indebtedness.
Several incompatibilities between the 1989 Agreement &

the 1980 original obligation:
! While the 1980 credit accommodation had
stipulated that the amount of loan was not to
exceed P8 million, the 1989 Agreement provided
that the loan was P12.2 million. The periods for
payment were also different.
! The later contract contained conditions, positive
covenants & negative covenants not found in
the earlier obligation. As an example of a positive
covenant, the Borrower undertook from time to
time & upon request by the Lender, (to) perform
such further acts &/or execute & deliver such
additional documents as may be necessary or
proper to effectively carry out the provisions &
purposes of this Loan Agreement.
! Likewise, SIMC agreed that it would not create any
mortgage or encumbrance on any asset owned or
hereafter acquired, nor would it participate in any
merger or consolidation.
Held: The original loan agreement was novated by a new one, as
evidenced by the acts of the parties & the terms of the new
agreement.
o
Art. 1293. Subjective Novation.

Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of
the latter, but not without the consent of the creditor. Payment by the new
debtor gives him the rights mentioned in Art. 1236 & 1237.
Art. 1294. Novation without Consent of Original Debtor.
If the substitution is without the knowledge or against the will of the debtor,
the new debtors insolvency or non-fulfillment of the obligation shall not give
rise to any liability on the part of the original debtor.
Subjective Novation
The creditor MUST always be aware of the novation.
o Ex. An assignment of a lease contract by the lessee to a 3rd
party must get the consent of the lessor because such
assignment would involve the transfer, not only of rights
but also of obligations. It constitutes novation by
substitution of the person of one of the parties, namely the
lessee-debtor.
The old debtor need not know, though this carries certain effects.
CASE: Gaw v. IAC

Lesson: The change in the principal object or conditions, the
substitution of the person of the debtor, the subrogation of a 3rd
person in the rights of the creditor must all involve a clear &
manifest intent to extinguish the old obligation & to release the
debtor from such old obligation.
Facts:
o X entered into an exclusive dealership agreement with a
Company Y to sell the Ys product.
o X entered into a co-terminous marketing agreement with Z
for the latter to market the products & to obtain funds to
fulfill the deposit required by company Y.
o Such deposit, upon being tendered by Z, was refused by Y
for fear that it might violate the exclusive dealership
agreement with X. Y said that it would accept provided it be
made under the name of the petitioner.
o X argued that the new agreement between X & Z was Zs
attempt to step into the shoes of X, & novation exists.
Held: The co-terminous marketing agreement did not novate the
dealership agreement.
o Though the agreement between X & Z is related to the
agreement between X & Y, as the term of the former is coterminous with the latter, the new agreement was merely
an attempted novation.
o Not only was X not released from complying with the terms
and conditions of the dealership agreement but he was, in
a sense, already implementing the latter.
o Novation SHOULD create a new obligation.
Novation through Debtor
Novation through the replacement of the old debtor by a new
debtor may be with or without the initiative of the old debtor.
Delegacion - If the old debtor, to extinguish his obligation, suggests
to the creditor that he be substituted by a new debtor of his choice
& the creditor agrees
Expromission - If the old debtor is substituted without the
knowledge or consent of the old debtor & the obligation is
extinguished
In both delegacion & expromission, the consent of the creditor is
indispensable.
X is indebted to Y in the amount of P1,000.
o Without knowledge or consent of X, O commits to pay the
indebtedness of X.
! Should it become due, Y can still claim from X the
said indebtedness on due date, despite Os
commitment, because there is no novation.
! There is nothing in the commitment of O that
clearly shows the intention of O to release X from
his obligation. O only became an additional debtor.
o However, if Z agrees that the obligation of X is to be
extinguished upon Os making the commitment to pay the
indebtedness of X, there is a novation.
! If O later on makes a partial payment of P500, Y
cannot go against X for the balance, as his
obligation has already been extinguished in so far
as Z is concerned.
O can demand reimbursement from X, not
of the whole P1,000, but only P500, the
amount which benefited X, pursuant to
Art. 1236 par. 2.8
! If O pays the whole amount, then he can recover
the full amount from X.
o HOWEVER, in all these cases, if the original indebtedness
of X to Y is secured by a mortgage on the house of X & the
payment of the indebtedness of X is made by O, he
CANNOT compel X to subrogate him in his rights, such as
those arising from mortgage, guaranty or penalty.
! Hence, if X fails to reimburse O, the latter cannot
make use of the mortgage which has been
constituted on the indebtedness, pursuant to Art.
1237 of the Civil Code.9
o In the event that after O commits to pay the indebtedness
of X which, upon agreement with Y releases X from his
obligation with Y, O becomes insolvent or does not pay Z
the indebtedness upon demand by Y on due date, Y can no
longer go against the original debtor, X, to claim the debt,
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
8 Whoever pays for another may demand from the debtor what he has paid, except that if he paid without
the knowledge of the debtor or against his will, he can recover only insofar as the payment has been
beneficial to the debtor.
9 Whoever pays on behalf of the debtor without the knowledge or against the will of the debtor, cannot
compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty or
penalty.!
as the latters obligation has already been extinguished

through novation.
Article 1295. Insolvency of the New Debtor.
The insolvency of the new debtor, who has been proposed by the original
debtor & accepted by the creditor, shall not revive the action of the latter
against the original obligor, except when said insolvency was already
existing & of public knowledge, or known to the debtor, when he delegated
his debt.
Insolvency of New Debtor
When there is delegacion, the obligation of the old debtor to make
payment is completely extinguished.
o In the event that the new debtor is insolvent, the creditor
cannot go against the old debtor to collect the debt.
2 Cases When the Creditor Can Go Against the Old Debtor
1) When the insolvency of the new debtor has already been existing &
of public knowledge at the time of the delegation by the old debtor
2) When the insolvency of the new debtor is known to the old debtor
when he delegates his debt
*NOTE: In both cases, the creditor must NOT know that the new
debtor is insolvent; otherwise, he would be considered in estoppel
o Also, in both cases, the insolvency must have existed at the
time the old debtor delegated his debt
CLASS SCENARIO
Facts: A is the original creditor; B is the original debtor. X tells A that
he will pay Bs debts. B agrees. However, A nevertheless collects
from B. Is there novation?
Answer: NO. X becomes merely a co-debtor of B. There is no
categorical extinguishment of the liability of B. Thus, there is no
novation.
Article 1296. Accessory Obligations.
When the principal obligation is extinguished in consequence of a novation,
accessory obligations may subsist only insofar as they may benefit 3rd
persons who did not give their consent.
Effect on Accessory Obligations
The accessory always follows the principal. If the principal is
extinguished, the accessory goes with it.
All accessory obligations such as those arising from a

contract of mortgage, guarantee, and pledge are likewise
extinguished.
HOWEVER, the law likewise says that the accessory obligation may
subsist only insofar as they may benefit third persons who do not
give their consent.
o Ex. X borrows P100,000 from Y to be paid after 12 months.
The loan is secured by a real estate mortgage of Zs house.
The mortgage is to be effective only for 12 months. In
constituting his house as security for the loan of X, Z
agrees to be paid by X the amount of P1,000 for as long as
the loan secured by the mortgage exists. However, instead
of paying Z the said amount, X will just apply the P1,000 to
the P12,000 indebtedness of Z in his favor (Xs) such that
by the time the 12-month loan matures, the indebtedness
of Z would have already been paid. This is made because Z
has no cash to pay the P12,000 obligation to X.
! On the 11th month, X & Y decide to consolidate
the P100,000 loan with the other P700,000 loan
which X owes in favor of Y &, in so doing, they
expressly agreed in the consolidation-document
that the loan of P100,000 shall in effect cease &
be integrated in the P700,000 with a lower
interest rate & payable for a longer period of time
without any collateral.
! Z did not consent to this arrangement as it would
clearly prejudice him. Zs mortgage therefore
may subsist for the remaining month attached to
the principal new obligation. X will still accept the
mortgage of Z as payment of P1,000 for the last
month, thereby extinguishing Zs obligation
o
Article 1297. Effect of Void New Obligation on Old Obligation.

If the new obligation is void, the original one shall subsist, unless the parties
intended that the former relation should be extinguished in any event.
Subsequent Void Obligation
A subsequent void obligation intended to novate an old one has no
legal effect & will be considered as not having been agreed upon in
the first place. The original obligation shall subsist.
o HOWEVER, if in coming up with the new but void obligation,
the parties agree that it shall in any event extinguish the
old obligation, then such old obligation will not be revived.
Ex. If X is bound to give Y a car & this is novated by binding X to give

instead his future inheritance from his fathers death to Y, the latter
new obligation is void because, according to the law, future
inheritance cannot be the object of a contract. This new void
obligation will not be deemed to have been entered into and the old
obligation will be revived.
o HOWEVER, if the parties agree that the act of entering into
the new but void obligation will in any event extinguish the
old one, then the latter will not be revived.
Article 1298. Void & Voidable Novation.

The novation is void if the original obligation was void, except when
annulment may be claimed only by the debtor, or when ratification validates
acts which are voidable.
Void or Voidable Novation
Novation of a principal obligation definitely presupposes a
previously existing obligation which is valid.
If the previously existing obligation is void, a subsequent obligation
intending to novate it shall likewise be void
o UNLESS it is clear that such subsequent one can stand on
itself & without any reference to the old one.
If the original obligation is merely voidable, it means that it is valid
up to the time it is annulled. Hence, it CAN be novated before it is
annulled.
o Ex. If, through force & intimidation, X was obliged to give Y
a car & later the prestation was novated, again through
force & intimidation, in such a way that X is now obliged to
give Y not a car but a house, it is only X who can file a case
for annulment of the obligation.
! If X does not do so, then the new obligation may
be given effect.
! Also, if, after the obligation was novated, X asks
for an increase in the price of the house & Y
agrees, then the obligation is ratified because of
the act of X.
Art. 1299. Suspensive or Resolutory Condition.
If the original obligation was subject to a suspensive or resolutory condition,
the new obligation shall be under the same condition, unless it is otherwise
stipulated.
If X is bound to give Y a house only if he passes his law course &

thereafter the obligation is novated such that X instead is bound to
give Y a car without any statement as to the suspensive condition,
it shall be deemed that the giving of the car is likewise subject to Y
passing his law course.
o In order not to subject the obligation to the previous
suspensive condition, there must be an express statement
to that effect in the new obligation as novated.
CLASS SCENARIO
Facts: X will give Y a ballpen if it rains next month. However, the 2
decide to novate the contract so it says, X will give Y the ballpen
without mentioning the condition. Will the condition still apply?
Answer: YES, according to Art. 1299. Thus, the parties must agree
& always read the 1st & 2nd contract.
Art. 1300. Subrogation.
Subrogation of a 3rd person in the rights of the creditor is either legal or
conventional. The former is not presumed, except in cases expressly
mentioned in this Code; the latter must be clearly established in order that it
may take effect.
Subrogation
The transfer of all the rights of the creditor to a 3rd person, who
substitutes him in all his rights
Types of subrogation:
o Legal subrogation - that which takes effect by mandate of
law & does not proceed from an agreement of the parties
! The law which forms the basis of the subrogation
must be clearly identified & invoked to enforce the
rights pertinent thereto.
o Conventional subrogation - must be clearly established by
the unequivocal terms of the substituting obligation or by
the evident incompatibility of the new and old obligations
on every point.
Both kinds of subrogation principally involve the change in the
person of the creditor
o Thus, if X is indebted to B for P10,000 secured by a
mortgage on Xs house. For consideration paid to B, Y, with
the consent of X, assumes the credit with the stipulation
that Xs obligation against B is extinguished such that B
can no longer collect from X, Y becomes the new creditor
who can enforce the claim, & if X cannot pay, Y can

foreclose on the mortgage.
Art. 1301. Consent of All Parties in Conventional Subrogation.
Conventional subrogation of a third person requires the consent of the
original parties & of the third person.
Conventional Subrogation & Consent
Conventional subrogation must be agreed upon by the debtor, new
creditor & the old creditor. It is therefore contractual.
o For the substitution of the creditor to be legally complete in
all aspects, all parties must agree to the same.
If the debtor does not agree & the 3rd party makes payment to the
creditor, such third party can demand payment from the debtor up
to the extent the latter has been benefited, but cannot compel the
creditor to subrogate him (3rd party) in his rights, such as those
arising from mortgage, guaranty, or penalty
Art. 1302.
It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even
without the debtors knowledge;
(2) When a 3rd 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 fulfillment of the obligation pays, without prejudice
to the effects of confusion as to the latters share.
General Rule: Novation is NOT Presumed
Exception: Art. 1302
3 Cases When Legal Subrogation is Presumed
1) When a creditor pays another creditor who is preferred, even
without the debtors knowledge
o Under our law, claims for the unpaid price of movables
sold, on said movables, so long as they are in the
possession of the debtor, up to the value of the same is a
preferred credit.
! Any creditor who owns such credit is a preferred
creditor & if another creditor pays off the unpaid
purchase price of the movable, such paying
creditor will be presumed to have been
subrogated to the rights of the creditor who

originally owned the credit
2) When a 3rd person, not interested in the obligation, pays with the
express or tacit approval of the debtor
o The debtor, in effect, agrees to the payment & hence there
exists something similar to a conventional subrogation
o CASE: Chempil v. CA
! Facts: The petitioner bought some shares from the
debtor in exchange for money; the shares,
however, which were owned by the debtor, were
being kept by a bank to satisfy the debtors debt.
The petitioner claimed that he was subrogated to
the rights of the creditor when he paid the
indebtedness of the debtor to the bank. The
money used for payment belonged to the debtor
! Held: There is no subrogation. The exact wording
of the contract between the petitioner & the
debtor stated that there was to be an order of
preference for the money the debtor would give
petitioner, & 1st on the list was the use of the
money to pay the creditor, as soon as the SC ruled
on just how much the debtor owed the creditor.
The debtor merely paid his debt to the bank via
the petitioner, as if the petitioner were a 3rd party
agent. Thus, the bank remained the creditor & no
subrogation took place.
Furthermore, in the case, the petitioner
claimed to be the subrogated new debtor
under Art. 1302(2), but SC said it was not
actually a disinterested party, because the
extinguishment of the debtors debt
served as the petitioners payment for the
shares.
3) When, even without the knowledge of the debtor, a person
interested in the fulfillment of the obligation pays, without prejudice
to the effects of confusion as to the latters share.
o A person interested in the fulfillment of the obligation is
one who will be affected by payment of the debtor.
! Ex. A guarantor, surety or solidary debtor will
be released if the principal obligation of the
debtor is paid.
o Ex. A is indebted to M. The loan was secured by a real
estate mortgage constituted by X on his own property for
the benefit of As debt. In the event X pays M, the

presumption of legal subrogation will arise in favor of X
even if such payment was made without the consent of A.
Since there is merger of the characters of the creditor &
the mortgagor, the real estate mortgage is extinguished.
In the event that the creditor & the 3rd party demands from
the debtor at the same time the payment of what is due
them, the creditor will be preferred. He will be paid first as
the law states that he is preferred.
TITLE II. CONTRACTS.
Art. 1303. Effects of Subrogation.

Subrogation transfers to the person subrogated the credit with all the rights
thereto appertaining, either against the debtor or against 3rd persons, be
they guarantors or possessors of mortgages, subject to stipulation in a
conventional subrogation.
Effects of Subrogation
Generally, 3rd person steps into the shoes of the creditor &
becomes the new creditor.
o HOWEVER, in conventional subrogation, the parties may
stipulate the nature, limits, extent & scope of the
subrogation provided these are not contrary to law, morals,
good customs, public order, or public policy.
Art. 1304. Preferred Creditor.
A creditor, to whom partial payment has been made, may exercise his right
for the remainder, & he shall be preferred to the person who has
subrogated in his place in virtue of the partial payment of the same credit.
Preferred Creditor
The provision contemplates a situation where a debt has been
partially paid by a 3rd person, with the consent of the debtor.
If there is no consent of the debtor, the only right of the third party
who made the payment is to be reimbursed of the amount he has
partially paid pursuant to Art. 1236.
o Art. 1237 - Whoever pays on behalf of the debtor without
the knowledge or against the will of the latter, cannot
compel the creditor to subrogate him his rights, such as
those arising from mortgage, guaranty, or penalty.
In the event partial payment is made by a 3rd person which
extinguishes the debtors obligation to pay the creditor up to the
extent of said partial payment, the creditor can still demand from the
debtor the balance of the obligation.
o In the meantime, the 3rd party who made the partial
payment can likewise demand from the debtor what he has
paid to the creditor.
CHAPTER ONE: GENERAL PROVISIONS

Art. 1305. Definition of Contracts.
A contract is a meeting of minds between 2 persons whereby one binds
himself, with respect to the other, to give something or to render some
service.
Contract
A juridical convention manifested in legal form, by virtue of which 1
or more persons bind themselves in favor of another or others, or
reciprocally, to the fulfillment of a prestation to give, to do or not to
do.
o HOWEVER, there are cases where, although there is a
meeting of the minds, the contract still cannot be legally
enforced because it lacks some of the required formalities
mandated by law for enforceability (e.g. Statute of Frauds)
Also defined as an agreement whereby at least 1of the parties
acquires a right, either in rem (real right) or in personam (personal
right), in relation to some person, thing, act or forbearance
Stages of Contracts
1) Negotiation - covers the period from the time the prospective
contracting parties indicate interest in the contract to the time the
contract is concluded
2) Perfection - takes place upon the concurrence of the essential
elements thereof
o A contract which is consensual as to perfection is
established upon a mere meeting of the minds, i.e., the
concurrence of offer & acceptance, on the object & on the
cause thereof
o Real contract a contract which requires for its perfection,
in addition to consent, the delivery of the object of the
agreement, as in a pledge or commodatum
o Solemn contract - compliance with certain formalities
prescribed by law, e.g. donation of real property, is
essential in order to make the act valid, the prescribed

form being thereby an essential element thereof
3) Consummation - begins when the parties perform their respective
undertakings under the contract
4) Extinguishment
Art. 1306. Autonomy of Contracts.

The contracting parties may establish such stipulations, clauses, terms &
conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy.
Autonomy in Contracts
Freedom to stipulate terms & conditions is the essence of the
contractual system, provided such stipulations are not contrary to
law, morals, good customs, public order, or public policy
o This freedom prohibits a party from coercing or
intimidating or unduly influencing another to enter into a
contract
In order for the court to declare a contract void for being against
public policy, it must be shown that the contract, as to the
consideration or thing to be done, has a tendency to injure the
public, is against the public good, or contravenes some established
interest of society, or is inconsistent with sound policy & good
morals which tends to undermine the security of individual rights,
whether of personal liability or of private property
CASE: Azcuna, Jr. v. CA
Lesson: Even contracts that seem unfair, though are freely entered
into, are protected by the law.
Facts: A lease contract provided that, if the lessee does not vacate
the premises on due date, the lessee shall be charged P1,000 per
day as damages without prejudice to other remedies which the
lessor is entitled to. There is no evidence of undue influence or
force.
Held: After entering into such an agreement, petitioner cannot
thereafter turn his back on his word with a plea that on him was
indicted a penalty shocking to the conscience & impressed with
inequity as to call for the relief sought on the part of a judicial
tribunal.
CASE: Pakistan Intl Airlines v. Ople
Lesson: The principle of autonomy in contracts is not absolute.

Laws are always deemed written into contracts; therefore, contracts
cannot circumvent the force & effect of the law.
Facts:
o Petitioner PIA invokes par. 5 & 6 of its contract of
employment with ex-employees X & Y, arguing that its
relationship with them was governed by the provisions of
its contract rather than by the Labor Code.
! Par. 5 of that contract set a term of 3 years for
that relationship, extendible by agreement
between the parties
! Par. 6 - notwithstanding any other provision in the
contract, PIA had the right to terminate the
employment agreement at any time by giving onemonths notice to the employee or, in lieu of such
notices, one-months salary.
Held: Parties may not contract away applicable provisions of law
especially those which are mandatory & prohibitory10 & dealing with
matters heavily impressed with public interest. The law relating to
labor & employment is clearly such an area.
o The contract is in direct contravention with laws on regular
employees & security of tenure found in the Labor Code, &
leaves the employment of X & Y at the option of PIA.
CASE: Manila Bay Club Assoc. v. CA

Lesson: Contracts are respected as the law between the
contracting parties, & they may establish such stipulations, clauses,
terms & conditions as they may want to include
Facts: Because of the failure of the petitioner to comply with the
insurance clause of the lease contract, the lessor terminated the
lease pursuant to a provision in the same lease contract stipulating
that failure to comply with any provision of the contract shall allow
the lessor to rescind the same
Held: The stipulation is valid. It was meant to ensure strict
compliance with the mandatory provisions of the contract, as
expressed by the language used in its drafting, such as the
building must be insured and the insurance premium must be for
the account of the LESSEE.
CASE: Phil. Am. General Insurance Co. v. Mutuc
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
10 Art. 5, Civil Code: Acts executed against mandatory or prohibitory laws shall be void, except when the law
itself authorizes its validity.
Lesson: When a party is free to choose whether to accept the

stipulations of a contract, even if there may seem to be some
adhesion, & chooses to sign it, he is bound by his consent.
Facts: X, after agreeing that his bond may be renewed or extended
without notification, which was stipulated by the company that
hired him to ensure his faithful performance, claimed that such
provision was null & void because it is a contract of adhesion; the
lower court held him liable for the bond.
Held: The contract is valid. X was not at all compelled to agree to it.
X was free to act either way.
CASE: De Leon v. CA
Lesson: The continued existence of a marriage cannot be made the
basis of a contract.
Facts: The parties, who were husband & wife, stipulated that in
consideration for a peaceful & amicable termination of relations
between the undersigned & her lawful husband, the husband
would give some properties to the wife & monthly support for the
children, & the wife would agree to a judicial separation of property
plus the amendment to the divorce proceedings initiated by the
wife in the United States to conform to the agreement
Held: The agreement is contrary to law, Filipino morals & public
policy because the consideration of the agreement is the
termination of the marriage by the parties which they cannot do on
their own & without any legal basis.
Laws Affecting Contracts
Only laws existing at the time of the execution of a contract are
applicable thereto
o Later statutes do not govern said contract unless the latter
is specifically intended to have a retroactive effect.
A later law which enlarges, abridges or in any manner changes the
intent of the parties to the contract impairs the contract itself &
cannot be given retroactive effect without violating the
constitutional prohibition against impairment of contracts
o However, while a contract is deemed to be the law
between the contracting parties, non-impairment of
contracts or vested rights clauses will have to yield to the
States police power, which is deemed written into every
contract
CASE: Ortigas v. CA
Lesson: Some laws, especially involving State police power, have a

retroactive effect & can extinguish contractual stipulations.
Facts: The contract of sale provided that the property shall only be
used for residential purposes. But the buyer subsequently built a
commercial edifice in consonance with a later zoning ordinance
classifying the area as a commercial zone.
Held: The restrictions of the contract of sale were deemed
extinguished by the retroactive effect of the zoning ordinance.
CLASS DISCUSSION
Violation of a law generally does NOT make a contract void
o The law violated must be mandatory or prohibitory to make
the contract void
Art. 1307. Innominate Contracts.
Innominate contracts shall be regulated by the stipulations of the parties, by
the provisions of Titles I & II of this Book, by the rules governing the most
analogous nominate contracts, & by the customs of the place.
Innominate Contracts
Those which are not specifically governed by any Civil Code
provision or special law, but which likewise involve the fulfillment or
accomplishment of some prestations
Innominate contracts are governed by the ff.:
1) Stipulation of the parties
o The parties may have some arrangements which they feel
should bind them but which do not have any exact legal
provisions in the Civil Code to govern the nature of the
obligation appertaining to it
2) Provisions on obligations & contracts in Title I & II of the Civil Code
o Following OBLICON general rules, parties can stipulate any
provision, term & condition that will govern the
enforceability of their agreement provided they are not
contrary to law, morals, good customs, public order, or
public policy
3) Rules governing the most analogous nominate contracts.
o Civil Codes nominate contracts: sale, barter or exchange,
lease, partnership, agency, loan, deposit, aleatory
contracts, compromises, guaranty, pledge, mortgage &
antichresis.
o Special laws - insurance, real estate mortgage, & charter
party
4) Customs of the place rules of conduct by repetition of acts

uniformly observed as a social rule, legally binding & obligatory
o Must be proved as a fact according to the rules of evidence
Kinds of Innominate Contracts:
1) Do ut des the parties mutually give each other a certain thing
2) Facio ut facias the parties mutually render a service
3) Do ut facias; facias ut des - a mixed prestation such that one party
gives something & the other party does something
o CASE: Dizon v. Gaborro
! Facts: A contract was entered into whereby the
respondent assumed to pay the indebtedness of
petitioner to certain banks, and in consideration
therefor, respondent was given the possession,
enjoyment & use of certain lands until petitioner
can reimburse fully the respondents the amounts
paid by the latter to the banks, to accomplish the
following ends: (a) payment of the bank
obligations; (b) make the lands productive for the
benefit of the possessor; (c) assure the return of
the land to the petitioner thus rendering equity &
fairness to all parties concerned
! Held: This was an innominate contract to give &
to do, which mixed the obligations & principally
uses antichresis11 between the parties
o CASE: Corpus v. CA
! Facts: An agreement as to legal fees between a
lawyer & his client were not reduced into writing,
but there were indicators that payment was
contemplated by the parties.
! Held: Payment was justified by virtue of the
innominate contract of facio ut des (I do & you
give) which is based on the principle that no one
shall unjustly enrich himself at the expense of
another.
Art. 1308. Mutuality of Contracts.
The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
A contract whereby a debtor pledges (i.e., conveys possession but not title) real property to a creditor,
allowing the use and occupation of the pledged property, in lieu of interest on the loan; pay your
indebtedness first before the interest of your collateral.
11
Mutuality of Contracts
A contract violates mutuality when it leaves the validity or
compliance of the contract entirely to the will of one of the
contracting parties
Violate this & the contract is void
CASE: Garcia v. Rita Legarda, Inc.
Lesson: A contract expressly giving to one party the right to cancel
the same if a resolutory condition therefor agreed upon similar to
the one under consideration is not fulfilled, is valid, the reason
being that when the contract is thus cancelled, the agreement of
the parties is in reality being fulfilled
Facts: A contract to sell a real property stipulated that the vendor
was given the right to unilaterally rescind or terminate the contract
in the event the other party failed to pay any of the required
installments of the purchase price. In particular, the contract reads:
o In case of default in the payment of installments by the
vendee, he shall have (1) a month of grace, & (2) should
said month of grace expire without the vendee paying his
arrears, he shall have another period of 90 days to pay
all the amounts he should have paid, etc., then the
vendor has the right to declare this contract cancelled &
of no effect.
Held: Stipulation is valid. The above stipulation merely gives the
vendor the right to declare this contract cancelled & of no effect
upon fulfillment of the conditions therein set forth. It does not leave
the validity or compliance of the contract entirely to the will of one
of the contracting parties.
CASE: Allied Banking Co. v. CA
Facts: A stipulation in a lease contract stated the contract may be
renewed for a like term at the option of the lessee
Held: It does not go against the attribute of mutuality of contracts.
Such right on the part of the lessee is part of the consideration in
the contract. The clause likewise means that, once the lessee
exercises the option to renew, all the terms & conditions of the old
contract are renewed and not only the period.
Contract of Adhesion
One wherein a party, usually a corporation, prepares the
stipulations in the contract, while the other party merely affixes his
signature or his adhesion thereto.
These types of contracts are as binding as ordinary contracts.
The party who adheres to the contract is free to reject it

entirely.
HOWEVER, courts will not hesitate to rule out blind adherence to
terms where facts & circumstances will show that it is basically onesided.
o Generally, contracts of adhesion are valid, except when
they are highly inequitable
o
CASE: PNB v. CA
Lesson: Contracts dependent on the sole will of one of the parties
are generally void, especially contracts of adhesion where the
parties are not in equal footing.
o Constant increases of interest at the will of the creditor are
contrary to law (they make potestative contracts)
Facts: PNB & the debtor entered into a loan agreement stipulating,
among others, that PNB was authorized to increase the stipulated
18% interest per annum within the limits prescribed by law at any
time depending on whatever policy PNB may adopt in the future
provided that the interest rate on the note shall be correspondingly
decreased in the event that the applicable maximum interest rate
is reduced by law or by the Monetary Board. PNB indeed increased
the rates to 32%, then subsequently to 41% & then finally to 48%
within the year over the objection of the debtor
Held: The stipulation is void. P.D. 116 specifically provides that
increases in interest rates shall be made once every twelve
months & furthermore such increases violated the mutuality of
contracts. It would have invested the loan agreement with the
character of a contract of adhesion, where the parties do not
bargain on equal footing, the weaker partys (the debtor)
participation being reduced to the alternative take it or leave it.
Such contract is a veritable trap for the weaker party whom the
courts of justice must protect against abuse and imposition.
CASE: Serra v. CA
Lesson: Not all contracts of adhesion are void. There must be a
showing that it is highly inequitable for such contract to be
invalidated.
Facts: A CPA-Lawyer assails the validity of the contract he entered
into.
Held: Stipulation is valid. Since the petitioner was already a CPALawyer, he should have been more cautious in his transactions,
particularly where it concerns valuable properties.
4 Cases When the Court Can Intervene into Contract of 2 Persons

1) If the contract is inequitable, when the determination of the
performance was left to the will of a 3rd person, the court can adjust
it.
2) If there is a penal clause that is iniquitous, the court can remove it
or reduce the penalty.
3) Rebus sic stantibus when there is an absolute, exceptional
change of circumstances
4) If there is reason for the court to fix a period
a. When a suspensive potestative condition is void, but the
obligation on which it hinges is still valid
b. When the debtor binds himself to pay when his means
permit him to do so
c. When one party seeks rescission, but the court finds just
cause to fix a period
d. When from the nature & circumstances of the obligation, it
is obvious that a period was intended by the parties
e. When the obligation is dependent on the sole will of the
debtor
Art. 1309.
The determination of the performance may be left to a 3rd person, whose
decision shall not be binding until it has been made known to both
contracting parties.
Art. 1310.
The determination shall not be obligatory if it is evidently inequitable. In
such case, the courts shall decide what is equitable under the
circumstances.
3rd Party Intervention
The parties may constitute a 3rd party to determine the
performance of the contract. The decision becomes effective when
both contracting parties already have knowledge of the decision.
o It will not be binding if only one of the parties knows of the
decision.
When one agrees to let a 3rd person decide, there is already a
contract. However, what remains is to figure out how something is
to be done.
o Cause, object & consent are already present; just the
MANNER is not yet settled.
This determination MUST not destroy the nature of mutuality of the
contract between the principal parties based on their essential
equality.
The court shall decide what is equitable under the

circumstances.
o The court cannot decide to invalidate, but can fix the
manner
Ex. A & B enter into a contract whereby A will sing in the nightclub
of B for 2 days. The contract stipulates that, for 2 days, A is to be
paid P5,000 for such number of songs to be determined by X 2
days before the performance, & any violation renders the contract
ineffectual entitling B not to pay A any consideration as a penalty.
They sign the contract. Later, X makes a determination that A is to
sing 20 songs, selected by X continually without a break starting
from 6PM-2AM; &, if the nightclub is filled with people, A will give an
encore 3 times divided into 30 minutes each time. A shall only sing
those specifically requested by the audience, & in case he does not
know the song, his fee is to be reduced. X notified A two days
before the performance that the latter will sing 15 English rock
songs & 5 Norwegian songs which obviously A does not know.
o This is clearly a situation where the performance is so
inequitable. In fact the contract itself & not merely the
determination of its performance is almost left to the will of
the third party & it greatly favors the nightclub owner.
o A can go to court which will decide what is equitable under
the circumstances. Court intervention is necessary in order
that the intent of the parties will not be rendered nugatory
by the inequitable terms and conditions of a third party.
o
Art. 1311. Relativity of Contracts.

Contracts take effect only between the parties, their assigns & heirs, except
in case where the rights & obligations arising from the contract are not
transmissible by their nature, or by stipulation, or by provision of law. The
heir is not liable beyond the value of the property he received from the
decedent.
If a contract should contain some stipulation in favor of a 3rd person, he may
demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have clearly &
deliberately conferred a favor upon a 3rd person.
Relativity of Contracts
Generally, contracts take effect only between the immediate parties
to the same.
General rules:
o
o
o
o
Contracts are transmissible to heirs & assignees; they are

the invisible parties
A stranger cannot invoke the contract of another for his
own interest or for a source of an alleged prejudice.
A party cannot impose an obligation or liability to one who,
under its terms, is a stranger to the said contract.
Real rights are transmissible, personal rights are not.
CASE: Integrated Packaging Corp. v. CA

Lesson: Contracts can only bind the parties who entered into it, & it
cannot favor or prejudice a 3rd person, even if he is aware of such
contract & has acted with knowledge thereof.
Facts: A company was in default in paying its supplier, & sued the
same supplier allegedly for causing damage to it in that it was not
able to comply with its contract with Philacor because the supplier
failed to deliver the materials which were supposed to be used by
the company for the orders of Philacor.
Held: The Court did not award damages to the company. Not only
because the non-delivery of the materials by the supplier was
justified due to the non-payment by the company of the deliveries,
but also because the supplier has absolutely nothing to do with the
contract between the company & Philacor.
o The contract between the company & the supplier did not
have a direct bearing in the contract between the company
& Philacor.
! The papers in the 2 contracts are different.
! The demand by Philacor was made after the
supplier filed its complaint in Court.
Relativity & Real Property
Principal parties include heirs & assigns
Under certain conditions, the law operates to effect the transfer of
an action from one person to another without any concurring act on
the part of the parties or indeed without their assent.
Usual ways interests in land are transferred:
o Marriage
o Death
Through the principle of relativity, real property rights are
transferred.
o With real property, upon its transfer, covenants may be
annexed to the contract which run with the land & one who
subsequently acquires an interest therein takes it subject
to the benefits and obligations of such covenants.
!
!
!
The period of a contract of lease is binding upon

the heirs of the lessor
Likewise, a sublessee is bound by the terms of the
principal contract of the lessor & the lessee
If the predecessor was duty-bound to reconvey
land to another, & at his death the reconveyance
had not been made, the heirs can be compelled to
execute the proper deed for reconveyance
CASE: DKH Holdings Corp. v. CA

Lesson: The death of a party does not excuse non-performance of a
contract which involves a property right, & the rights & obligations
thereunder pass to the personal representatives of the deceased.
Similarly, non-performance is not excused by the death of the party
when the other party has a property interest in the subject matter
of the contract.
Facts: The heir of the lessor refused to honor the lease contract
entered into by the deceased lessor contending that, though he
inherited the property from the deceased lessor, he was not a party
to the lease contract.
Held: The heir must honor the contract because in inheriting the
property, he acquired all the rights & obligations of the deceased
lessor with respect to the property.
o As the successor of his deceased mother, the heir only
succeeds to whatever rights his mother had & what is valid
& binding against her is valid & binding against him.
Transmission of Rights & Obligations
May likewise be agreed upon by the parties.
o Ex. A contract may provide that, in the event a contractor
fails to finish the house on time, another contractor may
assume his place in the contract subject to the same
terms & conditions.
If the transferee is the heir, he shall not be held liable beyond the
value of the property he received from the decedent.
o Ex. if the deceased left the heir a property which, however,
was a collateral for a debt which the deceased incurred
during his lifetime, the creditor can go against the property
to pay off the indebtedness of the deceased. If the property
is not sufficient to satisfy the debt, the creditor cannot
personally go against the heir to collect the deficiency.
Contracts cannot take effect with respect to theirs or assigns when:

(1) The nature of the contract does not allow transmission.
o Ex. A contract which binds a person to sing in a particular
nightclub because of the special way he sings his songs is
not transmissible because his hiring was personal & his
abilities cannot be exactly duplicated by any person. Plus,
the audience may have bought the tickets to the show
precisely because that particular singer will sing.
o Where acts stipulated in a contract require the exercise of
special knowledge, genius, skill, taste, ability, experience,
judgment, discretion, integrity, or other personal
qualification of one or both parties, the agreement is of a
personal nature, & terminates on the death of the party
who is required to render such service
! A good measure of determining whether a
contract terminates upon the death of one of the
parties is whether it is of such a character that it
may be performed by the promissors personal
representative.
! Contracts to perform personal acts which cannot
be as well performed by others are discharged by
the death of the promissory.
o Conversely, where the service or act is of such a character
that it may as well be performed by another, or where the
contract, by its terms, shows that performance by others
was contemplated, death does not terminate the contract
or excuse non-performance
(2) The parties stipulate that no transmission of rights shall be allowed
o Ex. Parties to a contract of lease can stipulate that the
lease contract cannot be subleased & a sublease without
the consent of the lessor shall allow the lessor to
terminate the lease
(3) The law provides non-transmission
o In a contract of voluntary deposit, the depositary cannot
deposit the thing with a 3rd person, unless there is a
stipulation to the contrary
o Art. 1649: In lease, the lessee cannot assign the lease
without the consent of the lessor, unless there is a
stipulation to the contrary
Contracts Pour Autrui
Relates to Art. 1312, 2nd par. - If a contract should contain some
stipulation in favor of a 3rd person, although he is not a party to the
contract, he may demand its fulfillment provided he communicate

his acceptance to the obligor before its revocation.
o A mere incidental benefit or interest of a person is not
sufficient.
o There must be a clear intent to benefit the 3rd person.
Requisites of a Contract Pour Autrui:
1) There must be a stipulation in favor of a 3rd person.
o It is unnecessary that the 3rd person be always named in
the contract.
2) The stipulation must be a part, not the whole of the obligation.
o The benefit must only be a part of the contract contained
in one of its stipulations & should not constitute the whole
contract.
! Ex. Letter of credit in commercial transactions in
favor of the exporter is the result of a stipulation
pour autrui.
In a letter of credit transaction, the
importer & a bank enters into an
agreement where the bank pays an
exporter in another country for goods
ordered & delivered to the importer. The
exporter-beneficiary therefore benefits
from the stipulation in a contract between
the importer & the bank.
3) The contracting parties must have clearly & decidedly conferred a
favor upon a 3rd person, NOT a mere incidental benefit or interest.
4) Neither of the contracting parties bears the legal representation or
authorization of the 3rd party.
5) The favored party must have communicated his acceptance of said
stipulation to the obligor before its revocation.
o General rule It is not necessary for the 3rd party to make
a formal acceptance prior to bringing of the suit. The
assent of the beneficiary will be presumed.
! The commencement of an action to enforce a
promise is sufficient as an acceptance.
CASE: Marmont Resort Hotel v. Guiang
Lesson: In a contract pour autrui, the parties must give way to the
benefit that will be granted to the 3rd party.
Facts:
A memorandum of agreement (MOA) was entered into

between Marmont Hotel & Maris Trading for the
installation of a complete water supply facility.
o The installation encroached on the property of X with the
Xs permission.
o The encroachment eventually prompted Maris Trading & X
to enter into a 2nd MOA stipulating that, for valuable
monetary consideration & the fact that the installation &
the drilling of the water facility for the benefit of Marmont
Hotel were made in the property of X with his consent, X
shall cede their possessory rights over the property to
Maris Trading.
o X, however, refused to let Marmont Hotel use the water
facility in his property.
Held: X can be held liable for refusing Marmont Hotel, because it is
clear that Marmont was to benefit from the 2nd MOA. In fact, said
stipulations appear to have been designed precisely to benefit
Marmont &, thus, partake of the nature of stipulations pour autrui
o Marmont was not a party to that 2nd MOA, but X could not
have prevented Maris Trading from entering the property
possessory rights it already acquired. That X remained in
physical possession of that particular bit of lane, is of no
moment: they did so simply upon the sufferance of Maris
Trading.
o
CASE: Coquia v. Fieldmans Insurance Co.

Lesson: Certain types of insurance contracts are also considered
contracts pour autrui.
Facts:
o On Dec. 1, 1961, Fieldmans issued, in favor of the
insured, a common carrier accident insurance policy,
covering the period from Dec.1, 1961-Dec. 1, 1962.
! It was stipulated in said policy that Fieldmans
would indemnify the insured in the event of
accident caused by car accidents against all sums
which the insured will become legally liable,
including death of any person in the vehicle.
o While the policy was in force, a taxicab of the insured,
driven by Coquia, met a vehicular accident at Pangasinan
& died.
! The insured filed therefore a claim for P5,000 to
which Fieldmans replied with an offer to pay
P2,000, by way of compromise. The insured
rejected the same & made a counter-offer for

P4,000, but Fieldmans did not accept it.
o On Sept.18, 1962 the insured & Coquias parents filed a
complaint against the Fieldmans to collect the proceeds of
the afore-mentioned policy.
o In its answer, Fieldmans admitted the existence thereof,
but pleaded lack of cause of action because the Coquias
have no contractual relations with Fieldmans.
Held: This is a contract pour autrui, because it was executed by
Fieldmans & the insured to favor 3rd personsthe drivers of
insured..
o The stipulations of the contract reveal such intent:
! It promised to indemnify the insured in the event
of an accident which the insured will become
legally liable to pay in respect to death, bodily
injury of its drivers.
! Fieldmans also stated that it would indemnify the
personal representatives of the driver if he dies.
! Fieldmans may, at its option, make the payable
directly to the heirs or claimants.
o This character being is manifest by the fact that the
deceased driver paid 50% of the corresponding premiums,
which were deducted from his weekly commissions. Under
these conditions, it is clear that the Coquias, as the sole
heirs of the deceased, have a direct cause of action
against Fieldmans &, since they could have maintained
this action by themselves, without the assistance of the
insured, it goes without saying that they could & did
properly join the latter in filing the complaint.
CASE: Mandarin Villa Inc. v. CA

Lesson: A credit card holders use of a credit card is a sign of
acceptance of the stipulation, communicated to the obligorthe
establishment that should process & accept the payment through
credit card.
Facts: The owner of a restaurant refused to honor a credit card for
the purpose of payment from a customer on the ground that its
machine validating such credit card indicated that the latter had
expired, when in fact it had not expired as clearly indicated in the
card itself.
o The owner would have known such fact had it merely
followed the rules it agreed upon with the credit card
company providing that, in cases of expiration of the credit
card as indicated in the machine, the restaurant owner

should examine the card itself & follow certain other
procedures
Held: The restaurant owner is liable for damages due to his
negligence, as this is a contract pour autrui. The restaurant is
affiliated with the credit card company & they signed an agreement
so that the cards holders could use their cards to pay in
establishments.
o The holders offer to pay by means of his credit card
constitutes not only an acceptance of the said stipulation
but also an explicit communication of his acceptance to
the obligor.
CASE: Young v. CA
Lesson: The favored party must also communicated acceptance of
the right of first refusal to the obligor, lest the right be revoked by
operation of law.
Facts:
o X owns a piece of land & a building. It rents out several
rooms in the building, including one room to Y.
o X received an order from the City Engineer to demolish the
building. Y filed an action to annul the demolition order.
! As an incident to this case, the parties executed a
compromise agreement provides that Y & all
persons claiming rights under them bind
themselves to voluntarily & peacefully vacate the
premises which they are occupying as lessees
which are the subject of the demolition order & to
surrender possession thereof to X within 60 days
from written notice, subject to the proviso that
should X decide to sell the subject property, Y
would have the right of first refusal.
o 2 years later, X sold the property by way of dacion to Z. The
land was subdivided into 2 parcels, both placed in the
name of Z.
! Z sold half the property to B & half to C.
o X filed a case for the annulment of the sale to C & for
specific performance & damages against Y & Z.
! X said he was not given the right of first refusal
promised to him.
o The lower courts ruled that X failed to show that he
demanded his right of first refusal from Y before Y sold the
property to Z, & that, anyway, if the stipulation was indeed
a contract pour autrui, X failed to inform the obligor of his

acceptance.
Held: The petition is devoid of merit.
o Assuming that X is correct in claiming that this is a
stipulation pour autrui, it is unrebutted that he did not
communicate his acceptance whether expressly or
impliedly. He insists however, that the stipulation has not
yet been revoked, so that his present claim is still timely.
! BUT the sale of subject property to some other
person or entity constitutes in effect a revocation
of the grant of the right of first refusal to X.
Exceptions to Relativity:
1) Tort interference
2) Contracts pour autrui
3) Contracts creating real rights, 3rd persons who come into
possession of the object of the contract are bound thereby
4) Contracts intended to defraud creditors
Art. 1312.
In contracts creating real rights, 3rd persons who come into possession of
the object of the contract are bound thereby, subject to the provisions of the
Mortgage Law & the Land Registration Law.
Real Rights & 3rd Persons
Another example when a 3rd person not a party to a contract is
affected or may be subject to its provisions.
o Ex. A lease of real estate recorded in the Registry of
Property between a lessor & lessee shall bind a
subsequent buyer who purchases & comes into the
possession of the contracts object which is the property
leased. The latter is bound to honor the contract entered
into by the former lessor.
! A sublessee is also bound by the contract of the
lessor and the lessee. If the lessor terminates the
lease contract for a valid cause, the sublessee can
be ejected from the leased premises even if he is
not a party to the lease contract.
! If the lessor was successful in judicially ejecting
the lessee, the following can likewise be ejected
despite the fact that they were not made parties to
the ejectment suit:
a) Trespassers, squatters, or agents of the

defendant-lessee fraudulently occupying the
property to frustrate the judgment;
b) Guest or other occupants of the premises with
the permission of the defendant-lessee;
c) Transferees pendente lite;
d) Sub-lessees;
e) Co-lessees;
f) Members of the family, relatives & other privies
of the defendant-lessee.
Ex. A property mortgaged as a collateral of a debt &
recorded in the Registry of Property shall bind any
subsequent possessor-owner of the same.
Art. 1313.
Creditors are protected in cases of contracts intended to defraud them.
Creditors
Another example when a 3rd person not a party to a contract is
affected.
Art. 1381(3) - a contract shall be rescissible if it is undertaken in
fraud of creditors when the latter cannot in any other manner
collect the claim due them.
o In such a case, even if the creditor is not a party to the
contract intended to defraud him, he is given legal
personality by law to terminate the contract.
Art. 1314. Tort Interference.
Any 3rd person who induces another to violate his contract shall be liable for
damages to the other contracting party.
Inducing Others to Violate Contracts
Could be referred to as tort interference
o Malice on part of the 3rd party
o Legal rights of the plaintiff are interfered with
While a contract between 2 parties cannot impose on a stranger a
liability in accordance with the terms of the contract without said
strangers consent, a stranger does owe to the parties to the
agreement a duty not to interfere with its performance
o A contract confers certain rights on the person with whom
it is made, & not only binds the parties, but also imposes
on all the world, in a sense, the duty of respecting the
contractual obligation.
Not only to contract of services; applies to any case where a person

maliciously persuades another to break a contract with a 3rd person
Measure - If the persuasion be used for the indirect purpose of
injuring the plaintiff, or benefiting the defendant, at the expense of
the plaintiff, it is a malicious act, which, in law & in fact, is a
wrongful act & thus an actionable act of injury issued from it.
o BUT no liability ordinarily attaches where the party sought
to be charged in damages was acting in the lawful exercise
of some distinct right.
o MOREOVER, if none of the legal rights of the plaintiff are
interfered with, an action for damages cannot be
maintained.
An action for damages is NOT the sole remedy.
o In a proper case one may properly be enjoined from in any
way procuring the violation of lawful & valid contract.
o While the one who violates his contract may be personally
liable to the other party thereto for its breach, the party
guilty of such breach may, nevertheless, recover against
the one who induces him to violate his contract when the
latter, by such acts & persuasion, intended to injure the
other contracting party or to coerce him into adopting a
line of business against his will & judgment.
Ex. If A was contracted by B to be the resident painter in his studio
for 1 year & C maliciously induces B to dishonor the contract so
that he can go to Cs studio, C can be liable for damages under Art.
1314.
Damages
The compensation awarded for the damage suffered.
o Damage the loss, hurt or harm which results from injury
One is liable in an action for damages for a non-trespassory
invasion of anothers interest in the private use & enjoyment of
assets if:
(1) The other has property rights & privileges with respect
to the use or enjoyment interfered with
(2) The invasion is substantial
(3) The defendants conduct is a legal cause of the
invasion, &
(4) The invasion is either intentional & unreasonable or
unintentional & actionable under general negligence rules.
Law of torts is concerned with the duty to respect the property of
others, & a cause of action ex delicto may be predicated upon an
unlawful interference by one person of the enjoyment by the other

of his private property.
o This may pertain to a situation where a 3rd person induces
a party to violate his undertaking under a contract.
In PH tort law, there must always be MALICE, with intent to cause
harm or injury to a party.
o Where there was no malice in the interference of a
contract, & the impulse behind ones conduct lies in a
proper business interest rather than in wrongful motives, a
party cannot be a malicious interferer.
o Where the alleged interferer is financially interested, &
such interest motivates his conduct, it cannot be said that
he is an officious or malicious intermeddler.
Elements of Tort Interference

(1) Existence of a valid contract
(2) Knowledge on the part of the 3rd person of the existence of
contract; &
(3) Interference of the 3rd person is without legal justification or excuse
(4) Malice (in PH)
CASE: Song Pin Bun v. CA
Lesson: Intervening in anothers contract for business interests
does not lead to damages if it lacks malice or a desire to cause
injury to another; it can, however, lead to permanent injunction.
Facts:
o Company X leased property from the lessor Y. After the
lease expired, the company still occupied the premises.
When the managing partner of Company X died, the son,
Z, of the said managing partner took possession of the
premises for his own company, Trendsetter Marketing,
using the leased premises as warehouse for his textile
business.
o X asked Z & Trendsetter Marketing to vacate the
premises. They refused & instead asked the lessor for the
execution of formal contracts of lease with his own
corporation. The lessor agreed. The lease contracts were
executed.
o X sued for the nullification of the lease contracts on the
ground of contractual interference under Art. 1314. X won
but did not order Y & Z to pay damages. They were only
ordered to pay attorneys fees.
Trendsetter & Z contend that since no award of damages

were imposed & the lower court did not rule that
Trendsetter caused damage, the contract between
Trendsetter & the lessor should not be annulled & there
should be no permanent injunction.
Held: SC rejected this contention, but also did not award damages.
o In this case, Trendsetter Marketing asked the lessor to
execute lease contracts in its favor, & as a result
Trendsetter deprived Company X of the latters property
right. Clearly, the 3 elements of tort interference are
present in this case. However, nothing on record imputes
deliberate wrongful motives or malice on Z, thus there can
be no award of damages, absent clear evidence of malice.
o The contracts were nullified & there was a permanent
injunction against the implementation of the contract
between Z & Y.
o
Art. 1315.
Contracts are perfected by mere consent, & from that moment the parties
are bound not only to the fulfillment 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. 1316.
Real contracts, such as deposit, pledge & commodatum, are not perfected
until the delivery of the object of the obligation.
Perfected Contracts
A contract is the law between the parties. Any non-fulfillment of the
contract will make the violator liable.
The law likewise states that the parties are bound to fulfill all the
consequences which, according to their nature, may be in keeping
with good faith, usage & the law.
o The parties are bound to exercise the diligence of a good
father of a family with respect to the thing sought to be
delivered unless there is another standard of care
stipulated by the parties or required by a law.
o There is an implied obligation to do the act contracted with
reasonable care in order that the person or property of
others may not be injured by any force which he sets in
motion or by any agent or agency for which he is
responsible.
They are likewise obliged to deliver with the determinate

thing which is the object of the contract all its accessions &
accessories even though they may not have been
mentioned.
They shall be liable for fortuitous event in case of delay.
Delivery & Perfection

Generally, a contract is perfected by mere consent of the parties.
o Ex. A contract of sale is consensual & is perfected once
agreement is reached between the parties on the subject
matter & the consideration.
o However, ownership over the object of the contract of sale
is transferred only upon actual or constructive delivery.
There are also contracts which are perfected, not by mere consent
alone, but by the delivery of the object of the contract. These are
real contracts such as deposit, pledge & commodatum.
o An accepted promise to deliver something by way of
commodatum is binding upon the parties, but the
commodatum itself shall be perfected upon the delivery of
the object of the contract (Art. 1934).
! The bailee in commodatum acquires the use of
the thing loaned but not its fruits. Hence, if he
does not have the object which he is entitled to
make use, there can never be perfection. The
contract can not be implemented.
o A contract of pledge is constituted by the owner of the
object to be pledged to secure a loan.
! In a pledge, it is indispensable that the thing
pledged be placed in the possession of the
creditor, or of a 3rd person by common agreement.
This transfer of possession is a requirement of law
under Art. 2093. Hence, before a contract of
pledge can be perfected, the object pledged must
first be delivered.
o Delivery is also required before a contract of deposit is
perfected because, under Art. 1962, a deposit is constituted
from the moment a person receives a thing belonging to
another, with the obligation & principal purpose of safely
keeping it & of returning the same.
Art. 1317.
No one may contract in the name of another without being authorized by the
latter, or unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority
or legal representation, or who has acted beyond his powers, shall be
unenforceable, unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by the other
contracting party.
Agency
A contract where a person binds himself to render some service or
to do something in representation or on behalf of another, with the
consent or authority of the latter
o The principal of the agent must comply with all the
obligations which the agent may have contracted within
the scope of his authority.
When the agent has exceeded his power (ultra vires), the principal
is not bound except when he ratifies it expressly or tacitly.
o Such would make the contract unenforceable
o Even when the agent exceeded his authority, the principal
is solidarily liable with the agent if the former allowed the
latter to act as though he had full powers.
In the execution of the agency, the agent shall act in accordance
with the instructions of the principal.
o In default thereof, he shall do all that a good father of a
family would do, as required by the nature of the business.
When a sale of a piece of land or any interest therein is through an
agent, the authority of the latter shall be in writing; otherwise, the
sale shall be void.
Examples in the Family Code:
o Parents & those exercising parental authority have the
right and duty to represent their unemancipated children in
all matters affecting their interests.
o The father & the mother shall be the legal guardian of the
property of the unemancipated common child without the
necessity of a court appointment.
! In case of disagreement, the fathers decision
shall prevail unless there is a judicial order to the
contrary.
o Parents can enter into contract with respect to properties
of their children even without court approval if this will
involve only simple acts of administration like repairs of
properties owned by the children.
! However, with respect to acts of dominion like
selling, encumbering or alienating the properties
of their children, court authority is needed;

otherwise the contract shall be considered void.
o To protect the interest of the children, the law requires that
where the value of the property or the annual income of
the child exceeds P50,000, the parent concerned shall be
required to furnish a bond in such amount as the court
may determine, but not less than 10% of the value of the
property or annual income, to guarantee the performance
of the obligations prescribed for general guardians.
However, a contract entered into in the name of another would be
unenforceable unless it is ratified by the person on whose behalf it
was executed, before it is revoked by the contracting party, when it
is executed by:
o One who ostensibly might have but who, in reality, had no
real authority or legal representation, or
o One who, having such authority, acted beyond his powers
CASE: Yao Kai Sin v. CA

Lesson: A corporate officer or agent may represent & bind the
corporation in transactions with 3rd persons to the extent that
authority to do so has been conferred upon him, & this includes
powers which have been intentionally conferred, & also such
powers as, in the usual course of the particular business, are
incidental to, or may be implied from, the powers intentionally
conferred, powers added by custom & usage, as usually pertaining
to the particular officer or agent, & such apparent powers as the
corporation has caused persons dealing with the officer or agent to
believe that it has conferred.
Facts:
o The president & chairman of Corporation X entered into a
contract with Corporation Y, but such president & chairman
had no authority under the law or the corporate by-laws to
enter into such agreement.
o The by-laws of Corporation X state that it is the Board of
Directors that enters into agreements, & the president &
chairman executes & signs, for & in behalf of the
corporation, all agreements the corporation may enter into
o Corporation Y, in making its claims, said that the president
& chairman had been vested with apparent authority
Held: The contract is unenforceable. The president & chairman was
not empowered by the by-laws of Corporation X to enter the
agreement between Corporation X & Y. The president merely signs
the agreement after the Board has approved it.
o
o
A corporation can act only through its officers & agents,

all acts within the powers of said corporation may be
performed by agents of its selection; &, except so far as
limitations or restrictions may be imposed by special
charter, by-laws, or statutory provisions, the same general
principles of law which govern the relation of agency for a
natural person govern the officer or agent of a corporation,
of whatever status or rank, in respect to his power to act
for the corporation
Agents when once appointed, or members acting in their
stead, are subject to the same rules, liabilities &
incapacities as are agents of individuals & private persons.
Corporation Y did not provide enough evidence that
Corporation X had clothed its president & chairman with
apparent authority as evidenced by similar acts executed
in its favor or in favor of other parties.
Supplement to Corporate Agency Cases

Although an officer or agent acts without, or in excess of, his actual
authority if he acts within the scope of an apparent authority with
which the corporation has clothed him by holding him out or
permitting him to appear as having such authority, the corporation
is bound thereby in favor of a person who deals with him in good
faith in reliance on such apparent authority, as where an officer is
allowed to exercise a particular authority with respect to the
business, or a particular branch of it, continuously & publicly, for a
considerable time.
If a private corporation intentionally or negligently clothes its
officers or agents with apparent power to perform acts for it, the
corporation will be estopped to deny that such apparent authority is
real, as to innocent 3rd persons dealing in good faith with such
officers or agents.
o This apparent authority may result from:
(1) The general manner by which the corporation
holds out an officer or agent as having power to
act or, in other words, the apparent authority with
which it clothes him to act in general, or
(2) The acquiescence in his acts of a particular
nature, with actual or constructive knowledge
thereof, whether within or without the scope of his
ordinary powers.
Examples where apparent authority led to corporate liability:
CASE: Francisco v. GSIS GSIS validly accepted the offer

of compromise made by the plaintiff. The terms of the
compromise telegram the plaintiff sent were clear, & the
General Manager of GSIS signed it with his name & the
GSIS Board Secretary informed the plaintiff that the
compromise had been accepted.
CASE: Board of Liquidators v. Kalaw - The practice of the
corporation has been to allow its general manager to
negotiate & execute contracts in its copra trading activities
for & in NACOCOs behalf without prior board approval. If
the by-laws were to be literally followed, the board should
give its stamp of prior approval on all corporate contacts,
but that board itself, by its acts & through acquiescence,
practically laid aside the by-law requirement of prior
approval.
Ratification of Unenforceable Contract

Can be ratified expressly or impliedly by the person on whose
behalf it has been executed, before it is revoked by the other
contracting party
Ratification must always come BEFORE revocation.
CASE: Regal Films v. Concepcion
Lesson: Ratification of the acts of an agent who had no authority to
act should always be made before the revocation of the other party.
Facts:
o The agent of a certain movie actor entered into an
agreement with Regal Films designed to constitute as an
addendum to the original agreements between the movie
actor & Regal Films so that the lawsuit between the movie
actor & Regal Films will finally be settled.
o The movie actor however disavowed the agreement
entered into by the agent contending that, by the time the
agent transacted the addendum, she was not anymore his
agent.
o In the preliminary conference in court, Regal Films
intimated to the movie actor that it was willing to release
him from the original contracts instead of pursuing the
addendum. Thereupon, the movie actor surprisingly
manifested to the court that he was accepting the
addendum. On the basis of this acceptance, a decision by
way of a compromise agreement was entered by the court.
o Regal Films filed a counter-case against the movie actor.
Held: The compromise agreement cannot be enforced.

o Consent is manifested by the meeting of the offer & the
acceptance upon the thing & the cause which are to
constitute the agreement.
! The offer, however, must be certain & the
acceptance seasonable & absolute; if qualified,
the acceptance would merely constitute a counteroffer.
o At the first instance, the addendum was flatly rejected by
the movie actor on the theses (a) that he did not give his
consent thereto nor authorized anyone to enter into the
agreement, and (b) that it contained provisions grossly
disadvantageous to him. The outright rejection of the
addendum made known to the other ended the offer.
When respondent later filed his Manifestation, stating that
he was, after all, willing to honor the addendum, there was
nothing to accept.
o Verily, consent could be given not only by the party himself
but by anyone duly authorized and acting for & in his
behalf. But by respondents own admission, the addendum
was entered into without his knowledge & consent.
o There was no ratification because the actor did not ratify
the contract before the revocation of Regal Films
Supplement to Compromise Case

Compromise an agreement between 2 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.
o Reciprocal concessions are the very heart & life of every
compromise agreement, where each party approximates
and concedes in the hope of gaining balanced by the
danger of losing.
It is, in essence, a new contract.
CHAPTER II. ESSENTIAL REQUISITES OF A CONTRACT.
GENERAL PROVISIONS.
Article 1318. Requisites of a Contract.
There is no contract unless the ff. requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the
contract;
(3) Cause of the obligation which is established.

Requisites of a Contract
All 3 requisites must be present.
Absence of any one of the requisites creates an inexistent contract.
It produces no effect.
o Inexistent contracts can be invoked by any person
whenever juridical effects founded thereon are asserted
against him.
! Ex. A transferor can recover the object of such
contract by accion reinvidicatoria12 & any
possessor may refuse to deliver it to the
transferee, who cannot enforce the transfer.
o The rule on pari delicto as between the parties does not
apply in cases of inexistent contracts.
! If there is an ostensible contract with all the
elements present ostensibly, there is pari delicto.
SECTION 1. CONSENT.
Art. 1319. Definition of Consent.
Consent is manifested by the meeting of the offer & the acceptance upon
the thing & the cause which are to constitute the contract. The offer must
be certain & the acceptance absolute. A qualified acceptance constitutes a
counter-offer.
Acceptance made by letter or telegram does not bind the offerer except
from the time it came to his knowledge. The contract, in such a case, is
presumed to have been entered into in the place where the offer was made.
Art. 1320.
An acceptance may be express or implied.
Consent
Consent The concurrence of the wills of the offerer & the
acceptor as to the thing & the cause which constitute a contract.
Offer
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
12
Offer a manifestation of a willingness to enter into a bargain so

made as to justify another person in understanding that his assent
to that bargain is invited & will conclude it
Action to recover ownership over real property.
Must be so complete that its absolute acceptance will form

an agreement containing all the terms necessary &
intended by the parties
o There can be no agreement until its terms are settled; an
offer which is not complete is merely a step in the
negotiations.
Making an offer means inviting an acceptance which, if given, will
finally create the contract
o The offer empowers the person offered to create a contract
Negotiation formally initiated by an offer
o Policitacion an imperfect promise; merely an offer
! Ex. Public advertisements or solicitations are just
invitations or proposals
Until a contract is perfected, there are no binding agreements
o Any time before perfection, the parties may stop
o Withdrawal is effective immediately after manifestation, &
not when the offeree learns of the withdrawal
o
Acceptance
No acceptance no concurrence of will & no consent
CASE: Salonga v. Farrales
o Lesson: The essence of consent is the conformity of the
parties on the terms of the contract, the acceptance by
one, of the offers made by the other. In a bilateral contract
(e.g. contract to sell), where there is merely an offer by one
party, without the acceptance of the other, there is no
consent.
o Facts: By way of compromise, X attempted to sell land to Y,
which Y rejected.
o Held: There is no contract. Consent is an essential element
of the existence of a contract, & when it is wanting, the
contract is non-existent.
Acceptance must be absolute.
o May be express or implied
o Except where a formal acceptance is so required, although
the acceptance must be affirmatively & clearly made &
must be evidenced by some acts or conduct
communicated to the offeror, it may be made either in a
formal or an informal manner
o May be shown by acts, conduct, or words of the accepting
party that clearly manifest a present intention or
determination to accept the offer to buy or sell
Acceptance may be shown by the acts, conduct or words of

a party recognizing the existence of the contract of sale.
Acceptance must be unconditional.
o Must be identical to the terms of the offer
o Qualified acceptance - variation from the proposal either by
way of omission, addition or alteration
! Considered as a counter-offer
! NOT acceptance; neither party is bound
! BUT an acceptance is not conditional if the
acceptor expresses dissatisfaction with the offer,
yet gives his unqualified assent, or if he adds
immaterial words.
o Both the modified acceptance & an unconditional assent
after such modified acceptance are in effect nothing more
than counter propositions that must be assented to by the
original offerer before any binding obligation is fastened on
the parties.
!
In case the original proponent accedes to the
modification imposed & gives notice to that effect,
the contract is concluded.
It is not necessary in every instance that
an express assent to the modified
acceptance be shown.
o If the parties proceed with their contract as if the condition
of the acceptance were a part of it, this is as effectual as
an acceptance as if the changes had been formally
assented to.
o
CASE: Jardine Davies v. CA

Lesson:
o Distinguishing between a condition imposed on the
perfection of a contract & a condition imposed merely on
the performance of an obligation
! Failure to comply with the 1st condition (imposed
on the perfection of a contract) results in the
failure of a contract
! Failure to comply with the 2nd (imposed on the
performance of an obligation) merely gives the
other party options &/or remedies to protect
interests.
o An acceptance may be express or implied, & this can be
inferred from the contemporaneous & subsequent acts of
the contracting parties.
Facts: The company accepted the bid of a particular supplier based

on the latters proposals & stated in its letter of acceptance that
the awarding of the project to the said supplier was subject to
certain basic terms and conditions such as: 1) payment shall be on
a progress billing basis with a guarantee bond; 2) the project shall
be undertaken pursuant to the attached specifications; 3) all
materials that will be used in the project shall be brand new; 4) the
project must commence immediately and completed within 20
working days; 5) the supplier must submit a performance bond & a
contractors all-risk insurance; 6) there is a warranty of 1 year
against defective material and/or workmanship
Held: The terms & conditions in the letter of acceptance were not
tantamount to a qualified acceptance. The terms are imposed on
the performance of the obligation, rather than the perfection of the
contract.
o Even assuming that the companys acceptance was
conditional, there was also implied acceptance on the
suppliers part when they submitted (1) the performance
bond & (2) the contractors all-risk insurance
Time of Knowledge
Acceptance by letter or telegram does not bind the offerer except
from the time it came to his knowledge
o Ex. If A offered to B his property & B, through telegram,
sent his acceptance but, before A actually received the
telegram, he informs B of the revocation of his offer, no
contract can be perfected.
CLASS DISCUSSION
The offer must be certain; the acceptance must be absolute
SCENARIO
Q: Can the offeree publish the acceptance on the newspaper &
assume constructive knowledge?
A: NO. There must be actual knowledge.
SCENARIO
Facts: X tells Y, Sign the bottom for acceptance. Y signs & X says,
OK! Is there already a contract?
Answer: YES.
Additional: If there is no signature, but Y is given the item of the
same, is there a contract?
Answer: YES.
Art. 1321.
The person making the offer may fix the time, place, & manner of
acceptance, all of which must be complied with.
Offerers Options
The offerer can indicate:
o The manner of acceptance (integrated into price)
o The time when acceptance is to be made
o The place where it should be made
The offerer will not be bound by an acceptance made by the
acceptor in any other manner than that specified by the offerer,
unless the offerer acquiesces in the change.
CASE: Matias v. CA
Lesson: Haggling over exorbitant prices means there is still no
acceptance of the offer; it is the offerer who has the right to make
offers which the other party could accept.
Facts: A subsequent new owner of a leased Hacienda offered to sell
to the lessee the property subject of the lease. The offer was
ignored by the lessee who instead filed a suit to compel the new
subsequent owner to sell the property in an amount & in a manner
which the lessee feels reasonable.
o During the early stages of the negotiations, the lessees
have already been in arrears in the payment of rentals,
which delinquency lasted up to the time of the
consummation of the sale of the Hacienda.
Held: The Court rejected the lessees appeal.
o Instead of discussing with the new owner the terms &
conditions they wish to impose on the projected sale, the
lessees insist on their claim that the price of the lots are
exorbitant; & that their right to purchase the lot at a price
fixed in the complaint was disregarded.
o Lessees insistence as to the price of the lot rests on the
false assumption that the fixing of the price of the lot they
wanted to purchase is one of the rights granted to them by
law.
Contract of Sale
Manner of payment of the purchase price part of the price; an
essential element before a valid & binding contract of sale can exist
o Parties must also meet on the terms or conditions of the
price, otherwise there is no sale
An agreement on the manner of payment goes into the price

o A disagreement on the manner of payment is tantamount
to a failure to agree on the price.
Even if the parties have agreed as to the object of the sale & the
purchase price but still has to agree on the manner of how & when
the downpayment & the installments are to be paid, the contract is
NOT perfected & there is no contract of sale.
Art. 1322.
An offer made through an agent is accepted from the time acceptance is
communicated to him.
Contract of Agency
A person binds himself to render some service or to do something
in representation or on behalf of another, with the consent or
authority of the latter.
The principal must comply with all the obligations which the agent
may have contracted within the scope of his authority.
o When the agent has exceeded his power, the principal is
not bound except when he ratifies it expressly or tacitly.
o If the offer is made through an agent, acceptance of the
offer can be made to such an agent.
o HOWEVER, when a sale of a piece of land or any interest
therein is through an agent, the authority of the latter shall
be in writing, otherwise the sale shall be void.
Art. 1323.
An offer becomes ineffective upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed.
Ex. A letter of acceptance may be sent by mail, but if,

before such mail is received & read by the offeror, either
the offeror or the acceptor died, there is still no contract
because the offer has become ineffective.
CASE: Villanueva v. CA
Lesson: The insolvency of a bank & the consequent appointment of
a receiver restrict the banks capacity to act especially in relation to
its property
Facts:
o A person offered to a particular bank the purchase of a
certain foreclosed property.
o The offer was accepted by the bank through a board
resolution which however was not relayed to the person
making the offer.
o The person was able to know of the acceptance only after
the bank was placed under receivership by the Central
Bank as said bank became insolvent
Held: The offer became ineffective; no contract was created
because the purported contract of sale never reached the stage of
perfection.
o Corollarily, he cannot invoke the resolution of the bank
approving his bid as basis for his alleged right to buy the
disputed properties.
Art. 1324.
When the offerer has allowed the offeree a certain period to accept, the
offer may be withdrawn at any time before acceptance by communicating
such withdrawal, except when the option is founded upon a consideration,
as something paid or promised.
Ineffective Offer When Either Party, Before Conveying Acceptance:

1) Dies
2) Suffers civil interdiction
3) Becomes insane
4) Becomes insolvent
Option Contract
An option is a contract granting a privilege to buy or sell at a
determined price within an agreed time
Also called the option period
Ineffective Offers Explained

There is no contract not simply because there is no acceptance but,
more importantly, because the offer has become ineffective.
o When an offer is ineffective, nothing can be accepted.
Before acceptance is conveyed before acceptance has come to
the actual knowledge of the offeror.
An Option Contract Founded on a Separate Consideration:

A privilege existing only in one party the buyer.
o For a separate consideration paid, he is given the right to
decide to purchase or not, a certain merchandise or
property, at any time within the agreed period, at a fixed
price.
This being his prerogative, the buyer may not be compelled to

exercise the option to buy before the time expires.
Jurisprudence demonstrating an option contract founded on a
separate consideration:
o There was a lease contract with the option to buy where
the consideration for the lessors obligation to sell the
leased premises to the lessee, should the lessee choose to
exercise his option to purchase the same, is the obligation
of the lessee to sell to the lessor the building &/or
improvements constructed &/or made by the former, if he
fails to exercise his option to buy said premises. (Vda. de
Quirino v. Palarca)
o The lessee is to initiate the transferring of the building
and/or improvements on the property to petitioner, should
respondent bank fail to exercise its option within the
period stipulated. (Serra v. CA)
Consideration in an option contract anything of value, unlike in
sale where it must be the price certain in money or its equivalent
Earnest Money
Considered as part of the price in a contract of sale
o Can be a proof of the perfection of the contract of sale.
o HOWEVER, it is NOT the giving of the earnest money per
se, but the proof of the concurrence of all the essential
elements of the contract of sale which establishes the
existence of a perfected sale.
If the buyer & the seller agreed that an earnest deposit should be
made by the seller merely to guarantee that the buyer will not back
out from the sale, such earnest deposit is NOT earnest money that
can be considered as proof of the perfection of the contract.
Effect of Non-Purchase in Option Period
Upon the expiration of the option period & the person given such
option does not manifest his acceptance, the offeror may offer the
intended contract to somebody else.
o Any contract perfected with such other person shall be
done in good faith.
Rules When There is an Option Period:
1) If the period is not itself founded upon a consideration
o The offeror is still free & has the right to withdraw the offer
(1) before its acceptance or, (2) if an acceptance has been
made, before the offerors coming to know of such fact, by

communicating that withdrawal to the offeree.
o The right to withdraw must not be exercised whimsically or
arbitrarily; otherwise it could give rise to a damage claim
under Art. 19, which ordains that every person must, in
the exercise of his rights & in the performance of his
duties, act with justice, give everyone his due, & observe
honesty & good faith.
2) If the period has a separate consideration
o A contract of option is deemed perfected; it would be a
breach of that contract to withdraw the offer during the
agreed period.
! The option is an independent contract by itself, &
must be distinguished from the projected main
agreement (subject matter of the option)
o If, in fact, the optioner-offeror withdraws the offer before its
acceptance (thus exercising the option) by the optioneeofferee, the latter may NOT sue for specific performance
on the proposed contract (object of the option) since it
has failed to reach its own stage of perfection.
! The optioner-offeror, however, renders himself
liable for damages for breach of the option.
o In these cases, care should be taken of the real nature of
the consideration given
o Ex. If the consideration has been intended as part
of the consideration for the main contract with a
right of withdrawal on the part of the optionee, the
main contract could be deemed perfected
o Ex. An earnest money in a contract of sale can
evidence its perfection (Art. 1482, Civil Code).
Art. 1325. Business Advertisements.
Unless it appears otherwise, business advertisement of things for sale are
not definite offers, but mere invitations to make an offer.
Advertisements of Things for Sale
Generally, advertisement of things for sale mere invitations to
make an offer.
Ex. If a seller advertises that he intends to sell his house to any
willing purchaser, it is an invitation for the purchaser to make an
offer as to how he intends to buy the house. The offer of the
purchaser should of course include all the essential requirements
to make a valid contract such as the price of the house. The phrase
unless it appears otherwise connotes that the advertisement may

constitute an offer which is certain.
Art. 1326. Advertisements for Bidders.
Advertisements for bidders are simply invitations to make proposals, & the
advertiser is not bound to accept the highest or lowest bidder, unless the
contrary appears.
Ads to Bid
A person who entertains an advertisement to bid does not
automatically become the other party to a contract.
o He is only allowed to make his proposals or his offer.
o If he makes his bid, he thereby makes an offer which is
not binding unless it is accepted.
o Offeror still has the right to set time, place & manner
Ex. When a company starts the process of a bidding & disseminates
the document denominated the Terms Conditions of the Bidding
to the bidders, the dissemination of the said documents constitutes
an advertisement to bid in the project.
o The bid proposals or quotations submitted by the
prospective suppliers are the offers.
o The favorable reply of the company to one of the
prospective suppliers is the acceptance.
Art. 1327.
The ff. cannot give consent to a contract:
(1) Unemancipated minors;
(2) Insane or demented persons, & deaf-mutes who do not know how
to write.
Minors
Emancipation takes place by the attainment of majority age, at the
age of 18.
o Leads to termination of parental authority over the person
& property of the child, who shall be qualified &
responsible for all acts of civil life, save the exceptions
established by existing laws in special cases
Contracts entered into by an unemancipated person is annullable.
o HOWEVER, persons who are capable cannot allege the
incapacity of those with whom they contracted to annul the
contract.
Only the minor can invoke the ground that a contract is

annullable because, at the time it was entered into, he was
still a minor.
Misrepresentation must be PASSIVE, not active
When the defect of the contract consists in the incapacity of one of
the parties, the incapacitated person is NOT obliged to make any
restitution except insofar as he has been benefited by the thing or
price received by him.
o Ex. If a person of age bought property from a minor & the
latter received the purchase price, the person of age
cannot file a case to annul the contract on the ground that
the other party is a minor.
! If the minor, upon coming of age, timely files a
case to annul the contract, he is not obliged to
return that part of the purchase price which he
had spent which did not redound to his benefit,
such as losses from gambling, but he is obliged to
pay or reimburse the other party for amounts
which he has spent for his benefit like payment of
tuition fees in school.
o
CASE: Braganza v. De Villa Abrille

Lesson: Minors who misrepresent their age can set up minority as
their defense as long as their misrepresentation is PASSIVE, & not
active.
Facts: 2 minors signed a promissory note, without telling the
creditor their ages. The debtor sought to enforce the promissory
note against them, stating that:
o The minors misrepresented themselves.
o The minors only interposed their objection in 1951, when
one of them turned 18 in 1947, thus the 4-year
prescription period in the Civil Code should apply13
Held: SC ruled that the minors can set up the defense of minority to
resist the claim, overruling Mercado v. Espiritu, which held that
minors who misrepresent their ages cannot be absolved from the
contract they entered into.
o Despite the failure of the minors disclose their minority in
the same promissory note they signed, it does not follow as
a legal proposition, that they will not be permitted
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
13 The provisions of Article 1301 of the Civil Code are quoted to the effect that an action to annul a contract
by reason of minority must be filed within 4 years after the minor reached majority age.
thereafter to assert it. They had no juridical duty to disclose

their inability.
In Mercado v. Espiritu, there was ACTIVE
misrepresentation, because the minor was required to give
his age in a form & he lied about it; in this case, the minors
were not asked about their age, & thus they did not
outright misrepresent themselves.
As for the prescription, there is reason to doubt the
pertinency of the 4-year period fixed by Art.1301 where
minority is set up only as a defense to an action, without
the minors asking for any positive relief from the contract.
They have not filed in this case an action for annulment.
They interposed an excuse from liability.
However, the minors here were paid for the loan to the
extent they were benefited during WW2.
Insane or Demented Persons

Likewise annullable & valid up to the time they are rendered
ineffective by the courts.
o The law presumes that the contract has been entered into
by competent persons. To annul a contract, it is always
important to prove the insanity of the other party at the
time of the perfection of the contract.
3 Classes of Mental Incapacity:
o Idiots insane from birth
o Lunatics someone sane at one time, but who from some
cause or another has lost use of his reason
o Those who are not legally totally incapacitated, but are
mentally weak all forms of mental weakness which do
not render the person affected totally incapable of
transacting business or managing his affairs.
The insanity must have a direct bearing on the agreement.
o A monomania or delusion unconnected with the subjectmatter of the contract does not destroy its binding force.
o If the persons ailment is mere mental weakness from
whatever cause, but it does NOT totally destroy the ability
to comprehend the nature & effect of the transaction, such
does NOT furnish ground for the avoidance of a contract
entered into by such persons in the absence of evidence
showing fraud, duress or undue influence.
o BUT if the insane delusion is so connected with the
subject-matter of the agreement as to render one of the
parties thereto incapable of understanding the nature or
effect of the contract, it is thereby rendered voidable at the

option of the party so afflicted.
The agreement cannot be avoided by the other party or a 3rd
person; the privilege is personal.
o BUT it is generally true that when the insane person is not
under a guardian & the other contracting party has no
reasonable cause to believe him otherwise insane, the
agreement is valid if equitable & beneficial to such insane
person, & it has been so far executed that the other party
cannot be placed in status quo.
A person of unsound mind is liable on his contract for necessities.
Deaf-Mutes + Inability to Read & Write
Contracts entered into by deaf-mutes who do not know how to write
is also annullable.
o The law is clear that being a deaf-mute alone is not enough
to make the contract voidable.
For the contract to be annullable, the deaf-mute must likewise not
know how to write.
Art. 1328.
Contracts entered into during a lucid interval are valid. Contracts agreed to
in a state of drunkenness or during a hypnotic spell are voidable.
Lucid Interval
That period of time when an insane person acts with reasonable
understanding, comprehension & discernment with respect to what
he is doing
o Contract is VALID when entered into during a lucid interval
However, where one is shown to have been mentally deranged at a
recent period anterior to the execution of the contract, that
condition is presumed to continue
o Burden of proof - on the other party, to show that the
agreement was entered into during a lucid interval or after
recovery
o PROVIDED that the derangement is not caused by a
temporary ailment, such as fever, fits or the like
State of Drunkenness
The intoxication is of such a character as to perpetuate an undue
advantage over the drunken person.
An agreement other than for necessities, made by a person when
so drunk as to be incapable of understanding its nature & effect, is
voidable at the intoxicated persons option
One or more of the influences mentioned below should have been

operative at the time the minds of the parties met on the terms of
the contract
Situations When Contract during Drunkenness is Voidable:

1) When it appears that the drunkenness was brought about by the
opposite party
o If one party to a transaction procures the intoxication of
the other & then takes advantage of his condition to obtain
the contract or conveyance it will be voidable at the
intoxicated persons option, notwithstanding the degree of
drunkenness may not have been excessive
2) That a fraudulent advantage was taken of it
o Mere intoxication unmixed with any inequitable conduct on
the part of the other party to the agreement is insufficient
to invalidate a contract entered into, unless it is complete
drunkenness
3) That the drunkenness was so complete as to deprive the party of
his reason of an agreeing mind
o Intoxication which merely prevents the party from giving
proper attention to what he is doing or from fully realizing
the nature of his acts is insufficient to invalidate a
contract.
Hypnotic Spell
A contract entered into during a hypnotic spell is likewise voidable.
Hypnosis an artificially induced state, resembling sleep, but
characterized by exaggerated suggestibility & continued
responsiveness to the voice of the hypnotist
Art. 1329.
The incapacity declared in Art. 1327 is subject to the modifications
determined by law, & is understood to be without prejudice to special
disqualification established in the laws.
Art. 1330.
A contract where consent is given through mistake, violence, intimidation,
undue influence, or fraud is voidable.
Freedom of Will
To create a contract, the meeting of the mind must be free,
voluntary, willful & with a reasonable understanding of the various
obligations the parties intend to be bound.
Annullable contracts (Art. 1390):

o Mistake (in the substance of the thing or principal
condition), violence, intimidation, undue influence & fraud,
because there is no real assent, due to acts of duress or
other reasons
Where duress is exerted on one of the parties of such a kind as to
overcome his will & compel a formal assent to an undertaking when
he does not really agree to it, the agreement is not binding
o UNLESS the other deals with him in good faith, in
ignorance of the improper influence & in the belief that the
party is acting voluntarily.
Art. 1331. Mistakes.

In order that mistake may invalidate consent, it should refer to the
substance of the thing which is the object of the contract, or to those
conditions which have principally moved one or both parties to enter into
the contract.
Mistakes as to the identity or qualifications of one of the parties will vitiate
consent only when such identity or qualifications have been the principal
cause of the contract.
A simple mistake of account shall give rise to its correction.
Mistake
General rule: BOTH must be mistaken; but there are exceptions
For mistake to make a contract voidable, it must either refer to:
1) The substance of the thing which is the object of the
contract
o Affects SUBSTANCE, not objectif theres no
object, theres no consent
o Ex. Where the contract for the sale of a cow was
entered into, both parties believing her to be
barren, which turned out to be untrue, it was held
that mistake was not as to the mere quality of the
animal sold, but went to the very nature of the
thing & that the vendor had a right to rescind the
agreement.
2) Those conditions which principally induced the parties to
enter into a contract.
o The conditions must not be mere incidents to the
consideration
o Ex. If A lent money to X only because he was
informed that it was the special request of Z to A,
who owed Z a favor which A wanted to reciprocate,
& only because there was an apparent assurance

from Z that he will be a solidary debtor; & X knew
that, had it not been for the request of Z & his
engagement as a solidary debtor, the loan would
not have been consummated; & it eventually
turned out that there was no request & no
assurance coming from Z who, in reality merely
vouched for the credit worthiness of X, the said
loan agreement can be annulled by A on the
ground that there was an invalid consent as the
conditions which principally moved both parties to
enter into the contract was a mistake.
A unilateral mistake in the making of an agreement, of which the
other party is entirely ignorant & to which he in no way contributes,
will not afford ground for its avoidance or rescission
o UNLESS it is such a mistake as goes to the substance of
the agreement itself
CASE: Spouses Heizrich & Betty Theis v. CA

Lesson: Mistake in Art. 1331 involves either (1) ignorance, which is
the absence of knowledge with respect to a thing & (2) mistake
properly speaking, which is a wrong conception about said thing, or
a belief in the existence of some circumstance, fact, or event, which
in reality does not exist
Facts:
o The seller, via a deed of sale, sold to the buyer a property
which was however not the one appearing in the deed of
sale. The mistake was not the fault of the parties but was
due to mistake in the survey made on the property.
o The seller, upon learning of this, immediately offered the
buyer another property instead or a refund of money
double the amount paid for the property, but which offer
was unreasonably refused by the buyers prompting the
seller to file for annulment of the contract based on
mistake
Held: Contract can be invalidated on the basis of Art. 1331 as it
involved mistake as to the substance of the thing & seller was in
good faith. He simply made a misconception about the lot.
Mistake as to Identity or Qualifications
Mistake as to the identity or qualifications of one of the parties
vitiates consent only when it is the principal cause of the contract.
When the identity of one of the parties is a material

element of the contract, a mistake in respect thereto
invalidates the agreement.
Ex. Y contracts with X believing him to be M.
o Y, the offerer, has in contemplation a definite person with
whom he intends to contract.
One has the right to select the person with whom he wishes to
contract, especially where the nature of the transaction is such that
it is important that performance be had by a particular individual,
as agreements with a painter, writer, or which call for the
performance of any act requiring skill such as the one sought to be
contracted with is supposed to possess. In such cases one may
contract with whomever he may choose & the sufficiency of his
reasons for so doing is immaterial.
Thus, where one sends an order for goods or other proposal to
another, a 3rd person cannot without the knowledge of the one
sending the order or making the proposal become a party to the
agreement by accepting such proposal.
o
Mistake of Account
A simple mistake of account shall give rise to its correction. A
simple accounting error does not go into the essentials of a
contract.
Art. 1332.
When one of the parties is unable to read, or if the contract is in a language
not understood by him, & mistake or fraud is alleged, the person enforcing
the contract must show that the terms thereof have been fully explained to
the former.
Presumptions in Contracts
The parties are presumed to have understood the terms of the
contract they voluntarily signed, especially when there is proof that
they are educated.
o Courts are not authorized to extricate parties from the
necessary consequences of their acts, & the fact that the
contractual stipulations may turn out to be financially
disadvantageous will not relieve parties thereto of their
obligations.
o They cannot disavow the agreement due to supposed
misunderstanding of its terms.
HOWEVER, Art. 1332 provides that, when one of the parties is
unable to read, or if the contract is in a language not understood by
him, & mistake or fraud is alleged, the person enforcing the

contract must show that the terms thereof have been fully
explained to the former.
To invoke Art. 1332, one must have the ff. conditions:
o He must be unable to read or
o He must not understand the language of the contract.
He must first prove such fact or circumstance. Only after sufficiently
adducing evidence proving the fact that he cannot read or that he
does not understand the language of the contract will the burden of
proof shift to the one enforcing the contract to show that the terms
thereof have been explained to the person who is unable to read or
who does not understand the language of the contract.
CASE: Lustan v. CA
Lesson: Where a party to a contract is illiterate or cannot read or
cannot understand the language in which the contract is written,
the burden is on the party interested in enforcing the contract to
prove that the terms thereof are fully explained to the former in a
language understood by him
Facts: The dispute was whether or not the Deed of Definite Sale
was in reality an equitable mortgage wherein the subject property
was merely intended to secure an existing debt by way of mortgage.
Held: The document was an equitable mortgage based on the clear
evidence supporting such contract & based on the finding that the
illiterate owner of the same was made to understand that the deed
of sale signed by her merely evidenced an indebtedness to the
creditor
o The contents of the same were not read nor explained to
her so that she may intelligently formulate in her mind the
consequences of her conduct & the nature of the rights
she was ceding in favor of the petitioner.
CASE: Arriola v. Mahilum
Lesson: In case one of the parties to a contract is unable to read &
fraud is alleged, the person enforcing the contract must show that
the terms thereof have been fully explained to the former.
Facts: A sister of an illiterate man was able to have a document
signed by the latter on the misrepresentation that properties other
than his property awarded by a cadastral court to him will be
partitioned among the heirs of their parent. It turned out however
that the document included such property. The property was
therefore fraudulently distributed to the other heirs. The illiterate
filed suit to recover his property alleging fraud & misrepresentation.
Held: SC sustained the cause of the illiterate. Since the deed of

partition is null, the reconstituted title & transfer titles arising
therefrom are void as well.
o The sister knew that there was no other way to obtain the
partition of the subject property than having her brother
sign a deed of partition, making the latter believe that the
deed pertained to the three other lots. The scheme was
simple enough considering that the brother was illiterate.
o The fact that the brother protested the transfer of the title
shows that the brother did not actually understand the
contents of the contract, as the sister claimed.
Art. 1333.
There is no mistake if the party alleging it knew the doubt, contingency or
risk affecting the object of the contract.
Contracts with Risk or Doubt

Involves a mistake of FACT, not a mistake in law
Where the parties to an agreement indicate an intention to be
bound irrespective of the existence of certain facts & take the risk
of their non-existence, the validity of their agreement is not at all
dependent upon the existence of such facts.
o Where the parties are conscious that the existence of
particular facts is doubtful & make their agreement on this
assumption, the non-existence of such facts does not
affect the validity of the agreement, the risk of their
existence being taken by the parties.
The view is taken that if the parties are conscious of their ignorance
as to the existence of some facts, the non-existence of such facts is
of no consequence; this is said to be predicated upon common
experience that if people contract under such circumstances, they
usually intend to abide by the resolution either way of the known
uncertainty, & have insisted on, & received, consideration for taking
that chance.
Ex. A seller, not knowing the nature of the stone he found, sold it to
a purchaser for only $1 after they discussed their ignorance as to
the quality & nature of the stone which they surmised to be
probably a Topaz. It turned out to be a Diamond worth about
$1,000.
o The contract cannot be annulled or rescinded as there was
legally no mistake as to the nature of the stone because
when they transacted the purchase, there was conscious
uncertainty & that the parties took the risk that it could
have been some other valuable object capable of being

sold at a higher price.
Art. 1334.
Mutual error as to the legal effect of an agreement when the real purpose of
the parties is frustrated, may vitiate consent.
Mutual Mistakes
A unilateral mistake of law as to the legal effect of an agreement is
generally not a ground to annul a contract.
o In such a situation, the document embodying the
agreement is drafted the way the parties have intended it
to be such that only its legal effect is different from what
the parties have assumed.
HOWEVER, a mistake of law may vitiate consent if the ff. requisites
are present:
1) The mistake as to the legal effect of the agreement
must be mutual
2) Such mutual mistake frustrates the real purpose of the
parties.
Ex. If A leases to B a property where the latter will construct a fourstory building but it turned out that such building cannot be erected
in the said city because of an ordinance prohibiting the same, the
contract can be annulled.
Art. 1335.
There is violence when in order to wrest consent, serious or irresistible force
is employed.
There is intimidation when one of the contracting parties is compelled by a
reasonable & well-grounded fear of an imminent & grave evil upon his
person or property, or upon the person or property of his spouse,
descendants or ascendants, to give his consent.
To determine the degree of the intimidation, the age, sex & condition of the
person shall be borne in mind.
A threat to enforce ones claim through competent authority, if the claim is
just or legal, does not vitiate consent.
Annullable Contracts & Conditions Defined
1) Violence serious & irresistible, leading to total absence of free will
o Ex. If A coerces B into a contract by continually beating him
until he signs the contract, A, in effect, imposes his will on
B & therefore, no valid consent is obtained from B.
2) Intimidation reasonable & well-grounded fear of an imminent &

grave evil upon his person or property, or upon the person or
property of his spouse, descendants or ascendants, to give his
consent
o To determine the degree of the intimidation, the age, sex &
condition of the person shall be borne in mind.
o The threats & circumstances must be of a character as to
excite the reasonable apprehensions of a person of
ordinary courage, & that the agreement be made under the
influence of such threats or menace; the threat must be
tangible & direct
o CASE: Vda. de Lacson v. Granada
! Facts: It was contended that a contract entered
into during the Japanese occupation should be
nullified because one of the parties was
constrained to enter the contract & to accept
Japanese currency for fear that, if he would not do
so, he might endanger his life
! Held: There was legally no intimidation enough to
annul the contract. The duress must be more than
the general feeling of fear on the part of the
occupied over the show of might by the occupant.
There must be specific acts or instances of such
nature & magnitude as to have, of themselves,
inflicted fear upon the subject thereof that his
execution of the questioned deed or act can not
be considered voluntary.
o CASE: Laperal v. Rogers
! Facts: A person was directly told by the Japanese
military authorities that he should sell his house &
warned him that his refusal to sell would be
considered as a sign of hostility to the Japanese.
Fearing for his life, he sold the house.
! Held: The contract can be annulled as the consent
was coerced by direct intimidation & does not fall
within the purview of collective or general
duress
Threat through Competent Authority
A threat to enforce ones claim through competent authority, if the
claim is just or legal, does not vitiate consent
Ordinarily, the institution or threatened institution of a civil suit, or
ordinary legal proceedings to enforce a legal demand does not
constitute duress, even though it may be made in a period of

business depression
o Ex.: Threat to commence legal proceedings for the removal
of a dam, or for the collection of a debt contracted during
infancy, to foreclose a chattel, or mortgage, to sue out a
writ of attachment or levy executions, or a threat by an
officer to arrest an execution debtor and take him to jail
unless he secures the debt, the officer having in his
possession at the time legal process requiring him to take
the debtor into custody, has in each of the foregoing
instances been held not to have been procured through
duress, etc.
HOWEVER, if a civil proceeding actually begun or threatened is
wrongful & oppressive in its nature & brought or threatened with
the intention of coercing the adverse party & does in fact coerce
such party into the payment of money or the formation of a
contract, such payment or contract is made under duress & may be
avoided.
o Ex. A threat to institute receivership proceedings against a
certain company at a time when it would ruin the
companys business & affect the reputation of the
defendant, constitutes such duress as will avoid the
defendants contract to pay a specified sum of money in
order to save the business of the company & his own
reputation.
o Ex. A bond given, or money paid from being falsely
attached to release property seized in attachment
proceedings oppressively instituted or conducted may be
cancelled or recovered.
o Ex. When an invalid and unfounded claim for a lien upon
real property is filed & the necessities of the defendants
business require that this lien be immediately discharged,
payment under such circumstances was made under
duress & that it might be recovered.
A threatened civil action may also amount to duress where the
parties are not on an equal footing.
o Ex. Threats made against a person of inferior intellect, or
an aged weakened in body & mind to the effect that
certain civil proceedings will be instituted, have been held
such duress as will avoid a contract induced thereby.
Threatening litigation while the defendant is ill, or to
continue litigation when the circumstances are oppressive
has been held to amount to duress
CASE: De Leon v. CA
o Facts: The mother claims that she was intimidated into
entering a letter agreement by the estranged wife of her
son because the said wife threatened to bring her son to
court for support, to scandalize their family by filing
baseless suits &, by agreeing to the agreement, the wife
would pardon the said mothers son for possible crimes of
adultery &/or concubinage subject to the transfer of
certain properties.
o Held: This did not constitute intimidation. Here, the Court
listed the requisites of legal intimidation.
Requisites for Intimidation as Vitiated Consent

(1) That the intimidation must be the determining cause of the
contract, or must have caused the consent to be given;
(2) That the threatened act must be unjust or unlawful;
(3) That the threat be real & serious, there being an evident
disproportion between the evil & the resistance which all men can
offer, leading to the choice of the contract as the lesser evil;
(4) That it produces a reasonable & well-grounded fear from the fact
that the person from whom it comes has the necessary means or
ability to inflict the threatened injury.
CLASS SCENARIO
Facts: X pokes a gun at Y to sign a contract. Y is a world champion
in running.
Answer: There is no irresistible force because Y can run away
Art. 1336.
Violence or intimidation shall annul the obligation, although it may have
been employed by a 3rd person who did not take part in the contract.
Violence or Intimidation
May emanate not only from any of the contracting parties but also
from 3rd persons not a party to the contract.
o The contracting party who is not the subject of the violence
or the intimidation may not even know that the other party
has been coerced.
Ex. If A is coerced to enter into a contract with X because G
threatens to kill all the children of A if he does not do so, such
contract may be annulled whether or not X knew of the intimidation.
Art. 1337.
There is undue influence when a person takes improper advantage of his

power over the will of another, depriving the latter of a reasonable freedom
of choice. The ff. circumstances shall be considered the confidential, family,
spiritual and other relations between the parties, or the fact that the person
alleged to have been unduly influenced was suffering from mental
weakness, or was ignorant or in financial distress.
Undue Influence
When a person takes improper advantage of his power over the will
of another, depriving the latter of a reasonable freedom of choice.
The ff. circumstances shall be considered: the confidential, family,
spiritual & other relations between the parties, or the fact that the
person alleged to have been unduly influenced was suffering from
mental weakness, or was ignorant or in financial distress. However,
not all influence is prohibited by law.
o Undue influence - must amount to fraud or coercion.
! The grantor must be overreached & deceived by
some false representation, stratagem or by
coercion, physical or moral.
o Generally, solicitations, entreaties, fair argument &
persuasion, or appeals to the emotions or affections will
NOT amount to undue influence
! UNLESS they overcome the will of the person &
take away his ability to act as a free agent
CASE: Banez v. CA
Lesson: Solicitation, importunity, argument & persuasion are not
undue influence, & a contract is not to be set aside merely because
one party used these means to the consent of the others. Influence
obtained by persuasion or argument or by appeals to the affections
is not prohibited either in law or morals & is not obnoxious even in
courts of equity. Such may be termed due influence.
Facts: The respondent contended that the letter of a senator unduly
influenced PHHC to approve the transfer of rights of a certain
property not to him but to another person.
Held: There was no undue influence enough to annul a contract.
o Regardless of whether or not the letter by the senator was
in fact given to PHHC, the evidence shows that the PHHC
used evaluation, inspections & recommended the transfer
of the rights to the other person & the letter had little to no
bearing.
CASE: Marubeni Corp. v. Lirag
Lesson: When the undue influence is caused by executive officials

performing their official functions, the contract is not only voidable;
its void.
Facts: A consultancy agreement was obtained from a government
agency because of the use of influence of executive officials.
Held: This contract is not just voidableit is null & void.
o Any agreement entered into because of the actual or
supposed influence which the party has, engaging him to
influence executive officials in the discharge of their
duties, which contemplates the use of personal influence
and solicitation rather than an appeal to the judgment of
the official on the merits of the object sought is contrary to
public policy. Consequently, the agreement, assuming that
the parties agreed to the consultancy, is null & void as
against public policy. Therefore, it is unenforceable before
a court of justice.
Art. 1338.
There is fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to.
Fraud
Presumption: Good faith & knowledge; arms length transaction

o Exception: When there is a duty to disclose
Generally, either at law or in equity, is a false representation of a
material fact made by word or conduct with knowledge of its
falsehood or in reckless disregard of its truth
o In order to induce & actually inducing another to act
thereon to his injury.
There must always be damage or injury in cases of fraud.
Ex. if A, an expert jeweler & in order to be able to sell his glass
figurine, told X that such figurine is made of Diamond from South
Africa &, on such false representation, X bought the figurine, the
contract of sale can be annulled by X.
Ex. In a lawyer-client relationship, the lawyer must disclose if the
former client is the enemy of the current client.
CASE: Rivero vs. Court of Appeals

Facts:
o A nephew of an old illiterate sickly woman took advantage
of her predicament by making her believe that the
Kasulatan Sa Ganap na Bilihan was a contract of

mortgage.
o Knowing that the old woman merely wanted to borrow
money secured by the mortgage of the property, again took
advantage of the desperate condition of the illiterate
woman by making her sign the Kasulatan where it
appeared thereon that he was the buyer of the property,
Held: The contract was annullable because the consent of the old
woman was obtained thru fraudulent misrepresentation of the
nephew that the contract she was signing was one of mortgage.
Art. 1339.
Failure to disclose facts, when there is a duty to reveal them, as when the
parties are bound by confidential relations, constitutes fraud.
Disclosing Facts
Each party is not duty-bound to make known to the other any facts
both within their knowledge or within their opportunity to know.
o The mere fact that one of the parties has superior
knowledge of the value of the property subject of the
transaction than the other party is not per se fraud.
There is only fraud when, under the special & peculiar
circumstances of each case:
o When a legal or equitable duty is imposed upon the
dominant party to reveal certain facts material to the
transaction
! Ex. An animal breeder has a duty to disclose to an
ordinary buyer that the particular cow the buyer
wants to buy is suffering from a disease not
detectable to the naked eye.
o When there is a confidential relationship between the
parties.
! Ex. Also, a lawyer, because of his confidential &
trust relationship with his client, is duty bound to
reveal facts important to the transaction;
otherwise, non-disclosure will constitute fraud.
Art. 1340.
The usual exaggerations in trade, when the other party had an opportunity
to know the facts, are not in themselves fraudulent.
Usual Exaggerations
The law recognizes the practice in trade that there are usual
exaggerations employed by the parties to consummate a particular
transaction.
If a party is induced by such usual exaggerations, there may be
fraud amounting to active misrepresentation.
o If it is within the means of the other party to investigate the
truthfulness of such exaggeration & he does not do so,
there is no fraud despite the exaggerations.
Art. 1341.
A mere expression of an opinion does not signify fraud, unless made by an
expert & the other party has relied on the formers special knowledge.
Opinions
Generally not regarded as a representation of the facts
o If the opinion is wrong, it is not seen as deceitful or
insidiously inducing a party to enter into a contract.
There are times when, without really having any special knowledge
as to the object of the contract, a person expresses an opinion
about the same. At the same time, the other party to whom the
opinion was relayed may equally have his own thoughts &
observation that would affect his judgment
o In such cases, the expression of an opinion will not vitiate
consent.
LOQUITOR thing speaks for itself
o NOT fraudulent if one says his car can fly, because people
know cars cant fly
Representation v. Opinion
An illustration of the difference between opinion & representation is
found in the difference between the vendor of property saying that
it is worth so much, & his saying that he gave so much for it.
o Opinion It is worth so much
! The buyer may adopt if he will
o Representation He gave so much for it
! An assertion of fact which, if false to the
knowledge of the seller, is fraudulent
Opinion
No Fraud
This is good oil land
This building is beautiful
This patent is a valuable
Representation
Fraud
The oil business is profitable
This building is fireproof
This is the only patent that
improvement.
works in the market.
Expert
If the opinion is given by one who is thoroughly knowledgeable or is
an expert in the field such that he knows for a fact that his opinion
will turn out to be false & still induces the other party to enter into
the contract on the basis of such false opinion, fraud can be
invoked to annul the contract.
o In such a case, the opinion will be considered as a fact.
Art. 1342. Misrepresentation by a 3rd Person.
Misrepresentation by a 3rd person does not vitiate consent, unless such
misrepresentation has created substantial mistake & the same is mutual.
Misrepresentation by a 3rd Person
Vitiates consent only if it created substantial mistake & the same is
mutual
CASE: Rural Bank of Caloocan v. CA
o Lesson: A contract may be annulled on the ground of
vitiated consent if deceit by a 3rd 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.
o Facts: A person induced an elderly woman to co-sign a
promissory note as debtor & to mortgage her property,
without said woman knowing the nature of the contract.
The same person successfully misrepresented to the bank
the qualification of the elderly woman to induce the bank
to grant the loan.
o Held: The loan agreement signed by the elderly woman can
be annulled on the ground of mistake in the giving of
consent by the parties.
! The promissory note between the bank & the
elderly woman is invalidated on the ground of
substantial mistake between the parties.
Art. 1343. Misrepresentation in Good Faith.
Misrepresentation made in good faith is not fraudulent but may constitute
error.
Misrepresentation in Good Faith
Misrepresentation is, in the main, inclusive of the term fraud.

Practically every fraud is a misrepresentation, but every
misrepresentation is not fraudulent.
Thus a misrepresentation as to the subject-matter of or parties to a
contract may be innocently made, &, if so, it does not amount to
fraud, but is a misrepresentation.
Misrepresentations may be made without the knowledge of its
falsity & therefore completely done in good faith. In such a case it
may constitute merely an error (mistake).
Art. 1344.
In order that fraud may make a contract voidable, it should be serious &
should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
Seriousness of Fraud
There must be an intention to injure & that damage or injury in fact
resulted.
The parties must not be in pari delicto.
o They must not have been mutually guilty of fraud.
It must not be dolo incidente which is accidental & collateral fraud
which does not necessarily bear on the decision of the party
defrauded to enter into the contract.
It must be dolo causante which refers to the very cause why the
other party entered into the contract.
Art. 1345.
Simulations of a contract may be absolute or relative. The former takes
place when the parties do not intend to be bound at all; the latter, when the
parties conceal their true agreement.
Simulations
The characteristic of simulation is the fact that the apparent
contract is not really desired nor intended to produce legal effects
nor in any way alter the juridical situation of the parties.
o Thus, a person, in order to place his property beyond the
reach of his creditors, simulated a transfer of it to another,
he does not really intend to divest himself of his title &
control of the property, hence the deed of transfer is but a
sham.
Kinds of Simulation
1) Absolute simulation when the parties do not intend to be bound

at all by the same
o Renders the contract null & void
o The apparent contract is not really desired or intended to
either produce legal effects or in any way alter the juridical
situation of the parties
2) Relative simulation binds parties to their real agreement
o Valid, when it does not prejudice a 3rd person & is not
intended for any purpose contrary to law, morals, good
customs, public order or public policy binds
CASE: Umali v. CA
Lesson: Absolute or relative simulation can be proved by the acts of
the parties that reveal their true intentions.
Facts:
o There was a Sales Agreement & attached Chattel Mortgage
executed between X & Y.
o It was contended that the failure of Y to pay the
consideration proved that the contract was absolutely
simulated & therefore null & void.
Held: The contract is not absolutely simulated.
o The subsequent act of Y in receiving & making use of the
tractor, subject matter of the Sales Agreement and Chattel
Mortgage, and the simultaneous issuance of a surety bond
in favor of X, concomitant with the execution of the
Agreement of Counter Guaranty with the Chattel/Real
Estate Mortgage, lead to the conclusion that petitioners
had every intention to be bound by these contracts. The
occurrence of these series of transactions between
petitioners & private respondents is a strong indication
that the parties actually intended, or at least expected, to
exact fulfillment of their respective obligations from one
another.
Art. 1346.
An absolutely simulated or fictitious contract is void. A relative simulation,
when it does not prejudice a 3rd person & is not intended for any purpose
contrary to law, morals, good customs, public order or public policy binds
the parties to their real agreement.
CASE: Javier v. CA
Lesson: A relatively simulated contract binds the parties to their
real agreement.
Facts:
o
A party assigned his timber license to another for a

consideration of P120,000, but the Deed of Assignment
dated Feb. 15, 1966 stated that, for such amount of
money, the assignee shall transfer his shares of stock in a
corporation to be known as Timberwealth Corporation.
o The assignment was eventually implemented but the
assignee did not fully pay the consideration.
o To claim the balance, the assignor sued the assignee who
contended that the contract was null & void because the
corporation was never set up & there was no transfer to
him of the shares of stock.
Held: The assignee should be held liable considering that the
assignment was a relatively simulated contract which, though
containing a false consideration, was not null & void per se
CASE: JR Blanco v. Quasha

Facts:
o The owner of the property entered into a contract of sale of
her property with a company payable in equal annual
installments of P25,000 per year.
o Simultaneously, the company & the said owner entered
into a contract of lease of the same property whereby the
owner would lease the property from the company for 25
years for a monthly rental of P2,083.34 or P25,000.08 per
year.
o The totality of the agreement was called a Sale-Lease-Back
Agreement.
o It is contended that the sale-lease-back agreement was
simulated & therefore void because no actual
consideration passed from the buyer to the seller.
Held: SC rejected this claim.
o Although no actual exchange of money was made, yet the
payment was effected between vendee & vendor by
mutual agreement whereby the monthly rental which was
due the vendor was paid from the annual installment of
P25,000 due from the vendee pursuant to the lease
contract executed between them. The court found nothing
wrong with this arrangement for the same is not contrary to
law, morals, good customs, or public policy, but rather for
the convenience of both parties.
CASE: Pua v. CA
Facts: It was proven that the person who allegedly entered into the
contract was not even conceived at the time the contract was
executed.
Held: The contract was definitely absolutely simulated.
CASE: Velasquez v. CA
Facts:
o A debtor was lured by the creditor to make it appear that
the debtor sold to the creditor the collateralized property of
the debtor.
o The creditor told the debtor that this scheme was
necessary so that the creditor can borrow money from a
certain bank & make use of the property as collateral.
o After the loan was obtained, the creditor was supposed to
execute a reconveyance of the property to the debtor who
would then assume the loan from the bank and use the
proceeds of the loan to pay off his loan to the creditor.
o In the implementation of the scheme, 3 documents were
executed on the same day: 1) a deed of cancellation of the
mortgage made by the debtor to the creditor; 2) a deed of
sale of the property from the debtor to the creditor; and 3)
a document purporting to re-sell the property to the debtor.
o It was contended by the creditors that the sale of the
property was authentic after the debtor filed a case to
annul all the said documents.
Held: The contract of sale was clearly simulated to facilitate the
transaction with the bank as there was absolutely no consideration
at all & the parties clearly did not intend to be bound by the deed of
sale & its accompanying documents.
CASE: Francisco v. Francisco-Alfonso
Facts: The 2 illegitimate daughters claimed that they bought the 2
properties in 1983 from their deceased father via a Kasulatan sa
Ganap na Bilihan for P25,000 but evidence showed that, even
with what they claimed as their respective jobs at that time, they
could not possibly have any income to be able to have such amount
of money at the time of the sale.
Held: SC declared the contract as void for being simulated because
there was no consideration for the same. It was impossible for one
of the illegitimate daughters to have money on hand in the amount
of P15,000 just selling goto or lugaw at the time of the sale.
Likewise, the Supreme Court said that it was incredible for the
other illegitimate daughter, who was engaged in the buying &
selling of RTW, to have money on hand in the amount of P10,000

at the time of the sale. Aside from the fact that a family friend
testified that the illegitimate daughters had no source of income at
the time of the sale, they likewise did not even present any single
witness to prove that the seller received the purchase price.
SECTION 2. OBJECT OF CONTRACTS
Art. 1347.
All things which are not outside the commerce of men, including future
things, may be the object of a contract. All rights which are not
intransmissible may also be the object of contracts.
No contract may be entered into upon future inheritance except in cases
expressly authorized by law.
All services which are not contrary to law, morals, good customs, public
order or public policy may likewise be the object of a contract.
Object of Contracts
To qualify as an object for purposes of a contract to exist, the object
must at LEAST be generic determinate as to its kind
o Also, it can be an expectancy
Any property or service can be the object of a contract provided that
it is within the commerce of man.
o Not within commerce of men lands of the public domain,
like the Luneta Park, a river, or even a fishpond that forms
at tributary leading to the Agno River (for the latter, its
conversion to a fish pond doesnt change the fact that its
public property)
o Within the commerce of men lands acquired by private
appropriation & acquisitive prescription
A service to assassinate a particular dignitary cannot be the object
of a contract because it is contrary to law & public order.
In a contract of sale, things having a potential existence may be the
object of such contract; & the efficacy of the sale of a mere hope or
expectancy is deemed subject to the condition that the thing will
come to existence.
o Hence, all future puppies of a particular pregnant dog can
be the object of a contract although the puppies are not
yet born.
o HOWEVER, the sale of a vain hope or expectancy is void.
Rights are also the object of contracts, provided they are
transmissible.
Ex. One can sell leasehold rights over a property provided

that there is no contractual & legal stipulation prohibiting
its transmissibility.
Future things that can be reasonably ascertained can be the object
of a contract.
o But future inheritance cannot be the object of a contract
because its extent, amount & quantity cannot be
determined.
o Future inheritance any property or right not in existence
or capable of determination at the time of the contract,
that a person may in the future acquire by succession
! Indeed one cannot determine with certainty how
much inheritance one would get from his father,
mother, or any person from whom he is called
upon to succeed or to inherit.
! It may happen that the father, at the time of his
death, may have some debts to pay. Under the
rules of succession, these obligations have to be
paid 1st to the creditors before the exact amount
of the inheritance is determined & distributed.
o
CASE: Blas v. Santos

Lesson: An agreement by a spouse to give his share in the conjugal
property is not considered future inheritance & can be the object of
a contract.
Facts: The wife agreed to give whatever her share in the conjugal
partnership property to her heirs once the husband dies
Held: The agreement is not upon a future inheritance, & is valid. It
is not an obligation or promise made by the maker to transmit of
her share in the conjugal properties acquired with her husband,
which properties are declared to be conjugal properties in the will
of the husband.
o The promise does not refer to any properties that the
maker would inherit upon the death of the husband. The
document refers to existing properties which she will
receive by operation of law on the death of her husband,
because it is her share in the conjugal assets.
Art. 1348.
Impossible things or services cannot be the object of contracts.
Impossible Things
One cannot be bound to do the impossible. Hence, a contract

requiring a person to become a monkey on a particular date is
impossible.
Art. 1349. Quantity Need Not Be Determinate.

The object of every contract must be determinate as to its kind. The fact
that the quantity is not determinate shall not be an obstacle to the
existence of the contract, provided it is possible to determine the same,
without the need of a new contract between the parties.
Determinable as to its Kind (Generic)
The object must be one that can be ascertained with reasonable
certainty as to its kind.
o A contract engaging a certain person to perform a deed,
without specifying what deed it is, does not make the
service determinable & is thus void.
! But a contract engaging a person to sing in his
nightclub identifies the kind of deed to be
performed & is valid.
o A contract requiring an obligor to deliver a fruit is void.
! But, if the contract is to deliver a kind of fruit such
as a mango or guava, the contract is valid.
The fact that the quantity is not determinate shall not be an
obstacle to the existence of the contract, provided it is possible to
determine the same, without the need of a new contract between
the parties.
o A contract which engages a person to supply all the ice
which a restaurant needs is valid because the quantity of
ice is easily ascertainable without the need for a new
contract.
CLASS SCENARIO
Facts: A & B are brothers. A says, Ill pay you with my inheritance.
Answer: NOT ALLOWED.
o Inheritance can be the object of the contract, but not
future inheritance. So if your parent dies today, you can
waive your right to your share without need of writing.
SECTION 3. CAUSE OF CONTRACTS.
Art. 1350. Cause Defined.
In onerous contracts the cause is understood to be, for each contracting
party, the prestation or promise of a thing or service by the other; in
remuneratory ones, the service or benefit which is remunerated; & in

contracts of pure beneficence, the mere liberality of the benefactor.
Cause
Essential or more proximate purpose which the contracting parties
have in view at the time of entering into the contract
May or may not be tangible
It can take different forms, such as a prestation or promise of a
thing or service by another.
It can be the giving of a sum of money, an object or even an
expectation of profits from a subdivision project.
CASE: Dihiansan v. CA
Lesson:
Facts:
o A corporation decided to sell its property along an avenue
& gave the persons living near the said property a
preferential right to buy the same. One of the persons
given such right, X, was approached by Y who requested
that he be allowed to buy the property with a commitment
to re-sell the same to the X who was originally given the
preferential right. X agreed and an agreement was signed
embodying this commitment.
o This scheme was done because, clearly, the corporation
will not sell the property to any other person except those
given a preferential right. Instead of re-selling to X, the Y
sold it to another. It was contended that the contract
between X & Y who requested to buy the property was
without consideration & therefore null & void.
Held: There was no lack of considerationthe consideration is the
preferential right of X to buy the property from the owner. The
contract stipulated that Y would re-sell the property back to X. This
contract is the law between the parties.
Kinds of Contracts
1) Onerous Contracts the cause is understood to be, for each
contracting party, the prestation or promise of a thing or service by
the other
2) Reciprocal Contracts - the obligation or promise of each party is the
consideration for that of the other
o CASE: Republic vs. Cloribel - where a compromise
agreement designed to terminate the case between
litigating parties to a suit was entered into, the cause of
the compromise was the mutual waiver & abandonment of

the parties of their claims against each other
3) Remuneratory Contracts - the cause is the service or benefit which
is remunerated
o When a doctor agreed to diagnose a patient, the cause for
engaging the doctor is for him to look at the patient &
diagnose him. The fee to be received by the doctor for his
diagnosis is the cause of the contract as far as the doctor
is concerned.
4) Contracts of Pure Beneficence - the mere liberality of the
benefactor is the cause of the contract; it does not involve any
material thing but rather it involves only the generosity of the
benefactor
o A scholarship contract given by a school where an indigent
will not pay anything for his education in the said school
has for its cause the liberality & generosity of the
benefactor-school
Art. 1351. Motive Defined.
The particular motives of the parties in entering into a contract are different
from the cause thereof.
Motive
Motive is different from cause.
o Cause is the essential reason for the contract
o Motive is the particular reason for a contracting party which
does not affect the other party & which does not preclude
the existence of a different consideration
Ex. There is a contract of sale of a valuable relic.
o Cause payment of the purchase price on the part of the
seller & the delivery of the thing sold on the part of the buyer
o Motive - the seller was motivated by some expectation of
profit while the buyer was motivated to purchase the relic by
the beauty & rarity of the relic.
! The motivation of the parties is independent from
the cause of the contract & therefore does NOT
form an essential part of it.
CASE: PNCC v. CA
Lesson: As a general principle, the motive of a party in entering into
a contract does not affect the validity nor existence of the contract:
an exception is when the realization of such motive has been made
a condition upon which the contract is made to depend
Facts: The lessee sought to release itself from paying rentals &
from the whole contract itself; the lessee contended that the
purpose for which it entered the contract did not materialize
Held: With regard to the non-materialization of the petitioners
particular purpose in entering into the contract of lease, i.e., to use
the leased premises as a site of a rock crushing plant, the same will
not invalidate the contract. The cause in a contract of lease is the
use or enjoyment of a thing.
Cause = Motive
There are certain situations where the cause is equated to the
motivewhen it is clear that the motive predetermines the cause
CASE: E. Razon v. PPA
Lesson: Motives may be regarded as cause when they
predetermine the purpose of the contract
o In this case, both contracts are void
Facts:
o The Management Contract under consideration was
executed by & between E. Razon, Inc. represented by its
President, Enrique Razon, & respondent PPA, represented
by E.S. Baclig, Jr.
o At the petitioners own admission, E. Razon, Inc. was then
60%-controlled by Romualdez, with Razon nearly serving
just as a puppet; Romualdez, as brother-in-law of thenPresident Marcos, was, by the Anti-Graft & Corruption Law,
prohibited from intervening, directly or indirectly, in any
transaction with the government.
o The Management Contract is thus void for being against
the law.
o E. Razon tried to escape liability by stating he was forced
by Romualdez to sell the shares to the latter, with no
monetary consideration.
Held: While the general rule is that the causa of the contract must
not be confused with the motives of the parties, this case squarely
fits into the exception that the motives may be regarded as causa
when it predetermines the purpose of the contract.
o For Romualdez, the motive was to be able to contract with
the government, which he was then prohibited by law from
doing, & on Razons part, to be able to renew his nearlyexpired management contract. For it is scarcely disputable
that Enrique Razon would not have transferred said shares
of stock to Romualdez without an assurance from the
o
o
latter that he would be unduly favored with a renewal of

the Management Contract. Thus, it came to pass that by
transferring 60% of the shares in his company to
Romualdez, petitioner Enrique Razon was able to secure
an 8-year contract with respondent PPA & for 6 years
before its cancellation benefit from the proceeds thereof.
He may be deemed to be a participant in the unlawful
purpose if, with knowledge thereof, he does anything which
facilitates the carrying out of such purpose
Elementary in the law of contracts is the principle that no
judicial 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 PPA to unilaterally
cancel & treat as avoided the Management Contract & no
arbitrariness may be attached to its exercise of this right.
CASE: Uy v. CA
Lesson: Where the motive stems from an implied condition of the
contract, & both parties knew of such motive & implication, the
motive can also become synonymous with the cause.
Facts: The National Housing Authority purchased certain lots &
thereafter cancelled the Deeds of Sale relative thereto considering
that the lots turned out to be unsuitable for its housing project.
Held: The dismissal was sustained against a claim for damages.
o The cancellation was valid as it was based on the negation
of the cause arising from the realization that the lands,
which were the object of the sale, were not suitable for
housing. For NHA, the cause was the acquisition of the
land. For the seller, the cause was to obtain the price. The
motive of the NHA, which was known to the seller, was to
use said lands for housing.
o It is clear that NHA would not have entered into the
contract were the lands not suitable for housing. In other
words, the quality of the land was an implied condition for
the NHA to enter into the contract. On the part of the NHA,
therefore, the motive was the cause for its being a party to
the sale.
Art. 1352.
Contracts without cause, or with unlawful cause, produce no effect
whatsoever. The cause is unlawful if it is contrary to law, morals, good
customs, public order or public policy.
Lack of Cause
If there is no cause, no contract is perfected, as there can be no
meeting of the minds.
This is also true if the cause is unlawful.
o A contract to engage a party to steal is unlawful as it is
against the law.
o A contract between a husband & wife to have their
respective paramours is contrary to morals.
o A contract to foment riots is contrary to public order.
o A contract waiving the right of an employee to receive what
is due him under the law is contrary to public policy.
Art. 1353.
The statement of a false cause in contracts shall render them void, if it
should not be proved that they were founded upon another cause which is
true and lawful.
False Cause
Generally, a false cause in a contract makes the contract void.
o A contract of sale, which states that the price of the object
for sale is P500 when in fact no such price has been paid
at all, is void.
HOWEVER, when a contract, though stating a false consideration,
has in fact a real consideration, the contract is NOT void.
o If a contract is relatively simulated in terms of cause, it is
VALID.
o When a contract stating the consideration of a ball pen is
P1,000 but it is only sold for P500 which the seller
accepted, the contract is valid.
o At the least, the contract is a relatively simulated one.
Art. 1354.
Although the cause is not stated in the contracts, it is presumed that it
exists & is lawful, unless the debtor proves the contrary.
CASE: Liam v. Olympic Sawmill Co.
Lesson: The debtor must produce evidence that a cause is not
stated in the contract; the law presumes that there is a valid cause.
Facts:
o A loan of P10,000 was entered into &, subsequently,
another loan agreement was executed increasing the
original amount of the previous loan by P6,000 to answer
for attorneys fees, legal interest & other cost incident
thereto to be paid unto the creditor upon the termination

of the agreement.
o The debtor failed to pay & a case was filed.
o By way of summary judgment, decision was rendered
ordering the defendant-debtor to pay the principal amount
of P10,000 & the additional amount of P6,000. The latter
amount was contested as being usurious.
Held: The Court ruled the additional P6,000 was valid as liquidated
damages suffered by plaintiff.
o The Usury Law was suspended
o Under Art. 1354, in P6,000 agreement of the parties, it is
presumed that it exists & is lawful, unless the debtor
proves the contrary.
o No evidentiary hearing having been held, it has to be
concluded that defendants had not proven that the P6,000
obligation was illegal.
Art. 1355.
Except in cases specified by law, lesion or inadequacy of cause shall not
invalidate a contract, unless there has been fraud, mistake or undue
influence.
CASE: Auyong Hian v. CTA
Lesson: Generally, an inadequate cause will not invalidate a
contract, absent a showing that said cause is against the law or
obtained through fraud, mistake or undue influence.
Facts: The contract involving tobacco was assailed as invalid due to
inadequacy of price. X claimed that they should be P7M, but the
contract between X & Y s contract stipulated it was only P1.5M.
Yet, the invoice value of tax with the BIR is only P227K for tax
purposes.
Held: The appraisal was made with a competent appraiser; also, X,
there is now law that would apply in Xs case to address the
inadequacy of the cause.
CASE: Penaco v. Rueva
Lesson: A valuable consideration, however small or nominal, if
given or stipulated in good faith is, in the absence of fraud,
sufficient. A stipulation in consideration of $1 is just as
effectual a consideration as a larger sum stipulated for or paid.
Facts: The inadequacy of cause was invoked to invalidate the
contract.
Held:
o
X contends that the consideration is for the house only

since the lot on which it is constructed is public land
which they cannot sell, & in view of the inadequacy of
the price, the building alone having an assessed value
of P1,500 & the land is too cheap for P5,000
Indeed, the lot on which the building sold a retro is
constructed is public land & X has no right to sell it.
What is sought to be transferred, however, is not the
ownership of the land, but the rights, interests &
participation of X as public land claimants thereof by
virtue of the decision of the Bureau of Lands, which
rights could be waived, transferred or alienated.
! By its contract, X had undertaken to effect
legal transfer of all his rights over the lot to Y
a retro & his assigns upon the consolidation
of the title over the building in the vendee, &
whether or not the herein Y is qualified to
acquire that land of the public domain
claimed by X depends upon the Director of
Lands. For this reason the land should be
raised in the administrative proceedings.
The inadequacy of the price is not sufficient proof that
the consideration of P1,000 was for the house alone.
The vendee a retro could not have possibly bought the
house alone without securing from the vendors a retro
a specific & fixed arrangement regarding the lot on
which the house is built, otherwise, he could be
ejected therefrom at the will of the vendors a retro.
CLASS SCENARIO:
Facts: A issued a check worth P100,000 to B. According to B, it was
a check because A bought something from him. According to A, it
was a donation to B.
Answer: A (the debtor) must prove his side.
CLASS SCENARIO:
Facts: I will buy this lot for 1 centavo. Is it valid?
Answer: YES. IT is valid, not void. It could be rescinded, but it is still
valid.
CHAPTER 3. FORMS OF CONTRACTS.
Art. 1356.
Contracts shall be obligatory, in whatever form they may have been entered
into, provided all the essential requisites for their validity are present.
However, when the law requires that a contract be in some form in order
that it may be valid or enforceable, or that a contract be proved in a certain
way, that requirement is absolute & indispensable. In such cases, the right
of the parties stated in the following article cannot be exercised.
Forms of Contracts
Generally, forms arent that important for contracts

o Certain contracts require certain forms to be enforceable
! In such cases, the form becomes absolute &
indispensible
In the matter of formalities, the PH system still follows:

o Spanish Civil Code of 1889 &
o Ordamiento de Alcala - upholding the spirit & intent of the
parties over formalities
Contracts Which Must Have Some Form:
1) Contracts which the law requires to be in some particular form
(writing) in order to make them valid & enforceable (solemn
contracts).
o Non-observance renders the contract void & of no effect
o Ex. Donation of immovable property (Art. 749) must be in a
public instrument so the donation is valid, i.e., existing or
binding.
o Donation of movables worth more than P5,000.00 which
must be in writing, otherwise the donation shall be void
(Art. 748)
o Contracts to pay interest on loans (mutuum) that must be
expressly stipulated in writing (Art. 1956)
o Agreements in Art. 1744, 1773, 1847 & 2134, Civil Code.
2) 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 Art. 1403(2) of the Civil Code.
o Non-compliance therewith will not permit, upon the
objection of a party, the contract, although otherwise valid,
to be proved or enforced by action
o Their existence generally 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.
CASE: Dauden-Hernaez v. De Los Angeles

Lesson: A contract for an actress services for a movie are valid in
any form, as they are not required to be in a certain way
Facts: A movie actress filed a suit to recover her compensation for
her services as a leading lady in 2 movies. The producers resisted
such claim on the ground that the contract was void as there was
no written agreement to the same.
Held: SC ruled in favor of the actress. The contract between them is
not one of the exceptions to the general rule.
CASE: Cenido v. Apacionado
Lesson: Formalities intended for greater efficacy or convenience or
to bind third persons, if not done, would not adversely affect the
validity or enforceability of the contract between the contracting
parties themselves.
Facts: There is a written contract of sale of real property, not in a
public instrument.
Held: Contract is valid; the requisites of a contract were proven. The
written contract of sale for real property is an example of a
formality, which must be in writing to bind 3rd persons.
Nevertheless, it is enforceable & valid.
CASE: Deloso v. Sandiganbayan
Lesson: Leasing of property generally need not be reduced into
writing; it is valid when an oral contract is later written down.
Facts: The contract was assailed as anomalous on the ground that
it was originally made orally & then later reduced into writing. The
written information & the Sandiganbayan ruled that certain tractors
were given to lessees in a municipality without any compensation
for their use. However, all the witnesses testified that the lessees
were aware of the obligations & agreed to be bound to all the terms
and conditions which the Municipality may impose.
Held: The contract is valid & the testimony of the witnesses was
considered the oral contract.
Art. 1357.
If the law requires a document or other special form, as in the acts &
contracts enumerated in the ff. article, the contracting parties may compel
each other to observe that form, once the contract has been perfected. This
right may be exercised simultaneously with the action upon the contract.
Compelling to Make a Written Contract
A party, who desires to have his contract reduced in the particular

form required by law, can file an action to compel the other party to
comply with such form.
If the requirement of law is directory only & has no bearing validity
or enforceability, the parties can enforce the contract &, at the
same time, demand that it be reduced in the form required by law.
CASE: Zaide v. CA
Lesson: An unregistered deed of sale is still valid.
Facts: A deed of sale was so far defective as to render it
unregistrable in the Registry of Property. It did not set forth the
name of the vendees husband & was for this reason refused
registration by the Register of Deeds.
Held: The contract is valid. The defect was unsubstantial & did not
invalidate the deed. The legal dispositions are clear. Though
defective in form, the sale was valid; & the parties could compel
each other to do what was needful to make the document of sale
registrable.
o If the agreement concerns the sale of land or of an
interest therein, the law requires not only that the same,
or some note or memorandum thereof, be in writing, &
subscribed by the party charged in order that it may be
enforceable by action, but also that the writing be in the
form of a public document.
CASE: Cenido v. Apacianado
Lesson: Private conveyance of real property is valid, but must be
registered to bind 3rd parties.
Facts: The petitioner is assailing the validity of a private conveyance
of real property denominated as Pagpapatunay as between the
parties.
Held: It may be valid, but the Court also said that the question as to
whether the it is sufficient to transfer & convey title to the land for
purposes of original registration or the issuance of a real estate tax
declaration in the new owners name is another matter altogether.
For greater efficacy of the contract, convenience of the parties & to
bind 3rd persons, the new owner has the right to compel vendor or
his heirs to execute the necessary document to properly convey the
property.
Art. 1358.
The ff. must appear in a public document:
(1) Acts & contracts which have for their object the creation,
transmission, modification or extinguishment of real rights over
immovable property; sales of real property or of an interest therein
are governed by Art. 1403, No. 2 & 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 3rd 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 P500 must appear
in writing, even a private one. But sales of goods, chattels or things in action
are governed by Art. 1403, No. 2 & 1405.
Effect of Non-Compliance
The failure to put in a public or private document or writing the
transactions or matters in Art. 1358 will NOT make the contract
unenforceable or void, but it needs to be in writing to bind 3rd
persons.
o Valid between parties even if not in public document
o Writing in a public instrument always gives GREATER
EFFICACY to a contract
Ex. A contract of sale is a consensual contract, which means that
the sale is perfected by mere consent. No particular form is
required for its validity.
o HOWEVER, under Art. 1498, when the sale is made
through a public instrument, the execution thereof is
equivalent to the delivery of the thing.
! Delivery may either be actual (real) or
constructive.
Thus, delivery of a parcel of land may be
done by placing the vendee in control &
possession of the land (real) or by
embodying the sale in a public instrument
(constructive).
Art. 1358(2) CPG
The Family Code has amended this provision in the Civil Code
According to Family Code, you CANNOT waive your share of the CPG
during your marriage
Real & Personal Rights in Relation to Public & Private Documents
Public Instrument execution = delivery

Private instrument demand = delivery
CLASS SCENARIO
Facts: A & B are brothers. When their dad died, A told B orally that
he waives his inheritance to B. Is this valid?
Answer: Yes. It is valid between the parties.
o Can it be enforced as against 3rd parties?
! No, since its not in a public instrument.
o If A puts it in a piece of paper, it is valid, but still will have
no efficacy because its a private, not public instrument.
CHAPTER 4. REFORMATION OF INSTRUMENTS.
Art. 1359.
When, there having been a meeting of the minds of the parties to a
contract, their true intention is not expressed in the instrument purporting to
embody the agreement, by reason of mistake, fraud, inequitable conduct or
accident, one of the parties may ask for the reformation of the instrument to
the end that such true intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting
of the minds of the parties, the proper remedy is not reformation of the
instrument but annulment of the contract.
Reformation
You can only reform INSTRUMENTS, not contracts
Applies only to written contracts contained in an instrument or a
series of instruments
o When the terms of an agreement have been reduced to
writing, it is considered to be containing all the terms
agreed upon & there can be, between the parties & their
successors-in-interest, no evidence of such terms other
than the contents of the written agreement
! EXCEPT when the instrument fails to express the
true intent & agreement of the parties thereto, in
which case, one of the parties may bring an action
for the reformation of the instrument to the end
that such true intention may be expressed
Connotes a valid contract & meeting of the minds
o The embodied contract just does not conform to the
contract
What is reformed is the instrument, not the contract itself, in order
for the instrument to express their real agreement
Rationale: It would be inequitable to allow the enforcement

of a written instrument which does not reflect the real
meeting of the minds. The rigor of legalistic rule that a
written instrument should be the final & inflexible criterion
of the rights & obligations of the parties is thus tempered
to forestall the effect of mistake, fraud, inequitable
conduct, or accident
Prescriptive period - within 10 years from the time the cause of
action accrues, since the suit is based on a written document.
o Cause of action accrues from the knowledge of the
ground for reformation or from the date of the execution of
the instrument embodying the contract if the cause or
causes for reformation were already known at the time of
the execution of the said instrument embodying the
contract
o CASE: Rosello-Bentir v. Leanda
! Facts: It was contended that, at the time of the
execution of the contract on May 5, 1968, there
was a verbal agreement between lessor & lessee
that the lessee will be given the right of first
refusal should the lessor decide to sell his
property. The lessee only filed the case for
reformation on May 15, 1992 to reflect such
intention of the parties.
! Held: Action had prescribed already; the period
began running on May 5, 1968.
May be barred by laches
o
2 Requisites for Reformation:

1) That the instrument embodying the contract does not reveal the
true intention of the parties
2) The existence of an actual contract entered into by the parties
*NOTE: Failure to prove these two matters may lead to the creation of
an entirely new contract not within the contemplation of the parties
Reformation due to Mistake, Fraud, Inequitable Conduct or Accident
Reformation may be cause by:
o Mistake
o Fraud
o Inequitable Conduct
o Accident
Burden of proof (onus probandi) is upon the party who insists that
the contract needs to be reformed.
BUT if these factors prevent the meeting of the minds of the

parties, the remedy is annulment & not reformation
An action for reformation is a personal right (in personam) even
when real estate is involved
o JDNOM in rem proceeding
o Legal Separation in personam proceeding
Action for Declaratory Relief

The special civil action for reformation
The purpose is to secure an authoritative statement of the rights &
obligations of the parties for their guidance in the enforcement
thereof, or compliance therewith.
o 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
o Ex. An action for reformation instituted after the lessor
allegedly breached the contract with the lessee giving the
lessee a right of first refusal to buy the leased premises, &
which right of first refusal was the subject of the action for
reformation, cannot prosper
Art. 1360.
The principles of the general law on the reformation of instruments are
hereby adopted insofar as they are not in conflict with the provisions of this
Code.
Art. 1361. Mistake.
When a mutual mistake of the parties causes the failure of the instrument
to disclose their real agreement, said instruments may be reformed.
Mistake as Cause for Reformation
Mistake must be mutual & must generally involve factual matters.
o There must be a prior meeting of the minds between the
parties.
o There must have been a valid existing agreement to which
the erroneous document can be made to match or
harmonize.
o The proof of mutual mistake MUST be of the clearest &
most satisfactory character.
! The amount of evidence necessary to impugn a
fact in a document is always more than a mere
preponderance of evidence
CASE: Gonzalez Mondragon v. Santos

Lesson: Contracts solemnly & deliberately entered into may not be
overturned by inconclusive proof or by reason of mistake of one of
the parties to which the other in no way has contributed.
Facts: One of the parties to a contract contended that there was a
mistake relative to the documentation of the contract because the
real intent of the parties was for the sale by the hectare & not for a
sum in gross as stated in the document of sale, but there was no
convincing evidence that the mistake was mutual.
Held: Reformation denied. An alleged defect in a contract perfectly
valid & binding on its face, must be conclusively proved. The validity
& fulfillment of contracts can not be left to the will of one of the
parties
CASE: Atilano v. Atilano
Lesson: Where a mutual mistake involves a real property, it is
possible as in this case that the parties are in possession of the
correct properties, but mistakenly placed the wrong lots in the
contract. BUT if they are both already in possession, there is no
need for reformation.
Facts: There was a mutual mistake in the designation of the
particular lands owned by 2 brothers; Brother 1 was supposed to
get Lot A & Brother 2 was getting Lot E, according to the contract,
but Brother 1 lived in Lot E & Brother 2 in Lot A. They have both
lived in said lots for more than 30 years.
Held: The remedy for correcting property designation is reformation.
However, if the correct properties were already in the possession of
the persons to whom they should rightfully belong, there was no
more need for reformation because the parties actually already
implemented the true intention of the contract.
o When one sells or buys real property i.e. a piece of land,
one sells or buys the property as he sees it, in its actual
setting & by its physical metes and bounds, & not by the
mere lot number assigned to it in the certificate of title.
o It must be assumed that the brothers had seen the
properties & are each living where they intended to live.
o The parties have retained possession of their respective
properties conformably to the real intention of the parties
to that sale, & all they should do is to execute mutual
deeds of conveyance.
Art.1362.
If one party was mistaken & the other acted fraudulently or inequitably in
such a way that the instrument does not show their true intention, the
former may ask for the reformation of the instrument.
Unilateral Mistakes & Reformation
If the mistake is unilateral, it must be shown that the other party
has acted fraudulently or inequitably resulting in the drafting of a
document which does not correspond to the actual contract agreed
upon by the parties.
Also, a party may have known the facts of the case but is ignorant
of or has been mistaken as to the legal consequences of the same.
Generally, mistake or ignorance of the law is not a ground for
reformation because parties must, as a rule, submit to the legal
ramifications of their written contracts clearly pursuant to their true
intent and meaning.
o But, where, on account of misplaced confidence, &
because of some artifice or deception fraudulently
practiced upon him by the other party, a material part of
the contract was omitted from the writing, or he was
otherwise misled, equity will decree a reformation
Art. 1363.
When one party was mistaken & the other knew or believed that the
instrument did not state their real agreement, but concealed that fact from
the former, the instrument may be reformed.
Knowledge of One Party
Knowledge by one party of the others mistake regarding the
expression of the agreement is equivalent to mutual mistake.
Reformation of the contract can be sought by the injured party.
Art. 1364.
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, the courts
may order that the instrument be reformed.
Person Drafting the Instrument
There can be reformation if the person typing the instrument is not
able to come up with a correct written document due to:
o Failure to follow instructions
o Ignorance, lack of skill, negligence or bad faith
The mistake will be deemed to be mutual
Hence, if the typist wrongly types the amount of consideration in a

written instrument embodying the contract of sale, the instrument
may be reformed to conform to the real consideration agreed upon.
CASE: Huibonhoa v. CA
Lesson: Where one party is aware of the oversight in the drafting of
the contract, there can be no reformation.
Facts: There was a failure to prove what costly mistake allegedly
suppressed the intention of the parties prompting the petitioner to
admit that there was an oversight in the drafting of the contract by
her counsel.
Held: SC rejected the propriety of reformation because, by such
admission of the petitioner, oversight may not be attributed to all
the parties to the contract & therefore, it cannot be considered a
valid reason for the reformation of the same contract.
Void Agreement
Reformation implies a prior agreement between the parties. If such
prior agreement is void, it cannot be given legal effect.
o An instrument embodying the void agreement cannot be
made to conform to such void agreement which is nonexistent as to its legal effect.
Art. 1367.
When one of the parties has brought an action to enforce the instrument, he
cannot subsequently ask for its reformation.
A party seeking to enforce an agreement necessarily acknowledges that the
instrument embodies the contract intended by the parties and therefore, he
is estopped from filing a case for reformation alleging that the contract does
not contain the true intent of the parties.
Art.1365.
If 2 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, reformation of the instrument is proper.
Art. 1368.
Reformation may be ordered at the instance of either party or his
successors in interest, if the mistake was mutual; otherwise, upon petition
of the injured party, or his heirs & assigns.
CASE: Palileo v. Cosio

Lesson: In reforming instruments, courts do not make another
contract for the parties. They merely inquire into the intention of the
parties &, having found it, reform the written instrument in order
that it may express the real intention of the parties.
Facts: The parties to a contract intended that the house subject of
the agreement was to be a collateral for a particular loan but the
agreement apparently states that the house was the subject of a
conditional sale of residential building.
Held: Reformation allowed.
Persons with Legal Standing to Initiate Reformation

If the mistake is mutual, either party or his successor-in-interest
may file the action
If the cause for reformation is on some other grounds, such as
fraud or vitiated consent, the injured party or his heirs & assigns
are the only persons given legal standing to sue
Art. 1366.
There shall be no reformation in the ff. cases:
(1) Simple donations inter vivos wherein no condition is imposed;
(2) Wills;
(3) When the real agreement is void.
Procedure for Reformation

Special civil action for declaratory relief
Rule 63 of the 1997 New Rules of Civil Procedure (promulgated by
SC) in an action for declaratory relief, any person interested
under a deed, will, contract or other written instrument, or whose
rights are affected by a statute, executive order or regulation,
ordinance or any other governmental regulation may, before breach
or violation thereof, bring an action in the appropriate Regional Trial
Court to determine any question of construction or validity arising,
& for the declaration of his rights & duties, thereunder.
Wills & Donations

Any disposition in a will or unconditional donation is an act of
liberality. There is no prior drafting where the parties mutually agree
or have a meeting of the minds.
Art. 1369.
The procedure for the reformation of instruments shall be governed by rules
of court to be promulgated by the Supreme Court.
If before the final termination of the case, a breach or

violation of an instrument should take place, the action
may thereupon be converted into an ordinary action, & the
parties shall be allowed to file such pleadings as may be
necessary or proper.
CLASS DISCUSSION
Who can seek reformation?
o Both parties & successors-in-interest, because mutual
mistake is the general rule
CHAPTER 5. INTERPRETATION OF CONTRACTS.
Art. 1370. If the terms of a contract are clear & leave no doubt upon the intention of
the contracting parties, the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of the parties, the latter
shall prevail over the former.
Purpose of Interpretation
Figuring out the intent of the parties
GENERALLY, contracts should not be interpreted; the words should be

applied as they are (LITERAL interpretation)
o Interpretation is just for checking the proper way to implement a
contract where the parties have conflicting views
It is the agreement of the parties which must be enforced
As opposed to reformation
o Interpretation - the determination of the meaning attached to the
words written or spoken which make the contract
o Reformation - 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
Statutory construction can apply as a guide

o CASE: Finnan General Assurance Corporation v. CA
!
Facts: The insurance policy procured by the insured did
not include murder as incidents exempting the
insurance company from liability in case of the death of
the inured.
!
Held: SC applied expresso unius exclusio alterius the
mention of one thing implies the exclusion of another
thingto make the insurance company pay the
beneficiaries arising from the death of the insured.
General rule: The literal meaning of the words in a contract control.

o Look at the text, and then
o Look at the words in context (not in isolation)
o Important task is really ascertaining the intent of the parties

The title of a contract does not necessarily determine its true nature
o Ex. The fact that a document is entitled Exclusive Option to
Purchase does not control where the text thereof shows it is a
contract to sell.
The LITERAL MEANING of the stipulations must prevail.
o Thus, parties must always carefully examine the terms of a
contract thoroughly before signing the same
CASE: Conde v. CA
Lesson: If the contract is plain & unequivocal in its terms, one is ordinarily
bound thereby, especially if it is in a language he understands. It is the duty
of every contracting party to know a contracts contents before he signs it.
Facts: The contract was written in the dialect known to X, & the
encumbrance of the property subject of the contract was inscribed in the
title. However, X claims that he only signed the contract to show his nonobjection to the repurchase constituting the lien & that he never received
the amount of P165 from Y.
Held: X must be held bound by the clear terms of the Memorandum of

Repurchase that he signed, where he acknowledged the receipt of P165 &
assumed the obligation to maintain the repurchasers in peaceful
possession should they be disturbed by other persons. It was executed in
the Visayan language which he understood.
CASE: Santi v. CA
Lesson: The word extendable does not mean automatic extension, but
extension subject to the will of the parties.
Facts: The stipulation reads, regarding the period of a contract of lease,

that said period of lease being extendable for another period of 20 years.
Held: The words are clear that the lessors intention is not to automatically
extend the lease contract but to give her time to think whether to extend
the lease. If the intent of the parties were to provide for an automatic
extension of the lease contract, then they could have easily provided for a
straight 40 years contract instead of 20.
CASE: Fernandez v. CA
Lesson: Where a contract is renewable at the option of both parties, both

parties must assent to the renewal.
Facts: X & Y entered into a contract of lease, & agreed that the lease,
which was scheduled to end on 1 July 1983, would be renewable for
another 10 years at the option of both parties under such terms,
conditions & rental reasonable at that time & that, upon expiration of the
lease, whatever improvements were then existing thereon should
automatically belong to the lessor without having to pay the lessee.
o Before the end of the period, X informed Y that he no longer
wanted to renew the lease. Y, on the other hand, wanted the
lease renewed.
Held: The parties should mutually agree on a new contract which may not
be the same as the original, under terms, conditions & rental reasonable at
that time. It follows therefore that Y cannot renew the lease by his
unilateral act of exercising his option. Simply stated, the option must be
mutually & consensually exercised, & not unilaterally as was erroneously
done by Y.
CASE: Buce v. CA
Lesson: Where a contract does not stipulate who has the option to renew,
it is implied that it will be renewed by mutual agreement of both parties;
the phrase subject to renewal means the creation of an entirely new
contract.
Facts: A contract of lease stipulated This lease shall be for a period of 15

years effective June 1, 1979, subject to renewal for another 10 years,
under the same terms & conditions.
o One party interpreted the provision as allowing automatic renewal
while the other party contended that there was an option to
renew.
Held: There was nothing in the contract that showed that the parties
intended automatic renewal. The fact that the lessee was allowed to make
improvements on the property was not indicative of the intention to
automatically renew the lease. Since the contract was also unclear as to
who may exercise the option to renew, it should be interpreted in a way to
benefit both partiesthus, by mutual agreement.
o Renewal of a contract - the death of the old one and the birth or
emergence of a new one. In such a case, there is an obligation to
execute a new lease contract for the additional term.
o Extension of the period of lease - operates of its own force to
create an additional term.
CASE: Universal Textile Mills, Inc. v. NLRC
Lesson: A court may not make a new contract for the parties or rewrite
their contract under the guise of construction. In other words, the
interpretation or construction of a contract does not include its
modification or the creation of a new or different one. It must be construed
and enforced according to the terms employed, and a court has no right to
interpret the agreement as meaning something different from what the
parties intended as expressed by the language they saw fit to employ.
Facts: A quasi-judicial body (NLRC) misread & therefore misapplied the

provisions of a collective bargaining agreement
Held: The NLRC cannot remake a contract by eviscerating it, by deleting

from it words placed there by the parties. No court, no interpreter and
applier of a contract, has such a prerogative.
Art. 1371. In order to judge the intention of the contracting parties, their
contemporaneous & subsequent acts shall be principally considered.
Interpreting Through Acts of Parties
Interpreter must be placed in the same situation as the parties at the time
of the writing of the contract
SCENARIO
Q: When a contract states that installments shall be paid monthly & the obligation is
P1M, how much should the debtor pay per month?
A: This contract is vague; however, if the debtor pays equally every month & the
creditor makes no objections, then the payments will be made by equal installments,
due to the acts of the parties.
CASE: Pingol v. CA
Lesson: Those contemporaneous & subsequent events are demonstrative

acts which present the true intent of the parties, which control the
interpretation of their contract.
Facts:
o There was a dispute as to whether the purchase agreement was
a contract to sell or an absolute sale.
o The contract reads: the VENDEE agrees that in case of default in
the payment of the installments due the same shall earn a legal
rate of interest, & to which the VENDOR likewise agrees.
o Pursuant to the deed, the vendor delivered actual & constructive
possession, the vendee constructed a building thereon, there was
submission to the Land Registry of the division done to the lands,
& the vendee continuously possessed the land until his death.
Held:
o A deed of sale is absolute in nature although denominated as a
Deed of Conditional Sale where there is no stipulation in the
deed that title to the property sold is reserved in the seller until
the full payment of the price, nor is there a stipulation giving the
vendor the right to unilaterally resolve the contract the moment
the buyer fails to pay within a fixed period.
o The acts of the parties, contemporaneous & subsequent to the
contract, clearly show that an absolute deed of sale was
intended, by the parties & not a contract to sell.
o The contract here being one of absolute sale, the ownership of
the subject lot was transferred to the buyer upon the actual and
constructive delivery thereof.
!
Constructive delivery - made upon the execution of the
deed of sale
!
Actual delivery - when the private respondents took
possession of and constructed a building on said lot
CASE: Rapanut v. CA
Facts:
o The controversial stipulation reads: The VENDOR/MORTGAGEE
(X) is willing to sell said portion of her lot to the
VENDEE/MORTGAGOR (Y) for a total price of P37,485 payable in
monthly installments of P500 with an interest of 10% per annum
on the remaining balance until the full amount is paid.
Xs view is that the 10% interest must be paid every year & are
not included in the payments already made. Y posits that the
P500 monthly installments include the 10% interest.
Held: The Court looked at the subsequent acts of the parties.
o The Deed of Conditional Sale with Mortgage provides for the date
of payment of the P500 monthly installments, that is, not later
than the fifth of every month, & of the P1,000 semi-annual
installment, that is, on June 30 & Dec. 31. The Supplemental
Agreement was likewise specific that petitioner shall pay private
respondent monthly installments, of P500 with an interest of
10% per annum on the remaining balance until the full amount is
paid.
o A liberal interpretation of the contract in question is that at the
end of each year, all the installment payments made shall be
deducted from the principal obligation. The 10% interest on the
balance is then added to whatever remains of the principal.
Thereafter, petitioner shall pay the monthly installments on the
stipulated dates. In other words, the interests due are added to
and paid like the remaining balance of the principal. Thus, it
appears the parties intended that petitioner pay the monthly
installments at predetermined dates, until the full amount,
consisting of the purchase price & the interests on the balance, is
paid.
o Additionally, the acts of X show the real intent of the contract
though X could have rescinded the contract based on their
stipulations due to failure to pay, he never made an attempt to do
so; X accepted Ys payments religiously for 4 years without
protest
o
CASE: Caltex v. IAC
Facts:
o X, a party to a deed of assignment, contended that the obligation
was limited only to the particular amount indicated in the deed of
assignment notwithstanding the fact that said deed provided that
the assignee (Y) shall be entitled to all funds which the assignor
(X) may be entitled from a certain administrative decision in
payment of Xs outstanding obligation plus any applicable interest
charges on overdue account. X also claimed that the contract
meant that the obligation would be totally extinguished.
Held: The subsequent act of the parties showed that they did not intend to
extinguish the obligation based on the contract alone.
o After the execution of the Deed of Assignment on July 31, 1980,
petitioner continued to charge respondent with interest on its
overdue account up to Jan. 31, 1981, pursuant to the Deed of
Assignment which provides for Xs obligation for applicable
interest charges on overdue account. The charges for interest
were made every month and not once did X question or take
exception to the interest.
X also wrote a letter explicitly asking for a reduction of the

interest, thus proving there was such interest to be paid
CASE: Javier v. CA
Lesson: Where the parties to a contract have given it a practical

construction by their conduct as by acts in partial performance, such
construction may be considered by the court in construing the con-tract,
determining its meaning and ascertaining the mutual intention of the
parties at the time of contracting.
Facts: Petitioners contend that the deed of assignment conveyed to them

the shares of stocks of private respondent in Timber-wealth Corporation, as
stated in the deed itself. Since said corporation never came into existence,
no share of stocks was ever transferred to the petitioners, hence the said
deed is null and void for lack of cause or consideration.
Held: SC ruled that the true cause or consideration of said deed was the
transfer of the forest concession of private respondent to petitioners for
P120,000; this was evident through their subsequent and
contemporaneous acts.
o Both parties knew the stocks did not yet exist
o Petitioners, after the execution of the deed of assignment,
assumed the operation of the logging concession of private
respondent.
o The statement of advances to respondent prepared by
petitioners stated: P55,186 advances to L.A. Tiro be applied to
succeeding shipments. Based on the agreement, we pay
P10,000 after every shipment. We had only 2 shipments.
o Petitioners entered into a Forest Consolidation Agreement with
other holders of forest concessions on the strength of the
questioned deed of assignment.
Reasonableness, Not Just Words
Analysis & construction should not be limited to the wIfords used in the
contact, as they may not accurately reflect the parties true intent.
o Carefully consider the reasonableness of the result obtained
Parties have reasonable leeway in terms of their contractual agreement,

since contracts should not be harsh & iniquitous
Import of a word depends on context, considering the entire provision

o If a provision demands mandatory application, even the word
may can be interpreted as shall
o If it demands directory application, shall could mean may as
well
Art. 1372. However general the terms of a contract may be, they shall not be
understood to comprehend things that are distinct & cases that are different from
those upon which the parties intended to agree.
Generality of Terms
Noscitur a sociis - general & unlimited terms are restrained and limited by
particular terms that follow
Ejusdem generis - a general term joined with a specific one will be deemed
to include only things that are like, of the same genus as, the specific one
Depending on the intent of the parties & reasonableness, the Court can
broaden or narrow down certain termsthey can even make the plural into
singular.
Noscitur a sociis & ejusdem generis are opposites of one another
Art. 1373. If some stipulation of any contract should admit of several meanings, it
shall be understood as bearing that import which is most adequate to render it
effectual.
CASE: Lao Lim v. CA
Lesson: The compromise agreement should be understood as bearing that

import which is most adequate to render it effectual. Where the instrument
is susceptible of 2 interpretations, one which will make it invalid and illegal
and another which will make it valid and legal, the latter interpretation
should be interpreted.
Facts: The contract stipulated: The term of the lease shall be renewed
every 3 years retroacting from Oct. 1979 to Oct. 1982; after which the
above-named rental shall be raised automatically by 20% every 3 years for
as long as defendant needed the premises & can meet and pay the said
increases, the defendant to give notice of his intent to renew 60 days
before the expiration of the term.
Held: Though the provision can be interpreted as involving a suspensive

potestative condition, said condition is subject to the word renewed
which means mutual agreement of the parties. The contract of lease
should be construed as providing for a definite period of 3 years; the
automatic increase of rentals by 20% will take effect only if the parties
decide to renew the lease
Disfavor of Interpretation Leading to Loss of Rights
Construction of the terms of a contract leading to impairment or loss of

right is not favored
o Conservation & preservation, not waiver, abandonment or
forfeiture of a right, is the rule.
CASE: Caltex v. IAC
Lesson: Provisions in the contract must be given a construction as will give

effect to them
Facts: The contract states

o ASSIGNOR has an outstanding obligation with ASSIGNEE of P4M
as of June 30, 1980, plus any applicable interest on overdue
account
o In consideration of the foregoing premises, ASSIGNOR by virtue
of these presents, does hereby irrevocably assign & transfer unto
ASSIGNEE any & all funds &/or Refund of Special Fund
Payments, including all its rights & benefits accruing out of the
same, that ASSIGNOR might be entitled to, pursuant to the
decision in BOE Case No. 80-123, in payment of ASSIGNORs
outstanding obligation plus any applicable interest charges on
overdue account & other avturbo fuel lifting & deliveries that
ASSIGNOR may from time to time receive from the ASSIGNEE, &
ASSIGNEE does hereby accepts such assignment in its favor.
Held: It can be seen that the Deed of Assignment speaks of three (3)
obligations (1) the outstanding obligation of P4M as of June 30, 1980;
(2) the applicable interest charges on overdue accounts; & (3) the other
avturbo fuel lifting & deliveries that the Assignor may from time to time
receive from the Assignee. As aptly argued by Assignee, if it were the
intention of the parties to limit Assignors obligation to P4M, they should
have so stated & there would have been no need for them to qualify the
statement of said amount with the clause as of June 30, 1980 plus any
applicable interest charges on overdue account & the clause & other
avturbo fuel lifting & deliveries that ASSIGNOR may from time to time
receive from the ASSIGNEE.
o The stipulations of the contract must be interpreted together to
give the intention of the parties full effect.
Art. 1374. The various stipulations of a contract shall be interpreted together,

attributing to the doubtful ones that sense which may result from all of them taken
jointly.
CASE: Ruiz v. Sheriff of Manila
Facts:
o The contract states: WHEREAS, the parties of the FIRST PART,
jointly & severally, has/have applied for & jointly & severally
obtained from the party of the SECOND PART, a loan in the sum
of P15,000 to be amortized at the rate of not less than P300
including interest on unpaid balance, at the rate of 8% per
annum, said interest & capital amortization to be effected at the
end of each month. Failure to pay 2 successive monthly
amortizations will cause this loan to be automatically due &
payable in its entirety. Notwithstanding the foregoing, this loan
shall not run for more than 5 years.
o Appellants claim that despite the acceleration clause, they had 5
years from Jan. 18, 1961 within which to pay their mortgage debt
because of the phrase notwithstanding the foregoing in the last
sentence. Since the 5-year period had not yet expired when the
mortgage was foreclosed, said foreclosure, they point out, was
premature.
Held: The entirety of the contract must be taken into account and not just
the last 2 sentences. The acceleration clause & the last sentence must be
read together. It only means that while the appellants can pay as little as
P300/mo., as long as they do not fail to pay at least some sum per month
otherwise, after 2 months of failing to pay, the entire debt will become due
& demandable.
CASE: Fernandez v. CA
Facts: The issue involved is the interpretation of the phrase renewable for
another 10 years at the option of both parties under such terms &
conditions & rental reasonable at that time.
Held: SC rejected the position that the word renewable means that the
lessee can unilaterally renew the contract & that therefore the phrase at
the option of the parties was just a superfluity
o The use of either extendible or renewable should be given
NOT sacramental significance. The task of the ascertaining the
intention of the contracting parties is to be discharged by looking
to the words they used to project that intention in their contract,
all the words not just a particular word or two, & words in context
not words standing alone.
CASE: China Banking Corp. CA
Facts: Petitioners aver that the additional loans extended in favor of private
respondents in excess of P6.5M & P3.5M amounts respectively
stipulated in the July 1989 & Aug. 10, 1989 mortgage contracts are also
secured by the same collaterals or real estate properties, citing as bases
the introductory paragraph of the mortgage contracts, as well as the
stipulations stated therein under the 1st & 2nd par. Respondents for their
part argue that the additional loans are clean loans (without mortgages),
relying on some isolated parts of the same introductory par. & 1st par. of
the contracts, & also of the 3rd par.
Held: The parties intent is to constitute the real estate properties as

continuing securities liable for future obligations beyond the amounts of
P6.5M & P3.5M.
o While the whereas clause provides: The mortgagee has
granted, & may from time to time hereafter grant to the
mortgagors credit facilities not exceeding P6.5M only yet in the
same clause it provides that the mortgagee had required the
mortgagor(s) to give collateral security for the payment of any &
all obligations theretofore contracted/incurred & which may
thereafter be contracted/incurred by the mortgagor(s) &/or
debtor(s), or any one of them, in favor of the mortgagee,
qualifying the initial part & showing that the collaterals or real
estate properties serve as securities for future obligations. The 1st
par., which ends with the clause, the idea being to make this
deed a comprehensive & all embracing security that it is
supports this qualification.
o The 2nd par. provides: The mortgagee may take further advances
& all sums whatsoever advanced by the mortgagee shall be
secured by this mortgagee; & although it was stated that the
said credit shall extend to any account which shall, within the
said limit of P6.5M exclusive of interest, this part of the 2nd
sentence is again qualified by its succeeding portion which

provides that this mortgage shall stand as security for all
indebtedness of the mortgagor(s) &/or debtor(s), or any one of
them, at any & all times outstanding . . .
The 4th par. states: All such withdrawals, & payments, whether
evidenced by promissory notes or otherwise, shall be secured by
this mortgage which manifestly shows that the parties principally
intended to constitute the real estate properties as continuing
securities for additional advancements which the mortgagee may,
upon application, extend. It is well settled that mortgages given to
secure future advancements or loans are valid & legal contracts,
& that the amounts named as consideration in said contracts do
not limit the amount for which the mortgage may stand as
security if from the instrument the intent to secure future & other
indebtedness can be gathered.
CASE: Home Development Mutual Fund v. CA
Facts: The consultancy agreement reads This agreement takes effect

on Jan. 1, 1985 to Dec. 31, 1985: Provided, that either party who desires
to terminate the contract may serve the other party a written notice at
least 30 days in advance.
o It was the contention of the petitioner that the 1st clause was
independent from the 2nd clause such that after Dec. 31, 1985,
the contract is deemed terminated. Hence, the notice of
termination given to the respondent 9 days after Dec. 31, 1985
was compliance in good faith with above-mentioned agreement.
Petitioner likewise contended that, even before the expiration of
the contract, it had served the respondent notice on Dec. 26,
1985. It was shown however by concrete evidence that, since
1981, the practice of the petitioner & the respondent was that,
without renegotiation, the consultancy contract was continuously
renewed so that the respondent continued to serve the
petitioner even after the expiry date with the renewal-contract
signed in the first few months of the year.
Held: The petitioner failed to comply with the 30-day notice requirement
for terminating the contract & therefore, also considering the yearly
practice of petitioner & respondent in the implementation & renewal of
their consultancy agreement, the said agreement must be deemed
renewed. The 1st clause relating to the term of the contract must be
construed together with the 2nd clause on the 30-day notice-requirement.
Thus, the 30-day notice should be given prior to the expiration date of the
contract on Dec. 31, 1985.
o The requirements of contract as to notice as to the time of
giving, form & manner of service thereof must be strictly
observed because in an obligation where a period is designated,
it is presumed to be for the benefit of both parties.
The unilateral termination of the contract in question by the

herein petitioners is violative of the principle of mutuality of
contracts.
Art. 1375. Words which may have different significations shall be understood in that
which is most in keeping with the nature & object of the contract.
NOTE: Usage or customs must always defer to intent of the parties.
CASE: Pasay City Govt v. CFI Manila
Lesson: In proportion in divisible obligations implies paying a

performance bond that covers only a particular stage of the project,
whereas the word to cover implies that the whole amount remaining for
the entire project is involved.
Facts:
o A compromise agreement said that the project was to be done in
stages & that, in acc. with par. 1(B), the contractor was to submit
a new performance bond in the amount required by pertinent
law, rules & regulations, in proportion to the remaining value/cost
of the unfinished work of the construction as per approved
specifications.
o There was a dispute as to whether the amount of the
performance bond covered the whole unfinished project or only
the next stage of work to be done
Held: The parties to the compromise contemplated a divisible obligation

necessitating therefore a performance bond in proportion to the
uncompleted work.
o What is crucial in par. 1(B) are the words, in proportion. If the
parties really intended the legal rate of 20% performance bond to
refer to the whole unfinished work, then the provision should
have required the contractor to submit & file a new performance
bond to cover the remaining value/cost of the unfinished work of
the construction.
o Using the words in proportion then significantly changed the
meaning of the paragraph to ultimately mean a performance
bond equal to 20% of the next stage of work to be done.
Art. 1376. The usage or customs of the place shall be borne in mind in the
interpretation of the ambiguities of a contract, & shall fill the omission of stipulations
which are ordinarily established.
Contracts, Usage & Custom
An express contract embodying in clear terms the intention of the parties

CANNOT be varied nor contradicted by evidence of usage or custom.
o Custom or usage is used to explain the meaning of words &
phrases used when they do not necessarily exclude the operation
of such custom or usage
BUT they may NOT be used to contradict nor vary the

plain meaning of the contract
o It can be used to explain what is doubtful - explains the meaning
& intention of the parties to a written/oral contract, which could
not be done without the aid of this extrinsic evidence
An express contract is always admissible to supersede, vary or control, a
usage or custom; for the latter may always be waived at the will of the
parties
o To do so would be like allowing presumptions & implications to
dictate the content of the formal & deliberate declaration of the
parties
!
Art. 1377. The interpretation of obscure words or stipulations in a contract shall not
favor the party who caused the obscurity.
Ambiguous Words in a Contract
Words or stipulations that are susceptible to different interpretations

causing ambiguity shall be construed against the person who chose to use
such ambiguous words or phrases.
This is based on the maxim verba accipiuntur fortius contra proferentem.
Contra proferentem rule against the profferer; against the person who
drafted the contract
o If there is an ambiguity which all the other methods of
construction have failed to resolve so that there are two
alternative meanings to certain words, the court may construe
the words against the party who put forward the document & give
effect to the meaning more favorable to the other party
CASE: Capitol Insurance v. Sadong
Facts: There was an ambiguity as to the scope of the mortgage contract

drafted by the lawyer of the insurance company which led to a
corresponding ambiguity in its application.
Held: If the mortgage contract as actually drafted seems to be vague or

ambiguous, the doubt must be resolved against the party whose lawyer
prepared the document.
CASE: Nacu v. CA
Facts: The dispute involved the application of a real estate mortgage to

another loan, as the Bank intended the 1982 real estate mortgage to be
applied to the 1983 loan transaction.
Held: If the parties intended the 1982 real estate mortgage to apply to the
1983 loan transaction, the Bank should have required petitioners to
execute the proper loan documents clearly constituting upon the same
property a real estate mortgage. The Bank failed to do this & must
therefore suffer the consequences.
Art. 1378. When it is absolutely impossible to settle doubts by the rules established
in the preceding articles, & the doubts refer to incidental circumstances of a
gratuitous contract, the least transmission of rights & interests shall prevail. If the
contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of
interests.
If the doubts are cast upon the principal object of the contract in such a way that it
cannot be known what may have been the intention or will of the parties, the
contract shall be null and void.
Rule of Thumb Greater Reciprocity of Rights for Reciprocal Obligations
Ex. Y (lessors) enters into a lease contract with X (lessee), where it states
that all improvements made by X will be owned by Y. X built a swimming
pool, a monument of himself, & a tower. At the end of the lease, Y says, All
this is mine. X, however, wants Y to pay for all the improvements. The
contract between them does not talk of payment. Does X have a right to be
paid?
o Since the contract does not make a statement, use the rule of
thumb in reciprocal obligations. Thus, X will be paid for the
improvements.
CASE: Central Philippine University v. CA
Facts: The deed of donation to the donee required as a condition that the
donee was to construct a medical school on the property donated.
o The donee did not comply with the condition but contended that
the donation should nevertheless be made effective considering
the length of time the donor did not seek the enforcement of the
condition
Held: SC ruled in favor of the donor & revoked the donation for noncompliance. Since the deed of donation is basically a gratuitous one,
doubts referring to incidental circumstances of such contract should be
resolved in favor of the least transmission of rights & interests.
CASE: Castelo v. CA
Lesson: If the contract is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests
Facts: Under the terms of the stipulation, respondent was bound, &
entitled, to pay the balance of P163,408 on or before 31 Dec. 1982
without incurring any liability for any interest & penalty charges. During the
grace period of 6 months, that is, from 1 Jan. 1983 to 30 June 1983,
respondent vendee was given the right to pay the said balance or any
portion that had remained unpaid provided that interest at the rate of
12% per annum shall be charged & 1% penalty charge shall be imposed on
the remaining diminishing balance.
o The question is whether, during the period of 1 Jan. 1983 to 30
June 1983, 12% interest per annum plus 1% penalty charge a
month was payable on the remaining diminishing balance, or
whether during the period, only 12% per annum interest was
payable while the 1% per month penalty charge would in addition
begin to accrue on any balance remaining unpaid as of 1 July
1983.
Held: The parties likely intended the latter view of their stipulation on
interest, as it was the least onerous; for if the parties had intended that
during the grace period, interest consisting of 12% per annum plus another
12% per annum (equivalent to 1% per month), or a total of 24% per
annum, was payable, then they could have simply said so. Instead, the
parties distinguished between interest at the rate of 12% per annum & the
1% a month penalty charge.
CASE: Gaite v. Fonacier
Lesson: In onerous contracts, the rules of interpretation would incline the

scale in favor of the greater reciprocity of interest
Facts: Gaite transferred to Fonacier all his goodwill, rights & interest on the
improvements he made on the area subject of a mining claim & the
24,000 tons of iron already extracted, all for a consideration of P75,000,
P10,000 of which was paid upon the signing of the agreement.
o According to par. B of the agreement, the balance of P65,000 will
be paid from & out of the first letter of credit covering the 1st
shipment of iron ores & of the first amount derived from the local
sale of iron ore made by the Larap Mines & Smelting Co., Inc.
o There was a dispute as to whether par. B provides a suspensive
period or a suspensive condition
Held: Greater reciprocity obtains if the buyers obligation is deemed to be

actually existing, with only its maturity (due date) postponed or deferred,
than if such obligation were viewed as non-existent or not binding until the
ore was sold.
o The sale of the ore to Fonacier was a sale on credit, & not an
aleatory contract where the transferor, Gaite, would assume the
risk of not being paid at all; & that the previous sale or shipment
of the ore was not a suspensive condition for the payment of the
balance of the agreed price, but was intended merely to fix the
future date of the payment.
Art. 1379. The principles of interpretation stated in Rule 123 (now Rule 130) of the
Rules of Court shall likewise be observed in the construction of contracts.
Rule 130 of the New Rules of Court
Sec.10. Interpretation of a writing according to its legal meaning.

o The language of a writing is to be interpreted according to the
legal meaning it bears in the place of its execution, unless the
parties intended otherwise.
Sec. 11. Instrument construed so as to give effect to all provisions.

o In the construction of an instrument where there are several
provisions or particulars, such a construction is, if possible, to be
adopted as will give effect to all.
Sec. 12. Interpretation according to intention; general and particular

provisions.
o In the construction of an instrument, the intention of the parties
is to be pursued; and when a general and a particular provision
are inconsistent, the latter is paramount to the former. So a

particular intent will control a general one that is inconsistent
with it.
Sec. 13. Interpretation according to circumstances.
o For the proper construction of an instrument, the circumstances
under which it was made, including the situation of the subject
thereof & of the parties to it, may be shown, so that the judge
may be placed in the position of those whose language he is to
interpret.
Sec. 14. Peculiar signification of terms.
o The terms of a writing are presumed to have been used in their
primary & general acceptation, but evidence is admissible to
show that they have a local, technical, or otherwise peculiar
signification, & were so used & understood in the particular
instance, in which the agreement must be construed accordingly.
Sec. 15. Written words control printed.
o When an instrument consists partly of written words & partly of a
printed form, & the two are inconsistent, the former controls the
latter.
Sec. 16. Experts and interpreters to be used in explaining certain writings.
o When the characters in which an instrument is written are
difficult to decipher, or the language is not understood by the
court, the evidence of persons skilled in deciphering the
characters, or who understand the language, is admissible to
declare the characters or the meaning of the language.
Sec. 17. Of two constructions, which preferred.
o When the terms of an agreement have been intended in a
different sense by the different parties to it, that sense is to
prevail against either party in which he supposed the other
understood it
o When different construction of a provision are otherwise equally
proper, that is to be taken which is the most favorable to the
party in whose favor the provision was made.
Sec. 18. Construction in favor of natural right.
o When an instrument is equally susceptible of 2 interpretations,
one in favor of natural right & the other against it, the former is to
be adopted.
Sec. 19. Interpretation according to usage.
o An instrument may be construed acc. to usage, in order to
determine its true character.
Invalid Contracts
Invalid contract is an imprecise term
Specific names in designating defective contracts, namely:

o Rescissible (Art. 1380, et seq.)
o Voidable (Art. 1390, et seq.)
o Unenforceable (Art. 1403, et seq.)
o Void or inexistent (Art. 1409, et seq.)
CHAPTER 6. RESCISSIBLE CONTRACTS

Art. 1380. Rescissible Contracts Defined.
Contracts validly agreed upon may be rescinded in the cases established by law.
Rescissible contracts
Valid, but may be subsequently terminated on legal grounds
Not principally premised on a breach of trust by the other party, but on

some economic damage as a result of inequitable conduct by one party
BUT, if the contract is in fraud of creditors, as well as completely simulated

because there is absolutely no consideration, it is void.
CASE: Dilag v. CA
Lesson: A contract in fraud of creditors but completely simulated is

considered void & not merely rescissible.
Facts:
o A deed of sale was entered into by the Dilag spouses & children
in 1974 during the pendency of Civil Case No. 8714 in which
Arellano, a creditor, was seeking for a money judgment against
the spouses.
o However, the Dilag spouses remained to be the registered owners
& executed a real deed of sale only in 1981, when title was
actually transferred to the children. Furthermore, during the
entire period covered, the actual possessor of the land was
Diancin, who the spouses leased the property to. Diancin,
however, gave way & handed the property to Arellano when the
latter obtained the money judgment in 1979 in his favor. The
Dilag children are now asserting their rights over the disputed lot.
Held: The first deed of sale executed in 1974 was evidently fictitious & was
executed in fraud of creditor Arellano, as the children relied on the 1981
deed of sale to uphold their claim. The first deed of sale was, therefore,
void. The spouses continued to be the ones who executed acts of
ownership, including renting out to Diancin.
Art. 1191 (Rescinding Reciprocal
Obligations)
Monetary damage is not essential
Based on breach of trust (sources of
liability)
Art. 1380 (Rescissible Contracts)

There is damage to a party
Financial, economic, quantifiable
damage
Art. 1381. Cases of Rescissible Contracts.

The ff. contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they
represent suffer lesion by more than of the value of the things which are
the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors, when the latter cannot in any other
manner collect the claim due them;
(4) Those which refer to things under litigation if they have been entered into
by defendant without knowledge & approval of the litigants or of competent
judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
Guardians & the Property of His Ward
Lesion implies economic damage
When there is court approval, any action is VALID

o Any act of ownership or disposition undertaken by the guardian
on behalf of his ward without court approval is void
Rescissible when guardian performs acts of administration (e.g. buying

materials for fixing the roof) which were not actually necessary, making
such purchase useless, & the lesion suffered is more than of the value
of the things which are the object of the contract
Absentees
The absence of a person may be declared:

o In 2 years - without any news about the absentee or since the
receipt of the last news
o In 5 years - in case the absentee has left a person in charge of
the administration of his property
When a person disappears from his domicile, his whereabouts being

unknown, the judge, at the instance of an interested party, relative or
friend, can appoint a person to represent him when necessary
o Administrator or representative manages the properties of the
absentee
Same rules governing guardians govern administrators

Contracts in Fraud of Creditors
When a contract is entered into in bad faith by the parties, purposely to

evade due obligations in favor of creditors who have no other way to collect
their debts
CASE: Bobis v. Provincial Sheriff of Camarines Norte

o Facts: It was contested that the sale in this case was fraudulent
due to inadequate price.
o Held: There was no proof that the parties to the contract entered
into the obligation to defraud the creditor. Fraud is not presumed.
It must be proved by clear preponderance of evidence. There
must be a showing of all these requisites concurring:
1) Both contracting parties acting maliciously & with fraud
2) Their purpose is to prejudice creditors
3) The creditors are deprived by the transaction of all
means by which they may effect collection of their
claims.
In this case, there was no showing that the

land involved was the only property the
debtors had which the creditor could pursue
The creditor also did not annotate the title to
protect his interests
CASE: Marsman Investment Ltd. v. Phil. Abaca Development Co. (PADCO)
Facts: The company involved, Marsman, waived the debts of the debtor
PADCO.
Held: There can be no rescission, because the phrase in fraud of

creditors necessarily refers to actual creditors of the debtor.
o Until & unless those releases are set aside, the corporation
ceased to be creditors of the transferor PADC0, & were thereafter
deprived of any interest in assailing the validity of the transfer of
its properties
o Only actual creditors can ask for the rescission of the conveyance
made by their debtors in favor of strangers
Things Under Litigation
Rescissible if they have been entered into by the defendant without the
knowledge & approval of the litigants or of competent judicial authority.
o Ex. In a replevin suit where plaintiff seeks to recover personal
property from the defendant, the latter, during the pendency of
the suit, cannot sell in bad faith the property being litigated to any
3rd person. If he does & the transferee also acts in bad faith, the
contract is rescissible
CASE: Litonjua v. LR Corporation

o Lesson: Right of first refusal is an example of a rescissible
contract.
o Facts: The creditor lent the money to the debtor who, in turn,
collateralized his property to secure the loan.
o Held: The failure of the debtor to recognize the stipulated right of
first refusal contained in the loan-mortgage agreement in favor of
the creditor makes any sale of the property to a 3rd person
rescissible at the instance of the creditor.
!
Right of first refusal - in the event debtor decides to sell
his property, he must first offer the same to the creditor
first
!
The consideration for the loan-mortgage includes the
consideration for the right of first refusal
!
To deprive the creditor of this right of first refusal will
prejudice the creditor in his substantial interests to be
able to own the property.
!
A contract of sale entered into in violation of a right of
first refusal of another person, while valid, is rescissible
Art. 1382. Payments made in a state of insolvency for obligations to whose

fulfillment the debtor could not be compelled at the time they were affected, are also
rescissible.
Insolvent Debtor
A debtor whose liabilities already exceed his assets and who can barely pay
off his debts
If such debtor pays off a creditor whose credit has not yet become due,
that payment can be rescinded.
o Prior judicial declaration of insolvency of the debtor NOT
necessary
CASE: De La Paz vs. Garcia

o Facts: The transfer of property was made after an insolvency
proceeding was filed with the competent court, and such transfer
was also claimed as in fraud of creditors.
o Held: The transfer was not rescissible under the Civil Code but
void under the Insolvency Law.
Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when
the party suffering damage has no other legal means to obtain reparation for the
same.
Cause of Action for Rescission
Proper & direct action filed for that purpose & not on a mere motion
incidental to another case (no collateral attack allowed)
Cannot be summary proceeding; it must be full-blown trial

o Cannot be done by mere motion of defender
Rescission a relief the law grants on the premise that the contract is
valid, for the protection of one of the contracting parties & 3rd persons from
all injury & damage the contract may cause, or to protect some
incompatible & preferential right created by the contract.
Last Remedy
If there are other means to claim reparation, such other means must be
availed of first
Accion pauliana (a separate, independent action) is a last resort; even filing

court cases must first be undertaken
o When implementation of decision of court case fails, one can
rescind
The date of the decision of the trial court is immaterial.

o The credit of the plaintiff antedates that of the fraudulent
alienation by the debtor of his property.
o The decision of the trial court against the debtor will retroact to
the time when the debtor became indebted to the creditor.
Requisites on an action for rescission:

1) A judgment;
2) The issuance by the trial court of a writ of execution for the
satisfaction of the judgment; &
3)
The failure of the sheriff to enforce & satisfy the judgment of the
court.
4) The creditor has exhausted the property of the debtor.
CASE: Goquilay v. Sycip
o The fraud charged not being one used to obtain a partys consent
to a contract (i.e., not deceit or dolus in contrahendo), if there is
fraud at all, it can only be a fraud of creditors that gives rise to a
rescission of the offending contract.
o If there is no allegation, or evidence, that Goquilay cannot obtain
reparation from the heirs of the deceased, the present suit to
rescind is not maintainable
!
EVEN IF fraud actually did exist
Art. 1384. Rescission shall be only to the extent necessary to cover the damages
caused.
Partial Rescission
Since rescission presupposes a valid contract, it need not be rescinded

totally
Remedy shall be only up to the extent necessary to cover the damages

caused.
o Ex. A is indebted to X for P5,000 &, to defraud X, A transfers his 2
houses, each worth P5,000, to B who is also in bad faith.
Rescission can be had only with respect to 1 house worth P5,000
because it is only up to this amount that X has been damaged.
Art. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, & the price with its interest;
consequently, it can be carried out only when he who demands rescission can return
whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of 3rd persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the
loss.
Restitution Following Rescission
Parties shall be placed in the same position where they were before they
entered into the assailed contract.
o Objective: To restore the parties to their original position
RETURN: The object subject of the rescissible contract + fruits or interest,

if any
If the object of the contract cannot be restored because of loss, damages

may be claimed from the person responsible for the loss.
o A party cannot rescind & at the same time retain the
consideration, or a part of the consideration. One cannot have
the benefits of rescission without assuming its burdens.
HOWEVER, if object is with person in good faith, there can be no restitution,

only damages from the party who caused the controversy
Ex. If a father, with the intent to defraud his creditors, sold the
property to his son for a valuable consideration but below the fair
market value of the same, such a sale is valid & not even
rescissible if the son was without any knowledge of the ulterior
motive of his father to defraud his creditors.
!
Mere inadequacy of price does not invalidate a contract.
!
For the son therefore the consideration can still be
considered a fair price. In short, the son was clearly in
good faith and therefore the contract of sale cannot be
rescinded.
Good faith is always presumed unless contrary evidence is adduced
o Purchaser in good faith - one who buys the property of another
without notice that someone else has a right or interest in such a
property & pays a full & fair price at the time of the purchase or
before he has notice of the claim or interest of some other person
in the property
Art. 1386. Rescission referred to in Nos. 1 & 2 of Art. 1381 shall not take place with
respect to contracts approved by the courts.
Approval by the courts implies that the parties were given their day in court to justify
to the court the necessity & reasonableness of the contract to be entered into.
Hence, once judicially approved, such contract cannot anymore be the subject of
rescission.
Court Approval of Contracts
Implies that the parties were given their day in court to justify to the court
the necessity and reasonableness of the contract to be entered into.
Once judicially approved, such contract cannot be the subject of rescission.

Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous
title are presumed to have been entered into in fraud of creditors, when the donor
did not reserve sufficient property to pay all debts contracted before the donation.
Alienations by onerous title are also presumed fraudulent when made by persons
against whom some judgment has been rendered in any instance or some writ of
attachment has been issued. The decision or attachment need not refer to the
property alienated, & need not have been obtained by the party seeking the
rescission.
In addition to these presumptions, the design to defraud creditors may be proved in
any other manner recognized by the law of evidence.
Rebuttable Presumptions of Art. 1387
Presumptions can only exist from facts or a set of facts.

o Ex. B is indebted to D for P10,000, E for P7,000, & F for
P13,000. All of the debts are due. B has money in the bank in the
amount of P60,000. B donates P55,000 to X.
!
The donation is presumed to be fraudulent as he has
not reserved sufficient property to pay all debts
contracted before the donation.
If the debts are not yet due, it shall be presumed

fraudulent because the only requirements of the law are
that the debts are contracted prior to the donation, &
that there is no reservation of sufficient property to pay
all debts contract before the donation. The maturity of
the debts is not a requirement.
!
The presumption can be controverted by convincing
evidence that the donation was not in fraud of creditors.
When alienation by onerous title has been made by persons against
whom some judgment has been rendered in any instance or some writ of
attachment has been issued.
o The presumption can be rebutted by convincing evidence to the
contrary.
o An alienation made during the pendency of a suit is not enough.
There must already be a decision or a writ of attachment.
o Ex. A is able to obtain a writ of attachment against debtor B. The
attachment effectively places his property in Mandaluyong under
the custody of the court so that, in the event A wins the case,
such property, if necessary, can be sold to pay the judgment debt.
!
Subsequently B sells his property in Laguna to Z. There
is a presumption of a fraudulent alienation even if the
Laguna property is not the subject of the attachment.
Attachment need not refer to the property

alienated.
!
A can seek the rescission of the sale by B to Z of the
property in Laguna.
!
Also, if a decision has been rendered against B in favor
of another creditor X, & B sells the property in Laguna to
M, there is also a presumption of fraudulent
transaction, & A can file a case to rescind the sale even
if the decision has not been obtained by him but by X.
!
CASE: Provincial Sheriff of Pampanga v. CA

!
Facts:
o An action for recovery was filed by X, Y & Z against B & C.
o At the same time, B was a furniture dealer under the Modern
Furniture Store, which burned down, together with its contents.
!
As a result, B surrendered his license to operate the
store.
!
Bs brother, D, put up a new store on the same site, also
called Modern Furniture Store
D secured new license & privilege tax for the

store
On the same date of payment of tax, B verbally

transferred Modern Furniture Store to his
brother D
o The trial court rendered judgment against B & C, affirmed by CA.
A writ of execution was issued; the Provincial Sheriff

levied pieces of furniture found in Modern Furniture
Store
!
D filed a 3rd-party claim with the sheriff, saying the
property did not belong to B, but to himself
o D filed a case to be declared the owner of the furniture levied &
damages against X, Y & Z plus the sheriff, & a writ of preliminary
injunction to stop the sale
Held: Art. 1387 applies only when there has in fact been an alienation or
transfer, whether gratuitously or by onerous title
o Ds store is entirely new & different from his brother Bs, as Ds
store had completely new content despite the same name &
style, since Bs things were burned down
o There was no transfer, as a matter of fact, thus, there was no
actual fraudD owns the properties in question
!
Art. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors,
shall indemnify the latter for damages suffered by them on account of the alienation,
whenever, due to any cause, it should be impossible for him to return them.
If there are 2 or more alienations, the 1st acquirer shall be liable 1st, & so on
successively.
Bad Faith Acquirer of Property Alienated in Fraud of Creditors
Liable to the creditor for damages, if it should be impossible for the

transferee to return the subject property.
o The knowledge of the evasive & fraudulent designs of the debtor
makes the said transferees acquisition tainted with bad faith.
If the transferee in bad faith transfers the property to a subsequent buyer

who is likewise in bad faith, the latter shall have the obligation to return
said property if it is still possible to do so. If not, he shall be liable for
damages.
o However, if such buyer is in good faith, his purchase is valid,
making it impossible for the 1st transferee to return the property,
in which case such 1st transferee shall be liable for damages.
SCENARIO
Q: A is the creditor of B. B mortgaged a property for the debt he owed A. B did not
pay, so A tried to foreclose on the property of B. B, however, had already sold the
property, back when he had not yet received the summons for foreclosure. Is B guilty
of fraud?
A: No. There is no writ of attachment or judgment yet.
Art. 1389. The action to claim rescission must be commenced within 4 years.
For persons under guardianship & for absentees, the period of 4 years shall not
begin until the termination of the formers incapacity, or until the domicile of the
latter is known.
Different Grounds & Beginning of Cause of Action
1)
2)
3)
4)
NOTE: In all cases, aggrieved party must have unsuccessfully exhausted all
possible remedies to enforce the obligation or to recover what has been
lost
NOTE: Another term for the action to rescind contracts made in favor of
creditors (accion pauliana)
Those under guardianship - from the time the incapacity terminates & the
aggrieved party has unsuccessfully exhausted all other legal remedies.
o Ex. For a minor, the period begins from the time he reaches 18
years old & has unsuccessfully exhausted all legal remedies
Absentees - From the time learns of the contract & said absentee has
unsuccessfully exhausted all other legal remedies
o Domicile of natural persons - place of habitual residence
o Judicial persons - place where their legal representative is
established or where they exercise their principal function
In fraud of creditors - From the time of the discovery of the fraud & after he
has unsuccessfully exhausted all other legal remedies
Contracts entered into without the knowledge & approval of the litigants or
of competent judicial authority - from the time of knowledge of the
transaction & unsuccessful exhaustion of all other legal remedies
CHAPTER 7. VOIDABLE CONTRACTS.
Art. 1390.
The ff. contracts are voidable or annullable, even though there may have been no
damage to the contracting parties:
(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation,
undue influence or fraud.
These contracts are binding, unless they are annulled by a proper action in court.
They are susceptible of ratification.
Voidable Contracts
Valid until annulled
Any defect or infirmity causing its annullable nature can be cured by the
party aggrieved or injured by ratification
Effects of annulment operate prospectively

o Do NOT retroact to the time the contract was made
Grounds enumerated are already explained under Art. 1327-1344.
Damage need not exist.

Art. 1391. Prescriptive Periods for Annulment.
The action for annulment shall be brought within 4 years.
This period shall begin:
In cases of intimidation, violence or undue influence, from the time the defect of the
consent ceases.
In case of mistake or fraud, from the time of the discovery of the same.
And when the action refers to contracts entered into by minors or other
incapacitated persons, from the time the guardianship ceases.
!
Start of Periods
1. Intimidation, violence or undue influence (IVU) from the time the defect
of the consent ceases
o Ex. B wants to lease his property to A.
!
He coerces A to enter into said lease contract by continually
threatening A with serious bodily injury.
A is excused from not filing a case for annulment while

the threat is still existing
!
If B finally reforms & stops the threats, the 4-year period for
A to annul the contract will commence from the cessation of
the threat
o CASE: Rodriguez v. Rodriguez
!
Facts: X filed a case for annulment against Y on the ground
of duress, 28 years after the intimidation is claimed to have
occurred, & 9 years after Y died.
!
Action is already barred by prescription.
2. Mistake or fraud from the time of the discovery of the same
o Ex. A, an expert jeweler, induces B in 1990 to buy a ring, knowingly
misrepresenting to B that it was made in diamond when it was made
only of crystal.
!
If B discovers the fraud in 1997, the 4-year period shall start
only from 1997.
3. Minors or other incapacitated persons from the time the guardianship
ceases
o Ex. B is As guardian.
!
During As minority, though obtaining a court order to sell the
property of his ward, B fraudulently transferred s property to
a 3rd party.
!
A cannot take action yet because B is the one taking charge
of his affairs. However, A must file a case against B within 4
years from the time:
o A reaches the age of majority, &/or
o The guardianship has ceased
Extrajudicial Demand
Generally, extrajudicial demand of creditor shall interrupt the running of

the prescriptive period
o HOWEVER, this only applies to a determinate conduct that can be
demanded
If a contract of sale is alleged as voidable, & aggrieved party who was

coerced or fooled (creditor-seller) makes an extrajudicial demand for the
reconveyance of the property prior to the filing of the suit, the prescriptive
period is NOT interrupted
!
Reason: a voidable contract is valid until annulled by
the courts; debtor-buyer thus has no obligation to acede
to a demand until the courts annul it
In voidable contracts, judicial demand is necessary to

interrupt the period
CASE: Mialilhe v. CA
Lesson: For intimidation & force, the period begins 4 years from the time
the intimidation ceases, & this period is not stopped by extrajudicial
demand; one must go immediately to the courts
Facts:
o X claimed that, during the Marcos era, he was intimidated &
forced to enter into a contract with DBP, a government bank, that
led to the forced conveyance of his property to DBP
o X made several extrajudicial demands for the return of his
property
o X filed suit to recover the property on March 23, 1990
Held: Action has prescribed. Marcos left the Philippines on Feb. 24, 1986;
this X should have filed suit on or before Feb. 24, 1990.
o Since there had been no annulment of the contract yet, there was
no determinate duty for DBP to heed the demand to reconvey
Art. 1392.
Ratification extinguishes the action to annul a voidable contract.
Art. 1393.
Ratification may be effected expressly or tacitly. It is understood that there is a tacit
ratification if, with knowledge of the reason which renders the contract voidable &
such reason having ceased, the person who has a right to invoke it should execute
an act which necessary implies an intention to waive his right.
Ratification
The act of curing the defect which made the contract annullable
Ex. If A is coerced by B to lease Bs property.

o Express ratification After B stops the coercion, A writes a letter
to B stating that A will continue the lease.
o Tacit ratification After B stops, A willingly & continuously pays
the rentals for the subject leased premises to be able to live in
the same
o In both cases, if A files an action to annul the agreement based
on force, it will not prosper even if it is within the 4 years.
CASE: Francisco v. GSIS
Lesson: There can be no ratification by a corporation of acts performed by

an officer if he has not been given apparent authority by the corporation, or
if his acts are not later validated by the corporation.
Facts:
o X, the plaintiff, sent a letter of compromise to GSIS, which GSIS
validly accepted.
The terms of the offer were clear, & over the signature
of GSISs general manager, X was telegraphically
informed that her proposal was accepted.
!
It was sent by the GSIS secretary & the manager never
disowned the same.
o In a letter remitting the payment of P30,000 advanced by Xs
father, X quoted verbatim the telegraph of acceptance.
o This was in itself notice to the corporation of the terms of the
allegedly unauthorized telegram. Notwithstanding this notice,
GSIS pocketed the amount and kept silent about the telegram.
Held: The Court found sufficient evidence of apparent authority through the
conduct & actuations of the corporations concerned. This silence, taken
together with the unconditional acceptance of 3 other subsequent
remittances from plaintiff, constitutes a binding ratification of the original
agreement.
!
CASE: Liquidators v. Kalaw
Lesson: The apparent authority of the one in a supposedly annullable

contract will serve as a barrier to further corporate action later, even if the
by-laws of a corporation require a different process.
Facts:
o Kalaw entered into a contract with NACOCO with only the general
maangers consent & without prior board approval.
o The practice of NACOCO has been to allow the general manager
to negotiate & execute contracts for & in NACOCOs behalf
without prior board approval.
o The by-laws, however, required the board to give their stamp of
prior approval in all corporate acts.
Held: The Kalaw contracts are valid corporate acts, because the board
itself, by its acts and through acquiescence, practically laid aside the bylaw requirement of prior approval.
Tacit Ratification
1) Person who has the right to invoke ratification has knowledge of the reason
which renders the contract voidable
2) The reason has ceased
3) Person executes an act which necessarily implies an intention to waive his
right
Art. 1394.
Ratification may be effected by the guardian of the incapacitated person.
Guardian & Ratification
Guardian administers the person & properties of the ward

o Must see to it that they are protection
o Everything undertaken affecting the ward is for the latters best
interest
Ratification can be made by the guardian of an incapacitated person.

Ex. If an insane person entered into a contract with a carpenter to repair

the roof of his house, this contract can be annulled, as it was entered into
by an incapacitated person.
o The guardian can make an express or tacit ratification of the
repair, especially if it redounds to the benefit of the ward
Art. 1395.
Ratification does not require the conformity of the contracting party who has no right
to bring the action for annulment.
Ratification as a Unilateral Act
Generally done by the injured party, not by the party causing injury
The consent of the injuring party is not required because such party
normally desires the effectivity of the contract anyway from its inception
Art. 1396.
Ratification cleanses the contract from all its defects from the moment it was
constituted.
Effects of Ratification
Transforms the contract completely as one without infirmity
Cures the defect which initially made the contract voidable
Retroacts to the day when the contract was entered into

Art. 1397.
The action for the annulment of contracts may be instituted against all who are
thereby obliged principally or subsidiarily. However, persons who are capable cannot
allege the incapacity of those with whom they contracted; nor can those who exerted
intimidation, violence, or undue influence, or employed fraud, or caused mistake
base their action upon these laws of the contract.
Parties in Annulment
Strangers to a contract cannot sue either or both of the contracting parties

to annul & set it aside.
o The existence of an interest in a particular contract that is the
basis of ones right to sue for nullification
Art. 1311: Contracts take effect only between the parties, their assigns and
heirs, except in cases:
o Where the rights and obligations arising from the contract are not
transmissible by their nature, or
o By stipulation or
o By provision of law.
The heir is not liable beyond the value of the property he received from the
decedent.
EXCEPTION (Ibaez v. HSBC, as explained in Malabanan v. Gaw Ching): He

who is not the party obligated principally or subsidiarily in a contract may
perhaps be entitled to exercise an action for nullity, if:
1) He is prejudiced in his rights with respect to one of the parties
2) He can show the detriment which positively would result to him from
the contract in which he had no intervention.
o A contract that affects a stranger to the said contract can be
nullified only to the extent that such nullification is absolutely
necessary to protect the plaintiffs lawful rights.
!
No need to set aside the entire contract.
CASE: Malabanan v. Gaw Ching
Lesson: A person leasing the property from a lessor does not fall under the
exception of 3rd parties who can filed an action for annulment of any
contract the lessor may enter into with a 3rd person.
Facts:
o X & Y executed a sale of Xs property to Y.
!
Gaw Ching wishes to intervene, invoking his right of
preemption in respect of the house & lot involved.
!
Gaw Ching leased the lot from X for many years
alraeady.
Held: Gaw Ching does not fall in the exception to the general rule that
strangers in a contract cannot file an action to annul it.
o X thrice offered the land to Gaw Ching but the latter had refused
to buy. Since Gaw Ching did not accept the offer to sell & did not
buy the land, he suffered no prejudice by the sale of the same
piece of land to Y. No fraud was thus worked upon him
notwithstanding his insinuation that the sale of the land to Y had
preceded the offer to himself.
o The fact that Gaw Ching had been lessee was simply not enough
basis for a right to bring an action to set aside the contract of sale
between X & Y. A lessee, it is elementary, cannot attack the title
of his lessor over the subject matter of the lease.
CASE: Armentia v. Patriarca
Lesson: Generally, an intestate14 heir is not contemplated as one of the

parties that can be considered principally involved; only forced15 or
testamentary heirs are. Thus, intestate heirs cannot file actions to annul
contracts entered into by the original owner & 3rd parties.
Facts:
o X was the brother of deceased Y; X is an intestate, rather than a
forced heir.
o Y was free to dispose her properties the way she liked, because
she had no ascendants or descendants.
Held: Plaintiff is not a forced heir. He is not obliged principally or

subsidiarily under the contract. Y did not transmit to him by devise or
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Someone who inherits the properties of the deceased who has left no will.
An heir who cannot be disinherited except for good causes recognized by law & whose share
in his ancestor's estate cannot be impaired by the will of the ancestor or even by gifts made
inter vivos.
14
15
!
otherwise any right to the property, the subject thereof. On the contrary,
Marta voluntarily disposed of it. No creditors are defrauded; there are
none. No legitimes are impaired. Therefore, plaintiff has no cause of action
to annul or to rescind the sale.
CASE: Concepcion v. Sta. Ana
Lesson: Only testamentary
Facts:
o X was the only surviving legitimate brother of Y, who died without
issue & without leaving a will.
o In Ys lifetime, she sold & conveyed three parcels of land for a
fictitious consideration to Z, who secured transfer certificate of
title of said lands issued under Ys name; Z has held possession
of the property since Ys death.
o X claims this is causing him damage & contracts hould be
annulled.
Held: In this case, Y never transmitted to X any right arising from the
contract with Z. X is just an intestate heir.
o Action to annul a contract entered into whenever they are tainted
with the vice which invalidate them, may be brought not only by
any person principally bound, but also by his heir to whom the
right & obligation arising from the contract are transmitted.
Hence, if no such rights, actions or obligations have been
transmitted to the heir, the latter cannot bring an action to annul
the contract in representation of the contracting party who made
it.
!
The testamentary or legal heir continues in law as the
juridical personality of his predecessor-in-interest, who
transmits to him from the moment of his death such of
his rights, actions & obligations as are not extinguished
thereby.
o In this case, Y voluntarily made the sale to Z, which X cannot now
protest. As Y had no forced heir, she was free to dispose of her
property as she wished, even without any consideration, unless
she is in fraud of her creditors (which she is not)
o A voluntary conveyance, without any consideration whatever, is
prima facie good as between the parties, & such an instrument
can not be declared fraudulent as against creditors in the
absence of proof, that there was at the time of the execution of
the conveyance a creditor who could be defrauded by the
conveyance
CASE: Baez v. CA
Lesson: A squatter to a property cannot be considered a stranger with a

substantial right to a third party contract even if he occupies the property
they live in, for he acquired possession in bad faith & his rights are not
prejudiced.
Facts:
X entered into & built his house upon PHHCs land without the
consent of the latter.
o PHHC executed a deed of sale in favor of Y & there were
subsequent transfers of ownership.
o X is suing because his rights, he claims, are substantially affected
by PHHCs actions.
Held: X has no right over the property, being a mere trespasser. Only
strangers those whose rights are prejudiced & who can prove the
detriment which they would positively suffer can interfere with a contract
between 2 stranger parties.
o
Those Estopped
Action for annulment cannot be filed by the person who caused the defect
in the contract.
o The one who committed fraud cannot annul the contract on the
ground that there was fraud. He is estopped from asserting the
grounds which were principally initiated by him.
o A litigant cannot come to court with unclean hands.
Annulment cannot likewise be filed by the person who is capacitated to

enter into the contract if the ground is the incapacity of the other party.
o If a minor & person of age entered into a contract of sale of a
particular car, the person of age cannot file a case to annul the
contract based on the fact that the other contracting party was a
minor.
o The minor, however can file a case upon reaching the age of
majority because it is at this time when the guardianship of the
parents ceases.
However, if the case filed is NOT for annulment of contract but for the
enforcement of the contract, the party who is capacitated may file such
action against the minor. The minors liability will depend on the kind of
misrepresentation the child made, & the extent of the childs benefit:
o Active misrepresentation - the minor deliberately & intentionally
undertakes to inform the other party & expressly declares in the
contract that he is of majority age, when in fact he is not of age
!
The minor will be liable to pay whatever his obligation is
under the contract as if his liability is that of a person
who is of age.
o Passive misrepresentation - the minor was able to enter into the
contract without doing anything to declare his true age, such
minor shall be liable only up to the extent that he has been
benefited by the contract.
Art. 1398.
An obligation having been annulled, the contracting parties shall restore to each
other the things which have been the subject matter of the contract, with their fruits,
and the price with its interest, except in cases provided by law.
In obligations to render service, the value thereof shall be the basis for damages.
Art. 1399.
When the defect of the contract consists in the incapacity of one of the parties, the
incapacitated person is not obliged to make any restitution except insofar as he has
been benefited by the thing or price received by him.
Decree of Annulment
Contracting parties must return to their original position
Ex. for things - In a contract of sale of a car, the (1) car must be returned to
the owner-seller & the (2) purchase money with the corresponding (3)
interest must be returned to the buyer.
Ex. for services - If the contract involves some service like the tutoring of a
particular child, the value of the tutoring must be paid to the tutor by way of
damages.
Incapacity as Defect
When the defect consists in the incapacity of one of the parties, the
incapacitated person is not obliged to make any restitution except insofar
as he has been benefited by the thing or price received by him
Ex.: A minor entered into a contract of loan with a bank.

o If part of the proceeds of the contract entered have been
uselessly spent by the minor, the bank cannot recover such
uselessly spent money even if a court decrees that the obligation
should be annulled. The minor has no obligation to restore such
money.
o HOWEVER, the bank can recover from the minor such part of the
proceeds which turns out to be beneficial to him like money spent
to enroll in a school.
o It must be noted that the bank cannot even file a case against
the minor.
!
It can only recover by way of a counterclaim in a
complaint for annulment filed by the minor when he
reaches the age of majority.
Art. 1400.
Whenever the person obliged by the decree of annulment to return the thing cannot
do so because it has been lost through his fault, he shall return the fruits received &
the value of the thing at the time of the loss, with interest from the same date.
When Thing is Lost
When the object cannot be returned, because it was lost by the person
obliged to return it due to the fault of the said person, the (1) value of the
object at the time of the loss, (2) its fruits & (3) interest from time of loss
shall be given instead to satisfy the order of restitution.
Ex. A is compelled by B to have an exchange of their respective cars. The

contract is subsequently annulled. A & B must return what each of them
has received from each other.
If A cannot return the car obtained by way of the exchange

because he lost it, he shall undertake restitution by paying B an
amount equivalent to the value of the car plus interest, if any.
Art. 1401.
The action for annulment of contracts shall be extinguished when the thing which is
the object thereof is lost through the fraud or fault of the person who has a right to
institute the proceedings.
If the right of action is based upon the incapacity of any one of the contracting
parties, the loss of the thing shall not be an obstacle to the success of the action,
unless said loss took place through the fraud or fault of the plaintiff.
Doctrine of Unclean Hands
General rule: action is extinguished if object is lost through fault or fraud of

the one who has a right to institute the proceedings
o Ex. If A coerced B to sell to him a car, B can seek the annulment
of the sale.
!
HOWEVER, if B lost the car by intentionally destroying it,
he cannot file the annulment case as such right will be
considered extinguished.
!
Self-reflection: If B lost the car by his own fault, he also
cannot file the case for annulment anymore.
BUT: If it is based upon the incapacity of any of the parties loss shall not
be an obstacle to the success of the action, unless the loss is due to the
fault or fraud of the plaintiff
o Reason an incapacitated person is not obliged to make any
restitution except when it has benefited him (Art. 1399)
o Ex.: If an incapacitated person, such as a deaf-mute who cannot
read & write, purchases a car & later he files a case to annul the
contract of sale, the mere fact that the car has been lost will not
abate the proceedings for annulment.
!
The incapacitated person is not obliged to make any
restitution EXCEPT when it has benefited him. Hence,
since the object of the contract has been lost, no
benefit can accrue in his favor.
!
HOWEVER, if the incapacitated person loses the car
through his own fault, then the case will be dismissed.
W/N you are incapacitated, if you lose the property through your own fault,
you do not have the right to file an action for annulment anymore.
Art. 1402.
As long as one of the contracting parties does not restore what in virtue of the
decree of annulment he is bound to return, the other cannot be compelled to comply
with what is incumbent upon him.
Restitution
Requires the return by the parties of what each has received from the
other.
If one of them cannot restore to the other what he has received from the
said other, such other person cannot be compelled to return what he, in
turn, has received.
o HOWEVER, if one of the parties is incapacitated, he is not obliged
to return what he has received except insofar as he has been
benefited by the thing or price received by him (Art. 1399).
CHAPTER 8. UNENFORCEABLE CONTRACTS.
Art. 1403. The ff. contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been
given no authority or legal representation, or 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 ff. cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some note or memorandum
thereof, be in writing, & 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 P500, unless the buyer accept & receive
part of such goods & 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 & entry is
made by the auctioneer in his sales book, at the time of the sale,
of the amount & kind of property sold, terms of sale, price, names
of the purchasers & person on whose account the sale is made, it
is a sufficient memorandum;
e. An agreement for the leasing for a longer period than 1 year, or
for the sale of real property or of an interest therein;
f. A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a contract.
Art. 1404. Unauthorized contracts are governed by Art. 1317 & the principles of
agency in Title X of this Book.
Unenforceable Contracts in This Chapter
The unenforceable contracts in this chapter - A contract may have ALL the
requisites for perfection but may still be unenforceable.
Contracts without Authority
Discussed under Art. 1317,
Non-authority is also governed by the principles of agency in Art.

1868-1932 of the Civil Code.
If a contract has been entered into without authority, it cannot be enforced.
o
Another case of an unenforceable contract is when a contract is entered into by

parties who are both incapacitated to enter into a contract. Hence, if a contract is
entered into by a minor and by a deaf-mute who cannot read and write, such
contract is unenforceable. If only one is incapacitated, the contract will only be
voidable.
Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Art.
1403, are ratified by the failure to object to the presentation of oral evidence to
prove the same, or by the acceptance of benefits under them.
Art. 1406. When a contract is enforceable under the Statute of Frauds, & a public
document is necessary for its registration in the Registry of Deeds, the parties may
avail themselves of the right under Art. 1357.
Compelling the Other Party
When an agreement in Art. 1403(2) is in writing & therefore enforceable, &

the law requires registry in the Registry of Property, the contracting parties
may compel each other to observe the form required once the contract has
been perfected.
o They may do so simultaneously with the action upon the contract.
CASE: Almirol vs. Monserrat

o Facts: By virtue of a verbal sale, the applicant came into actual
possession of the land. The applicant sought the registration of
the subject lot already in his possession. The opposition claimed
that oral proof of the contract cannot be adduced in court where
the registration was being questioned.
o Held: Parol evidence of sale is adduced not for the purpose of
enforcing performance thereof, but on the basis of the lawful
possession of the applicant, entitling him to have the land
thereby sold registered in his name. Thus, the statute of fraud is
not applicable.
A mere tenant in the subject property cannot invoke the doctrine in the
Almirol case.
Art. 1407. In a contract where both parties are incapable of giving consent, express
or implied ratification by the parent, or guardian, as the case may be, of one of the
contracting parties shall give the contract the same effect as if only one of them
were incapacitated.
If ratification is made by the parents or guardians, as the case may be, of both
contracting parties, the contract shall be validated from the inception.
Incapacitation of Both Parties & Ratification
In case both parties are incapacitated, & the guardians of one of them
ratifies the contract, the same shall be transformed into an annullable
contract.
If ratification is by the parents or guardian of both parties, the contract
shall be valid, without any defect or infirmity at all.
Art. 1408. Unenforceable contracts cannot be assailed by 3rd persons.

Unassailable by 3rd Parties
It is useless for a 3rd person to assail an unenforceable contract since it

cannot be executed anyway
CHAPTER 9. VOID & INEXISTENT CONTRACTS.
Art. 1409. The ff. contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of
the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived.
CASE: De Leon v. CA
Lesson: The continued existence of a marriage cannot be made the basis

of a contract; such a contract is void.
Facts: The parties, who were husband & wife, stipulated that in
consideration for a peaceful & amicable termination of relations between
the undersigned & her lawful husband, the husband would give some
properties to the wife & monthly support for the children, & the wife would
agree to a judicial separation of property plus the amendment to the
divorce proceedings initiated by the wife in the United States to conform to
the agreement
Held: The agreement is contrary to law, Filipino morals & public policy
because the consideration of the agreement is the termination of the
marriage by the parties which they cannot do on their own & without any
legal basis.
CASE: Gardner v. CA
Lesson: An absolutely simulated contract is void.
Facts: A contract purporting to be a sale of land was really without

consideration. Said contract was intended merely to protect a party to a
joint venture for the cash advances he was to make for the realty
subdivision that the parties wanted to put up.
Held: The contract was absolutely simulated and therefore null and void.
CASE: Prudential Bank v. Panis
Lesson: A contract which violates a law is void.
Facts: A grantee of a government sales patent mortgaged the same within

the prohibition provided by the Public Land Act that no encumbrance or
alienation should be made of the property subject of the patent within 5
years from the issuance thereof
Held: The mortgage was null and void for being in violation of law.
CASE: Maharlika Publishing Corp. v. Tagle
Lesson: Public order & public policy dictates that a public official cannot
participate in a bidding for foreclosed property, as it gives rise to suspicions
of insider information.
Facts: The wife of a GSIS official, acting for her husband who was an
influential Division Chief of the GSIS, was allowed to bid on a foreclosed
property, and she eventually won the bidding.
Held: The bidding and the contract of sale resulting therefrom as null and
void as they violated Art. 1491 prohibiting public officers and employees
from purchasing property under their administration in an auction sale.
CASE: Cui v. Arellano University
Lesson: Scholarships are not just a business scheme; they are part of
public policy in order to award students who deserve the merit. Thus, it
cannot be waived because a student is transferring schools.
o 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 a transaction which in its object, operation, or
tendency, is calculated to be prejudicial to the public welfare, to
sound morality, or to civic honesty.
Facts: A student scholar, who decided to move to another school, was

required to refund the amount of his free tuition, which he initially got from
a scholarship granted to him by the school on the basis of a contract. He
had signed said contract, which stated: In consideration of the scholarship
granted to me by the University, I hereby waive my right to transfer to
another school without having refunded to the University the equivalent of
my scholarship cash.
Held: The refund cannot be properly demanded because the waiver was
against public policy. The scholarship is based on the memorandum issued
by the Director of Private Schools; a contract of waiver is in direct violation
of the memorandum. In determining a public policy of the State, courts are
limited to a consideration of:
o The Constitution,
o The judicial decisions,
o The statutes, and
o The practice of government officers.
CASE: Marubeni Corporation v. Lirag
Lesson: Contracts obtained through the influence of higher executive

officials in government are void for being against public policy.
Facts: A consultancy agreement was obtained from a government agency
through the use of influence of executive officials.
Held: The contract is void. Any agreement entered into because of the
actual or supposed influence which the party has, engaging him to
influence executive officials in the discharge of their duties, which
contemplates the use of personal influence and solicitation rather than an
appeal to the judgment of the official on the merits of the object sought is
contrary to public policy.
Further Examples of Void Contracts
A stipulation in a contract prohibiting a mortgagor to sell the property

mortgaged is void.
o Art. 2130 of the Civil Code, which provides that a stipulation
forbidding the owner from alienating the immovable mortgaged
shall be void.
o HOWEVER, a stipulation prohibiting the re-mortgage to another of
the same property already mortgaged to the creditor-mortgagee is
valid.
The non-payment of the purchase price of a valid contract of sale is not

among the instances where the law declares a contract null and void.
o At most, the non-payment gives a cause of action for rescission or
specific performance.
Effect of a Void Contract
Defect is permanent & incurable no ratification

o A void agreement will not be rendered operative by the parties
alleged partial or full performance of their respective prestations.
It produces no legal effects at all.
Scenario: A & V enter into a contract for the sale of opium. A delivers but V
does not want to initially pay.
o The later payment of V does not make the contract valid. It is still
void.
CASE: Arsenal v. IAC

o Lesson: A void contract can never be ratified, even if a new one is
executed to fix the old one. Further, equity or estoppel cannot
give validity to a void contract.
!
The original owners of a homestead remain the rightful
owners despite the fact that they themselves granted
the homestead to someone else or that they
acknowledged the grantee as the rightful owner.
o Facts:
!
Respondent, in 1957, bought from grantee-petitioners a
homestead patent a property subject of the patent
within the prohibitory period provided by law, which
therefore made the same void as being against public
policy.
Respondent was in possession of the said property even

up to 1974 when the case was filed.
!
The original owners in this case want the land back, but
they never disaffirmed the contracts executed between
them and the respondent. More than that, they
expressly sustained the title of the latter in court and
failed to show any interest in recovering the land.
Held: The Supreme Court refused to award the property to the
said individual even if another contract was executed after the
prohibitory period ratifying the previous sale. Neither can the
infirmity be cured by equity because the individual himself
transgressed the law.
!
In cases where the homestead has been the subject of
void conveyances, the law still regards the original
owner as the rightful owner subject to escheat
proceedings by the State. The land is awarded back to
the original owner even if he was equally guilty with the
vendee in circumventing the law.
!
Pari delicto doctrine may not be invoked, since it would
run counter to a fundamental policy of the State, that
the forfeiture of a homestead is a matter between the
State and the grantee or his heirs. Until the State had
taken steps to annul the grant and asserts title to the
homestead the purchaser is, as against the vendors or
his heirs, no more entitled to keep the land than any
intruder.
!
Art. 1410. The action or defense for the declaration of the inexistence of a contract
does not prescribe.
Judicial Declaration
There is no need to judicially declare a void contract void; the judicial

decision merely confirms it.
It can be filed at anytime and has no prescriptive period, even as a

defense.
Ex. If A and B enter into a contract, where it is stipulated that, for a

valuable consideration to be given by B, A is to construct a 3-storey
building in 3 days, such a contract is void because it contemplates an
impossible service.
o B can just treat it as void even without a court action making
such contract void.
o HOWEVER, B can file a case to declare that the contract is void so
that he can get back what he has given as valuable consideration
to A.
Laches does not apply when resisting an imprescriptible legal right
Restitution generally applies
If both parties have no fault or are not guilty, the restoration of

what was given by each of them to the other is consequently in
order
Art. 1411. When the nullity proceeds from the illegality of the cause or object of the
contract, & the act constitutes a criminal offense, both parties being in pari delicto,
they shall have no action against each other, & both shall be prosecuted. Moreover,
the provisions of the Penal Code relative to the disposal of effects or instruments of
a crime shall be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent
one may claim what he has given, & shall not be bound to comply with his promise.
Void Contracts due to Criminal Activities
Ex dolo malo non oritur actio & in pari delicto potior est conditio
defendentis.
o The law will not aid either party to an illegal agreement; it leaves
the parties where it finds them.
Ex. If A & B enter into a contract whereby A is to kidnap X & to place X in

the custody of B, and the car to be used for the kidnapping shall thereafter
be given to A as the latters payment, the cause of the contract is clearly
void & even constitutes a criminal offense.
o If A is successful in kidnapping X, & B does not give the car, A has
no action against B for the delivery of the car.
o If B already delivers the car & A does not fulfill his obligation, B
has no right to go against A.
o Both are in pari delicto & both shall be prosecuted for
kidnapping. The car will be disposed of as an instrument of the
crime in accordance with the Revised Penal Code.
Art. 1411 & 1412 are NOT APPLICABLE to inexistent contracts

o In pari delicto doctrine only applies to contracts with illegal
consideration or subject matter, whether the attendant facts
constitute an offense or misdemeanor, or whether the
consideration involved is merely rendered illegal.
o If a contract has absolutely no consideration at all, or there is
total absence of consent, or there is absence of an object, such
contract is inexistent & therefore the rule on pari delicto will not
apply.
Art. 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the ff. rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may
recover what he has given by virtue of the contract, or demand the
performance of the others undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what
he has given by reason of the contract, or ask for the fulfillment of what
has been promised him. The other, who is not at fault, may demand the
return of what he has given without any obligation to comply with his
promise.
CASE: Lita Enterprises, Inc. v. IAC
Lesson: Though certain schemes such as the kabit system may not be
criminal, they may be considered against public policy; any contract based
on such a scheme is inexistent & the parties, if both at fault, shall be in
pari delicto.
Facts: The parties herein operated under an arrangement, known as the

kabit system, whereby a person who has been granted a certificate of
convenience allows another person who owns motor vehicles to operate
under such franchise for a fee. However, a certificate of public convenience
is a special privilege conferred by the government.
Held: The contract is void & inexistent, & the parties can claim no reliefs as
they are in pari delicto. The system is seen as the root of corruption in
many government transportation offices, & though it is not criminal, it is
void for being against public policy.
CASE: Heirs of Marciana Avila v. CA
Lesson: Parties to an illegal contract that are contrary to law will not be
able to recover what they have given, nor can they ask for fulfillment.
Facts: A teacher bought property in violation of the Administrative Code

prohibiting public officials from purchasing property sold by the
government for non-payment of taxes.
Held: The contract was void because it was contrary to law. The teacher, as
a party to an illegal transaction cannot recover what she gave by reason of
the contract or ask for the fulfillment of what had been promised her
pursuant to Article 1412 of the Civil Code.
CASE: Compania General De Tabacos de Filipinas (Tabaclera) v. CA
Lesson: Parties who enter into a contract to evade creditors are also in pari
delicto & cannot have claims against one another.
Facts: Buyer Tabaclera & a seller of certain sugar quota, which was
previously mortgaged to certain banks, entered into a contract of sale
purposely intending to negate the lawful rights & claim of the banks.
o The banks, however, had already foreclosed on the mortgage.
o Tabaclera then claimed that it should be reimbursed of what it
gave the seller in the event that it was ordered to reconvey the
sugar quota to the banks.
Held: Tabaclera & the seller cannot recover, because they are both in pari
delicto. They both had the common intention of negating the banks &
acting in bad faith, even if what they did is not contrary to any express
provision of law.
CASE: Rodriguez v. Rodriguez
Lesson: Family members who enter into transactions to evade taxes,

though this would not be illegal per se, are in pari delicto & cannot recover
whatever they lost.
Facts: A mother sold property to her daughter; the daughter then sold the
property to her father. These transactions were done to for convert the
paraphernal property of the mother to conjugal property. This would vest

half interest on the husband & evade the prohibition against donations
from one spouse to another during coverture.
o The wife, contending that the sale was a circumvention of the
said prohibition and therefore void according to law, filed a case
for the nullification of the transactions.
Held: The wife could no longer recover. While the Court did not consider the
transactions simulated, it regarded the same as a circumvention of the
legal prohibition against donations between spouses. However, all the
parties were guilty, & thus no one was entitled to recover.
When Only One Party is At Fault
The one at fault cannot recover what he has given, or ask fulfillment of
what was promised to him
The one without fault may demand the return of what he has given
without any obligation to comply with his promise
Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be
recovered by the debtor, with interest thereon from the date of the payment.
Usury Law
Under the Usury Law, in case of usurious interest, the whole interest will be
recoverable.
Ex. In a loan of P1,000, with interest of 20% per annum or P200 for 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 allowed by law.
o The whole P200 is void, since payment of said interest is illegal.
o Effect of Art. 1413 adds that the wrongly paid interest can be
recovered with interest thereon from the date of payment
HOWEVER, this does not lead to forfeiture of the principal

Art. 1414. When money is paid or property delivered for an illegal purpose, the
contract may be repudiated by one of the parties before the purpose has been
accomplished, or before any damage has been caused to a third person. In such
case, the courts may, if the public interest will thus be subserved, allow the party
repudiating the contract to recover the money or property.
CASE: De Leon v. CA
Lesson: When the parties repudiate a void contract before it is

accomplished, the courts may choose to allow the repudiating party to
recover the money.
Facts: The parties entered into a void contract, as the consideration was
the termination of marital relationship. The husbands mother, who already
previously gave P380,000 to the wife pursuant to the void contract,
resisted the attempt by the wife to enforce the other provisions of the
agreement on the ground that the contract was void.
The lower court ruled that no enforcement can be made because

the parties are in pari delicto, & therefore the mother cannot
recover the P380,000.
Held: The mother can recover the P380,000, as the letter-agreement she &
the wife entered into was repudiated before its purpose was accomplished.
o
Art. 1415. Where one of the parties to an illegal contract is incapable of giving
consent, the courts may, if the interest of justice so demands, allow recovery of
money or property delivered by the incapacitated person.
Incapacity as an Exception to Pari Delicto Rule
Ex. A is a minor and he enters into a contract with B, whereby B sells to A

prohibited drugs.
o The court may allow the minor to recover the money he paid B in
purchasing the illegal drugs. However, this is within the discretion
of the court.
Art. 1416. When the agreement is not illegal per se but is merely prohibited, & the
prohibition by the law is designed for the protection of the plaintiff, he may, if public
policy is thereby enhanced, recover what he has paid or delivered.
CASE: Ras v. Sua
Lesson: A disregard or violation of the conditions of the land grant in

RA477 & the Public Land Act does not produce automatic reversion of the
property to the State, nor work to defeat the grantees right to recover the
property he had previously disposed of or encumbered.
Facts: A property acquired from the government pursuant to a law

designed to give land to the landless was, in violation of the spirit of said
law, leased to 3rd parties. Said parties then refused to have the property
reconveyed to the possession of the owner-grantee despite violation of the
lease agreement.
o In their defense, the 3rd-party possessors claimed that
repossession cannot be made because the parties were in pari
delicto and that the proper party to file the suit was the
government who granted the land to the owner.
Held: SC ruled that the property should be returned to the owner-grantee,

as here it would be favorable to the interests of public policy. The
contentions of the 3rd-party possessors are premised on the incorrect
assumption that upon the plaintiffs violation of RA 477 he automatically
loses his rights over the land and said rights immediately revert to the
State.
Art. 1417. When the price of any article or commodity is determined by statute, or by
authority of law, any person paying any amount in excess of the maximum price
allowed may recover such excess.
When Law Provides Highest Amount
It is illegal to charge the buyer higher than the statutory ceiling

The excess from the limit shall be recoverable
Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of
hours of labor, and a contract is entered into whereby a laborer undertakes to work
longer than the maximum thus fixed, he may demand additional compensation for
service rendered beyond the time limit.
Overtime Pay
Now governed by the Labor Code of the Philippies
If an employer and employee enter into a contract where the employee

shall work only 8 hours a day for a specified compensation, such employee
cannot be forced to work beyond the said time
o If he is required to do so, he should be paid for the extra time
Art. 1419. When the law sets, or authorizes the setting of a minimum wage for
laborers, & a contract is agreed upon by which a laborer accepts a lower wage, he
shall be entitled to recover the deficiency.
Minimum Wage
Ex. If according to law A is to receive P200 a day, & he enters into an

employment contract providing that he is to get P150 a day, the contract is
void
o A can demand the difference of P50.
Art. 1420. In case of a divisible contract, if the illegal terms can be separated from
the legal ones, the latter may be enforced.
Divisible Contracts
If a void provision in a contract directly affects the entirety of the contract,

the contract can be considered void.
o HOWEVER, if the provision is independently separable from the
other provisions, such provision alone shall be considered void.
Ex. In a contract of loan secured by a collateral of the debtors property

which, as stipulated in the contract, shall automatically be owned by the
creditor in the event of non-payment of the debt, the loan itself is valid but
the security is void.
o This is pactum commissorium; for the forfeiture to be valid in
case of non-payment the collateral must be foreclosed & sold at
auction to the highest bidder.
Art. 1421. The defense of illegality of contracts is not available to 3rd persons whose
interests are not directly affected.
Mutuality of Contracts & Void Contracts
General rule: There can only be mutuality of obligations in a contract which

affects the parties involved therein.
o Exception: If a 3rd person is greatly prejudiced as his interest is
directly affected, he may file a case for the nullification of a
contract or set the same as a defense even if said prejudiced

person is not a party to the void contract.
!
Ex. If A & B enter into a contract of sale of real property,
where A sells a particular land which he does not own to
B for an illegal consideration, such a contract is void.
If the particular land area sold encroaches on

the property of X, a 3rd person, he can seek
the nullification of such contract as it directly
affects his interest.
Art. 1422. A contract which is the direct result of a previous illegal contract, is also
void & inexistent.
Void Contract & Subsequent Inexistent Contract
If a subsequent contract proceeds from an inexistent contract, the

subsequent contract is likewise void.
Contract
Void
3rd Persons
May assail
Rescissible
Unenforceable
May assail
Only parties can assail
Voidable
May assail
Restitution
Generally, no
restitution
There is restitution
No execution yet;
no application
There is restitution
Damages
No
Yes
N/A
No
TITLE III. NATURAL OBLIGATIONS.

Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to
compel their performance. Natural obligations, not being based on positive law but
on equity & natural law, do not grant a right of action to enforce their performance,
but after voluntary fulfillment by the obligor, they authorize the retention of what has
been delivered or rendered by reason thereof. Some natural obligations are set forth
in the ff. articles.
Rationale of Natural Obligations (1947 Code Commission)
On the part of the payor give rise to a moral, rather than legal, duty to pay
or perform, but the person thus performing feels that in good conscience
he should comply with his undertaking which is based on moral grounds
o He should not be allowed by law to take back what he has rightly
done
On the part of the payee - under the laws in force, the payee is obliged to
return the amount received by him because the payor was not legally
bound to make the payment; this is unfair to the payee, who deserves to
be paid
Equity, morality & natural justice are the foundation of natural law
Examples of natural obligations in Title III are NOT exclusive
Art. 1424. When a right to sue upon a civil obligation has lapsed by extinctive
prescription, the obligor who voluntarily performs the contract cannot recover what
he has delivered or the value of the service he has rendered.
Paying Despite Extinctive Prescription
Ex. The prescriptive period to file a case based on a written agreement is

10 years from the time the right of action accrues. If a creditor, by virtue of
a written loan contract, does not collect the amount of the loan after 10
years from the time it should be paid, such creditor can no longer collect
from the debtor.
o However, if the debtor, despite the lapse of the period & knowing
that the debt has already prescribed, pays the creditor, such
debtor can no longer recover such payment.
Art. 1425. When without the knowledge or against the will of the debtor, a 3rd person
pays a debt which the obligor is not legally bound to pay because the action thereon
has prescribed, but the debtor later voluntarily reimburses the 3rd person, the obligor
cannot recover what he has paid.
3rd Person Paying Against Will of Debtor
Ex. A is indebted to Z but the collection of such debt has already

prescribed.
o If M pays the debt to Z, &, later on, A voluntarily reimburses M,
such payment shall be considered valid & A cannot recover such
amount from Z on the ground that M should not have paid him.
Art. 1426. When a minor between 18 & 21 years of age who has entered into a
contract without the consent of the parent or guardian, after the annulment of the
contract voluntarily returns the whole thing or price received, notwithstanding the
fact that he has not been benefited thereby, there is no right to demand the thing or
price thus returned.
Art. 1427. When a minor between 18 & 21 of age, who has entered into a contract
without the consent of the parent or guardian, voluntarily pays a sum of money or
delivers a fungible thing in fulfillment of the obligation, there shall be no right to
recover the same from the obligee who has spent or consumed it in good faith.
Minors & Payment
An incapacitated person is not obliged to make any restitution except

insofar as he has been benefited by the thing or price received by him.
A person who is between 18 & 21 years of age is not anymore a minor

because the age of majority today, pursuant to RA 6809 is 18.
o HOWEVER, if ever the law is still to apply, it means that a minor,
who voluntarily makes payment or restitution of what he has
obtained by contract even though he has no legal obligation to
make payment or restitution, can no longer recover what he has
returned.
Art. 1428. When, after an action to enforce a civil obligation has failed, the
defendant voluntarily performs the obligation, he cannot demand the return of what
he has delivered or the payment of the value of the service he has rendered.
Defendant Performing Obligation Despite Failure of Civil Action
Ex. If A is indebted to B for P1,000 & a civil suit is filed to collect the
amount but such suit is dismissed, A need not pay the said amount but, if
he voluntarily makes payment, he can no longer recover such payment.
Art. 1429. 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.
Voluntary Payment of Heir in Excess of Inherited Property
Ex. A is indebted to X for P10,000. A later dies, with M as his heir who is
entitled only to P5,000 from the estate of A. If M voluntarily pays X
P10,000, M can no longer recover such an amount.
Art. 1430. 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 & irrevocable.
Legacy Paid in a Defective Will
Ex. M provided in his holographic will that his car shall go to his driver X.
Later, the holographic will turns out to be partly type-written & therefore it
is void as such will should be wholly hand-written by the testator.
o If, despite the nullity of the will, Ms heir, Z, still voluntarily gives
the legacy of the car to X, it shall be valid & cannot be revoked
anymore.
TITLE IV. ESTOPPEL.
Art. 1431. Through estoppel an admission or representation is rendered conclusive
upon the person making it, & cannot be denied or disproved as against the person
relying thereon.
Estoppel & Its Application
The doctrine of estoppel having its origin in equity, its application depends
on the special circumstances of each case
o However, in each case, estoppel must be determined after
carefully considering the material facts of the case lest injustice
may result
Estoppel cannot be sustained by mere argument or doubtful inference; it

must be clearly proved in all its essential elements by clear, convincing &
satisfactory evidence.
Estoppel is not applicable:

(1) Against government suing in its capacity as sovereign or asserting

governmental rights
(2) When a law or public policy will be violated
(3) Against government owing to the mistakes or errors of its officers
o Any error made by a tax official in the assessment of
taxes does not have the effect of relieving the taxpayer
from the full amount of liability as fixed by law.
(4) To questions of law
o Estoppel applies only to questions of fact
o If an act, conduct or misrepresentation of the party
sought to be estopped is due to ignorance founded on
innocent mistake, estoppel will not arise
CASE: Republic v. Go Bon Lee
Lesson: Government is never estopped by mistakes on the part of its

agents
Facts: The government, in 1951, filed a petition to cancel the certificate of

naturalization of a Chinese who was granted naturalization in a court in
Cebu in 1941 & who took his oath of allegiance in 1942. The Chinese man
claimed that his case could no longer be reopened due to estoppel.
Held: The doctrine of estoppel or of laches does not apply against the
Government suing in its capacity as Sovereign or asserting governmental
rights
Art. 1432. The principles of estoppel are hereby adopted insofar as they are not in
conflict with the provisions of this Code, the Code of Commerce, the Rules of Court &
special laws.
Art. 1433. Estoppel may be in pais or by deed.
Estoppel by Deed
Estoppel by deed is a bar which precludes one party to a deed & his privies
from asserting as against the other party & his privies any right or title in
derogation of the deed, or from denying the truth of any material facts
asserted in it.
o Technical in nature
o May conclude a party without reference to the moral equities of
his conduct.
When a man has entered into a solemn engagement by deed, he shall not
be permitted to deny any matter which he has asserted therein.
Aim: To prevent circuity of actions, & to compel party to fulfill their

contracts.
Where estoppel by deed arises, it is generally limited to an action on the

deed itself; in a collateral action, there is ordinarily no estoppel.
Estoppel in Pais (Equitable Estoppel)
A situation where, because of something which he has done or omitted to

do, a party is denied the right to plead or prove an otherwise important
fact.
It is the principle by which a party who knows or should know the truth is
absolutely precluded, both at law & in equity, from denying, or asserting
the contrary of, any material fact which by his words or conduct, affirmative
or negative, intentionally or culpable negligence, he has induced another,
who was excusably ignorant of the true facts & who had a right to rely upon
such word or conduct, to believe & act upon them thereby, as a
consequence reasonably anticipated, changing his position in such a way
that he would suffer injury if such denial or contrary assertion was allowed.
Rests upon facts & circumstances of a particular case
Essential Elements of Estoppel in Pais

(1) Conduct amounting to false representation or concealment of material
facts or at least calculated to convey the impression that the facts are
otherwise than, & inconsistent with, those which the party subsequently
attempts to assert;
(2) Intent, or at least expectation that this conduct shall be acted upon, or at
least influenced by the other party;
(3) Knowledge, actual or constructive of the actual facts.
Essential Elements of Estoppel by Conduct/Deed
(1) There must have been a representation or concealment of material facts;
(2) The representation must have been with knowledge of the facts;
(3) The party to whom it was made must have been ignorant of the truth of the
matter; &
(4) It must have been made with the intention that the other party would act
upon it.
Art. 1434. When a person who is not the owner of a thing sells or alienates &
delivers it, & later the seller or grantor acquires title thereto, such title passes by
operation of law to the buyer or grantee.
If A, who is not the owner of a car sells the same to B, the sale is
unenforceable because A has no authority to sell the property.
o HOWEVER, if A himself delivers the property to B, & later A buys
the same from the real owner N, A cannot claim the property as
his on the ground that when he sold it to B, he was not the owner
of the same.
o B shall be preferred by the law, which will treat the sale as
completely valid even though at the time it was actually made,
the seller is not the owner.
CASE: Estoque v. Pajuimala

o Lesson:
o Facts: A co-owner sold a land which he co-owned 2 other owners.
The next day, that co-owner completely acquired the property
from the other 2 owners. Such sale was assailed as invalid

because the seller could not have sold the interest of the other
co-owners without their consent.
Held: The sale was valid because the vendor, the next day,
acquired the entire property from her co-owners & became the
sole owner.
Art. 1435. If a person in representation of another sells or alienates a thing, the

former cannot subsequently set up his own title as against the buyer or grantee.
Agent
If A constituted B as his agent to sell a car & the car was in fact sold by B, A
cannot later on claim that he was the owner to invalidate the transaction.
Art. 1436. A lessee or a bailee is estopped from asserting title to the thing leased or
received, as against the lessor or bailor.
Lessee & Bailee
Lessee - acknowledges the fact that he is not the owner of the property &
he has only the peaceful possession thereof under such terms &
conditions as the owner & the lessee have mutually agreed.
Bailee in commodatum - merely acquires the use of the thing loaned but
not its fruits. A bailee likewise acknowledges the fact that he is not the
owner of the non-consumable object delivered to him for his use for a
certain period of time with the obligation to return the same at the
expiration of said period.
Art. 1437. When in a contract between 3rd persons concerning immovable property,
1 of them is misled by a person with respect to the ownership or real right over the
real estate, the latter is precluded from asserting his legal title or interest therein,
provided all these requisites are present:
(1) There must be fraudulent representation or wrongful concealment of facts
known to the party estopped;
(2) The party precluded must intend that the other should act upon the facts
as misrepresented;
(3) The party misled must have been unaware of the true facts; &
(4) The party defrauded must have acted in accordance with the
misrepresentation.
3rd Party Fraudulence
Ex. A & B have a contract of lease where A, the lessee, has been given a
preferential right to buy the property in the event that B, the lessor, decides
to sell the property.
o A approaches Z, and tells him that the property is his (As) already
because he (A) has already exercised his preferential right, & that
only the documentation is to be done. A also tells Z that the
property is being eyed by a corporation, which intends to buy the
same.
This representation is made to entice Z to buy the

property and then later resell it to said corporation,
thereby giving him enormous profit.
However, the real owner, in fact, has not yet offered the property
for sale such that A could not have exercised his preferential
right. Also there is really no corporation intending to buy the
property.
Because A is a seasoned real estate broker, Z relied on As
fraudulent representation and buys the property.
Later on, A cannot assert a claim on the property contending that
the sale is unenforceable for not having the consent of the true
owner, B, at the time it was sold.
!
o
o
Art. 1438. One who has allowed another to assume apparent ownership of personal
property for the purpose of making any transfer of it, cannot, if he received the sum
for which a pledge has been constituted, set up his own title to defeat the pledge of
the property, made by the other to a pledgee who received the same in good faith &
for value.
Pledge
A thing pledged must be placed in the possession of the creditor, or of a 3rd

person by common agreement.
o A pledge is constituted by the absolute owner of the thing
pledged to secure the fulfillment of a principal obligation.
o The person constituting the thing must have free disposal of his
property, or, in the absence thereof, he must be legally authorized
for the purpose.
Ex. A does not want to be known as the owner of a Mercedez Benz. He tells
everybody that said car is owned by B. B knows of this representation of A
& goes along with it. A even gives B the authority to sell, encumber or
alienate the property. A instructs B to obtain a loan; B decides to pledge
the property for said loan, which he obtains from X. The proceeds of the
loan however goes to A who, in the first place, instructed B to obtain the
loan.
o As pledgee, X now is in possession of the car. The loan becomes
due. X warns B that if no payment is made, the pledge will be
foreclosed. Learning of this legal threat by X, A cannot resist the
foreclosure by claiming that the pledge of the car is invalid
because B does not actually own it. A is estopped.
Art. 1439. Estoppel is effective only as between the parties thereto or their
successors-in-interest.
Mutuality in Estoppel
General rule: An equitable estoppel must be mutual & reciprocal

o Unless both parties to a transaction are bound by an estoppel,
neither is bound.
CASE: Castrillo v. CA
o Facts:
!
Isabel sold her 1/3 share of Lot No. 188 to Dimaranan
in 1932 at the time when she was not yet the owner
thereof.
!
Isabel acquired ownership only when her sister,
Crispina, executed a formal deed of sale in her favor in
1934, covering an area of 252 sqm., thereby rendering
unquestionable the ownership of Dimaranan.
!
The heirs of Crispina assailed the lower courts
application of estoppel provided for in Article 1434.
o Held: Estoppel can be applied. If any body at all may be heard to
challenge the application of the doctrine of estoppel in favor of
respondents (Dimaranan), it is only the party against whom it
may be invoked in this case the vendor, Isabel, from whom they
acquired the disputed property.
!
Crispina having conveyed the same to Isabel, neither
she nor her successors may raise the point to their
advantage. For them to do so would in effect be to deny
the rights of Isabel.
TITLE V. TRUSTS.
CHAPTER 1. GENERAL PROVISIONS.
Art. 1440. A person who establishes a trust is called the trustor; one in whom
confidence is reposed as regards property for the benefit of another person is known
as the trustee; & the person for whose benefit the trust has been created is referred
to as the beneficiary.
Art. 1441. Trusts are either express or implied. Express trusts are created by the
intention of the trustor or of the parties. Implied trusts come into being by operation
of law.
Trust Defined
Trust - the right enforceable solely in equity, to the beneficial enjoyment of

property, the legal title to which is vested in another
o But the word trust is frequently employed to indicate duties,
relations, and responsibilities which are not strictly technical
trusts.
Express Trusts - those created by the direct & positive acts of the parties,
by some writing, deed, or will, or by words either expressly or impliedly
evincing an intention to create a trust
Implied Trusts - those which, without being expressed, are deducible from
the nature of the transaction as matters of intent, or which are superinduced on the transaction by operation of law as matters of equity,
independently of the particular intention of the parties
Resulting Trust - raised or created by the act or construction of

law, but in its more restricted sense it is a trust raised by
implication of law & presumed always to have been contemplated
by the parties, the intention as to which is to be found in the
nature of their transaction, but not expressed in the deed or
instrument of conveyance
!
Ex. Art. 1448-1455, Civil Code
Constructive Trust - a trust raised by construction of law, or
arising by operation of law; not created by any words, either
expressly or impliedly evincing a direct intention to create a trust,
but by the construction of equity in order to satisfy the demands
of justice. It does not arise by agreement or intention but by
operation of law.
!
Ex. If a person obtains legal title to property by fraud or
concealment, courts of equity will impress upon the title
a so-called constructive trust in favor of the defrauded
party. A constructive trust is not a trust in the technical
sense.
Imprescriptibility of Express Trusts
A trustee can never acquire by prescription the ownership of the property

entrusted to him
o Property held in trust can be recovered by the beneficiary
regardless of the lapse of time
An action to compel a trustee to convey property registered in his name in

trust for the benefit of the cestui que trust does not prescribe
The defense of prescription cannot be set up in an action to recover

property held by a person in trust for the benefit of another
HOWEVER, acquisitive prescription may bar the action of the beneficiary

against the trustee in an express trust for the recovery of the property held
in trust where:
(1) The trustee has performed unequivocal acts of repudiation
amounting to an ouster of the cestui que trust;
(2) Such positive acts of repudiation have been made known to
the cestui que trust; &
(3) The evidence thereon is clear & conclusive
Prescription & Implied Trusts
Resulting Trusts the rule of imprescriptibility of the action to recover

property held in trust might apply as long as the trustee has not repudiated
the trust
Constructive Trusts prescription may supervene such an implied trust
Either way, action may be barred by laches
CASE: Salvatierra v. CA
o Lesson: An action for reconveyance of registered land based on
an implied trust may be barred by laches. The prescriptive period
for such actions is 10 years from the date the right of action
accrued.
The registration of an instrument in the Office of the

Register of Deeds constitutes constructive notice to the
whole world. Thus, the discovery of the fraud is deemed
to have taken place at the time of registration. Such
registration is deemed to be a constructive notice that
the alleged fiduciary or trust relationship has been
repudiated.
Express Trusts
Created by the intention of the trustor or
the parties
Created by direct & positive acts of the
parties, by some writing, deed, will or by
words evidencing intention to create a
trust
When intention to establish a trust is
clear
Implied Trusts
Comes into being by operation of law
Those which, without being expressed,
are deducible from the nature of the
transaction by operation of law as
matters of equity, independent of the
particular intention of the parties
If the intent to establish a trust is to be
taken from circumstances or other
matters indicative of such intent
Art. 1442. The principles of the general law of trusts, insofar as they are not in
conflict with this Code, the Code of Commerce, the Rules of Court & special laws are
hereby adopted.
CHAPTER 2. EXPRESS TRUSTS.
Art. 1443. No express trusts concerning an immovable or any interest therein may
be proved by parol evidence.
Express Trusts & Parol Evidence
Parol evidence oral evidence
To prove an express trust over immovable properties or any interest

therein, there must always be a showing of some documents proving the
same
CASE: Pascual v. Meneses

o Facts: Certain properties were claimed by different persons.
Some of the heirs contended that there was allegedly an express
trust over some of the real estates constituted by some claimant
as co-owners who, however, did not present any documentary
proof of the same.
o Held: For immovables, there must be a document. Mere oral
evidence is not enough.
CASE: Ramos v. Ramos

o Lesson: An express trust must be proven by clear, satisfactory, &
convincing evidence. It cannot rest on vague & uncertain
evidence or on loose, equivocal or indefinite declarations.
o Facts: The evidence showed that the properties claimed to be
held in trust was actually the subject of a partition.
Held: The plaintiffs did not prove any express trust in this case.
The expediente of the intestate proceeding, Civil Case No. 217,
particularly the project of partition, the decision and the
manifestation as to the receipt of shares negatives the existence
of an express trust. Those public documents prove that the estate
of Martin Ramos was settled in that proceeding and that
adjudications were made to his seven natural children.
Art. 1444. No particular words are required for the creation of an express trust, it
being sufficient that a trust is clearly intended.
No Particular Words
For as long as the intention to establish a trust is very clear from the
proofs, whether by some writing or deed or will or by words, an express
trust is created.
Art. 1445. No trust shall fail because the trustee appointed declines the designation,
unless the contrary should appear in the instrument constituting the trust.
Declining Trustee
An express trust must be implemented even if the trustee appointed

declines the designation.
o In case of refusal to accept the trust by the trustee, the court will
appoint a trustee.
HOWEVER, if the appointment of the trustee is a material provision, the

trustor can provide that a refusal of the trustee to accept the trust shall
result in the failure or nullification of the same.
Art. 1446. Acceptance by the beneficiary is necessary. Nevertheless, if the trust
imposes no onerous condition upon the beneficiary, his acceptance shall be
presumed, if there is no proof to the contrary.
Acceptance by Beneficiary
Trust property is designed to benefit a cestui que trust or a beneficiary.

o If the beneficiary does not want the trust, the trustor will not be
estopped from deciding on another beneficiary.
The acceptance of the beneficiary may be express or implied
If the trust imposes no onerous condition upon the beneficiary, his

acceptance shall be presumed, if there is no proof to the contrary.
o Onerous condition - one which the beneficiary is required to
perform to make the trust effective or is one which should be
done for as long as the trust exists.
!
No onerous condition - an act of gratuity or liberality;
therefore the acceptance of the beneficiary shall be
presumed.
CHAPTER 3. IMPLIED TRUSTS.
Art. 1447. The enumeration of the ff. cases of implied trust does not exclude others
established by the general law of trust, but the limitation laid down in Art. 1442 shall
be applicable.
Resulting Trusts
Based on the equitable doctrine that
valuable consideration & not legal title
determines equitable title or interest;
presumed to always have been
contemplated by the parties
Arise from circumstances of the
consideration involved in a transaction
whereby one person thereby becomes
invested with legal title but is obligated
in equity to hold his legal title for the
benefit of another
Constructive Trusts
Created by the construction of equity in
order to satisfy the demands of justice &
prevent unjust enrichment
Arise contrary to intention against one
who, by fraud, duress or abuse of
confidence, obtains or hold the legal
right to property, which he ought not, in
equity, & good conscience, to hold
When There is No Trust
A trust will not be created when for the purpose of evading the law
prohibiting one from taking or holding real property, one takes conveyance
thereof in the name of a 3rd person
o Ex. When, under a homestead law, a certain person is
disqualified from obtaining a homestead patent over a certain
property, it cannot be contended that the actual possessor of the
property is merely a trustee of the disqualified person who claims
to be the real beneficiary of the homestead patent.
!
The alleged trust is of doubtful validity since it would
promote a direct violation of the Public Land Act as
regards the acquisition of a homestead patent.
!
A homestead applicant is required by law to occupy &
cultivate the land for his own benefit, & not for the
benefit of someone else.
If there is an express intention to create a trust, the trust is express & not
implied, even if the situations falls under any of the provisions in this
chapter.
o Ex. If a document exists clearly involving a situation under Art.
1453 but the same document states that the trustor is
constituting an express trust to the beneficiary, such trust will not
be considered an implied, but express
CASE: Policarpio v. CA
Lesson: A constructive trust (aka maleficio, a trust ex delicto, a trust de son

tort, an involuntary trust) does not arise on every moral wrong in acquiring
or holding property or on every abuse of confidence in business or other
affairs; ordinarily such a trust arises & will be declared only on wrongful
acquisitions or retentions of property of which equity takes cognizance. It
has been broadly ruled that a breach of confidence although in business or
social relations, rendering an acquisition or retention of property by one

person unconscionable against another, raises a constructive trust.
o A constructive trust is substantially an appropriate remedy
against unjust enrichment. It is raised by equity in respect of
property, which has been acquired by fraud, or where although
acquired originally without fraud, it is against equity that it should
be retained by the person holding it.
Facts: A representative of the tenants of an apartment, instead of
negotiating the sale of the apartment for & on behalf of the tenants as he
was tasked to do under their association, bought the property for himself to
the detriment of the tenants
Held: There is a constructive trust in this situation & the representative
acted in breach of the trust reposed in him by his co-tenants; the
representative must execute a conveyance to the particular tenant.
Art. 1448. There is an implied trust when property is sold, & the legal estate is
granted to one party but the price is paid by another for the purpose of having the
beneficial interest of the property. The former is the trustee, while the latter is the
beneficiary. 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.
A sold to B his shares of stock in a corporation. While the property is in the

name of B, it is X who pays the property so that he can make use of the
benefits of the shares of stock like the dividends.
o B is the trustee while X is the beneficiary.
o If X expressly tells A & B that he intends to create a trustrelationship from the transaction, it is clearly an express trust.
!
However, if he does not do so, the law nevertheless
considers it an implied trust.
o If B is the legitimate or illegitimate child of X, no trust is implied by
law, it being disputably presumed that a gift has been made to B
by X.
CASE: Padilla v. CA
Facts: A mortgagor sold the mortgaged property to a 3rd party who did not
know that, by the time he bought it, it was already foreclosed &
consolidated in favor of the mortgagee.
o The mortgagee later allowed the reselling of the property to the
original owner, but it was the 3rd-party-buyer who paid the price in
order that his purchase of the same will push through.
o Subsequently, the original owners confirmed their sale to the 3rdparty buyer
Held: An implied trust exists. The sale to the 3rd-party buyers was purely a
matter of form, as they were the mortgage debtors. They should be
considered implied trustees under an implied or resulting trust for the
benefit of the real owner.
Art. 1449. There is also an implied trust 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 beneficial interest or only a part thereof.
Example of a Donation that is an Implied Trust
Ex. A donation of a lot & the apartment on it was made by M to N.

o Despite the donation, M was still to get all the rentals of the
apartment.
This is an implied trust where the trustee is the donee & the beneficiary is
the donor. This is a case of a resulting trust.
Art. 1450. If the price of a sale of property is loaned or paid by one person for the
benefit of another & the conveyance is made to the lender or payor to secure the
payment of the debt, a trust arises by operation of law in favor of the person to
whom the money is loaned or for whom it is paid. The latter may redeem the
property & compel a conveyance thereof to him.
Implied Trust in Sale of Property
Ex. A wanted to buy the property of Z. X made the payment using his own
money for the benefit of A. The money was a loan to A.
o When the purchase was made, the property was placed under the
name of X. This was done so that X will have an assurance that
the debt of A can be paid.
o In this case, the trustee is the lender (X).
!
A can later redeem the property by paying X the money
paid for the property. Thereafter, A can compel X to
convey the property.
Art. 1451. When land passes by succession to any person & he causes the legal title
to be put in the name of another, a trust is established by implication of law for the
benefit of the true owner.
Implied Trust in Succession
Ex. A is the only compulsory heir of M who dies. After payment of the debt
of M, the net estate of M should go to A.
o However, if A causes the title to the estate to be placed in the
name of Z, an implied trust is created for the benefit of A.
Art. 1452. If 2 or more persons agree to purchase property & by common consent
the legal title is taken in the name of one of them for the benefit of all, a trust is
created by force of law in favor of the others in proportion to the interest of each.
Implied Trust in Co-Ownership
Ex. A, B and C are co-owners of a particular land in equal parts but, by

agreement of all of them, the whole of the property is registered under the
name only of C.
In this case, C is the trustee of the respective 1/3 shares of A &

B, the other co-owners.
Art. 1453. 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, there is an implied
trust in favor of the person whose benefit is contemplated.
Property Conveyed in Reliance Upon His Declared Intention to Hold it For Another
Ex. A told B that the property sold should be in his name because he shall
only hold it for the benefit of X, the real owner. An implied trust is created
in favor of X.
Personal note: How is this not an express trust?

Art. 1454. If an absolute conveyance of property is made in order to secure the
performance of an obligation of the grantor toward the grantee, a trust by virtue of
law is established. If the fulfillment of the obligation is offered by the grantor when it
becomes due, he may demand the reconveyance of the property to him.
An Absolute Conveyance to Secure Performance of Obligation
Ex. M is indebted to N. A particular property was conveyed to N by M to

secure such indebtedness. N holds the property only in trust for M. N is the
trustee.
o Upon payment of the debt, M can demand that the property be
returned to his name.
Art. 1455. When any trustee, guardian or other person holding a fiduciary
relationship uses trust funds for the purchase of property & causes the conveyance
to be made to him or to a 3rd person, a trust is established by operation of law in
favor of the person to whom the funds belong.
Trustees Use of Funds Held in Trust
Ex. N constituted B as the trustee of his funds for the benefit of X.

o B, using the trust fund, purchased property & placed it under his
name or under the name of X.
o A trust is created; the trustee is either B or X & the trust is in favor
of Z.
Art. 1456. 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 benefit of the person
from whom the property comes.
Property Acquired Through Mistake or Fraud
Ex. A fraudulently made X sign an alleged loan agreement which actually

turned out to be an absolute sale of Xs property.
o The sale is voidable; a trust is deemed created by force of law.
o The trustee is A; A is merely holding the property for the benefit of
X.
CASE: Gonzales vs. Jimenez

o
o
Facts: The buyer bought a property from the seller who

subsequently fraudulently caused the issuance of a patent & a
certificate of title to his son over the same property.
Held: The situation falls under Art. 1456 & therefore an implied
trust is created in favor of the buyer. The seller & his son are
deemed to hold the property in trust for the benefit of the buyer
who is the person prejudiced by the fraudulent act.
Art. 1457. An implied trust may be proved by oral evidence.

Oral Evidence
An implied trust can be proven by oral evidence - it is deducible from the

nature of the transactions as matters of intent or which are super-induced
on the transaction by operation of law, independently of the particular
intention of the parties
TITLE XVII. EXTRA-CONTRACTUAL OBLIGATIONS
CHAPTER 1. QUASI-CONTRACTS
Art. 2142. Certain lawful, voluntary & unilateral acts give rise to the juridical relation
of quasi-contract to the end that no one shall be unjustly enriched or benefited at
the expense of another.
Quasi-Contracts
NOT an implied contract

o No meeting of them minds between the parties
A juridical relation is created by a quasi-contract so that no one shall be

unjustly enriched at the expense of another
Art. 2143. The provisions for quasi-contracts in this Chapter do not exclude other
quasi-contracts which may come within the purview of the preceding article.
Quasi-Contracts Explicitly Found in its Chapter in the Civil Code
(1) The obligation incident to the officious management of the affairs of other
persons (gestion de negocios ajenos)
(2) The recovery of what has been improperly paid (cobro de lo indebido)
Quasi-Contracts Not Limited to Those in Civil Code
There are many quasi-contractual obligations, but it would be impractical

for the Code to enumerate them all
The Code concentrates on 2 without attempting to exclude the other kinds
The 2 are explicitly in the Code because:

o They are not considered in the other parts of the Code
o They are the most conspicuous of the quasi-contracts
Other quasi-contracts, according to Jorge Giorgi (Italian jurist)

o Payments made upon an existing consideration which fails;
o
o
Payments wrongly made upon a consideration which is contrary

to law, or opposed to public policy;
Payments made upon a vicious consideration or obtained by illicit
means
SECTION 1. NEGOTIORUM GESTIO.
Art. 2144. Whoever voluntarily takes charge of the agency or management of the
business or property of another, without any power from the latter, is obliged to
continue the same until the termination of the affair & its incidents, or to require the
person concerned to substitute him, if the owner is in a position to do so. This
juridical relation does not arise in either of these instances:
(1) When the property or business is not neglected or abandoned;
(2) If in fact the manager has been tacitly authorized by the owner;
In the first case, the provisions of Art. 1317, 143 (1) & 1404 regarding unauthorized
contracts shall govern.
In the second case, the rules on Agency in Title X of this Book shall be applicable.
Negotiorum Gestio
Not performed for profit
Ex. A abandons his property, a mango plantation, & his business therein. B
decides to manage the business & the property so that the business will
earn upon harvest time. B does this without any authority from A.
o B therefore becomes an officious manager without expectation of
any profit or remuneration. B must continue managing the
property or the business until it is terminated. He can also require
A to have him (B) substituted if A is in a position to do so.
o If the property is not abandoned, all acts of A unauthorized & any
contract entered into by him shall be generally unenforceable.
o If B were authorized, the law on agency shall apply.
CASE: Sison & Azarraga v. Balgos
Lesson: The ff. are circumstances under which one may undertake to carry
out a business matter for another (Manresa)
(1) That they relate to determined things or affairs
(2) That there be no administrator or representative of the owner
who is charged with the management thereof;
(3) That there is no express or tacit mandate on the part of the
owner, for it very often may happen even without his knowledge;
(4) That the actor be inspired by the beneficent idea of averting
losses & damages to the owner or interested party through the
abandonment of the things that belong to him or of the business
in which he may be interested; that administration is not for
profit, or with the avaricious idea of gain.
Facts: The guardian of certain minors died without paying the redemption
price on behalf of the minors with respect to a certain property to which the
said minors were entitled.
The uncle of the said minors took upon himself to deposit the
redemption price in court so that the period to redeem will not
prescribe.
o The authority of the said uncle to do so was questioned.
Held: There was a quasi-contract created; therefore the act of the uncle in
preserving the property of the minors was valid. The uncles actions were
for the benefit of the kids.
o Art. 1893: The owner of property or a business who avails himself
of the advantages of the administration of another, even when he
has not expressly ratified it, shall be liable for the obligations
contracted for his benefit.
!
He shall indemnify the administrator for the necessary
expenses which he may have in charge of his duties.
!
The same obligation shall pertain to said owner when
the object of said administration should have been to
avoid any imminent or manifest damage, even when no
profit results therefrom.
o The minor, although usually incapable of contracting or binding
himself, cannot disavow the efficacy of the contracted obligation
when it redounds to his benefit, because of the principle that no
one may enrich himself to the prejudice of another.
o
Art. 2145. The officious manager shall perform his duties with all the diligence of a
good father of a family, & pay the damages which through his fault or negligence
may be suffered by the owner of the property or business under management.
The courts may, however, increase or moderate the indemnity according to the
circumstances of each case.
Degree of Diligence for Officious Manager
A good father of a family - the ordinary degree of care which a reasonable

& prudent person will do given the same circumstances
If he causes damage to the property of the owner, he shall be liable to such

owner
An officious manager is in a sense an intruder in the business or the

property of the owner.
o However, if his intrusion is with the objective of preserving &
taking care of the property without any intent to gain, a quasicontract is created.
The officious manager cannot escape liability by stating that there was no
obligation on his part to take over the property or business in the first
place.
o Once he takes over, he has the responsibility to take care of it.
If the owner suffers damage due to the negligence or fault of the officious
manager, the court can increase or moderate the indemnity according to
the circumstances.
Art. 2146. If the officious manager delegates to another person all or some of his
duties, he shall be liable for the acts of the delegate, without prejudice to the direct
obligation of the latter toward the owner of the business.
The responsibility of 2 or more officious managers shall be solidary, unless the
management was assumed to save the thing or business from imminent danger.
Delegation of Management
The officious manager can delegate the management of the properties to

another.
o HOWEVER, he will be responsible for the acts of the said
delegate.
Such person to whom the management has been delegated shall likewise
be directly responsible to the owner.
The liability of 2 or more officious managers is solidary.

o The owner can seek the full amount of damages from anyone of
the officious managers.
Art. 2147. The officious 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.
Rules for Fortuitous Events
General Rule: The happening of a fortuitous event affecting an obligation

excuses the person charged from performing the obligation.
In case of negotiorum gestio, Art. 2148 does NOT excuse the officious
manager from liability due to fortuitous event.
Situations Where Officious Manager is Liable for Fortuitous Events
1) When the officious manager undertakes risky operations which the owner
is not accustomed to embark upon.
Ex. If the business of the owner is simply providing a warehouse

for dolls, & the officious manager decides to allow the storing of
highly inflammable materials in the warehouse, the officious
manager shall be liable if the warehouse is burned due to a
fortuitous event, such as the striking of lightning.
2) When the officious manager has preferred his own interest to that of the
owner.
Ex. The officious manager takes over the business of the owner of
warehousing goods. In the meantime, the officious manager also
stores some of his goods in the warehouse. In the event that a
flood occurs, and he first saves his goods, before the goods of the
owner & the latters clients, from being destroyed, the officious
manager will be liable for the loss due to the fortuitous event.
3) When the officious manager fails to return the property or business after
demand by the owner.
Once the owner demands the return of the business, the officious
manager should readily return it. He has no right to keep it for
himself.
When the officious manager assumes the management in bad faith.
Ex. The officious manager takes over the warehousing business

of the owner so that he can get the clients of the owner for his
(officious managers) own warehousing business.
4)
Art. 2148. Except when the management was assumed to save the property or
business from imminent danger, the officious manager shall be liable for fortuitous
events:
(1) If he is manifestly unfit to carry on the management;
(2) If by his intervention he prevented a more competent person taking up the
management.
Further Liability For Fortuitous Events
The officious manager has no business taking over the abandoned

property or business of somebody if he has no knowledge or is not
competent to undertake the management.
o
Ex. If a teacher takes on the farming business of another, he shall
be liable for any damage caused by a fortuitous event because he
should have known that he cannot undertake something which he
has no competence in.
!
IF another person who is competent to take over the
farming business decides to manage the same & the
said teacher prevents him from doing so on the ground
that he has been there first, such teacher will be liable if
the property is destroyed by a fortuitous event.
!
HOWEVER, if the teacher manages the farming
business to save it from imminent danger, he will not be
liable for damages caused by a fortuitous event.
Art. 2149. The ratification 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.
Ratification = Express Agency
Ratification - the owner agrees to whatever the officious manager has

done.
o Cures even the defects which the officious manager has
committed
If ratification happens, the law on agency applieseven if the business is

not successful, such agency by virtue of ratification shall be recognized.
Art. 2150. Although the officious management may not have been expressly ratified,
the owner of the property or business who enjoys the advantages of the same shall
be liable for obligations incurred in his interest, & shall reimburse the officious
manager for the necessary & useful expenses & for the damages which the latter
may have suffered in the performance of his duties.
The same obligation shall be incumbent upon him when the management had for its
purpose the prevention of an imminent & manifest loss, although no benefit may
have been derived.
Reimbursement to Officious Manager
The owner must always reimburse the officious manager for all expenses
which have inured to the benefit or advantage of the owner.
o Ex. If the officious manager pays taxes on the property so that it
will not be foreclosed, the owner must reimburse the officious
manager.
Even if no benefit has been derived but the officious manager takes over to
save the property or business from imminent loss, the officious manager
should also be reimbursed for obligations incurred for the owners interest,
including useful & necessary expenses.
Art. 2151. Even though the owner did not derive any benefit & there has been no
imminent and manifest danger to the property or business, the owner is liable as
under the 1st par. of the preceding article, provided:
(1) The officious manager has acted in good faith, &
(2) The property or business is intact, ready to be returned to the owner.
Good Faith & Intact
W/N there is benefit & W/N there is imminent danger, the officious
manager should be reimbursed for useful & necessary expenses & of
payment made in furtherance of the owners interest if:
o The officious manager has acted in good faith &
o The property or business is intact, ready to be returned to the
owner.
!
The very fact that the property is intact means that the
officious manager has prudently & with due diligence
managed the property.
Art. 2152. The officious manager is personally liable for contracts which he has
entered into with 3rd persons, even though he acted in the name of the owner, &
there shall be no right of action between the owner & 3rd persons. These provisions
shall not apply:
(1) If the owner has expressly or tacitly ratified the management; or
(2) When the contract refers to things pertaining to the owner of the business.
3rd Persons & Officious Manager
If the officious manager decides to manage the property or business, & for
this reason, he buys some decorations to be placed in the property, such
officious manager shall be the only one responsible for the payment of
such decorations even if he acts in the name of the owner.
o The seller of the decorations has no right of action against the
owner in the event the officious manager does not pay for them.
HOWEVER, the owner shall pay for said purchases if he expressly or tacitly
ratifies the act of the officious manager.
o Ex. If the buying and selling of decoration is the very object of the
business of the owner, the owner shall be liable.
Art. 2153. The management is extinguished:

(1) When the owner repudiates it or puts an end thereto;
(2) When the officious manager withdraws from the management, subject to
the provisions of Art. 2144;
(3) By the death, civil interdiction, insanity or insolvency of the owner or the
officious manager.
Repudiation
The management is extinguished if the owner repudiates it (puts an end to

it).
The owner still has the power of dominion over his property or his business.
Hence his decision must prevail over that of the officious manager. If
owner does not want the officious manager, this decision should prevail.
CASE: Benedicto v. Board of Administrators

o Facts:
!
After People Power I, the properties & assets of
Broadcast City were abandoned, & no one was looking
after them.
!
When the PCGG was created, its chairman, Sen. Jovito
Salonga, requested the Ministry of National Defense &
the Ministry of Information to sequester Broadcast City
pending clarification of its uncertain financial condition
& its legal & beneficial ownership.
!
E.O. 11 Cory Aquino created a Board of Administrators
to manage Broadcast City & said that the Board:
Would exercise all the powers imposed on

trustees under the principles of the general
law on trust & officious managers under the
law on extra- contractual obligations
Would have an existence coterminous with the

investigation of the seized assets by the PCGG
& the final disposition of the seized assets.
Would hold office at the pleasure of the

President.
!
Pet. filed an action against PCGG to annul the
sequestration & to recover management of Broadcast
City.
PCGG & Pet. entered into an agreement to

reorganize the Board of Broadcast City & allow
the Pet. to nominate 2/3 of the members of
the Board.
The Board of Administrators refused to relinquish

management & operation to the newly organized Board.
Held: The role of the Board of Administrators has become functus
oficio. In negotiorum gestio, the authority of the officious
manager of a business is extinguished when the owner demands
its return.
!
Withdrawal of Officious Manager
The officious manager can withdraw, putting an end to his management.
HOWEVER, he must require the person concerned or the owner to

substitute him if the owner is in a position to do so (Art. 2144).
o If the owner is not in a position to do so, he must continue & only
withdraw upon the termination of the affair & its incidents.
Death, Civil Interdiction, Insanity or Insolvency
Death the duty to be officious manager naturally ceases
Civil interdiction an accessory penalty to a principal penalty as

punishment for the commission of a crime; deprives the offender, during
the time of his sentence, of the rights of:
o Parental authority or guardianship, either as to the person or
property of the ward
o Marital authority
o Management of his own property
o Disposal of such property by any act or any conveyance inter
vivos
Insanity deprives the person of reason
Insolvency deprives the person of the financial liquidity to manage his

affairs as his liabilities surpass his assets
SECTION 2. SOLUTIO INDEBITI
Art. 2154. If something is received when there is no right to demand it, & it was
unduly delivered through mistake, the obligation to return it arises.
Requisites of Solutio Indebiti (City of Cebu v. Piccio)
(1) When he who paid was not under the obligation to do so; &
(2) The payment was made by reason of an essential mistake in fact.
CASE: Velez v. Balzaraza
Lesson: When there is no intention to charge interest or rentals & there is

only a principal, any payment made in excess of said principal must be
returned to the obligor. Solutio indebiti exists when:
(1) There is no right to collect these excess sums; &
(2) The amounts have been paid through mistake
Facts: The defendants paid money which did not constitute either payment
of rentals or interest & therefore was not due.
o The parties in their contracts never intended that either rents or
interest should be paid
When these payments were made, they were intended by

defendants to be applied to the principal, but they already
overpaid the amounts loaned to them.
Held: This is a situation of solution indebiti; the plaintiff must return the
excess payments made by the defendants.
o Jure naturae acquum est, neminem cum alterius detrimento et
injuria fieri locupletiorem.
o Ninguno non deue enrique cerse tortizeramente con dano de
otro.
o Lawmakers have used the principle that no one shall be unjustly
enriched at the expense of another to shape laws in the Civil
Code & in the conflict of rights
o
CASE: Adres v. Manufactureres Hanover & Trust Corp.
Lesson:
Facts:
o X is engaged in the manufacture of ladies garments, childrens
wear, etc. under the name Irene Wearing Apparel
!
Among Xs foreign buyers is Facets Funwear, Inc.
(FACETS)
o FACETS would from time to time remit certain amounts of money
in payment to X for the products it purchased.
o In Aug. 1980, FACETS instructed the FNSB bank to transfer
$10,000 to X; the FNSB bank informed its local partner bank,
PNB.
o Acting on said instruction, PNB told Y, the respondent
Manufacturers Hanover & Trust Corp., to effect the transfer of the
$10,000.
!
However, the payment was not effected immediately
because the payee designated in the telex for the
transfer was only Wearing Apparel (no Irene)
When PNB asked for a follow-up, Y sent

another telex which was correctly forwarded to
X; thus, X received the $1O,000.
o Meanwhile, FACETS heard about the delay due to the failure of
the 1st telex, & asked FNSB to instead use another Phil. bank,
PCIB instead.
!
FNSB, also unaware that PNB had successfully asked Y
to send the $10,000, instructed PCIB to pay the same
amount to X.
!
On Sept. 1980, X received a 2nd $10,000.
o Y debited the amount to FNSB for the 2nd $10,000 effected
through PCIB.
!
FNSB then discovered that Y had made a duplication of
the remittance, & asked for the credit of its account in
the amount of $10,000; Y complied with the request.
o Y asked X for the return of the extra $10,000, but X refused to
pay.
RTC ruled that the payment was not made by mistake,

but by negligence, & thus X was not unjustly enriched.
o Before SC, X argues that it had the right to demand & retain the
2nd $10,000, because even after the 2 $10,000s are credited to
Xs receivables, FACETS still owes X $49,324. Thus, there was no
unjust enrichment. Also, the employees of FNSB were just
negligent.
Held: Solutio indebiti applies; X must return the 2nd $10,000 paid by
mistake.
o The contract of X is with FACETS. It is FACETS & not Y that is
indebted to X. On the other hand, the contract for the transmittal
of dollars FACETS to X was entered into by Y with FNSB.
!
X, although referred to as the payee, was not privy to
the contract of remittance of dollars. Neither was Y a
party to the contract of sale between X & FACETS.
!
There being no contractual relation between them, X
had no right to apply the 2nd $10,000 remittance
delivered by mistake by Y to the outstanding accounts
of FACETS.
o On the issue of negligence, FACETS sent only 1 remittance. FNSB
only requested that Y remit $10,000; this is the only remittance
requested by FNSB as per instruction of FACETS.
!
The mistake was actually due to the remittance having
the same reference invoice number, 26380.
!
Y made the remittance on the wrong assumption that X
did not receive the 1st remittance.
o X invokes the equitable principle that when one of 2 innocent
persons must suffer by the wrongful act of a 3rd person, the loss
must be borne by the one whose negligence was the proximate
cause of the loss.
!
General rule: Principles of equity (or common law)
cannot be applied if there is a statutory provision of law
specifically applicable to a case.
o Ys suit was filed well within the 6 years prescriptive period for
actions based upon a quasi-contract, so the defense of
prescription also cannot apply.
!
Art. 2155. Payment by reason of a mistake in the construction or application of a

doubtful or difficult question of law may come within the scope of the preceding
article.
Mistake Due to Difficult Provision of Law
General rule: Solutio indebiti invokes only a mistake of fact

o Exception - Art. 2155: A mistake of law is allowed if the mistake is
brought about by the construction or application of a doubtful or
difficult question of law
CASE: Gonzalo Puyat & Sons Inc. v. City of Manila
Lesson: When multiple laws overlap, making it difficult to determine the

taxes which one must pay, the tax payments made by mistake in the
interpretation of said laws are recoverable.
o The taxpayer has no voice in the imposition of the burden. He has
the right to presume that the taxing power has been lawfully
exercised. He should not be required to know more than those in
authority over him, nor should he suffer loss by complying with
what he bona fide believes to be his duty as a good citizen.
Facts: The appellee (Gonzalo) paid taxes which were not due by mistake,
as it was actually exempted; the mistake in payment was, among others,
the result of a complicated correlation & application of various municipal &
national laws.
o Appellee: This is solution indebiti, because the payments could
not have been voluntary.
!
At most, they were paid mistakenly and in good faith &
without protest in the erroneous belief that it was liable
thereof.
!
Voluntariness is incompatible with protest & mistake.
Held: Solutio indebiti should apply.
o Gonzalo is exempted from the payment of the tax in question, as
manifested from the reply of the City Treasurer stating that sales
of manufactured products at the factory site are not taxable
either under the Wholesalers Ordinance or under the Retailers
Ordinance.
!
The taxes were paid, through mistake. The appellant
City of Manila, at the very start, notwithstanding the
Ordinance imposing the Retailers Tax, had no right to
demand payment thereof.
o Gonzalo did not voluntarily make the payment, as Manila avers,
but paid believing it was due.
!
In such situation, the amount paid, even without
protest, is recoverable.
Art. 2156. If the payer was in doubt whether the debt was due, he may recover if he
proves that it was not due.
Debt Not Due
Ex. A debtor pays a creditor prematurely because he is not sure whether

the debt is already due. The creditor accepts it. The debtor can recover
what he has paid prior to the due date of the debt provided that the
demand for reimbursement is NOT made after the debt has become due.
Art. 2157. The responsibility of 2 or more payees, when there has been payment of
what is not due, is solidary.
Solidary Obligation of Multiple Payees Under Solutio Indebiti
Ex. A is indebted to B and C for P2,000. The obligation is of a solidary

nature such that A can pay only to one of them the whole obligation, and
the debt is considered paid as to both.
o If A pays B the amount of P2,000, the debt is considered paid. It
is up to C to claim from B his share of the credit which is P1,000.
o If there is payment by mistake, A can recover what he paid from B
or C. This is true, even if in the meantime, C has not yet obtained
his P1,000.
Art. 2158. When the property delivered or money paid belongs to a 3rd person, the
payee shall comply with the provisions of Art. 1984.
Payment Made Belongs to 3rd Person
Art. 1984 - The depositary cannot demand that the depositor prove his
ownership of the thing deposited.
o NEVERTHELESS, should he discover that the thing has been
stolen & who its true owner is, he must advise the latter of the
deposit.
!
If the owner, in spite of such information, does not claim
it within the period of 1 month, the depositary shall be
relieved of all responsibility by returning the thing
deposited to the depositor.
o If the depositary has reasonable grounds to believe that the thing
has not been lawfully acquired by the depositor, the former may
return the same.
Ex. A is obliged to pay B his obligation by giving B a watch. Despite the fact
that the payment is not yet due, A gives B the watch which turns out to be
stolen from X.
o At the time of his receipt of the watch, B has no obligation to ask
A questions as to who owns the watch.
!
HOWEVER, if B later finds out that X really owns the
watch, B must advise X that he (B) is in possession of
his (Xs) watch. X must claim the watch within one
month from the advice.
If X does not claim the watch, B is excused

from all liability if, A, because of solutio
indebiti, claims back the watch, & B gives
back the watch to A.
o HOWEVER, if at the time A gives the watch of B, the latter has
reasonable grounds to believe that it has been acquired
unlawfully, B can return the same to A.
Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if
a sum of money is involved, or shall be liable for fruits received or which should have
been received if the thing produces fruits.
Bad Faith Acceptance of Undue Payment
If the creditor knows that the payment is not yet due & payment is
tendered to him, he must inform the debtor that payment is not yet due.
o Should the creditor accept such premature payment, he is in bad
faith.
!
He shall be liable for interest from the time he accepts
payment up to the time he returns it upon demand of
the debtor.
Art. 2160. He who in good faith accepts an undue payment of a thing certain &
determinate shall only be responsible for the impairment or loss of the same or its
accessories & accessions insofar as he has thereby been benefited. If he has
alienated it, he shall return the price or assign the action to collect the sum.
Acceptance Not Knowing it Was Due
Ex. A is obliged to give B a house on Jan. 1, 1997. Believing that it was due
on Aug. 1, 1996, A delivered the house on said date. B likewise did not
know that the house was still due on Jan. 1, 1997. B was in good faith.
o On Nov. 1996, the house was rented in the amount of
P2,000/hour by a movie producer for a particular motion picture
&, while shooting, the kitchen was accidentally burned. After the
shooting of the motion picture, B was paid the rent in the amount
of P30,000 for 15 hours.
o On Dec. 1996, A discovered that the house was not yet due &
demanded its return. B can return the house & pay the amount of
the kitchen which has been impaired, because he (B) has been
benefited by the house when he had it rented.
Art. 2161. As regards the reimbursement for improvements & expenses incurred by
him who unduly received the thing, the provisions of Title V of Book II shall govern.
Rules for Reimbursement Incurred by the One who Unduly Received the Thing
Art. 546 - Necessary expenses shall be refunded to every possessor; but

only the possessor in good faith may retain the thing until he has been
reimbursed therefor.
o Useful expenses shall be refunded only to the possessor in good
faith with the same right of retention, the person who has
defeated him in the possession having the option of refunding
the amount of the expenses or of paying the increase in value
which the thing may have acquired by reason thereof.
Art. 547 - If the useful improvements can be removed without damage to

the principal thing, the possessor in good faith may remove them, unless
the person who recovers the possession exercises the option under
paragraph 2 of the preceding article.
Art. 548. - Expenses for pure luxury or mere pleasure shall not be refunded
to the possessor in good faith; but he may remove the ornaments with
which he has embellished the principal thing if it suffers no injury thereby,
& if his successor in the possession does not prefer to refund the amount
expended.
Art. 549 - The possessor in bad faith shall reimburse the fruits received &
those which the legitimate possessor could have received, and shall have a
right only to the expenses mentioned in par. 1 of Art. 546 & in Art. 443.
o The expenses incurred in improvements for pure luxury or mere
pleasure shall not be refunded to the possessor in bad faith; but
he may remove the object for which such expenses have been
incurred, provided that the thing suffers no injury thereby, & that
the lawful possessor does not prefer to retain them by paying the
value they may have at the time he enters into possession.
Art. 550 - The costs of litigation over the property shall be borne by every
possessor.
Art. 551 - Improvements caused by Nature or time shall always inure to the
benefit of the person who has succeeded in recovering possession.
Art. 552 - A possessor in good faith shall be liable for the deterioration or
loss of the thing possessed, except in cases in which it is proved that he
has acted with fraudulent intent or negligence, after the judicial summons.
o A possessor in bad faith shall be liable for deterioration or loss in
every case, even if caused by fortuitous event.
Art. 553 - One who recovers possession shall not be obliged to pay for
improvements which have ceased to exist at the time he takes possession
of the thing.
Art. 2162. He shall be exempt from the obligation to restore who, believing in good
faith that the payment was being made of a legitimate & subsisting claim, destroyed
the document, or allowed the action to prescribe, or gave up the pledges, or
cancelled the guaranties for his right. He who paid unduly may proceed only against
the true debtor or the guarantors with regard to whom the action is still effective.
3rd Person in an Obligation & Solutio Indebiti Situation
Ex. A is indebted to B in the amount of P1,000. It is an oral contract of loan

& hence it prescribes in 6 years from the time it falls due.
o X is the guarantor of the indebtedness. As guarantor, X will only
pay B if B has unsuccessfully exhausted all efforts to collect from
A upon the maturity of the debt.
o The debt becomes due & A fails to pay B. B has not yet exhausted
all efforts to collect from A.
o Believing that he is principally liable also for the debt, X pays B on
the 5th year since the debt has become due. B also believed in
good faith that he could collect from X & hence accepts the
payment from X. In the meantime, more than 6 years have
already lapsed since the debt has become due. B does not
demand from A anymore because he has already been paid by X
on the 5th year.
!
Here, X paid B by mistake. X cannot recover the money
paid by mistake from B because, if this is allowed, B
cannot anymore recover payment from A as Bs cause
of action against A has prescribed. X can only recover
from A, the true debtor.
Since a quasi-contract of solutio indebiti exists from the

time X made the payment on the 5th year, he has 6
years from such payment within which to file an action
against A, the principal debtor. This is because a quasicontract prescribes after 6 years from the time the
cause of action accrues, the action to collect from A is
still effective.
Art. 2163. It is presumed that there is a mistake in the payment if something which
had never been due or had already been delivered was delivered; but he from whom
the return is claimed may prove that the delivery was made out of liberality.
Presumption of Mistake in Payment
A debtor who pays in solutio indebiti may recover what he has paid by
mistake.
o HOWEVER, the person to whom the payment has been made can
show that such payment is a gift or donation by showing the
proper evidence like a valid deed of donation.
SECTION 3. OTHER QUASI-CONTRACTS
Art. 2164. When, without the knowledge of the person obliged to give support, it is
given by a stranger, the latter shall have a right to claim the same from the former,
unless it appears that he gave it out of piety & without intention of being repaid.
Art. 206, Family Code
Art. 2164 was adopted by the Family Code

CASE: De Marcaida v. Redfern
Lesson: For one to recover under this provision, it must be proven

(1) That support has been furnished a dependent of one bound to give
support but who fails to do so;
(2) That the support was supplied by a stranger;
(3) That the support was given without the knowledge of the person
charged with the duty.
(4) That the support is given with the expectation of recovering it.
Facts: A spouse borrowed a sum of money on different occasions from her

sister. The sister & her husband then sued the husband of the borrowing
spouse for reimbursement.
Held: The sister & her husband were not able to obtain reimbursement,
due to the absence of the 1st & 2nd requisite.
o For the 1st It was not shown that the wife ever complained to
her husband for support or that her husband actually denied her
support; in fact, the husband gave an contradictory testimony
that he instructed his agent to furnish his wife with any
reasonable sum she needed, yet the wife never took advantage
of said offer. Also, the husbands support lessened because of
some financial issues he faced, which is a valid reason under the

law.
Art. 2165. When funeral expenses are borne by a 3rd person, without the knowledge
of those relatives who were obliged to give support to the deceased, said relatives
shall reimburse the 3rd person, should the latter claim reimbursement.
Obligation to Pay Funeral Expenses
The ff. are obliged to support each other:

1) Spouses;
2) Legitimate ascendants & descendants;
3) Parents & their legitimate children & the legitimate & illegitimate
children of the latter (grandchildren);
4) Parents & their illegitimate children & the legitimate & illegitimate
children of the latter;
5) Legitimate brothers & sisters, whether of full or half-blood.
Whenever 2 or more persons are obliged to give support, the liability shall
devolve upon the ff. persons in the ff. order:
1) Spouse;
2) Descendants in the nearest degree;
3) Ascendants in the nearest degree; &
4) The brothers and sisters.
Ex. A was the daughter of X & Y. A died. G, a stranger, was the one who
shouldered the expenses for As funeral.
o If G did this benevolent act as an act of charity, X & Y need not
reimburse him.
o If G intended to be reimbursed, he can only be paid after
demanding payment from X & Y.
Art. 2166. When the person obliged to support an orphan, or an insane or other
indigent person unjustly refuses to give support to the latter, any 3rd person may
furnish support to the needy individual, with right of reimbursement from the person
obliged to give support. The provisions of this article apply when the father or mother
of a child under 18 years of age unjustly refuses to support him.
Art. 207 of the Family Code
Adopts this provision; only adds that a parent shall also be liable if he fails
to give support to the child when urgently needed.
Art. 2167. When through an accident or other cause a person is injured or becomes
seriously ill, & he is treated or helped while he is not in a condition to give his
consent to a contract, he shall be liable to pay for the services of the physician or
other person aiding him, unless the service has been rendered out of pure
generosity.
When a Person is in an Accident & is Helped
Ex. A is bumped by a car & is seriously injured. He becomes unconscious. X

sees A and brings him to the hospital. As injuries need immediate
treatment but, since he is in coma, he cannot give his consent. The doctor
nevertheless treats his injuries lest it becomes more serious.
o When A recovers, he has the obligation to pay the services of the
doctor unless the latter does not want to be paid.
Art. 2168. When during a fire, flood, storm or other calamity, property is saved from
destruction by another person without the knowledge of the owner, the latter is
bound to pay the former just compensation.
Calamity & Saving of Property by Another
Ex. The house of A starts to catch fire but A is not in the house. When the
garage of the house is already on fire, B goes inside the burning garage &
pushes the car of A out of the same without the knowledge of A. The car is
saved from destruction.
o A is bound to pay B just compensation unless B does not want to
accept it.
Art. 2169. When the government, upon the failure of any person to comply with
health or safety regulations concerning property, undertakes to do the necessary
work, even over his objection, he shall be liable to pay the expenses.
Government & Services to Unwilling Citizens
Ex. A municipal ordinance prohibits the throwing of spoiled food outside of

the house in a waste can without any plastic bag. X does not abide by the
said ordinance & continually throws spoiled food in a wooden garbage
container in his house. To prevent the spread of disease, the municipal
government can put the spoiled food inside a plastic bag first & then
provide X with a garbage can at his expense even if he does not want to.
Art. 2170. When by accident or other fortuitous event, movables separately
pertaining to 2 or more persons are commingled or confused, the rules on coownership shall be applicable.
Movables Commingling
The commingling here is unintentional & the result of an accident or

fortuitous event.
Art. 2171. The rights and obligations of the finder of lost personal property shall be
governed by Art. 719 & 720.
Art. 719 & Art. 720 of the Civil Code
Art. 719: Whoever finds a movable, which is not treasure, must return it to
its previous possessor. If the latter is unknown, the finder shall
immediately deposit it with the mayor of the city or municipality where the
finding has taken place.
o The finding shall be publicly announced by the mayor for 2
consecutive weeks in the way he deems best.
If the movable cannot be kept without deterioration, or without

the expenses which considerably diminish its value, it shall be
sold at public auction 8 days after publication.
o 6 months from the publication having elapsed without the owner
having appeared, the thing found, or its value, shall be awarded
to the finder. The finder and the owner shall be obliged, as the
case may be, to reimburse the expenses.
Art. 720: If the owner should appear in time, he shall be obliged to pay, as
a reward to the finder, 1/10 of the sum or of the price of the thing found.
o
Art. 2172. The right of every possessor in good faith to reimbursement for necessary
& useful expenses is governed by Art. 546.
Art. 546 of the Civil Code
Necessary expenses shall be refunded to every possessor; but only the

possessor in good faith may retain the thing until he has been reimbursed
therefor.
Useful expenses shall be refunded only to the possessor in good faith with
the same right of retention, the person who has defeated him in the
possession having the option of re-funding the amount of the expenses or
of paying the increase in value which the thing may have acquired by
reason there-of.
Art. 2173. When a 3rd person, without the knowledge of the debtor, pays the debt,
the rights of the former are governed by Art. 1236 & 1237.
Art. 2174. When in a small community a majority of the inhabitants of age decide
upon a measure for protection against lawlessness, fire, flood, storm or other
calamity, any one who objects to the plan & refuses to contribute to the expenses
but is benefited by the project as executed shall be liable to pay his share in the
expenses.
Small Communities & Order
Ex. The people of a certain barrio decide to engage a security force to

protect their community because of rampant lawlessness. For this reason,
the people agree to contribute to the expenses of this security force. G
however refuse to make any contribution. In the event that the security
force apprehend robbers intending to rob the house of G, G should pay his
share in the expenses for the communitys engagement of the security
force to protect the people from criminals.
Art. 2175. Any person who is constrained to pay the taxes of another shall be
entitled to reimbursement from the latter.
Another Person Pays Anothers Tax
Ex. A is the neighbor of G whose property is about to be forfeited to the

government because of unpaid real estate taxes.
A can pay the taxes but G must reimburse him.

Oblicon Sta. Maria Gaw

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OBLIGATIONS & CONTRACTS

Atty. Melencio Sta. Maria

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Requisites of laches (CDLI)

CASE: Z.E. Lotho, Inc. v. Ice & Cold Storage

CASE: Catholic Bishop of Balanga v. CA

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a case against the State, acting through its instrumentality,

Art. 1109. Between Husband & Wife, Children & Guardian.

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General rule: No prescription between parent & child during the

Guardian & Ward

CASE: DBP v. Adil

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An application was filed for the registration of a particular

CASE: Lovina v. Moreno

also satisfied the requirements of the Public Land Act

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The Civil Code shall prevail provided that such period

CHAPTER 2. PRESCRIPTION OF OWNERSHIP & OTHER REAL RIGHTS

Felix divided his lot 665 to his 7 children.

Article 1118. Possession.

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Ones ownership of a thing may be lost through

Art. 1119. Possession Through License or Tolerance

Monterola executed a deed of donation in favor of

Art. 1120. Interruption.

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B goes broke, & the property is sold in a public auction due to Bs

Art. 1123. Civil Interruption.

When the possessor receives the judicial summons & the

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Art. 1126. Titles.

If theres a title, there can be no acquisition by adverse possession.

Sale with a right to repurchase

Florentino & the private respondents. This fact, petitioners do not

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CASE: Negrete v. CFI Marinduque

Held: Petitioners cannot justify their ownership and possession of

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True & Valid Title

The right given by ordinary acquisitive prescription is not

Article 1132. Acquisition of Movables or Personal Property.

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Held: SC rejected the claim of the delinquent partner that a trust

Art. 559 & 1505 of the Civil Code

Example: If A stole Bs car, A can never acquire title over the

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Art. 1136. Wartime Possession.

Petitioners ancestor occupied the particular alienable

Art. 1138. Computation of Prescription.

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Held: For Lot A & B, there is no need to tack on possession

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Summary Chart for Acquisitive Prescription

Notes: Uninterrupted possession is always a requisite for all forms of

*Exception: When loss is due to a crime, the offender can

Other Rules Governing Prescription of Actions

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Art. 1141. Prescription of Immovables.

Considered as an accessory contract

CASE: DBP v. Tomeldan

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