Oblicon Reviewer - Anton Mercado

OBLICON - MISON
Obligations and Contracts Pineda Reviewer Following Misons syllabus plus

Case List Doctrines : Anton Mercado 1-E
READ ME FIRST:

This reviewer is for all students taking Oblicon under Atty. Mison.
It is a condensed version of the Pineda book, merged along with Sir
Mison's course outline and also digests for each of the assigned
cases. It is important to note however that this reviewer does not
start from the beginning of the outline. This is because I didn't
know how to approach his class back then. The first time I was
called for recitation, I didn't even know how to answer the
question. In short, I literally started from the bottom, which forced
me to make this reviewer. Hence, I began making this only after the
first few meetings. This reviewer only gets better over time as I got
better at adapting to the demands of his class.

Can you survive using only this reviewer? Probably. I got an 84 in
his class by only reading this reviewer repeatedly. Use this as an
additional source of information if you are already reading other
books aside from the assigned Pineda book.

IMPORTANT NOTES:
1. This reviewer begins in Article 1174.
2. There are typos in this reviewer, please bear with me.
3. The information regarding the maximum amount of coins
you can give as payment is outdated. Don't forget to update
it yourself.

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
7. Fortuitous Event, Essential Conditions, Exceptions:
Article 1174. 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.
(1105a)
Fortuitous Event
An occurrence or happening which could not be foreseen, or even if foreseen, is inevitable.
Events beyond the control of the obligor. Must be impossible to foresee or to avoid.
Essential Conditions:
1. Cause of the breach must be independent of the debtors will
2. Event must either be unforeseeable or unavoidable
3. Event must be such as to render it impossible for the debtor to fulfill his obligation in a normal
manner
4. Debtor must be free from any participation in, or aggravation of, the injury to the creditor
Exceptions:
1. Express stipulation by the parties that there is liability even though non-performance is due to
fortuitous events
2. Nature of the obligation requires assumption of risk
3. Obligor is in delay
4. Obligor promised the same thing to 2 or more persons who do not have the same interest
5. Possessor in bad faith and thing is lost or deteriorated due to fortuitous event
6. Obligor contributed to the loss of the thing
7. Obligor is guilty of fraud, negligence, delay, or violation of the tenor of the agreement
8. If the adverse consequence is found to be partly the result of a persons participation or neglect to
act and take steps in forestalling the damage/injury.
Nakpil vs. CA
- The Philippine Bar Association decided to construct its office building in Intramuros Manila.
- Construction was undertaken by United Construction Inc, and the plans and specifications of the
building were prepared by Juan Nakpil and Sons Inc. Soon enough, the building was completed.
- In August 2, 1968 an unusually strong earthquake hit Manila and the building constructed sustained
major damage and by reason of this collapse defendants in this case instituted a third party complaint
against Nakpil and Sons, who executed and formulated plans and specifications of the property.
- Issue: Whether or not an act of god, an usually strong earthquake,- which caused the failure of the
building, exempts from liability parties who are otherwise liable because of their negligence.
- The negligence of United Construction Inc. and Juan Nakpil and Sons Inc. in the planning,
specification, and construction of the Philippine Bar Association Building led to its collapse during an
unusually powerful earthquake. This is evidenced by the fact that many other buildings older than it
remained standing. If the happening of the fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of the tenor of the
obligation as provided in Article 1170 which results in the loss or damage, the obligor cannot escape
liability.
Sia vs. CA
- Plaintiff Luzon Sia rented a safety deposit box of Security Bank and Trust Co. (Security Bank) at its
Binondo Branch wherein he placed his collection of stamps. The said safety deposit box leased by the
plaintiff was at the bottom or at the lowest level of the safety deposit boxes of the defendant bank.
- During the floods that took place in 1985 and 1986, floodwater entered into the defendant banks
premises, seeped into the safety deposit box leased by the plaintiff and caused, according damage to
his stamps collection. Security Bank rejected the plaintiffs claim for compensation for his damaged
stamps collection.
- Issue: Whether or not the Bank is liable for negligence.

- The banks negligence aggravated the injury or damage to the stamp collection. SBTC was aware of
the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where the safe
deposit box was located. In view thereof, it should have lost no time in notifying the petitioner in
order that the box could have been opened to retrieve the stamps, thus saving the same from further
deterioration and loss. In this respect, it failed to exercise the reasonable care and prudence expected
of a good father of a family, thereby becoming a party to the aggravation of the injury or loss. As
correctly held by the trial court, Security Bank was guilty of negligence.
RP vs. Luzon Stevedoring

- A barge being towed by tugboats "Bangus" and "Barbero" all owned by Luzon Stevedoring Corp.
rammed one of the wooden piles of the Nagtahan Bailey Bridge due to the swollen current of the
Pasig after heavy rains days before. The Republic sued Luzon Stevedoring for actual and
consequential damages. Luzon Stevedoring claimed it had exercised due diligence in the selection
and supervision of its employees; that the damages to the bridge were caused by force majeure; that
plaintiff has no capacity to sue; and that the Nagtahan bailey bridge is an obstruction to navigation.
- Issue: Whether or not the collision of appellant's barge with the supports or piers of the Nagtahan
bridge was in law caused by fortuitous event or force majeure.
- The collision of Luzon Stevedorings barge with the supports of the Nagtahan Bridge was not caused
by a fortuitous event or force majeure. The Nagtahan bridge was an immovable and stationary object
provided with openings for the passage of water craft, thus, it is undeniable that the unusual event that
the barge rammed the bridge raises a presumption of negligence on the part of its employees manning
the barge or the tugs that towed it. Luzon Stevedoring voluntarily entered the swollen stream knowing
the dangers that it posed. It therefore assured the risk and cannot shed responsibility merely because
the precautions it adopted turned out insufficient.
NPC vs. Philipp Brothers

- National Power Corporation (NAPOCOR) issued invitations to bid for the supply and delivery of
120,000 metric tons of imported coal for its Batangas Coal-Fired Thermal Power Plant of
which Philipp Brothers Oceanic, Inc. (PHIBRO) bidded and was accepted.
- PHIBRO told NAPOCOR that disputes might soon plague Australia that will seriously hamper
its ability to supply coal. PHIBRO informed NAPOCOR that unless a "strike-free" clause is
incorporated in the charter party or the contract of carriage, the ship owners are unwilling to load their
cargo. In order to hasten the transfer of coal, they should share the burden of the "strike-free" clause
but NAPOCOR refused.
- PHIBRO effected its first shipment only on November 17, 1987 which was supposed to be on the
30th day after receipt of the letter of credit of which it received on August 6, 1987, due to the strikes
in Australia
- NAPOCOR once more advertised for the delivery of coal to its Calaca thermal plant (2nd bidding) of
which PHIBRO applied but was rejected since it was not able to satisfy the demand for damages on
its delay in the first delivery.
- Issue: WON strikes can be considered as a fortuitous event to exempt PHIBRO from liability of
paying damages due to its delay? WON NAPOCOR is bound to accept PHIBRO in the second
bidding?
- Strikes are included in the definition of force majeure since it is an event which takes place by
accident and could not have been foreseen and by law and by stipulation of the parties as per their
agreement, Philipp Brothers is exempted from the liability of the effects of the delay in delivery of the
coal. The Court stressed that even considering force majeure as the reason for the delay in the first
shipment, which exempted Philipp Brothers from liability does not mean NAPOCOR is bound under
any contract to approve Philipp Brothers pre-qualification for subsequent biddings as it expressly
reserved its right to reject bids.
8. Usury:
Article 1175. Usurious transactions shall be governed by special laws. (n)
Usury - The action or practice of lending money at unreasonably high rates of interest.
CBP Circular No. 905-82 suspended the effectivity of the Usury Law. Usurers are no longer criminally
liable. If stipulation on the interest rate is unconscionable, they are void for being contrary to morals.
Unilateral increase of interest rate by the lender is not allowed. Absent any evidence of fraud, undue
influence or any vice of consent exercised by one party against the other, the interest rate agreed upon is
binding upon them.
Medel vs. CA
- Medel obtained several loans from Gonzales totalling P500,000.These were evidenced by several
promissory notes agreeing to an interestrate of 5.5% per month with additional service charge of 2%
per annum,and penalty charge of 1% per month.. On maturity, Medel failed to paytheir indebtedness.
Hence, Gonzales filed with the RTC of Bulacan acomplaint for collection of the full amount of the
loan.
- RTC declared that the promissory notes were genuine, however, it ruledthat although the Usury Law
had been repealed, the interest charged byGonzales on the loans was unconscionable. Hence, RTC
applied the legalrate of interest for loan of money, goods or credit of 12% per annum.CA reversed the
ruling of the RTC holding that the Usury Law had becomelegally inexistent. Hence, this petition for
review on certiorari
- Issue: WON the stipulated interest is valid?
- A stipulated rate of interest at 5.5% per month on the 500,000.00 pesos loan is excessive, iniquitous,
unconscionable and exorbitant, but it cannot be considered usurious because Central Bank Circular
No. 905 has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury
Law is now legally inexistent. Jurisprudence provides that CB Circular did not repeal nor in a way
amend the Usury Law but simply suspended the latters effectivity. Interest can now be charged as
lender and borrower may agree upon. However, the interest of 5.5% a month or 66% per annum is
unconscionable, contrary to moral and thus this stipulation is VOID.
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. (1110a)
The presumption in the codal provision is rebuttable. Until the principal sum due is returned to the
creditor, regular interest continues to accrue since the debtor continues to use such principal amount.
9. Remedies for Breach of Obligations (Extra-judicial and Judicial; Principal and Subsidiary)
Article 1177. The creditors, after having pursued the property in 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. (1111)
Extrajudicial Remedies:
Ex. A demand letter, extrajudicial rescission
Judicial Remedies:
Ex. Action for performance, damages, rescission
Principal Remedies:
a. Action for Performance (Specific Performance or Obtain Compliance)
b. Action for Damages (Exclusively or in addition to either of the first actions)
c. Action for Rescission (In a reciprocal obligation)
Subsidiary Remedies:
a. Accion Subrogatoria Creditor steps in the position of the debtor to collect valid and demandable
credit from those who owe the debtor. May be done extrajudicially
Limits: Not allowed to pursue actions which are personal to the debtor
Ex. The right to revoke a donation, right to exercise parental authority.
b. Accion Pauliana Action for the rescission of acts/contracts entered into by the debtor designed to
defraud the creditor
Article 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has
been no stipulation to the contrary. (1112)
General rule:
Rights of obligations or those rights which are acquired by virtue of an obligation are transmissible in character.
Exceptions:
1. Where they are not transmissible in their very nature (i.e. purely personal rights);
2. Where there are stipulations by the parties that they are not transmissible;
3. Where they are not transmissible by operation of law.
Pure and Conditional Obligations: (Articles 1179 1192)

Article 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. (1113)
1. Pure Obligations:
Pure Obligation
No condition or term upon which the fulfillment of the obligation is made to depend.
Immediately demandable by the creditors and debtor cannot be excused from complying.
Demandability is different from fulfillment, thus, when the court gives a grace period, this cannot be
seen as impairing the attribute of immediate demandability.
If debtor does not fulfill, he is in default (after a demand has been made)
Examples:
Bare acknowledgement of a debt by the debtor
Period originally given in a contract is cancelled by mutual agreement
HSBC vs. Spouses Broqueza

Petitioners Gerong and Broqueza are employees of Hongkong and Shanghai Banking Corporation
(HSBC).
Petitioner Broqueza obtained a car loan in the amount of Php175,000.00. She again applied and was
granted an appliance loan in the amount of Php24,000.00. On the other hand, petitioner Gerong applied
and was granted an emergency loan in the amount of Php35,780.00. These loans are paid through
automatic salary deduction.
However, they were terminated due to a labor dispute in which a case was pending for illegal dismissal
before NLRC. They were not able to pay the monthly amortization thus HSBCL-SRP( HSBC Corp., Ltd.
Staff Retirement Plan) considered them delinquent. And when demands were made, they failed to pay.
Issue: WON HSBCL-SRP has a right to demand immediate payment?
The RTC is correct in ruling that since the Promissory Notes do not contain a period, HSBCL-SRP has
the right to demand immediate payment. Article 1179 of the Civil Code applies. The spouses Broquezas
obligation to pay HSBCL-SRP is a pure obligation. The fact that HSBCL-SRP was content with the prior
monthly check-off from Editha Broquezas salary is of no moment. Once Editha Broqueza defaulted in
her monthly payment, HSBCL-SRP made a demand to enforce a pure obligation.
2. Kinds and Effects of Conditions, Suspensive vs. Resolutory:

Conditional Obligations
Obligation which is subject to a condition.
The effectivity of the conditional obligation is subjected to the fulfillment or the non-fulfillment of a
future and uncertain event.
Futurity and uncertainty must concur. If event is not uncertain, then it is a period/term.
Ex. An obligation subjected upon death is not a conditional obligation because death is certain.
Suspensive Condition Fulfillment of the condition gives rise to the obligation.

Ex. Ill buy your land if you pass the 2014 bar examinations
Resolutory Condition Fulfillment of the condition extinguishes an already existing obligation.

Ex. In donation propter nuptias, marriage is a resolutory condition.
If condition is made to be dependent upon past events, it is not a condition because the element of
uncertainty is no longer present. Proof of the past event can become a condition, but not the past event
itself.
Santiago vs. Millar

Geronimo Santiago, Jr. purchased from PCSO ten booklets of tickets for the sweepstake draw and race held
on May 16, 1937. Among the winning tickets was a ticket bought by the plaintiff.
Tickets for the said sweepstake draw and race contained a condition that "prizes of tickets sold locally will be
paid to holder of ticket upon surrender of same."
Carmen B. Garcia, an employee in the National Drug Store where the plaintiff offered for sale his sweepstake
tickets, bought two units (or one-half) of ticket No. 0293020 and, on February 20, 1937, presented the
plaintiff with them on the occasion of the latter's birthday. However, on May 18, 1937, the said two units
were lost.
Santiago then filed a case for the issuance of an injunction to restrain PCSO from paying the prize money to
any person while at the same time seeking judicial declaration that he is the owner of the tickets.
Issue: WON PCSO has the obligation to pay Santiago and not those who are actually holding the tickets?
Two units of tickets for the sweepstakes draw and race were given to Santiago as a gift for his birthday.
However, he lost them along with the winning ticket that it contained. As the ticket bears the notation prizes
of tickets sold locally will be paid to holder of ticket upon surrender of same, PCSO is under no obligation to
pay Santiago if he is not able to present the required ticket. This is because the contract is aleatory in nature
(Art. 1790 Civil Code) and the contracting parties may establish any agreements, terms, and conditions they
may deem advisable, provided that they are not contrary to law, morals, or public order. Obligations arising
from contracts have the force of law between the contracting parties (Art 1091).
Article 1180. 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 article 1197. (n)
Patente vs. Omega

Roman Omega issued a promissory note payable to Patent Health of the amount of P1,600 . the relevant
portion of the promissory note reads: "I am going to pay debt to her, her heirs, assigns and successors, in
the said sum of P1,600 in Philippine currency, as soon as possible or as soon as I have money."
A case arose where the primordial issue is whether the obligation is now a pure obligation as the condition
stipulated is left to the sole will of the debtor.
Issue: WON the obligation is pure or the courts may fix a period?
Omegas promissory note to Patente contained the condition that he will pay as soon as he has the money.
This is a void condition for its fulfillment is left solely to the will of the debtor. Still, the original intention
was to grant the debtor a deadline for the payment, and to make it a pure and unconditional obligation is to
impose a completely different approach than agreed upon. Thus, when the time for payment of an obligation
is left to the sole will of the debtor, and the condition is annulled, the obligation does not become a pure and
unconditional obligation. The recourse of the creditor is to go to court and ask for setting a time limit for the
payment.
Gaite vs. Fonacier

Fonacier was the owner and/or holder of 11 iron lode mineral claims known as the Dawahan Group, situated
in the province of Camarines Norte.
By a Deed of Assignment, Fonacier constituted and appointed Fernando Gaite as his true and lawful attorney-
in-fact to enter into a contract with any individual or juridical person for the exploration and development of
mining claims.
After Gaite has finished his worked, Fonacier decided to revoke the authority he gave to Gaite and the latter
agreed, subject the condition Fonacier will to pay P75,000 where P10,000 will be paid at the signing of the
agreement while the remaining P65,000 will be paid from and out of the first letter of credit covering the first
shipment of iron ores and the first amount derived from the local sale of iron made by Larap Mines;
To secure the P65,000, a surety bond was delivered by Fonacier to Gaite. But Gaite wanted to make sure, so
Fonacier executed a second surety bond, with the Far Eastern Surety and Insurance Co., Inc. as additional
surety (a contract that is to expire in one year).
Issue: WON the obligation of Fonacier to pay Gaite is an obligation with a suspensive term or condition?
The shipment or sale of the iron ore is not a condition or suspensive to the payment of the balance of
P65,000.00, but was only a suspensive period or term. It was intended Merely to fix the future date of the
payment. It is certain that the payment will be made. What is uncertain is the exact date at which it will be
made. Nothing is found in the contract that Gaite assumed to run a risk of losing his right over the ore without
getting paid for it. This is proved by the fact that Gaite insisted on a bond to guarantee the payment of
P65,000.00.
Article 1181. 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. (1114)
Coronel vs. Court of Appeals

On Jan. 19, 1985, Romulo Coronel, et. al. (Coronels) executed a document entitled " Receipt of Down
Payment" in favor of plaintiff Ramona Patricia Alcaraz (Ramona) upon payment of the down payment by
Concepcion Alcaraz (Concepcion), mother of Ramona.
The conditions appurtenant to the sale are the following: The Coronels will cause the transfer in their names
of the title of the property registered in the name of their deceased father upon receipt of the P50,000.00 down
payment. Upon the transfer in their names of the subject property, the Coronels will execute the deed of
absolute sale in favor of Ramona and the latter will pay them the whole balance of P1,190,000.00.
Title was transferred to the Coronels but then they subsequently offered the land to a third party for a higher
purchase price for the reason that Alcaraz went to the US and breached their agreement.
Issue: WON an action for specific performance to execute the sale between Coronel and Alcaraz is
meritorius? YES
Since the condition contemplated by the parties which is the issuance of a certificate of title in petitioners
names was fulfilled on February 6, 1985, the respective obligations of the parties under the contract of sale
became mutually demandable, that is, petitioners, as sellers, were obliged to present the transfer certificate of
title already in their names to private respondent Ramona P. Alcaraz, the buyer, and to immediately execute
the deed of absolute sale, while the buyer on her part, was obliged to forthwith pay the balance of the
purchase price amounting to P1,190,000.00.
It is also significant to note that in the first paragraph in page 9 of their petition, petitioners conclusively
admitted that: The sale was still subject to a suspensive condition. (Emphasis supplied.)
The third party is not a buyer in good faith because a notice of a pending suit was attached in the TCT which
was impossible to have been overlooked by the buyer.
Javier vs. Court of Appeals

Tiro, a timber license holder, executed a deed of assignment in favor of petitioners, the Javiers, which would
transfer his shares of stock in Timberwealth Corporation in consideration of 120k. He also had a pending
application for an additional forest concession adjoining the area of the concession subject of the previous
deed.
Tiro and petitioners once again entered into an agreement that Tiro would transfer rights he may acquire for
an additional 30k if his pending application becomes approved by the Bureau of Forestry.
The pending application did not see the light of day, therefore Tiro never acquired any right over it.
Issue: Whether or not Tiro has a right to demand payment from petitioners after his failure to acquire
approval from BOF.
The said agreement in this case is a bilateral contract which gave rise to reciprocal oligations, that is the
obligation of Tiro to transfer his rights over the concession once approved by the BOF to the petitioners and
on the other hand, the petitioners to pay 30,000. The demandability of the obligation of one depends upon the
fulfillment of the other. Tiros non fulfillment of his end of the deal negates his right to demand from the
Javiers.
Heirs of Atienza vs. Espidol

The Atienzas owned a parcel of agricultural land which they acquired through an emancipation patent through
the govt land reform program. They entered into a contract to sell such land with down payment with Espidol
payable in three instalments: upon the signing of the contract, in December 2002 and in June 2003.
On the second instalment, Espidol was unable to pay the amount. Atienzas filed a complaint for the
annulment of their agreement with damages, claiming that Espidol breached his obligation by failing to pay
the second installment. Espidol argues that since it was a contract of sale on installments, failure to pay an
installment is not a breach but rather just an event which justifies the non-conveyance of the title to him.
Issue: WON the Atienzas can validly cancel the contract due to non-payment of the 2nd installment?
In a contract to sell, the buyers full payment of the price is a positive suspensive condition to the coming into
effect of the agreement. Admittedly, Espidol was unable to pay the second installment of P1,750,000.00 that
fell due in December 2002. That payment, said both the RTC and the CA, was a positive suspensive condition
failure of which was not regarded a breach in the sense that there can be no rescission of an obligation (to turn
over title) that did not yet exist since the suspensive condition had not taken place. since Espidol failed to pay
the installment on a day certain fixed in their agreement, the Atienzas can afterwards validly cancel and
ignore the contract to sell because their obligation to sell under it did not arise. Since the suspensive condition
did not arise, the parties stood as if the conditional obligation had never existed. The Court directs petitioner
Heirs of Atienza to reimburse the P130,000.00 down payment to respondent Espidol.
3. Effects of Potestative, Casual or Mixed Conditions:
Article 1182. 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. (1115)
This provision applies only to suspensive conditions. If the resolutory condition is dependent upon the
sole will of the debtor, the condition may be valid.
This article speaks of three conditions:
1. Potestative or Facultative Condition The fulfillment of the condition depends on the exclusive will
of one of the parties, that is either the debtor or creditor. However, this article refers only to the
debtor.
Ex. I promise to pay when my house is sold.
2. Casual Condition The fulfillment of the condition depends upon chance or the will of a third person.
Ex. Ill buy your house if you win the lotto.
3. Mixed Condition The fulfillment of the condition depends partly upon the will of the parties and
partly upon chance or the will of a third person.
Ex. Ill pay as soon as I received funds derived from the sale of my car in Spain.
Effect of Potestative (Facultative) Condition:

- The conditional obligation is void, that is, both the obligation and the condition are void. This is to
prevent the establishment of obligations which are illusory.
Ex. A promises to sell if A finds it convenient to do so.
B would pay her shares after she had harvested from her fishpond.
- If the fulfillment depends upon the will of the creditor, the condition and obligation are valid. This is
because a creditor is naturally interested in the fulfillment of the condition which will benefit him.
Parks vs. Province of Tarlac

- Concepcion Cirer and James Hill, the owners of parcel of land, donated it perpetually to the
municipality of Tarlac, Province of Tarlac, under certain conditions specified in the public document
in which they made the donation, to wit: one of the parcels donated was to be used absolutely and
exclusively for the erection of a central school and the other for a public park.
- The donation was accepted by the municipal council president. However, subsequently after the land
was then sold by Cirer and Hill to a certain Parks, arguing that the condition was not met thus the land
was never donated to Tarlac.
- Issue: WON the sale to Parks was valid - No
- Parks contends that a condition precedent having been imposed in the donation and the same not
having been complied with, the donation never became effective. We find no merit in this contention.
It is true that this condition has not been complied with. The allegation, however, that it is a condition
precedent is erroneous. The characteristic of a condition precedent is that the acquisition of the right
is not effected while said condition is not complied with or is not deemed complied with. In the
present case the condition that a public school be erected and a public park made of the donated land,
work on the same to commence within six months from the date of the ratification of the donation by
the parties, could not be complied with except after giving effect to the donation. Also, action to
revoke donation has already prescribed.
Osmena vs. Rama

- Rama executed and delivered to Osmena a contract with the ff stipulations: That in exchange of 200
pesos, Rama will pay Osmena in the form of sugar with an interest rate of half a cuartillo per month.
- Another loan was given in favor of Rama but sometime after the execution and delivery of the
contracts, Osmena died and one of his heirs took over.
- Rama executed a promissory note with the ff. conditions: Rama will pay her indebtedness IF HER
HOUSE IS SOLD. However, Rama failed to pay.
- Issue: Is the condition valid?
- It was suggested during the discussion of the case in this court that, in the acknowledgment above
quoted of the indebtedness made by the defendant, she imposed the condition that she would pay the
obligation if she sold her house. If that statement found in her acknowledgment of the indebtedness
should be regarded as a condition, it was a condition which depended upon her exclusive will, and is
therefore, void. (Art. 1115, Civil Code.) The acknowledgment, therefore, was an absolute
acknowledgment of the obligation and was sufficient to prevent the statute of limitation from barring
the action upon the original contract. (In short, she acknowledged the debt thus the action for its
enforcement did not prescribe. May utang pa rin siya)
Trillana vs. Quezon Colleges

- Damasa Crisostomo sent a letter to the Board of Trustees of Quezon College, Inc. entering her
subscription to 200 shares of the capital stocks of the school. Damasa Crisostomo further wrote
"Babayaran kong lahat pagkatapos na ako ay makapag-pahuli ng isda, and that she will pay in
accordance with the rules and regulations of the Quezon College, referring to the balance to be paid.
- Damasa Crisostomo died. As no payment appears to have been made on the subscription mentioned
in the foregoing letter, the Quezon College, Inc. presented a claim before the CFI of Bulacan in her
testate proceeding.
- The CFI of Bulacan issued an order dismissing the claim of the Quezon College, Inc. on the ground
that the subscription in question was neither registered in nor authorized by the Securities and
Exchange Commission.
- Issue: WON the obligaiton is void
- Indeed, the need for express acceptance on the part of the Quezon College, Inc. becomes the more
imperative, in view of the proposal of Damasa Crisostomo to pay the value of the subscription after
she has harvested fish, a condition obviously dependent upon her sole will and, therefore, facultative
in nature, rendering the obligation void. It cannot be argued that the condition solely is void, because
it would have served to create the obligation to pay, unlike a case, exemplified by Osmea vs. Rama
(14 Phil., 99), wherein only the potestative condition was held void because it referred merely to the
fulfillment of an already existing indebtedness.
Hermosa vs. Longara

- Epifanio Longara filed a claim against the estate of Fernando Hermosa, Sr. for money owed to him by
the deceased.
- Longara presented evidence proving that the intestate had asked for the said credit advances for
himself and for the members of his family on condition that their payment should be made by
Fernando Hermosa, Sr. as soon as he receive funds derived from the sale of his property in Spain.
- Upon Hermosas death, the property was sold and the money sent to the estate in the Philippines.
- Luz Hermosa, as administratrix of the Intestate Estate of the deceased, contented on appeal that the
obligation by the intestate was purely potestive one and therefore null and void.
- Issue: WON the condition is potestative
- If the condition were "if he decides to sell his house." or "if he likes to pay the sums advanced," or
any other condition of similar import implying that upon him (the debtor) alone payment would
depend, the condition would be protestativa, dependent exclusively upon his will or discretion. In the
form that the condition was found by the Court of Appeals however the condition implies that the
intestate had already decided to sell his house, or at least that he had made his creditors believe that
he had done so, and that all that we needed to make his obligation (to pay his indebtedness)
demandable is that the sale be consummated and the price thereof remitted to the islands. Note that if
the intestate would prevent or would have prevented the consummation of the sale voluntarily, the
condition would be or would have been deemed or considered complied with (article 1119, old Civil
Code)
Smith Bell vs Matti

- During the World War, Smith Bell and Sotelo Matti entered into a contract where in Smith Bell
obligated itself to sell and Sotelo to purchase steel tanks, expellers, electric motors, each having no
definite time to be delivered In the month of September 1918 or as soon as possible and
"Approximately within 90 days this is not guaranteed
- The goods arrived on April 1919, and Matti refused to receive the goods due to the "delay".
- Issue: WON a period was fixed making Smith liable for delay
- Under these stipulations, it cannot be said that any definite date was fixed for the delivery of the
goods. As to the tanks, the agreement was that the delivery was to be made "within 3 or 4 months,"
but that period was subject to the contingencies referred to in a subsequent clause. With regard to the
expellers, the contract says "within the month of September, 1918," but to this is added "or as soon as
possible." And with reference to the motors, the contract contains this expression, "Approximate
delivery within ninety days," but right after this, it is noted that "this is not guaranteed." And as the
export of the machinery in question was, as stated in the contract, contingent upon the sellers
obtaining certificate of priority and permission of the United States Government, subject to the rules
and regulations, as well as to railroad embargoes, since this was done during the world war, then the
delivery was subject to a condition the fulfillment of which depended not only upon the effort of the
herein plaintiff, but upon the will of third persons who could in no way be compelled to fulfill the
condition.
Lao Lim vs. Court of Appeals

- A lease agreement was made between petitioner Lao Lim and private respondent Dy for a period of
three years, renewable for another three years for as long as defendant needed the premises. Dy
informed Lao Lim that he wanted to renew his lease for another term despite petitioners claim that he
would no longer do so. Because Dy refuses to vacate the premises, Lao Lim filed a case in the court
against private respondent.
- Issue: WON the condition is potestative
- Contrary to the ruling of respondent court, the disputed stipulation "for as long as the defendant
needed the premises and can meet and pay said increases" is a purely potestative condition because it
leaves the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee. It
is likewise a suspensive condition because the renewal of the lease, which gives rise to a new lease,
depends upon said condition. The continuance, effectivity and fulfillment of a contract of lease cannot
be made to depend exclusively upon the free and uncontrolled choice of the lessee between
continuing the payment of the rentals or not, completely depriving the owner of any say in the matter.
Mutuality does not obtain in such a contract of lease and no equality exists between the lessor and the
lessee since the life of the contract is dictated solely by the lessee.
Catungal vs. Rodriguez

- Agapita Catungal owned a parcel of land in Cebu City. Agapita, with the consent of her husband,
entered into a Contract to Sell which was later on upgraded to a Conditional Deed of Sale with
Rodriguez. A condition imposed therein was that the respondent shall successfully negotiate, secure
and provide a road right of way. It was also stated in the contract that the vendee has the option to
rescind the sale. According to Rodriguez, after he had refused to pay the advance of 5M, he learned
that the Catungals were offering said property to third parties. Moreover, a letter was received by
Rodriguez from Jose Catungal stating the contract had been cancelled and terminated. Rodriguez filed
a Complaint contending that the Catungals' unilateral rescission was unjustified. RTC ruled in favor
of Rodriguez which was later on affirmed by the CA. Hence, this appeal.
- Issue: Was the conditon void for being potestative? No. Was the rescission valid? No.
- Such a condition is not purely potestative as petitioners contend. It is not dependent on the sole will
of the debtor but also on the will of third persons who own the adjacent land and from whom the road
right of way shall be negotiated. In a manner of speaking, such a condition is likewise dependent on
chance as there is no guarantee that respondent and the third party-landowners would come to an
agreement regarding the road right of way. This type of mixed condition is expressly allowed under
Article 1182 of the Civil Code.
- In sum, Rodriguez's option to rescind the contract is not purely potestative but rather also subject to
the same mixed condition as his obligation to pay the balance of the purchase price - i.e., the
negotiation of a road right of way. In the event the condition is fulfilled (or the negotiation is
successful), Rodriguez must pay the balance of the purchase price. In the event the condition is not
fulfilled (or the negotiation fails), Rodriguez has the choice either (a) to not proceed with the sale and
demand return of his downpayment or (b) considering that the condition was imposed for his benefit,
to waive the condition and still pay the purchase price despite the lack of road access. This is the most
just interpretation of the parties' contract that gives effect to all its provisions.
- After thorough review of the records of this case, we have come to the conclusion that petitioners
failed to demonstrate that the Court of Appeals committed any reversible error in deciding the present
controversy.
4. Effects of Possible or Impossible Conditions:

Article 1183. Impossible conditions, those contrary to good customs or public policy and those prohibited
by law shall annul 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. (1116a)
This article applies only to cases where the condition was already impossible from the time of the
constitution of the obligation. Hence, any supervening possibility will not make the impossible condition
possible unless the parties agree again, nor will a supervening impossibility make the possible condition
an impossible one.
Possible Condition If it is capable of realization according to nature, law, public policy or good
customs. Otherwise, it is an impossible condition. When the condition is impossible, the obligation is
void.
a.) Physically impossible Contrary to the law of nature
Ex. Drink the water of the Pasig River until it runs dry.
b.) Juridically impossible Contrary to law, public policy, morals, and good customs.
Ex. Ill give you money if you kill X. Condition is contrary to law, hence impossible
Condition not to do an impossible thing shall be considered as not written, because the rule has always
been that no person is allowed to commit an unlawful act. The obligations will then stand as simple, pure
and immediately demandable.
Impossible conditions differ from those found in obligations and in donations and wills. In the latter, it is
considered as not written but the will remains valid.
Luneta Motor vs. Abad

- Plaintiff sought recovery of the sum of P2,674.05 with accrued stipulated interest and attorney's fees
for balance due on four promissory notes executed by the defendant on March 12, 1931. The
complaint sued for a writ of attachment which was issued. Luneta Motor filed a suit against Abad,
and asked for a writ to attach Abads properties. The writ was granted, but Abad asked for its
cancellation, and for this purpose offered a bond, secured by two sureties. The bond contained a
statement that in case Luneta Motor should WIN, the sureties would answer for Abads liability.
Because of this bond, the writ was dissolved. Later, Luneta Motor lost the case, it having been
dismissed since Abad died. Are Abads sureties still bound?
- No more, because Luneta Motor can never win, the case having been dismissed. The condition has
become a legal impossibility. Therefore, the obligation dependent upon this condition must be
deemed extinguished, according to article 1116 of our Civil Code. (1183 NCC)
Article 1184. 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. (1117)
This refers to positive conditions, while 1185 refers to negative conditions.
Ex. A binds himself to give B, a 3rd year law student, a car if he becomes a lawyer in 2016. Year 2016 has lapsed
and B is still not a lawyer, obligation is extinguished. If B travels abroad on a 5-year contract of employment in
2014, then obligation is also extinguished due to the certainty that it will not take place.
Article 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. (1118)
The condition that some event will not happen at a specified time will make the obligation effective only when:
a. Specified time has already lapsed without the event occurring
b. Or if it has become definite that the event will not occur
Ex. A binds himself to give B a parcel of land if B does not run for Mayor in their City within 6 years. Time
elapsed and B did not run for Mayor, obligation to deliver land becomes effective. Also, if the City was erased
due to a nuclear bomb, B can no longer run for Mayor in that City, hence, obligation becomes effective too.
5. Constructive Fulfillment of Condition:

Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.
(1119)
The Article refers to a constructive and not an actual fulfillment of the condition. Mere intent to prevent
the fulfillment is not enough without actual prevention of fulfillment. The prevention must be
consummated. These are the 2 requisites.
When an obligor committed an act voluntarily which is not intended to prevent the fulfillment of the
condition, but nevertheless resulted in the frustration of the condition, there shall be no constructive
fulfillment.
This article is brought about by the principle that no person shall profit by his own wrong.
If the parties stipulate that the obligation shall be extinguished if the condition could not be fulfilled for
any reason, then even if the obligor prevents its fulfillment, the obligation shall still be extinguished.
PLDT vs Jeturian
Before the war, PLDT adopted a pension plan for its employees: All employees who have reached the age
of 50 years and have been in service for more than 20 years may be retired with pension
After the war, the BOD abrogated the pension plan, causing 60 employees to file a complaint claiming
monetary benefits under the pension plan.
PLDT said: Obligation is subject to a suspensive condition- when the employees reach 50 years of age,
thus the employees are not entitled to benefits because the conditions have not been fulfilled.
Issue: Were the conditions fulfilled?
When PLDT abrogated the pension plan after the war, it voluntarily prevented the fulfillment of its
obligation to provide pension plans to its employees, thus, whether or not the employees have reached the
age of 50, their rights are reserved for such benefits.
Valencia vs. RFC

Valencia made a bid for the installation of plumbing works in a government building
Valencia was required to put up the required performance bond after his bid was accepted, but Valencia
neither put up the bond nor begun the plumbing works.
In the case filed against him, he proffered the defense that since he did not put up the required bond, it
follows that there was no contract as the condition was not fulfilled.
Issue: WON Valencia is liable for damages due to non-compliance with the contract?
Valencia is liable for damages. The putting up of a performance bond is not a condition before he could
be compelled to make the installation. Assuming that the bond is a condition, it was he who voluntarily
prevented its fulfillment. In either case, the existence of the contractual relation between the parties did
not depend upon the posting the performance bond. Although, the latter was essential to the birth of some
of the rights stipulated in favor of petitioner herein, those of respondent were not conditioned upon the
giving of said performance bond.
Labayan vs. Talisay

Labayen, the owner of Dos Hermanos hacienda, and the respondent, a corporation dedicated to the milling of
sugar cane, entered into a contract. It was agreed that a permanent railroad was to be constructed for the use
of the plantations in the transportation of sugar cane and all other articles as the producer may need for his
estate, provided that the countour of the land, the curves and elevations permit the same.
The central has not continued its railroad through to the Hacienda Dos Hermanos. The civil engineer
employed in the construction testified that it was possible to construct and extend the railroad to the
hacienda but that to do so would be very dangerous.
Issue: WON the defendant can excuse itself from constructing the railroad on the grounds that it
would be very dangerous to do so
There is another aspect to the case which has to do with the tenth paragraph of the mutual obligations of
the contract and which concerned the securing of the right- of-way for the proposed railroad. To get from
the Hacienda Esmeralda No. 2 to the Hacienda Dos Hermanos, the railroad would have to pass through
the haciendas of Esteban de la Rama. But he would not grant permission to use his land for this purpose
in 1920, and only consented to do so in 1924. Here then was a clear case of such a condition of affairs as
was contemplated by the contract.
Article 1187. 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 and 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 and interests received, unless from the
nature and circumstances of the obligation it should be inferred that the intention of the person
constituting the same was different.
In obligations to do and not to do, the courts shall determine, in each case, the retroactive
effect of the condition that has been complied with. (1120)
This article only applies to suspensive conditions where there was fulfillment.
Since the condition is merely an accidental element of the obligation, the effect of a conditional obligation
to give, once the suspensive condition is fulfilled, shall retroact to the date of the constitution of the
obligation. This is similar to the legitimation of a natural child.
If the object of the obligation is the delivery of a determinate thing, obligor should not be allowed to
alienate the property during the pendency of the suspensive condition. If the obligor alienates the
property, alienation will be abrogated upon the happening of the condition unless the third person acted in
good faith. If that is the case, the only remedy then is to file for damages against the debtor. If the third
person acted in bad faith, he can be compelled to deliver upon the happening of the suspensive condition.
If it is the obligee who alienates the property before the condition is fulfilled, then fulfillment of the
condition will convalidate the alienation.
For practical reasons, delivery of fruits and interests accruing before the fulfillment of the suspensive
conditions is not required. When the obligation imposes reciprocal prestations, the fruits and interests
they receive during the pendency of the condition shall be deemed to have been mutually compensated.
If obligation is unilateral like in donation, debtor is allowed to appropriate the fruits and interests received
since the debtors has not received anything from the creditor.
Article 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. (1121a)
Pending the happening of the suspensive condition, the creditor cannot compel the debtor to perform the
prestation.
Article does not grant any preference of credit but only allows the bringing of proper action for its
preservation.
However, the creditor may avail himself of some remedies such as:
1. Action for Prohibition restraining alienation of the thing during pendency
2. Petition for the Annotation of the creditors right
3. Action to demand security if debtor has become insolvent
4. Action to set aside alienations made by the debtor in fraud of creditors
5. Actions against adverse possessors to interrupt the running time of prescriptive periods.
6. Rules in Cases of Improvement, Deterioration, or Loss:

Article 1189. When the conditions have been imposed with the intention of suspending the efficacy of an
obligation to give, the following rules shall be observed in case of the improvement, loss or
deterioration of the thing during the pendency of the condition:
(1) Lost without the fault of the debtor: obligation extinguished
(2) Lost through the fault of the debtor: obliged to pay damages; A thing is lost when it:
a. Perishes
b. Goes out of the commerce of man
c. Disappears in such a way that its existence is unknown or it cannot be recovered
Ex. Diamond ring falls into magma
(3) Deteriorates without the fault of the debtor: impairment is to be borne by the creditor;
(4) Deteriorates through the fault of the debtor: creditor may choose between the rescission of
the obligation and its fulfillment, with indemnity for damages in either case
(5) Improved by its nature, or by time: inure to the creditor
(6) Improved at the expense of the debtor: no other right than that granted to the usufructuary.
(1122)
This article applies only to obligations to deliver a determinate or specific thing. No application to generic
objects.
Also, it applies only when the suspensive condition is fulfilled.
During pendency, the thing can undergo some changes:
a. Loss
b. Deterioration or Impairment
c. Improvement or Betterment
Gone out of commerce means that it is used to be sold in the market but is not a prohibited good.
Ex. A land where a public plaza is built can no longer be alienated.
Deterioration is making worse the condition of the thing. It is the impairment or reduction of its value.
Improvement is anything which increases the value of the thing.
a. If improvement is due to nature/time, it belongs to the creditor.
b. If at the expense of the debtor, cannot claim indemnification but may enjoy usufructuary rights.
Inure means belong
Usufructuary means the right to enjoy the use and advantages of another persons property.
Article 1190. 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 the preceding article shall be applied to the party who is
bound to return.
As for the obligations to do and not to do, the provisions of the second paragraph of article
1187 shall be observed as regards the effect of the extinguishment of the obligation. (1123)
This article refers to the fulfillment of a resolutory condition. If the event happens, the obligation is
considered as if it did not exist. Thus, the parties are bound to return what they have received from each
other and return to the status quo.
In reciprocal restitutions, the fruits and interests shall be compensated against each other.
Same rules for loss, deterioration, or improvement in Art. 1189 will be applicable except the party bound
to return something shall be considered as the debtor under the present article.
Retroactivity of the fulfillment of the condition shall be determined by the courts, taking into
consideration the intention of the parties if they are determinable.
7. Power to Rescind in Reciprocal Obligations:

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law. (1124)
Article 1192. In case both parties have committed a breach of the obligation, the liability of the first
infractor 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, and each shall bear
his own damages. (n)
Ang vs. Court of Appeals

Petitioners Ernesto Ang and Rosalinda Ang, brother and sister, (Angs) are the owners of three (3) parcels
of land in Quezon City.
Negotiations were undertaken for the sale of the properties between the Angs (seller) and private
respondent Lee Chuy Realty Corporation (LCRC), through its president Henry Lee Chuy as buyer.
Subsequently, there was a perfected contract of sale between the Angs and LCRC as evidenced by the
P50k down payment. In the receipt prepared by LCRC, which was not signed by petitioners, the stated
purchase price is P1.6M. However, the receipt signed by petitioners, which substantially reproduced the
terms and conditions embodied in the original receipt, did not state the agreed price. Petitioners then
refused to proceed with the sale unless LCRC would pay 2.34 million pesos, which forced LCRC to seek
for the rescission of the contract and the refund of the down payment.
Issue: Was there a breach of contract as to warrant rescission?
While it is true that in reciprocal obligations, such as the contract of purchase and sale in this case, the
power to rescind is implied and any of the contracting parties may, upon non-fulfillment by the other
party of his part of the obligation, resolve the contract, rescission will not be permitted for a slight or
casual breach of the contract. Rescission may be had only for such breaches that are so substantial and
fundamental as to defeat the object of the parties in making the agreement. The Court holds that when
petitioners refused to proceed with the sale unless private respondent agreed to pay the higher price of
P2,340,000.00, the petitioners thereby committed a serious breach of the agreement. Private respondent
had the right to rescind the agreement as petitioners committed a serious breach of the terms of the same.
Heirs of Gaite vs. The Plaza Inc

Petitioners (Gaite and Rhogen) and respondent (The Plaza) entered into a contract for the construction of
a restaurant building. The Plaza made a downpayment in favor of Gaite, which signaled the start of the
restaurants construction.
The Plazas obligation to pay the contract price is conditioned on Gaite and Rhogens performance to
complete the works within the stipulated period and in accordance with the approved plans and other
specifications by the owner. The Plaza faithfully complied with its end of the contract right before the
construction (operated by Gaite and Rhogen) was stopped by local authorities on account of several
violations of the National Building Code and other regulations of the municipal authorities.
The Plaza then rescinded the contract and told Gaite that it would hold him and his company liable due to
the substantial breach in the contract.
Issue: WON petitioners have breached the contract thereby leading the respondents to terminate the
same - YES
When Rhogen Builders failed to secure a proper and sufficient permit in due to non-compliance with the
provisions of the National Building Code, it had committed a serious breach in the terms of contract with
the Plaza for the purposes of constructing a restaurant in Makati. Gaites failure to build the structure in
accordance with the approved plans and non-observance of laws and regulations affecting the
construction constitute a substantial violation of the contract, which entitles The Plaza to terminate the
same without obligation to make further payment to Rhogen.
Lalicon vs. NHA

NHA executed a deed of sale with mortgage over a Quezon City lot in favor of the Alfaros, with the
contidion that the Alfaros could sell the land within 5 years from the date of release of the mortgage
without NHAs prior consent. The Alfaros were forbidden from selling the property within the five-year
period prescribed by the NHA. However, the Alfaros sold the lot to their son when the mortgage was not
yet released and thereby committing a substantial breach of the obligation for failure to secure NHAs
consent to selling the lot while the mortgage payments were not yet completed. This entitled the NHA to
rescind the contract, an action which they filed after 6 years from the date of the forbidden sale, but the
Lalicons were arguing that the action has already prescribed.
Issue: WON the action has prescribed? - NO
It has been held that Article 1191 speaks of rescission in reciprocal obligations within the context of
Article 1124 of the Old Civil Code which uses the term resolution. Resolution applies only to
reciprocal obligations such that a breach on the part of one party constitutes an implied resolutory
condition which entitles the other party to rescission. Resolution grants the injured party the option to
pursue, as principal actions, either a rescission or specific performance of the obligation, with payment of
damages in either case.
Rescission under Article 1381, on the other hand, was taken from Article 1291 of the Old Civil Code,
which is a subsidiary action, not based on a partys breach of obligation. The four-year prescriptive period
provided in Article 1389 applies to rescissions under Article 1381. Here, the NHA sought annulment of
the Alfaros sale to Victor because they violated the five-year restriction against such sale provided in
their contract. Thus, the CA correctly ruled that such violation comes under Article 1191 where the
applicable prescriptive period is that provided in Article 1144 which is 10 years from the time the right of
action accrues. NHA filed the action 6 years from such time, well within the 10 year limit.
Spouses Fernando and Lourdes Viloria vs. Continental Airlines Inc.

Fernando purchased for himself and his wife, Lourdes, two (2) round trip airline tickets from San Diego,
California to Newark, New Jersey on board Continental Airlines. Fernando purchased the tickets from a
travel agency called Holiday Travel and was attended to by a certain Margaret Mager (Mager).
According to Spouses Viloria, Fernando agreed to buy the said tickets after Mager informed them that
there were no available seats at Amtrak, an intercity passenger train service provider in the United States.
However, when Fernando tried to schedule in Amtrak train he was able to purchase tickets. So he wanted
a refund but the ticket was said to be non-refundable. He sent a letter demanding a refund where it was
denied but he was told that he can apply the amount of previous ticket for new tickets.
He wanted to replace both of their tickets to a new single round trip ticket to LA under his name but he
was advised that Lourdes ticket cannot be transferred under his name, and he needs to add additional
amount to cover the full cost of the new ticket. Fernando then demanded for the refund of the tickets
claiming that CAI's acts constituted a breach of its undertaking.
Issue: WON petitioner has the right to rescind on the ground of substantial breach - NO
While CAIs refusal to allow Fernando to use the value of Lourdes ticket as payment for the purchase of
a new ticket is unjustified as the non-transferability of the subject tickets was not clearly stipulated, it
cannot, however be considered substantial. The endorsability of the subject tickets is not an essential part
of the underlying contracts and CAIs failure to comply is not essential to its fulfillment of its undertaking
to issue new tickets upon Spouses Vilorias surrender of the subject tickets. This Court takes note of
CAIs willingness to perform its principal obligation and this is to apply the price of the ticket in
Fernandos name to the price of the round trip ticket between Manila and Los Angeles. CAI was likewise
willing to accept the ticket in Lourdes name as full or partial payment as the case may be for the
purchase of any ticket, albeit under her name and for her exclusive use. In other words, CAIs willingness
to comply with its undertaking under its March 24, 1998 cannot be doubted, albeit tainted with its
erroneous insistence that Lourdes ticket is non-transferable.
Therefore, CAIs liability for damages for its refusal to accept Lourdes ticket for the purchase of
Fernandos round trip ticket is offset by Spouses Vilorias liability for their refusal to pay the amount,
which is not covered by the subject tickets. Moreover, the contract between them remains, hence, CAI is
duty bound to issue new tickets for a destination chosen by Spouses Viloria upon their surrender of the
subject tickets and Spouses Viloria are obliged to pay whatever amount is not covered by the value of the
subject tickets.
F.F. Cruz vs. HR Construction

FFCCI entered into a contract with the DPWH for the construction of the Magsaysay Viaduct, known as
the Lower Agusan Development Project. FFCCI, in turn, entered into a Subcontract Agreement with HR
Construction Corporation (HRCC) for the supply of materials, labor, equipment, tools and supervision for
the construction of a portion of the said project.
HRCC submitted to FFCCI several progress billings over several months. However, FFCCI was not able
to pay diligently, claiming that it still had to valuate the works accomplished by HRCC.
HRCC soon enough sent a letter demanding payment from FFCCI in the amount of 7 million pesos plus
interests. Subsequently, HRCC completely halted construction and issued a work stoppage.
The issue of whether the work stoppage is justified reached the courts, and the CA held that it actually
was justified.
ISSUE: WON there was a valid rescission of the subcontract agreement by the HRCC? - NO
The right to rescind may be waived, expressly or impliedly. In spite of the existence of dispute or
controversy between the parties during the course of the Subcontract Agreement, HRCC had agreed, via a
stipulation in the subcontract, to continue the performance of its obligations pursuant to the Subcontract
Agreement. In view of such provision, HRCC is deemed to have effectively waived its right to effect
extrajudicial rescission of its contract with FFCCI. Accordingly, HRCC, in the guise of rescinding the
Subcontract Agreement, was not justified in implementing a work stoppage.
a. Resolution vs. Rescission:
Article 1191 Rescission is different from Article 1381 Rescission.

The original term used for the Rescission in 1191 is RESOLUTION:
Rescission is a resolution or a cancellation of a contract.
Power to Rescind:
Means the right to cancel or resolve the contract or reciprocal obligations in case of non-
fulfillment on the part of one of the contracting parties.
Failure without legal reason to comply with the terms of a contract is called a breach of
contract.
There can be no rescission of an obligation that is non-existent, hence when a suspensive
condition has not happened yet, then there cannot be a rescission.
The right to rescind is implied even absent any provision providing for a right to rescind.
Breach of Faith:
Resolution is predicated on a breach of faith by the other party, a failure to comply with an
obligation already existing, that violates the reciprocity between them.
This article applies only to reciprocal obligations where two parties are mutually debtor and
creditor. Reciprocity must arise from identity of cause. This means 2 obligations are created
at the same time.
Does not apply to non-reciprocal obligations.
Ex. Non-payment of the purchase price of a property.
Effect of Rescission:
General rule: to rescind a contract is not merely to terminate it, but to abrogate and undo it
from the beginning.
Annuls the contract and restores the parties to the relative positions which they would have
occupied if no such contract had ever been made.
Mutual restitution of the benefits received is required.
Who has the Right to Rescind:

The party who can demand rescission is the one who is ready, willing, and able to comply
with his own obligations while the other is not capable to perform his own.
Also, he must be in a position to return whatever he may be obliged to return.
A party who has not performed his part of the obligation cannot rescind.
A guilty party cannot rescind because he has unclean hands.
Power to rescind is given to the injured party in reciprocal obligations.
Remedies available to Aggrieved Party:

1. Specific performance or fulfillment of the obligation WITH damages
2. Rescission of the contract WITH damages
v Injured parties CANNOT seek BOTH remedies.
v Specific performance and rescission are ALTERNATIVE remedies, not conjunctive.
Exceptions:
1. If fulfillment was chosen but the same had become impossible, rescission may still be sought.
2. If there is a valid basis for the extension of the performance of the reciprocal obligation, the court
will not decree rescission but will rather fix a period for the fulfillment of the obligation.
3. Partial rescission and partial fulfillment may be allowed.
Not applicable in the following cases:

a. Sales of real property by installments (Maceda Law governs)
b. Sales of personal property by installments (Recto Law governs. If not by installment, 1191 governs.)
c. Contracts of partnerships (Governed by 1786 and 1788)
Basis Article 1191 Rescission (Resolution) Article 1381 Rescission
A principal action which seeks the resolution or A subsidiary action limited to cases or rescission
Nature cancellation of the contract. for lesion as enumerated in Art. 1381.
Prescriptive period: 10 years Prescriptive period: 4 years
Only ground is the non-performance of ones Five grounds enumerated in Art. 1381. Non-
Grounds obligation or what is incumbent upon him. performance by the other party is not important.
Applicability It applies only to reciprocal obligations. Applies to both unilateral and reciprocal
obligations.
Person who Only the a party to the contract may demand the Even a third person who is prejudiced by the
may institute fulfillment or seek the rescission (cancellation) of contract may demand the rescission of the contract.
the action the contract.
Fixing of Court may fix a period or grant extension of Court cannot grant extension of time for the
period by the time for the fulfillment of the obligation. fulfillment of the obligation.
court
Purpose To cancel the contract. To seek reparation for the damage or injury
caused, thus allowing partial rescission of contract.
b. Restrictions on the Power:

1. Due process must be observed:
Rescission authorized under 1191 is a judicial rescission.
Other party must be given his day in court, hence, the aggrieved party must not take justice in
his own hands and decide by himself along the right of the parties on the matter.
In the absence of a contrary stipulation, the power to rescind an obligation must be invoked in
court.
2. Right to rescind is subordinated to the rights of 3rd persons who acquired the thing in GOOD FAITH.
If the 3rd person acquired the thing in accordance with 1385 and 1388 of the Civil Code, the
innocent party can no longer recover the property.
The remedy is to seek indemnification for the value of the thing and damages.
3. Power of the Court to fix period in lieu of decreeing Rescission.

If the court finds a just cause for giving the debtor time to perform his obligation, such as
when the default was not willful or is excusable under the circumstances, then rescission will
not be granted.
4. Slight breaches of the contract will not justify Rescission.

Rescission will not be permitted for a slight or casual breach of a contract, but only for such
breaches as are so substantial and fundamental as to defeat the object of the parties in
entering into the agreement.
5. A judicial or notarial act is necessary before a valid rescission can take place, whether or not automatic
rescission has been stipulated.
Proof of violation of the agreement is a condition precedent to the declaration of rescission.
Tan vs. Court of Appeals

Spouses Singson were the owners of a house and lot in Baguio which were up for sale.
Tan and his agent went on to see the said property and agreed to buy the same. Tan advanced 200,000
for the cancellation of the mortgage and lien attached to the title of the property.
They agreed on executing a deed of absolute sale but the clearance needed from DBP has not yet been
accomplished through DBPs delay in processing the same. Petitioners saw this as a breach on the
agreement therefore cancelled the sale and demanding 200,000 without judicial notice/authority for
rescission.
Issue: WON there was susbstantial breach to merit a rescission? - NO
It is a settled principle of law that rescission will not be permitted for a slight or casual breach of the
contract but only for such breaches as are so substantial and fundamental as to defeat the object of the
parties in making the agreement.
A court, in determining whether rescission is warranted, must exercise its discretion judiciously
considering that the question of whether a breach of a contract is substantial depends upon the
attendant circumstances
Time not being of the essence in the agreement, a slight delay on the part of the private respondents in
the performance of their obligation, is not sufficient ground for the resolution of the agreement, more
so when the delay was not totally attributable to them. In this case, as to the lot covered by TCT No.
T-13826, it is true that as of June 25, 1984, the date set for the execution of the final deed of sale, the
mortgage lien in favor of DBP annotated in the title has not yet been cancelled as it took DBP some
time in processing the papers relative thereto. However, just a few days after, or on July 12, 1984, the
cancellation of the DBP mortgage was entered by the Register of Deeds and duly noted on the title.
Petitioner is given a period of ninety (90) days within which to pay the sum of one million and five
hundred fifty thousand pesos (Pl,550,000.00) representing the balance of the purchase price, with
interest.
c. Necessity of Judicial Approval:
In specific performance, there is always a need for judicial action if the other party refuses to make the
delivery of the thing promised.
However in rescission, the rule is different:
1. If there is an express stipulation of automatic rescission without need of judicial action, rescission is
authorized without court intervention.
Where the contract provides that it may be revoked and cancelled for violation of any of its
terms and conditions, no judicial action is necessary.
Where the contract provides a resolutory provision by which the obligation may be resolved
or extinguished in case of a violation of the terms, judicial action is not necessary.
A stipulation of automatic rescission is in the nature of a facultative resolutory condition

Rescission shall take effect only after the creditor has notified the debtor of his choice of
rescission, as the creditor may choose between rescission or performance.
Cancellation of a contract based on such stipulation is provisional, and still subject to judicial
scrutiny. This means that the party must proceed at his own risk, as only the final judgment of the
corresponding court shall conclusively settle whether the action taken was correct in law.
2. If there is no express stipulation of automatic rescission in case of breach:

a. When the object has already been delivered, judicial approval is needed unless the debtor
voluntarily returned the thing.
b. Not yet delivered, judicial approval is not needed to rescind the contract.
If there is an arbitration clause, breaches by a party arising from the contract must be brought
first and resolved by arbitration, not through extrajudicial rescission or judicial action.
Rescission of contract is a power vested in the Regional Trial Courts, not Municipal Trial Courts.
Courts have no power to relieve parties from obligations voluntarily assumed, simply because
their contracts turned out to be disastrous or unwise investments.
Heirs of JBL Reyes vs. CA

Justice Jose Benedicto L. Reyes (JBL) and Dr. Edmundo Reyes are co-owners of a parcel of land in
Taft Ave. Pasay City. They entered into a lease contract with Metro Manila Builders at a very low
rate of rental. The condition in the contract: Lessee would cover all present and future improvements
in the property with insurance against risks and maintain premises in good, sanitary at all times.
In the course of the lease, petitioners found out that respondent had not properly maintained the
premises or covered it with an adequate insurance policy. WORSE, they have subleased the property
to 3rd parties.
Petitioners served on respondent a notice terminating the lease contract and demanding that they
vacate and surrender the premises subject of the lease.
Respondent questioned the actions of the petitioner, especially the absence of a judicial rescission of
the contract of lease.
Issue: WON there was a need for Judicial rescission in this case? - NO
We rule that there is no need for a judicial rescission of the lease contract between lessors heirs of
Justice J. B. L. Reyes, et al. and lessee MMB, Inc. The contract provides:
"Section 18, paragraph 4 (a) In the event of default or breach of any of the condition of this contract,
the LESSOR may, in his absolute discretion declare the contract cancelled and terminated and require
the TENANT to vacate the leased premises.
The law on obligations and contracts does not prohibit parties from entering into agreement providing
that a violation of the terms of the contract would cause its cancellation even without judicial
intervention. This is what petitioners and respondent entered into, a lease contract with stipulation
that the contract is rescinded upon violation of its substantial provisions, which MMB, Inc. does not
deny they violated.
d. Effects of Slight Breaches:
The breach of the contract should be substantial and fundamental as to defeat the object of the
parties in entering into the contract.
Non-substantial breach of a contract cannot give rise to a rescission.
The aggrieved party cannot seek the rescission of the contract based merely on slight infractions
committed by the other party. The law is not concerned with trifles.
Song Fo vs. Hawaiian Phil

Song-Fo entered into an agreement with Hawaiian Phil to supply them molasses.
A letter revealed the quantity of molasses to be delivered and the date to be delivered. However,
Song-Fo delayed in paying for 20 days.
Hawaiian then alleged that it had to rescind the agreement due to the delay of Song-Fo's payment.
Issue: WON the delay for 20 days was a valid ground for rescission? - NO
The general rule is that rescission will not be permitted for a slight or casual breach of the contract,
but only for such breaches as are so substantial and fundamental as to defeat the object of the parties
in making the agreement. A delay in payment for a small quantity of molasses for some twenty days
is not such a violation of an essential condition of the contract was warrants rescission for non-
performance. Not only this, but the Hawaiian-Philippine Co. waived this condition when it arose by
accepting payment of the overdue accounts and continuing with the contract. Thereafter, Song Fo &
Company was not in default in payment so that the Hawaiian-Philippine co. had in reality no excuse
for writing its letter of April 2, 1923, cancelling the contract. the appellant had no legal right to
rescind the contract of sale because of the failure of Song Fo & Company to pay for the molasses
within the time agreed upon by the parties.
Filoil vs. Mendoza

A contract of lease of a 750 sq. meter lot between Fil-Oil Refinery and Jesus and Severina Garcia was
entered into. FilOil Refinery allegedly violated the terms of the contract for it subleased the property
to FilOil Marketing and PetroPhil and delayed in a number of times in their payment of monthly
rentals.
In rescinding the contract of lease between petitioner Filoil Refinery Corporation and private
respondents, the lower court found that petitioners illegally subleased the lot to petitioner Filoil
Marketing Corporation and that the latter, in turn, assigned its sublease to petitioner Petrophil
Corporation.
Issue: WON the rescission was valid? - NO
An examination of the lease contract reveals that there is no express prohibition against the
assignment of the leasehold right.
Under the law, when there is no express prohibition, the lessee may sublet the thing leased and all
rights acquired by virtue of an obligation are transmissible, if there has been no stipulation to the
contrary. Arguments are moot and academic for the lease of contract has already expired, and the
petitioners are ordered to vacate the premises.
Obligations with a Period: (Articles 1193 1198)
1. Classification, In diem vs. Ex die, Legal, Conventional, Judicial,
Article 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,
and it shall be regulated by the rules of the preceding Section. (1125a)
Arrival of the Term/Period is either Definite or Indefinite

a. Definite Exact date or time is known
b. Indefinite Exact date or time is not known but is sure to come or happen.*
*Uncertainty of the date does not convert it into a condition as long as there is no uncertainty as to
whether it will happen or not.
Classification of Terms/Periods in Roman Law

1. Ex Die
Term or period with a suspensive effect
Obligation becomes effective only from the arrival of a certain day
Example: A binds himself to support B from the death of Bs father. Obligation begins only after Bs father dies.
2. In Diem
Term or period with a resolutory effect
Obligation will subsist up to a certain day, the arrival of which terminates the obligation
Example: A binds himself to support B until B reaches the 18 years old. Obligation terminates upon B turning 18.
Other Classifications
1. Legal Period is fixed by law
2. Conventional/Voluntary Period is agreed upon by the parties
3. Judicial Period is fixed by the courts for the performance of the obligation or for its
extinguishment
On or About Fulfillment may be made on the date, or a few days after, but not on a remote date.
On or Before Fulfillment may be made before the date, but the deadline is fixed.
Requisites for a Valid Term/Period

1. It must be future
2. It must be certain, that is, sure to come but may be extended by mutual agreement
3. It must be possible physically and legally
Before you quit, remember why you started

Period Distinguished from Condition
Basis Period Condition
As to Time Period always refers to the future. Condition can refer to a past
event unknown to the parties.
Sure to happen at an exact date May or may not happen being

As to Fulfillment known from the start, or at an an uncertain event.
indefinite time, but is sure to arrive.
No effect or influence upon the May cause the arising of an

existence of the obligation but only obligation, or the cessation of
As to its Influence on the in its demandability or one already existing.
Obligation to be Fulfilled performance.
or Performed
While a period has a suspensive or The former is known as a
resolutory effect, nonetheless, in suspensive condition and the latter
the former, it cannot prevent the a resolutory condition.
birth of the obligation in due time,
and in the latter, does not militate
against its existence.
PNB vs. Lopez Vito

Defendant spouses entered into a mortgage contract with PNB payable in 10 installments.
The mortgage contact has a condition stating that if the mortgagors at any time neglect, fail or
refuse to comply with any or all the stipulations or conditions of the contract., the mortgagee
shall have the right to declare such stipulations or condition violated and to proceed for the
foreclosure of the mortgage. However, the Lopez Vito were not able to pay the sums
corresponding to six annual installments. Thus, PNB instituted an action demanding the
defendants to pay the installments due and unpaid, and the spouses contended that such action
is premature. The trial court ordered the spouses to pay PNB the unpaid installments but
reserved to PNB the proper action on the last installment since it is not yet demandable, hence
the recourse to the Supreme Court.
To determine whether the obligation is demandable, it has to be resolved first whether the
obligation was with a period or an obligation subject to a resolutory condition. The Court
ruled that it is an obligation subject to a resolutory condition. The non-fulfillment of the
conditions of the contract renders the period ineffective, and makes the obligation
demandable at the will of the creditor.
Victorias Planters vs. Victorias Milling

Victoria and Negros Planters entered into milling contracts with North Negros Sugar Inc. for
30 years. War broke and destroyed the central that was being used and so North Negros Inc.
made an arrangement with Victoria Milling Inc. for respondents to mill their sugar canes with
them. Thirty years had lapsed and respondent corporation refused for execution of new
contract and accepting the petitioners contention of the 6 year extension. The court ruled that
the 6 year period comprising 4 years of the last World War II and 2 years of post-war
reconstruction of respondent's central at Victorias, Negros Occidental cannot be deducted in
the 30 year period contract of plaintiff and defendant.
Where the gifts are, that is where the giver is

The seventh paragraph of one of the contracts, quoted by the appellant in its brief, where the
parties stipulated that in the event of flood, typhoon, earthquake, or other force majeure, war,
insurrection, civil commotion, organized strike, etc., the contract shall be deemed suspended
during said period, does not mean that the happening of any of those events stops 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.
Article 1194. In case of loss, deterioration or improvement of the thing

before the arrival of the day certain,
the rules in Article 1189 shall be observed. (n)
Article 1189 is applicable:

Loss
F Through the fault of debtor Obligor to pay damages
F Without the fault of debtor Obligation extinguished
Deterioration
F Through the fault of debtor Creditor may choose between rescission or fulfillment, with damages
F Without the fault of debtor Impairment to be borne by the creditor
Improvement
F By its nature or time Inure to the creditor
F At the expense of the debtor No other right than usufructuary
Article 1195. Anything paid or delivered before the arrival of the period,
the obligor being unaware of the period
or
believing that the obligation has become due and demandable,
may be recovered, with the fruits and interests. (1126a)
Applicability:
This article only applies to obligations to give because it speaks of payment or delivery.
Rationale:
Article 1126 of the Old Civil Code provides that in such cases, only the fruits and interests may be
recovered and not what the debtor has paid or delivered prematurely. This was seen as unjust, hence the
modification.
Effects of Good and Bad Faith

If debtor was not aware of the period or he was of the belief that the obligation has become due and
demandable, he can recover what he paid or delivered including fruits and interest.
If debtor was aware of the period and he paid voluntarily, he cannot recover the payment or delivery he
made. He is deemed to have waived the benefit of the term and the obligation is considered as already
matured. Hence, recovery is barred.
Good faith or Bad faith of the Creditor is immaterial, since it is unfair if the creditor will be allowed
to hold on the thing when it is not yet due and leave the debtor without any relief.

Comparison with Solutio Indebiti

In Solutio Indebiti, where there is payment of what is not due, the recipient will pay legal interest only if
money is involved. If he acted in bad faith, he will be liable for the fruits or fruits which he might have
received. If he acted in good faith, no interests or fruits will be returned, only the thing received.
The big difference is that in the present article, the debtor already has an existing debt or obligation to the
creditor which will become demandable upon the arrival of the period; While in solutio indebiti, the payer
has no debt or obligation to pay the recipient.
Exceptions
Even if the conditions in the Article are present, there can be no recovery in the following situations:
a. Obligation is reciprocal and there has been premature performance on both sides.
b. Obligation is a loan on which the debtor is bound to pay interest.
c. Period is exclusively for the benefit of the creditor because debtor paying in advance loses
nothing.
2. Benefit of the Period
Article 1196. Whenever in an obligation a period is designated,

it is presumed to have been established for the benefit of both the creditor and the debtor,
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. (1127)
Applicability:
Applies only when the parties themselves have fixed a period on the performance of the obligation.
Does not apply to a case where the Court was authorized by the parties to fix a reasonable term.
Effects of the Presumption:

Creditor cannot demand the performance of the obligation before the expiration of the designated
period.
Debtor cannot perform the obligation before the expiration of the period.
This is because the creditor is interested in the interest, and the debtor is interested in the time given him
within which to pay the obligation.
Debtor has no right, unless the creditor consents, to accelerate the time for the payment, even if the
payment includes not only the principal but also the interests in full.
Presumption is Rebuttable:
If it can be shown that the period was established for the benefit of the creditor, he can compel
performance even before the arrival of the period. He may also waive this right if he so desires.
If it can be shown that the period was established for the benefit of the debtor, he can oppose the
premature demand for the performance of the obligation. He may also waive the benefit of the period by
paying the creditor in before the arrival of the period.

Reasons why Creditor cannot be compelled to accept before period arrives:

1. Payment of Interest:
The interest expected to be realized will be lessened if premature payment is done.
2. Desire of the creditor to have his money invested safely instead of having it in his hands:
By the fixing of the period, he is able to protect himself against the sudden decline in the purchasing
power of the currency loaned specially at a time when there are many facts that influence the
fluctuation of the currency.
Ponce de Leon vs. Syjuco

Ponce de Leon executed two promissory notes in favor of Syjuco for P20,000 and P16,000.
Both loans are payable within one year from May 5, 1948. However, on several occasions
in November 1944, Ponce de Leon tendered payment to Syjuco but the latter refused to
accept the same so the former deposited the payment to the court (consignation). The Court
ruled that Ponce de Leons consignation is invalid because the tender of payment was
prematurely done and he cannot compel Syjuco to accept the same since the period is for the
benefit of both of them.
The benefit of the period is both for the debtor and the creditor hence the debt owed by de
Leon to Syjuco is not yet due and demandable. Furthermore, it may be argued that the
creditor has nothing to lose but everything to gain by the acceleration of payment of the
obligation because the debtor has offered to pay all the interests up to the date it would
become due, but this argument loses force if we consider that the payment of interests is not
the only reason why a creditor cannot be forced to accept payment. One of them is that the
creditor may want to keep his money safely invested instead of having it in his hands.
Another is that the creditor wants to protect himself from sudden decline in the purchasing
power.
3. When Courts May Fix a Period:
Article 1197. If the obligation does not fix a period,

but from its nature and 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. (1128a)
Note:
The status of the obligation is suspended before the period of compliance had been fixed.
Rationale for fixing a period is to prevent debtors from not fulfilling their obligations forever without
being liable for delay.
Prescriptive period for filing an action to fix the period is 10 years from the perfection of the
contract.

Situations When The Court Will Fix A Period
1. When no period is mentioned, but it is inferrable from the nature and circumstances of the obligation
that a period was intended.
Examples:
Contract of sale on credit without any time fixed for the payment
Contract for construction where the period of completion was not stated but intended
Contract of lease that states as long as the tenant pays the stipulated rent
When the period is for a reasonable time agreed upon, there is a period fixed. The court
will determine whether the reasonable time had elapsed.
When the seller of a property is given the right to redeem but no period was stipulated for the
redemption, the court may fix the period.
2. When the period is dependent upon the will of the debtor.
Examples:
When the debtor binds himself to pay when his means permit him to do so
When the debtor binds himself to pay as soon as possible or little by little
When the debtor shall pay as soon as he has the money
When the duration of the lease is left to the will of the lessee
Significance of The Courts Fixing of The Period

It is the duty of the court to fix the period if the parties intended it.
When the court fixes the period, it merely ascertains the will of the parties and gives effect thereto.
The court does not modify or amend the obligation but carries out an implied stipulation in the contract.
It is essential that it be alleged that a period was clearly intended by the parties.
Specific performance cannot be demanded simultaneously with the petition for fixing a period because
the former is premature, unless the latter action will only be a formality and serves no purpose but to
delay.
Period Fixed By The Court Cannot Be Extended

Once the court has fixed the period, the period cannot be changed or extended.
Cases Where Article Was Not Applied

A stipulation in a contract that the agent will turn over the proceeds of the sale of the tobacco as soon as
the same was sold, does not fall under this article.
When the duration of the lease is left to the sole will of the lessor.
Contract of lease had not been renewed, there could be no contract on which a period could be fixed.
When the obligation agreed upon is payable on demand.
When the obligation is pure, simple and unconditional.
Duration of contracts of employment or service is implicitly fixed by the period for the payment of the
salary of the employee. This article is inapplicable in such a case.
Barretto vs. City of Manila

Barretto offered to donate his land situated in front of Malacaang palace on the following
condition: That no building will be erected and it will be used for the beautification of the
vicinity. The agreement entered into did not fix a period as to which the donee would
commence the conditions, therefore, after 18 years, Barretto filed an action reclaiming the
land alleging that the city of Manila has not fulfilled the terms stipulated therefrom. Court
fixed the period in question to 30th September 1907, But days later, the court modified and
extended the period.
The issue is WON the Court can validly modify a period it has fixed. When the terms of the
donation do not fix the time of the performance of a condition, the proper period will be
determined by the court. Once the court has fixed the period , such period acquires the nature
of the contract, becoming the law governing the contract and once it has been agreed upon by
the parties, IT CANNOT BE CHANGED OR MODIFIED through any subsequent action.
Peoples Bank vs. Odom

Odom was contracted by Gibbs to construct two buildings. The contract provides that the
respondent shall bear all the expenses of the construction until its completion in exchange for
Gibbs transfer of rents which the building may produce in 8 years. Respondent entered into a
contract with the petitioner bank to obtain an overdraft which was increased twice. To secure
its payment, respondent assigned all his rights, title and interest in the contracts of lease in the
buildings with interest at 9% per annum in favor of the petitioner. Based on their contracts,
the payment shall be due and demandable upon demand of the petitioner bank.
Issue: WON the petitioner should have first brought an action to fix the date of payment as
provided by Article 1228 of the Civil Code
It was expressly stipulated in that the obligation contracted by Odom shall expire and be due
upon demand of the petitioner, and in view of the fact that the latter deed was incorporated in
Exhibit D and that Odom was required by the petitioner to pay all his indebtedness, it is plain
that the obligation was without a term and that it became due and is demandable.
Gonzales vs. Jose

Jose issued two promissory notes (PNs) in favor of Gonzales. The PNs were worded as I
promise to pay as soon as possible. Benito Gonzales instituted an action to recover from
Florentino de Jose the amount of two promissory notes. CFI of Manila ordered Jose to pay
Gonzales within 30 days from notice of the decision. Jose, in defense, asserted that the
complaint is uncertain since it does not specify when the indebtedness was incurred or when
it was demandable, and that, granting that the plaintiff has any cause of action, the same has
prescribed in accordance with law.
The Court held that such are governed by Article 1128 (Art.1197 NCC) of the Civil Code
because under the terms thereof, the plaintiff (Gonzales) intended to grant the benefit of the
period to De Jose. As the PNs do not fix the period, it is for the court to fix. But, the action to
ask the court to fix the period has already prescribed (10-year prescription period) in
accordance with Sec. 43 (1) of the Code of Civil Procedure.
Eleizegui vs. Manila Lawn Tennis Club

Elezegui leased his piece of land to Manila Lawn Tennis Club. The contract thereof stipulates
the ff: The lease to Mr. Williamson is subject to a lease for all time the members of the club
shall see fit. The owners of the land undertake to maintain the club as tenant as long as the
latter shall see fit without altering in the slightest degree the conditions of the contract, even
though the estate be sold.
Elezegui maintains that the contract of lease was terminated on Aug. 28 of the recent year and
such theory is maintained by Article 1581 which substantially provides that if theres no
conventional term, the legal term will be applied.
In this case, a conventional term was established. That being the case, it erases the
assumption that the lease was terminated by the notice given by the plaintiffs. Notice is only
necessary when it becomes necessary to recourse to the legal term. It was apparent that the
lessors did not intend to reserve to themselves the right to rescind the contract when they
expressly conferred upon the lessee this right by stipulating it in the contract. Generally, if the
term of the lease whose termination is at the sole will of the lessee, the courts must fix the
period according to the character and conditions of the mutual undertakings. Legal term will
not be applied in this case as to the existence of an express stipulation stating a conventional
term at the sole will of the lessee.

Araneta vs. Phil Sugar

Gregorio Araneta Inc, sold a portion of land to Philippine Sugar Estates Development Co Ltd.
In their contract they agreed that the buyer will build on the said parcel of land the Sto.
Domingo Church and Convent, and the seller will construct streets on the NE, NW and SW
sides of the land sold and the NE street will be named Sto. Domingo Avenue. The buyer
was able to build on such the Sto. Domingo Church and Convent but the seller was not able
to perform his end of the bargain because of a third party. The land sold was inhabited by
informal settlers wherein one of them, Manuel Abundo, refused to vacate the same. Because
of the failure of the petitioners to perform their part, the defendants filed a complaint. The
lower court gave Gregorio Araneta Inc, a period of 2 years to comply with its obligation. CA
affirmed the decision of the lower court. Hence, this appeal.
No basis is stated to support the conclusion that the period should be set at two years after
finality of the judgment. According to Art. 1197, the courts cannot set the period arbitrarily.
As the parties must have known that they could not take the law into their own hands, but
must resort to legal processes in evicting the squatters, they must have realized that the
duration of the suits to be brought would not be under their control nor could the same be
determined in advance. The conclusion is thus forced that the parties must have intended to
defer the performance of the obligations under the contract until the squatters were duly
evicted, as contended by the petitioner Gregorio Araneta, Inc.
4. Loss of Benefit of the Period
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,
and when through a fortuitous event they disappear,
unless he immediately gives new ones equally satisfactory;
(4) When the debtor violates any undertaking,

in consideration of which the creditor agreed to the period;
(5) When the debtor attempts to abscond. (1129a)
Applicability:
Applies only if the parties have designated or fixed a period for the fulfillment of the obligation.
It cannot apply to a case where no period is fixed by the parties. (Article 1197 shall apply)
Elaboration on the Five Instances

a. Insolvency
Insolvency terminates the period. Obligation becomes due and demandable unless the debtor gives
a guaranty or security for the payment of the debt.
Insolvency does not have to be declared by the insolvency court. It is enough that the debtor could
not pay his financial obligations due to lack of money or funds.
Insolvency must be one occurring after the fixing of the term.
b. Failure to Provide Guaranties or Securities
When the debtor failed to provide the creditor the guaranties or securities he had promised, he
loses the right to use the period.
Thus, failure of the mortgagors to register the mortgage they had executed in favor of the mortgagee,
and in mortgaging the same parcel of land to another entity, there is a non-fulfillment of the promise
to furnish the creditor with the agreed security. Obligation becomes due and demandable.
c. Impairment of the Guaranties or Securities
When there is an impairment of the guaranties or securities caused thereon by the fault of the
debtor, or got lost by fortuitous event, the obligation becomes due and demandable immediately-
unless the debtor immediately provides the creditor with new guaranties or securities equally
satisfactory as the first ones.
d. Violation of any undertaking
If the debtor has violated any undertaking, which undertaking is the reason for the creditor to agree
to the contract, the term is terminated and the obligation becomes due and demandable at once.
Thus, the employer may terminate the employment of an employee who made a substantial
breach of his employment contract, even if there was a fixed duration for the job.
e. Attempt to Abscond
The debtors act of absconding (leaving hurriedly and secretly, escaping) with the intention to hide
from and defraud creditors is an indication of bad faith. The term is thus terminated.
Mere attempt to abscond is enough to render the obligation pure and immediately demandable.
Gaite vs. Fonacier
Fonacier was an owner of two iron ore mineral claims in which he executed a Deed of
Assignment with his attorney-in-fact, Gaite. Gaite executed a General Assignment
conveying the development and exploration to HIS OWN COMPANY Larap Iron Mines.
He has developed, paved roads and extracted 24,000 metric tons of iron. Fonacier decided to
revoke the authority of Gaite and agreed to exchange the right and possession in
consideration of 75,000 pesos, 10,000 of which was fully paid upon signing of the agreement.
In order to secure payment Gaite required Fonacier to secure a bond, with Fonacier as
principal and the stockholders of Larap Iron Mines as sureties upon the stipulation that:
65,000 will be paid upon the first shipment and local sale of iron ore. HOWEVER, Gaite
insisted on another bond for which Fonacier obtained from Far Eastern Sureties and it
provided that the liability of the surety company would attach only when there had been an
actual sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less then
P65,000.00, and that, furthermore, the liability of said surety company would automatically
expire on December 8, 1955. Come Dec. 8 1955, no sale of iron ore was made and bond with
Far Eastern Sureties expired. On the theory that they had lost right to make use of the period
given them when their bond, automatically expired and when Fonacier and his sureties failed
to pay as demanded by Gaite, the latter filed the present complaint.
The period granted wherein Gaite should wait for the sale or shipment of the ore before
receiving payment was lost because of their failure to renew the bond of the Far Eastern
Surety Company or else replace it with an equivalent guarantee. The expiration of the
bonding company's undertaking substantially reduced the security of the vendor's rights as
creditor for the unpaid P65,000.00. All the alternatives, therefore, lead to the same result: that
Gaite acted within his rights in demanding payment and instituting this action one year from
and after the contract was executed, either because the appellant debtors had impaired the
securities originally given and thereby forfeited any further time within which to pay; or
because the term of payment was originally of no more than one year, and the balance of
P65,000.00 became due and payable thereafter.

Abesamis vs. Woodcraft
"East Samar Lumber Mills" (owned by Jose Abesamis) and Woodcraft Works, Ltd. entered
into two agreements wherein Woodcraft is to purchase logs from East Samar Lumber.
In the first agreement, Jose Abesamis maintains that due to the failure of appellant to send a
vessel to Dolores, Samar, the storm on May 5, 1951 swept away almost all the logs then
awaiting shipment, amounting to 410,000 board feet. It should be noted that under the
contract, shipment was to be made before the end of July 1951, but not to commence earlier
than April of the same year. The obligation between the parties was a reciprocal one,
appellant to furnish the vessel and appellee to furnish the logs. It was also an obligation with
a term, which obviously was intended for the benefit of both parties, the period having been
agreed upon in order to avoid the stormy weather in Dolores, Samar, during the months of
January to March. The obligation being reciprocal and with a period, neither party could
demand performance nor incur in delay before the expiration of the period. Consequently,
when the typhoon struck on May 5, 1951 there was yet no delay on the part of appellant, and
the corresponding loss must be shouldered by appellee.
In the second purchase agreement entered into by the parties, East Samar Lumber Mills
(plaintiff-appellee) is to load the logs upon the arrival of the vessels to be sent by Woodcraft
(defendant-appellant). However, on several occasions, the vessels did not come. Plaintiff thus
seeks for rescission of the contract and indemnification for damages. Appellant was advised
of the quantity of logs ready for shipment and was urged to send a vessel to take delivery. It
thereupon gave assurance that a vessel, the "SS ALBAY," will come on June 25, 1951.
Appellee readied the necessary quantity of logs but the vessel did not arrive. As a result,
60,000 board feet of logs which had been rafted broke loose and were lost. Although the
obligation would not become due until July 31, 1951 appellant waived the benefit of the
period by the assurance that it gave. Appellant failed on his commitment without any
satisfactory explanation for such failure. Therefore, appellant should bear the corresponding
loss.
Song Fo vs. Oria

Song Fo & Co., the original plaintiff in this action, sold a launch to Oria, the defendant, for
P16,500, payable in quarterly installments of P1,000, together with interest at the rate of ten
per centum per annum. The launch was shipwrecked while in Orias possession, without
having paid the full purchase price. Oria contends that Song-Fo had obligated themselves to
insure the launch but they failed to do so, therefore making Song-Fo responsible for the
shipwreck or loss. But upon examination of the facts, and from the fact that the contract of
sale did not impose such obligations to insure to Song-Fo, because it was Song-Fos duty to
do so, they exercised all means necessary to secure an insurance. While waiting for the
insurance policy to be released, Oria, having the exclusive control of the ship sent the ship
from Manila to Samar which, evidently the shipwreck was well beyond Song-Fos control.
The trial court favored Song Fo but only for the payment of P6000 with interest that being the
amount of unpaid installments due under the express terms of the contract at the date of
institution of the action. The same court declined to render judgment for the balance of the
indebtedness on the ground that the full payment was not yet due and payable when the
complaint was filed.
Ruling: Article 1129 par. 3 When by his own acts, he has reduced such security, after giving
it, or when it disappears through an unforeseen event.
The security for the payment of the purchase price of the launch itself having disappeared as
a result of an unforeseen event (vis major), and no other security having been substituted
therefor, the plaintiffs were clearly entitled to recover judgment not only for the installments
of the indebtedness due under the terms of the contract at the time when the instituted their
action, but also for all installments which, but for the loss of the vessel had not matured at
that time. The judgment entered in the court below should be modified from P6,000 together
with interest to P16,500 together with interest at the rate of ten per centum per annum.

Alternative and Facultative Obligations: (Articles 1199 1206)
1. Concept and Features, Limitations of the Right of Choice:

Article 1199. A person alternatively bound by different prestations
shall completely perform one of them.
The creditor cannot be compelled to receive

part of one and part of the other undertaking. (1131)
Classification Of Obligations with Plurality of Prestations or Objects

a. Conjunctive Obligation Debtor has to perform all the prestations to extinguish the obligation
b. Alternative Obligation Debtor has to completely perform only one of several prestations
Example: A promised to give B a land, or a painting, or 500 pesos. The delivery of one is enough.
c. Facultative Obligation Debtor is bound to perform one prestation or deliver one thing with a reserved
right to choose another prestation or thing as substitute for the principal
Creditor Cannot Be Compelled To Receive Parts of the Prestations

In the above example, the creditor cannot be compelled to receive part of the car, part of the painting, or
part of the money.
However, if the creditor agrees to accept part of one and part of the other, there is no prohibition. In that
case, there is a novation in the prestation.
Reyes vs. Martinez

Estanislao Reyes and the Martinez heirs executed a contract of ownership of:
(ALTERNATIVE PRESTATIONS) A parcel of land containing 1,000 trees described in
paragraph 8 of the contract, OR 5 parcels of land which contains an equivalent number of
trees described in paragraph 9 of the contract.
Reyes elected the parcel of land described in paragraph 8 but upon a subsequent litigation
among the parties, Reyes was seeking to recover 5 parcels of land to which he did not elect
to. Furthermore, Reyes is asking for a sum to be awarded to him, the value of which is
proceeds of the coconut trees as well as awarding of consequential damages thereof.
The plaintiff is bound by his election and that he could not now reject said parcel and elect to
take other land under the alternative conceded in the contract. An election once made is
binding on the person who makes it and he will not thereafter be permitted to renounce who
makes it, and he will not thereafter be permitted to renounce his choice and take an
alternative which was at first open to him. He is now estopped from asserting a contrary
election to take the 5 parcels of land described in paragraph IX of his complaint. The title to
the parcel of land in paragraph 8 is in the heirs of Inocente Martinez and it does not appear
that they have transferred said title to Reyes. It results therefore that Reyes now has a claim
for damages against the parties signatory to the contract for the value of the aforesaid
property. The Martinez heirs are given 3 months, extendible if necessary, within which to
procure the execution of a sufficient deed conveying to the plaintiff the particular parcel of
land described in paragraph 8.

Article 1200. The right of choice belongs to the debtor,

unless it has been expressly granted to the creditor.
The debtor shall have no right to choose those prestations which are
impossible,
unlawful
or
which could not have been the object of the obligation. (1132)
Right of Choice:
The general rule is that the right of choice belongs to the debtor unless that right had been expressly
granted to the creditor.
Implied grant of the right to the creditor is not allowed.
If it does not appear on the agreement as to who of the debtor and creditor has the right of choice, it is
the debtor who can choose the prestation. The creditor shall have it only when expressly granted to him.
The debtor must choose and fulfill only one of the prestations which does not belong to any of the above
unacceptable kinds.
2. Purpose of Choice:
Article 1201. The choice shall produce no effect

except from the time it has been communicated. (1133)
Effectivity of the Choice

Choice produces no legal effect until it has been communicated to the other party.
Notice of choice may be effected in any form in the absence of any specific requirement under the law.
Hence, it can be done in writing, verbally, impliedly, or by any other unequivocal means.
If the debtor, without announcing to the creditor his choice of the prestation simply performed one of
them, the performance is not binding. The debtor can recover what he had delivered, performed, or paid,
under the law on quasi-contracts.
Effect of Choice or Selection

Once the choice has been communicated, the effects are the following:
1. Obligation becomes limited to the prestation chosen and all its natural consequences.
2. The choice is irrevocable, otherwise, the other party might be exposed to damages which may arise
for instance, from costly preparations in anticipation of the performance of the announced prestation.
Consent of the Other Party Not Required in the Making of Choice

In the making of the choice, the law does not require that the choosing party first secure the conformity of
the other party. Otherwise, that will in effect frustrate the clear intention of the law and the alternative
nature of the obligation. The decision in Ong Guan in holding that the purpose of the notice is to give the
other party the opportunity to express his consent is erroneous.

Effect of Delay in Choosing and Rules in Case of Plurality of Debtors/Creditors

If there is delay in the making of the choice, the right to make the choice is not lost.
The code is silent on what will happen when a case is filed before any choice is made, hence three
possibilities may arise:
a. The Court will make the choice
b. The Court may order the Debtor or
c. Creditor to make the choice within a certain period
If the debtor is in delay, the court should authorize the creditor to make the choice because the debtor is
deemed to have waived his right. The same applies if the creditor has the choice but incurred delay.
If there are several debtors or creditors all must give their consent in the making of the selection. This is
because if the obligation is joint, none of then can extinguish the entire obligation.
If the obligation is solidary, the choice of one is binding to all.
Ong Guan Chan vs. Century Insurance

Ong Guan Can (Can) insured his building and the goods and merchandise therein against fire
to The Century Insurance Co. (Century). The conditions of the policies provided that Century
may, at its option, pay the amount in which the house was insured, or rebuild it. The issues
are whether or not Century could elect to rebuild the house without notice to Ong Guan Can
of such election. In alternative obligations, the debtor, the insurance company in this case,
must notify the creditor of his election/choice, stating which of the two prestations he is
disposed to fulfill, in accordance with Art. 1133 of the Civil Code. (Art. 1201 NCC).
The object of this notice is to give the creditor the opportunity to express his consent, or to
impugn the election made by the debtor, and only after said notice shall the election take legal
effect when consented by the creditor, or if impugned by the latter, when declared proper by a
competent court. The record shows that Century did not give a formal notice of its election to
rebuild. There is nothing to justify the reversal of the finding of the trial judge, holding that
the election alleged by the appellant to rebuild the house burnt instead of paying the value of
the insurance is improper.
Until the choice is made and communicated, the obligation remains alternative. Once notice
has been given, the obligation becomes simple. Such choice, when properly made and
communicated, is irrevocable and cannot be changed by either party without consent of the
other. Concurrence of the creditor to the choice is not required.
Article 1202. The debtor shall lose the right of choice when
among the prestations whereby he is alternatively bound,
only one is practicable. (1134)
Applicability:
Applies only to debtors with right of choice.
If creditor is expressly given the right to choose, Article 1205 will apply.
Practicable means possible or lawful.
If only one of the prestations is practicable, debtor loses his right of choice and the obligation loses its
alternative character. The prestation becomes a simple obligation.
Article 1203. If through the creditor's acts

the debtor cannot make a choice according to the terms of the obligation,
the latter may rescind the contract with damages. (n)

When Debtor Cannot Make A Choice Due to The Creditors Acts; Consequences:
If the debtor cannot make any choice due to the creditors fault, he may rescind the contract with
damages.
However, if the debtor is being prevented to choose only a particular prestation, and there are others
available, he is free to choose any of the others, after notifying the creditor of his decision.
The rescission mentioned in the law does not take place ipso facto but only upon the debtors initiative.
Example: A agreed to paint the house or the building of B at 100 pesos. B sold his commercial building.
Painting the building is now impossible due to a change of ownership. Debtor has now the option to paint
the house or rescind the contract with damages, if he suffered any.
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. (1135a)
Applicability:
The article applies only when the right to choose belongs to the debtor.
It is Article 1205 which applies when the right to choose belongs to the creditor.
All prestations must have been rendered impossible due to the fault of the debtor. When only one or
some of the prestations had been lost or become impossible, the creditor cannot claim indemnity for
damages because the debtor, who has the right of choice, may still perform any of the remaining
alternative prestations.
If the impossibility is caused by the fault of the debtor, the creditor is entitled to indemnity for damages.
If all things which are alternatively the object of the obligation have been rendered impossible of
performance by fortuitous event, obligation is extinguished and the debtor is released from responsibility
unless the contrary had been stipulated by the parties.
Example: A agreed to deliver B his 2020 model car with Plate Number 337 or his diamond ring worth 200
pesos, or his condominium at Makati City. If A burned his car, threw his diamond ring into boiling lava,
and sold his condo, nothing is left of the prestations. B is entitled to indemnity for damages under 1204.
Indemnity for Damages, Mode of Determination

The basis for the amount of indemnity is the value of the last thing whish disappeared or that of the
service which has become impossible last.
The reason behind this is because upon the loss or impossibility of the first thing or service, the last
one is converted into a simple obligation. Consequently, the debtor has no more alternative to choose
from. He must deliver or perform the last thing or service. If he fails to do so, due to his own fault, he will
be liable for damages using the value of this last thing as measurement for damages.
Additional damages may be awarded to the creditor if there is any justification therefor.

Article 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. (1136a)
Applicability:
Applies only when the right of choice has been expressly granted to the creditor.
The obligation of the debtor ceases to be alternative from the day the selection of the specific prestation
out of the two or several, had been communicated by the creditor. From that moment on, the obligation is
converted into a simple one.
If the creditor is guilty of delay, the debtor will not incur any delay for the reason that until the
obligation shall have become a simple obligation, the debtor would know now what prestation to perform.
If there is any period in the obligation, the creditor is deemed to have waived the same.
3. Difference between Alternative and Facultative Obligations:

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. (n)

Concept of Facultative Obligation:
An obligation where the obligor is obliged to perform only one prestation, but he is allowed to perform
or deliver another one in substitution thereof.
Example: A promised to deliver B an iPhone 6 with a stipulation that he could give a brand new S5 as a substitute.
If loss or deterioration of the thing intended to be a substitute happens before the substitution is made
known, obligor is not liable for he can still choose the principal in payment of the obligation. This is
regardless of whether it was through the fault of the debtor or due to any other cause.
After the substitution has been made and communicated to the creditor, obligor is then liable for the loss
of the thing on account of the obligors delay, negligence, or fraud.
Deterioration, according to Pineda, must also be deemed included in the last sentence of the provision
since there is no valid reason why it should not be included, as it adversely affects the value of the thing
substituted.
Basis Facultative Obligation Alternative Obligation

As to Contents of Obligation Only one thing is principally due but There are various things due but the
a substitute upon the choice of the complete performance of one of
debtor may be delivered in payment them is sufficient for the payment of
of the obligation. the obligation.
As to Nullity If the principal obligation is void, the If one of the prestations is void, the
creditor cannot compel delivery of others which are without vices
the substitute. preserve the validity of the obligation.
Effect of Loss or Impossibility If there physical or legal impossibility If the various prestations are
to deliver the principal thing or impossible of performance except one,
prestation, the obligation is this one must be delivered to settle the
extinguished. obligation. If all prestations are
impossible of performance, the
obligation is extinguished.
The right of choice that is, whether The right of choice may be given
Right of Choice to make a substitution or not, pertains either to the debtor or the creditor.
to the debtor alone. The creditor is
never given this right.

Joint and Solidary Obligations: (Articles 1207 1222)

1. Comparative Jurisprudence:
Article 1207. The concurrence of two or more creditors or of two or more debtors
in one and 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 a solidary liability only when the obligation expressly so states,

or when the law or the nature of the obligation requires solidarity. (1137a)
Article 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 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. (1138a)
Concept of Joint Obligation

A joint obligation is one in which each debtor is liable only for proportionate part of the debt, and the
creditor is entitled to demand only a proportionate part of the credit from each debtor.
Concept of Solidary Obligation:

A solidary obligation is one in which each of the debtors is liable for the entire obligation and each of
the creditors is entitled to demand the satisfaction of the whole obligation form any of all of the debtors.
Classification of Obligations According to Number of Parties:

1. Individual Obligation One debtor and one creditor.
2. Collective Obligation Two or more debtors and two or more creditors. Has 2 kinds:
a. Joint Obligation Entire obligation is paid proportionately by the debtors.
b. Solidary Obligation Each debtor is obliged to pay the entire obligation and creditors may
demand from any of the debtors the payment of the entire obligation. Has 2 kinds:
i. Passive Solidarity Solidarity on the part of the debtors.
ii. Active Solidarity Solidarity on the part of the creditors.
Presumption in Collective Obligation and its Rationale:

An obligation is presumed joint unless the contrary appears from the:
1. Law (Legal Solidarity) The law has its own legal reason.
2. Nature of the obligation (Real Solidarity) The obligation requires solidarity.
3. Stipulation of the parties (Conventional Solidarity) Burden of solidarity is assumed voluntarily.
If the obligation is silent, on the nature or character of the rights of creditors and debtors, it is joint.
The presumption is there because solidarity is burdensome on the debtors. It increases their
responsibilities and liabilities as against the solidary creditors whose rights are correspondingly increased
at the burden of the debtors. To favor the debtors, the law recognizes the existence of solidarity only in
the situations mentioned above.

Consequences of a Joint Obligation:
1. Each debtor is liable only for a proportionate part of the entire debt, the reason being that there are as
many separate debts as there are debtors.
2. Each creditor, if there are several, is entitled only to a proportionate part of the credit. The reason is,
there are as many separate credits as there are creditors.
3. Demand made by one creditor upon one debtor produces the effects of default only as between them.
4. Interruption of prescription caused by the demand made by one creditor upon one debtor will not benefit
the co-creditors; neither will that demand interrupt the prescription of the obligation as to the other
debtors.
5. Insolvency of a debtor will not increase the liability of his co-debtors, meaning, his co-debtors will not
answer for him. Neither will it allow a creditor to demand anything from the co-creditors.
6. The vices of each obligation emanating from the personal defect of a particular debtor or creditor will not
affect the obligation or rights of the others.
7. As the credit or debt is presumed divided into as many shares as there are creditors and debtors, a joint
creditor cannot act in representation of the other creditors. A debtor cannot be compelled to answer
for the liability of other debtors.
8. If there is a breach of the obligation arising from the act of one of the debtors, he alone must bear the
damages caused.
9. An acknowledgement made by one of the joint debtors as to the existence of the debt will not stop the
running of the period of prescription as to the others. Same rule applies if only one of the debtors paid.
10. If the consent of one debtor is vitiated by the creditors, this will not affect the liability of the other debtor
whose consent is not vitiated.
11. Defenses available to one debtor is not necessarily useful for the others.
Practical Problems:
A and B bind themselves in a promissory note to pay C and D the sum of 100,000. It is now due and
demandable, and no voluntary payment was made by A and B.
1. Can C alone proceed against A and B for the payment of the whole obligation?
No. Obligation is silent on the character of credit and the liability of the debtors. It is
presumed joint. C can only collect his proportionate share, which is 25,000 from A and
25,000 from B.
2. Can C and D proceed against A alone?
No. The explanation is the same as above. C and D can only collect 25,000 each from A.
3. If A is insolvent, can B be compelled to pay for the share of A?
No. The obligation being joint, the debt is presumed to be divided into as many equal shares
as there are debtors. The share of A is distinct from the share of B.
4. As prescription of the action is nearing. C wrote a demand letter to A alone. Did this letter
interrupt the running of the prescriptive period as against B?
No. The obligation being merely joint, the prescriptive period insofar as B is concerned is not
interrupted. After 10 years, the obligation of B will become stale due to prescription.
Other Technical Terms for Joint Obligation

1. Proportionate or Pro Rata
2. Mancomunada Simple
3. Mancomunada (If solidaria is added, it becomes solidary)

Consequences of Solidarity:
1. Passive Solidarity Several Debtors
This arises when any one of the several debtors can be made liable for the payment of
performance of the entire obligation without prejudice to his right to seek reimbursement from his
co-debtors as to their respective shares in the obligation in accordance with their internal
arrangement of which they are allowed to enter into.
Full payment made by anyone of the solidary debtors extinguishes the obligation.
The debtor who made the payment may claim reimbursement from his co-debtors as regards their
corresponding shares in the obligation.
Example: A, B, and C, are solidary debtors of X. If X filed a case against all of them when the debt
becomes due and demandable, he can execute the judgment against anyone of them to compel satisfaction
of the entire judgment.
2. Active Solidarity Several Creditors

Where any one of the solidary creditors can demand the payment or performance of the entire
obligation from the debtor or any of the debtors if there are several of them. Among them, there is
mutual representation with power to exercise the rights of others in the same manner as their own
rights.
The creditor who received the entire amount will be liable to pay the corresponding shares of his
co-creditors in accordance with their internal agreement. If there is no agreement, it is presumed
that each creditor is entitled to receive equally.
Example: A is indebted to X, Y, and Z who are solidary debtors. A can pay either to X, Y, or Z. The full
payment to any of them extinguishes the obligation.
Legal, Real, and Conventional Solidarity:

1. Legal Solidarity From Law
Example: All partners are liable solidarily with the partnership for everything chargeable to the
partnership under articles 1822 and 1823. (Article 1824 of the NCC)
*Solidarity may also arise if imposed by final judgment by a court upon several defendants
2. Real Solidarity From Nature of the Obligation
Example: Solidary liability may arise if two or more persons acting together in violation of Articles 19,
20, 21, and 22 of the Code under the Chapter on Human relations shall be liable solidarily be reason of
the nature of the obligation incurred. According to Manresa, the mentioned articles have a comment
element they are morally wrong. A moral wrong cannot be divided into parts; hence, the liability for it
must be solidary
3. Conventional Solidarity From Stipulation of Parties
When the parties expressly agreed on solidary liability, the precise word solidary need not be
used. It is sufficient if the obligation states that each one of the debtors can be compelled to pay
the entire obligation, or that each of them is obligated for the entire value of the obligation.
The following terms are used to convey the idea of solidary obligation:
a. Mancomunada Solidaria (if mancomunada only, then it is joint)
b. De Mancomun e Insolidum
c. In Solidum
d. Juntos or Separadamente
e. Jointly and severally
f. Individually and collectively
g. Each to pay the whole value
h. I promise to pay signed by 2 or more debtors
Jaucian vs. Querol
Dayadante and Rogero executed in a private writing a note acknowledging indebtedness the first part
of which says: We jointly and severally acknowledge our indebtedness in the sum of 13,332.33php
Philippine currency (a balance made October 23, 1908) bearing interest at the rate of 10 percent.
Rogero signed the document in the capacity of surety for Daydante. Jaucian, as answer to the action
of Rogero for the court to declare the private instrument void, asked for judgement against Rogero for
the amount due from the obligation. Jaucian continued instituting the demand for the obligation
because Dayadante became insolvent but Querol (heir of Rogero) contends that their relationship is
that of a principal debtor-surety and that it should be the courts action to exhaust first all the property
of Dayadante.
IS ROGERO/QUEROL LIABLE AS A SURETY? OR AS A SOLIDARY DEBTOR?
Rogero, though acting as surety for Dayadante, was bound jointly and severally with Dayadante in the
obligation because when a surety bound himself jointly with the debtor he will be compelled to pay a
creditor. The relationship is that of a joint solidary obligation by the very reason of the choice of
words in the private instrument executed which has the force of law between the parties. Joint and
several = solidary.
Borromeo vs. Court of Appeals

Jose Villamor is a friend and former classmate of Borromeo. Villamor was then faced with a need to
settle a pressing obligation with Miller (owner of the Lumber Company). In a promissory note
executed by Villamor, he promised to pay Borromeo AS SOON AS I HAVE MONEY and further
stipulates that he waives his rights to the prescription established in the Civil Procedure and that
Borromeo can collect or recover even after the lapse of ten years. Borromeo has repeated ORAL
DEMANDS but Villamor failed to settle his obligation. The CFI rendered a judgment sentencing
Villamor to pay his indebtedness with in 90 days but CA reversed, the legal basis of which was the
lack of validity of the stipulation amounting to a waiver, that a person CANNOT RENOUNCE
FUTURE PRESCRIPTION
The issue in this case is whether or not the stipulation amounting to a waiver of a future prescription
is valid.
Yes. Borromeo was not renouncing any right for he was just being considerate. Between two possible
interpretations, that which saves rather than destroys shall be preferred. In interpreting contracts, what
matters is the ascertainment of the intent of the parties. Decision of the CA is reversed.
PNB vs. Sta Maria

Siblings Sta. Maria executed Special Power of Attorney authorizing brother Maximo to mortgage a
land. In addition, Valeriana Sta. Maria alone executed another SPA authorizing Maximo to borrow
money and mortgage real estate owned by her:
For me and in my name to borrow money and make, execute, sign and deliver mortgages of real
estate now owned by me standing in my name and to make, execute, sign and deliver any and all
promissory notes necessary in the premises. (Exh. E-I)
Maximo obtained two loans including in its security the land he jointly owned with his brothers and
sisters. PNB then filed a petition for collection against Maximo and his siblings.
The authority granted by defendants-appellants (except Valeriana) unto their brother, Maximo, was
merely to mortgage the property jointly owned by them. They did not grant Maximo any authority to
contract for any loans in their names and behalf.
Although the question has not been raised in appellants' brief, we hold that Valeriana's liability for the
loans secured by Maximo is not joint and several or solidary as adjudged by the trial court, but only
joint, pursuant to the provisions of Article 1207 of the Civil Code that "the concurrence ... of two or
more debtors in one and the same obligation does not imply that ... each one of the (debtors) is bound
to render entire compliance with the prestation. There is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires solidarity." It should be
noted that in the additional special power of attorney, Exh. E-1, executed by Valeriana, she did not
grant Maximo the authority to bind her solidarity with him on any loans he might secure thereunder.

Ronquillo vs. Court of Appeals
Petitioner Ronquillo together with 3 others owed Antonio P. So of a certain amount. The compromise
agreement entered into by the parties are worded as follows:
Plaintiff agrees to reduce its claim of 117, 498.95 to only 110,000 and defendants agrees to
acknowledge the validity of such claim and further bind themselves to initially pay out their total
indebtedness defendants individually and jointly agree to pay within a period of six months.
Because of the failure of the 2 other debtors (aside from Ronquillo) to pay their corresponding shares
in the amount of the debt, a Motion for Execution was issued. Certain furniture and appliances owned
by Ronquillo were then sold at a public sale to satisfy the full amount of the unpaid debt. Ronquillo
now questions the validity of the Motion for execution by saying that since their liability is joint, each
of them should only be held liable for of the total debt and that his properties should not be made to
answer for the full amount.
WHAT IS THE NATURE OF THE LIABILITY OF THE DEBTOR IN THE CASE AT BAR?
By the express term of the compromise agreement and the decision based upon it, the defendants
obligated themselves to pay their obligation "individually and jointly". The term "individually" has
the same meaning as "collectively", "separately", "distinctively", respectively or "severally". An
agreement to be "individually liable" undoubtedly creates a several obligation, and a "several
obligation is one by which one individual binds himself to perform the whole obligation. The
obligation in the case at bar being described as "individually and jointly", the same is therefore
enforceable against one of the numerous obligors.
Marsman vs. Philippine Geoanalytics

Marsman Drysdale and Gotesco Properties entered into a Joint Venture agreement for the
construction and development of an office building on a land owned by Drysdale in Makati. In the
agreement, a 50-50 investment share was agreed upon in which Drysdale is to contribute the property
and Gotesco is to contribute the monetary investment of 420,000,000 in cash. A technical services
contract was entered into by Marsman with Philippine GeoAnalytics Inc. to provide subsurface soil
exploration. PGI was only able to drill 4 out of 5 holes due to the failure on the part of the joint
venture to clear the area where the drilling has to be made. PGI billed the JV and despite repeated
demands the JV failed to pay its obligations. Marsman Drysdale passed the responsibility to Gotesco
which, under the JVA is solidarily liable for all money claims.
Court finds Marsman Drysdale and Gotesco jointly liable to PGI. A technical services contract clearly
listed Marsman Drysdale and Gotesco as beneficial owners of the project. Article 1208 If from the
law or the nature of the obligation 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 and
debtors. Thus the obligation between Drysdale and Gotesco with respect to PI is joint notwithstanding
the JVA which is only binding among them.
2. Joint Divisible Obligations:
Agoncillo vs. Javier

The heirs of Anastacio Cruz Anastacio Alano, Jose Alano and Florencio Alano, executed a
document promising to pay Marino on or before Feb. 27, 1905. In order to secure the payment they
will mortgage to Marino the house and lot bequeathed to them by Anastacio Cruz AND in case of
insolvency on their part, they will transfer ownership of said house to Marino and if the appraisal of
the property be lower than the amount of indebtedness, it will be deducted from the amount and they
will be liable to pay the difference. No part of the sum due was paid, except the 200 paid by
Anastacio Alano who died intestate. A complaint was filed, alleging that, unless defendants pay the
debt for the recovery of which the action was brought, they be required to convey to plaintiffs the
house and lot.
The obligation involved here is an alternative one. The principal undertaking is the payment of
money. The agreement to convey the house and lot at an appraised valuation in the event of failure to
pay the debt in money at its maturity is simply an undertaking that if the debt is not paid in money, it

will be paid in another way. It is clear that the liability of the respondents as to the conveyance of the
house and lot is subsidiary and conditional, being dependent upon their failure to pay the debt in
money. It must follow therefore that if the action to recover the debt has prescribed, the action to
compel a conveyance of the house and lot is likewise barred.
The complaint was not filed within 10 years (Code of Civil Procedure, Sec. 43), it is obvious that the
plea of prescription is well taken, unless the running of the statute was interrupted. An extrajudicial
demand is not sufficient, under the law, to stop the running of the statute. There must be either (1) a
partial payment, (2) a written acknowledgement or (3) a written promise to pay the debt.
It cannot be said that the payment made by Anastasio Alano was for the benefit of Jose or Florencio
or that it was authorized by either of them, hence suspending the running of the period of prescription.
Article 1138 of the Civil Code joint obligations are, as regards to each of the debtors, to be reputed
as separate debts with respect to each of the debtors. It follows that a payment or acknowledgement
by one of such joint debtors will not stop the running of the period or prescription as to the others.
The payment only suspended the period of prescription as regards to him alone.
Article 1209. If the division is impossible,

the right of the creditors may be prejudiced only by their collective acts,
and 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. (1139)
Applicability:
This article applies to a Joint Indivisible Obligation because solidarity is not provided and the
prestation or object is not susceptible of division.
According to Manresa, the peculiarity of a joint indivisible obligation is that on the part of the debtors, its
fulfillment requires the concurrence of all the debtors, although, each for his part. On the part of the
creditors, there must be a collective action for acts which are prejudicial to the rights of the creditors.
In case of the insolvency of a debtor, his co-debtors shall not be liable for his share. Otherwise, the joint
character of the obligation will be disregarded.
Effect of Breach of A Joint Indivisible Obligation

In a joint indivisible obligation where there is plurality of debtors, compliance can only be enforced by
proceeding against all of them.
If one of them failed in his undertaking, the obligation could no longer be fulfilled because the prestation
or object is an indivisible one. Division is not possible in indivisible prestation. Accordingly, the
obligation is converted into one of indemnity for damages. (See Article 1224)
If there is plurality of creditors but there is only one debtor, the obligation can be performed only be the
delivery of the thing to all the creditors jointly. Debtor may only deliver to one if that one is authorized by
all the other creditors.
The debtor can refuse to make delivery if only one creditor or some, but not all, are making the demand.
Meaning of Right of the Creditors May Be Prejudiced Only by Collective Acts

The collective action required of creditors in acts which may be prejudicial to them clearly implies the
opposite that if the act is beneficial to the others, the act of one creditor is sufficient to benefit all other
creditors.
As long as the obligation is joint, the act of one creditor cannot have any effect as to the other creditors
because the credit of each is separate from the credits of others. Indivisibility requires collective action to
be effective.
In the old code, shall was used instead of may. The court is now given the discretion to determine when
an act of one creditor which is beneficial to the others would be binding upon all of them.
Article 1210. The indivisibility of an obligation does not necessarily give rise to solidarity.
Nor does solidarity of itself imply indivisibility. (n)
Indivisible Obligation:
An indivisible obligation is one where the prestation or object cannot be performed by parts without
altering its essence or substance.
Example: Delivering a horse. If this obligation is made divisible, the horse will be delivered in pieces,
which destroys the essence of the object.
Kinds of Indivisibility:
1. Legal Indivisibility Indivisibility by operation of law, whereby a law declares as indivisible an
obligation which has for its object a prestation that is not divisible by nature.
Example: Delivery of definite things like a car (Art. 1225)
2. Conventional Indivisibility Indivisibility by the agreement of the parties whereby an
obligation which is divisible in nature is made indivisible by the will of the parties.
Example: Accomplishment of work by metrical units but by agreement is made indivisible.
3. Solidary Obligation - One where each debtor is liable for the entire obligation, and each creditor
is entitled to demand the fulfillment of the whole obligation. It refers to the vinculum or tie or
relationship existing between the parties representing the same interest. Thus there are solidary
debtors as well as solidary creditors. The tie is within the group.
Basis Indivisibility Solidarity

1. Nature Refers to the prestation or object of the Refers to the vinculum or tie existing
contract between the subjects or parties to the
obligation
2. Number of Subjects It does not require plurality of subjects It requires plurality of subjects or
or parties parties
Converted into one of indemnity for The liability of the solidary debtors
3. Effect of Breach of Obligation damages. As a result, indivisibility of although converted into one of
the obligation is terminated and so indemnity for damages shall remain
each debtor is liable only for his part solidary
of the indemnity
4. Effect of Death of a Debtor Heirs of the debtor remain bound to Terminates the solidarity, the tie or
perform the same prestation vinculum being intransmissible to the
heirs
Indivisibility and solidarity are not identical. They need not exist together, but they can also exist together.
a. Solidary Divisible X and Y to pay Z $100. $100 is divisible but is made indivisible by agreement.
b. Solidary Indivisible X and Y to deliver a plane to Z. In case of breach, both liable for entire indemnity.
c. Joint Indivisible X and Y to deliver horse to Z worth $100. In case of breach, $50 indemnity each.
d. Joint Divisible X and Y to pay Z $100. In case of breach, $50 indemnity each.

Article 1211. Solidarity may exist although the creditors and the debtors may not be bound
in the same manner and by the same periods and conditions. (1140)
Solidarity Not Affected by Differences in Terms and Conditions

The solidarity of the debtors, whether active or passive, is not affected even if different terms and
conditions are assumed or made applicable to them.
Enforcement may be made at different times. Obligations which have matured can be enforced while
those still undue will have to be awaited. A particular debtor is answerable for all prestations which fall
due although chargeable to the other co-debtors. Thus, the essence of solidarity remains.
Example: A, B, and C got a loan of $150 from D. They bound themselves solidarily under the terms that
A will pay the following month, B a month after that, and C another month after that. Once As obligation
becomes due, D may claim from him, but only As share until B and Cs share matures. Once they do, D
may claim again from A the shares of B and C. The solidarity between A, B, and C was not affected by
the difference in terms and conditions.
Forms of Passive Solidarity

1. Uniform Solidarity when the debtors are bound by the same terms and conditions or stipulations.
2. Varied Solidarity when the debtors, while bound under the same obligation, are not subject to the same
terms and conditions of payment but to different secondary stipulations or clauses. The example above
shows a varied solidarity.
Article 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. (1141a)
Beneficial and Prejudicial acts of Solidary Creditor:

Relationship of mutual agency exists among solidary creditors. Acts of one will affect the others because
of their relationship. Solidary creditors may perform acts which are useful or beneficial to the others.
Every solidary creditor is benefited by the useful acts of any one of them.
Example: Act of a solidary creditor in filing a complaint so that the obligation may bear legal interest.
Demand of a solidary creditor which interrupts the running of the prescriptive period of filing the action.
If a solidary creditor performs an act which is prejudicial to his co-creditors, the act may have valid legal
effects, but the performing creditor shall be liable to his co-creditors. (See Article 1215 for an example)
Article 1213. A solidary creditor cannot assign his rights without the consent of the others. (n)
Rationale:
There is a mutual agency among the solidary creditors. This mutual agency is the essence of their active
solidarity which is based on mutual trust and confidence.
Thus, this agency cannot just be assigned to a third person without the consent of the other creditors.
With the consent of all, the rights may be assigned.
Without the consent, the assignee does not become a solidary creditor. Any payment made to him by the
debtor does not extinguish the obligation. He is considered a stranger. His acts will not bind other
creditors.

Article 1214. The debtor may pay any one of the solidary creditors;
but if any demand, judicial or extrajudicial, has been made by one of them,
payment should be made to him. (1142a)
To Whom Payment Shall Be Made:

The debtor can actually pay any one of the solidary creditors! Can you believe that?
Payment, when accepted by any of the solidary creditors, will extinguish the obligation.
HOWEVER, once there has been a demand, payment shall be made to the demanding creditor.
Payment to another creditor, once a demand has been made, will not extinguish the obligation except
insofar as the share of the payor is concerned.
If there are other debtors to whom no demand was made, they are free to pay any of the other solidary
creditors unless the first debtor had already fully paid the entire obligation. This is without prejudice to
the debtors respective liability to the paying debtor.
In case of two or more demands were made, the first demand must be given preference.
If the first demanding creditor made only an extrajudicial demand, but neglected to pursue it to the
prejudice of the other creditors, judicial demand may still be resorted by the latter against the debtor.
Article 1215. Novation, compensation, confusion or remission of the debt,

made by any of the solidary creditors or with any of the solidary debtors,
shall extinguish the obligation, without prejudice to the provisions of article 1219.
The creditor who may have executed any of these acts,

as well as he who collects the debt,
shall be liable to the others for the share in the obligation corresponding to them. (1143)
Novation
There is novation when obligations are modified by:
1. Changing their Object or Principal Conditions
2. Substituting the person of the debtor
3. Subrogating a third person in the rights of the creditor (Art. 1291)
Compensation
Takes place when two persons, in their own right, become creditors and debtors of each other. (Art. 1278)
Confusion
Takes place when the characters of creditor and debtor are merged in the same person. (Art. 1275)
Remission
Gratuitous abandonment by the creditor of his right. Acceptance by the obligor is necessary. (Art. 1270)
Effects of Execution of the Specified Four Modes of Extinguishing:
These four modes are prejudicial to other solidary co-creditors, because said acts have the effect of
extinguishing the debt or obligation which is due to all of them.
The co-creditors are not left without any recourse. The one who had collected the debt shall be liable for
the shares corresponding to all his co-creditors.
The remission made by a solidary co-creditor to 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. 1219)
If there is no such previous payment, all the solidary debtors are released from the obligation. The
solidary debtor who accepted the remission cannot seek reimbursement from his co-debtors. (Art. 1220)

Article 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. (1144a)
Against whom will the creditors action be addressed?

When there is passive solidarity, the creditor can proceed against:
a. Any of the solidary debtors
b. Some of the solidary debtors, or
c. All of the solidary debtors simultaneously
No Bar to Subsequent Actions:

If a solidary creditor made an extrajudicial demand on a solidary debtor and the latter did not pay
despite such demand, the former may direct similar demands to any or all of the other co-debtors. The
first demand shall not preclude subsequent demands on the other co-debtors.
If demand is judicial and a judgment was rendered by the court, the rules are different:
a. If the decision is favorable to the solidary creditor, judgment will benefit all of them.
b. If the solidary co-debtor happens to be insolvent and the case was filed only against him,
judgment cannot be executed against the other co-debtors who were not made parties in the
complaint. A new action is necessary to make them liable and this new action is not barred by the
first action. There is no waiver against those not sued.
c. If the solidary creditor lost the case, the judgment will constitute res judicata between the co-
creditors and co-debtors. The judgment will constitute a bar to the filing of the same case by any
or some or all of the solidary creditors. The remedy of the co-creditors is to go after the creditor
who filed the case for not informing them of the complaint. If they knew about it, it is their duty
to join in the case.
Passive Solidarity and Suretyship are not Identical:
Basis Passive solidarity suretyship

Nature of the Obligation Primary Subsidiary
Extent of the Liability Solidary debtor liable for his own Surety is responsible only for the
obligation and that of his co-debtors principal debtor
Right to Reimbursement Solidary debtor is entitled to be Surety is entitle to be reimbursed for

reimbursed for what he has paid, everything that he has paid
minus his own share
Effect of Grant of Extension of Time If granted extension of time to pay, the If principal debtor is granted extension
to the Debtor to pay the Creditor co-debtors are not released but shall of time without the consent of the
remain liable for the whole obligation surety, the surety is released from the
minus the share of the debtor who was obligation
granted the extension

Article 1217. Payment made by one of the solidary debtors extinguishes the obligation.
If two or more solidary debtors offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share
which corresponds to each, with the interest for the payment already made.
If the payment is made before the debt is due,

no interest for the intervening period may be demanded.
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. (1145a)
Effect of Full Payment By A Solidary Debtor:

Payment The delivery of the thing or the rendition of the service which is the object of the obligation.
Payment made by one of the solidary debtors extinguishes the obligation. The release of the paying
solidary debtor results in the simultaneous release from the same liability of the other co-debtors.
When a solidary debtor fully pays the obligation, the resulting obligation of the co-debtors to reimburse
becomes a joint one (but not ordinary joint, -wtf does that mean Pineda?)
If one of the debtors is insolvent, all solidary debtors including the paying debtor shall share
proportionately in the settlement of the corresponding share of the insolvent debtor in the obligation.
Co-debtors shall pay their shares with the corresponding interest at the legal rate if there is no
specification, from the time the debt has become due and not from the date of payment.
Effect of Partial Payment:

If the payment made by the solidary debtor is only partial, he is entitled to be reimbursed only for such
amount of money which he had paid in excess of his own share in the obligation.
If there is no excess, he cannot seek reimbursement.
Payor May Be Substituted as Party Plaintiff:

Solidary debtor who paid the entire obligation may be substituted as plaintiff in the same action for the
purpose of enforcing the payment of the contributions of the co-debtors to which the former is entitled.
This is not subrogation, as the right is not based on the original obligation but upon his payment.
He does not step into the shoes of the creditor because he is entitled to collect only the corresponding
contribution of his co-debtors and not the whole amount.
If payment was made before maturity of the debt, there shall be interests for the period between the date
of payment and the date of maturity which the law refers to as intervening period. [This is how it is
written in the Pineda book. (Page 184, bottom portion) I believe it should have read, there shall be NO
interests. What a stupid book huh?]
When Offer To Pay is Made by Two or More Solidary Debtors

When two or more solidary debtors offer to pay, the creditor may choose which of the offers to accept.
The law gives him the option.

Article 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. (n)
Applicability:
Applicable if payment of the obligation was made under the following situations:
a. Obligation had already prescribed due to the lapse of time required by law:
Example: A, B, and C are solidary debtors of D in the amount of $150. The creditor did not make
any demand for more than 10 years. Obligation already prescribed in accordance with Article
1144. Still, A paid the entire obligation because he felt a sense of fairness within him. A is now
precluded from seeking reimbursement from B and C based on Article 1218.
b. Obligation has become illegal before it could be performed
Example: A, B, and C solidarily bound themselves to make and deliver 100 air rifles to D. Before
the air rifles could be finished and delivered, an ordinance was passed prohibiting the
manufacture and sale of such rifles. Being the lil bitch that he is, A still delivered the prohibited
rifles to D. A cannot seek reimbursement from B and C for the expenses he incurred in the
manufacture and delivery, in accordance with Article 1218.
The payor is not entitled to reimbursement in such situations.
Article 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. (1146a)
Applicability:
This article applies to a situation where one of the solidary debtors paid the entire obligation to the
creditor. Subsequently, the creditor remitted the share of one of the solidary debtors. The one whose share
had been belatedly remitted is not released from his responsibility as to his co-debtors. This is to prevent
the commission of fraud and unfairness to the co-debtor/s who paid the entire obligation.
The creditor cannot, by his act of belated remission, exempt any debtor from the latters obligation to his
co-debtors. Thus, if one of them is insolvent, the one whose share was remitted remains liable for the
share of the insolvent who is bound to make reimbursement for what had been paid by the paying debtor.
In passive solidarity, a dual relationship exists: the relationship of the solidary debtors to the creditor, and
the relationship that exists between or among the solidary debtors themselves. The creditor is not privy to
the second relationship. Any belated remission by the creditor of the share of any debtor has no effect on
the internal relationship of the co-debtors.
Example: A, B, and C solidarily owe D $150. A paid the entire obligation. Thereafter, D remitted the
share of C. Can A seek reimbursement from B and C? The answer is yes. A can collect $50 each from B
and C even if the share of C in the obligation had been belatedly remitted. The reason is that after the
prior payment of the entire obligation, there is nothing more to remit because the obligation had already
been extinguished.

Article 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle
him to reimbursement from his co-debtors. (n)
Applicability:
This article applies only when remission covers the whole or entire obligation and the remission is
obtained by one of the solidary debtors without spending anything for its grant.
In case the remission is only partial, the solidary debtor who paid the unremitted part of the obligation is
entitled to reimbursement with respect only to the amount he actually paid.
Example: A, B, and C are solidarily liable to D in the sum of $150. When A offered to pay the entire
obligation, D, by an impulse of sudden kindness, remitted the entire obligation resulting in the
extinguishment thereof. A is not entitled to reimbursement from B and C because A did not spend
anything for the remission granted by D, the remission being a gratuitous one.
Article 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 and the payment of damages and 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.
(1147a)
Effect of Loss of Thing or Impossibility of Prestation:

In case of loss of the thing or the impossibility of the prestation, the following rules apply:
1. If there is no fault on the part of the solidary debtors, liability is extinguished.
2. If there is fault on the part of anyone of them, all will be liable because of their mutual agency,
without prejudice to their action against the guilty or negligent solidary debtor.
3. If the loss or impossibility is due to a fortuitous event, there is no liability unless there is delay. In
which case, all will be liable without prejudice to their right to go against the guilty or negligent
solidary debtor.
If the thing was lost due to the fault of one and the creditor sued the guilty debtor and fortunately the
latter fully paid him, the guilty solidary debtor cannot get any contribution from his co-debtors because he
as the one who caused the loss. The one at fault will shoulder all the consequences.
However if the thing was not lost, but there is merely a delay, fraud, or negligence on the part of one of
the solidary debtors, all will share in the payment of the principal prestation. If there are damages and
interest imposed, the debtor who was guilty of delay, fraud, or negligence, will shoulder not only his
share in the prestation but also, will be liable alone to pay the amount of damages and interest imposed.
When the thing is lost or becomes impossible due to the fault of all of the debtors, or anyone of them, the
obligation is converted into one of indemnity for damages. This indemnity includes the price or value of
the thing or prestation due plus damages and interest.
Article 1221 is just a repetition of 1174, 1262, and 1266.

Article 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. (1148a)
Defenses Which a Solidary Debtor May Avail Himself Of:

When a creditor files a complaint against a solidary debtor, whether the case is filed solely against him or
simultaneously against all of the solidary debtors, he may set up as defenses the following:
a. Defenses arising from the nature of the obligation such as payment, prescription, remission,
statute of frauds, presence of vices of consent, and similar others.
b. Defenses which are personal to him or which pertains to his own share along such as minority,
insanity and others purely personal to the solidary debtor.
c. Defenses personal to the other solidary debtors but only as regards that part of the debt for
which the latter are liable.
Illustrative Cases:
A mother and her two minor children signed a promissory note binding themselves solidarily to pay Villa
Abrille 10,000 pesos in legal currency of the Philippines two years after the war. The money was used for
the support of the children who are minors. For failure to pay the indebtedness, the lender sued the mother
and her minor children. The minority of the children was pleaded as defense. It was held that the minority
of the children did not completely release the mother from responsibility, because such defense is a
personal defense of the minors. (Braganza vs. De Villa Abrille)
If a solidary debtor is granted an extension of time within which to pay the obligation, the solidary debtor
against whom the action is filed for the enforcement of the entire obligation, may interpose as defense the
extension of time granted to one of the solidary debtors but only with respect to that portion of the debt
the payment of which was extended. (Inchausti vs. Yulo)
4. Consequences of Solidarity:
Inchausti vs. Yulo

August 12, 1909 Gregorio, for himself and in representation of his brother Manuel, and in their
own behalf Pedro, Francisco, Carmen, and Concepcion, the latter being of age at the time, executed
the notarial instrument. They severally and jointly acknowledged and admitted their indebtedness to
Inchausti for P253,445.42 First installment begins on June 30, 1910.
They also stipulated that the default in payment of any of the installments or the noncompliance of
any of the other obligations they have assumed will result in the maturity of all the said installments,
and their debt will immediately be due and demandable. All the obligations were contracted in
solidum by all of them.
The Yulos did not pay the first installment of the obligation. 1911Inchausti brought an ordinary
action against Gregorio Yulo for the payment of the whole amount due plus interest (10% per annum)
Francisco, Manuel, and Carmen Yulo executed in favor of Inchausti another notarial instrument in
recognition of the debt and obligation of payment with terms: reducing the debt and pushing back the
date of the first installment to June 30, 1911.
The issue is whether or not the court may demand the whole amount of their debt to Gregorio alone.
Gregorio answered in defense that, among others, the initial instrument was novated by that which
was executed by Manuel, Francisco and Carmen, concluding that the action is premature since the
new due date would be on 1911. The court however, replied that when the suit was brought on March
27, 1911, the first installment of the obligation had already matured of June 30, 1910, and with the

maturity of this installment, the first not having been paid, the whole debt had become due and
demandable.
But as regards Francisco, Manuel, and Carmen, none of the installments payable under their
obligation, contracted later, had as yet matured. The first payment was to mature on June 30, 1912.
This exception or personal defense of Francisco, Manuel, and Carmen Yulo "as to the part of the
debt for which they were responsible" can be sent up by Gregorio Yulo as a partial defense to the
action.
The part of the debt for which these three are responsible is P112,500, hence Gregorio may claim
that, even acknowledging that the debt for which he is liable is P225,000, nevertheless not all of it can
now be demanded of him, for that part of it which pertained to his co-debtors is not yet due, a state of
affairs which not only prevents any action against the persons who were granted the term which has
not yet matured, but also against the other solidary debtors who being ordered to pay could not now
sue for a contribution, and for this reason the action will be only as to the P112,500.
The contract of May 12, 1911 has affected the action and the suit to the extent that Gregorio Yulo has
been able to make in his favor the defense of remission of part of the debt (Art.1222 NCC) because it
is a defense derived from the nature of the obligation, so that although the said defendant was not
party to the contract in question, yet because of the principle of solidarity he was benefited by it.
The remission of any part of the debt, made by the creditor in favor of one or more of his solidary
debtors, inures to the benefit of the rest of them, and these latter may utilize in their favor the defense
of remission. (Art. 1222 NCC).
The solidary debtor unconditionally obligated (or whose period for payment has expired) may
not, with respect to the part of the debt for which he is liable, plead the defense of prematurity
of the action, which is personal to his co-debtors.
Quiombing vs. Court of Appeals

A Construction and Service Agreement was entered into by Nicencio Tan Quiombing and Dante
Biscocho, as the first party, jointly and severally bound themselves to construct a house for private
respondents Francisco and Manuelita Saligo, as the second party. Quiombing and Manuelita Saligo
entered into a second agreement under which the completion of the house and payment of the balance
of the contract price were stipulated to be done.
M. Saligo signed a promissory note for 125,363.50 php representing the amount still due from them
payable to Quiombing. Quiombing filed a complaint for the recovery of the said amount, and
respondents contend that the complaint must be dismissed because Biscocho was an indispensable
party to the case and therefore should have been included as co-plaintiff.
On the other hand, petitioner argues that as a solidary creditor he could act by himself alone in the
enforcement of his claim. The amounts due were payable only to him under the second agreement,
where Biscocho was not mentioned at all.
May one of the two solidary creditors sue by himself alone for the recovery of amounts due to both of
them without joining the other creditor as a co-plaintiff?
Biscocho does not need to be included as a co-plaintiff in the complaint. Quiombing as a solidary
creditor can by himself alone enforce payment of the construction costs by respondents and as a
solidary debtor may by himself alone be held liable for any possible breach of contract that may be
proved by the private respondents. Biscocho is neither a necessary nor an indispensable party.
Question of who should sue the private respondents was a personal issue between Quiombing and
Biscocho in which the spouses Saligo had no right to interfere. If Quiombing eventually collects the
amount due from the solidary debtors, Biscocho may later claim his share thereof, but that decision is
for him alone to make. Payment of the debt to the complainant will be considered payment to the
other solidary creditor even if the latter was not a party to the suit.
Imperial Insurance vs. David

Reyes and his wife (David) executed 3 indemnity agreements in favor of Imperial Insurance Inc.
jointly and severally to assure indemnification of the latter for whatever liability it may incur in

connection with its posting the security bonds to lift the attachments in civil cases, for the benefit of
Felicisimo Reyes.
While the case was pending, Reyes died. In the first two civil cases, judgment was rendered against
the spouses Reyes and Emilia David. Appellee made demands on Emilia T. David to pay the amounts
of P60,000.00 and P40,000.00 under the surety bonds. When David failed to make payments,
Imperial filed an action for collection of sums of money under three (3) different causes of action.
Judgment was rendered ordering David to pay the amounts under the surety bonds. David contended
that the action has been barred because of petitioners failure to file its claims against the estate of
Reyes in due time.
The issue in the case at bar is whether or not the creditor may file an action against the surviving
solidary debtors alone instead of instituting a proceeding for the settlement of the estate of the
deceased debtor(Reyes).
Under the law and well settled jurisprudence, when the obligation is a solidary one, the creditor may
bring his action in toto (as a whole) against any of the debtors obligated in solidum (for the whole).
Thus, if husband and wife bound themselves jointly and severally, in case of his death her liability is
independent of and separate from her husbands; she may be sued for the whole debt and it would be
error to hold that the claim against her as well as the claim against her husband should be made in the
decedent's estate.
In the case at bar, appellant signed a joint and several obligation with her husband in favor of herein
appellee; as a consequence, the latter may demand from either of them the whole obligation. The
Civil Code expressly allows the creditor to proceed against any one of the solidary debtors or some or
all of them simultaneously. Hence, there is nothing improper in the creditor's filing of an action
against the surviving solidary debtors alone, instead of instituting a proceeding for the settlement of
the estate of the deceased debtor wherein his claim could be filed.
Divisible and Indivisible Obligations: (Articles 1223 1225)
Article 1223. The divisibility or indivisibility of the things that are the object of obligations
in which there is only one debtor and only one creditor
does not alter or modify the provisions of Chapter 2 of this Title. (1149)
1. Indivisibility of Obligation vs. Indivisible Thing: (Check out Article 1225 to see Comparison)
Divisibility and Indivisibility (Of an Obligation):

1. Divisibility refers to the susceptibility of an obligation to be performed partially.
Example: Obligation to deliver 500 television sets
2. Indivisibility refers to the non-susceptibility of an obligation to partial performance.
Example: Obligation to deliver a particular car
True Test of Divisibility:

The true test is whether or not the prestation is susceptible of partial performance.
Partial performance should not be taken in the sense of possibility or impossibility of performance in
separate or divided parts, but in the sense of the possibility of realizing the purpose which the obligation
seeks to obtain.
If a thing could be divided into parts and is divided, its value is impaired disproportionately, that thing is
indivisible. Otherwise, it is divisible.
Example: A car may be divided into major parts but this will not serve the purpose of the obligation.
Hence, the obligation to deliver a car is indivisible, that is, it must be delivered as a whole thing to suit its
purpose.

Kinds of Division of Things:

The divisibility of things may be classified into three:
1. Qualitative Division When the divisibility of the thing depends on the quality of the thing,
which means that the thing is not homogenous (not of the same kind).
Example: Inheritance consists of real property and personal property. Both come from one estate
or inheritance but the things are not homogenous.
2. Quantitative Division When the divisibility of the thing depends on the quantity of the thing,
which means that there is homogeneity in the thing.
Example: One hundred kilos of fine sugar can be divided into two parts, etc.
3. Ideal Division When the divisibility is not material division of a thing but only mental or
intellectual division.
Example: The undivided portions of a whole property in co-ownership.
*Important: Check page 7 (Article 1201) for a comparison between Indivisibility and Solidarity
Kinds of Indivisibility:
There are three kinds of indivisibility:
1. Legal Indivisibility Indivisibility provided by law.
2. Conventional Indivisibility This is the indivisibility agreed upon by the contracting parties.
3. Natural Indivisibility This is the indivisibility by reason of the nature of the object or subject
matter of the obligation. Example: A contract to sing in a wedding.
Article 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. (1150)
Applicability:
This article applies to a Joint Indivisible Obligation. The object is indivisible but the liability of the
parties is joint. The action for enforcement of the obligation must be pursued against all the debtors.
From the time any one of the debtors fails to comply with his part of the undertaking, he will be liable for
damages sustained by the creditor and even by his co-creditors. The unfulfilled undertaking is converted
into a monetary obligation which is now divisible.
Example: A and B undertook to deliver to C a valuable painting displayed for sale. The painting was
valued at $100. At the maturity date of the obligation, A was ready with his $50 but B could not produce
his share. Hence, they failed to comply with their joint indivisible obligation to deliver the painting to C.
The obligation to deliver the painting is converted into money obligation, meaning, A and B will be liable
to pay C $100. A is liable to pay C the amount of $50. But, he is not liable for the share of B. On the
other hand, B is now indebted to C in the sum of $50. Damages may be imposed against B the erring
debtor if warranted by the circumstances.
Based on the same facts but with the modification that A and B are solidarily (not jointly) liable to deliver
the painting to C, A can be made liable for the entire monetary obligation of $100 without prejudice to his
right to go after B for the latters share in the obligation in the amount of $50.

Article 1225. For the purposes of the preceding articles, obligations to give definite things
and 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. (1151a)
Indivisibility or Divisibility of a Thing, Different from Divisibility of Obligation

The test of divisibility of an object is its susceptibility to physical division.
The test of divisibility of an obligation is its susceptibility of partial performance or compliance.
The divisibility of an object does not necessarily carry with it the divisibility of an obligation, unlike the
indivisibility of an object which carries with it the indivisibility of the obligation.
While a divisible thing is that which can be physically divided without impairing its usefulness or value
and therefore is considered divisible, nevertheless, the obligation to deliver it will be considered
indivisible under two situations:
a. When the law so provides
b. When the parties intended that the obligation be indivisible
Indivisible Obligations
The following are considered indivisible obligations :
1. Obligations to give definite things A specified diamond ring
2. Obligations which are not susceptible of partial performance Creation of a wedding dress
3. If the law provides or if the parties intended it to be indivisible.
Divisible Obligations
The following are considered divisible obligations:
1. Object of the obligation is the execution of a certain number of days of work
(such as the employment of a carpenter to work for a week)
2. Object of the obligation is the accomplishment of work measured by metrical units
(such as the irrigation of ten hectares of agricultural land)
3. Object of the obligation is susceptible of partial compliance
(such as stage-by-stage construction of a building)
4. Object of the obligation is the accomplishment of analogous things
(such as when the debtor is required to pay in installments)
Effect of Illegality of a Part of a Contract

1. Divisible Contract If contract is divisible and a part of it is illegal, the illegal part is void and is
not enforceable. The legal part remains valid and is enforceable.
2. Indivisible Contract If the contract is indivisible and a part is illegal, the entire contract is void
and is not enforceable.
Effect of Partial Performance of an Indivisible Obligation:

In an indivisible obligation, partial performance is tantamount to non-performance.
Thus, a debtor who abandoned work he had started, cannot recover payment based on quatum meruit for
the partial works done. When an obligation is indivisible, it is not susceptible to partial performance.

Obligations with a Penal Clause: (Articles 1226 1230)

1. Concept and Purpose of Penal Clause:
Article 1226. In obligations with a penal clause,
the penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance,
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. (1152a)
Penalty Clause:
An accessory obligation or undertaking attached to a principal obligation, which imposes an additional
liability in case of breach of the principal obligation.
If the debtor fails to perform his obligation, he suffers a fixed civil penalty without need of proving the
damages of the other party.
It is attached to assume greater liability in case of breach and to secure the performance of the obligation.
If the stipulation is found contrary to law for being usurious, it can be nullified by the courts without
affecting the principal obligation.
Nature of Penalty:
Penalty imposable is a substitute for the indemnity for (a) damages, and (b) payment of interests in case
of breach of the obligation, unless there is a contrary stipulation, unless there is a contrary stipulation, in
which case additional damages may further be recovered.
It can be in the form of money or any other thing agreed upon, including an act, or an abstention.
Purposes of Penalty:
In short: Imposition of the penalty is designed to ensure faithful compliance by the obligor of his
obligation, and in case of breach, to stand as the substitute for damages and payment of interests
without need of proving damages.
It is intended to create an effective deterrent against breach of the obligation, by making the consequences
of such breach as onerous as may be possible.
Examples:
1. In a contract for the sale of a subdivision lot, there was a stipulation that the buyer would complete a
house within a year on the said lot, otherwise, the buyer will pay the sum of 100 pesos to the seller. As the
buyer failed to construct 50% of the proposed house, within the period stipulated, the penalty is
demandable. However, there being partial performance, the obligation of the debtor may be mitigated.
2. A penalty of 15% interest on the unpaid installment is a valid penal clause.
3. Imposition of attorneys fees in case of breach is a valid penal clause.
4. A stipulation that an employee shall be liable to his employer for damages if he would engage in any
business similar to that conducted by the employer is a valid penal clause.

When Additional Damages May Be Recovered Aside From The Stipulated Penalty:
General Rule: Penalty takes place of indemnity for damages and for payment of interests.
However, the rule is subject to certain exceptions where additional damages are recoverable:
1. If the obligor refuses to pay the penalty
2. If the obligor is guilty of fraud in the fulfillment of the obligation; In case of fraud, the difference
between the proven damages and the stipulated damages may be recovered
3. If there is an express stipulation that other damages or interests are demandable in addition to the
penalty in the penal clause.
Penalty Clause Compared With Liquidated Damages:

Penal clause is strictly penal in nature or cumulative in character and does not partake the nature of
liquidated damages.
However, in so far as legal results are concerned, there is no difference between penalty and liquidated
damages, and either may be recovered without proving actual damages, and both may be reduced when
found unconscionable or iniquitous.
Obligation with a Penal Clause Distinguished from Obligation with Suspensive Condition:
In an obligation with a penal clause, there is already an existing obligation; in an obligation with a
suspensive condition, there is no obligation yet, until the condition shall have been fulfilled.
In the former, the accessory obligation is dependent upon the non-performance of the principal obligation;
while in the latter, the principal obligation is dependent upon the happening of an uncertain event, which
may or may not happen.
Obligation with Alternative

Basis
a penal clause obligation
Number of Obligations There is only one principal obligation, There are two or more obligations, the
the non-performance of which makes fulfillment of one of which is
the stipulated penalty enforceable. sufficient to satisfy the obligation.
Impossibility of Obligation The impossibility of the principal The impossibility of one of the
obligation extinguishes the penalty. obligations, without fault of the debtor,
leaves the other prestation subsisting.
Obligor cannot choose to pay the The obligor can choose which
Freedom to Choose penalty to excuse himself from the prestation or obligation to fulfill.
principal obligation, unless given that
right explicitly.
Example: A obligated himself to deliver a specific Mercedes Benz to B, or to pay B the sum of 2 million pesos.
This obligation is an alternative obligation. A can choose which one to deliver. However, if the obligation
of A is to deliver the said car to B, and in case he fails to deliver, he will pay 2 million with 15% interests,
the obligation is now with a penal clause. A has no choice. He will deliver the money with interest, if he
fails to deliver the car.

Distinctions Between Obligations With A Penal Clause and Facultative Obligation:

Obligation with Facultative
basis
a penal clause obligation
Power to Make Substitution The obligor cannot substitute the The power of the obligor to make
payment of penalty for the principal substitution is absolute.
obligation, unless expressly allowed.
Demand for fulfillment of both The creditor may demand both the Creditor cannot demand both
prestations principal and accessory obligations. prestations or obligations.
Example: A is obliged to deliver a specific car to B, or if A so desires, to deliver as a substitute a specific yatch to
B. This is a facultative obligation. However, if A, who is a car dealer, obliged himself to deliver a specific
car to B within 10 days and if he fails to do so, he will pay 1,000 pesos per day of delay, there is an
accessory obligation in the form of a penalty.
Are All Penalties Inserted In Contracts Demandable or Recoverable?

The answer is no, my friend. The second paragraph of Article 1226 reads: The penalty may be enforced
only when it is demandable in accordance with the provisions of this Code. Thus, when the penalty
imposed is unlawful, immoral, or against public order it should not be enforced.
Manila Racing Club vs. Manila Jockey Club

Rafael Campos entered into a contract with the Manila Jockey Club whereby he purchased
from it a parcel of land with its improvements, good will and certain personal property. The
price agreed upon is 1,200,000 pesos payable in installments on or before March 24, 1937.
It was agreed upon that should the purchaser fail to pay the amount corresponding to each
installment in due time, the vendor may rescind the contract and keep the amounts paid
for itself.
Manila Racing Club Inc. (formed by Campos) paid a total of 100,000 as preliminary payment
and second installment to Manila Jockey Club. The third installment of 300,000 pesos was
defaulted by Manila Racing Club Inc. Manila Jockey Club moved for the rescission of the
contract but later on agreed to grant an extension of payment in which Manila Racing Club
Inc. still failed to comply with. Thus this action for the rescission of the contract and the
forfeiture of the amount of 100,000 pesos.
Is the forfeiture of what has been partially paid valid?
The forfeiture of what has been partially paid is valid. It is in the nature of a penal clause.
A penal clause has a double purpose:
1. Insuring compliance with the contract and
2. Measuring beforehand the damages which may result from non-compliance.
The amount to be forfeited in the case at bar constitutes only 8% of the stipulated price, thus,
it would not have been excessive as opposed to the case of Jison v. CA where 47,312.64Php
has already been paid out of the 55,000 purchase price and forfeiture of the same would be
unconscionable and iniquitous.
The penal clause does away with the duty to prove the existence and measure of the damages
caused by the breach.

SSS vs. Moonwalk
Moonwalk applied for a loan from SSS in the amount of 30 million pesos for the purpose
of developing and constructing a housing project in the provinces of Rizal and Cavite. Out of
the 30 million pesos, only 12 million was released to Moonwalk. Moonwalk issued a
promissory note for this.
Subsequently, SSS issued a Statement of Account (SOA) to Moonwalk showing that the total
obligation of the latter amounted to 15 million pesos and forthwith demanded payment from
defendant-appellee. Because of the demand for payment, Moonwalk made a complete
payment of its obligation. After settlement of the account, plaintiff issued to defendant
Moonwalk the Release of Mortgage for Moonwalk's mortgaged properties in Cavite.
After some time, SSS alleged that it committed an honest mistake in releasing defendant
because there is still an unpaid amount for the penalties that Moonwalk has to pay. The
penalty is said to be because of Moonwalks delayed payments.
Whether or not the defendants are still liable for the unpaid penalties as claimed by plaintiff-
appellant or is their obligation extinguished?
No. According to the court, the principal obligation (the loan) was already extinguished
when Moonwalk paid for its full amount even beyond maturity date. Thus, the penalty
clause (an accessory obligation) was also extinguished. Furthermore, there was no demand
made by SSS even though Moonwalk was already late in its payments. There being no delay,
SSS has no right to ask for penalties.
What is a penal clause?
A penal clause is an accessory undertaking to assume greater liability in case of
breach. It has a double function: (1) to provide for liquidated damages, and (2) to
strengthen the coercive force of the obligation by the threat of greater responsibility
in the event of breach.
From the foregoing, it is clear that a penal clause is intended to prevent the obligor
from defaulting in the performance of his obligation. Thus, if there should be default,
the penalty may be enforced.
What is an accessory obligation?
An accessory obligation has been defined as that attached to a principal obligation in
order to complete the same or take its place in the case of breach (4 Puig Pea Part 1
p. 76). Note therefore that an accessory obligation is dependent for its existence on
the existence of a principal obligation. A principal obligation may exist without an
accessory obligation but an accessory obligation cannot exist without a principal
obligation.
In the present case, the principal obligation is the loan between the parties. The
accessory obligation of a penal clause is to enforce the main obligation of payment of
the loan. If therefore the principal obligation does not exist the penalty being
accessory cannot exist.
When is the penalty deemed demandable?
A penalty is demandable in case of nonperformance or late performance of the main
obligation. In other words in order that the penalty may arise there must be a breach
of the obligation either by total or partial non fulfillment or there is nonfulfillment in
point of time which is called mora or delay. We must make a distinction between a
positive and a negative obligation. With regard to obligations which are positive (to
give and to do), the penalty is demandable when the debtor is in delay; hence, the
necessity of demand by the debtor unless the same is excused
Caridad Estate vs. Santero

Caridad Estates leased to Pablo Santero its cadastral lots for 2,200 pesos. About three months
after, the lessor sold the same to Santero the lots in consideration of 30,000 pesos payable in
installments.
Stipulated in the contract:

Should the vendee fail to make the payments agreed upon within 60 days of the date they fall
due, the total balance shall become due and payable and recoverable by any action at law, or
the vendor may recover possession of the property and consider any and all the sums paid by
the vendee forfeited.
The last installment was offered by Santero to Caridad Estates but the latter refused on the
reason that a contract of sale to a third party has already been executed due to the failure of
Santero to pay the total balance on the day it has become due and payable.
Is the refusal of Caridad Estates on account of the failure of Santero to pay the total balance
on the day it has become due, valid notwithstanding the payments already made by Santero?
The stipulations in the contract, in the form of a penal clause, is valid and not unconscionable.
It gives the vendor, if the vendee fails to make the specified payments, the option of (1)
considering the total remaining purchase price due and payable and recoverable by an action
at law or (2) recovering the possession of the property in which case any and all sums paid by
the vendee shall be regarded as rental for the use and occupancy of the property.
The person to whom the property is forfeited is the real and equitable owner of the property
because the title will not pass until the payment of the last installment. In the case at bar, full
ownership has not been vested to the lessee-vendee because of failure to pay the last
installment, thus, the payments made has been considered rental payments for the time the
lessee-vendee benefitted from the property.
Provisions are not unjust and does not make the vendee unduly rich at his cost and expense
2. Exception to the Purpose of Penal Clause:

Article 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

and 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. (1153a)
General Rule on Penalty; Exception:

A debtor cannot shirk from the payment of his principal obligation by choosing to pay the penalty
stipulated.
Stated otherwise, he cannot put up as defense his offer to pay the penalty to avoid the payment of the
principal obligation.
Exception: When the debtor is expressly granted the right to substitute the penalty for the principal
obligation.
Restriction on the Right of the Creditor:

General Rule: The creditor cannot demand the fulfillment of the principal obligation and the stipulated
penalty at the same time.
Exceptions to the Rule:
a. When the creditor was clearly given the right to enforce both the principal obligation and the
penalty
b. When the creditor has demanded fulfillment of the obligation, but the same could no longer be
fulfilled due to the debtors fault, he may demand the penalty agreed upon

If the fault is due to the creditors own act, he cannot claim the penalty.
If the impossibility of fulfillment is due to fortuitous events, both the principal obligation and the penalty
shall be extinguished.
Example: If a contractor, who obligated himself to finish the construction of a building for the owner, was
negligent and failed to finish the building on time, the owner is not allowed to claim the stipulated
penalty and at the same time confiscate the balance of the contract price not yet paid to the
contractor.
Bachrach vs. Espiritu
Faustino Espiritu purchased from Bachrach a two-ton White truck for 12,000 pesos paying a
1,000 down payment obligating himself to pay 11,000 within the periods agreed upon.
It was agreed that a 12 percent interest would be paid upon the unpaid portion of the price at
the execution of the contracts and in case of non-payment of the total debt upon its maturity,
25% thereon as penalty.
Espiritu failed to pay the remaining purchase price secured by mortgaging his three other
trucks which were also purchased and paid in full from plaintiff corporation.
Was the 25% penalty in addition to the 12% interest per annum makes the contract usurious?
Article 1226 (1152 in the Old Civil Code) permits the agreement upon a penalty apart from
the interest. Should there be such an agreement, the penalty does not include the interest and
as such the two are different and distinct things which may be demanded separately. The
penalty is not to be added to the interest for the determination of whether the interest exceeds
the rate fixed by law, since said rate was only fixed for the interest.
But considering that the obligation was partially performed, and by virtue of Article 1229 the
penalty is hereby reduced to 10% of the unpaid debt.
Cabarroguis vs. Vicente

Cabarroguis was a passenger of a jeep owned by Vicente; the jeep got involved in a vehicular
accident causing permanent disability to her forearm. To avoid court litigation, Telesforo
Vicente, owner and operator of the AC jeep, entered into a compromise agreement with
Cabarroguis, obligating himself to pay to her the sum of P2,500 as actual and compensatory,
exemplary and moral damages. Vicente had an unpaid balance of P1,000. It was also
stipulated in the agreement that should defendant fail to complete payment within a period of
60 days, he would pay an "additional amount of P200.00 as liquidated damages."
Defendant failed to pay the balance of 1,000Php and refused, upon repeated demands, to
comply with his obligations, thus Cabarroguis filed an action for the collection of the sum of
money. The municipal trial court as well as the Court of Appeals ruled in favor of
Cabarroguis and sentenced defendant herein for payment of interests apart from the penalty
thereof.
Is the awarding of interests apart from the penalty valid?
In obligations with a penal clause (Article 1226 NCC), the penalty shall substitute the
indemnity for damages and the payment of interests. The exceptions to this rule, according to
the same article, are: (1) when the contrary is stipulated; (2) when the debtor refuses to pay
the penalty imposed in the obligation, in which case the creditor is entitled to interest on the
amount of the penalty, in accordance with Article 2209; and (3) when the obligor is guilty of
fraud in the fulfillment of the obligation.
Applying the law, no interest can be awarded on the principal obligation of defendant, the
penalty of P200.00 agreed upon having taken the place of the payment of such interest and
the indemnity for damages.
The case, however, takes a different aspect with respect to the penalty attached to the
principal obligation. It has been held that in obligations for the payment of a sum of money
when a penalty is stipulated for default, both the principal obligation and the penalty can be
demanded by the creditor. Vicente having refused to pay when demand was made by
Cabarroguis, the latter clearly is entitled to interest on the amount of the penalty.

In the discretion of the court, this interest may be alleged upon damages awarded for breach
of contract(Art. 2210 NCC). The interest is recoverable from the time of delay (date of
demand) either judicial or extrajudicial. There being no showing as to when demand for
payment was made, plaintiff must be considered to have made such demand only from the
filing of the complaint.
4. Proof of Actual Damages:
Article 1228. Proof of actual damages suffered by the creditor is not necessary
in order that the penalty may be demanded. (n)
Proof of Actual Damages Not Necessary:

If the contracting parties had fixed the penalty for the purpose of compensating or substituting the
indemnity for damages as well as the payment of interests, proof of actual damages suffered by the
creditor is not necessary to enforce penalty whether or not damages had been suffered as long as the
agreement or contract had been breached.
The presentation of proofs for the enforcement of a penal clause after establishing the breach of the
contract will be superfluous.
Thusly, in this sense, penalty and liquidated damages are the same in cases where there is no partial or
irregular performance by the debtor.
However, when the debtor refuses to pay the agreed penalty despite demands and the creditor was
compelled to litigate to collect the penalty, additional damages may be claimed by the creditor, but these
latter damages must be proved with sufficient evidence to justify their grant by the court.
Mere nonfulfillment of the principal obligation entitles the creditor to the penalty stipulated. The purpose
of the penalty clause is precisely to avoid proving damages.
Thus, a bond of 10,000 which is penal in nature may be forfeited to its full amount even if the amount
involved in its violation is considerably much lesser in amount.
Lambert vs. Fox

John R. Edgar & Co. in 1911 found itself in such condition financially that its creditors
agreed to take over the business. Lambert and Fox, being the two highest stockholders of the
company, agreed not to sell, transfer, or otherwise dispose of any part of their present
holdings of stock till after 1 year from the date hereof. Either party violating the agreement
shall pay to the other the sum of 1,000 pesos.
Notwithstanding the contract, defendant Fox sold his stock to their competitor corporation.
The trial court decided the case in favor of the defendant upon the ground that the intention of
the parties as it appeared from the contract in question was to the effect that the agreement
should be good and continue only until the corporation reached a sound financial basis, and
that that event having occurred some time before the expiration of the year mentioned in the
contract, the purpose for which the contract was made and had been fulfilled and the
defendant accordingly discharged of his obligation thereunder.
Hence, this recourse by Lambert. Fox contends that Lambert cannot claim for the reason that
the latter was not able to prove damages.
Is the decision of the trial court meritorious? Is foxs contention that lambert cannot claim
for the reason that the latter was not able to prove damages valid?
The trial court erred in interpreting and construing the contract without applying the clear and
unequivocal terms of the same. When the language is plain and terms are clear, the only duty
of the court is to apply the law. Interpretation and Construction shall be its last resort. In this
jurisdiction, penalties provided in the contracts are enforced. Parties are allowed to make such
stipulations as long as the same are not contrary to law, public policy, good morals, etc.

The only case recognized by the Civil Code in which the courts are to intervene is when the
principal obligation has been partly complied with or when the penalty is iniquitous or
unconscionable.
One of the functions of a penalty clause is to do away with the proof of damages therefore not
being able to prove damages would not preclude a party from enforcing the penalty clause to
a contract. In the case at bar, the penalty is neither unconscionable nor the principal
obligation partly complied with, therefore the only duty of the courts is to apply the
stipulations in the contract. Court rules in favor of Lambert ordering Fox to pay 1,000 pesos.
3. Reduction of Penalty:
Article 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. (1154a)
Judicial Reduction of Penalty, When Proper

Court can order reduction of the penalty under the following circumstances:
1. When the principal obligation had been partly complied with by the debtor
2. When the principal obligation had been complied with but not in accordance with the tenor of the
agreement thus rendering the compliance irregular
3. When, although there is no performance, the penalty is iniquitous or unconscionable
4. When the penalty interest is patently iniquitous and unconscionable as to warrant the exercise by the
Supreme Court of its judicial discretion
Limitation of the Judges Power to Reduce Penalties

Power to reduce penalties applies only to penalties agreed upon in private contracts. It cannot cover the
collection of surcharges on taxes already due, as the same is mandatory on the collector.
When Penalty Is Iniquitous or Unconscionable

A penalty is iniquitous when it is revolting to the conscience or common sense, or when it is grossly
disproportionate to the damage suffered.
A contract with an unconscionable penalty is not void. However, the penalty must be reduced.
In exercising the power to determine what is iniquitous and unconscionable, courts must consider the
circumstances of each case.
Situations When Penalty is Not Enforceable

A penalty will not be enforceable under the following situations:
1. When the principal obligation has become impossible of performance due to fortuitous events
2. When the debtor is prevented by the creditor to fulfill the obligation
3. When the penalty agreed upon is contrary to morals or good customs. (Example: Penalty of forfeiture
of future support is contrary to law, morals, and good customs. It is void.)
4. When both parties are guilty of breach of contract
5. When none of the contracting parties committed any willful or culpable violation of the agreement,
no one can invoke the penalty clause against each other
6. When the breach of the contract is committed by the creditor

Interest on the Penalty May be Stipulated Separately From the Penalty

The civil code allows an agreement on the payment of interest in case of breach of contract, in addition to
the penalty agreed. In such a case, the two may be demanded separately from the debtor.
Jison vs. Court of Appeals

Spouses Jison entered into a contract to sell with private respondent, Robert O. Phillips &
Sons Inc. in which respondent agreed to sell a subdivision lot at 55,000 pesos with 8%
interest per annum, payable on installment. It was expressly written that in case any of the
terms in contract was violated, there would be an automatic rescission and forfeiture of
payments.
Spouses Jison were able to pay the of 47,000 pesos, but then failed to pay 3 subsequent
installments despite a letter from the respondents reminding them of the automatic rescission
and forfeiture clause, leading the latter to rescind the contract.
Was the rescission and the forfeiture of the amounts already paid, valid?
Yes. Although RA 6552 (which was in effect at that time, 1972) provides for a notarial notice
for rescission before the automatic rescission clause can be effected, the same was not yet
operative in the year the agreement was entered into. Thus, a letter reminding the petitioner of
the automatic rescission clause would suffice and render the automatic rescission valid.
However, the forfeiture of the amount of 47,000 pesos, although it includes the accumulated
fines for petitioners failure to construct a house as required by the contract, is clearly
iniquitous as the contract price was only 55,000PHP. A forfeiture of 50% of the amount
already paid (Around 23,000 pesos) could have been a fair settlement.
The court gave weight to the fact that after the rescission of the contract, the lot has reverted
back to the respondents and they are free once again to sell it.
Umali vs. Miclat,
For the showing of the film Lagrimas, Miclat prepared posters, a theatre board display, a
theatre display standee, a float and other forms of advertisement and Umali agreed to pay a
sum of money in which 225Php was paid in advance. In the contract of said parties, if
appellant should fail to pay the balance of P675 after the lapse of 30 days from the date
exhibition of the film "LAGRIMAS" has started, he should pay a surcharge of 10% every 30
days thereafter until the amount has been fully paid. (penal clause)
However, after several demands on the remaining balance, Umali refused to pay without
justification. An action to recover certain sums of money was then filed by Miclat.
The trial court and the CA ruled that Umali should pay Miclatthe sum of P675.00, plus 10%
surcharge thereon as stipulated in the contract, and the sum of P200.00 as attorney's fees; and
with respect to the second claim, to pay the sum of P344.50. The Court ordered that the sums
of 675.00 and 344.50 shall bear 6% interest per annum for the date of the filing of the
complaint until paid.
Is the penal clause valid? Is the surcharge and the 6% interest per year unreasonable?
While this surcharge partakes of the nature of a penal clause which the parties may stipulate
under the law, however, one cannot deny that the same is unreasonable, for if that is to be
maintained, we would have that on the basis of P675 which is the balance that remains
outstanding, appellant would pay P67.50 a month, or P810 a year, which considering the time
that has already elapsed since appellant defaulted, would amount to P3,420. In this case,
equity demands that the penalty be reduced in fairness to the debtor. The court is of the
opinion that the surcharge of 20% per annum would be reasonable.
The claim of Umali that the 6% interest per annum is unconscionable is untenable. For
Article 1226 provides that in obligations with a penal clause, the penalty shall substitute the
indemnity for damages and 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. In other words the penalty takes place of the interest only if there is no stipulation
to the contrary and even then, damages may still be collected if the obligor refuses to pay the
penalty.

In the case at bar, not only is there an express stipulation to pay damages in addition to the
penalty, but appellant has failed to pay his obligation as well as the penalty. Therefore, the
imposition of the 6% interest in thus justified.
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. (1155)
Effect of nullity of the Penal Clause Upon the Principal

If the penal clause is void, the principal obligation will remain subsisting.
The efficacy of the principal obligation does not depend upon the efficacy of the penal clause, hence, the
nullity of the penal clause does not carry with it the nullity of the principal
Effect of nullity of the Principal Obligation

The nullity of the principal obligation carries with it the nullity of the penal clause as the latter is just an
accessory to the former.
The accessory cannot exist alone.

CHAPTER 4
Extinguishment of Obligations
General Provisions
Article 1231. Obligations are extinguished:

This article is not
(1) By payment or performance; included in the syllabus
(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 and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as

Annulment,
Rescission,
Fulfillment of a resolutory condition, and
Prescription,
are governed elsewhere in this Code. (1156a)
Other Causes which the Article failed to State:

According to Pineda, this article is deficient for failing to include many other causes of terminating
obligations, such as:
1. Waiver or renunciation by the creditor
2. Mutual agreement or mutual dissent
3. Compromise
4. Fulfillment of resolutory condition
5. Expiration of a resolutory term
6. Prescription
7. Death of the debtor when the obligation is purely personal like an obligation to render a
personal service
8. Decision or will of one of the parties in certain contracts like agency, partnership, and lease
of services
9. Happening of unforeseen events
10. Abandonment of the property charged with an obligation like the abandonment of an interest
in a party wall (Art. 662)
Payment or Performance: (Articles 1232 1261)

Article 1232. Payment means not only the delivery of money
but also the performance, in any other manner, of an obligation. (n)
Definition:
Payment is the satisfaction or fulfillment of a prestation that is due, resulting in the extinguishment of
the obligation of the debtor.
Kinds of Payment:
Voluntary When the debtor willingly pays in money or performs the prestation stipulated.
Involuntary When the debtor is forced to deliver or perform by order of the court.

Requisites of a Valid Payment:

1. Capacity of the person paying
2. Capacity of the person receiving the payment
3. Delivery of the full amount or the full performance of the prestation
4. Propriety of the time, place, and manner of payment
5. Acceptance of the payment by the creditor
Article 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. (1157)
Elaboration:
A debt is considered paid when the full amount has been delivered, or the service has been rendered.
To extinguish the indebtedness, performance must be complete unless otherwise stipulated.
A receipt is a good proof of payment, and the debtor can demand the issuance of a receipt when the debt
is paid.
Burden of proving payment rests upon the debtor, after the creditor has shown that the debt exists.
1. Substantial Performance in Good Faith:
Article 1234. 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. (n)
Rationale:
In case of substantial compliance of the obligation, the obligee is benefited. So the obligor should be
allowed to recover as if there had been a strict and complete performance.
There is substantial compliance by the debtor when in good faith, he has attempted to perform the
contract or prestation, but through excusable neglect, failed to make a full and complete performance.
The omission or defect contemplated in the article must be slight and unimportant. It must not be so
material as to frustrate the accomplishment of the intended work.
There must also be no willful or intentional deviation from the contract.
Having received the benefits of the substantial compliance, the creditor cannot require the performance of
the unperformed portion of the obligation as a condition precedent to the payment of his own liability.
Right to rescind cannot be availed of when there is substantial performance.
Angeles vs. Calasanz

Defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and plaintiffs-appellees
Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of land located
in Cainta, Rizal for the amount of P3,920 plus 7% interest per annum. Pursuant to the terms
of the contract, Angeles made a down payment of P392 and promised to pay the balance in
monthly installments of P 41.20 until fully paid.
On numerous occasions, Calasanz have received late payments from Angeles. Due to the
failure of Angeles to effect subsequent installment payments, Calasanz cancelled the contract
by virtue of a stipulation which allows unilateral cancellation in case of non-payment. But
upon perusal of Angeles together with the CFI of Rizal of all the subsequent payments made,

they found out that 4,533 pesos including interests have already been paid. Thus, Angeles
contend that the rescission be held invalid.
Was the contract validly cancelled?
Unilateral cancellation is unwarranted if there is only a slight or casual breach on the
fulfillment of the obligation. Apart from the initial down payment of 392 pesos, Calasanz
received and accepted the aggregate amount of 4,533 pesos. Angeles have paid the monthly
installments for 9 years and full payment will be made in such a short time, thus not
amounting to a substantial breach thereof. Courts should only order the payment of the few
remaining installments but not uphold the cancellation of the contract.
In addition, when the defendants-appellants, instead of availing of their alleged right to
rescind, have accepted and received delayed payments of installments, though the plaintiffs-
appellees have been in arrears beyond the grace period mentioned in paragraph 6 of the
contract, the defendants-appellants have waived and are now estopped from exercising their
alleged right of rescission. Calasanz is ordered to execute the final deed of sale upon full
payment of the purchase price.
Pagsibigan vs. Court of Appeals

Petitioner Pagsibigan obtained an agricultural loan from the Planters Development Bank
secured by a mortgage over a parcel of land.
Pagsibigan issued a promissory note stipulating that for a first payment to be made on May 3,
1977 and payments every six months at 1,018 pesos with 19% interest for unpaid
amortizations. This promissory note contained an acceleration clause.
Initial payment was made followed by several payments in the total amount of 11,900 pesos.
However, only 4 payments were made in time and those were the only payments that were
credited in his loan amount. The property was foreclosed extra judicially on May 7, 1984 for
failure to pay an outstanding balance of 29,554 pesos. This resulted in the property being sold
to the bank for 8,163 pesos and the bank thereafter claimed a deficiency of 21,391 pesos.
Was the foreclosure and auction sale of the property valid and justified under the
circumstances?
No. The respondent bank has the right to foreclose the mortgage upon the first default of but
the records show that it did not. When it received payment which had been 2 months and 3
days delayed, it applied P154.80 to the principal, P210.00 to interest, and only P25.20 to
penalty. From this act of receiving delayed payment, it is clear that the respondent bank had
waived its right under the acceleration clause.
Petitioner in this case has the right to move for the cancellation of the mortgage and the
release of the mortgaged property, upon payment of the balance of the loan. Aside from the
fact that the respondent bank was estopped from enforcing its right to foreclose by virtue of
its acceptance of the delayed payments for a period of more than six years, the application of
such payment to the interest and the principal during the first three payments constitutes a
virtual waiver of the acceleration clause provided in the contract. We cannot sustain the
legality of the foreclosure under the peculiar facts of this case, because there is substantial
performance of the obligation on the part of petitioner. Under Article 1235 of the Civil Code,
when the creditor accepts performance, knowing its incompleteness and irregularity without
protest or objection, the obligation is deemed complied with.
The bank is bound by estoppel and has no right to rescind, and further foreclose the property
and claim an astronomical amount of 29,554 pesos. In fact, it was the bank who acted in bad
faith, thereby being liable for: Moral damages, because of the mental anguish caused to
petitioners, and Exemplary damages, to sufficiently deter similar acts in the future.
JM Tuason vs. Javier

Jm Tuason and Co. and Javier entered into a contract to sell a parcel of land in Sta. Maria
Heights for the total sum of P3,691.20, with interest thereon at the rate of 10% a year,
payable as follows: P396.12 upon execution of the contract and P43.92 every month

thereafter, for a period of 10 years.. Paragraph 6 of said contract substantially stipulates that
upon failure of payment, a one month grace period will be given and if no payment has been
made on the defaulted month plus the grace period, a 10% interest per annum will be added
and further, if nothing has been paid within 90 days, the vendor may have the right to rescind
the contract.
Upon execution of contract and the payment of the first installment, the respondent was
placed in possession of the land. Subsequently, however, she defaulted in the payment of said
installments, in view of which, petitioner informed her by letter that their contract had been
rescinded. Respondent sent an answer, admitting that she had defaulted in the payment of the
stipulated monthly installments and that this fact was due to unforeseen circumstances. She
said that she is willing to pay all overdue installments under the contract and had in fact
offered the same to the petitioner. Tuason refused and moved for the rescission of the
contract. CFI of Rizal rendered a decision, declaring the contract to sell has not yet been
rescinded and ordering the respondent to pay the petitioner within 60 days
Can JM Tuason and Co. validly rescind the contract?
Apart from the initial installment paid upon the execution of contract, the respondent
religiously satisfied the monthly installments accruing thereafter, for a period of 8 years.
Although the principal obligation under the contract was P3,691, the total payments made by
the respondent, including the stipulated interest, aggregated to P4,134.08. The respondent has
offered to pay all of the installments overdue including the stipulated interest, apart from
reasonable attorneys fees and the costs.
The petitioner will be able to recover everything due thereto, pursuant to its contract,
including such damages as the former may have suffered in the consequence of the latters
default. Under these circumstances, We feel that, in the interest of justice and equity, the
decision appealed from may be upheld upon the authority of Art. 1234 of the Civil Code.
2. Completeness by Estoppel:
Article 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. (n)
Reason behind the Article:

Although the obligation is not completely executed, the same is deemed fully fulfilled or performed
because the obligee is placed under estoppel in accepting the payment or performance with actual
knowledge of its incompleteness or irregularity.
He has waived his right to question the defect when he made the acceptance without any protest or
objection thereto.
Examples:
Owner accepted and occupied a newly constructed house without protest. This would amount
to an acknowledgement of the performance of the work by the contractor. He is also estopped
from setting up the claim that the material used in the construction of said house was not in
accordance with the plans and specifications.
Meaning of the word Accept

Accept means to take as satisfactory or sufficient, or to give assent or to agree or to accede to an
incomplete performance.

The law does not require the creditor to protest or object in a particular manner or at a particular time, so
long as the acts of the creditor at the time of the payment or a reasonable time thereafter, shows that he is
not satisfied with the said payment or performance. If this is the case, obligation is not extinguished.
When by the acts of the creditor himself caused the appearance of the defects in the performance, he is
estopped from objecting to the performance.
Esguerra vs. Villanueva

De Guzman and Esguerra agreed to enter into a contract of lease of the Esguerra Gueco
building in which de Guzman is bound by a 10-year term of 300 pesos monthly and 400
thereafter. De Guzman failed to pay for 7 consecutive months, thus, he executed a promissory
note promising to pay. De Guzman failed to do so, and forcing Esguerra to file an action to
recover. A writ of attachment was issued and the parties entered into a compromise
agreement wherein De Guzman is bound to pay Esguerra 2,260 pesos ON OR BEFORE
November 26, 1962. De Guzman failed to pay, and thus a writ of execution was issued. De
Guzman contends that he delivered 800 and subsequently 1400 pesos to Esguerra and that
this constitutes full satisfaction and compliance with the obligation.
Was the "receipt" of said sums by the Esguerras constituted "acceptance" of the
incomplete and irregular performance of respondents' obligation? Was the acceptance
deemed as full compliance of the obligation?
Esguerra had neither acceded or assented to said payment, nor taken the same as satisfactory
or sufficient compliance with the judgment aforementioned. The day immediately following
that of the first payment of P800, the Esguerras asked the court to issue the corresponding
writs of execution. Thus, the Esguerras patently manifested their dissatisfaction with
which necessarily implied an objection or protest to said partial payment.
The law does not require the protest or objection of the creditor to be made in a particular
manner or time. So long as the acts of the creditor, at the time of the incomplete or irregular
payment by the debtor, or within a reasonable time thereafter, evince that the former is not
satisfied with or agreeable to said payment or performance, the obligation shall not be
deemed fully extinguished.
3. Effect of Payment by and to Third Persons:
Article 1236. The creditor is not bound to accept payment or performance

by a third 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. (1158a)
Rationale:
The creditor should not be compelled to accept payment from a third person whom he may dislike or
distrust. Creditor may also have personal reasons not to have any business dealings with a third person,
such as lack of confidence in the honesty of the third person.
Exceptions:
1. If there is a stipulation that the creditor shall accept the payment made by a third person
2. If the third person has an interest in the fulfillment of an obligation such as the interest of sa surety, a
guarantor or amortgagee.

Right of the Third Person who Paid the Obligation:

Payment may be made with consent of the debtor or without the knowledge or against the will of the
debtor.
If payment is made with the knowledge and consent of the debtor, the payor is entitled to be reimbursed
for the full amount he paid. Same rule applies if the debtor knows about the payment but did not object.
If payment is made without the knowledge or against the debtors will, reimbursement shall be only up to
the amount or extent by which the debtor was benefited. If the debt had already prescribed, payment
cannot beneficial to the debtor, thus the payor is not entitled to reimbursement.
Debtors knowledge of the payment may be proved inferentially or by his act or conduct.
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. (1159a)
Consequences of Payment without knowledge or against the will of the Debtor:

1. He can recover only insofar as the payment has been beneficial to the debtor.
2. He cannot compel the creditor to subrogate him in his rights, such as those arising from mortgage,
guaranty, or penalty.
Subrogation Elaborated:
This is the juridical act of putting somebody into the place of the creditor by virtue of which, the former is
enabled to exercise all the rights and actions appertaining to the latter.
Subrogation transfers to the person subrogated the credit with all the right thereto appertaining, either
against the debtor.
Example:
Bianca got a loan of 1 million from a bank using as collateral a parcel of land. Without the consent of
Bianca, her friend Kosh paid the obligation, whereby Bianca benefited to the full amount of 1 million.
Kosh can claim form Bianca full reimbursement of the amount she paid to the bank. However, if Bianca
could not make the reimbursement, Kosh has no right to foreclose the mortgage because Kosh had not
been given the right to subrogate the bank as the payment was done without the consent of Bianca.
If Kosh made the payment with the consent of Bianca, Kosh is entitled to full reimbursement of the
amount paid and to subrogation, such that if the debtor fails to reimburse Kosh, the latter can foreclose the
mortgage as the payor is subrogated to the rights of the bank.

Article 1238. Payment made by a third person

who does not intend to be reimbursed by the debtor
is deemed to be a donation,
which requires the debtor's consent.
But the payment is in any case valid as to the creditor who has accepted it. (n)
Applicability:
The donation and the acceptance of the thing/money must comply with the formal requisites to make it
valid. (See Articles 748 and 749 of the New Civil Code)
Reason why consent of the Debtor is required:

The reason is that no one should be compelled to accept the generosity of another.
When the payor does not intend to be paid back, the presumption arises that such payment is a donation.
The debtors consent is necessary to perfect the donation. When the debtor has given his consent, the law
on ordinary donation will apply.
If the debtor did not give his consent to the presumed donation, nonetheless, the payment if accepted by
the creditor will have the effect of extinguishing the obligation.
The consent of the debtor is immaterial insofar as the extinguishment of the obligation is concerned.
Article 1239. In obligations to give, payment made by one who does not have
the free disposal of the thing due and capacity to alienate it shall not be valid,
without prejudice to the provisions of article 1427
under the Title on "Natural Obligations." (1160a)
Valid Payment in Obligations to Give:

In an obligation to give, the payor must have the free disposal of the thing paid, otherwise, the payment is
not valid. Payment made by a payor who does not have the capacity to alienate the thing, such as when he
is insane, is not valid.
Article 1427 (which refers to minors aged 18-21 being able to recover what is paid due to incapacity) is
no longer applicable since R.A. 1609 reduced the age of majority to 18.
Article 1240. Payment shall be made to the person

in whose favor the obligation has been constituted,
or his successor in interest,
or any person authorized to receive it. (1162a)
Persons to whom payment shall be made:

Payment shall be valid and effective if it is paid to:
1. The creditor himself in whose favor the obligation was constituted. If the credit had been
transferred or assigned to a third person, payment shall be made to the latter. The term creditor
shall refer to the creditor at the time of the payment.
2. To the successor or successors in interest (like the heirs) in default of the creditor.

3. To any person duly authorized to receive the payment. He may be an attorney-in-fact or an agent.
The authority may be granted by law such as the authority of the guardian in relation to his ward;
liquidator of a partnership or corporation; the administrator or executor of an estate.
Payment to an unauthorized person is not valid payment (Exception: Article 1241)
The phrase a person authorized to receive it means not only those who are authorized by law to do so
(such as guardian, executor, etc.) but also any other person who may be authorized to do so by law.
Illustrations:
Payment to unauthorized persons:
a) Payment to an alleged agent who is not authorized is not valid payment. Payment was made at
ones risk.
b) Payment made to the second wife instead of the children of the first wife who are the ones
authorized to receive payment, was void. The payors obligation was not extinguished.
Payment to authorized persons:
a) Payment of an account with the China Banking Corp through its liquidator is a valid payment.
b) Payment made to the administrative officer of PRRA, a government agency, for certain goods
sold by the agency to the defendants, was considered valid since said officer had been allowed to
receive payment from the buyers of such goods.
Tanguilig vs. Court of Appeals
Tanguilig entered into a proposal with Herce on the construction of a wind-mill system for a
consideration on 60,000Php. Herce was able to pay a downpayment of 30,000Php and a
subsequent installment of 15,000Php leaving a balance of 15,000Php. Tanguilig, due to the
refusal of Herce to pay the remaining installment, filed an action for the recovery of the sum
of 15,000Php. Herce contends that he already paid 15,000Php to San Pedro General
Merchandising Inc the contractor who built the deep well to which the windmill system was
to be connected, and assuming he still had to pay the balance, it should be offset because of
the defects of the windmill which caused it to collapse after a strong wind hit the area.
Did the payment to SPGMI constituted a valid 3rd party payment?
The word deep well or the construction thereof was not actually included in the proposals.
It was not a stipulation included in the construction of the wind mill system it merely
described the type of a deep well pump suitable for the construction of the wind mill system.
SPGMI is not an authorized 3rd party in the case. Although defendant contends that
Tanguilig executed a letter authorizing SPGMI to construct a deep well, the same has
not been proven with sufficient and convincing evidence. Thus no debtor-creditor
relationship exists between defendant and SPGMI.
A one-year guaranty from the date of the completion of windmill still binds petitioner to
reconstruct it. When the windmill failed to function properly it became his obligation to make
proper repairs in accordance with said guaranty agreed by both parties. Strong wind is not
unforeseen in the case of windmills, because you put windmills where the strong winds are!
PNB vs. Court of Appeals
Loreto Tan is the owner of a parcel of land in which expropriation proceedings was instituted
by the government. Tan filed a motion to release him the expropriation price of 32,480Php.
Court, as a judgment rendered in favor of Tan, ordered PNB to release to Tan 32,480. Branch
manager issued the check to Sonia Gonzaga, whom, by SPA, they contend to be an
authorized representative of Tan. Tan denies as such but PNB contends that an SPA was
signed by Tan authorizing Gonzaga to receive such payment.
Did an SPA ever exist? Is the payment to Gonzaga valid?
There is no question that no payment had ever been made to Tan as the check was never
delivered to him. When the court ordered PNB to pay Tan the amount of 32,480, it had the
obligation to deliver the same to him. The burden of proof of such payment lies with the
debtor (PNB). In the case at bar, neither SPA nor the check issued by the PNB was ever
presented to the court.

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 third 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 following cases:
(1) If after the payment, the third person acquires the creditor's rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor's conduct, the debtor has been led to believe
that the third person had authority to receive the payment. (1163a)
Applicability:
The article refers to payment made by the debtor with the intention to extinguish his debts to an:
a) Incapacitated Creditor, or
b) Third Person who is not a successor in interest of the creditor nor an authorized representative
Effects:
1. If the payment made to the incapacitated creditor who cannot administer his property did not
benefit him or he has not kept the thing delivered, the debtor may be compelled by the creditor
to pay anew when he regains capacity, or by the latters representative during the time of the
incapacity.
2. If the incapacitated creditor has kept the thing delivered or he benefited from the payment he
received, the debtor is released from his obligation by virtue of the payment. There is benefit if
the thing or the money received was used for payment of medical expenses, taxed, or
indebtedness of the creditor. Benefit may be in the form of financial, moral or intellectual
advantages which must be proved.
The rationale behind this is that because the creditor is incapacitated and cannot administer his own
property, payment to him should, in the ordinary course of things, be coursed to the legal representative or
guardian; if there is none, the debtor may consign the thing in court so that he will be released from the
obligation.
Exception to the rule in Article 1240

This article is an exception to the rule that payment made to a third person who is not a successor in
interest nor an authorized representative shall be invalid.
In this article, payment to such a third person is also valid IF the creditor was benefited thereby. The
validity of the payment is co-extensive to the benefit which the creditor achieved. This requires evidence
to establish the extent of the benefit enjoyed.
However, the benefit need not be proved in the three given situations provided in the codal provision.
1. In the first case given, there is a merger of right of the creditor and of the third person. There
being a conveyance of rights, the creditor must have received a valuable consideration therefor.
2. In the second case, there being ratification, whatever defects there may be in the manner the
payment had been made, are all deemed cleansed or cured.
3. In the third case, the creditor is under estoppel to deny the payment received in his behalf by the
third person.

Article 1242. Payment made in good faith

to any person in possession of the credit
shall release the debtor. (1164)
Character of Payment
Payment made by the debtor must be made in good faith.
It is immaterial whether the creditor acted in good faith or bad faith, since the law is intended to protect
the debtor from being required to pay again, and not to protect the creditor.
Meaning of Possessor of Credit

The one in possession of the credit does not refer to the real creditor or his heirs, or person authorized by
him or by law.
It refers rather to a person who has the appearances of the creditor but who actually is not.
This article is an exception to the rule that payment shall be made to the persons enumerated therein.
Example: A holder of a negotiable instrument payable to bearer who merely stole it is the apparent
creditor. Payment to the bearer made in good faith will release the debtor from the obligation. The remedy
of the creditor then is to go against the person who received the payment.
True Possession of Credit vs. Document Representing the Credit The explanation of
Pineda on this matter is
The first refers to the very credit itself, that is, the monetary prestation. deficient for me. YOLO
The second refers merely to the document representing or evidencing the credit.
Example: If a document which is payable to order or to a definite person is in the possession of someone
but without any indorsement, the possession is not of the credit but only of the title, and payment to the
holder is not a valid payment
In true possession of credit there must be an actual and legal relation between the credit and the possessor
of the document.
Example: An instrument payable to bearer is held by the person to whom it is intended. This is true
possession of credit.
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. (1165)
Applicability:
The article applies to debts or credits and not to property.
Properties are attached, while a credit on the other hand is garnished.
The law contemplates a situation where the debtor had been sued by his creditor and a writ of
garnishment was issued by the court enforced against another person who is the debtor of the defendant-
debtor. The debtor of the defendant-debtor, who was served the notice of garnishment, should not pay the
credit garnished to the defendant-debtor because that credit is now subject to the outcome of the case and
is earmarked for the plaintiff-creditor in case of victory. By the garnishment, the stranger becomes a
forced intervenor. The garnished credit is deemed in custodia legis. If the forced intervenor violates the
writ of garnishment by paying the defendant-debtor, the payment is not valid. Thus, if the plaintiff-
creditor finally wins the case, he can execute the judgment against the forced intervenor to the extent of
the amount paid.

Example:
A is creditor of B. B is creditor of C. A filed to collect from B. A issued writ of garnishment against B.
Writ was served upon C. C shall not pay to B without consent of A and the Court. If he does, and A wins
the case, A can compel C to pay again the sum representing the debt garnished.
In the illustration given above, C may consign (deposit) the money in court for his own convenience. If
this is properly done, he will be freed from further responsibility.
An interpleader is not within the ambit of the article.
An interpleader, a person who possesses a certain property, interest or credit is confronted by two or more
persons laying conflicting claims on the same thing, files a case against all claimants that the latter may
litigate among themselves their conflicting claims.
Article 1244. 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,

an act or forbearance cannot be substituted by another act or forbearance
against the obligee's will. (1166a)
No payment or delivery of a different thing:

General Rule: Creditor shall be paid ONLY hat has been stipulated upon because the contract between the
parties is the law between them. This applies even if the thing offered is worth more than the thing agreed
to.
However, it is the compulsion which is barred. If the creditor consents, his acceptance of the substitute
extinguishes the obligation. This happens in novation, and also in dacion en pago.
The same applies to obligations to do and not to do.
4. Dation in Payment:
Article 1245. Dation in payment,

whereby property is alienated to the creditor in satisfaction of a debt in money,
shall be governed by the law of sales. (n)
Concept:
Dation in payment or dacion en pago is the alienation by the debtor of a particular property in favor of his
creditor, with the latters consent, for the satisfaction of the formers money obligation to the latter, with
the effect of extinguishing the money obligation.
Dation in payment is a form of novation in which there is a change in the object involved in the original
contract.
The thing offered as an accepted equivalent of the performance of the obligation is considered as the
object of the contract of sale, while the pre-existing debt is considered as the purchase price.
Dation in payment extinguishes the whole obligation, unless otherwise provided by the parties.
Example:
A owes B. A could not pay his money obligations to B. A offered a property as payment for his money
obligations. If be agrees, there is dacion en pago.

Elements of Dation in Payment:

1. Existence of a money obligation
2. Alienation to the creditor of a property by the debtor with the consent of the former
3. Satisfaction of the money obligation of the debtor
Since the law on sales governs, the creditor is deemed as the vendee and the debtor as the vendor.
The reason why law on sale governs is because the undertaking really partakes the nature of a sale. The
creditor is really buying the thing or property of the debtor, payment or which is to be charged against the
debtors debt.
Adjudicacion en pago and datio in solutum are legal terms synonymous with dacio en pago.
Basis Dation in Payment Sale

Existence of pre-existing credit There is a pre-existing credit. There is no pre-existing credit.
Effect It extinguishes the obligation It gives rise to obligations, to deliver

completely or partially depending on the part of the seller and to pay on
upon the agreement of the parties. the part of the buyer.
From the viewpoint of the creditor, the From the viewpoint of the buyer, the
Cause of consideration cause is the acquisition of the object cause is the object; from the viewpoint
offered as payment; from the of the seller, the cause is the price.
viewpoint of the debtor, the cause is
the extinguishment of his debt.
There is less freedom to bargain in the

Freedom to bargain determination of the price because if There is greater freedom in the
the creditor refuses, the debtor will determination of the price as the
suffer more. The debtor is forced to parties stand on equal footing at the
yield to the dictates of the creditor to bargaining table.
save himself from more inconvenience
and embarrassment.
Caltex vs. IAC

Private respondent Asia Pacific Airways Inc., entered into an agreement with petitioner
Caltex (Philippines) Inc., whereby petitioner agreed to supply private respondent's aviation
fuel requirements for two (2) years. Private respondents had an outstanding obligation to
petitioner in the total amount of around 4 million pesos representing the unpaid price of the
fuel supplied. Asia Pacific assigned its receivables from National Treasury to be applied as
payment. The National Treasury then issued a Treasury warrant amounting to 5.4M which
was issued in favor or Caltex. Private respondent, having learned that the amount remitted to
petitioner exceeded the amount covered by the Deed of Assignment, wrote a letter to
petitioner, requesting a refund in the amount of 900k pesos. However, 500k was not returned
by Caltex as it represented interest and service charges at the rate of 18% per annum on the
unpaid and overdue account of respondent. Thus, Asia Pacific filed a complaint to collect the
said amount, contending that the Deed of Assignment was in fact dation in payment limiting
their debt to only 4.072M.
Did the deed of assignment satisfy the requisites of dation in payment?

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 payment of ASSIGNOR's outstanding obligation plus any applicable interest
charges on overdue account and other avturbo fuel lifting and deliveries that ASSIGNOR
may from time to time receive from the ASSIGNEE, and ASSIGNEE does hereby
accepts such assignment in its favor.
The Deed of Assignment speaks of three (3) obligations (1) the outstanding obligation of
P4,072,682.13 as of June 30, 1980; (2) the applicable interest charges on overdue accounts;
(3) the other avturbo fuel lifting and deliveries that assignor (private respondent) may from
time to time receive from assignee.
If it were the intention of the parties to limit or fix respondent's obligation to P4,072.682.13;
they should have so stated and 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" and the clause "and other avturbo fuel lifting and deliveries that
ASSIGNOR may from time to time receive from the ASSIGNEE".
After the execution of the Deed of Assignment, petitioner continued to charge respondent
with interest on its overdue account. This was pursuant to the Deed of Assignment which
provides for respondent's obligation for "applicable interest charges on overdue account." The
charges for interest were made every month and not once did respondent question or take
exception to the interest. The foregoing subsequent acts of the parties clearly show that they
did not intend the Deed of Assignment to have the effect of totally extinguishing the
obligations. The Court rules in favor of Caltex and held that the Deed of Assignment was not
a dation in payment.
Luzon Development Bank vs. Enriquez

Luzon Development Bank is a bank that extends loans to subdivision developers. Delta is a
domestic corporation engaged in the business of developing and selling real estate properties.
Spouses de Leon, owners of Delta, obtained a loan from LDB amounting to 4 million pesos
and as security for said loans executed a Real Estate Mortgage in favor of the Bank on several
of their properties including the lot in question.
Years later, Delta executed a contract to sell with Enriquez over the house and lot in Lot 4.
On the other hand, Delta defaulted on its loan with the Bank and instead of foreclosing the
mortgage, the two agreed to a dation in payment wherein Delta assigned/transferred to the
bank several properties including Lot 4. The BANK argues that, if title to Lot 4 is ordered
delivered to Enriquez, DELTA has the obligation to pay the BANK the corresponding value
of Lot 4. According to the BANK, the dation in payment extinguished the loan only to the
extent of the value of the thing delivered.
Did the dacion en pago extinguish the loan obligation, such that DELTA has no more
obligation to the BANK?
A dacion en pago is governed by the law of sales. Contracts of sale come with warranties,
either express (if explicitly stipulated by the parties) or implied (under Article 1547 et seq. of
the Civil Code). In this case, however, the BANK does not even point to any breach of
warranty by DELTA in connection with the Dation in Payment. To be sure, the Dation in
Payment has no express warranties relating to existing contracts to sell over the assigned
properties. As to the implied warranty in case of eviction, it is waivable and cannot be
invoked if the buyer knew of the risks or danger of eviction and assumed its consequences.
As we have noted earlier, the BANK, in accepting the assigned properties as full payment of
DELTAs total obligation, has assumed the risk that some of the assigned properties are
covered by contracts to sell which must be honored under PD 957.
Delta is NOT LIABLE TO PAY the Bank the value of the subject lot; and respondent
Enriquez is ordered to PAY the balance of the purchase price and the interests accruing
thereon, as decreed by the Court of Appeals, to the Bank.

Tan Shuy vs. Spouses Maulawin
Petitioner Tan Shuy, a man engaged in the business of buying copra and corn in Quezon
Province, extended a loan to Guillermo Maulawin, a farmer-businessman engaged in buying
and selling of copra and corn, in the amount of P 420,000. In consideration thereof,
Guillermo obligated himself to pay the loan and to sell lucad or copra to petitioner. Despite
repeated demads, Guillermo failed to pay his outstanding balance and Tan Shuy filed a case
before the Court.
According to respondent Guillermo, he had already paid the subject loan in full. Allegedly, he
continuously delivered and sold copra to petitioner. Guillermo said they had an oral
arrangement that the net proceeds thereof shall be applied as installment payments for the
loan. He alleged that his deliveries amounted to P 420,537.68 worth of copra. Furthermore,
he pointed out that the pesadas (like a receipt) did not contain the notation "pd," which meant
that actual payment of the net proceeds from copra deliveries was not given to him, but was
instead applied as loan payment.
Did the delivery of copra amount to installment payments for the loan obtained by
Guillermo from Tan Shuy?
Yes. There was a dation in payment. In this case, the debtor delivers and transmits to the
creditor the formers ownership over a thing as an accepted equivalent of the payment or
performance of an outstanding debt. In such cases, Article 1245 provides that the law on sales
shall apply, since the undertaking really partakes in one sense of the nature of sale.
Dation in payment extinguishes the obligation to the extent of the value of the thing
delivered, either as agreed upon by the parties or as may be proved, unless 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.
Supported by petitioners statement that he only gets the payments for trucking while the total
amount which represent the total purchase price for the copras that he delivered to the
plaintiff were all given to Elena Tan Shuy as installments for the loan he owed to plaintiff,
the arrangement between Tan Shuy and Guillermo can thus be considered as one in the nature
of dation in payment. Pesadas show that other deliveries were for corn and not copra, so
Maulawin is still indebted to the plaintiff in the amount of 41k pesos.
Article 1246. When the obligation consists in the delivery of an indeterminate or generic thing,
whose quality and 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 and other circumstances shall be taken into consideration. (1167a)
Rule in Delivering Indeterminate or Generic Things:

When the quality and circumstances of an indeterminate or generic thing supposed to be delivered had not
been stated, only the ordinary kind or category of said thing should be delivered.
For example, if the obligation consists in delivering a car of a particular brand (latest model), and there
are three kinds of that brand with different costs, the one to be delivered is the second most powerful in
the row.
The purpose and other circumstances shall be considered. Thus, in the example earlier, if the purpose is to
secure the most powerful to be used in a race, then the car with the superior quality should be delivered.
The law speaks of quality. Quantity is not mentioned. The reason is because if both quantity and quality
are not determined, then the contact is considered void (Art. 1349 and 1409)

Article 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. (1168a)
If there is no agreement regarding extrajudicial expenses, debtor shall bear the expenses because he is the
one principally benefited as he is freed from the obligation by reason of the payment.
5. Effects of Partial Payment:
Article 1248. Unless there is an express stipulation to that effect,

the creditor cannot be compelled partially to receive the prestations
in which the obligation consists.
Neither may the debtor be required to make partial payments.
However, when the debt is in part liquidated and in part unliquidated,

the creditor may demand and the debtor may effect the payment of the former
without waiting for the liquidation of the latter. (1169a)
Partial Performance can be Refused:

The debtor cannot make a partial payment or partial performance to the creditor unless there is an express
agreement to that effect. The creditor therefore can refuse partial payment or performance. Conversely,
the debtor cannot be compelled to make partial payments if he is ready to make a full payment.
The reason behind this is that a debt is not 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.
Example:
A obligated himself to finish the construction of the house of B with 7 bedrooms in a period of 8 months.
A cannot compel B to receive the house where only 4 bedrooms had been finished, unless B agrees.
When the prestation is partly liquidated and partly unliquidated, the creditor may demand the fulfillment
of the liquidated portion, without waiting for the liquidation of the unliquidated portion.
Example:
A borrowed money 100 pesos from B with interests based on the prevailing bank rates. The loan matured
after one year. B can collect the 100 pesos which is liquidated without waiting for the liquidation of the
interests which have yet to be computed and determined.
Nasser vs. Cuevas

In the proceedings for the settlement of the estate of Amadeo Molave, a supplemental
compromise agreement and project of partition was executed among the heirs and interested
parties. The agreement provided for the payment of attorneys fees to Atty. Canlas in the
aggregate amount of 600,000Php 128,000Php in property and 472,000Php in cash.
Stipulation: Until after the full payment, there shall be established on all the properties of the
Estate, a charging lien for attorneys fees to secure the payment of said fees and, by these
present, all the signatories to this Compromise Agreement expressly agree to the
establishment and creation of the aforesaid charging lien, provided that upon full payment of
the corresponding liability of party the lien on his/her share is extinguished.

The agreement was approved by the Court and shortly thereafter, Canlas moved for the
execution of the agreement. The court assigned the corresponding shares to be paid by the
heirs and ordered Mariano Nasser to deliver payment within 10 days from the receipt of the
directive. The heirs contend that the execution was improper due to the absence of a written
agreement on the precise terms of payment, furthermore, the clause Upon full payment of
the corresponding liabilities of a party, the lien on his/her share is extinguished - to mean
that the agreement is that of an installment basis and the fact that Nasser have complied with
their undertaking, they are not subject to their lien, and that the same was extinguished.
Did the clause upon full payment of the corresponding liability of party the lien on his/her
share is extinguished in the agreement connote payment of fees in installments?
The meaning of the proviso only connotes that the heirs will pay at different times but does
not connote that of a separate payment in installments. The creditor cannot be compelled to
partially receive the prestations in which the obligations consist unless there is an express
stipulation to that effect.
Petition is hereby denied, and the Court holds that the Order and Execution are validly and
lawfully issued, and alias execution may issue to the extent that the judgment credit of Atty.
Canlas remains unsatisfied, with the proviso that the sums still due to him shall bear interest
until fully paid since it has already been 16 years and not a single centavo has been paid by
the heirs.
6. Currency of Payment:
The portion
Article 1249. The payment of debts in money shall be made in the currency stipulated, cancelled out is
and if it is not possible to deliver such currency, no longer in
then in the currency which is legal tender in the Philippines. effect since this
provision has
already been
(All monetary obligations shall be settled in the Philippine currency repealed. The
which is the legal tender in the Philippines. applicable law
However, parties may agree that the obligation or transaction today has been
shall be settled in any other currency at the time of payment.) (RA 8183) inserted in the
first portion of
this codal
The delivery of promissory notes payable to order, provision for
or bills of exchange or other mercantile documents easy reading.
shall produce the effect of payment only when they have been cashed, The rest of the
or when through the fault of the creditor they have been impaired. provision remain
subsisting.
In the meantime,
the action derived from the original obligation
shall be held in the abeyance. (1170)
Evolution of this Article:

Article 1249 was amended by R.A. No. 529 in 1950 (prohibited transactions in foreign currency), further
amended by R.A. No. 4100 (provided exceptions to RA 529 to encourage foreign investments) in 1964,
and recently amended by R.A. No. 8183 in 1996.
Section 1 of R.A. No. 8183 provides:
All monetary obligations shall be settled in the Philippine currency which is the legal tender in the
Philippines. However, parties may agree that the obligation or transaction shall be settled in any other
currency at the time of payment.
Only the first paragraph was amended. The rest remain subsisting.
Today, there is no more legal impediment to having obligations paid in a foreign currency as long as the
parties agree to such an arrangement.

Legal Tender, Concept:

Legal tender refers to such currency which may be used for payments of debts whether public or private,
and which the creditor cannot refuse to accept.
Legal tender in the Philippines covers all notes and coins issued by the Central Bank of the Philippines.
However, P.D. No. 72 set a limit in the use of coins as legal tender:
a. 1 centavo coins and 5 centavo coins are legal tender up to 20 pesos.
b. Other coins are legal tender up to 50 pesos
The reason for the limit is to avoid burdening the creditor with the work of counting huge amounts of
coins and carrying the same. He can refuse the acceptance of coins which go beyond the limits.
Payment in Negotiable Documents:

Negotiable documents like checks, promissory notes payable to order, or bill of exchange, are not legal
tenders. Creditor has the right to refuse such even if they happen to be good.
Payment in such medium does not produce the effect of payment. These papers shall produce the effect of
payment only when they have been encashed, meaning, they had been exchanged with cash money like
the honoring of checks by the drawee bank.
Section 62 of the Central Bank Act provides that checks representing deposit money do have legal tender
power and their acceptance in payment of debts, both public and private, is at the option of the creditor.
Provided, however, that a check which has been cleared and credited to the account of the creditor shall
be equivalent to payment in cash.
Rule on Payment in Check:

A check, whether it is ordinary or managers, is not legal tender. Creditor may refuse payment of such.
This rule applies even if the check was consigned in court.
Exceptions: Check is considered as valid payment when
1. When the creditor has accepted the check. He cannot refuse to accept the check as payment the
following day. Creditor is under estoppel.
2. When the check had lost its value due to the fault of the creditor, such when he unreasonably
delayed the presentation of the check.
3. When the foreign bill of exchange lost its value for the reason that the creditor had neglected to
make a protest. Had the creditor protested to dishonor the bill, the debtor could have pursued the
right to recourse against the parties secondarily liable therefor.
4. When a managers check is consigned with the court, endorsed to the provincial treasurer which
was honored by the bank and credited to the treasurers account.
5. When after the payment of the check in court by the debtor, the creditor petitions to withdraw the
amount in deposit.
Mere delivery of a bill of exchange by the debtor does not immediately effect payment. It however
suspends the action arising from the original obligation. To finally extinguish the obligation, the
commercial instrument or check should be cashed.
Distinction between Article 1249 and Article 1250:

In Article 1249, the parties may agree on payment by another currency and the basis of the value shall be
the value during the time of the payment.
In Article 1250, the parties may also agree on a different currency, but the basis of the value of the
stipulated currency is reckoned at the time of establishment of the obligations and not at the time of
payment. But before this applies, there must first be a supervening extraordinary inflation/deflation of the
currency stipulated.

Fortunado vs. Court of Appeals
A judgment in favor of Fortunado was rendered by the court whereby two parcels of land of
Bautista were levied as payment for the damages. The latter lot had already been purchased
by National Steel Corporation (NSC) but had not yet been registered in its name.
After due notice, these lots were sold at public auction to the petitioners as the only bidder.
They were issued a certificate of sale which was registered thereafter. NSC notified the
sheriff of its intention to redeem one of the parcels of land. The sheriff suggested that as the
two lots had been sold together for the lump sum, both of them should be redeemed by NSC.
As the motion remained unresolved and the period of redemption would soon expire, NSC
issued to the sheriff a check as the redemption price for the lot. The sheriff acknowledged
receipt of the check on the same date.
The sheriff acknowledged receipt of the check as redemption money for the two parcels of
land; issued a certificate of redemption in favor of NSC and Bautista.
In a Motion, Bautista prayed that the sum covered by the check be delivered to and kept by
the Clerk of Court of the RTC until such time as all incidents relative to the validity of the
auction sale conducted by the sheriff were finally resolved. The sheriff notified the
petitioners counsel of the deposit of the check. The said counsel replied that he was rejecting
the check because it was not legal tender and was not intended for payment but merely for
deposit.
Was the check issued by NSC considered payment of redemption price?
Redemption is not rendered invalid by the fact that the said officer accepted a check for the
amount necessary to make the redemption instead of requiring payment in money. It goes
without saying that if he had seen fit to do so, the officer could have required payment to be
made in lawful money, and he undoubtedly, in accepting a check, placed himself in a position
where he could be liable to the purchaser at the public auction if any damage had been
suffered by the latter as a result of the medium in which payment was made. But this cannot
affect the validity of the payment.
The Court held that, while it is not sanctioning the use of a check for the payment of
obligations over the objection of the creditor, a check may be used for the exercise of the
right of redemption, the same being a right and not an obligation. The tender of a check is
sufficient to compel redemption but is not in itself a payment that relieves the redemptioner
from his liability to pay the redemption price.
Tibajia vs. Court of Appeals

In a civil case, Spouses Tibajia was ordered to pay Eden Tan a total money judgment of
398,483.40php. They paid Tan in the following form: 262,750.00php in cashiers check and
135,733.70php in cash. Tan refused to accept the payment, and insisted that the garnished
funds deposited with the RTC cashier be withdrawn to satisfy the judgment. Trial court and
CA favored Tan by saying that a payment in cashiers check is not payment in legal tender.
Petitioners cited that the cashiers check was that of Bank of the Philippine Islands, a bank of
good standing, and it was enough to fulfill the obligation.
Is payment by means of a cashiers check considered as payment in legal tender?
No, it is not considered payment in legal tender. Section 1 of RA No. 529, as amended,
which provides:
Section 1. Every provision contained in, or made with respect to, any obligation which
purports to give the obligee the right to require payment in gold or in any particular kind
of coin or currency other than Philippine currency shall be as it is declared against
public policy null and void, and no effect in any obligation thereafter incurred.
Section 63 of RA No. 265 (Central Bank Act), as amended, which provides:
Section 63. Legal Character Checks representing deposit money do not have legal
tender power and their acceptance in the payment of debts, both public and private, is at
the option of the creditor. (There is a proviso in this section, but not significant in this
case.)

In Philippine Airlines, Inc. vs CA and Roman Catholic Bishop of Malolos, Inc. vs IAC,
the Court held that:
A check, whether a managers check or ordinary check, is not legal tender, and an offer
of a check in payment of a debt is not a valid tender of payment and may be refused
receipt by the obligee or creditor.
General Insurance vs. Union Insurance

Union Insurance Society of Canton, an insurance organization, and General Insurance &
Surety Corp (GISC for brevity) entered into a First Surplus Reinsurance Agreement. Parties
agreed on reciprocal reinsurance expressed and payable in pounds sterling or any equivalent
Philippine currency valued at the exchange rate existing at the time of payment.
After termination of the reinsurance agreement, Union Insurance claim that General
Insurance is still indebted with a sum of 4,784.51 pounds and demands that it be paid
according to the terms stipulated in the contract. Union requested GISC to pay the
aforementioned sums in pounds sterling or in Philippine Pesos at the exchange rate prevailing
at such time. GISC refused to pay in pounds and insisted to pay the said amounts in
Philippine Pesos at the old exchange rate. Hence, this recourse to the Supreme Court.
Was the agreement to pay in a foreign currency valid under Philippine Law?
While the petitioners seek to evade its obligation to pay in pounds sterling as being
inconsistent to public policy, it manifested its willingness to pay in another foreign currency,
U.S. dollars.
Whether GISC agreed to pay its obligations in pounds sterling or in US dollars, it is settled
that if there is any agreement to pay the (instant) obligation in a currency other that the Phil
Currency, the same is null and void as contrary to public policy (RA 529).
HOWEVER, RA 529 does not invalidate the whole contract which gives the obligee the right
to demand payment in gold or in other foreign currencies. What it declares void is the
provision to such effect. Consequently, the transactions or contract SUBSISTS! The most that
could be demanded is to pay the obligation in Philippine Currency.

7. Extraordinary Inflation or deflation of currency:
Article 1250. 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. (n)
Applicability:
Applies only to contractual obligations.
Applies only if there is an extraordinary inflation or deflation of the currency stipulated, and when there is
an official pronouncement or declaration of the existence of an extraordinary inflation or deflation.
As a declaration by the competent authorities is needed, extraordinary inflation or deflation cannot be
presumed.
If the inflation or deflation is just ordinary, that is, it is a universal trend which did not spare the country,
Article 1250 will not apply.
Illustration:
Extraordinary inflation exists when there is a decrease or increase in the purchasing power of the
Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and
such decrease or increase could not have been reasonably foreseen or was beyond the contemplation of
the parties at the time of the establishment of the obligation.
An example would be Germany in 1921: Early in that year it was 4.2 mark to the US dollar, by May it
became 62 to the US dollar. On October of 1923, it was 4.2 trillion mark to the US dollar.
Basis:
There is a great deal of uncertainty and confusion as a result of contracts entered into or payments made
during the last war. It is thought that the foregoing rule provides a just solution for future cases, so that
the juridical relations of creditor and debtor would be equitably adjusted in case of another war resulting
in extraordinary inflation.
Exception:
As an exception, the parties may agree on another basis if they do not want the value of the currency at
the time of the establishment of the obligation as the basis of payment.
Velasco vs. Meralco

Velasco bought 3 lots at Diliman, Quezon City. 2 of these lots were sold to Meralco, who
then proceeded to built a substation which is a facility that reduces high voltage electricity to
a current suitable for commercial distribution. As this facility emitted noise, Velasco filed a
claim for damages due to nuisance. The trial court dismissed it, but upon appeal to the
Supreme Court, the latter granted the petition granting P20,000 in damages and P5,000 for
attorneys fee to Velasco. Hence, this motion for reconsideration contending that the decision
has incorrectly assessed appellant's damages and unreasonably reduced their amount. It is
first argued that the decision erred in not taking into account, in computing appellant's loss of
income. Appelant also claimed that he lost his chance in selling his house for P95,000 due to
the noise caused by Meralcos substation. Appellant Velasco urges that the damages awarded
him are inadequate considering the present high cost of living, and calls attention to Article
1250 of the present Civil Code.
Is Article 1250 of the Civil Code applicable to this case?
No, it is not applicable. It can be seen from the employment of the words "extraordinary
inflation or deflation of the currency stipulated" that the legal rule envisages contractual
obligations where a specific currency is selected by the parties as the medium of payment;
hence it is inapplicable to obligations arising from tort and not from contract, as in the case at

bar, besides there being no showing that the factual assumption of the article has come into
existence. Hence, his motion for reconsideration was denied.
Filipino Pipe Foundry vs. NAWASA

NAWASA entered into a contract with FilPipe and Foundry Corp in which the latter is to
supply cast iron pressure pipes amounting to 270k pesos. NAWASA paid in installments,
leaving a balance of 135,507 pesos. FilPipe demanded payment for the unpaid balance and
NAWASA failed to pay, thus, FilPipe instituted a complaint for recovery of a sum of money.
Subsequently, FilPipe demanded that an adjustment for the unpaid balance in accordance
with the value of the Phil peso at the time of the decision, due to the alleged supervening
extraordinary inflation.
Filpipe presented voluminous records and statistics showing that the price index of
commodities, which is the usual evidence of the value of the currency, has been rising.
Was there an extraordinary inflation as to warrant the adjustment for the unpaid balance?
While appellant FPFCs voluminous records and statistics proved that there has been a
decline in the purchasing power of the Philippine peso, this downward fall of the currency
cannot be considered "extraordinary." It is simply a universal trend that has not spared our
country.
Extraordinary inflation exists "when there is a decrease or increase in the purchasing power
of the Philippine currency which is unusual or beyond the common fluctuation in the value
said currency, and such decrease or increase could not have reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of the establishment of the
obligation.
Example of extraordinary inflation: More recently, in the 1920's Germany experienced a case
of hyperinflation. In early 1921, the value of the German mark was 4.2 to the U.S. dollar. By
May of the same year, it had stumbled to 62 to the U.S. dollar. And as prices went up rapidly,
so that by October 1923, it had reached 4.2 trillion to the U.S. dollar!
Gonzalo Maluel Co. vs. Central Bank

The Central Bank issued a circular which limited the sales of exchange at 2 pesos to 1 dollar
to certain specified transactions. Subsequently, the Monetary Board passed two resolutions,
the first one adjusting the exchange rate of dollars in the free market at 3.20 pesos to 1 dollar
and the second reducing the said amount to 3 pesos is to 1 dollar, with a 15% margin levy.
Gonzalo L. Manuel & Co., Inc., purchased US dollars from Central Bank through its duly
authorized agent bank, the Philippine Bank of Communications, at the rate of P3.00 to $1.00.
After some time, petitioner filed a formal claim with CB for the refund of around P20,000
pesos, allegedly paid in excess of the amount which the law allowed, based on the statutory
par value of P2.00 to $1.00. Central Bank turned down the claim explaining that there was no
devaluation of the peso or change in its par value, and only that the exchange rate changed.
Company then filed a petition at the CFI but was likewise dismissed for the same reason.
Was there a change in the par value of the peso in relation to the US dollar?
Par value vs. Exchange Rate
Par value
Sometimes called legal exchange rate or par of exchange.
It signifies "the amount it takes of one currency (also based on gold) to buy a unit
another currency(also based on gold) that is, how many pieces of the one unit (or
their gold content) are necessary to equal the gold content of the other unit.
Exchange Rate
The price, or the indication of the price, at which one can sell or buy with one's own
domestic currency a foreign currency unit.
Normally determined by the law of supply and demand for a particular currency.
The price of one currency in terms of another
Thus, there is a difference between par value and rate of exchange: the first is defined by law,
and (as in the case of the peso) is based upon its gold content. The second is conditioned by
prevailing economic factors which bear upon the demand for a particular currency and its
availability in the market.
The par value of the peso is defined in the Central Bank Act, which is seven and thirteen-
twenty first (7-13/21) grains of gold, nineteenth (0.900) fine. If the resolutions were meant to
change the par value of the peso, they were null and void for not having complied with the
requisites under the said act, which provides that any modification in the gold or dollar value
of the peso shall be made only by the President upon the proposal of the Monetary Board and
with the approval of Congress and the proposal of the Monetary Board shall require the
concurrence of at least five of the members.
Article 1251. Payment shall be made in the place designated in the obligation.
There being no express stipulation and 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. (1171a)
Venue of Payment:
1. If there is a specific place designated, that place is where payment shall be made.
2. If there is no agreement on where payment shall be made, the following rules shall apply:
a. If the undertaking is to deliver a determinate thing, place of payment is where the thing might be
at the time the obligation was constituted.
b. In other cases, such as to deliver a generic thing or to perform a specific service, payment shall be
made at the domicile of the debtor.
Effect of Debtors Change of Domicile:

If done in bad faith or after having been in delay, additional expenses incurred by the collecting party
shall be borne by the debtor.
These additional expenses do not cover the regular expenses incurred in going to the original place of the
debtor.
If changing of domicile is done in good faith, such as for security reasons or for being appointed as an
officer in another place, the debtor will not be liable for additional expenses.
In case of conflict between the parties stipulation on the place of payment and the rules on venue
provided under the Rules of Court, the latter shall prevail.

SUBSECTION 1.
Application of Payments
8. Application of Payments:
Article 1252. He who has various debts of the same kind in favor of one and 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 the payment is made,
the former cannot complain of the same,
unless there is a cause for invalidating the contract. (1172a)
Application of Payments Defined:

Application of payments is the designation of the particular debt being paid by the debtor who has 2 or
more debts or obligations of the same kind in favor of the same creditor to whom the payment is made.
Right to Make Application of Payments Belongs Primarily to the Debtor:

Debtor has the right to choose which debt of the several debts due shall be paid.
Designation of the debt to which payment shall be made must be made at the moment of payment.
If the debtor fails to exercise such right, the creditor may exercise it by issuing a receipt wherein the debt
paid is indicated. If the debtor accepts the receipt without objection, payment is deemed applied to the
debt indicated in the receipt.
If the assent or the acceptance of the receipt by the debtor is tainted with fraud, intimidation, violence, or
undue pressure, the application of payment shall be invalid.
If both do not exercise the right, or if the application is void, Articles 1253 and 1254 shall apply.
By mutual agreement, application of payment already made may be changed, unless a third person is
adversely affected. i.e., when payment is applied to a debt for the release of a mortgage, and
subsequently, a third party caused the inscription of a lien over the property which was just released.
Changing such application of payment would then adversely affect the third party.
Requisites for a Valid Application of Payment by the Debtor:

1. There is only one debtor and one creditor.
2. The debtor owes the creditor two or more debts which are of the same kind or identical specie such as
money obligations obtained on different dates.
3. All the debts are due and demandable, except when there is a stipulation to the contrary or when the
application is made by the party for whose benefit the term has been constituted.
4. The payment made by the debtor is not sufficient to cover or settle all the debts.
Requisites for a Valid Application of Payment by the Creditor:

1. The debtor did not make any designation on which debt should be paid when he made the payment.
2. The creditor issued a receipt expressing the application of the payment to a particular debt.
3. The debtor assented to the application made by the creditor by accepting the receipt w/o objections.

Contract means Assent in the Last Paragraph:

In the last paragraph, the term contract was used. It actually refers to the assent given by the debtor in
accepting the receipt. It must be noted that the debtor may or may not accept the receipt where the
application is made. When the debtor rejects such application, Article 1254 will apply.

Limitations on the Right of the Debtor to Choose the Debt to be Paid:
1. Debtor cannot apply payment to a debt not yet liquidated or due, unless there is a contrary stipulation or
he is the one given the benefit of the period or term.
2. If creditor is given the benefit of the period or term, application of payment cannot be made by the debtor.
3. If there is an agreement as to which debts shall be paid first, debtor cannot change it without consent of
the creditor.
4. If there is a principal obligation which bears interests, the debtor cannot pay the interests without first
paying the principal (Article 1253)
5. A debtor cannot choose to pay a bigger debt partially when the payment can be applied as full payment to
a smaller debt. The reason is that he is not allowed to make partial payment for the bigger debt unless
there is an agreement to the contrary. (Art. 1248)
Not Applicable to a Surety:

Articles 1252 to 1254 do not apply to a person whose obligation as a mere surety is both contingent and
singular. His liability is confined to such obligation.
He is entitled to have all payments applied exclusively to said obligation and to no other.
Article 1253. If the debt produces interest,

payment of the principal shall not be deemed to have been made
until the interests have been covered. (1173)
Article is Directory and not Mandatory:

The Supreme Court has ruled that this article applies only if there is no verbal or written agreement to the
contrary; this means that the article is merely directory and not mandatory.
Article 1254. When the payment cannot be applied in accordance with the preceding rules,
or if application can not 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 and burden,

the payment shall be applied to all of them proportionately. (1174a)
Applicability:
Applies only in the following circumstances:
a. When application of payment cannot be made in accordance with Art. 1252 and 1253, or
b. The application of payment cannot be inferred from other circumstances.
The rule to follow is then is that the debt which is the most onerous to the debtor shall be deemed to have
been satisfied.
If the debts happen to be of the same nature and burden, the payment shall be applied to all
proportionately.

Onerous Debt Defined:
An onerous debts is one with a burden. i.e., a loan secured with a mortgage. The mortgage is a burden.
A contract is onerous when it has responsibilities or obligations which outweigh its advantages.
Determining the most burdensome debt is a question of fact and must be resolved on the basis of the
surrounding circumstances.
Guides in Determining Which Debt is More Onerous:

1. A debt that bears interest is more burdensome than a debt which does not.
2. Older debts are more onerous than recent debts.
3. A mortgage obligation is more burdensome than a debt arising from a current account.
4. A mortgage debt is more burdensome than unsecured advances.
5. Debts covered by a guaranty are more onerous because the creditor & guarantor may sue the debtor.
6. In a bond where the surety is bound solidarily with the debtor but for a lesser amount, the principal
debtors portion is more onerous.
7. Debts subject to a penal clause is more onerous than debts subject to the general rules on damages.
8. An exclusive debt is more burdensome than a solidary debt!
More Burdensome Rules Applicability:

Only applicable if the two preceding articles are not applicable.
Will not apply where there has been an application of payment!
When it cannot be determined which debt is more onerous, they must be treated as equally onerous.
Payments must then be applied to all the debts proportionately.
If debts are of the same nature and burden, payment shall also be applied proportionately.
Magdalena Estates vs. Rodriguez

Spouses Antonio and Herminia Rodriguez bought from Magdalena Estates a parcel of land in
Quezon City. In view of the unpaid balance of 5,000 pesos, the spouses executed a PN
binding them to pay solidarily such amount with an interest rate of 9% per year. On the same
date, the spouses and the Luzon Surety Co., Inc. executed a bond in favor of the petitioner.
When the obligation of the spouses became due and demandable, Luzon Surety Co., Inc. paid
to the petitioner the sum of P5,000. Subsequently, the petitioner demanded from the spouses
the payment of P655.89 corresponding to the alleged accumulated interests on the principal
of P5,000. Due to the refusal of the spouses to pay the said interest, the petitioner filed a suit
the spouses contend that the unqualified acceptance of payment made by Luzon Surety of
P5,000 and without exercising the petitioners right to apply a portion of P655.89 thereof to
the payment of the alleged interest due despite its presumed knowledge of its right to do so,
the petitioner showed that it waived or condoned the interests due because of Art. 1235 and
1253 of the CC:
Art. 1235. When the obligee accepts performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with.
Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have
been made until the interests have been recovered.
Was the petitioner deemed to have waived his right to the interests due when it failed to
exercise its right to application of payment from the 5,000 pesos paid by Luzon Surety?
No. The petitioners did not protest when it received only P5,000 because they knew that it
was the only amount that the surety obligated himself to deliver. The liability of a surety is
not extended, by implication, beyond the terms of his contract. The petitioners cannot apply a
part of the P5,000 as payment for the accrued interest. Therefore there is no waiver or
condonation.
Article 1253 only applies to a person owing several debts of the same kind to a single
creditor. It cannot be made applicable to a person whose obligation as a mere surety is both

contingent and singular; his liability is confined to such obligation and he is entitled to have
all payments made applied exclusively to said application only.
Baltazar Vs. Lingayen Gulf Inc.

Baltazar and Rose subscribed to a number of shares of stock of Lingayen Gulf Electric Power
Co. They were issued certificates of stock for the shares they have already paid. In a board
meeting, the members of the BoD passed a resolution which provided that all unpaid
subscriptions should bear interest, and any or all payments already made on said unpaid
subscriptions should be applied first to interest, then the capital debt after all interest is fully
paid.
Issue: WON previous payments applied to capital may be applied to interest on unpaid
balance of subscription.
Lingayen Gulf Inc. argues on the basis of Art. 1253 NCC which provides that "if the debt
produces interest, payment of the principal shall not be deemed to have been made until the
interests have been covered." This provision of law only applies in the absence of verbal or
written agreement, to the contrary. It is likewise merely directory, and not mandatory. (Art.
1252 NCC).
In the present case, the defendant-corporation had applied the payments made by the
stockholders to the full par value of the shares of stock subscribed by them, instead of the
accepted interest, as shown by the capital stock shares certificate issued for the payments
made, and the stockholders had accepted such certificates issued for such payments. The said
application of payments must be deemed to have been agreed upon by the Corporation and
the stockholders, and the same cannot now be changed without the consent of the
stockholders concerned.
The Corporation Law and the by-laws of the defendant Corporation do not contain any
provision, prohibiting the application of stockholders' payments to the full par value of a
corporation's capital stock, ahead of the payment of accrued interest for unpaid subscriptions.
A corporation may, upon request of an interested stockholder, as his option, apply payment
by them to the full par value of shares of capital leaving its collection later of the accrued
interest on unpaid subscriptions, and that once such option has been exercised and the
corresponding stock certificates have been issued, the corporation cannot, by a unilateral act,
legally nullify and cancel the capital stock certificates so issued.
SUBSECTION 2.
Payment by Cession
9. Cession:
Article 1255. 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 and his creditors
shall be governed by special laws. (1175a)
Cession means the formal giving up of

Concept of Payment By Cession: rights, property, or territory
Payment by cession is the same as payment by assignment.

A special form of payment where the debtor cedes his property to his creditors so the latter may sell the
same and the proceeds realized by applied to the debts of the debtor.
No cession or assignment if the creditors do not agree. Without creditors acceptance, it has no effect.
Properties covered by this provision are those not exempt from execution.

Classes of Cession or Assignment:
1. Voluntary or Contractual This is cession or assignment by agreement of the parties.
2. Involuntary or Legal This is cession or assignment which is governed by the Insolvency Law.
Requisites of Voluntary Cession or Assignment:

1. There is plurality of debts
2. There is complete or partial insolvency on the part of the debtor
3. There are at least two creditors
4. There is acceptance of the cession or assignment by the creditors
5. Property ceded or assigned is not exempt from execution
Effect of Valid Cession or Assignment:

If there is a valid cession or assignment, the debtor is released from responsibility up to the extent of the
net proceeds of the property, unless there is a contrary stipulation.
Payment by Cession contemplates existence of Two or More Creditors:

There is no payment by cession under Art. 1255 where there is only one creditor for the plain reason that
the Article contemplates the existence of two or more creditors to whom the property of the debtor is
assigned.
Cession or Assignment Distinguished from Dation in Payment
Basis Cession or assignment Dation in payment

Object What is ceded is the universality of all What is delivered is only a particular
the debtors property excluding those property considered as an equivalent
exempt from execution of the performance of the obligation
Number of Parties There is plurality of creditors There may be only one creditor
Financial Condition of Debtor Debtor is necessarily in a state of Debtor is not necessarily in a state of
insolvency insolvency
Effect Ownership is not transferred to the Ownership is transferred to the

creditors creditor upon delivery
Novation It is not an act of novation of the It is an act of novation of the contract

contract
Lopez vs. Court of Appeals

Benito Lopez obtained a loan of 20,000Php from Prudential Bank. Lopez executed a
promissory note in favor of Prudential Bank, binding himself to repay in one year with
interest of 10% per annum.
Aside from the promissory note, he executed a surety bond with Phil American General
Insurance and bound themselves jointly and severally in favor of Prudential Bank for the
payment of 20,000Php.
Lopez executed an indemnity agreement whereby he agreed to indemnify PhilAmGen and
hold the same harmless from and against all damages.
Lopez also executed a deed of assignment of 4,000 shares of the Baguio Military Institution
(BMI) entitled Stock Assignment Separate from Certificate which contains Lopez, as the
assignor, sells, assigns, and transfers unto Philamgen, as assignee surety company, 4,000
shares of the BMI in consideration of the obligations undertaken by Philamgen under the
terms and conditions of Surety Bond.
It was Lopez and Philamgens understanding that if the former could not pay the loan,
Philamgen Vice-President Emilio Abello and Pio Pedrosa of PBTC would buy the shares of
stocks and out of the proceeds thereof, the loan would be paid to PBTC.
June of next year came, Lopezs obligation matured without it being fulfilled, so PBTC made
a demand to both Lopez and Philamgen. In turn, Philamgen also demanded Lopez to perform
his obligations, in which the latter failed to do so. Hence, PBTC filed an action to enforce
Lopez to pay.
Atty. Timoteo J. Sumawang, upon receipt of the complaints, reminded Pedrosa and Abello of
their commitment to buy the shares of stock of BMI in the even that Lopez failed his
obligations. So the two ordered him to transfer the stocks to Philamgen, and after which, they
will buy the shares, the proceeds of which will be used to pay the bank. The stock certificate
in the name of Lopez was then cancelled, and a new one was created in favor of Philamgen.
The first complaint was dismissed, but when no payment was still insight from the end of
both Lopez and Philamge, PBTC filed another complaint. This time around, Lopez made an
appearance and sent a letter to Philamge, asking the company what happened to my shares
of stocks of BMI which were pledged to your good selves to secure said obligation. These
shares of stock I think are more than enough to answer for said obligation.
Philamgen was forced to pay PBTC the sum of 27,785.89php which included the loan and the
interest. The company brought an action in the Court of First Instance to demand
reimbursement from Lopez.
CFI dismissed the complaint, but the Court of Appeals reversed it. CA declared that the stock
assignment was a mere pledge: that the transfer of stocks was intended to make Philamgen
the owner thereof; and that Philamgen was merely holding the stock as a security for the
payment of Lopezs obligation.
In response, petitioner Lopez raised the following: when Philamgen caused the shares of
stock to be transferred to it, taking a new certificate of stock, the transaction was a pledge,
and in not holding instead that it was a Dation payment.
Was the stock assignment a pledge or a dation in payment? Pledge!
Dation in payment is the delivery and transmission of ownership of a thing by the debtor to
the creditor as an accepted equivalent of the performance of the obligation. Pledge is merely a
security to a debt when the debtor fails or delays in paying his obligations.
If the transfer of stock was intended to secure the payment of money, then it must be
considered a pledge. The indemnity agreement and the stock assignment must be considered
together as related transactions because in order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall be principally considered.
The indemnity agreement connotes a continuing obligation of Lopez towards Philamgen
while the stock assignment indicates a complete discharge of the same obligation.
This is consistent with the theory of an absolute sale for and in consideration of the same
undertaking of Philamgen. There would be no necessity for the indemnity agreement if the
stock assignment was really intended as an absolute conveyance. There are strong reasons to
say that the parties intended the stock assignment to complement the indemnity agreement
and thereby sufficiently guarantee the indemnification of Philamgen should it be required to
pay Lopezs loan to PBTC.
If the transfer was intended to secure the payment of money, then it must be construed as a
pledge. And the Court sided with CA when it declared the transfer of BMI stock to
Philamgen as a pledge.
In summation, the Court finds that the transaction (Stock Assignment Separate from Stock in
relation to Surety Bond No. 14164 and Indemnity Agreement) constitutes a pledge of the

shares of stock in favor of Philamgen. And since respondent did not choose to file an action
against Pedrosa and Abello over their promise to buy the shares, and that respondent
Philamgen chose to sue petitioner under the Indemnity Agreement shows that Philamgen has
abandoned its right and interest over the pledged properties and must therefore return the
same to Lopez upon the latters satisfaction of his obligation under the Indemnity Agreement.
SUBSECTION 3.
Tender of Payment and Consignation
10. Tender of Payment and Consignation:
Article 1256. 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 two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost. (1176a)
Presence of Creditor-Debtor Relationship is Required:

If there is no creditor-debtor relationship, consignation cannot apply.
The debtor must be willing to pay or deliver, but the creditor unjustifiably refuses to accept.
To shield himself from responsibility, debtor should make a tender of payment, which if refused, should
be followed by a complaint for consignation.
The second paragraph lists situations when tender is dispensable.
Article 1257. 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. (1177)
Consignation must first be Announced to the Creditor:

Consignation will not release the debtor from the obligation unless it has been first announced to the
creditor.
The purpose of the announcement is to give the creditor the opportunity to accept the tender of payment
and avoid unnecessary litigation.
Article 1258. 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,
and the announcement of the consignation in other cases.
The consignation having been made, the interested parties shall also be notified thereof. (1178)

Concept of Tender of Payment and Consignation:

Tender of payment is the voluntary act of the debtor whereby he offers to the creditor for acceptance the
immediate performance of the formers obligation to the latter.
Consignation is the act of depositing the object of the obligation with the court or competent authority
after the creditor has unjustifiably refused to accept the same or is not in a position to accept it due to
certain reasons or circumstances.
Tender of payment is an antecedent of consignation, it is a preliminary act for the consummation of
consignation. Consignation generally requires tender of payment, subject to exceptions provided in the
second paragraph of Article 1256.
Before the consignation has been accepted by the creditor or before it has been judicially declared as
properly made, the debtor is still the owner of the thing or amount deposited. Other parties have no right
to oppose the withdrawal of such thing or amount.
The rational behind consignation is to avoid the performance of an obligation becoming more onerous to
the debtor by reason of causes not imputable to him.
Consignation indispensably requires a creditor-debtor relationship between the parties.
Requisites of Consignation and their explanations:

1. There is an existing valid debt which is already due
Tender of payment not yet due may be refused by the creditor.
When there is no debt due, deposit of the thing with the court is not necessary.
2. There is a prior valid tender of payment to the creditor (except when tender is dispensable)
The tender of payment must be a valid one to be an effective antecedent of consignation; Reqs:
a. Made before the act of consignation
b. Unconditional
c. Full amount including interests due must have been offered in legal tender
Mere sending of letters expressing intent to pay without any payment is not a valid tender of payment.
Tender made must be proved by evidence. A formal complaint must be commenced before the trial
court to provide the proper venue for the determination if there is a valid tender of payment.
3. There is a refusal to accept the payment tendered without any valid reason on the part of the creditor
Refusal must be without a valid cause.
If refusal to accept is with a valid cause, the consignation will not extinguish the obligation.
A tender to pay part of the full obligation may be refused.
Payment of a debt which is due must be in full and complete.
4. There is a prior notice of consignation given to the persons interested in the fulfillment of the obligation
Before depositing, there must be a prior notice of consignation to the creditor and to other persons
interested in the fulfillment of the obligation.
Without this notice, the consignation is void.
Purpose is to give the creditor the opportunity to withdraw the money deposited and to make use of it
or to allow them the opportunity to reconsider their previous refusal to accept the tender of payment
so as to avoid unnecessary litigation.
5. That the amount or the thing due is deposited with the court or competent authority
It is necessary to file a consignation case in court. Without a suit, there can be no valid consignation.
In certain cases, the deposit may be made with a competent authority other than a court, i.e., payment
of rentals due may be made by consigning the same to a bank in the name of the lessor with due
notice to the latter.
Not knowing whom to pay the rentals does not justify the failure of the lessees to pay because they
can avail of the remedy of consignation.
6. Subsequent notice of consignation is given to the persons interested in the fulfillment of the obligation
Mandatory, made after the filing of the complaint and after the deposit has been made.
May be made in the form of a letter properly addressed to the creditor.
Not required if amount is due as a consequence of a final judgment, since the law contemplates only
contractual obligations.
Consignation is void if the notices required had not been complied with.

Requirement of Notices Explained:
When the creditor is absent or is unknown, the notice may be effected through publication.
The reason for requiring the notices is to enable the creditor to withdraw the goods or money deposited. It
would be unjust to make him suffer the risk for any deterioration, depreciation or loss of such goods or
money by reason of lack of knowledge of the consignation.
Other Cases Where Tender of Payment is Not Necessary:

No need for tender before consignation when:
(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 two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.
Tender may be dispensed with for consideration of equity such as when prior tender would be useless.
Consignation need not be preceded by tender of payment when the consignation is ordered by the court.
No Automatic Cancellation, and the Retroactive Effect of Cancellation

Once consignation has been effected, the debtor may by motion ask the court to order the cancellation of
the obligation. In other words, there is no automatic cancellation of the obligation.
A judicial order is still necessary because there might be some factual issues which may be raised in the
court needing presentation of evidence.
The obligation is deemed cancelled from the time the amount or thing has been placed at the disposal of
the court or at the disposal of the competent authority.
Consequences of the Deposit:

1. The amount or property is placed in custodia legis
Property cannot be alienated or disposed of without judicial approval. If the property is perishable, the
court may order its sale.
2. The property is exempted from attachment or execution.
3. When the property consigned consists of real estate which cannot actually be placed in the hands of the
court, the debtor becomes the agent of the court. To effect a valid consignation, a receiver should be
appointed by the court upon the initiative of the debtor.
4. Consignation has a retroactive effect and the payment is deemed to have been made at the time of the
deposit of the thing in court or when it was placed at the disposal of the judicial authority.
Cases where Consignation Does Not Apply:

1. Where the filing of the complaint is the equivalent of an offer to redeem, consignation is not necessary.
2. In a contract of lease where the lessee is granted the option to buy the property leased, the latter is not
obliged to consign the price in court, if the lessor refused to sell. The lessee is merely exercising a right.
3. Consignation does not apply to an exercise of a right but to the discharge of a debt.
4. Consignation is not a remedy to determine the relation between a landlord and a tenant.
5. There is no valid tender of payment when the payment is tendered is in check, unless creditor accepts it.
Payment in check produces effect only upon encashment. Creditor may always insist on payment in cash.
6. A debtor does not incur any default in failing to make a fruitless tender of payment after the creditor had
notified him that he would not accept or receive the money.
7. Tender of payment is dispensed with where the buyer of the land acquired under a free patent refused to
permit the repurchase of the property.
8. Articles 1256 and 1257 do not apply to a money judgment. In case of a refusal of a tender of payment of
the amount due on a judgment, the court may direct the money to be paid into court.
9. When there is no creditor-debtor relationship, consignation will have no legal effect.

Tender of Payment Distinguished from Consignation

basis Tender of payment consignation
Nature Antecedent of consignation or the Principal or consummating act for the
preliminary act to consignation extinguishment of the obligation
Effect It does not by itself extinguish the It extinguishes the obligation when
obligation declared valid
Character It is extrajudicial It is judicial for it requires the filing of

a complain in court.
Article 1259. The expenses of consignation,

when properly made,
shall be charged against the creditor. (1179)
Creditor to Bear the Expenses of Consignation:

The creditor, who by reason of his unjustifiable acts has prompted the filing of the suit, must bear the
expenses of the consignation like storage fees, filing fees, attorneys fees and other related
expenses.
Article 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. (1180)
Effect of a Valid Consignation:

When the consignation is properly effect, the court will order the cancellation of the obligation upon
motion duly filed by the debtor.
When the validity of the consignation has been affirmed or declared by the court, the consignation shall
have a retroactive effect.
The obligation is deemed paid from the moment the amount or the thing due has been actually placed at
the disposal of the court.
The running of interest if stipulated is also deemed suspended at the same time.
If the consignation is improperly made, the obligation stays.
If the consignation case is dismissed by the court, it will have no favorable effect upon the debtor.
Withdrawal of the Thing or Sum Deposited, When Allowable:

The debtor may still withdraw the thing he deposited in court provided that:
a. The creditor has not yet accepted the thing or sum deposited
b. The court had not yet made a judicial declaration that the consignation had been properly made

The reason why the debtor may still withdraw the thing deposited is that he still owns the money or thing
deposited at that precise time.
Before the consignation has been accepted or judicially declared as properly made, the debtor is still the
owner of the thing or amount deposited.
Pineda opines that since a declaration will be made in a formal order, it will be subject to a 15-day period
before it becomes final and executory, hence the debtor may still withdraw the thing during this time.
In case of partial acceptance by the creditor, withdrawal by the debtor is still proper.
The obligation will remain in place if the debtor decides to withdraw the thing or amount deposited.
It can happen that the thing deposited may be lost or depreciated pending the hearing of the case. If the
consignation is finally found to have been done properly, the loss shall be borne by the creditor. If it is
improperly made, the loss shall be at the risk of the debtor.
Article 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. (1181a)
Effect of Withdrawal After Creditors Acceptance or Judicial Approval of Consignation:

Withdrawal under this article is not a matter of right unlike the preceding article, but a privilege.
Without the consent of the creditor, the withdrawal is not allowable.
For allowing such withdrawal, the creditor shall lose any preference or priority of right over the thing
previously consigned.
Solidary co-debtors, guarantors and sureties of the debtor who are benefited by the consignation are
released from their obligations. The solidary co-debtors are released from their liability in relation to the
creditor but not from their individual liability to one another. Thus, they are still liable for their share.
The withdrawal of what has been consigned has the effect of reviving the obligation of the debtor.
Adelfa Properties vs. Court of Appeals

Private respondents in this case and their brother, Jose and Dominador Jimenez were the
registered co-owners of a parcel of land in Metro Manila
Private respondents sold their share of the eastern portion of the land to Adelfa Properties,
and subsequently executed an Exclusive Option to Purchase of the western portion thereof:
Selling price of 2,586,150Php, 50,000 option money credited as partial payment and the rest
shall be paid on Nov. 30, 1989. In case of default, this option shall be cancelled and 50% of
the option money shall be forfeited and refund of remaining 50% upon sale of the property to
a 3rd party
Before petitioner could even make payments, it received summons on November 29, 1989
and an action filed against them by the nieces of private respondents for the annulment of the
deed of sale in favor of Household Corporation. Petitioner wrote a letter that it would hold
payment of the full purchase price and Atty. Bernardo, as petitioners counsel, offered to pay
the purchase price to private respondents provided that 500,000 be deducted for the
settlement of the civil case, but the same was refused.
Private respondents executed a deed of conditional sale in favor of Chua for 3,029,250Php.
Atty. Bernardo wrote to private respondents again, expressing their willingness to pay the
purchase price but this was ignored by the private respondent. 50% of this option money was
returned to Adelfa Properties.
Was the refusal without just cause? Was there a valid tender of payment? YES, NO
Petitioner was justified in suspending payment of the balance of the purchase price by reason
of the vindicatory action filed against it. Be that as it may, and the validity of the suspension
of payment notwithstanding, we find and hold that private respondents may no longer be
compelled to sell and deliver the subject property to petitioner for two reasons, that is,

petitioner's failure to duly effect the consignation of the purchase price after the disturbance
had ceased (i.e. the dismissal of the civil case); and, secondarily, the fact that the contract to
sell had been validly rescinded by private respondents.
Mere sending of letters expressing intent to pay do not constitute a valid tender of payment.
A mere tender of payment is not sufficient to compel private respondents to deliver the
property and execute the deed of absolute sale. It is consignation which is essential in order to
extinguish petitioner's obligation to pay the balance of the purchase price.
A contract to sell, as in the case before us, involves the performance of an obligation, not
merely the exercise of a privilege of a right. Consequently, performance or payment may be
effected not by tender of payment alone but by both tender and consignation.
Soco vs. Militante
Soco and Francisco entered into a contract of lease on January 17, 1973 whereby SOCO
leased her commercial building to Francisco for a monthly rental of 800 pesos for a period of
10 years renewable for another 10 years.
Francisco noticed that Soco did not anymore send her collector for the payment of rentals and
at times there were payments made but no receipts were issued. This situation prompted
Francisco to write Soco the letter which the latter received.
After writing this letter, Francisco sent his payment for rentals by checks issued by the
Commercial Bank and Trust Company. Obviously, these payments in checks were received
because Soco admitted that prior to May, 1977, defendant had been religiously paying the
rental.
Soon after SOCO learned that Francisco sub-leased a portion of the building to NACIDA at a
monthly rate of more than 3,000 SOCO felt as if she was losing end of the contract and tried
to look for ways and means to terminated the contract
Soco through her lawyer served notice to vacate the premise leased because of alleged
nonpayment of rental of the leased premises beginning May, 1977. Francisco informed Soco
through letters that he was in fact paying the rentals through Commercial Bank which issued
the check to the Clerk of Court. However Soco still filed this instant case of illegal detainer.
CFI ruled that there was substantial compliance of the requisites of consignation, hence his
payments were valid and effective.
Is substantial compliance of the requisites enough for a valid consignation? NO
We hold that the respondent lessee has utterly failed to prove the following requisites of a
valid consignation:
o First, the tender of payment of the monthly rentals to the lessor except that indicated
in the June 9, l977 letter. There is no factual basis for the lower court's finding that
the lessee had tendered payment of the monthly rentals, thru his bank, citing the
lessee's letter (Exh. 4) requesting the bank to issue checks in favor of Soco in the
amount of P840.00 every 10th of each month. In Franciscos arrangement with the
bank, it was the lessee's duty to send someone to get the cashier's check from the
bank and logically, the lessee has the obligation to make and tender the check to the
lessor. This the lessee failed to do.
o Second, respondent lessee also failed to prove the first notice to the lessor prior to
consignation, except the payment referred to in the June 9, 1977 letter. purpose of the
notice is in order to give the creditor an opportunity to reconsider his unjustified
refusal and to accept payment thereby avoiding consignation and the subsequent
litigation. This previous notice is essential to the validity of the consignation and its
lack invalidates the same.
o Third, respondent lessee likewise failed to prove the second notice, that is after
consignation has been made, to the lessor except the consignation for 2 payments
indicated in the July 6 letter.
o The fourth requisite that respondent lessee failed to prove is the actual deposit or
consignation of the monthly rentals except the two cashier's checks referred to in the
July 6 letter. As indicated earlier, not a single copy of the official receipts issued by

the Clerk of Court was presented at the trial of the case to prove the actual deposit or
consignation.
Substantial compliance is not enough for that would render only a directory construction to
the law. We hold that the essential requisites of a valid consignation must be complied with
fully and strictly in accordance with the law. CFI decision is reversed and set aside, petition
granted.
Ponce De Leon vs. Syjuco

Ponce de Leon executed two promissory notes in favor of Syjuco for P20,000 and P16,000.
Both loans are payable within one year from May 5, 1948. However, on several occasions
in November 1944, Ponce de Leon tendered payment to Syjuco but the latter refused to
accept the same so the former deposited the payment to the court (consignation).
Was the consignation valid? NO
Requisites for a valid consignation:
1. That there was a debt due;
2. That consignation of the obligation had been mad 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;
4. That the amount was placed at the disposal of the court;
5. That after the consignation had been made the person interested was notified thereof.
The consignation made by de Leon failed in the 1st and 3rd requisites.
Regarding the first requisite, the obligation was not yet due and demandable when the money
was consigned and was thus made prematurely. Regarding the 3rd requisite, there was no
previous notice of consignation given by Ponce de Leon to Syjuco, thus invalidating the
consignation.
Federation of United NAMARCO Distributors vs. National Marketing

Due to the rise in the prices of commodities, National Marketing Corporation (Namarco) was
to procure, buy, and distribute such commodities that were in short supply with a special non-
recurring dollar allocation from the Central Bank.
But during those times, the activities of Namarco were paralyzed by the picketing of its
workers who were on strike. They realized that should the strike continue, the goods to be
imported under said dollar allocation would be frustrated.
They devised a plan to prevent such occurrence and as a result, Federation of United
Namarco Distributors, Inc. (Federation) was one of the various associations who filed for
petition for trade assistance. In response, Namarco issued different resolutions and it also
executed a Contract of Sale with the Federation.
The commodities started to arrive and the Federation, in compliance with the terms of the
contract of sale proceeded to pay to the NAMARCO the full value of the merchandise that
had been arriving.
A new Board of Directors and General Manager took over the management of the Namarco,
and this new management decided to discontinue compliance by Namarco of the contract of
sale with respect to the commodities not actually delivered, and it so notified the Federation.
The Federation a complaint in the Court of First Instance of Manila against the Namarco, to
compel the latter to perform the Contract of Sale as to what was left of the commodities
subject matter thereof.
The trial court sentenced Namarco to specifically perform the contract of sale by delivering
the commodities and among others, to reimburse Federation the storage charges.
Is the Federation liable for the handling and storage charges of the commodities as the
trial court ruled?

It is true that on March 2, 1960, the FEDERATION, upon filing its complaint, obtained a writ
of preliminary injunction to prevent NAMARCO from disposing of these goods through
other distributors or retailers, but the FEDERATION was willing to accept, and in fact had
been requesting, the delivery of the same to it or its members for sale to the general public,
but NAMARCO refused to make such delivery.
The storage charges that became due from the date the goods had to remain in the warehouse
because of the refusal of NAMARCO to deliver the same to the FEDERATION which had
been demanding the surrender thereof to it, can not be charged to the FEDERATION, but to
NAMARCO as the one who, in the performance of its obligation under the contract, has been
guilty of delay in the delivery of the goods subject matter thereof.
PNCC vs. Court of Appeals
A contract was entered into by PNCC and herein private respondents for a rock crushing
project in which petitioners had to enter into the contract of lease with private respondents
Lease contract, among others, contained the ff:
o Period of 5 years
o Suspensive condition of obtaining an industrial permit with the Ministry of Human
Settlements and payment of lease starts within the happening of this condition
PNCC obtained from Ministry of Human Settlements a Temporary Use Permit and
subsequently, private respondents wrote to PNCC requesting payment for the first annual
rental of 240,000 due and payable upon the execution of the contract.
PNCC contends that the payment of rentals would commence from the date of the issuance of
the industrial clearance and not from the date of signing and further alleges that the
Temporary Use Permit was not the clearance contemplated in the agreement
Furthermore, provided that it really had the obligation which is due and demandable, the
same cannot be effected because of Rebus Sic Stantibus in that PNCC should be released
from the obligation because there was an abrupt change in the political climate after the
EDSA revolution as well as financial difficulties.
Can PNCC invoke Articles 1266 and 1267 to release it from its obligation?
PNCC cannot successfully take refuge in Article 1266 as well as Article 126725 because both
contemplates obligations to do. The obligation to pay rentals constitutes obligations to give in
which the doctrine of rebus sic stantibus cannot be validly invoked.
Besides, PNCC failed to state specifically the circumstances brought about by the abrupt
change in the political climate of the country. Prior to entering into a contract, there were
already risks of unfavorable developments such as the assassination of Ninoy, political
upheavals, turmoils, mass demonstrations, inflation, peace and order deterioration, etc.
Notwithstanding, PNCC entered into the contract of lease with open eyes of the deteriorating
conditions of the country. 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.
Naga Telephone vs. Court of Appeals

Naga Telephone Co., Inc. (NATELCO), telephone company in Naga City, entered into a
contract with Camarines Sur II Electric Cooperative, Inc. (CASURECO II), an electric power
servicing company, for the use by NATELCO in the operation of its telephone service the
electric light posts of CASURECO in Naga City.
In consideration therefor, petitioners agreed to install, free of charge, ten (10) telephone
connections for the use by private respondent.
After over ten (10) years, private respondent (CASURECO) filed for reformation of the
contract with damages against petitioners on the ground that
o It is too one-sided in favor of petitioners;
o It is not in conformity with the guidelines of the National Electrification
Administration (NEA) which direct that the reasonable compensation for the use of
the posts is P10.00 per post, per month;

o After eleven (11) years of petitioners' use of the posts, the telephone cables strung by
them thereon have become much 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;
o That a post now costs as much as P2,630.00;
o That justice and equity demand that the contract be reformed to abolish the inequities
thereon.
o That since 1981, petitioners have used 319 posts in the towns outside Naga City,
without any contract with it;
Is Article 1267 applicable?
Petitioners assert that Article 1267 of the New Civil Code is not applicable because the
contract does not involve the rendition of service or a personal prestation and it is not for
future service with future unusual change.
Article 1267 speaks of "service" which has become so difficult. Taking into consideration the
rationale behind this provision, the term "service" should be understood as referring to the
"performance" of the obligation. In the present case, the obligation of private respondent
consists in allowing petitioners to use its posts in Naga City, which is the service
contemplated in said article.
Furthermore, the article reveals that it is not a requirement that the contract be for future
service with future unusual change. According to Senator Arturo M. Tolentino, Article 1267
states in our law the doctrine of unforeseen events. This is said to be based on the discredited
theory of Rebus Sic Stantibus in public international law; under this theory, the parties
stipulate in the light of certain prevailing conditions, and once these conditions cease to exist
the contract also ceases to exist. Considering practical needs and the demands of equity and
good faith, the disappearance of the basis of a contract gives rise to a right to relief in favor of
the party prejudiced.
Despite the increase in the volume of appellant's subscribers and the corresponding increase
in the telephone cables and wires strung by it to plaintiff's electric posts in Naga City for the
more than 10 years that the agreement has been in effect, there has been no corresponding
increase in the ten (10) telephone units connected by appellant free of charge to plaintiff's
offices and other places chosen by plaintiff's general manager which was the only
consideration provided for in said agreement for appellant's use of plaintiffs electric posts.
Also, appellant even started using plaintiff's electric posts outside Naga City although not
provided in the agreement. Hence, while very few of plaintiff's electric posts were being used
by appellant in 1977 and they were all in the City of Naga, the number of plaintiff's electric
posts that appellant was using in 1989 had significantly increased outside Naga City.
Add to this the destruction of some of plaintiff's poles during typhoons, and the escalation of
the costs of electric poles from 1977 to 1989, and the conclusion is, without a doubt, that the
agreement has already become too one-sided in favor of appellant to the great disadvantage
of plaintiff.
The parties were hereby released from their correlative obligations under the contract.
However, the possible consequences of merely releasing the parties therefrom should be
taken into account: petitioners will remove the telephone wires/cables in the posts of private
respondent, resulting in disruption of their service to the public; while private respondent, in
consonance with the contract will return all the telephone units to petitioners, causing
prejudice to its business.
Such cannot be allowed. Rather, it is required that: 1) petitioners pay CASURECO for the use
of its posts in Naga City and in the towns of Camarines Sur and in other places where
petitioners use private respondent's posts, the sum of ten P10/post, per month, beginning
January, 1989; and 2) CASURECO to pay NATELCO the monthly dues of all its telephones
at the same rate being paid by the public beginning January, 1989.

Loss of the Thing Due: (Articles 1262 1269)
SECTION 2
Article 1262. 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,
and he shall be responsible for damages.
The same rule applies when the nature of the obligation requires the assumption of risk. (1182a)
Loss of the Thing Due, Meaning:

Article 1189 states that a 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.
Not confined to the strict legal meaning of loss, but extends to causes which render impossible the
performance of the prestation.
This is not limited to obligations to give but also extends to personal obligations.
To extinguish the obligation, the impossibility of performance must arise subsequent to the execution of
the contract and that the debtor has not incurred any delay in the delivery thereof when the loss happened.
Effects:
If the debtor is at fault for the loss or destruction of the thing, obligation is converted to an indemnity for
damages. (Art. 1170)
If the debtor is not at fault but he is in delay, he will be liable for damages. (Art. 1170)
If there is a stipulation, or when the law mandates that the obligor is liable for the loss even if it is due to
fortuitous events, or when the nature of the obligation requires assumption of risk, the obligor is liable.
(Art. 1174)
Situations when the Law makes the Obligor liable even if due to Fortuitous Events:
1. Art. 1165 When the debtor is in default, or when the debtor has promised to deliver the same thing to
two or more persons with different interests
2. Art. 1174 When the nature of the obligation requires assumption of risk
3. Art. 1263 When the obligation consists in the delivery of a generic thing
4. Art. 1268 Obligation to deliver a determinate object arising from a criminal act
5. Art. 1942 Liability of Bailee
6. Art. 1979 Liability of Depositary
7. Art. 2147 Liability of Officious Manager
8. Art. 2159 Acceptance in bad faith of undue payment
Article 1263. In an obligation to deliver a generic thing,

the loss or destruction of anything of the same kind does not extinguish the obligation. (n)
Consequences:
When the obligation is to deliver a generic thing, the loss or destruction of anything of same kind does not
extinguish the obligation. i.e., obligation to pay money, to deliver sugar without regard to origin, etc.
Obligation subsists under the principle genus never perishes.

Exceptions:
If the generic thing has been delimited, that is, where there has been a limitation of the generic object to a
particular group of things, the obligation is extinguished by the loss of that particular group from which
the prestation has to be taken. i.e., obligation to deliver mangoes from a specific mango tree, and the
harvest was damaged by a typhoon. Obligation is then extinguished.
Article 1264. 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. (n)
Partial Loss May Extinguish the Obligation:

Even if the loss is partial, if it is so important to the obligee that without it, he would not have entered into
the contract, the partial loss may be considered a sufficient reason to extinguish the obligation.
Illustration: A man buys a house and lot due to its swimming pool and garden. The said pool and garden
were expropriated by the government before the man was able to pay for the property. Obligation to pay
is now extinguished.
Partial loss may be considered total by the court after considering the intention of the parties.
Article 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,
and without prejudice to the provisions of article 1165.
This presumption does not apply in case of earthquake, flood, storm, or other natural calamity.
(1183a)
Presumption of Negligence on the part of the Debtor:

The presumption is rebuttable. The debtor may prove that he was not at fault.
However if he has incurred delay, or that he had promised to deliver the thing to two or more persons
with different interests, he will be liable even if the loss is due to fortuitous events.
The last sentence refers to the applicability of Art. 1174, the rule on fortuitous events where the
presumption of negligence shall not apply.
Article 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. (1184a)
Applicability:
Applies only to obligations to do.
Impossibility of performance must exist only after the execution of the contract. Otherwise, the contact is
void if it existed from its inception.
Where a person by his contract charges himself with an obligation possible to be performed, he must
perform it, unless performance is rendered impossible by the act of God, by the law, or by the other party.
Kinds of Impossibility:
1. Legal Impossibility Arises when the act to be performed is subsequently prohibited by law. i.e.,
construction of a 30 story building but then a law is passed limiting maximum stories to 3 in that area.
2. Physical Impossibility Arises when the act could not be physically performed due to reasons subsequent
to the execution of the contract. i.e., painter agreeing to paint but gets his hand cut-off in an accident.

Effect of Impossibility and Rationale:

If the impossibility had emerged without fault of the debtor, whether legal or physical, the latter is
released from his obligation.
The reason is because if a man binds himself by contact unconditionally to do that which turns out to be
impossible, he will be held to his bargain and have to pay damages for his failure to perform. If the
impossibility arises from a cause that neither party can reasonably have contemplated when the contract
was made, a man will not be so bound, the matter being unforeseen, he is not taken to have promised
unconditionally.
Article 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. (n)
Applicability:
Applies only to personal obligations but not to obligations to give.
This article does not refer to impossibility but to difficulty of service or performance manifestly beyond
the intention of the parties.
If considered favorably, the obligor is released from his prestation totally or partially depending upon the
degree of difficulty or performance.
Not applicable if the debtor had merely suffered minor or insignificant losses which are normal risks in
contractual relationships.
The reason behind this is that the intention of the parties should govern, and if it appears that the service
turns out to be so difficult as to have been beyond their contemplation, it would be doing violence to that
intention to hold the obligor still responsible.
Limitation:
The court cannot modify or revise the terms and conditions stipulated in the contract. i.e., cannot modify
terms and conditions in a subdivision contract, cannot fix a sharing ratio different from the one
contractually stipulated, etc.
Principle of Unforeseen Difficulty Of Service:

The article may be referred to as the principle of unforeseen difficulty of service, is said to have been
based on the principle of rebus sic stantibus used in international law which provides that a treaty
remains valid only if the same conditions existing and prevailing at the time of its execution shall
continue to exist at the time of performance. Otherwise, the treaty shall not be enforceable.
However, this principle cannot be absolutely applied in contractual relations, as to do so would undermine
the stability of contracts. It is only in extremely unusual change of circumstances that equity shall come to
the succor of the debtor.
Unforeseen events or circumstances must be greatly beyond what could have been reasonably anticipated
by diligent persons at the time of the execution of the contract.
The debtor cannot be required to overcome the difficulties if to do so would mean economic ruin on his
part and unjust enrichment on the part of the creditor.
Illustration:
Kevin contracted Eden for the latter to construct a deep well. The contract price was pegged at only 50
pesos considering that on the neighboring areas, Eden was able to strike the water basin at the depth of
only 5 feet. In Kevins area, Eden was confronted by an unusual problem for she could only extract water
at a depth of 10 feet which is beyond the contemplation of the parties. Thus, Eden is released from her
prestation. Otherwise, she will be prejudiced as the contract price of 50 pesos will not be enough to cover
the expenses for the deep well.

Article 1268. When the debt of a thing certain and 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. (1185)
Applicability:
Applies only to an obligation to deliver a certain thing which is determinate, and which obligation arose
out of the commission of a criminal offense committed by the debtor. If the thing is lost for whatever
reason, the debtor shall pay for the value of the thing.
Exception: If the obligor had offered or tendered the delivery of the thing to the obligee, but the latter had
unjustifiably refused to accept it, and the thing got lost, the former is not liable anymore because the latter
is in mora accipiendi.
Remedies of Debtor if Creditor Refuses without just cause to Receive the Thing:
If debtor offers the thing but the creditor refuses to receive, debtor has two options:
a. Consign the thing in court and seek the cancellation of the obligation
b. Keep the thing and preserve it using due diligence, but obligation will subsist. But if the thing is
then lost through a fortuitous event, the obligor is no longer liable.
Article 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 third persons by reason of the loss. (1186)
Consequences of Extinguishment By Loss:

There shall be a sort of subrogation whereby the creditor shall have all the rights of action which the
debtor may have against third persons by reason of the loss.
The transfer of rights is by operation of law starting from the moment of extinguishment of the
obligation. i.e., thing due is insured by the debtor, but then it got lost due to reasons allowable by under
the policy. The creditor can collect the insurance indemnity from the insurer.
Another example, when the thing due is expropriated, the creditor can collect the compensation paid by
the authorities for the taking of the property for public use.
Yu Tek Co. vs. Gonzales

A contract was entered into by Basilio Gonzales and Yu Tek & Co. In the contract, Gonzales
acknowledged that he had received Php3,000 from Yu Tek , and in consideration of that money, he
obligated himself to deliver to Yu Tek 600 piculs of sugar of the within a period of three months.
It also included that in case Gonzales would not deliver the sugar, the contract will be rescinded, and
Gonzales would be obligated to return to Yu Tek the money he received and also an additional sum of
Php1,200 by way of indemnity for loss and damages.
No sugar was delivered by Gonzales, because according to him, his sugar plantation was unable to yield
enough sugar to fulfill his obligation. The dry weather destroyed his growing sugar cane.
Gonzales claimed that his obligation was extinguished because of the loss of the thing (the sugar) due,
especially because its loss was not his fault. Yu Tek brought an action to the court, asking that Gonzales
return the money plus the indemnity.
Was the failure of Gonzales produce the sugar constitute a loss of the thing due thereby
extinguishing his obligation?
No, there was never a loss in this case; obligation subsists. After a careful examination of the contract,
Court found that there was no clause written even remotely suggesting a condition that the sugar must
exclusively come from Gonzales plantation. It meant Gonzales could have bought 600 piculs of sugar or

could have gotten it someplace else to fulfill his obligation. His plantation might have been the best place
to source out the sugar, but the contract had not implicated such limit.
Contract was rescinded, and Gonzales was ordered to pay back Php3,000 plus the liquidated damages.
Labayen vs. Talisay-Silay Milling

Labayen, the owner of Dos Hermanos (hacienda) entered into a contract with Talisay-Silay Miling Co.
Parties agreed that a permanent railroad shall be built by the defendant whenever the contour of the land,
the curves, and elevations permit the same.
A stipulation in the contract states that In case of . . . inability to secure, under reasonable conditions
such rights-of-way as "La Central" may require, . . . "La Central" shall notify the Committee of Producers
and without incurring any liability for the nonfulfillment of the terms of this contract.
The defendant has not continued its railroad through to the Hacienda Dos Hermanos. A civil engineer
testified that it was possible to construct a railroad to the Hacienda Dos Hermanos but that to do so would
be very dangerous.
Can the defendant excuse itself from constructing the railroad on the grounds that it would be very
dangerous to do so?
Article 1184 (NCC Art. 1266) of the Old Civil Code provides: "The debtor shall also be relieved from
obligations which consist in the performance of an act if fulfillment of the undertaking becomes legally or
physically impossible."
The contract was a general contract of the form used by the central and various proprietors of sugarcane
fields. It was intended to be limited in particular application to haciendas where not impeded by physical
impossibility.
The contract was qualified by an implied condition which, if given practical effect, results in absolving
the central from its promise. Not to sanction an exception to the general rule would run counter to public
policy and the law by forcing the performance of a contract undesirable and harmful.
There is another aspect to the case which has to do with the mutual obligations of the contract and which
concerned the securing of the right- of-way for the proposed railroad. To get from the Hacienda
Esmeralda No. 2 to the Hacienda Dos Hermanos, the railroad would have to pass through the haciendas of
Esteban de la Rama. But he would not grant permission to use his land for this purpose in 1920, and only
consented to do so in 1924. Here then was a clear case of such a condition of affairs as was contemplated
by the contract.
Trial court did not err in ruling in favor of the defendant. Decision affirmed, costs against appellant.
Condonation or Remission: (Articles 1270 1274 and 748 752)

SECTION 3
Article 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor.
It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious donations.
Express condonation shall, furthermore, comply with the forms of donation. (1187)
Concept of Condonation or Remission:

Remission or Condonation is an act of liberality by which the creditor renounces the enforcement of the
obligation contracted without receiving any price or equivalent. It is the gratuitous abandonment by the
creditor of his right. To condone is to forgive or remit a debt.
Essential Characteristic:
The essential and inherent characteristic of condonation/remission is that it is gratuitous.
If the creditor receives something, it is not longer a condonation or remission but rather a novation or a
Dation in payment.

Requisites of Condonation or Remission:
1. Existence of a demandable debt
2. Renunciation of the debt is purely gratuitous
3. Acceptance of the condonation or remission by the debtor
4. Formalities require by law on donation must be complied with
5. What has been condoned or remitted must not be inofficious
Express Condonation or Remission:

When the condonation is express, it Article 748. The donation of a movable may be made orally or in writing. An oral
is not enough that it be in writing. donation requires the simultaneous delivery of the thing or of the document
representing the right donated. If the value of the personal property donated exceeds
It must follow the formalities five thousand pesos, the donation and the acceptance shall be made in writing.
Otherwise, the donation shall be void. (632a)
required of ordinary donations
provided in Articles 748 and 749. Article 749. In order that the donation of an immovable may be valid, it must be made in a
public document, specifying therein the property donated and the value of the charges which
When the condonation is oral and the donee must satisfy. The acceptance may be made in the same deed of donation or in a
involves movable things, the same separate public document, but it shall not take effect unless it is done during the lifetime of the
donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof
need not follow the formalities. in an authentic form, and this step shall be noted in both instruments. (633)
There is no need for delivery
anymore because the thing is already in the possession of the debtor.
When the express condonation is defective for failure to follow form of ordniary contracts, it does not
become an implied condonation with valid effect.
Implied and Legal Condonations:

Tacit condonations may be deduced from the acts of the parties confirming the existence and acceptance
of the condonation not reduced to writing. i.e., creditor burning promissory note in front of the debtor.
If the debtor does not accept the remission but does not pay, and the creditor does not enforce payment
within the prescriptive period, the abandonment will result in the prescription of the credit.
Remissions or waivers are not presumed. Their existence must be established by convincing evidence.
Acceptance By Debtor Required:

Condonation is a donation of an existing credit in favor of the debtor.
As the liberality of a person cannot just be imposed upon another, it is required that the debtor gives his
consent thereto by making an acceptance.
Condonation or remission is not a unilateral act. It is a bilateral act.
No acceptance, no remission. Article 745. The donee must accept the donation personally, or through
When accepted, subject to the rules on donation. an authorized person with a special power for the purpose, or with a
general and sufficient power; otherwise, the donation shall be void. (630)
Article 745 and 746 must be complied with to
make the acceptance effective and valid. Article 746. Acceptance must be made during the lifetime of the donor
and of the donee. (n)
Limitation on Condonation:
It is subject to the rule that it shall Article 750. The donation may comprehend all the present property of the donor, or part
not be inofficious. thereof, provided he reserves, in full ownership or in usufruct, sufficient means for the
support of himself, and of all relatives who, at the time of the acceptance of the donation,
The creditor must reserve are by law entitled to be supported by the donor. Without such reservation, the donation
sufficient means for his own shall be reduced in petition of any person affected. (634a)
support and of all relatives who Article 751. Donations cannot comprehend future property. By future property is understood
are entitled to be supported by anything which the donor cannot dispose of at the time of the donation. (635)
him at the time of the acceptance
Article 752. The provisions of article 750 notwithstanding, no person may give or receive,
of the condonation or remission. by way of donation, more than he may give or receive by will. The donation shall be
inofficious in all that it may exceed this limitation. (636)
(Articles 750 and 752)
Subject to Revocation:
If the condonation or remission is excessive or inofficious, it may be totally revoked or reduced
depending on whether or not it is totally or only partially inofficious.
The grounds for revocation are found in Articles 760, 761, and 765 of the Code.

Article 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 and his heirs may uphold it by proving that the delivery of the document
was made in virtue of payment of the debt. (1188)
Applicability and Coverage, Private Document Evidencing a Credit:

Applies only to private documents evidencing credits like a private promissory note.
Cannot apply to public instruments evidencing credits because such instruments ordinarily have other
copies in the hands of the Notary Public who had notarized them.
Implied Renunciation of Action:

It is implied that the action for the enforcement of the debt had been renounced or remitted by the creditor
when he voluntarily delivered to the debtor the private document of credit.
The law does not state specifically the remission of the credit. The credit has not yet prescribed. It merely
states the implication of renunciation of the action which the creditor has against the debtor.
This is because if the debt itself had already been renounced, subsequent payment will be void. However,
if only the right of action is renounced, and the debtor pays even after the prescription of the action, the
payment could not be recovered anymore because it constitutes a performance of a natural obligation.
Defense of Debtor and His Heirs when Waiver of Action is Challenged:

If the remission is claimed to be inofficious meaning, it is excessive as it cannot be totally covered by
the disposable free portion of the estate of the deceased creditor, or that is revocation is sought under
Articles 750, 752, 760, and 761, the law provides a defense for the debtor or his heirs.
The defense is that the delivery of the document was made in virtue of payment of the debt.
According to Pineda, there is an absurdity in the article if this defense is pursued, particularly because
there is a presumption of renunciation of the action in the first part of the article. This presumption is not
being maintained if the defense proffered by the debtor is payment.
The solution to this absurdity is that if the debt had actually been paid, the debtor must give up the
presumption of renunciation in his favor. He might as well present the proofs of payment rather than lean
on a presumption of remission which is rebuttable.
If the debtor has no receipts to prove payment, there will be two presumption available: either
presumption of payment, or the presumption of remission. If they are not rebutted, the action of the
creditor shall fall.
In the face of these two favorable presumptions, presumption of payment should be stressed because there
is greater reciprocity of interests in that presumption.
Article 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. (1189)
Applicability and Presumption:

Applies only when the subject document evidencing the credit is a private one.
If the document evidencing the credit is found in the possession of the debtor, the presumption that the
said document was delivered voluntarily to the said debtor. The presumption is rebuttable.
The presumption of voluntary delivery of the document implies the remission of the debt evidenced by
the credit.

Article 1273. The renunciation of the principal debt shall extinguish the accessory obligations;
but the waiver of the latter shall leave the former in force. (1190)
Effect of the Remission of the Principal on the Accessory:

If the principal debt has been remitted, the accessory obligation is extinguished.
The reasons is that the existence of the accessory obligation is dependent upon the principal.
The principle accessory follows the principal applies.
Example: Monica borrowed money from May, and Mikey guaranteed the payment of the loan. May
remitted the entire obligation of Monica. The guarantee of Mikey is then also extinguished.
On the other hand, if the accessory alone is extinguished by remission, the principal stays.
Thus, if May remitted the guarantee of Mikey, the loan of Monica remains.
Article 1274. It is presumed that the accessory obligation of pledge has been remitted
when the thing pledged, after its delivery to the creditor,
is found in the possession of the debtor, or of a third person who owns the thing. (1191a)
Coverage; Pledge:
Article refers only to pledge. Pledge is a real contract. It is not valid unless the thing pledged is delivered
and placed in the possession of the creditor, or of a third person by common agreement. (Article 2093)
Presumption When Thing Pledged Found in Possession of Debtor or 3rd Person Owner:
If the thing pledged, after its delivery to the creditor, is found in the hands of the debtor, it is presumed
that the pledge had been remitted. The presumption does not include the principal obligation (loan).
The presumption also applies if thing pledged is found in the possession of a third person, not just any
third person, but a third person who is the owner of the thing. This happens when the loan is secured by a
property owned by a third person.
Presumption is rebuttable as the creditor may prove that the thing was just stolen from him, that he
delivered it for repair purposes, etc.
Soria vs. COA

The Land Bank of the Philippines (Land Bank) was engaged in a cattle-financing program wherein loans
were granted to various cooperatives. The Ipil Branch granted six loans to the four cooperative borrowers
amounting to P3,115,000.00.
Three checks were issued by the Ipil Branch to REMAD to serve as advanced payment for the cattle.
REMAD, however, failed to supply the cattle on the dates agreed upon (because of foot-and-mouth
disease that broke out among its herds).
In post audit, the Land Bank Auditor disallowed the amount of P3,115,000.00 in view of the non-delivery
of the cattle. Also made as the basis of the disallowance was the fact that advanced payment was made in
violation of bank policies and COA rules and regulations.
Petitioners Reyna and Soria were among those who were found liable by the Auditor for the amount of
P3,115,000.00 which was advanced to REMAD.
Employees, including Soria and Reyna, herein petitioners are now asked to refund the disallowed
transaction but they contend that the same had been written off by the main branch, approved by the CB,
thus amounting to a condonation of the same and the obligation is thereby extinguished.
Is writing-off a loan equal to a condonation or release of a debt by the creditors?
As an accounting strategy, the use of write-off is a task that can help a company maintain a more
accurate inventory of the worth of its current assets. In general banking practice, the write-off method is
used when an account is determined to be uncollectible and an uncollectible expense is recorded in the

books of account. If in the future, the debt appears to be collectible, as when the debtor becomes solvent,
then the books will be adjusted to reflect the amount to be collected as an asset. In turn, income will be
credited by the same amount of increase in the accounts receivable.
Write-off is not one of the legal grounds for extinguishing an obligation under the Civil Code. It is not a
compromise of liability. Neither is it a condonation, since in condonation gratuity on the part of the
obligee and acceptance by the obligor are required. In making the write-off, only the creditor takes action
by removing the uncollectible account from its books even without the approval or participation of the
debtor.
Furthermore, write-off cannot be likened to a novation, since the obligations of both parties have not been
modified. When a write-off occurs, the actual worth of the asset is reflected in the books of accounts of
the creditor, but the legal relationship between the creditor and the debtor still remains the same the
debtor continues to be liable to the creditor for the full extent of the unpaid debt.
Based on the foregoing, as creditor, Land Bank may write-off in its books of account the advance
payment released to REMAD in the interest of accounting accuracy given that the loans were already
uncollectible. Such write-off, however, as previously discussed, does not equate to a release from liability
of petitioners. Petition is unmeritorious, hence it is denied.
Confusion: (Articles 1275 1277)

SECTION 4 Confusion or Merger of Rights
Article 1275. The obligation is extinguished from the time the characters of creditor and debtor
are merged in the same person. (1192a)
Concept of Confusion or Merger of Rights:

Confusion is also known as merger of rights, as it is a merger or convergence of the characters of the
creditor and debtor in the same person involving the same obligation.
Since it is non-sensical for the person to pursue a claim against himself, the merger results in the
extinguishment of the obligation.
Example: Kara issued a check payable to cash in favor of Eunice in order to pay Eunice the amount Kara
loaned from the her. Instead of encashing the check, Eunice endorsed it to her creditor Therese. Later,
Therese indorsed it to Kara in payment of her indebtedness to Kara. Kara issued the check and she
received the same check. There is a merger which is definite and complete.
Requisites for Confusion or Merger of Rights:

1. There is a merger in the same person the characters of a creditor and a debtor
2. The merger must be in the characters of a principal creditor and a principal debtor
3. The merger is definite and complete. (Partial merger is allowed. It is definite and complete up to the
extent of the concurrent amount or value.)
Effect of Revocation of Merger or Confusion:

The event the act which created the confusion is revoked for some causes (like rescission of contracts),
the confusion or merger is also revoked.
The obligation is revived in the same condition as it was before the confusion. During the interregnum,
the running period of prescription of the obligation is suspended since the creditor could not have made a
demand for the fulfillment of the obligation.

Article 1276. 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.
(1193)
Applicability:
The article refers to two kinds of mergers: Merger in the person of the principal debtor or creditor, and
merger in the person of the guarantor.
In the first merger, the guaranty is also extinguished because it is just an accessory obligation to the
principal.
In the second merger, the principal obligation will not be extinguished because the efficacy of the
principal is not dependent upon the accessory obligation.
Illustration:
Alyssa owes Kit 100 pesos. Kyrah was taken in as a guarantor. Kit assigned this particular credit to Ira.
Later, Ira assigned this credit to Alyssa. There is now a merger in the characters of the principal debtor
and creditor. Thusly, the principal obligation of Alyssa is extinguished which carries the extinguishment
too of Kyrahs obligation as guarantor.
Continuing from the same scenario, if Ira assigned her credit to Kyrah, there is a merger of the credit in
the person of the guarantor. Kyrah is thus released from the guaranty because of the merger of the credit
in her person. However, the principal obligation of Alyssa remains. So, Kyrah can collect from Alyssa the
100 pesos.
Article 1277. Confusion does not extinguish a joint obligation

except as regards the share corresponding to the creditor or debtor
in whom the two characters concur. (1194)
Joint Obligation not Extinguished by Confusion, Exception:

Generally, the emergence of confusion in one principal debtor or creditor will not extinguish the joint
obligation because the confusion is not definite and complete with regard to the entire obligation. A part
of the obligation still remains outstanding.
However, the law allows the merger as a mode of extinguishing the obligation with respect only to the
share corresponding to the debtor or creditor concerned, in whom the two characters of debtor and
creditor converge.
If the confusion takes place in the person of the debtor, the effect is only with regard to his share. In fine
there is only partial extinguishment of the obligation. Thus, the creditor can still go after the other debtors
whose part of the debt had not been affected by the extinguishment.
Illustration:
Camille and Chloe jointly obtained a loan of 10 pesos from Georgia. Georgia later assigned this whole
credit to Camille. This extinguishes Camilles share in the obligation because of the merger of the
characters in her person. However, Chloe remains liable to the extent of her share which is 5 pesos, not to
Georgia but to Camille.
Solidary Obligation:
The rule in solidary obligation is different. If a solidary debtor had paid the entire obligation, the
obligation is totally extinguished without prejudice to the rights of the solidary debtor who paid, to
proceed against his solidary co-debtors for the latters individual contribution or liability.

Sochayseng vs. Trujillo
Paulina Sochayseng, mother of the deceased, Marcela Sochayseng, filed a complaint against Marcelas
widower Andres Trujillo in that she asks that she be reimbursed of the total expenses she incurred when
Marcella was hospitalized as well as the funeral expenses therein.
Background: Marcela Sochayseng left her husbands house without the latters knowledge and consent.
She went to her mother and spent her remaining days with her. Her mother was the one who paid all
hospitalization, care and subsistence, as well as burial expenses.
Is the widower of marcella liable to pay marcellas mother for the hospitalization expenses during
marcellas lifetime?
The matter involved is a claim for expenditures to the benefit of a married woman. During her lifetime a
third person furnished her subsistence which amounted to P410 in value, and at her death defrayed her
funeral and burial expenses, amounting to P320, both sums aggregating P730. The first of these debts is
not a personal and exclusive one of the said married woman; it pertains to the marriage or the conjugal
partnership. The widower must pay it out of the property of the conjugal partnership. As the deceased left
property of her own, it is improper to deduct the P320 demanded for funeral expenses.
But of course we must not lose sight of the provision of article 1192 of the Civil Code (1275 NCC):
"Whenever the characters of creditor and debtor are merged in the same person, the obligation is
extinguished."
Since Paulina is the sole heir of Marcela, the latters exclusive property and share in the conjugal
property will go to the her mother Paulina. Thus, as regards to the amount of P320, it is extinguished
since it is to be paid out of the total amount of property that now belongs to Paulina (i.e., Paulina owes
herself the amount of P320).
Yek Ton Lin vs. Court of Appeals

Defendant Pelagio Yusingco was the owner of the steamship Yusingco. He executed a power of attorney
in favor of Yu to administer, lease, mortgage and sell the vessel.
Yu mortgaged the steamship to plaintiff Yek Tong Lin Fire & Marine Insurance Co. Ltd.
After some time, the steamship needed some repairs which were made by the Earnshaw Docks &
Honolulu Iron Works.
When the Yusingcos could not pay the cost of the repair, defendant-appellant Vicente Madrigal had to
make payment by reason of the bond filed by him as the guaranty of said repairs.
When Madrigal discovered that he was not to be reimbursed for the repairs made on the steamship, he
brought an action against the Yusingcos to compel them to reimburse him. It was provided in the
judgment that upon failure of the Yusingcos to pay the above-stated amounts to Madrigal, a writ of
execution would be issued in order to have the steamship sold at a public auction for the purpose of
satisfying said amounts with the proceeds. The Yusingcos again failed to pay the amount of the judgment.
Said steamship was nevertheless sold at the public auction and was purchased by the Yek Tong Fire and
Marine Insurance, being the highest bidder worth 12,000 pesos. The sheriff turned over 10,000 to
Madrigal in payment of the judgment credit.
Is confusion or merger of rights applicable in the case at bar?
Article 1156 and 1192 of the Civil Code provide that obligations are extinguished by the merger of the
rights of the creditor and debtor.
After the steamship Yusingco had been sold for the execution of the judgment rendered in favor of
Vicente Madrigal, the only right left to the Yek Tong Fire and Marine Insurance was to collect its
mortgage credit from the purchaser thereof at public auction, inasmuch as the rule is that a mortgage
directly and immediately subjects the property on which it is imposed, whoever its possessor may be, to
the fulfillment of the obligation for the security of which it was created; but it so happens that it cannot
take such steps now because it was the purchaser of the steamship Yusingco at public auction, and it was
so with full knowledge that it had a mortgage credit on said vessel.
Thus, there is no need for Madrigal to turn over to Yek Tong Fire and Marine Insurance the amount of
money paid by him by the provincial sheriff fom the proceeds of the sale of steamship Yusingco. The
obligation was extinguished by virtue of Confusion or Merger of Rights.

Chittick vs. Court of Appeals
William and Muriel Chittick, both American citizens, married in USA but lived in Manila. They had 4
children. However, their marital relation became strained because of infidelity, so they entered into an
agreement of separation:
o William will pay Muriel P550/month for the support of Muriel and children. Said payment shall
continue until the youngest child turns 18.
o The community or conjugal assets of the parties will be divided equally once Muriel secures a
final decree of divorce.
Muriel obtained a divorce. William complied faithfully with the payment of P550/mo. until war broke
out. William, during the period of interment, paid Muriel but it was not sufficient. Muriel commenced an
action to recover support and her share in the conjugal partnership. While the case was pending with CA,
Muriel died.
5 days after CA promulgated its decision, her counsel filed a motion for substitution of party by her heirs:
her surviving spouse (Laurence de Prida) and the legitimate children of parties. CA granted the
substitution. William appealed to SC and while it was pending, he died.
WON the death of William and Muriel, in which their legitimate children became their heirs,
extinguished the obligation?
When a party dies, the heirs of the deceased may be allowed to be substituted for the deceased without
requiring the appointment of an executor or administrator and the court may appoint a guardian for the
minor heirs. In the case at bar, the counsel of Muriel failed to notify the court instantly of Muriels death,
therefore the substitution was INVALID.
Assuming that the substitution was valid, the obligation is still extinguished. This is due to the fact that
William died during the pendency of the case, which meant that the heirs were bound to substitute for the
defendant also. The substitution effectively merged the persons of the plaintiff and the defendant and thus
extinguished the obligation being sued upon.

Compensation: (Articles 1278 1290, Rule 6 of the Rules of Civil Procedure)
1. Concept and Distinctions with Other Means of Extinguishing an Obligation:
Article 1278. Compensation shall take place when two persons, in their own right,

are creditors and debtors of each other. (1195)
Concept:
It is the off-setting of the respective obligations of TWO persons who stand as principal creditors and
debtors of each other, with the effect of extinguishing their obligations to their current amount.
Example: Samantha borrowed 100 pesos from Bettina, and Bettina borrowed 50 pesos from Samantha.
Samantha now only owes Bettina 50 pesos, by reason of compensation.
Kinds:
As to origin:
1. Conventional or Voluntary By agreement of the parties
2. Legal By operation of law from the time all requisites of compensation concur
3. Judicial By judgment of the court when there is a counterclaim duly pleaded, and the compensation is
decreed.
4. Facultative Takes place when it is claimed by one of the parties who has the right to object to it, but
waives his objection thereto such as when the object of litigation of such party is with a period for his
benefit alone, and he renounces the period to make the obligation become due. i.e., Gem borrowed 100
pesos from Natasha payable within 3 years. Natasha borrowed money from Gem for the same amount. If
Gem will renounce the term, there will be immediate compensation.
As to extent:
1. Total Takes place when both obligations are totally extinguished because they happen to be the same
amount, or by agreement of the parties.
2. Partial Takes place when after the operation of compensation, a balance still remains because the
obligations are not of the same amount.
Distinguished from Payment:

In compensation, there can be partial extinguishment; In payment, the performance must be complete
unless waived by the creditor.
Payment involves delivery or action, while (legal) compensation takes place by operation of law without
simultaneous delivery.
Compensation is simplified or abbreviate payment, because the two debts are extinguished without
requiring the transfer of money or property.
Distinguished from Merger or Confusion:

In compensation, there are at least two persons who stand as principal creditors and debtors of each other.
In merger, there is only one person involved who becomes the debtor and creditor.
In compensation, there are two obligations; in merger, there is only one.
Distinguished from Counterclaim:

Compensation takes place by mere operation of law, a counterclaim must be pleaded as part of the answer
to a complaint. Counterclaim is judicial compensation.

Insular Investment vs. Capital One
Insular Investment and Trust Corporation (IITC), Capital One Equities Corporation (COEC) and Planters
Development Bank (PDB) were regularly engaged in trading, sale and purchase of Philippine treasury
bills.
Insular purchased from Capital treasury bills with an aggregate face value of 260 million pesos. Capital
was able to deliver 121 million worth to Insular. Insular bought as well from Capital (called COEC T-
bills). But allegedly, to satisfy Capitals purchase from it, Insular also bought treasury bills from the bank,
hence Insular demanded a delivery from the bank. Capital proposed a legal set-off, but Insular argues that
was it was only a mediator or facilitator in this chaotic purchase.
Can there be valid legal set-off?
Yes. Because both Insular and Capital were principal creditors of the other over debts which consist of
consumable things or a sum of money, Capital may validly set-off its claims for undelivered treasury bills
against that of Insulars claims.
Second requisite only requires that the thing be of the same kind and quality, COEC T-Bills and IITC T-
Bills are both government securities and the tripartite agreement recognized the monetary value and
treated them as sums of money.
Both debts are due and remained unsatisfied, the existence and amount are determined, and there was no
retention or controversy commenced by third persons.
Therefore, in the case at bar, there was indeed a valid legal set-off/compensation
2. Requisites:
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally,

and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money,

or if the things due are consumable,

they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,

commenced by third persons and communicated in due time to the debtor. (1196)
Requisites of Legal Compensation:

All the requisites must be present before compensation can be effectual.
Their right as such creditors, or obligations such as debtors, need not spring from one and the same
contract or transaction.
Elaboration:
1. Principal creditor and debtor of each other.
Relationship must be a principal one. Obligation to a guarantor is not a principal debt.
2. Both are sums of money or consumable things of the same kind and same quality if stated.
When the debts consist of things, it is necessary that the things are consumable which must be
understood as fungible and therefore susceptible of substitution.
More than that they must be of the same kind, and if quality is stated, same quality.
Compensation is not proper when one of the debts consists in civil liability arising from a penal
offense, as the satisfaction of such obligation is imperative.
3. The two debts are due.
Both are mature debts that is due for payment.

The law does not require that the parties obligations be incurred at the same time, what it

requires only is that the obligations be due and demandable.
When an obligation is payable on demand, not yet due until there is a demand.
In voluntary compensation, parties may agree upon compensation of debts which are not yet due.
4. Liquidated and demandable.
It is liquidate when its amount is clearly fixed, or if it is not specifically fixed, a simple

mathematical computation will determine its value.
If the amount is not fixed because it is still the subject of dispute, it is unliquidated.
Not enough that they are liquidated, they must also be demandable. A debt is demandable when it
is not yet barred by prescription and it is not illegal or invalid.
5. No retention or controversy commenced by 3rd parties
A debt or thing cannot be the subject of compensation if it is also the subject of a garnishment, or
if the thing is placed under custodia legis.
Purpose and Reason of Compensation:

Purpose is to prevent unnecessary suits and payments.
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.

(1197)
Exception to the Rule:

General Rule: For compensation, the parties must be the principal debtors and creditors of each other.
Exception: Guarantor is allowed to set up compensation for:
a. What the creditor owes the principal debtor whom the guarantor is guaranteeing and/or
b. For what the creditor owes the guarantor himself.
The reason for this is that the creditor shall not collect from the guarantor on the basis of the guaranty, as
long as the principal debtor is capable of paying his obligation.
Article 1281.
Compensation may be total or partial.
amount, there is a total compensation. (n)
When the two debts are of the same
Article 1282.
The parties may agree upon the compensation of debts which are not yet due. (n)

Parties must have the capacity to dispose of their credits which they compensate, otherwise, there will be
no compensation.

Garcia vs. Lim Chiu Sing
Sing executed a promissory note in favor of Mercantile Bank of China payable in monthly installments
which shall become immediately due and demandable in case of default. He defaulted when the balance
was P9,105.17, thus such balance became due and demandable. Sing owns P10,000 shares of stock in
MBC, and he is claiming for compensation of his shares with his debt.
Is it proper to compensate the indebtedness if defendant is a stockholder of plaintiff?
A share of stock or certificate is not an indebtedness or an evidence of indebtedness of the owner to
stockholder. Stockholders are not creditors of a corporation.
The indebtedness of a shareholder to a banking corporation cannot be compensated with the amount of
his shares therein, there being no relation of creditor and debtor with respect to such shares.
Domingo vs. Carlitos

In the estate proceedings of the late Walter Scott Price, the government claims inheritance taxes in the
amount of 40,058.55Php.
On an earlier petition, SC ruled for the settlement of inheritance taxes, etc. However, CFI of Leyte denied
the enforcement of claims presented subsequently as the Government is indebted to the estate under
administration in the amount of 262,200Php.
Can there be valid compensation?
The court having jurisdiction of the estate had found that the claim of the estate against the Government
had been appropriated for the purpose of RA 2700.
Both the claim of the government for inheritance taxes and the claim of the intestate for services rendered
have already became due and demandable as well as fully liquidated
Compensation in the case at bar takes place by operation of law.
Soriano vs. Compania General

Compania General de Tobaco de Filipinas granted Soriano a crop loan account to finance the planting,
cultivation, harvesting and milling of sugar cane in Sorianos various sugar cane plantations
A subsequent loan agreement was entered into and to secure both the prior and the latter loans, Soriano
executed a deed of mortgage in favor of defendant on the sugar cane plantations of Soriano.
Soriano and herein defendant, Compania General included in heir agreement that Soriano is to be
obligated to deliver sugar during crop year of 1941-1942 and defendant, Compania General is to sell it at
the most advantageous prices of which, the proceeds thereof will be credited to plaintiffs account.
Soriano made several inquiries from defendant about the status of his export sugar produced during 1941-
1942 crop year, however, defendant informed Soriano that said sugar was destroyed during the war but it
was later found out by Soriano that said sugar was in fact sold by defendant and that the defendant.
Defendant argues that automatic compensation should take place by operation of law to the concurrent
amounts between the two debts because the plaintiff is a debtor of the defendant on his crop loan account
and at the same time a creditor of the defendant for the proceeds of the sale of plaintiff's sugar.
Is there automatic compensation?
No, there is no automatic compensation.
Compania General cannot invoke the defense of automatic compensation since by virtue of Article 1278,
compensation takes place when two persons in their own right are creditors and debtors of each other. As
defendant theorizes, the sugar was shipped to the US for its own account, it cannot reverse its stand and
consider Soriano as its creditor.
Even if we consider soriano as creditor of defendant to the extent of 35,528.01 piculs of sugar which
defendant exported without crediting sorianos account, the very act of fault and breach of the crop loan
agreement would be the only reason why soriano would be the creditor of compania general.

Republic vs. Mambulao
Defendant Mambulao owes the Republic of the Philippines the amount of 4k pesos for forest charges.
Prior to that, Mambulao has already paid the amount of P8,200.52 for reforestation charges. It is the
contention of the defendant Mambulao Lumber Company that since the Republic of the Philippines has
not made use of those reforestation charges collected from it for reforesting the denuded area of the land
covered by its license, the Republic of the Philippines should refund said amount, or, if it cannot be
refunded, at least it should be compensated with what Mambulao Lumber Company owed the Republic of
the Philippines for reforestation charges.
Can the sum of 9k pesos paid by Mambulao be set-off or applied to the payment of the sum of 4k pesos
as forest charges to RP?
NO. Under RA 115, it seems quite clear that the amount collected as reforestation charges shall constitute
a fund known as the Reforestation Fund which shall be expended by the Director of Forestry with the
approval of the Secretary of Agriculture and Natural Resources, upon investigation of the areas needing
reforestation. There is nothing in the law that requires that the amount collected as reforestation charges
should be used EXCLUSIVELY for the reforestation of the area covered by the license.
There is no compensation where parties are not creditors and debtors of each other. With respect to the
forest charges which the defendant Mambulao Lumber Company has paid to the government, they are in
the coffers of the government as taxes collected, and the government does not owe anything, crystal clear
that the Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of
each other, because compensation refers to mutual debts.
Gullas vs. PNB

Atty. Gullas was a member of the Philippine Bar and a holder of a current account with PNB
Atty. Gullas, together with Pedro Lopez signed as indorsers of the check paid to the US Treasury as
payment to the warrant in the amount of $361 for their client.
PNB learned of the dishonor of the treasury warrant thus applied the outstanding balance of Gullas
current accounts to the US Treasury.
Can PNB validly apply a deposit to the debt of a depositor to the bank?
Yes. As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any
indebtedness to it on the part of a depositor. It has been held that the relationship existing between a
depositor and a bank is that of a creditor and debtor.
Ong vs. Court of Appeals

Ong borrowed 160,000 from private respondent and secured payment of 3 post-dated checks totaling the
same amount. Ong stored in private respondents warehouse quantity of zippers valued at 181,000.
When Ong tried to get the zippers, private respondent refused to release them on the ground of non-
payment of the loan. Ong promised to pay his indebtedness if the zippers be returned to him, but likewise
claims that because private respondent refused to release the zippers, the same became outmoded and lost
their value.
Can Ong validly invoke compensation?
Each one of the obligor be bound principally and that he be at the same time a principal creditor of the
other. Mariano Ong, the private respondent, is not a debtor of Fermin Ong, it is only the latter who is
indebted to Mariano Ong.
Both debts consist in the sum of money, or if the things due are consumable, they be of the same kind and
of the same quality, if the latter had been stated.
Debts in the case at bar do not both consist in a sum of money nor are they of the same quality or of the
same kind.

Perez vs. Court of Appeals
CONGENERIC Development and Finance Corporation is a company engaged in money market
operations.
On May 8 and 15, 1974, CONGENERIC issued promissory notes valued at 100kPhp and 200kPhp
respectively in favor of Ramon Mojica
MEVER Films Inc, private respondent in the case at bar borrowed 500kPhp from CONGENERIC,
issuing a promissory note to be referred to as NCI-0352.
CONGENERIC sold to Perez 200kPhp out of the 500kPhp of the NCI-0352. In lieu of this sale,
CONGENERIC obligated itself to pay 3kPhp.
On August 5, 1974, MEVER paid 100kPhp on account of NCI-0352
On the same date, CONGENERIC paid 100kPhp, the 3kPhp coming from its own funds CONGENERIC
paid Mojica the interests due from both the debts it incurred and the principals for both were rolled-over
to mature on October 4 and 11, 1974 respectively
Mojica, assigned both the accounts of CONGENERIC to MEVER through a notarized deed.
CONGENERIC advised Mever that of the original amount of 500k the sum of 200k was sold to a third
party (Corazon Perez)
MEVER contends that because Mojica assigned to it the account of the debt due by CONGENERIC to
Mojica, there was legal compensation.
Can MEVER validly claim legal compensation?
There was no legal compensation since the bills were not yet due and demandable as of the date of their
assignment by MOJICA to MEVER nor as of the date of surrender to CONGENERIC; for it to exist, the
two debts, among other requisites, must be due and demandable.
Mialhe vs. Manalili

While their civil case was still on appeal in the Supreme Court, petitioners already asked for a writ of
execution against the properties of Halili. The public auction done by the sheriff of Manila was a success,
but SC actually reduced the judgment sum from Php74,400.00 to Php46,800.00.
Petitioners were now obligated to return the difference between trial courts judgment and SCs judgment
to Halili.
Petitioners claimed that they could retain the 2,004.28 because in another civil case (in which the parties
were the same), petitioners were able to secure a judgment against Halili for the same amount.
Can the petitioners retain the 2k on the defense of compensation?
Compensation could not take place in this case because petitioners claim against Halili was still being
the subject of court litigation. It is a requirement, for compensation to take place, that the amount
involved be certain and liquidated.
Dalton vs. FGR Realty

Dayrit owned a parcel of land located in Cebu City which is leased to Dalton and Sasam, et. Al. Later on,
Dayrit sold such parcel of land to respondent FGR Realty and Development Corporation (FGR). Dayrit
and FGR stopped accepting rental payments because they wanted to terminate the lease agreements with
Dalton and Sasam, et al. Dalton and Sasam, et al. consigned the rental payments with the RTC.
They failed to notify Dayrit and FGR about the consignation. Dayrit and FGR withdrew the rental
payments. In their motions, Dayrit and FGR reserved the right to question the validity of the
consignation.
Is the consignation valid?
The consignation made by Dalton is NOT VALID because it did not satisfy the mandatory requirements
of a valid consignation given in the NCC.
Daltons failure to notify the respondents regarding the consignation rendered such
INEFFECTIVE/VOID/NOT VALID .

3. Other Kinds of Compensation:
Article 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. (n)
Judicial Compensation Based on Judgment:

If a plaintiff filed a complaint against a defendant for collection of sum of money, and the defendant has a
claim for damages, the claim for damages if properly pleaded and proven by evidence, will be converted
into a liquidated claim payable in money.
When the adjudication of the court has become final and executory, assuming the plaintiffs claim for
collection is justified, there will be a compensation between the plaintiffs claim as against the
defendants claim for damages.
The compensation retroacts to the date of the filing of the pleading where compensation was alleged and
claimed.
Article 1284. voidable,

When one or both debts are rescissible or

they may be compensated against each other before they are judicially rescinded or avoided. (n)
Effect of Subsequent Rescission:

Until the debts are rescinded, they can be compensated against each other.
If the debt is rescinded or annulled, the compensation is automatically cancelled and there shall be
restitution of what each party had received before the rescission.
If the prescriptive period for the rescission or annulment of the debts had already lapsed, there is
automatic compensation and the same will not be disturbed.
Article 1285. 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.

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
and also later ones until he had knowledge of the assignment. (1198a)
Assignment of Debts Subject to Compensation:

When all the requisites of compensation are present, compensation takes effect automatically ipso jure
whether the parties are aware of it or not.
If after automatic compensation one of the debts is assigned to a third person, the assignment is
ineffective because there is nothing more to assign, except only the excess amounts.
Insofar as the excess is concerned, the assignment to 3rd person with the consent of debtor constitutes
subrogation of a third person in the rights of the creditor (Art. 1300)

Exception to the General Rule on Compensation:
If compensation had already taken place ipso jure, but the parties nevertheless agreed to waive, or not to
pursue their rights under Art. 1290, then the effects will be in accordance with the ff:
1. Assignment with consent of the debtor Here, the debtor cannot avail himself against the assignee,
of any defense of compensation which he might have against the assignor. Exception: If at the time of
assignment, the debtor has notified the assignor the he is reserving his right to the compensation.
2. Assignment made with knowledge but without the consent of the debtor The debtor retains his
right to invoke against the assignee, the compensation of his debts which fell due prior to the
assignment. Debts falling due after the assignment are not included.
3. Assignment made without the knowledge of the debtor The debtor is allowed by law to set up
the compensation of all credits of the creditor prior to the assignment as well as subsequent ones until
the time that the debtor learns of the assignment. The compensation is set up against the assignee
not against the old creditor.
Assignment under the Article is Different from Cession under Article 1255:
Article 1255 refers to cession or assignment of the property of the debtor to his creditors in payment of
his debts. In the present article, the one assigning rights is the creditor in favor of a third person who need
not be a creditor.
Limitation to Assignment of Rights:

A solidary creditor cannot assign his rights without the consent of the others (Art. 1213)
Article 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. (1199a)
Legal Compensation:
Legal compensation takes place by operation of law. This rule applies even if the debts are payable at
different places.
If debts are payable abroad and there is a need to use foreign currency, whoever claims compensation
must shoulder the expenses for the foreign exchange.
Similarly, expenses for transportation to the place of payment will be borne by the party claiming
compensation.
Impliedly, other kinds of expenses incurred by the claiming party shall not be charged against the other.
Compensation is Ipso Jure; Retroactive:

Compensation takes effect by operation of law even without the consent or knowledge of parties
concerned as long as all the requisites mentioned are present.
Compensation when used as a defense, retroacts to the date when all its requisites are fulfilled.

Article 1287. Compensation shall not be proper when one of the debts arises from a depositum
or from the obligations of a depositary or of a bailee in commodatum.

Neither can compensation be set up against a creditor
who has a claim for support due by gratuitous title,
without prejudice to the provisions of paragraph 2 of article 301. (1200a)
Debts or Obligations not subject to Compensation:

1. Debts or obligations arising from contracts of depositum;
2. Debts arising from obligations of a depositary;
3. Debts arising from obligations of a bailee in commodatum;
4. Debts or claims for support due by gratuitous title.
5. Debts or obligations consisting in civil liability arising from penal offense. (Art. 1288)
6. Debts or obligations du to the government, like taxes, fees, duties, and similar others.
Support in arrears like future support is no longer subject to compensation.
Parties who cannot claim Compensation, Exceptions:
The parties who are not allowed to claim compensation are the depositary (a person to whom
something is lodged in trust) and bailee (a person to whom goods or property are delivered for a purpose,
for example repair, but no transfer of ownership occurs.)
The reason for the prohibition is to prevent breach of trust. However, the depositor and the bailor are
allowed to claim compensation against the depositary and bailee respectively. This is may be called a
FACULTATIVE COMPENSATION.
Example: Sofia agreed to keep for safekeeping Elaines 100 pieces of 1k peso bills which are newly
printed. Elaine borrowed money from Sofia in the sum of 50k pesos. When Elaine asks for the return of
her 100 pieces, Sofia offers only 50 pieces of the money claiming partial compensation as Elaine owes
her 50k.
Sofia cannot refuse to return to Elaine the entire 100 pieces. This money is not subject to compensation
because it was specifically entrusted to Sofia for purposes of deposit.
However, if Elaine the depositor desires, she may set up compensation against Sofia in which case Sofia
will only owed Elaine 50 pieces of the bills. The depositor is allowed to claim compensation but not the
depositary.
Status of Money Deposited in the Bank

A deposit of money with a bank is not really a depositum but a loan.
The relationship of the depositor and the bank is one of creditor and debtor between whom there can be
compensation.
Article 1288.
Neither shall there be compensation
liability arising from a penal offense. (n)
if one of the debts consists in civil
Debts arising from crime cannot be compensated by the criminal.

Compensation is improper because the satisfaction of the obligation arising from crime is imperative.
However, the victim is allowed to claim compensation.
Article 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. (1201)
It can happen that a debtor may have several debts to a creditor and vice versa.
Under these circumstances, Articles 1252 to 1254 (application of payments) shall apply.

Article 1290. When all the requisites mentioned in article 1279 are present,

compensation takes effect by operation of law,
and extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not aware of the compensation. (1202a)
Time When Compensation Takes Effect:

When it is a legal compensation, the moment all five requisites become present, compensation takes place
by operation of law, even though the parties are not aware thereof.
When the compensation is voluntary, it will take effect from the time or day agreed upon by the parties.
If the compensation is judicial, it will be effective from the moment the judgment becomes final and
executory.
Pioneer Insurance vs. Court of Appeals

Pioneer issued warehousing bonds in favor of Bureau of Customs in behalf of Wearever Textile Mills and
its president Lim. Wearever failed to comply with its commitments so Customs demanded the amount of
the warehousing bonds from the Pioneer.
Wearever promised to Pioneer that they will settle their obligations with Customs.
Customs granted the request of Wearever for staggered monthly payments however they still failed to pay
said amount. Customs demanded from Pioneer for payment of said bonds. No payment, however, has
been made as yet. A fire broke in Wearevers factory in which they were claiming insurance from
Pioneer.
Pioneer refused to pay in account of the previous warehousing bond and claimed that said proceeds must
be applied by way of partial compensation or set-off against its liability with the Bureau of Customs
arising from the warehousing bonds.
Can there be a valid compensation in the case at bar?
There is no dispute that the petitioner owes the private respondents the amount representing the proceeds
of the insurance policy.
The contention of private respondents that the petitioners cannot claim for reimbursement because they
have not paid Bureau of Customs yet cannot be maintained since it was ruled in jurisprudence that
stipulations in the indemnity agreement allowing the surety to recover even before it paid the creditor is
enforceable and it has long been settled by courts in the affirmative.
Thus, legal compensation can take place because all requisites for a valid compensation are present.
Sesbreno vs. Court of Appeals

Philfinance assigned to Sebsereno a note called Delta Motors Corporation Promissory Note (DMC PN
No. 2731) in consideration for the money market placement made by the latter to the former. Said note
was originally made by Delta in favor of Philfinance.
When Sebsereno wants to collect from Delta the amount of the note, Delta denied any liability to
petitioner on the promissory note, and explained that it had previously agreed with Philfinance to offset
its DMC PN No. 2731 against another promissory note issued by Philfinance in favor of Delta.
Was there a valid compensation between Delta and Philfinance?
The assignment to Sesbreno would have prevented compensation to take place between Philfinance and
Delta, to the extent of 304, 533.33Php, because upon execution of the assignment in favor of petitioner,
Philfinance and Delta would have ceased to be creditors and debtors of each other.
However, Sesbreno only notified Delta of the fact of the assignment in July 14, 1981 when the DMC PN
2731 had already been discharged by compensation.
Hence a valid compensation have taken place. Thus, Sesbreno cannot validly run after Delta in
fulfillment of Deltas obligations, but should run after Philfinance by virtue of the terms of assignment

Novation: (Articles 1291 1304)
1. Concept:
Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
Concept:
Novation is the extinguishment of an obligation by substitution or change of the obligation by a
subsequent one which terminates the first, either by changing the object or principal conditions,
substituting the persons of the debtor or subrogating a third person with the rights of the creditor.
The animus novandi, whether partial or total, must appear by the express agreement of the parties, or by
their acts that are too clear and unequivocal to be mistaken.
Two-Fold Function of Novation:

1. It extinguishes an obligation
2. Creates a new obligation in lieu of the old one
If novation is partial, modificatory, or an imperfect one, it will operate only as a relative extinction.
Novation need not be absolute, thus the beginning of the article reads Obligations may be modified
implying clearly that it may be partial.
The term principal conditions should be construed to include a change in the period to comply with the
obligation, which change would only be a partial novation, since the period merely affects the
performance, not the creation of the obligation
Requisites:
1. There must be a previous valid obligation.
It cannot be void, as in the eyes of the law, it does not exist.
If there is no previous obligation, there is nothing to modify.
2. There must be an agreement by the parties to extinguish or modify the old obligation, and to create
a new one or a modified version.
3. The validity of the new obligation.
Effects of a Valid Novation:

In novation consisting of the substitution of a new debtor, it is not enough to extend the juridical relation
to a third person; It is necessary that the old debtor be released from the obligation, and the third person or
new debtor take his place in the relation.
If not, then there is no novation and the third person merely becomes a co-debtor or a surety.
A novation is not made by showing that the substituted debtor agreed to pay the debt, it must also appear
that he agreed with the creditor to do so.
Defective Obligations and Mere Drafts:

A void obligation cannot be novated, but a voidable obligation may be novated before it is annulled.
If the new obligation created is void, there is no novation. The original obligation will subsist, unless the
parties intended that the former relation is extinguished in any event..
A mere draft of the new contract is not a perfected contract. It cannot supplant the original contract.
Neither will a contract not signed by all have any effect.

2. Kinds: Objective, Subjective, or Mixed:

Kinds of Novation
As to essence:
1. Objective or Real Novation This is the novation effected by changing the object or principal
conditions of the obligation.
2. Subjective or Personal Novation This is the novation effected by either substituting the person of the
debtor or subrogating a third person to the rights of the creditor. The first kind is also called passive
novation and the second active novation.
3. Mixed Novation This is the novation which arises when there is a combination of the objective and
subjective novations.
As to form of their constitution:
1. Express It is express when the parties declared in unequivocal terms that the old obligation is
extinguished by the new obligation, the latter thusly superseding the old one.
2. Implied It is implied when there are no express declarations that the old obligation is extinguished by
the new one. However, the old and new obligations are incompatible on every material point such that
they cannot co-exist.
As to the extent of their effects:

1. Total or Extinctive It is total when the original obligation is completely extinguished. The new
contract must extinguish the old contract. There is no novation when the new contract is not between the
same parties as in the old contract. Extinctive Novation has four requisites:
a. Existence of a previous valid obligation
b. Agreement of all the parties to the new contract
c. Extinguishment of the old obligation or contract
d. Validity of the new one
2. Partial or Modificatory It is partial when the original obligation is not totally extinguished but merely
modified. Hence, the unmodified portion of the obligation remains effective. Novation is merely
modificatory when the old obligation subsists to the extent it remains compatible with the amendatory
agreement.
As to their origin:
1. Legal Novation Takes place by operation of law such as the novations in Arts 1300 & 1302.
2. Conventional Novation This novation takes place by agreement of the parties. Arts 1300 & 1301.
As to the presence or absence of condition:

1. Pure When the creation of a new obligation is not subject to any condition.
2. Conditional When the creation of the new obligation is subject to a condition.
Effect of Non-Fulfillment of Condition:

If the condition is not fulfilled, there is no novation.
Failure to comply with a suspensive condition of the novation restores the original agreement.

NOVATION IS NEVER PRESUMED:

Novation can never be presumed. The intention to novate should be expressly, clearly and unequivocally
declared, or that the terms of the new agreements be incompatible with the old contract on every point.
Novation must be clearly proved as a fact either by express stipulation or by implication derived from an
irreconcilable incompatibility between old and new obligations or contracts on every point.
Changes that breed incompatibility must be essential in nature and not merely accidental.
An agreement subsequently executed between a seller and a buyer that provides for a different schedule
and manner of payment, to restructure the modes of payment by the buyer so that it could settle its
outstanding obligation in spite of its delinquency in payment, is not tantamount to novation.
Novation may be a means to avoid criminal liability as long as novation occurs prior to the filing of the
criminal action.
Article 1292. In order that an obligation may be extinguished

by another which substitute the same,
it is imperative that it be so declared in unequivocal terms,

or that the old and the new obligations be on every point incompatible with each other. (1204)
Formalities Required When Novation is Express:

If done in writing, it is imperative that it be declared in unequivocal terms to avoid any doubt.
It is also imperative that the new obligation should expressly declare that the old obligation is
extinguished or that the new obligation is on every point incompatible with the old one.
In the absences thereof, absolute incompatibility of the two agreements must be shown.
Implied Novation:
It is essential that the old obligation and the new obligation are incompatible in all material points.
If there is no incompatibility, there is no novation created.
Test of Incompatibility:
The test is Whether the two obligations can stand together.
If they cannot, incompatibility arises, in which case the latter obligation novates the first one.
Absolute incompatibility must exist, in order to establish novation in the absence of an express
declaration.
If there is no incompatibility, there is no novation. i.e., a party executed three successive overdraft
obligations which increased the debt, it could not be said that the third novated the first two.
If the parties expressly negate the lapsing of the old obligation, there can be no novation.
Effect of Increasing or Reducing the Term or Period:

Increasing the term of the obligation will not give rise to novation because of the absence of
incompatibility between the two obligations.
Thus, the postponement of the date of payment and the grant of an extension did not result in novation
because the obligations are not incompatible and there is no change in the obligatory relation of the
parties which altered the essence of the obligation.
The rule is different if the term is decreased. If the term is reduced, novation arises because there is
now an incompatibility between the old and the new obligations.
When there is a change not only on the persons of the parties involved but also on the amount due as well
as on the date of maturity of the obligation, it is clear that there is a novation.
If there is a novation, the parties shall be governed by their subsequent agreement which alone can be the
basis of any action between them.
An obligation is not novated by an instrument that expressly recognizes the old one, changes only the
terms of payment, and adds other obligations not incompatible with the old provisions or where the new
contract merely supplements the previous one.

4. Delegacion vs. Expromision:
Article 1293. 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 articles 1236 and 1237. (1205a)
Passive Subjective or Personal Novation:

Consists in the substitution of a new debtor in place of the original debtor with the consent of the creditor.
Active subjective novation, on the other hand, consists in substituting a new creditor in place of the old.
Two forms of Passive Subjective:

1. Delegacion When the substitution is initiated by the old debtor himself by convincing another person to
take his place and to pay his obligation to the creditor.
Requisites:
a. The substitution is upon the initiative or proposal of the old debtor himself by proposing to the
creditor the entry of another person as the new debtor who will replace him in the payment of the
obligation.
b. The creditor accepts, and the new debtor agrees to the proposal of the old debtor.
c. The old debtor is released from the obligation with the consent of the creditor.
If the new debtor in turned out to be insolvent, the creditor is estopped from going after the old
debtor because the old debtors obligation has already been extinguished.
Exceptions: If the insolvency of the new debtor was already existing and of public knowledge, or
if the old debtor knew that the new debtor is insolvent when he delegated his debt, the old debtor
may still be held liable.
2. Expromision When the substitution of the old debtor by a new debtor is upon the initiative or proposal
of a third person. Here, there is an agreement by and among the old debtor, the new debtor, and the
creditor to extinguish the old obligation. There must be an express and clear agreement that with the entry
of the new debtor, the old debtor is released from the obligation.
Requisites:
a. The substitution is upon the initiative of a third person who will step into the shoes of the old
debtor.
b. The creditor gave his consent to the proposal of the third person.
c. The old debtor must be released from the obligation with the consent of the creditor.
The substitution of the old debtor by a new debtor may be made without the consent of the old
debtor or even against his will. The consent of the creditor, however, is mandatory.
Rights of the New Debtor:

If the new debtor has paid the obligation of the old debtor, the former is given the right to
beneficial reimbursement, if payment was made without old debtors consent or against his will.
The new debtor is given the right to reimbursement and subrogation if payment as made with the
old debtors consent.
Creditors Consent:
Creditors consent or acceptance of the substitution of a new debtor may be given at anytime and in any
form whatever while the agreement of the debtors subsists.

Article 1294. If the substitution is without the knowledge or against the will of the debtor,
the new debtor's insolvency or nonfulfillment
of the obligations
shall not give rise to any liability on the part of the original debtor. (n)
Applicability:
Applies only to expromision where the substitution of the old debtor is upon the proposal of a third
person whose proposal was accepted by the creditor.
Expromision may be made without the knowledge of the old debtor, or even against his will.
If made without consent of the old debtor, he will not be liable in case the new debtor becomes insolvent.
But if made with his consent, the old debtor will be made liable to avoid unjust enrichment.
Article 1295. The insolvency of the new debtor,

who has been proposed by the original
debtor and accepted by the creditor,
shall not revive the action of the latter against the original obligor,
except when said insolvency was already existing and of public knowledge,
or known to the debtor, when the delegated his debt. (1206a)
Applicability:
Applies only to delegacion where the substitution of the old debtor is upon the proposal of the old debtor
himself and the proposal was accepted by the new debtor and the creditor.
Effect of Insolvency of New Debtor:

If the new debtor is insolvent, old debtor will not be liable anymore because the obligation is already
extinguished. However, if the insolvency was already existing and is of public knowledge when the debt
was delegated to the new debtor, or if the insolvency of the new debtor was already existing and known to
the original debtor at the time of the obligation of the debt to the new debtor, the old debtor is liable.
Thus, if the insolvency was not existing at the time of the delegation of the debt, or even if it was but it
was not of public knowledge, or the same is not known to the original debtor, the latter has no more
liability to the creditor. The obligation of the original debtor had already been extinguished by the
novation.
When Delegacion does not give rise to Novation:

1. When the third person acted merely as a surety or guarantor for the original debtor
2. When the third person is merely an agent of the debtor
3. When the new debtor merely agreed to assume a joint responsibility for the obligation. The delegacion
is only with reference to the proportionate share.
Article 1296. When the principal obligation is extinguished in consequence of a novation,

accessory obligations may subsist only insofar as they may benefit third persons

who did not give their consent. (1207)
Extinction of the Principal, Effect on Accessories:

General Rule: Extinguishment of principal carries with the extinction of the accessory.
Exception: Accessories may subsist only insofar as they benefit third persons who did not consent.
If the contract contained a stipulation in favor of the third party, the beneficiary who did not consent may
demand the accessory obligation. If he consented, he cannot make a demand anymore.
Article does not apply to novations by the subrogation of a third person in the rights of the creditor.

Article 1297. one shall subsist,

If the new obligation is void, the original

unless the parties intended that the former relation should be extinguished in any event. (n)
Effect of Invalidity of New Obligation:

If the new one turns out to be void, it follows that there is no new obligation to supersede the old
obligation. Corrolarily, the original obligation shall continue to subsist.
Exception: If the parties have agreed that the old obligation shall nevertheless be extinguished even if it
turns out that the new one is invalid, then this is tantamount to waiver or remission of the obligation.
Example: Pio, a well known movie director owes Regal films a sum of money. Because Pio could not pay
the amount, he proposed to direct a particular film for Regal films in settlement of his obligation. The
film involves rebellion, and before the film could be directed, a law was passed prohibiting the production
of such movies. The new obligation having become legally impossible is now void and the old obligation
subsists.
Effect of New Obligation which is merely Voidable:

When the obligation is merely voidable, that is, it is valid and binding until annulled, the obligation is
novated.
However, once it is annulled, the old obligation will subsist and the novation will be set aside.
If the parties agree otherwise, that the old obligation would still be extinguished in any event, then the old
obligation shall not subsist.
Article 1298. 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. (1208a)
Effect of Invalidity of the Old Obligation:

If it is the old obligation which is void, there is nothing to novate. So the new will also be void.
The action to set aside a void contract is an action for declaration of nullity, while an action to set aside a
voidable contract is referred to as an action for annulment.
There is a contradiction in the words used in the article because a void contract is not susceptible of
annulment or ratification. The solution is that the first portion should apply only to void obligations, and
the second portion to voidable obligations.
Effect of a Voidable New Obligation:

If the new obligation is voidable, it is valid and binding upon the parties until annulled.
Once annulled, whatever has been novated shall be set aside.
Effect of a Voidable Old Obligation:

If the old obligation, being the voidable one, was ratified before it could be annulled, then it can be the
subject of novation.
However, if it was already annulled, it ceases to exist and there is nothing to novate.
Rule in Prescribed Debts:

An obligation which had not been enforced within the prescribed statute of limitations is considered to
have prescribed. That is, it cannot be enforced anymore in court.
Nonetheless, it has been reduced to a natural obligation such that when one pays, the payment will be
valid. As a prescribed debt constitutes a moral or natural obligation, it can be the cause or consideration
for a new obligation in novation.

Article 1299. 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. (n)
Applicability:
Applies only to cases of original obligations subject to conditions, whether suspense or resolutory.
Effect of the existence of Conditions in the Original Obligation on the New one:
In the absence of any contrary stipulation, the conditions attached to the original shall also be considered
as attached to the new obligations.
Example: Naomi promised Alexandra with a building which could be converted into a hospital, provided
that Alexandra shall become a licensed doctor of medicine. Shortly thereafter, the parties agreed that
instead of a building, Naomi will just give Alexa his resthouse in Baguio City. The second agreement did
not make any stipulation on the nature of the condition. The giving of the rest house is nevertheless
subject to the same condition, that Alexa shall become a licensed doctor of medicine.
Article 1300. Subrogation of a third 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. (1209a)
Konsepto:
Ang sabrogasiyon ay isang.. just kidding! Subrogation is the active subjective novation characterized by
the transfer to a third person of all the rights appertaining to the creditor in the transaction concerned
including the right to proceed against the guarantors or possessors of mortgages, and similar others
subject to any applicable legal provision or any stipulation agreed upon by the parties in conventional
subrogation.
It is the transfer of the credit of the creditor arising in a transaction, to a third person with all the rights
appertaining thereto, either against the debtor or against the third persons.
Rationale: Equity. It is designed to promote and to accomplish justice and is the mode which equity
adopts to compel the ultimate payment of a debt by one who in justice and good conscience ought to pay.
Limitation: A subrogee cannot succeed to a right not possessed by the subrogor.
Kinds of Subrogation (Active Subjective Novation):

As to their creation:
1. Legal Subrogation This is the subrogation that takes place by virtue and operation of law (Art. 1302)
2. Voluntary or Conventional Subrogation This is the subrogation created by the agreement of the
parties.
As to their extent:
1. Total Subrogation This is the subrogation where the credit or rights of the creditor in the transaction
are totally transferred to the third person.
2. Partial Subrogation This is the subrogation where only a part of the credit or rights of the creditor in
the transaction are transferred to the person.
Proving the Existence of Subrogation:

Legal subrogation is not presumed except in the cases mentioned in article 1302.
Voluntary subrogation must be clearly established with sufficient evidence.

Article 1301. Conventional subrogation of a third person

requires the consent of the original parties and of the third person. (n)
In the absence of consent of all the parties, no subrogation will result.

Assignment of rights is not subrogation.
Active subjective novation is stricter than passive subjective novation because in the latter, the consent of
the old debtor is not even required in expromission.
Basis Conventional Subrogation Assignment of credit/rights
The transfer of the credit/right does

Effect Extinguishes the original obligation
not extinguish or modify the
and creates a new one.
obligation. The transferee becomes the
new creditor for the same obligation.
Need for consent of Debtor The consent of the debtor is necessary The consent of the debtor is not
including the other original parties. necessary, notification is enough for
the validity of the assignment.
Effectivity Effectivity begins from the moment of Effectivity begins from the notification
subrogation. of the debtor.
Curability of defect or vice The defect in the old obligation may The defect in the credit or rights is not
be cured such that the new obligation cured by its mere assignment to a third
becomes valid. person.
The word legal is added to clarify that this applies to

5. Legal Subrogation: legal subrogation and not voluntary subrogation.
Article 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
(2) When a third person, not interested in the obligation,

pays with the express or tacit approval of the debtor;

(3) When, even without the knowledge of the debtor,
a person interested in the fulfillment of the obligation pays,
without prejudice to the effects of confusion as to the latter's share. (1210a)
Legal Subrogation Not Presumed:

Legal subrogation is subrogation by operation of law.
Generally, it is not presumed, unless there is a specific law providing for it.
Three Exceptions: in the 3 instances mentioned in the provision, legal subrogation is presumed to exist.

First Presumption:
The payment is made by a creditor to another who is preferred, meaning, one who enjoys priority of
payment under the rules on preference of credits.
Example: Isabel borrowed money from Lea and Bianca in the sum of 100 and 50 pesos, respectively. Isabels loan
from Lea is secured by a real estate mortgage, while Isabels loan from Bianca is unsecured. Without the
knowledge of Isabel, Bianca paid Lea all the obligations of Isabel. By this development, Bianca becomes a
mortgage creditor of Isabel at the same time an ordinary creditor insofar as the 50 pesos is concerned. There is
now a presumption that there is legal subrogation. Wherewith, Bianca can collect from Isabel and if the latter
failed to pay the mortgage obligations, Bianca can foreclose the mortgage. From the proceeds of the foreclosure
sale, Biancas credits shall be paid.
The rule in Articles 1236 and 1237 referring to payments made by a third person in behalf of the debtor
does not apply in the first exception.
Second Presumption:
A person not interested in the fulfillment of the obligation is someone who is not a party to the obligation
or contract. A person interested in the fulfillment is someone connected to the obligation like a guarantor,
co-debtor, or somebody who has a right on the property under consideration.
When a third person without interest in the obligation pays the obligation of the debtor, with the consent
of the latter, he is entitled not only to be reimbursed for what he had paid but is also subrogated in all the
rights of the creditor.
If the third person made the payment without the consent of the debtor, the former has no right to be
subrogated in all the rights of the creditor. He can only demand reimbursement for what he had paid and
only to the extent of the benefit enjoyed by the debtor (Art. 1236-37)
Example: Camila borrowed money from Meg. The loan is secured by a real estate mortgage. Sofy paid all the
obligations of Camila with the consent of the latter. The result of the consented payment is the subrogation of
Sofy into all the rights of Meg. Sofy may foreclose the mortgage if the mortgage obligations are not paid when
they become due.
Continuing from the above, if the payment was made by Sofy without the consent of Camila, Sofy cannot
be subrogated into the rights of Meg. This time, Art. 1236 applies.
Third Presumption:
In the third exception, the one who pays the obligation is someone interested in the fulfillment of the
obligation like a surety or guarantor.
Payment may be done without the knowledge of the debtor. Legal subrogation operates.
The co-debtor or guarantor is placed in the position of the old creditor.
Subrogation contemplates full substitution such that it places the party subrogated in the shoes of the
creditor, and he may use all means which the creditor could employ to enforce payment.
Rule In Case A Solidary Debtor Pays: If the payor is a solidary debtor, once the full payment is made
the entire obligation is extinguished. Hence, there is nothing more to subrogate. The payor cannot step
into the position of the creditor because he cannot enforce against his co-debtors the payment of the
original obligation.

Article 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining,

either against the debtor or against third person, be they guarantors or possessors of mortgages,

subject to stipulation in a conventional subrogation. (1212a)
Effect:
Article applies to both legal and voluntary subrogations. Once subrogation takes effect, the credit of the
creditor as well as all the rights appurtenant thereto like guaranty are transferred. However in
conventional subrogation, parties may stipulate on the extinguishment of the accessories.
Example: Bea borrowed money from Nica. Monique stood as guarantor for the obligation of Bea. Nicole, a
stranger to the contract, paid the obligations of Bea with the latters consent and that of Monique, the guarantor. If
Bea could not pay the obligation to Nicole, who has been subrogated in the place of Nica, Nicole could proceed
against Monique, the guarantor. The reason is that the guaranty subsists in the absence of a contrary agreement.
If the credit transferred to the new creditor is subject to a suspensive condition, the credit cannot be
collected until after the fulfillment of the said condition.
Article 1304. A creditor, to whom partial payment has been made, may exercise his right for the remainder,

and he shall be preferred to the person who has been subrogated in his place
credit. (1213)
in virtue of the partial payment of the same
Rule of Preference In Case Of Partial Subrogation:

There is partial subrogation when the credit had not been entirely subrogated.
It arises when a third person makes partial payment only to the creditor leaving the remainder of the
credit as subsisting.
There being two creditors, there may arise in conflict of interests when the payment made is not enough
to cover the two credits, in which case, the law states, the original creditor shall be preferred to the new
creditor.
The preference granted to the original debtor applies only to assets in the possession of the debtor. It
cannot be exercised against assets already transferred to other persons.
Example: Joyce borrowed money from Hazel in the sum of 10 pesos. Kim, a stranger, paid Hazel the sum
of 5 pesos leaving a balance of 5 pesos in the original obligation. The payment made by Kim is with the
consent of Joyce and Hazel. When the obligation matured, due to a bad choices, Joyce has only 7 pesos.
By the rule of preference, Hazel will be paid 5 pesos in full, and Kim will be paid only 2 pesos.

Contracts - General Provisions: (Articles 1305 to 1317)
1. Meeting of minds:
Article 1305. A contract is a meeting of minds between

two persons whereby one binds himself,
with respect to the other, to give something
or to render some service. (1254a)
Definition Given is Inaccurate:

A contract cannot be confined to a meeting of the minds between two persons, otherwise if the number of
persons exceed two then the article would no longer cover them.
A party in a contract may refer to one or more persons. There may be more than two parties in a contract,
and each party has a separate individuality which may constitute two or more persons.
The definition covers only the performance side of the obligation by one party, it failed to include cases
of mutual or reciprocal prestation where both parties have to perform for each other.
It also failed to include obligations not to do
Suggested Definition:
It is a meeting of the minds between two or more parties, whereby one party binds himself with respect to
the other, or where both parties bind themselves reciprocally, in favor of one another, to fulfill a
prestation to give, to do, or not to do.
Three Stages in the Making of a Contract:

1. Conception or Generation The first stage, where parties begin their initial negotiation and bargaining
for the formation of the contract ending at the moment of agreement of the parties. Also called
preparatory stage.
2. Perfection or Birth The second stage where the contract is said to have been born. Here, the parties
had a meeting of minds as to the object, cause, or consideration and other terms and conditions of the
contract. It has passed the preparatory stage.
3. Consummation or Fulfillment This is the last stage which consists in the performance or fulfillment
by the parties of their obligations under the terms of the perfected contract. Consummation is
accomplishment, death or termination of the contract. The parties ceased to be contractually related to one
another.
Classifications of Contracts:
ACCORDING TO NAME
a. Nominate those which have been given particular names or denominations by law. Ex. Sale, mortgage,
lease, carriage, deposit, insurance, agency, partnership, barter
b. Innominate those which have not been given any particular name and not regulated by special
provisions of law. Roman law has classified them as follows:
i. (aa) Do ut des (I give that you may give)
ii. (bb) Do ut facias (I give that you may do)
iii. (cc) Facio ut facias (I do that you may do)
iv. (dd) Facio ut des (I do that you may give)
ACCORDING TO SUBJECT MATTER

a. Contracts covering things such as contracts of sale, deposit, pledge, etc.
b. Contracts covering services such as contracts of carriage, agency
c. Contracts covering transmissible rights or credits such as a contract of usufruct and assignment of
credits

ACCORDING TO FORMATION OR PERFECTION
a. Consensual perfected by mere consent such as sale
b. Real cannot be perfected without delivery, such as commodatum, depositum, pledge, and loan
c. Formal cannot be perfected without compliance with the special formalities required by law such as
donations and mortgages of real property. Also called solemn contracts.
ACCORDING TO CAUSE
a. Onerous contracts providing for exchange of valuable considerations such as sale
b. Gratuitous those where one party gives/does something to/for the other without receiving any
equivalent or compensation such as donation and commodatum. Also called a lucrative contract.
c. Remunerative those where one party gives something to another in consideration of a previous or past
deeds of the other.
ACCORDING TO THE VINCULUM PRODUCED OR ACCORDING TO THE PARTY OR PARTIES OBLIGATED

a. Unilateral those where only one of the parties is bound to fulfill an obligation such as commodatum,
where the borrower must preserve the property and return it to the lender at the appointed time, and a
promissory note, where only the promisor had signed it.
b. Bilateral both parties have reciprocally bound themselves to fulfill their obligations. Also known as
synalagmatic contracts.
ACCORDING TO CERTAINTY OF FULFULLMENT

a. Commutative those contracts where the contracting parties contemplate the assured fulfillment of the
terms and conditions of their agreement such as contracts of mortgage and pledge. Generally, there is no
risk to anticipate here.
b. Aleatory those contracts where the fulfillment is dependent upon chance or event which may not
happen within the period stipulated such as an insurance contract.
ACCORDING TO COMPLETION OF PERFORMANCE

a. Executed those which are already completed when formally entered into such as a sale of a thing which
has already been delivered and paid for. There can be partially executed contract when there was already
partial payment.
b. Executory those where the prestations have yet to be fulfilled at some future date such as a unilateral
promise tot sell which has been accepted but the sale is not yet executed.
ACCORDING TO THE DEPENDENCE OF ONE CONTRACT UPON ANOTHER

a. Principal can exist alone such as sale, lease, deposit commodatum.
b. Accessory cannot exist alone such as mortgage which depends upon the existence of a contract of loan.
c. Preparatory those entered into for the creation of another contract such as an agency. In agency, the
principal gives authority to the agent to do a particular act. Equipped with a SPA to sell, the agent, for
instance, sells a property belonging to the principal. Here, the agency was established in preparation for
the contract of sale. A partnership is also a preparatory contract.
ACCORDING TO THE NUMBER OF PERSONS ACTUALLY PARTICIPATING IN THE CONTRACT

a. Ordinary two or more parties are represented by different persons such as sale.
b. Auto-contracts the two opposite parties are represented by one and the same persons, who represents
and acts in different capacities, such as an agent representing his principal who authorized him to borrow
money, may himself lend the money but not the other way around. Auto-contracts are allowed, unless
there is a specific law prohibiting them.
ACCORDING TO THE DIGNITY ACCORDED BY LAW

a. Institutional those which are given by law such as contract of marriage.
b. Ordinary those which are not institutional such as sale, deposit, lease, etc.
ACCORDING TO FREEDOM OF BARGAIN

a. Ordinary those where both parties are placed on equal footing in the negotiation and perfection of the
contract.
Do we fight the fights that we know we will win? Or do we fight the fights that are needed to be fought?
b. Contracts of adhesion those where one of the parties had drafted the contract for the other party to
accept or not to accept such as an insurance contract which is already printed. The adherent has no
freedom of bargain because he cannot modify the ready made covenant. He can only take it or leave it.
These contracts are strictly interpreted against the party who drafted them.
ACCORDING TO THE EVIDENCE NEEDED TO PROVE THEIR EXISTENCE

a. Contracts covered by the statue of frauds contracts which require a written evidence, note, or
memorandum to prove their existence.
b. Contracts which can be proved by parole evidence such as a lease contract for a period of less than
one year, a contract of sale where there was already full or partial payment.
ACCORDING TO THE PERSONALITY OF PARTIES

a. Personal those where the person of the party is essential to the existence of the contract such as a
contract for life insurance where the contract shall cease to exist upon the death of the insured.
b. Impersonal those where the persons of a party or parties are not essential to the continuity of the
contract such as a contract of lease. Death will not terminate the contract, heirs may continue it.
ACCORDING TO THE MANNER THE CONSENT IS GIVEN

a. Express consent is given expressly in writing or verbally.
b. Implied consent is not given expressly but is deducible from the conduct or acts of the parties such as
an implied agency where the principal fails to repudiate the acts of the person acting in his behalf,
knowing such as situation.
c. Presumed consent was not given by the parties but is presumed or provided by the law itself, to prevent
unjust enrichment such as quasi-contracts.
Basic Legal Principles Governing Contracts:

(or characteristics of contracts)
1. Freedom to Stipulate the parties are free to create or establish stipulations, clauses, terms and
conditions as they may deem convenient provided these are not contrary to law, morals, good customs,
public order, or public policy.
2. Obligatory force of contracts obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
3. Mutuality of contracts a contract binds both contracting parties and its validity or the compliance
cannot be left to the will of only one party.
4. Relativity of contracts contracts take effect only between the parties, their assigns and heirs except
where the rights and obligations arising from the contract are not transmissible by their nature, by
stipulation, or by law.
5. Perfection by mere consent of consensual contracts consensual contracts are perfected by mere
consent.
Jardine Davies vs. CA

Purefoods held a bidding for the purchase of 2 generators. In its letter, they awarded the contract to FEMSCO. In
the letter, there are 6 conditions stated. After sometime, Purefoods unilaterally cancelled the contract. Femsco
protested but before the matters can be resolved, Purefoods awarded the contract to Jardine.
Was there a perfected contract between Purefoods and Femsco? - YES
The court ruled that there was already a perfected contract between Purefoods nd Femsco.
The letter by Purefoods constituted acceptance by Femsco. The conditions in the letter were not conditions where
the perfection of contract was dependent rather they were conditions in performing the obligation. Even if we
assume that the letter was a conditional counter offer, subsequent acts such as the return of the bidding bond and
the payment of the all-risk insurance policy confirmed that there was already a perfected contract.

2. Freedom To Stipulate:
Article 1306. The contracting parties may establish such stipulations,

clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.
(1255a)
Principle of Free Stipulation:

By this principle, parties have the right to negotiate and agree on any stipulation.
The right is guaranteed under the constitution, so the right of stipulation is both a statutory and a
constitutional right.
Limitations:
Freedom to stipulate is not an absolute right.
The stipulations must not be contrary to law, morals, good customs, public order, or public policy.
a. Limitations by Law Existing law enters into and forms part of a valid contract without the
need for the parties expressly making reference to it. Acts contrary to mandatory and prohibitory
law are void except when the law itself authorizes their validity. Violation of directory and
suppletory laws do not make the act void. i.e., a stipulation which deprives a court of jurisdiction
is void.
b. Limitations by Morals Morals referred to are those moral principles which are incontrovertible
and accepted universally. They must have social and practical recognition. A full understanding
of the Ten Commandments of God provides the perfect and immutable standard for determining
what is good and what is evil. i.e., a contract where a man and a woman would get married but
the woman would be paid for entering into the relationship is void
c. Limitations by Good Customs Good customs refer to the generally accepted principles of
morality which have received some social and practical recognition in the community for a long
period of time. Thus, all contracts which have their aims for immoral purposes are against good
customs. Good morals and good customs overlap each other, though sometimes they do not. i.e.,
a contract of marriage with someone only for the purpose of economic gains since the other
spouse is very rich is contrary to good customs. Providing a penalty if one of the parties would
back out from his/her promise to marry is against good customs.
d. Limitations by Public Order Public order refers only to public safety of the people which
includes the maintenance of peace and order both in the entire country and in a particular
community. i.e., a contract for importation of piranhas is void for being contrary to public safety.
e. Limitations by Public Policy Public policy is the public, social, and legal interest in private
law. It is a principle which restricts freedom of contract for the good of the public. In the
constitution, there is a declaration on the public policies of the state, and a stipulation against
these would be a stipulation against public policy. A contract is contrary to public policy if it has
a tendency to injure the public, is against the public good, or contravene some established interest
of society, or is inconsistent with sound policy and good morals, or tends clearly to undermine the
security of individual rights. i.e., a stipulation exempting a carrier from liability for its gross
negligence, a stipulation in a contract surrendering ones right to vote and to run for public office.
Validity of Contracts, to be Sustained:

When the stipulations are not against any of those mentioned above, the validity of the contract must be
sustained. Some examples of valid stipulations are as follows: a stipulation that the mortgage debt shall
not be paid during the war, a stipulation that if the debtors could not pay, they would mortgage their land
to the creditor, etc. These are valid stipulations.
Azcuna, Jr. vs. CA
Azcuna (lessee) entered into a one year lease agreement with private respondent Barcelona Family (lessor). The
agreement contained a penal clause which states that inn case the LESSEEs failure or inability to do so, LESSOR
has the right to charge the LESSEE P1,000.00 per day as damages without prejudice to other remedies which
LESSOR is entitled in the premise.
The lease expired without an agreed renewal thereof and petitioner failed to surrender the leased premises to the
private respondent causing the latter to file an ejectment case against Azcuna.
The CA affirmed the ruling of the MTC and RTC ordering petitioner to vacate the premises and pay damages in
addition to the amount of the fair rental value that is due.
Petitioner on appeal argues that the awarding of damages is improper because only the fair rental value may be
claimed in an ejectment case as cited in jurisprudence, and other damages must be claimed in an ordinary action.
Was the awarding of damages in addition to the fair rental value valid? - YES
The freedom of the contracting parties to make stipulations in their contract provided they are not contrary to law,
morals, good customs, public order or public policy is so settled, and the Court finds nothing immoral or illegal
with the indemnity/ penalty clause of the lease contract.
Manila Bay Club vs. CA

The Sabenianos entered into a lease contract with Manila Bay Club Corporation. The contract contained a
special clause which provided for the right of the Sabenianos to rescind the contract in case of any breach in the
terms and conditions provided therein.
It appeared that Manila Bay Club committed several breaches, the most substantial of which is its failure to secure
an insurance policy on the leased premises for the benefit of the Sabenianos as lessors.
Thus, the Sabenianos unilaterally rescinded the contract.
Was the unilateral rescission based on the special clause valid?
The Court held that it is within the right of the Sabenianos to rescind the contract in view of the principle that
contracts are considered as the law between the parties and also the Freedom to Contract doctrine providing for
the power of the parties to establish such stipulations, clauses, terms and conditions as they may want to include
subject to the condition that they should not be contrary to law, morals, good customs, public policy or public
order.
De Leon vs. CA
Jose and Sylvia were married for 2 years until Sylvia left the conjugal home and went to US, where she obtained
American citizenship. She filed with the Superior Court of California a petition for the dissolution of marriage but
she chose to hold in abeyance the divorce proceedings because Jose is a Philippine citizen and did not have any
assets in US.
She entered in a Letter-Agreement with Macaria (mother-in-law), premised on the termination of relations."
This was to obtain some of the properties of Jose in the Philippines.
Was the termination of relations a valid stipulation? NO
The court held that relations pertain to all kinds of relations, both marital and property. Since the Letter-
Agreement is premised on the termination of either or both the marital or property relationship, it is void.
Marriage is not a mere contract but a sacred social institution.
Batarra vs. Marcos

Batarra sought to recover damages for breach of promise of marriage to her by Marcos, and alleged that she was
induced to submit herself to sexual relation with him on account of a promise of marriage.
Lower court ruled in favor of Batarra; awarded her damages worth P500. The facts in the record do not show the
commission of the crime of seduction because it does not appear that the plaintiff was below 23y/o.
Can Batarra recover damages for the breach of promise of marriage? - NO
A promise of marriage based upon carnal knowledge is an unlawful and immoral consideration and no action can
be maintained against Marcos by Batarra who was already over 23y/o and deemed to have voluntarily participated
in the act. Both parties were at fault.

Cui vs. Arellano University

In order to able to take the bar examinations, plaintiff Cui secured his transcript of records from his previous
school, defendant Arellano University.
He was a recipient of scholarship grants during his stay in Arellano, wherein his semestral tuition fees were
refunded to him at the end of each semester. For failure to pay his tuition fee during the first semester of his last
school year, he needed to transfer to another university.
Arellano refused to issue him his transcripts unless he paid them back the fees corresponding to his previous
scholarships. To ensure the payment, Cui was made to sign a contract of waiver which states that he waives his
right to transfer to another school until he has refunded his scholarship fees to Arellano.
Was the contract of waiver valid? NO!
Scholarships are granted in recognition of merit not to keep outstanding students in school to bolster its prestige.
The contract of waiver was contrary to public policy, and hence, null and void. Awarding scholarships to attract
students and to keep them in school is not good customs.
Ferrazzini vs. GSell

Ferrazzini was under the employment of Gsell. However, his employment was terminated on account of his
absence, unfaithfulness, and disobedience of orders.
A provision in their contract states that once his employment is terminated, he cannot work anywhere in the
Philippines for the next five years after his termination.
After Gsell discharged Ferrazzini from his service, Ferrazzini entered the employment of Mr. Whalen in the
Philippine Islands as a foreman on some construction work for a cement factory within a few days after his
discharge and without the consent, either written or verbal, of the defendant.
Was the provision valid? NO
SC ruled that such stipulation is an undue and unreasonable restraint of trade and therefore against public policy.
It would force Ferrazzini to leave the Philippines in order to seek employment if ever Gsell decides not to allow
him to work here. It was stated that Public Policy is the principle under which freedom of contract or private
dealing is restricted by law for the good of the public.
Omico Mining and Industrial Corp vs. Vallejos

Judge Catolico was a stockholder of Omico Mining. His 10 certificate of stocks were borrowed by Omico to be
used as collateral however these stocks were not yet returned to him.
Omico and Webber contracted the professional service of Judge Catolico. He headed the Legal Department of
Omico and attended to personal consultation by Webber.
They failed to pay Judge Catolico and Judge Catolico demanded accounting and payment of such salaries and
commission.
Was the contract of service between Judge Catolico and Omico valid? - NO
The contract of professional services entered into between private respondent and the petitioners, while the former
was still a judge of the Court of First Instance, constituted private practice of law and in contravention of the
express provision of Section 35 of Rule 138 of the Revised Rules of Court.
The aforesaid contract is void because a contract, whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy, is considered inexistent and void from the beginning.
3. Innominate contracts:
Article 1307. Innominate contracts shall be regulated by the stipulations of the parties,
by the provisions of Titles I and II of this Book,
by the rules governing the most
analogous nominate contracts,
and by the customs of the place. (n)
Classification of Contracts as to their Names:

Nominate contracts are those given specific individuality and names by law such as sale, lease, mortgage,
pledge, deposit, commodatum, partnership, agency, compromise, arbitration, guaranty, etc.
Those which are not given any names or designations are nominate contracts. Under the Roman Law,
they are classified as follows:
o Do ut des (I give that you may give)
o Do ut facio (I give that you may do)
o Facio ut des (I do that you may give)
o Facio ut facias (I do that you may do)
Innominate contracts shall be governed by the following:
o Stipulations of the parties
o Provisions of Obligations and Contracts in the Civil Code
o Rules governing the most analogues nominate contracts
o Customs of the Place
Perez vs. Pomar

Pomar verbally engaged Perez to act as interpreter between himself and the military authorities. Perez did, on
various occasions, render the services as an English interpreter for Pomar. Perez now comes to court asking it to
determine the amount of compensation due to him for acting as an interpreter.
Pomar moved to dismiss the complaint saying that there existed no legal relation between his company and Perez
and that the latter acted as an interpreter on his own free will, without being requested by the defendant and
without any offer of payment.
Is Perez entitled to compensation for acting as interpreter? YES
Whether the service was solicited or offered, the fact remains that Perez rendered to Pomar services as interpreter.
As it does not appear that he did this gratuitously, the duty is imposed upon the defendant, having accepted the
benefit of the service, to pay a just compensation therefor, by virtue of the innominate contract of facio ut des
implicitly established.
It is but just that he should pay a reasonable remuneration therefor, because it is a well-known principle of law
that no one should be permitted to enrich himself to the damage of another.
Asian Construction vs. Cathay Pacific Steel

Asian Construction and Development Corporation (ACDC) purchased from Cathay Pacific Steel Corporation
(CAPASCO) reinforcing steel bars.
ACDC made few partial payments but defaulted on the balance of P214, 704.91 which prompted CAPASCO to
file an action against ACDC. The RTC ruled in favor of CAPASCO and ordered ACDC to pay a sum of money
plus 2% interest per month. Court of Appeals modified the interest rate into 24% per annum as this was,
according to the court, expressly provided in the sales invoice.
ACDC now contends that the Court should follow the ruling in Eastern Shipping lines vs. CA which provided for
the legal interest of 6% per annum. CAPASCO countered saying that the sales invoices are clear and unequivocal
as regards the stipulated interest rate of 24% per annum.
Should the stipulated interest rate on the sales invoice be followed? YES
The sales invoices expressly stipulated the payment of interest and attorneys fees in case of overdue accounts and
collection of suits.

The sales invoices are in the nature of contracts of adhesion. The court has repeatedly held that contracts of
adhesion are as binding as ordinary contracts. Those who adhere to the contract are in reality free to reject it
entirely and if they adhere, they give their consent.
By contracting with the respondent and not objecting to the stipulations in the sales invoice, ACDC bound itself to
what is stipulated therein.
4. Mutuality of Contracts:
Article 1308.
The contract must bind both contracting parties;

its validity or compliance cannot be left to the will of one of them. (1256a)
Mutuality of Contract:
It is natural and logical that the contract shall bind both contracting parties. This is based on the essential
equality of the parties.
The binding effect of a contract on both parties is based on the principle that the obligations arising from
contracts have the force of law between the contracting parties.
Rule on Validity or Compliance:

Validity or compliance with the contract cannot be left to the will of one of the contracting parties.
What is meant here is that the contract cannot have any stipulation authorizing one of the parties to:
o Determine whether or not the contract shall be valid
o Determine whether or not the contract shall be fulfilled
However, a third person may be authorized to determine fulfillment but not the validity, as provided for in
the next article. But he must not make the determination of the fulfillment evidently inequitable.
Stipulations Allowing a Party to Cancel or Rescind do not Militate Against Mutuality:

When the contract provides that the contracting parties is authorized to cancel the same and the party
given this right subsequently cancelled the contract, the agreement is just being fulfilled. Mutuality of the
contract is not violated.
The general rule is that a party cannot revoke or renounce a contract without the consent of the other.
They may however mutually cancel their contract under such terms and conditions as they may deem
wise.
Article 1309. The determination of the performance may be left to a third person,

whose decision shall not be binding

until it has been made known to both contracting parties. (n)
Determination of Performance:
Performance refers to the fulfillment of the obligation. It is different from the execution of the contract
where only the contracting parties have any direct participation.
Illustration: Hazel purchased from Joyce goods in the possession of Kim. Hazel and Joyce may agree that
the delivery of the goods to Hazel will be at the convenient day and time of Kim. Here, the delivery is left
at the discretion of a third person, Kim. However, Kim must notify Hazel and Joyce when she would
deliver the goods to bind the parties. Notice is required to allow the parties to prepare themselves for the
acceptance of the goods.
Article 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. (n)
If Determination is Evidently Inequitable, it is Not Obligatory upon the Parties:

Once determination of the performance is left to a third person and that person made a determination
which is evidently or apparently inequitable, the court will resolve what is equitable under the
circumstances.
Concept of Equity; Distinguished from Justice:

Equity is a system or code of law compiled as corrective to a too technical system.
Remedies in courts are so limited and precise in their application and so rigid as to procedure that they are
in many instances inadequate to mete out justice.
When a person seeks justice, he is seeking the full impact of the law. When he seeks equity, in effect, he
is seeking mercy or relaxation of the sanctions of the law due to certain humanitarian circumstances.
The general rule is that where an adequate remedy can be had at law, one cannot resort to a court of
equity.
There are certain classes of cases which are peculiarly within the jurisdiction of a court of equity, such as
fraud, accident or mistake, imperfect consideration, cancellation and reformation of instruments, etc. This
includes instances where parties do not stand on equal ground, such as a parent and a child, guardian and
ward, attorney and client, or where the person is incapable of taking care of his own rights, etc.
Courts in the Philippines are both courts of justice and equity, unlike courts in England. Hence, a judge is
allowed leeway to dispense what is equitable when the law is too rigid such that it becomes inadequate to
give tempered justice.
UCPB vs. Beluso

UCPB and Spouses Beluso entered in a Credit Agreement whereby the latter could avail from the former, a credit
up to P2.35 million. The spouses executed 5 promissory notes, but the UCPB failed to release the amounts
covered by the last 2 (amounting to P350k).
Still, UCPB applied interest rates on all promissory notes ranging from 18%-34%.
The spouses were able to pay the total sum of P750k, but failed to pay for the interest and penalty. UCPB
demanded to pay their total obligation amounting to P3 million but spouses failed to comply.
Was the interest rate used by UCPB void for violating the mutuality of contract? YES
The interest rates are dependent solely on the will of UCPB: it is determined by Branch Head who may chose any
rate he desires.
In order that obligations arising from contracts may have the force of law between the parties, there must be
mutuality between them based on their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the parties, is void.
Joaquin vs. Mitsumine

Atty. Joaquin executed a chattel mortgage in favor of Mitsumine as a security for two promissory notes. He
alleged that the mortgage must be declared as null and void as it was executed by mistake.
He claimed to have instructed Mitsumine to acquire the machines at the request of his client Macario, and thus
such client should be the one responsible for the payment.
Is the chattel mortgage null and void? NO
Atty. Joaquin, for himself and in his own name, contracted with Mitsumine for the acquisition and purchase of the
said machine and received from him the machine so purchased.
He therefore cannot use as a defense that the vendor should collect the balance of its price from a third person
with whom the vendor did not contract and who did not receive the purchased machine, and in asserting such a
claim on the pretext that he made a mistake in contracting for himself and not in the name of his client Macario
Vito.

If, after a perfect and binding contract has been executed between the parties it occurs to one of them to allege
some defect therein as a reason for annulling it, the alleged defect must be conclusively proven , since the validity
and fulfillment of contracts cannot be left to the will of one of the contracting parties
The validity and authenticity of the said mortgage deed, is unquestionable for the plaintiff has not explained the
claimed error, nor has he proved that the real purchaser of the machine was his client Macario Vito
Garcia vs. Legarda

Spouses Garcia bought 3 lots/parcels of land from Legarda. There is a stipulation in their contract that if
petitioners fail to pay installments, they would be given a month of grace to make the payment, and if they still
fail to do so, a 90-day grace period would take place. Upon expiration of the 90-day grace period, respondent
had the right to cancel the contracts, and sell the lots to other parties as if the previous contracts had never taken
place.
In relation to the contracts to sell, petitioners made installments corresponding the amount stipulated in the
contract. But as of June 11, 1952, they failed to pay the subsequent installments. Spouses now claim that the
stipulation is void for being violative of Article 1308 since the rescission is based upon the sole will of Legarda.
Was the contract violative of Article 1308? NO!
The stipulation merely gave the vendor the right to declare the contract cancelled and of no effect upon
fulfillment of the conditions set forth in the contracts. It does not leave the validity or compliance of the contract
entirely to the will of one of the contracting parties.
A contract expressly giving to one party the right to cancel is valid; the reason being that when the contract was
thus cancelled, the agreement of the parties was in reality being fulfilled. It could be exercised, but only upon the
other contracting party committing the breach of contract of non-payment of the installments agreed to it.
5. Relativity of Contracts:
Article 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract
are not transmissible by their nature, or by stipulation or by provision of law.
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 third 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 and deliberately conferred a favor upon a third person.
(1257a)
Principle of Relativity of Contracts or Principle of Limited Effectivity:

One of the characteristics of contracts is that they are binding or effective only between the contracting
parties, their assigns, and heirs. This is the principle of relativity.
It is understood that the rights are transmissible because if they are not, then they only bind the actual
parties in the contract.
Assigns and heirs are thus excluded when the right or obligation is personal to the party, such as the right
to receive support. This is the principle of limited effectivity. If the recipient dies, his heirs cannot
continue with it as recepients.
Test to Determine Transmissibility of Rights:

Rights which are intransmissible are purely personal rights, either by provisions of law or by its nature.
A good measure for 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 which cannot be performed by anyone else are discharged by the death of the promissory.
Conversely, when the service or act may be performed by another, death does not terminate the contract.
Exceptions to the Principle of Relativity:

The binding power of contracts is generally limited only to the parties, their assigns and heirs.
However, there are 3 exceptions:
1. If the obligation is by their nature, not transmissible such as personal obligations. i.e., obligation to
give support.
2. If by stipulation of the parties, the obligation shall be performed only by the party himself.
3. If under the provision of law, the obligation is intransmissible. i.e., obligations arising from a
contract of partnership.
Third Persons are not Bound in Contracts Where they did not Participate:
Those who did not participate in the contract are not bound thereby.
In compromise agreements, a judgment based on a compromise agreement is binding only on the parties
to the compromise the court approved, and not upon the parties who did not take part in the compromise
agreement.
Exceptions to Third Persons not being Bound:
1. When there is a stipulation in favor of a third person who accepted the benefit before the contract had
been revoked. This is also known as stipulation pour autrui.
2. A lessor is not bound by the terms of the sublease entered into by the lessee and the sublessee as he is not
a party thereto, but an action by the lessor against the lessee will affect the sublessee
3. Even if the consignee is not a signatory to the contract of carriage, the consignee can still be bound by the
contract.
4. When third persons are adversely affected by a contract where they have no participation.
5. When a third person induces a party to violate his contract.
6. Where a creditor by provision of law is authorized to assail the contract entered into by his debtor.
6. Stipulation Pour Autrui:

Definition:
It is a stipulation in favor of a third person conferring a CLEAR and DELIBERATE favor upon him and
which stipulation is merely a part of the contract entered into by the parties, neither of whom acted as
agent of the third person, and which favor can be demanded by the third person if dully accepted by him
before it could be revoked.
A stipulation pour autrui cannot be revoked unilaterally by the obligor alone. The conformity of the other
contracting party is needed.
Requisites of Stipulation Pour Autrui:

1. There is a stipulation in favor of a third person
2. The stipulation is just a part of and not the whole obligation in the contract
3. The favor or benefit must have been clearly and deliberately conferred by the parties upon a third person
4. The favor or benefit conferred is not just an incidental benefit or interest
5. Neither of the parties bears the legal representation or authorization of the third party
Forms of Acceptance:
Acceptance by the third person may be done expressly or impliedly.
The acceptance must be absolute, unconditional, and identical with the terms of the offer.
Thus, when a beneficiary entered into the possession of the property, there is acceptance already.
Test to Determine the Nature of the Interest of the Third Person:

The question to answer is this: Did the parties deliberately insert terms in their contract with the avowed
purpose of conferring a benefit or favor upon such third person? If yes, then there is a stipulation pour
autrui.
A stipulation in the insurance policy providing that the insurer shall indemnify the insured taxi company
in the event of an accident which causes bodily injury to its driver is a stipulation pour autrui. It is a
justification of the suit of the heirs of the deceased driver filed against the insurer seeking indemnity.

Integrated Packing vs. CA
Integrated (petitioner) entered into an order of agreement with Fil-Anchor whereby the latter bound itself to
deliver to the former 3,450 reams of printing paper at different dates worth P1 million.
Later, Integrated entered into a contract with Philacor to print 3 volumes of Philacor Cultural Books for
delivery on different dates for a total cost of P3 million.
Fil-Anchor was able to deliver 1,097 reams of printing paper and various quantities of printing paper
amounting to P766,101.70. Integrated failed to settle the payment of such delivery to Fil-Anchor. However,
Integrated made partial payments totalling P97,200.00. Integrated failed to comply with its contract with
Philacor. Philacor filed a collection suit with RTC Caloocan against Integrated (amount disclosed below).
Was the failure of Fil-Anchor to deliver the paper at different dates violative of its agreement with Integrated?
Is Fil-Anchor liable for Integrateds breach of contract with Philacor? NO!
It was petitioner which breached the agreement as it failed to pay on time the materials delivered by private
respondent.
Transaction between the parties is a CONTRACT OF SALE whereby Fil-Anchor (seller) obligates itself to
deliver printing paper to Integrated (buyer) which, in turn, binds itself to pay therefor a sum of money or its
equivalent (price). Both parties concede that the order agreement gives rise to reciprocal obligations such that the
obligation of one is dependent upon the obligation of the other.
The private respondents suspension of its deliveries to petitioner whenever the latter failed to pay on time, as in
this case, is legally justified.
Fil-Anchor is not a party to said agreements. It is also not a contract pour autrui.
Aforesaid contracts could not affect third persons like private respondent because of the basic civil law principle
of relativity of contracts which provides that contracts can only bind the parties who entered into it, it cannot
favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof.
DKC Holdings vs. CA

DKC Holding had a Contract of Lease with Option to Buy with Encarnacion Bartolome. DKC religiously paid
P3,000 every month to Encarnacion as consideration for the reservation of its option until her death.
When they gave the payment to Victor, the sole heir of Encarnacion, he refused to accept such payment. DKC
also informed Victor of their decision to exercise the option to lease the property and Victor refused to accept the
payment.
Was the contract executed by the late Encarnacion, binding upon her sole heir Victor? - YES
The general rule, therefore, is that heirs are bound by contracts entered into by their predecessors-in-interest
except when the rights and obligations arising therefrom are not transmissible by (1) their nature, (2) stipulation
or (3) provision of law.
In the case at bar, there is neither contractual stipulation nor legal provision making the rights and obligations
under the contract intransmissible. More importantly, the nature of the rights and obligations therein are, by their
nature, transmissible.
A good measure for 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 promissor's personal representative.
In the case at bar, there is no personal act required from the late Encarnacion Bartolome. Rather, the obligation of
Encarnacion in the contract to deliver possession of the subject property to petitioner upon the exercise by the
latter of its option to lease the same may very well be performed by her heir Victor.
Marmont Hotel vs. CA

Marmont Resort and Maris Trading entered into an agreement wherein the latter is to install a water supply
facility for the former. Maris trading drilled a well and installed a water pump on a land owned by the Guiang
spouses. In view of this, Maris Trading entered into an agreement with the spouses wherein the latter is to sell the
portion of the lot where the water pump is located to Maris Trading.
When subsequent improvements to the water facility were needed, Marmont employed the services of another
contractor. They asked permission from the Guiang spouses to enter the premises of their land to inspect the water
system but the spouses refused them saying that they do not have knowledge of any agreement between Marmont
and Maris Trading.
Marmont now claims for damages.
Are the spouses liable for damages to Marmont? YES
The sole purpose of Maris Trading in acquiring possessory rights over that specific portion of the land where well
and pump and piping had been installed, was to supply the water requirements of petitioners hotel. That said
purpose was known by respondent spouses, is made explicit by the second Memorandum of Agreement. Maris
Trading itself had no need for a water supply facility; neither did the respondent spouses. The water facility was
intended solely for Marmont Resort Hotel. The interest of Marmont cannot therefore be regarded as merely
"incidental."
It is clear from the foregoing stipulations that petitioner Marmont was to benefit from the second Memorandum of
Agreement. In fact, said stipulations appear to have been designed precisely to benefit petitioner and, thus,
partake of the nature of stipulations pour autrui, contemplated in Article 1311 of the Civil Code.
Coquia vs. Fieldmens Insurance

Fieldmen's Insurance Company, Inc. issued an insurance policy in favor of Manila Yellow Taxicab Co., Inc.
One of the taxicabs of the taxi company got involved in an accident which led to the death of its driver. The taxi
company, joined by the parents of the deceased driver, filed a claim of P5, 000 (later decreased to P4, 000) against
the Insurance Company but the latter refused.
This led to a formal filing of action to collect the proceeds of the insurance policy in the CFI of Manila which
sentenced the Insurance Company to pay the Coquias. The main contention of the Insurance Company in this case
was that there was no existing contractual relations between them.
Can the Coquias validly claim the proceeds of the insurance policy? YES
Pursuant to the stipulations in the insurance policy, the Insurance Company "will indemnify any authorized Driver
who is driving the Motor Vehicle" of the Taxi Company and, in the event of death of said driver, the Company
shall, likewise, "indemnify his personal representatives."
In fact, the Company "may, at its option, make indemnity payable directly to the claimants or heirs of claimants
- in other words, third parties.
The policy under consideration is typical of contracts pour autrui, this character being made more manifest by the
fact that the deceased driver paid fifty percent (50%) of the corresponding premiums, which were deducted from
his weekly commissions.
Mandarin Villa vs. CA

On Oct 1989, Atty.de Jesus hosted a dinner for his friends at Mandarin Villa Seafoods Village. He offered to pay
through his BANKARD credit card with an expiration date on Sept 1990. The cashier passed the card over the
verification computer twice but the same information was produced, card expired. He offered to pay through his
BPI credit card and it was accepted.
De Jesus filed a suit for damages. Judgment was rendered directing the petitioner and BANKARD to pay jointly
and severally the private respondent for damages. CA modified this decision absolving BANKARD from liability.
Is the petitioner bound to accept payment via credit card, particularly BANKARD? YES
Mandarin Villa Seafood Village is affiliated with BANKARD. In fact, an "Agreement between them states that
Mandarin shall honor validly issued credit cards.
While private respondent may not be a party to the said agreement, the Agreement conferred a favor upon the
private respondent, a holder of credit card validly issued by BANKARD. This stipulation is a stipulation pour
autri and under Article 1311 of the Civil Code private respondent may demand its fulfillment provided he
communicated his acceptance to the petitioner before its revocation.
In this case, private respondent's offer to pay by means of his BANKARD credit card constitutes not only an
acceptance of the said stipulation but also an explicit communication of his acceptance to the obligor.
Thus, the appeal is dismissed and Mandarin must pay damages.
Everett Steamship vs. CA

Hernandez Trading bought three crates of bus spare parts from Maruman Trading to be shipped from Japan by a
vessel owned by Everett; Marumans importation using the services of Everett was covered by a bill of lading
which stipulated in a clause a limited liability (Y100,000 only) in case of loss or damage unless the value of the
goods higher than such amount is declared in writing by the shipper.
Upon arrival at Manila, one crate was missing and Hernandez Trading filed a claim for recovery since Everett
only offered to pay 100k yen pursuant to the bill of lading provision.

Trial Court and the CA both ruled that Hernandez is not bound by the bill of lading entered into by Maruman and
Everett since Hernandez is not a party in such agreement, hence, Everett must pay the actual amount of damages.
Also, the bill of lading had small letters, making it unreasonable.
Was the lower court and the court of appeals correct in its ruling? NO
When private respondent formally claimed reimbursement for the missing goods from petitioner and subsequently
filed a case against the latter based on the very same bill of lading, it (private respondent) accepted the provisions
of the contract and thereby made itself a party thereto, or at least has come to court to enforce it. Thus, private
respondent cannot now reject or disregard the carriers limited liability stipulation in the bill of lading. In other
words, private respondent is bound by the whole stipulations in the bill of lading and must respect the same.
To defeat the carriers limited liability, the Clause in the bill of lading requires that the shipper should have
declared in writing a higher valuation of its goods before receipt thereof by the carrier and insert the said
declaration in the bill of lading, with the extra freight paid. These requirements in the bill of lading were never
complied with by the shipper, hence, the liability of the carrier under the limited liability clause stands.
The bill of lading is a contract of adhesion, a pre-made form which may be rejected entirely or consented to. It is
not illegal, but it is carefully scrutinized to avoid deceptive schemes. In this case, the small letters do not make the
bill of lading invalid, and Maruman Trading has been in the business for a long time to know what it should have
done in order to increase the liability of Everett, but it did not do so.
Kauffman vs. PNB

Kauffman, president of the Philippine Fiber and Produce Company (PFPC), held in his own right nearly the entire
issue of the companys capital stock. The companys board of directors gave him the sum of Php98,000 from its
surplus earnings in 1917.
In 1918, Wicks, the companys treasurer, requested a telegraphic transfer of $45,000 to be sent to Kauffman in
New York City, upon the account of the company. Wicks was informed that the total cost of the transfer was
Php90,355.50, so he drew a check for that amount to make the transfer.
After accepting the payment, PNB withheld the transfer despite Kauffmans demand. PNBs defense was that it
was only protecting itself, because Kauffmans company did not have sufficient security to warrant payment of
the remittance.
In this case, PNB insisted that Kauffman had no right to institute any action, because he was not a party to the
contract; the contract was between PNB and PFPC.
Can Kauffman file an action against the bank for the non delivery of the money? YES
The Court ruled in favor of Kauffman. Relying upon the intentions of the parties, it can be said that Kauffman
was a third party whose interests were incidental to the contract.
The banks promise to cause a definite sum of money to be paid to him in New York was a stipulation in his favor
within the meaning of the Civil Code, and as such, he had the right to maintain an action to recover it.
He also signified his acceptance to the transfer by demanding the money from PNB New York, therefore the
provision on pour autrui was met.
Associated Bank vs. CA

Associated Banking Corporation and Citizens Bank and Trust Company merged to form just one banking
corporation known as Associated Citizens Bank (surviving bank) but later on the surviving banks name was
changed into Associated Bank.
Sarmiento (defendant) executed a promissory note in favor of Associated Bank whereby he undertook to pay the
latter P2.5 M. He failed pay despite repeated demands.
Sarmiento contended that a) plaintiff is not the proper party in interest because the promissory note was executed
in favor of Citizens Bank and Trust Company (which is no longer existent due to a merger) and the said note was
a contract pour autrui.
Was the bank the proper party and was the contract a contract pour autrui? NO
The fact that the promissory note was executed after the effectivity date of the merger does not militate against
petitioner. The agreement itself clearly provides that all contracts -- irrespective of the date of execution --
entered into in the name of CBTC shall be understood as pertaining to the surviving bank, herein petitioner.
SC found no stipulation at all that would even resemble a provision in consideration of a third person. The
instrument itself does not disclose the purpose of the loan contract. It merely lays down the terms of payment and
the penalties incurred for failure to pay upon maturity.
It is patently devoid of any indication that a benefit or interest was thereby created in favor of a person other than
the contracting parties.
Article 1312. In contracts creating real rights,

third persons who come into possession of the object of the contract are bound thereby,
Law and the Land Registration Laws. (n)
subject to the provisions of the Mortgage
Concept of Real Right:

A real right is one which binds the property over which it is created or exercised.
Examples: A mortgage constituted on a titled property and duly registered, A contract of lease of a parcel
of land for more than one year which is duly registered.
These real rights if recorded are binding upon third persons even if they did not participate in the said
contracts.
However, if they are not registered, and the buyers of the properties have acted in good faith, they are not
bound to respect the mortgage or lease.
Article 1312 is an Exception to the General Rule of Relativity

Even though third persons are not parties to the contracts under the article, they are thus bound.
A real estate mortgage which is duly recorded is a right in rem and is binding against third persons. It is a
lien on the property which is inseparable therefrom and remains subsisting until discharged. Subsequent
purchasers of said property are bound by the said liens.
Article 1313. of contracts intended to defraud them. (n)

Creditors are protected in cases

Accion Pauliana, Baby!:
This article is also an exception to the rule of the principle of relativity of contracts.
When a debtor alienates a property without leaving enough for his creditors and his intention is to
defraud them, his creditors may file an action for rescission of the said contracts, accion pauliana.
7. Contractual Interference:
Article 1314. Any third person who induces another to violate his contract

shall be liable for damages to the other contracting party. (n)

Effect of Interference with Contractual Relations:

A third person who induces another to violate his contract without a valid excuse is liable for damages to
the other contracting party who is prejudiced by the said intereference.
This intermeddling is known in the law on torts as interference with contractual relations.
Extent of the liability for damages of the intermeddler cannot be more than the liability that will be
incurred by the party in whose behalf he intermeddled.
Elements of Tortious Interference with Contractual Relations:

1. Existence of a valid contract
2. Knowledge on the part of the third person of the existence of the contract
3. Interference of the third person without legal justification or excuse
Knowledge of the existence of the contract is an essential element to state a cause of action.
Liability of the intermeddler is solidary with the person whom he intermeddled because the former has
committed a tortious act or quasi-delict where liability is solidary.

Generally, Malice is Essential to Make Intermeddler Liable:
There must be bad faith in inducing a contracting party to break his contractual relations with the other.
It is immaterial whether he benefited from the act or he did it simply to gratify his thirst for spite or
revenge against the other party. The malice required is legal malice.
However, if the intention is honest and laudable, such as when it is done to protect the contracting party
from danger to his life or property, he should not be made liable for damages for the breach of contract.
Gilchrist vs. Cuddy

Gilchrist(theater owner in Iloilo) rented the film Zigomar which was owned by Cuddy for P125. Cuddy returned
the payment because he had already made other arrangements that was the rental of Espejo who was also
operating a theater in Iloilo for P350.
It was conclusive that Espejo knew Gilchrist had already contracted the film for six weeks but he personally
offered Cuddy a high amount which Cuddy accepted.
Was Espejo liable for interfering with the contract of Gilchrist and Cuddy? YES
The mere right to compete could not justify the appellants in intentionally inducing Cuddy to take away the
appellee's contractual rights.
In the case at bar the only motive for the interference with the Gilchrist Cuddy contract on the part of the
appellants was a desire to make a profit by exhibiting the film in their theater. There was no malice beyond this
desire; but this fact does not relieve them of the legal liability for interfering with that contract and causing its
breach.
The liability of the appellants arises from unlawful acts and not from contractual obligations, as they were under
no such obligations to induce Cuddy to violate his contract with Gilchrist. So that if the action of Gilchrist had
been one for damages, it would be governed by chapter 2, title 16, book 4 of the Civil Code. Article 1902 of that
code provides that a person who, by act or omission, causes damages to another when there is fault or negligence,
shall be obliged to repair the damage do done.
So Ping Bun vs. CA

Tek Hua Enterprises entered into a lease agreement with DCCSI for its textile business. When the managing
partner of Tek Hua died, the grandson of the managing partner, petitioner So Ping Bun occupied the warehouse of
the premises leased by Tek Hua for his own textile business, Trendsetter Marketing.
After almost 3 years, Manuel Tiong, the president of Tek Hua, asked Song Ping to vacate the premises since Tek
Hua is in need of the warehouse for their stocks. Petitoner refused to vacate and instead entered into a lease
agreement with DCCSI in favour of Trendsetter Marketing.
Was Song Ping guilty of interference when he entered into the lease agreement in favor of TM? YES
In the instant case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to lease the warehouse to his
enterprise at the expense of respondent corporation. Lack of malice, however, precludes damages. But it does not
relieve petitioner of the legal liability for entering into contracts and causing breach of existing ones.
The respondent appellate court correctly confirmed the permanent injunction and nullification of the lease
contracts between DCCSI and Trendsetter Marketing, without awarding damages.
Lagon vs. CA
Respondent Lapuz entered into a lease agreement with Bai Tonina Sepi over parcels of land in Sultan Kudarat. In
said agreement, Lapuz is to build commercial buildings over the land which would be leased to new tenants. The
rent to be recovered from these shall be made to apply to the rent Lapuz was obligated to pay Bai Tonina Sepi.
When Bai Tonina Sepi died, her heirs sold the same land to Lagon who now collects the rents from the tenants of
the commercial buildings.
Lapuz filed a complaint against Lagon for inducing the heirs of Bai Tonina Sepi to sell him the subject property.
He claims torts and damages.
Was Lagon guilty of interference? NO
2nd and 3rd elements are missing.
In this case, Lagon claims that he had no knowledge of the lease contract. His sellers (the heirs of Bai Tonina
Sepi) likewise allegedly did not inform him of any existing lease contract. An examination of the entire propertys
title bore no indication of the leasehold interest of private respondent. Even the registry of property had no record
of the same.
Also, The records do not support the allegation of private respondent that petitioner induced the heirs of Bai
Tonina Sepi to sell the property to him
The records show that the decision of the heirs of the late Bai Tonina Sepi to sell the property was completely of
their own volition and that petitioner did absolutely nothing to influence their judgment. In short, even assuming
that private respondent was able to prove the renewal of his lease contract with Bai Tonina Sepi, the fact was that
he was unable to prove malice or bad faith on the part of petitioner in purchasing the property. Therefore, the
claim of tortuous interference was never established.
8. Perfected by mere consent:
Article 1315. Contracts are perfected by mere consent, and from that moment the parties are bound

not only to the fulfillment of what has been expressly stipulated

but also to all the consequences which, according to their nature,

may be in keeping with good faith, usage and law. (1258)
Applicability of the Article, and Responsibilities of the Parties:

Refers to consensual contracts which are perfected by mere consent.
From the moment of perfection of the contract, the parties are bound to fulfill what has been expressly
stipulated in the contract.
Their responsibility extends to all consequences which are the natural effects of the contract taking into
consideration its real objects, purposes, or aims, and other related things in keeping with the law, good
faith, and usage.
Impliedly, at any time prior to the perfection, unaccepted offers and proposals remain as such and cannot
be considered as binding commitments; hence not demandable.
In the absence of agreement or mutual assent of the parties, there can be no contract.
Once Perfected, a Consensual Contract cannot be Disregarded:

In one case, AFP occupied a lot and agreed to pay the owner. The owner accepted the offer. However,
there was a change in the Chief-of-Staff and the new Chief refused to sign the papers for payment on the
ground that the owner is entitled to a lower amount. The contract has already been perfected previously,
and the amount cannot now be changed.
Luxuria Homes vs. CA

Petitioner Aida Posadas and her children co-owned a property in Sucat, occupied by squatters. She entered into
negotiations with private respondent Jaime Bravo regarding the development of the property into a subdivision.
She authorized Bravo to negotiate with the squatters to leave the property. Months later, Posadas, through a Deed
of Assignment, assigned the property to petitioner Luxuria Homes, Inc.
Years after, the relationship of Posadas and Bravo turned sour when the former could not accept the proposed
management contracts to develop the said property. Private respondents James Builder Construction and Bravo
instituted a complaint for specific performance against Posadas and Luxuria Homes, Inc.
Can the petitioners be compelled to execute a contract on the basis of a written authorization by Posadas? - NO
Since there was no perfected management contract and also considering that the parties are no longer in a
harmonious relationship, the Court finds no cogent reason for the execution of a contract to develop a subdivision.
The authorization letter is nothing more than a to-whom-it-may-concern authorization letter to negotiate with
the squatters. Although it appears that there was an agreement for the development of the area, there is no
showing that same was ever perfected and finalized.
Private respondents only presented drafts of a proposed management contract with petitioners handwritten notes
but the contract was not put in its final form because the parties could not agree on the stipulations of said
contract. These drafts should best be considered as mere unaccepted offers.
Parties are bound to fulfill stipulations in a contract only upon its perfection. At any time prior to the perfection of
a contract, unaccepted offers and proposals remain as such and cannot be considered as binding; hence not
demandable.

9. Real contracts: (Kinds; Difference with Ordinary Contracts)
Article 1316.
Real contracts, such as deposit, pledge and commodatum,
are not perfected until the delivery of the object of the obligation. (n)

Perfection of Real Contracts:

Article refers to real contracts which require delivery of the object for their validity, in addition to the
presence of the other essential elements of a contract: consent, subject matter, and cause or consideration.
Real contracts are perfected from the moment of delivery of the object of the obligation. A contract of
carriage is also a real contract. A loan contract is also a real contract perfected upon delivery of the object.
Reason why Delivery is Required:

Delivery is necessary because without the object, the other party cannot exercise his duties under the
contract. To illustrate: in a contract of deposit, the depositary cannot comply with his obligation to keep
the property safely without the thing having been placed first in his possession. Delivery is therefore an
essential requisite for the perfection of real contract of deposit. The same applies to pledge or
commodatum.
Agreement to Enter into Real Contract Distinguished from the Real Contract Itself:
There can be a contract to make a deposit, pledge, etc. This is consensual. It is perfected upon the meeting
of the minds of the parties. However, once the object has been delivered, the contract is converted into a
real contract.
10. Unenforceable contracts:
Article 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. (1259a)
Contracting in the Name of Another Person; Requirements:

A person who contracts in the name of another person must comply with any of the following:
1) He must have the authority to contract in the name of the other person
2) He has a right to represent the latter under the law such as a duly appointed guardian with respect
to his ward.
In case of non-compliance with any of the above conditions, the contract is rendered an unenforceable
contract, one which cannot be enforced in court.
Unenforceable Contracts Are New in the Civil Code:

A new class of defective contract is to a certain extent created by various decisions of the Supreme Court.
The term unenforceable is used as distinguished from voidable. The latter are binding, unless annulled
while the former cannot be sued upon or be enforced, unless they are ratified.
Voidable contracts are farther away from absolute nullity than unenforceable contracts.
In other words, an unenforceable contract occupies an intermediate ground between a voidable and a void
contract.
Ratification of the Unenforceable Contracts Under the Article is Allowed:

The contracts referred to in the article are susceptible of ratification expressly or impliedly.
It is express when the confirmation of the act is done for instance in a sworn statement where the party
explicitly states that he gave his consent to the contract.
It is implied when the confirmation can be deduced from the acts of the party in whose behalf the contract
was entered into. i.e., receiving benefits from the unauthorized contracts.
Effect of Ratification:
Ratification validates the act. It purges the contract of its defect from the moment it was constituted and
not from the time of ratification.
Example: A contract entered into without authority in the name of a minor may be ratified by him hen he
reaches the age of majority.
Liability of the Person who contracted without Authority:

The person who contract in the name of another without authority shall be liable for damages to the party
with whom he dealt with.
Availability of Ratification:
Ratification may be effected only before the contract had been revoked by the other contracting party.
Once it has been revoked, there is nothing more to ratify.
Rallos vs. Felix Go Chan

Simeon Rallos, an agent granted with SPA by Concepcion and Gerundia Rallos to sell a lot, sold the undivided
share of Concepcion (principal) in the land after her (Concepcions) death.
The administrator of the estate sought to declare the sale unenforceable and to recover the disposed share.
Was the sale by the agent valid? NO
The Court held that such sale was invalid . Art. 1259 (Art. 1317 NCC) provides that a contract entered into in the
name of another by one who has no authority or the 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.
However, under Art. 1931, an act done by the agent after the death of his principal is valid and effective only
under two conditions, viz: (1) that the agent acted without knowledge of the death of the principal and (2) that the
third person who contracted with the agent himself acted in good faith. These two requisites must concur the
absence of one will render the act of the agent invalid and unenforceable. In this case, the agent, Ramon, executed
the sale notwithstanding notice of the death of his principal Accordingly, the agent's act is unenforceable against
the estate of his principal for having acted without authority
United Namarco Distributors vs. NAMARCO

NAMARCO, through its General Manager Estrella, entered into a Contract of Sale with Federation pursuant to its
Resolution No. 524 which recognizes the Federation as its distributor of the imported commodities. While the
contract was being fulfilled and the commodities had started to flow in from abroad, Estrella assigned
NAMARCOs Auditor to examine the contract of sale. Liboro requested that the Contract of Sale be approved
first by the Board of Directors before it can be submitted to the Auditor-General. The Board of Directors passed
Resolution No. 14 which specifically gave its approval on the Contract.
A new Board of Directors took over the management, and decided to stop NAMARCOs compliance of the
contract, because the contract lacks the proper approval of the Board as it was executed by Estrella alone.
Is the sale binding upon NAMARCO? YES
Through Liboros endorsement, NAMARCOs former Board of Directors, in its Resolution No. 14, was able to
clarify and give proper authority on the Contract of Sale in favor of the Federation.
Aside from that, NAMARCOs acceptance of the benefits (e.g. 5% mark-up) under the Contract of Sale
constitutes an implied ratification by its Board of Directors of the contract in question.
The ratification cleanses the contract of any defect; in this case, through ratification, the necessary consent and
authority was subsequently given. (The acceptance of benefits and Resolution No. 14 are the ratification in this
case.)

Essential Requisites : Articles 1318 to 1355 (Part 1, 1339)
Article 1318. There is no contract unless the following 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. (1261)
Applicability:
Applies to consensual contracts which require only the three elements: Consent, Object, and Cause.
Real contracts require an additional element, namely: Delivery. (Commodatum, deposit, pledge, and
carriage are examples of real contracts)
Solemn or Formal contracts require an additional requisite, namely: Compliance with Formalities
required by law such as in donations.
The article is deficient for not being able to expressly cover real and solemn contracts, for the three
requisites are just the requirements for consensual contracts.
Elements of Contracts:
Essential Elements:
a. Consent the meeting of the minds between the parties or their conformity to all the terms and
conditions of the contract which is freely given. Legal capacity is presupposed by consent, since
there cannot be consent without capacity.
b. Object certain the subject matter of the contract. It must be definite and certain, otherwise, the
meeting of the minds is not possible. Services may also be the objects of contracts.
c. Cause of the obligation the compelling reason why a part assumes an obligation. It is different
from motive which is the personal reason unknown to the other party why a person enters into the
contract.
d. Delivery of the object the tradicion or transfer of possession of the object to the other party
which is required as an additional element in real contracts.
e. Mandated formalities the need to comply with certain solemnities or formalities required for the
validity of certain formal contracts.
Natural Elements elements of the contract which are inherent. They need not be state in the contract.
For example, the warranty of eviction in contracts of sale.
Accidental Elements elements which exist only when expressly provided by the contracting parties in
the contract for the purpose of limiting or modifying the normal effects of contracts. For example, the
parties may stipulate the place, currency, and manner of payment, whether in cash or installment.
Effect if Essential Element is Absent:

The contract is void if an essential element is missing. For example, a person who does not own the land
he disposed renders the contract void for lack of object. Also, when there is no consideration paid for the
obligation, like when the sale is fictitious and simulated, there is no contract.
If consent given is vitiated by any vice of consent, contract is voidable only, not void.
Two types of Void Contracts:

1. Those where one of the essential requisites of a valid contract is missing
2. Those declared to be so under Article 1409 of the Civil Code:
Article 1409. The following contracts are inexistent and void from the beginning: (5) Those which contemplate an impossible service;
(1) Those whose cause, object or purpose is contrary to law, morals, good (6) Those where the intention of the parties relative to the principal object
customs, public order or public policy; of the contract cannot be ascertained;
(2) Those which are absolutely simulated or fictitious; (7) Those expressly prohibited or declared void by law.
(3) Those whose cause or object did not exist at the time of the transaction; These contracts cannot be ratified. Neither can the right to set up the
(4) Those whose object is outside the commerce of men; defense of illegality be waived.
(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.
Clarin vs. Rulona
Clarin executed two documents showing evidence of a contract of sale between the parties.
Exhibit A provides for the authorization of a surveyor to survey on behalf of the Rulonas a portion of the
share of a lot from the Clarin, the 10 hectares awarded to Rulonas which the couple purchased from
Clarin.
Exhibit B provides that Clarin received from Rulona the sum of 800Php as initial payment for the 10
hectares of land in Carmen Bohol.
Clarin returned the downpayment and the first installment of the Rulonas saying that his co-heirs refused
to sell the specific portion of his share. The Rulonas then filed for an action for specific performance.
Clarin argues that there is no contract since it was subject to the approval of his co-heirs.
Was there a perfected contract in this case? YES
Exhibits A and B are by themselves prima facie evidence that indeed, there existed a perfected contract
between the petitioners and the respondent and such contract has already been partially executed and
fulfilled.
The petitioners acceptance of the 800Php as evidenced by Exhibit B clearly showed his consent
(implied) to the contract thereby precluding him from rejecting its binding effect.
Consent
1. Offer:
Article 1319. Consent is manifested by the meeting of the offer

and the acceptance upon the thing and the cause which are to constitute the contract.
The offer must be certain and the acceptance absolute.

A qualified acceptance constitutes a counter-offer.

does not bind the offerer
Acceptance made by letter or telegram
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. (1262a)
Consent, Concept:
Consent is giving of ones conformity to the terms of the contract FREELY and VOLUNTARILY.
The concurrence of the minds of the parties on the cause and subject matter which will constitute the
contract, as well as on the other conditions and terms thereof to which they voluntarily bind themselves to
abide.
Consent is the most important requisite of a contract.
Elements of Consent:
1. Legal Capacity parties must possess both juridical capacity and capacity to act, in other words, parties
must have full civil capacity. If incapacitated, a party may be represented by a legal representative such as
by his parents or guardians.
2. Manifestation of Conformity there must be overt acts showing the concurrence of the offer and the
acceptance with respect to the object and cause of the contract. This is known as the meeting of the
fucking minds. The manifestation may be in writing (express) or implied from the conduct (implied) like
the acceptance of payment.
3. Conformity must be intelligent, spontaneous, and free from all vices of consent.
4. Conformity must be real and not simulated or fictitious.
Forms of Consent:
May be given expressly or impliedly.
It is express when it is explicitly made like the affixing of ones signature on the written contract.
It is implied, when it is manifested by the conduct of the parties like performing ones obligations under
the contract such as by paying the amount due or by accepting the payment.
Consent may also be presumed by law as in the cases of quasi-contracts.
Character of the Offer and Acceptance:

For a contract to be perfected,
The Offer must be CERTAIN, DEFINITE, and COMPLETE
The Acceptance must be ABSOLUTE and UNCONDITIONAL
Any modification or variation from the terms of the offer annuls the offer.
A conditional acceptance is a counter-offer which extinguishes the offer. If not accepted by the offeror,
there is no contract.
Once there is concurrence of the offer and the acceptance on the object and cause, the stage of negotiation
is finished. The contract is now deemed perfected if it is a consensual one.
Effect of Non-Acceptance of the Offer:

If the offer is not accepted, no consent arises. Thus, no contract is established.
Acceptance by Letter or Telegram:

Acceptance made by a party to an offer, which is coursed through letter or telegram, binds the offeror
only from the time the offeror came to know of the acceptance, and the law presumes that the contract
was perfected at the place where the offer is made, which is the place of origin of the conception of the
contract.
Withdrawal of the Offer:

The offeror may withdraw the offer before any interested party had made an acceptance.
Pending the acceptance of the offer, the offerer is free to enter into a contract with another person
involving the same subject matter.
However, if there was an acceptance already, the offeror cannot just withdraw his offer unilaterally. He
will be liable for damages specially to an offeree who had incurred expenses in relation thereto.
Effect of Silence:
Silence can constitute a manifestation of conformity to a contract will depend upon the circumstances, as
silence is by itself ambiguous.
When there is a duty to speak up on the part of the person to whom an obligation is being proposed for
acceptance, his silence can be considered as consent.
The silence, however, must be such that it cannot be interpreted in any other way except to mean
conformity.
Revocation of Acceptance:
Acceptance may be revoked by the offeree before the acceptance reaches the offeror. Thus if the
acceptance was done through mails but before it could reach the offeror a faster communication like a
fax message is sent to him, no contract is perfected for lack of consent.

Korean Air vs. Yuson
Korean Air suffered net loss which prompted it to implement Early Retirement Program (ERP) to its
employees. They sent a memorandum offering the said ERP to their employees on their discretion.
Yuson accepted the early retirement offer however the general manager claimed that she was not entitled
to the ERP because she was already due for retirement and the purpose of the ERP was for the employees
who ought to work for more years in the company.
Yuson claimed that Korean Air was bound by the perfected contract the offer being the memorandum sent
and the acceptance the letter which Yuson sent.
Was there a perfected contract between Yuson and Korean Air? NO
For an offer to be certain, a contract must come into existence by the mere acceptance of the offeree
without any further act on the offerors part. The offer must be definite, complete and intentional.
In the present case, the offer is not certain.
The memorandum clearly states that, "MNLSM Management, on its discretion, is hereby offering the said
early retirement program to its staff"
Also, applications for the ERP were forwarded to the head office for approval, and further acts on the
offerors part were necessary before the contract could come into existence
Rosenstock vs. Burke

Burke owns a yacht known as Bronzewing acquired from Australia for the purpose of selling it. The yacht
at that time was also mortgaged to Asia Banking Corp to secure the debt of Burke.
Elser began negotiations with Burke for the purchase of the same.
Elser had been using the yacht even before they came up with a finalized sale agreement. Elser even paid
for the repairs of the yacht.
Now Elser saw the need to replace its engine and tried to obtain from the manager of Asia Banking Corp
a new loan but was refused.
Sometime in April, Elser wrote a letter to Burke saying I am in position and willing to entertain the
purchase of Yacht followed by several terms.
However, after 2 days, Elser wrote another letter to Burke saying that in view of the attitude of the bank
manager regarding the loan, it is impossible for him to take charge of the boat and he made delivery
thereof to Burke. Burke is now demanding from him the performance of the offer to purchase the yacht
based on their agreement.
Was there a definite offer and a binding sale in this case? - NO
The Court ruled that it is not a definite offer. The word "entertain" applied to an act does not mean the
resolution to perform said act, but simply a position to deliberate for deciding to perform or not to
perform said act. Taking into account only the literal and technical meaning of the word "entertain," it
seems to us clear that the letter of the Elser cannot be interpreted as a definite offer to purchase the yacht,
but simply a position to deliberate whether or not he would purchase the yacht.
2. Acceptance:
(1) Absolute vs. Qualified & (3) Express or implied:
Article 1320. be express or implied. (n)

An acceptance may
Acceptance, Forms:
May either be express or implied. Expressly in writing or verbally, Impliedly by the conduct. You already
know this shit. Refer to page 3 again if you wanna know it better.
Special Forms Of Acceptance:

1. Silence In certain specific cases, silence puts the silent party in estoppel (Arts. 1670 1873)
2. Presumption The law presumes acceptance of an inheritance, if within 30 days from the approved
partition, the heir has not repudiated the inheritance. (Art. 1057)
Article 1321. the time, place, and manner of acceptance,

The person making the offer may fix
all of which must be complied with. (n)
Right of the Offeror to Control the Offer:

1. To fix the time when acceptance should be made;
2. To fix the place where acceptance should be effected; and,
3. To fix the manner and procedure of acceptance.
Although not mentioned, it is understood that the offeror may fix the price, conditions, and other terms of
the offer. If accepted by the offeree, the latter is bound thereby.
Consequence of Acceptance After the Lapse of the Period Fixed by the Offeror:
If the acceptance was made after the period fixed by the offeror had lapsed, the acceptance is not a legal
acceptance anymore but constitutes instead as an offer by the original offeree and this offer may or may
not be accepted by the original offeror.
The acceptance must be made known to the offeror before the lapse of the period fixed.
Manner of Acceptance Fixed by the Offeror:

Offerer may require for instance that the acceptance by done by letter or personal communication or
through a representative.
Acceptance not made in the manner as directed by the offeror constitutes as counter-proposal which
extinguishes the offer and this may or may not be accepted by the original offeror.
Batagan v. Cojuangco
A case was pending between the parties in the civil courts when a statement was made by Cojuangco
wherein she promised on her part to resell the land in question to Bataga. However, judgment was
rendered in the case before Batagan agreed to the offer.
Batagan, offered payment for what he purported to be a compromise agreement between him and Mrs.
Cojuangco.
Cojuangco refused several tenders of payment saying that no such agreement exists. Batagan instituted
an action to compel Mrs. Cojuangco to comply with the agreement.
Was Cojuangcos acceptance duly accepted by Batagan? NO acceptance was late
An offer of compromise settlement must be accepted within a reasonable time. And acceptance or
rejection of an offer of compromise may be inferred from circumstances.
The Batagans failure to act on the offer before the judgment was entered was an implied rejection of
said offer. In pushing the appeal to final conclusion the he made it clear that he was not interested in his
creditor's liberal concession.
A compromise has for its purpose the avoidance or termination of a law suit. Acceptance in order to
conclude the agreement must in every respect meet and correspond with the terms and conditions of the
offer.
Granting that the appellant acted on time, payment of P800 fell short of the appellee's requirement. The
appellee wanted P1, 508.28 in cash. This was the least she was entitled to, being the amount which the
court below had found to be due her.

Zayco vs. Serra
Zayco and Serra entered into an option contract to buy Palma Central for 1 million pesos and that in case
the party cannot pay the whole, then he will be given a period not exceeding 3 years to pay the balance.
Zayco wrote a letter to Serra accepting the contract and placing at his disposal a cash order of BPI of
P100,000, in part payment. He demanded Serra to execute the deed of sale.
Serra argued that since the contract does not specify the amount of initial payment and the part to be paid
within 3 years in the contract, Zaycos acceptance is not sufficient to perfect the contract.
Was there a perfected contract between Zayco and Serra? NO
Zaycos acceptance could not, in itself, convert the offer of sale made by Serra as provided in their option
contract into a perfect contract. His acceptance did not imply conformity with the offer of Serra, but only
when the latter shall, in turn, have accepted his proposal that the amount to be paid in the first payment
was P100,000.
The amount of the first payment and the balance to be paid within 3 years were not determined in the
option contract. Consequently, when Zayco accepted the offer, tendering the sum of P100,000 as first
payment, his acceptance involved a proposal, not contained in the offer, that this precisely, and not any
other, should be the amount of the first payment. This proposal, in turn, required the acceptance on the
part of Serra.
(2) In person; via agent; by letter or telegram:
Article 1322. from the time acceptance is communicated to him.

An offer made through an agent is accepted
(n)
Applicability:
Applies when the offer is made through an agent.
If authorized through a power of attorney, the agent is an attorney-in-fact.
If the offeree has accepted the offer, the offer is deemed accepted not from the knowledge of the
acceptance by the offerer but from the moment the attorney-in-fact has received the communication of
acceptance.
An intermediary for the offeror who is not an authorized agent cannot bind the former. The offeree may
also act through an authorized agent who will be representing the offeree with binding effect.
Laudico vs. Arias

Arias wrote a letter to Laudico giving him an option to lease the building to a third person. Laudico
presented Mr. Fred Harden, as the party desiring to lease the building.
After negotiations, Laudico wrote a letter to Mr. Arias advising him that all his propositions, as amended
and supplemented, were accepted. This letter of acceptance was received by Arias at 2:53pm of that day.
On that same day, at 11:25am, Arias had also sent a letter of revocation to Laudico withdrawing the offer
to lease the building.
Was there a valid acceptance of the offer? NO
The Court held that an acceptance by letter does not have any effect until it comes to the knowledge of
the offerer. Therefore, before he learns of the acceptance, the latter is not yet bound by it and can still
withdraw the offer. There was no meeting of the minds, through offer and acceptance, which is the
essence of the contract.
While there was an offer, there was no acceptance, and when the latter was made and could have a
binding effect, the offer was then lacking. Though both the offer and the acceptance existed, they did not
meet to give birth to a contract.
(4) Effects of death, civil interdiction, insanity, or insolvency of either party before acceptance:
(Art 40 - 41, RPC)
Article 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency
of either party before acceptance is conveyed. (n)
Loss or Modification of Legal Capacity:

It is essential that the parties must possess full legal capacity to enter into contracts.
Before the acceptance of the offer had been made known to the offeror, no contract is yet perfected.
If during this interregnum, either party or both parties had lost their legal capacity to contract, the offer
becomes ineffective.
Death terminates the personality of a person except for purposes of succession, where the deceased
through his estate is considered an artificial person.
Civil interdiction, insanity, or insolvency render the offer ineffective. While the law speaks of an offer, it
can also apply to a counter-offer.
Definitions of Civil Interdiction, Insanity, and Insolvency:

Civil Interdiction A mandatory accessory penalty deemed imposed whenever the sentence rendered is
within the range of reclusion temporal to death, if the latter is not executed by reason of commutation or
pardon.
Insanity The legal term from mental disorder. It is a manifestation of disease or defect of the brain, or a
more or less permanently diseased or disordered condition of the mentality, characterized by the
disordered function of the sensory or intellective faculties, or by impaired or disordered volition.
Insolvency A condition where a mans assets, if all made immediately available, would not be sufficient
to discharge his obligations or liabilities. His obligations are more than his assets. It is the inability or the
lack of means to pay ones debt, or the condition of a person who is unable to pay his debts as they fall
due.
3. Option Contract:
Article 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. (n)
Applicability:
Applies only to a situation where the offeror has allowed the offeree a certain period of time to accept.
Time when Acceptance Should be Made:

1. If a period is fixed Acceptance should be made within the period fixed. If after the lapse of the period,
there is no more offer to accept. A delayed acceptance will not result in the meeting of the minds.
2. If no period is fixed Acceptance must be made immediately. This is similar to a pure obligation.
However, if the offer is made to a person who is not present, acceptance should be made within such a
time the acceptance could be received from the offeree under normal circumstances.

Option Contract, Concept:
An option contract is a contract where the offeror grants the offeree, for a valuable consideration, the
privilege to buy or not buy certain objects at anytime within a specified period and for a fixed price.
An option contract is separate and distinct from the principal contract which the parties may enter into
later if they finally conclude their main agreement. It is therefor a preparatory contract to the principal
contract should the parties finally consummate their transaction which is under negotiation. The matter is
said to be still under negotiation because the offeror may or may not take advantage of the privilege
granted him.
Kinds of Options Under the Article:

1. Option without any consideration given by the offeree.
2. Option with a consideration given by the offeree which consideration is different and distinct from the
purchase price.
Status of an Option without a Consideration; Effect:

If the privilege granted to the offeree is not supported by a consideration, then the option is just
considered as an offer to sell.
In other words, if the option is given without a consideration, it is a mere offer to sell, which is not
binding until accepted. Hence, it may be withdrawn by communicating the withdrawal to the offeree.
The offeror incurs no liability for the withdrawal of the offer. The reason is because there is no contract
perfected yet and the offeror is free to withdraw his offer.
If, however, acceptance is made before a withdrawal, it constitutes a binding contract of sale.
Consequences of Withdrawal of Offer with Consideration:

If the offeror withdraw his offer after the offeree had given a consideration for the option granted, which
consideration is distinct from the purchase price or cause of the principal contract, the offeror is liable for
damages which may be suffered by the offeror.
The reason for this is that there is already a contract called an Option Contract.
Within the period granted to the offeree, the offeror must not deal with any other party involving the same
subject matter of the option contract. The offer is an exclusive deal with the offeree, until the lapse of the
option period and the latter failing to exercise the privilege granted him.
If the offeree exercises his right to accept the offer within the period fixed, the offeror cannot just back
out from his commitment.
If the offeror unjustifiably backs out, he may be required to execute the necessary document of sale, and
in addition, damages may be imposed upon him.
Distinctions Between Option Money and Earnest Money:

Option money is the consideration paid in an option contract. If the principal contract is not
consummated, the option money is not refunded.
Earnest money is the payment made to the seller by the buyer to show his good faith. It will constitute as
part of the purchase price, if the sale is finally consummated. It is also a proof of the perfection of the
contract (Art. 1482) If the sale is not concluded, the earnest money shall be returned to the would-be-
buyer unless there is a contrary agreement.
Rule in Case the Offer is Subsequently Revoked but the Offer is Already Accepted:
If the acceptance arrives first and came to the knowledge of the offeror, the contract is perfected.
If it is the revocation which arrives first and came to the knowledge of the offeree, no contract is
perfected.
Whichever of the two arrives first shall be the one considered effective. If they arrived exactly at the same
time, the perfection of the contract shall be sustained.
Sanchez vs. Rigos
An Option to Purchase was executed by Rigos in favor of Sanchez, where the former agreed, promised
and committed to sell a parcel of land in Nueva Ecija to the latter for the price of Php1,510.
The option must be made within 2 years from the date of the issuance of the option.
Sanchez made several tenders of payment as way of buying the land, which Rigos rejected. This
prompted Sanchez to consign the said payment, and ask for special performance on the part of Rigos.
Can Rigos be compelled to sell the property? YES
An Option to Purchase did not bind Rigos to sell or Sanchez to buy. It is unilateral, not binding as a
contract, unless an acceptance to the offer/option/promise is made before the expiration of the period
given and before the promiser/prospective vendor withdraws his promise, in which case, it becomes a
bilateral reciprocal contract to buy and sell. In the case at bar, Sanchez had shown his acceptance by his
tenders of payment even before Rigos withdrew the option, and even before the period expired.
4. Business advertisements:
(1) Mere invitations to make an offer:
Article 1325. Unless it appears otherwise,

business advertisements of things for sale are not definite offers,
but mere invitations to make an offer. (n)
Business Advertisements:
Business Advertisement may or may not constitute a definite offer, depending on each case.
If the advertisement contains all the necessary data needed in a contract, it is a definite offer for the sake
of the thing advertised.
o For example, For sale: House and Lot located at No. 999 Taft Avenue, Manila. Lot Area: 50
square meters, house floor area: 10 square meters. Price: 3 million pesos. Payment in cash.
Contact owner Anton Mercado at said address by letter or telegram. This kind of an
advertisement is a definite offer. The advertiser cannot withdraw the offer once somebody had
accepted it.
If the advertisement does not contain all the important data for a future contract, it is not a definite offer.
It is a mere invitation to make an offer.
o For example, For sale House and Lot located at 999 Taft Avenue, Manila. Price: 50 million.
Negotiable. Contact Anton at the address. Clearly, this is just an invitation to make offers. If
offers are made, the same may not be accepted by the advertiser.
(2) Advertisements for bidders:
Article 1326. Advertisements for bidders are simply invitations to make proposals,
and the advertiser is not bound to accept the highest or lowest bidder,
unless the contrary appears. (n)
Applicability:
Refers to advertisement for bidding, where bidders are invited to make proposals. Unless the contrary
appears, the advertiser is not bound to accept the highest or lowest bid.
The advertiser seeks the highest bidder when the bidding is for alienation of property like in execution
sales, and for the lowest bidder, when some services are to be done like the construction of a building or
structure.
The advertiser has the right to prescribe the manner, conditions, and terms of the bidding. He may even
provide that the full purchase price be paid at the time of sale, or that time will be given for payment.
The bidder who offers a bid is bound by the terms and conditions announce in the notice. The terms and
conditions are binding upon the bidder as long as he made a bid regardless if he is aware of them.

5. Incapacitated persons to give consent to a contract:
(Art 1491, NCC; Art 87, FC; Art 37-38, NCC)
Article 1327. The following cannot give consent to a contract:

(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a)
Persons who Cannot Give Consent to a Contract:

The article mentioned only three classes of incapacitated persons who cannot enter into contracts.
There are others enumerated in Article 37 and 38 who cannot enter into certain contracts like the
imbecile, civil interdictee, family relatives, aliens, absentees, insolvents, trustees.
Effects of Contracts Entered By Incapacitated Persons:

The contracts entered into by the incapacitated persons enumerated in the law are not void. They are only
voidable if only one party cannot give his consent.
If both parties are incapacitated to give consent, the resulting contract is unenforceable.
(1) Minors:
Under the present law, the only unemancipated minors are those below 18 years of age.
Children below 18 cannot enter into contracts by themselves.
Exceptions:
1. When the minor actively misrepresented his age on the contract by stating that he is of age, and the other
party was misled, the contract shall be binding upon him on the basis of estoppel. If there is merely
silence in the contract as to the age of the minor, the fraud is not actual but only constructive, the minor is
not bound by his signature. Yet, he must still make restitution up to the extent that the was benefited. If
the other party knew of the minority of the minor, he is bound thereby.
2. When the contract involves the sale and delivery of necessaries (or those which constitute support), he is
bound thereby.
3. When the minor, upon reaching the age of majority, ratifies the contract, he becomes bound thereby.
4. When the contract is in the form of savings account in the postal savings bank provided the minor is at
least 7 years of age, the same is valid.
5. When the contract is an insurance for life, health, and the accident on the minors life.
Bambalan vs. Maramba

There was an alleged contract between Isidro Bambalan and Maramba regarding the sale of the land in
question. Isidro Bambalan at time of the execution of the contract was a minor.
Was the contract valid? NO
The document is vitiated to the extent of being void as regards the said plaintiff, for the reason that the
latter, at the time he signed it, was a minor, which is clearly shown by the record and it does not appear
that it was his real intention to sell the land in question.
In the case now before us the plaintiff did not pretend to be of age; his minority was well known to the
purchaser, the defendant, who was the one who purchased the plaintiff's first cedula used in the
acknowledgment of the document.
Mercado, et al. vs. Espiritu

This is a case of active misrepresentation made by Domingo and Josefa Mercado who now asks the court
to declare the deed of sale with respect to Espiritu annulled for they signed said contracts during their
minority.
It could be deduced from the long line of facts that when the instrument was being crafted, Domingo and
Josefa, as revealed upon perusal of the evidences presented stated that they were of legal age at the time
they executed and signed it. (They were 18 and 19, legal age then was 21)
Can the deed of sale be validly declared annulled? - NO
No evidence appears in the record that the plaintiffs Josefa and Domingo Mercado were in fact minors,
for no certified copies were presented of their baptismal certificates, nor did the plaintiffs adduce any
supplemental evidence.
Even assuming that there is sufficient evidence to warrant the petitioners claims that they were minors,
the sale of real estate made by minors who pretend to be of legal age, when in fact they are not, is valid,
and they will not be permitted to excuse themselves from the fulfillment of the obligations contracted by
them.
Braganza vs. de Ville Abrille

Rosario Braganza and her sons Rodolfo (18 yrs old) and Guillermo (16 yrs old) issued a promissory note
in favor of Abrille for the loan they received from him. Because of failure to pay, Abrille sued Braganza.
Can the defense of minority be invoked by Rosario Braganza even though there was failure to disclose
minority in the note? YES
In order to hold the minor liable the fraud must be actual and not constructive. There was no active
misrepresentation on the part of the minors and no explicit mention of majority was made by the minors
in executing the instrument Therefore, the minors cannot be legally bound by their signatures.
However, these minors may not be entirely absolved from monetary responsibility. In accordance with the
provisions of Civil Code, even if their written contact is unenforceable because of non-age, they shall
make restitution to the extent that they have profited by the money they received.
(2) Insane persons:

When a person is insane or demented, he is detached from reality. He does not know what he is doing. He
cannot act with legal effects. Thus, he cannot enter into valid contracts.
Old age and weakness of the mind do not amount to insanity.
Exceptions:
During lucid intervals, they may enter into contracts, as can be seen in the following article. This is
because they are sane and capable of knowing what they are doing during these moments.
And deaf-mutes who do not know how to write:

Not all deaf-mutes, but only those who do now know how to write are disqualified.
If he knows how to write, it is not difficult to communicate with him. If he can read, generally, he knows
how to write. Such a deaf-mute may validly enter into contracts.
(3) Drunk or under hypnotic spell:
Article 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. (n)
Contracts During Lucid Interval:

The contracts referred to in the article are those entered into by insane persons who re-enter into the realm
of sanity at certain times. This moment of normalcy is called lucid interval, after which the person may be
out of his mind again.
As long as the contract was entered into during this lucid interval, even if the person is then under judicial
guardianship, the contract is valid.
However, sanity must be proved since such a person under judicial guardianship is presumed to be insane.
A person may be insane on certain subjects and situations but nevertheless sane in other respects.

Drunkenness:
Contracts entered into by persons who were drunk at that moment may be valid or voidable depending
upon the degree of his intoxication.
If the drunkenness has reached that point that the person has completely lost the use of his faculties and
level of consciousness, the contract is voidable for the lack of capacity to contract.
However, if he is still fully aware of what he is doing and knows the consequences thereof, the contract is
valid.
Hypnotic Spell:
A person under a hypnotic spell is doing things without volition. He is placed under the control of the
hypnotizer and his will is subdued and overcome by the power or will of another.
While he may sign the contract, his consent is not free. The contract is therefore voidable.
Article 1329. subject to the modifications determined by law,

The incapacity declared in article 1327 is
and is understood to be without prejudice to special disqualifications established in the laws.
(1264)
Special Disqualification to Contract, Different from the Incapacity under Art. 1327:
Persons in 1327 are incapacitated to give consent because they do not have the mental capacity to do so.
The special disqualifications referred to in the present article refer to those explicitly disqualified by law
from entering into certain contracts.
For example, a generally, a husband and wife cannot donate, sell, or lease properties to one another as
provided for in the family code.
Also, the persons
enumerated in Article 1491. The following persons cannot acquire by purchase, even at a public or judicial auction, either in
person or through the mediation of another:
Article 1491 are (1) The guardian, the property of the person or persons who may be under his guardianship;
(2) Agents, the property whose administration or sale may have been intrusted to them, unless the consent of
disqualified to enter the principal has been given;
into contracts (3) Executors and administrators, the property of the estate under administration;
(4) Public officers and employees, the property of the State or of any subdivision thereof, or of any government-
because of fiduciary owned or controlled corporation, or institution, the administration of which has been intrusted to them; this
relationship or provision shall apply to judges and government experts who, in any manner whatsoever, take part in the sale;
(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and
because of public employees connected with the administration of justice, the property and rights in litigation or levied upon an
policy. execution before the court within whose jurisdiction or territory they exercise their respective functions; this
prohibition includes the act of acquiring by assignment and shall apply to lawyers, with respect to the property
Insolvents cannot and rights which may be the object of any litigation in which they may take part by virtue of their profession;
(6) Any others specially disqualified by law. (1459a)
enter into contracts
until discharged.
Other Causes of Incapacity to Enter into Contracts:

The following are considered incompetents and may be placed under judicial guardianship:
a. Those suffering the penalty of civil interdiction
b. Hospitalized lepers
c. Prodigals
d. Deaf and dumb who are unable to read and write
e. Those of unsound mind even though that have lucid intervals
f. Those who by reason of age, disease, weak mind, and other similar causes, cannot without
outside aid, take care of themselves and manage their property.
The above incompetents are not prohibited to enter into contracts, but they can only do so through their
guardians with the approval of the court. But those specially disqualified are prohibited whether they are
represented or not.
Distinctions Between Incapacity to Consent (Art. 1327) and Special Disqualifications:
The first is a mere restriction upon the exercise of the right to enter into a contract. The person can still
enter into a contract through his guardian, and violating this would only make the contract voidable.
The second is a restriction upon the right itself which means that the person is absolutely disqualified
from entering into the contract, and violating this would make the contract void.
6. Vice of Consent:
Article 1330. A contract where consent is given through

mistake, violence, intimidation, undue influence, or fraud is voidable. (1265a)
Historical Notes:
The old civil code provision did not contain undue influence as a ground which vitiated consent, and the
old civil code also considered contracts with vitiated consent as void and not voidable.
Vices of Consent:
1. Vices of the Will this includes mistake, violence, intimidation, undue influence, and fraud.
2. Vices of Declaration this class includes all kinds of simulated contracts (Arts. 1345-6)
These can affect all kinds of contracts including the unilateral ones like will, donations, recognition of
illegitimate children.
Consent:
Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which
are to constitute the contract.
Consent must be intelligent, free and spontaneous. If these requisites are absent, the consent is said to be
defected or vitiated and the ensuing contract voidable.
Intelligence is vitiated by mistake or error; Freedom by intimidation, violence, or undue influence;
Spontaneity by fraud.
Proof needed to Sustain Annulment:

Full, clear, and convincing evidence is needed to annul a contract on the ground of vitiated consent.
Hernandez vs. Hernandez

Respondent Cecilio Hernandez was appointed by his family to be their representative in the expropriation
case involving a parcel of land they own in Sto. Tomas, Batangas.
When the trial court arrived at the amount of just compensation, it ruled that the full amount should be
given to the attorney-in-fact (Cecilio).
When Cornelia, a part-owner of the land, sought her share in the just compensation, Cecilio issued her a
check with an amount of ONE MILLION accompanied by a Receipt and Quitclaim document. Because of
the urgent need of Cornelia for money, she signed the Receipt and Quitclaim document. When she
learned of the actual amount she is entitled to which is SEVEN MILLION, she filed for the annulment of
the said document together with Recovery of the remaining sum of money.
Was the receipt, and the quitclaim, valid? NO
What is on record is that Cornelia asked for an accounting of the just compensation from Cecilio several
times, but the request remained unheeded. Right at that point, it can be already said that Cecilio violated
the fiduciary relationship of an agent and a principal.
Instead of an accounting, what Cornelia received was a receipt and quitclaim document that was ready for
signing. As testified to by Cornelia, due to her frail condition and urgent need of money in order to buy
medicines, she nevertheless signed the quitclaim in Cornelios favor.
Quitclaims are also contracts and can be voided if there was fraud or intimidation that leads to lack of
consent. Based on the attending circumstances, the receipt and quitclaim document is an act of fraud
perpetuated by Cecilio.

(1) Mistake:
Article 1331. 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.
Mistake as to the identity or qualifications of one of the parties will vitiate consent
only when such identity or qualifications have been the principal cause of the contract.
A simple mistake of account shall give rise to its correction. (1266a)
Applicability and Concept of Mistake:

The article refers to mistakes of fact and not to mistakes of law.
Mistake is an erroneous belief about something. It is a belief on the existence of a thing, event, or
circumstance, which in reality does not exist.
Mistake Distinguished from Ignorance:

Mistake is the false impression on something, while ignorance is absence of any notion or impression
about a particular thing.
In both concepts, there is a lack of full and correct knowledge about a thing.
Both are contemplated in the article and the NCC does not distinguish between the two.
Kinds of Mistake or Error which Vitiates Consent:

The only mistake or error which vitiates consent refers to the substance of the thing which is the object
of the contract, or those conditions which have principally moved one or both parties to enter into the
contract.
Classification of Mistakes or Errors which Vitiate Consent:

1. Mistake of Fact this is the mistake incurred by a party or both parties in the contract as to the nature of
the contract, the object, the substance of the thing, the quality of conditions of the thing, the identity or
qualification of the person, and the quantity of the thing where quantity is the main reason for the
contract.
a. Nature of the contract if the mistake refers to the nature of the contract, the error or mistake
goes to the essence thereof. This may invalidate the contract.
For example, a party who affixed his thumb mark on the document presented to him which he believed to
be a deed of mortgage and not a deed of sale, his consent is vitiated.
b. Object of the contract the mistake here refers to the substance of the thing itself, that is, the
very material of which the thing is made of.
For example, a buyer purchased a ring for a valuable consideration believing that it is pure gold, but
actually is only gold-plated. His consent is vitiated.
c. Quality or principal conditions of the thing the condition must be the principal reason why a
party or the parties entered into the contract.
For example, a vendee agreed to purchase a parcel of land on the belief that the land is free from any
encumbrance. Turns out, land is being claimed by another person. The vendor honestly thought, his land
is free from any claim. This mistake vitiates the consent of the parties.
On the other hand, accidental conditions or qualities, such as the particular lot number of the land, or the
boringness of a film that was rented, are accessory matters which do not invalidate the contract. They do
not attach to the essence of the thing.

d. Identity of the person or his qualifications refers to an error made on the identity or
qualification of one of the contracting parties. It is the identity of the person, not the name. A
mistake in the name but not as to the person will not vitiate consent as long as the person is
identifiable. Generally applies to obligations to do.
Requisites of Mistake as to the Person:

1. Mistake must be with respect to the identity of one of the parties, or his qualifications
2. The identity or qualification is the principal reason why the injured party entered into
the contract
Example of Mistake as to Identity:
Kim agreed to grant a loan to Jade, on her belief that Jadess guarantor is Zantua, on whom
Kim as full trust and confidence. It turned out, however, that the guarantor is actually a
different person named John Chua, and not Zantua. Here, the consent is vitiated due to his
mistake on the person of the guarantor.
Example of Mistake as to Qualification:
Isabel engaged the services of Hazel to pose as a model for the front cover of her magazine,
believing that Hazel is such an empowering role model for the youth. It evolved that Hazel is
different from the model that Isabel had in mind, it only happened that Hazel has the same
name as the other model. Isabels consent is vitiated, even though the Hazel that she hired is as
beautiful as the other Hazel.
e. Quantity mistake in quantity must be distinguished from a mistake or error in accounting. In
the first, there really exists an error as to the extent or dimension of the object of the transaction
or contract. In the second, there is no real mistake but only a mistake on paper due to an
erroneous mathematical computation. The contract in the first is voidable, while the contract in
the second is not.
For example, a vendee is informed by the vendor that the subject matter of the sale is a 30 hectare
sugarland which would produce 2,000 piculs of sugar. Vendee paid 30,000. Later, it turned out that the
land was only 18 hectares and production was only around 800 piculs. There was mistake in quantity and
the contract was set aside. But if the error in the area of the land is not considered as essential to the
contract, the sale is valid.
However, when Joyce purchased 10 boxes of Royce chocolate covered potato chips as comfort food at
the price of 500 pesos each but was quoted in the contract as amounting to 3,600 pesos instead of 5,000,
there is merely an error in computation of the account which can be easily corrected as it is just a matter
of arithmetic. It will not invalidate the contract.
2. Mistake of Law This is the mistake incurred by a party or both parties as to the legal effect of a certain
transaction or act. Generally, mistake of law does not vitiate consent as to render the contract voidable,
because ignorance is not an excuse. However, if mutual error of the contracting parties as to the legal
effect of an agreement frustrates the intention of the parties, such error or mistake may vitiate consent.
Error in the Making of Estimates:

Error in the estimation or calculation of the benefits derivable from a contract as well as the expected
expenses attendant thereto, is not a ground for annulment of the contract. These errors do not permeate to
the essential elements of the contract itself.
If the estimations were done in bad faith to induce the other party to enter into the contract, there is fraud,
which may now invalidate the contract.

Is the Party Who is the Source of the Mistake or Error Liable for Damages?:
If a party has sustained damages by his reliance on the erroneous declaration of the other party, the latter
may be held liable for damages if he is guilty of negligence.
If he could have discovered the error by observance of simple diligence, and by such omission, he had
misled the other party to enter into the contract resulting in damages to the latter, the errant party will be
responsible therefor. However, if the party alleging the mistake knew the doubt, contingency or risk
affecting the object of the contract, there is no mistake. (Art. 1333)
The party who claimed he had made a mistake and would want to annul the contract by reason thereof, is
estopped from doing so, if he was aware of the existence of the real fact from which the mistake has
allegedly arisen. For example, if the purchaser knew that the growing crops in a hacienda belonged to the
lessee and not the owner, there is no error or mistake that vitiated the purchasers consent.
Negligence for not reading the fine prints of the contract which a party signed cannot be considered as a
vitiating factor in the consent given by such party. Such failure did not make the act of the signing party
as involuntary.
If the negligence is mutual, they do not have a cause of action against each other.
If the mistake is being employed merely as an excuse to evade the contract, but actually, there is fraud,
the misleading party will be liable for damages under Article 1171.
Mistake or Error in the Motive/s of a Party Does Not Vitiate Consent:
If a contracting party was motivated to enter into the contract by reason personal to himself but which
turned out to be wrong, the consent he gave to the contract is not vitiated. For example, Ysa purchased a
car believing that her original car which was car napped could no longer be recovered. However, the car
was recovered and returned to her. The purchase of the new car could not be set aside by reason of the
mistake or error in her motive.
Gomez vs. Linton
Petitioner Gomez Marino and Linton, et al. entered into a contract to purchase a land in Cavite.
Petitioner alleged that respondents failed to carry out the contract and that by reason thereof, he lost some
money.
Respondents, on the other hand, alleged that petitioner falsely represented the boundaries of the land and
that by reason thereof, they refused to consummate the deal.
Was the consent given by the respondents void by reason of error and deceit? YES
The facts show conclusively that the respondents were misled and deceived by the petitioner as to the
actual boundaries of he land, and, as to the important fact, that petitioner could not make a good title to all
of the land within the boundaries.
Respondents admit that before the signing of the contract, plaintiff took them out over the land, which he
proposed to sell and showed them the corners and exterior boundaries.
After the contract was signed and upon making further examinations of the record title, it was found that a
large portion of the most valuable part of the tract was not included in the land, which the petitioner
proposed to covey.
Atilano vs. Atilano
Eulogio Atilano I executed a deed of sale covering lot E in favor of his brother Eulogio Atilano II while
retaining for himself the only remaining portion of the land, lot A.
When Eulogio Atilano II became a widower, they had the land resurveyed so that it could properly be
subdivided; and it was then discovered that the land they were actually occupying on the strength of the
deed of sale executed in 1920 was lot A and not lot E while the land which remained in the possession of
the vendor, Eulogio Atilano I was lot E and instead of A.
The heirs of Eulogio Atilano II (plaintiffs) filed an action and demanded the return of possession of lot E,
but the defendants refused to accept the exchange.
Did the mistake vitiate the consent of the parties thereby affecting the validity of the agreement? NO
Based on the facts and circumstances, the Court finds that the object thereof, as intended and understood
by the parties, was that specific portion where the vendee was then already residing (lot A) ; and that its
designation as lot E in the deed of sale was simple mistake in the drafting of the document, and thus
such mistake did not vitiate the consent of the parties, or affect the validity and binding effect of the
contract between them.
Teran vs. Villanueva
A Deed of Sale was executed wherein defendants Villanueva and Viuda de Rosa sold to plaintiff Teran a
parcel of land containing an area of 34 hectares, 52 ares and 43 centares.
An agent of the defendants accompanied Teran to investigate the land. The former only pointed to the
boundaries of the land, but did not go over all of them.
Without further investigating the area of the land, Teran purchased it. Unfortunately, after acquiring a
sketch of the said land from proper authorities, Teran found out that the land actually contained only 10
hectares. He now wanted to rescind the contract.
Was the sale binding even though the actual land is smaller than what is written on the deed? YES
The Court ruled against Teran. He obviously had ample opportunity to investigate the conditions of the
land, without any hindrance from the defendants, because of this he had no right to allege that the vendors
made false representation. Besides, no evidence shows that the area was an essential element of the
contract. A mistake on an element not essential to the contract could not vitiate the same.
Furthermore, parties did not consider the area as an essential element of the contract. Teran could not now
argue that a mistake on an element not essential to the contract vitiated the whole obligation.
a. Illiterates:
Article 1332. When one of the parties is unable to read,

or if the contract is in a language not understood by him, and mistake or fraud is alleged,
the person enforcing the contract must show that the terms thereof
have been fully explained to the former. (n)
Rationale and Applicability:

There is still a fairly large illiterates in the country, and documents are ordinarily drawn up in English.
For this article to apply, it must first be convincingly established that the illiterate or disadvantaged party
could not read or understand the language in which the contract was written or that the contract was left
unexplained to said party.
Presumption:
In the law on evidence, it is presumed that a person intends the ordinary consequences of his voluntary
act. This principle that a party is presumed to know the import of a document to which he affixes his
signature is modified by article 1332. Burden rests upon the party who seeks to enforce the contract to
show that the other party fully understood the contents of the document.
When Presumption is Not Applicable:

1. When one of the contracting parties is unable to read;
2. When the contract is written in a language not understood by the said party.
Allegation of Fraud or Mistakes by an Illiterate, Effects:

If a contracting party is an illiterate or even if literate, but he could not understand the language used in a
contract which he signed, and later, he alleged that there was fraud and mistake in the execution thereof,
there is a presumption created that there was fraud or mistake when he signed or gave his conformity to
the contract.
The burden of proof is shifted now to the party who is enforcing the agreement. He must prove that the
document was fully explained to the party alleging fraud or mistake.
For example: Two people who are both blind affixed their thumb marks to a deed which they thought was
merely a deed of mortgage but turned out to be a deed of sale. The document was set aside as the
defendant failed to prove that the other party fully understood the contents of the document.

Tan vs Mandap
The Mandaps are the legitimate children of Mandap Sr. and Maria Mandap. When their parents parted
ways, the respondents opted to stay with Maria.
Mandap Sr., until his death, lived with Diorita Dojoles. He suffered from diabetes since 1931, became
totally blind in 1940, and was crippled for about 10 years until his death.
Before his death on May 25, 1989, he conveyed the subject properties to his common-law wifes sister,
Elenita Dojoles Vasquez; and her husband, Crispulo Vasquez. Such sale was challenged by the Mandaps
stating that the sale of subject properties by their father was fictitious, and without any consideration.
Was the sale between Mandap Sr. and the Vasquez spouses valid? NO
At the time Dionisio Mandap, Sr., purportedly sold the lots in question to the Vasquez spouses, he was
already totally blind and paralyzed. He could not possibly have read the contents of the deeds of sale. He
could not have consented to a contract whose terms he never knew nor understood. It cannot be presumed
Mandap, Sr., knew the contents of the deeds of sale disposing of his properties.
As the party seeking to enforce the contract, the petitioners should have presented evidence showing that
the terms of the deeds of sale to the Vasquez spouses were fully explained to Mandap, Sr. But petitioners
failed to comply with the strict requirements of Article 1332, thereby casting doubt on the alleged consent
of the vendor.
Dela Cruz vs. Dela Cruz

Pacencia dela Cruz is the owner of a parcel of land. Pacencia allegedly executed a Deed of Sale in favor
of her son Fortunato whereby she conveyed said parcel of land for P21,000.
Fortunato subsequently sold said land to Clark and Divina Gutierrez.
Pacencia instituted an action for reconveyance of the property saying that the sale of the property to the
Gutierrezes was null and void and was fraudulently made by Fortunato who has no authority to sell the
same.
Pacencia died and was substituted by her children, the petitioners herein.
Petitioners fault the court a quo for failing to appreciate the fact that the Deed was entirely and completely
written in English, a language neither known nor understood by their mother, against the dictates of
Articles 1330 and 1332 of the Civil Code.
Was the deed executed by Pacencia simulated and thus void? NO
The Court held that for Article 1332 to apply, it must first be convincingly established that the illiterate or
disadvantaged party could not read or understand the language in which the contract was written or that
the contract was left unexplained to said party.
Plaintiffs failed to discharge this burden. The sale was valid.
There is nothing on record to support sufficiently petitioners contention. Fortunato declared the property
in his name for taxation purposes and paid the realty taxes, without any protest from Paciencia or
petitioners. His actions are contrary to petitioners allegation that the parties never intended to be bound
by the assailed contract.
b. Adhesion: ??
Article 1333. There is no mistake if the party alleging it knew the doubt,
contingency or risk affecting the object of the contract. (n)
Applicability:
Covers mistakes or errors which are not excusable.
If the mistake could have been avoided by exercising ordinary prudence or by observing diligence to
know the facts, or when it is so obvious and apparent that an ordinary person could have known it, a party
cannot invoke mistake to seek the annulment of the contract.
The mistake contemplated in this article which could constitute as a basis for the annulment of the
contract is an excusable one. It must arise from facts unknown to the person. If the facts are known to
him, or which he should have known by the exercise of ordinary diligence, he cannot allege mistake.
Example: A bought Bs house along the edge of a hill. It collapsed after a strong typhoon. Nganga si A.
Article 1334. Mutual error as to the legal effect of an agreement

when the real purpose of the parties is frustrated,
may vitiate consent. (n)
Rationale:
When even the highest courts are sometimes divided upon difficult legal questions, and when one-half of
the lawyers in all controversies on a legal question are wrong, why should a layman be held accountable
for his honest mistake on a doubtful legal issue? (Report of the Code Commission)
Requisites of Mutual Error:

1. The error must be mutual, that is, both parties are mistake about something but not about the object,
condition, personality or qualifications of a person as understood in Art. 1331.
2. The error must refer to the legal effects of the agreement. Legal effect refers to the rights of the parties as
stated in legal provisions and not as stipulated by the contracting parties.
For example: A is an heir of B, his deceased father. A sold his share to C which share is indicated as his
inheritance in the last will of his father. Both A and C believed that the sale is valid. So C paid the value
of the property. However, the will was denied probate, therefore A is not yet the owner of the property.
There is mutual error and the sale is voidable.
Mistake in 1334 is different from Mistake in Reformation Cases:

Where by a mutual mistake, the instrument embodying the agreement did not reflect the agreement of the
parties, the instrument is not annullable because there was a meeting of the minds between the parties.
The remedy authorized by law is reformation of the instrument.
Calilap-Asmeron vs. DBP

Petitioner Calilap and her brother executed a real mortgage over two parcels of land to serve as a security
over a loan obligation with DBP. DBP foreclosed the mortgage and thereafter acquired the property being
the highest bidder. Petitioner Calilap and DBP had conflicting versions as to what has transpired after
such events. Calilap contends that she had not given her full consent to the deed of conditional sale on
account of her lack of legal and technical knowledge. The issue is whether or not the provisions of the
Civil Code on fraud or mistakes by an illiterate (Art. 1332) is to be applied to petitioner Calilap.
Is Article 1332 applicable to the case at bar? NO!
It is quite notable that the petitioner did not specify which of the stipulations of the deed of conditional
sale she had difficulty or deficiency in understanding. Her generalized averment of having been misled
should, therefore, be brushed aside as nothing but a last attempt to salvage a hopeless position. Our
impression is that the stipulations of the deed of conditional sale were simply worded and plain enough
for even one with a slight knowledge of English to easily understand.
Nor was the petitioners ignorance of the true nature of the deed of conditional sale probably true. By her
own admission, she had asked the bank officer why she had been made to sign a deed of conditional sale
instead of an absolute sale, which in itself reflected her full discernment of the matters subject of her
dealings with DBP.

Article 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 and well-grounded fear of an imminent and grave evil upon his person
or property, or upon the person or property of his spouse, descendants or ascendants,
to give his consent.
To determine the degree of intimidation,

the age, sex and condition of the person shall be borne in mind.
A threat to enforce one's claim through competent authority,

if the claim is just or legal, does not vitiate consent. (1267a)
(2) Violence:
Violence, Concept:
It is an external and physical force or compulsion exerted upon a person to prevent him from doing
something or compelling him to do an act. Serious or irresistible force is employed overcoming the mind
of a person for the purpose of wresting his consent.
Elements of Violence:
1. There is a physical force employed which must be serious or irresistible such that the victim is left
without any choice but to submit.
2. The physical force employed is the determining cause in the giving of the consent.
(3) Intimidation:
Intimidation, Concept:
It is an internal moral force operating in the will and inducing the performance of an act. The victim in
intimidation is compelled to give his consent due to a reasonable and well-grounded fear of an imminent
and grave evil upon his person or property or those of his spouse, descendants or ascendants.
Elements of Intimidation:
1. The threat is real, serious, and imminent endangering the person and the property of the victim or those of
his spouse, descendants, or ascendants, if he does not give his consent.
2. The threatened act is unjust or unlawful, for if it is not, there is no intimidation.
3. The threatened act is aimed to secure the consent of the victim.
Violence Intimidation
It consists of physical force which is serious It consists of moral force operating in the
or irresistible. will of a person.
It is external because it is exerted upon the It is internal because it operates in the mind
body of the victim. It is physical compulsion. of the person. It is a moral compulsion.
There is no space of time to choose between There is a brief space of time between the
the physical compulsion and the act. They are threat and the actual act giving the victim a
simultaneously done. chance to choose between two evils: to do
what is being pressed upon him, or to suffer

the threatened act.
Article 1336. obligation,

Violence or intimidation shall annul the
although it may have been employed by a third person who did not take part in the contract.
(1268)
Violence or Intimidation by a Third Person:

Even if duress is employed by a third person who did not take part in the contract, the principle remains
the same, the contract is voidable because the consent is still vitiated.
(4) Undue influence:
Article 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 following 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. (n)
Undue Influence; Concept:

Undue influence is ANY means employed upon a party which, under the circumstances, he could not well
resist, and which has the effect of controlling his volition and inducing him to give his consent to the
contract, which otherwise, he would not have entered into.
It is a means which compels a person to do that which is against his will because of fear, the desire for
peace, or other feeling which he is unable to resist.
It must in some measure destroy the free agency of a party and interfere with the exercise of that
independent discretion which is necessary for determining the advantages or disadvantages of a proposed
contract.
Undue influence is different from intimidation. In intimidation, the threatened act must be unjust or
unlawful, in the former, the act need not be unjust or unlawful.
In undue influence, the victim is deprived of his reasonable freedom of choice by someone who subdued
his will. Thus, when during a serious famine, one party is compelled to accept the terms of a contract
imposed by someone who has the monopoly of the food, there is undue influence.
Due Influence, Reluctance, and Reverential Fear Does Not Vitiate Consent:
When influence consists in persuasive arguments or appeals to the affections, the consent is not vitiated
at all. This is rather an exertion of due influence which is allowed by law.
Solicitation, importunity, argument, and persuasion do not constitute undue influence, and a contract is
not to be set aside merely because one party used these means to obtain the consent of another.
Giving of reluctant consent cannot be considered as vitiated consent because it is clear that the person
acted voluntarily and freely though he is reluctant.
Reverential fear is the fear of displeasing persons to whom respect and obedience are due, and this does
not vitiate consent.
Circumstances Necessary in Determining Undue Influence:

The law mentions certain circumstances to be considered in resolving whether there is undue influence,
but these are not exclusive.
Other circumstances may be considered if they lead to the determination of the existence of any kind of
ascendancy or power of one person over the will of another, depriving the latter of his freedom of choice.


Martinez vs. HSBC
Alejandro Macleod (husband of petitioner) was the managing partner of Aldecoa & Co. Due to Macleods
alleged acts of fraud to the prejudice of the company, HSBC and Aldecoa & Co. filed charges. But before
the filing, Macleod went to Macao, a territory not covered by extradition treaties to escape the criminal
charges.
The respondents proposed a settlement that if the wife of Macleod assented to the requirements of
defendants, the civil suit against her and her husband would be dismissed and the criminal charges against
her husband would be withdrawn; but if she refused, her husband must either spend the rest of his life in
Macao or be criminally prosecuted.
Wife assented to the settlement: the respondents had taken possession of spouses properties, the charges
were dismissed and withdrawn, and her husband returned to Manila.
Wife negotiated for a portion of land in Malate but the respondents refused. The wife now argues that the
agreement cannot be binding because her consent was obtained under duress.
Was the consent of the wife obtained under duress thus rendering the agreement void? NO
In the case at bar, it is not sufficient nor conclusive that the petitioner now regrets having entered into the
contract and that she disliked entering into such. Petitioner was given the opportunity to take the advice of
her attorneys and if ever there were threats, it was not made directly to her because it was her attorneys
who negotiated.
Cases where duress is applicable or present:
1. in cases where there was no time within which to deliberate the matter as it should have been
deliberated
2. there was no time or opportunity to take the advice of friends or of disinterested persons
3. there was no time or opportunity to take the advice of counsel
4. the threats made to secure the performance of the act complained of were made directly to the
complaining party
5. there was no consideration for the performance of the act complained of except immunity from the
prosecution threatened
6. the property transferred or encumbered was the separate property of the person performing the act in
which the person for whom the act was performed claimed no interest whatever
7. there was no dispute as to the title of the property transferred or encumbered, no claim made by
anybody and no pretension that it could be taken for the debts of the husband or any other person.
Baez vs. CA
Pio Arcilla was a squatter in the land owned by PHHC. PHHC awarded such lot to Cristeta Laguihon by
virtue of a contract to sell. When Cristeta died, she was survived by her father, Basilio.
Basilio requested for the transfer of said land to Baez, to whom Cristeta was indebted.
Mr. Epis (Head Executive Assistant), after restudying the matter, considered the transfers from Cristeta to
Basilio, and from the latter to Baez, to be proper and meritorious, and recommended the approval of the
same.
CA held that the approval of the transfer of the rights to the lot was due to the intercession of the then
Senator Estanislao Fernandez.
Was the letter of Senator Fernandez constitutive of undue influence? NO
The evidence on which the finding of the Court of Appeals that the PHHC accommodated petitioners
because of the intercession of whoever wrote "Exhibit C, has no evidentiary basis, for Exhibit C was
rejected by the trial court" for being immaterial, irrelevant, impertinent and not properly identified.
But assuming that the letter was written by Senator Fernandez, it cannot be implied from the facts of the
case that the transfer of rights from Basilio to Baez was approved solely on the strength of such letter,
for the approval of the transfer was recommended as "extremely meritorious" by the Head Executive
Assistant, and by the Homesite Sales Supervisor.
This Court has already said that solicitation, importunity, argument and persuasion are not undue
influence , and a contract is not to be set aside merely because one party used these means to obtain 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, and is not obnoxious even in courts of equity. Such may be termed
"due influence."
Vales vs. Villa
Plaintiff Vales owned certain properties in Ermita to which he conveyed in favor of defendants for the
consideration of his Php25,000 debt to the latter. The conveyance had a clause giving Vales right to
repurchase the properties within one year, but he failed to do so.
Some of the properties were then sold. Vales now wished to set aside the conveyance on the ground that
his consent was obtained by undue influence. He thought it was insane for a man to sell his properties
valued at Php78,515 for Php25,000, so the only explanation he could think of was that he was deceived
into agreeing to the conveyance.
Was there undue influence placed upon Vales? NO
No deception took place in this case. Although Vales was in a disadvantageous position, he acted
independently and voluntarily. The only fear he had that time was the fear of losing his properties. He
could have gone to courts to recover his properties, instead he continued dealing with the defendants, and
even repurchased the properties from them years later. The court took it as his way of accepting all that
had happened to his person, no matter how unfavorable.
(5) Fraud:
Article 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.
(1269)
Concept of Fraud; Reason for Lack of Definition:

Fraud is every kind of deception or misrepresentation designed or schemed to lead a party into substantial
mistake or error, and relying thereon, he executes a particular act leading to his damage or prejudice
In fraud, the will of a person is maliciously misled by means of a false appearance of reality resulting in
his damage and prejudice. Fraud does not necessarily need to amount to estafa or felony to be considered
as a fraud.
The article did not define fraud. This is because the circumstances evidencing fraud are as varied as the
men who schemed the fraud in each case. Fraud is manifested in illimitable degrees or gradations. The
causal fraud (efficient cause to the giving of consent) or dolo causante is a ground for annulment of a
contract while the incidental fraud is a ground for damages.
It is fraud to conceal fraud.
Requisites of Fraud (Dolo Causante):
1. Fraud is applied or utilized by one contracting party upon the other. (If both committed fraud, contract
is valid) (Art. 1344)
2. It must be serious deception or misrepresentation. (Art. 1344)
3. It must have induced the victim to enter into the contract. (Art. 1338)
4. It must have resulted in damage or injury to the victim.
Insidious Machinations:
This refers to a deceitful scheme or plot with an evil design, or a fraudulent purpose. Thus, the deceit
which avoids a contract, need not be by misrepresentations in words.
The deceit exists where the party who obtains consent does so by concealing or omitting to state material
facts which, with intent to deceive, by reason of such omission or concealment the other party was
induced to give consent which he would otherwise have not given.
Quantum of Evidence:
Fraud and misrepresentation are never presumed they must be proved by clear and convincing evidence
and not mere preponderance of evidence.
Bad Faith Partakes of the Nature of Fraud:
Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. It means breach of a known duty through some motive or
interest or ill will. It partakes the nature of fraud.

Kinds of Fraud:
The civil code speaks of two different kinds of fraud which have no similarities.
The first kind is treated in Article 1170-71 centering on the performance of the prestation.
The second kind is treated in Article 1338 centering on the celebration or perfection of the contract.
Fraud that justifies a prayer for annulment of contracts is different from the fraud that justifies a liability
for damages
Fraud under 1338 refers to all kinds of deception, whether through insidious machination, manipulation,
concealment or misrepresentation to lead another party into error.
Distinction Between Fraud in Performance and Fraud in the Perfection
Basis Fraud in the performance Fraud in the perfection
It occurs after the valid execution of It occurs before or simultaneous with

Time of occurrence the contract. It is employed in the the creation or perfection of the
performance of a pre-existing obligation.
obligation.
Consent Consent is free and not vitiated. Consent is vitiated by serious

deception or misrepresentation
Effect It is not a ground for annulment of the It is a ground for annulment of the
contract. contract.
Remedy Action for damages only. Action for annulment with damages.
Classes of Fraud in the Perfection:

1. Dolo Causante/Causal Fraud The essential cause of the consent without which the party would not
have agreed to enter into the contract.
2. Dolo Incidente/Incidental Fraud Not the efficient cause for the giving of the consent to the contract,
as it refers merely to an incident therein and, which even if not present, the contracting party would have
still agreed to the contract.
Basis Dolo causante Dolo incidente

Nature It is the efficient cause to the giving of It is not the efficient cause for the
consent to the contract. giving of consent to the contract.
Effect It renders the contract voidable. It does not affect the validity of the
contract.
Remedy Annulment with damages. Contract remains valid. Remedy is

claim for damages only.
Distinctions Between Dolo Incidente and Fraud in the Performance:

In so far as effects and remedies are concerned, they have no differences. In both, the contract remains
valid and the remedy is to claim for damages.
They differ only on the time of occurrence of the fraud. Dolo Incidente occurs prior to or at the time of
perfection, while fraud in the performance obviously occurs after the perfection of the contract.
Example: Yanna wanted to insure herself. Afraid that she might not pass the medical examination, she
requested Ida to pose for her. The insurance company executed the insurance due to the favorable results.
Yanna then passed away, and the world wept. The contract is voidable, since the deceit exerted being of
serious nature, thus Ida cannot claim for the insurance now.
Another example: Marlo stated in the deed of sale she executed that she is married, when in fact she is
actually single and free on Valentines day. This is not a sufficient evidence of fraud as this fact is not the
inducing factor that led to the sale.
Law furnishes No Protection to the Inferior Simply Because he is Inferior:

If a person enters into ridiculous contracts and had a bad bargain, the law does not necessarily come to his
succor.
One man cannot complain because another is more able, or better trained, or has a better sense of
judgment than he has: and when the two meet on fair field, the inferior cannot murmur if the battle goes
against him. The law furnisher protection on both alike, it makes no distinction between the wise and the
foolish.
Error Resulting from Fraud Distinguished from Error/Mistake as Separate Ground:

The insidious words or machinations referred to in Art. 1338 lead the complaining party into error and
acting along this error, he suffers prejudice or damage. This error must not be confuse with the error or
mistake in Article 1331 which is another vice of consent.
To be clear, error induced by fraud will always vitiate consent if it is the influencing factor for the party
to enter into the contract. (Art. 1338)
Whereas, the mistake or error in 1331 will only vitiate consent if it refers to the substance of the thing
which it is the object of the contract or to those which have principally moved one or both parties to enter
the contract or it refers to the identity or qualification of one of the parties which have been the principal
cause of the contract.
Article 1339. Failure to disclose facts, when there is a duty to reveal them,
as when the parties are bound by confidential relations, constitutes fraud. (n)
Failure to Disclose Facts, When Fraudulent:

When by the reason of confidential relations, a party is bound to disclose facts, but instead, concealed
them with the intention to deceive such concealment constitutes fraud. It is a basis for annulment of the
contract.
For example: A principal was persuaded and induced by his agent to sell to the latter certain properties at
12 dollars per piece. The agent did not disclose the fact that the government was interested in buying
these properties at a higher price of 19 dollars per piece. It was held that the sale is fraudulent.
Opponents in Litigation have no Confidential Relations:

Between opponents in a case, there could be no duty to disclose facts because their relationship is far
from being confidential, it is rather antagonistic.
Innocent Non-disclosure of facts when there is No Duty to Reveal them:

When there is mere innocent non-disclosure of a fact where between the parties there is no duty to reveal
it, no fraud was committed.

Strong vs. Gutierrez
Mr. Strong owned 800 shares of the capital stock of the Philippine Sugar Estates Development Company,
Limited, an anonymous society formed to hold the Dominican friar lands.
Gutierrez bought such shares from Jones which was alleged to be an agent of Mrs. Strong. Mrs. Strong
contends that Jones had no power to sell or deliver her stock in the Philippine Sugar Estates Development
Company, Limited; and that its sale, through her agent, was procured by fraud on the part of the
defendant.
Was Jones authorized and was there fraud in the sale? - NO authority, NO fraud
We fail to find proof of an effective power given Jones to dispose of this stock. The difficulty of this
branch of the case is the scantiness of the evidence.
The defendant violated no duty in not communicating to the plaintiff his purpose in buying her shares and
has been guilty of no fraud.
The machinations with which the defendant is charged consist in the suppression of his identity while
negotiating for the stock and were paying for it and also of his intention as majority stockholder in the
company to close the negotiation then pending with the Government for the sale of the friar lands owned
by the company. The prospect of such a sale would have materially affected the price of the stock.
This negotiation and the defendant's management of it in behalf of the vendors was known to Jones and
had been for same time a matter of public notoriety and newspaper comment in the Islands
Woodhouse vs. Halili
Woodhouse and Halili entered into a contract for organizing a partnership Woodhouse as an industrial
partner or manager and Halili as a capitalist for Mission softdrinks bottling and distribution.
After Woodhouse and Halili signed a contract, they went to US where they entered into a franchise
agreement with Mission Dry Corporation.
When the plant was already operating, Woodhouse demanded that partnership papers be executed which
Halili never did.
Woodhouse sued Halili but Halili claimed that Woodhouse falsely represented himself as the owner or
was about to become owner of the franchise when in fact the franchise was given to Halili himself.
Was there false representation by Woodhouse as the sole owner of the franchise? YES
The defendant was made to believe, and he actually believed, that plaintiff had the exclusive franchise.
Defendant would not perhaps have gone to California and incurred expenses for the trip, unless he
believed that plaintiff did have that exclusive privilege, and that the latter would be able to get the same
from the Mission Dry Corporation itself.
This Court had held that in order that fraud may vitiate consent, it must be the causal (dolo causante), not
merely the incidental (dolo causante), inducement to the making of the contract.
The record abounds with circumstances indicative that the fact that the principal consideration, the main
cause that induced defendant to enter into the partnership agreement with plaintiff, was the ability of
plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for the partnership.
The principal obligation that he assumed or undertook was to secure said franchise for the partnership, as
the bottler and distributor for the Mission Dry Corporation. We declare, therefore, that if he was guilty of
a false representation, this was not the causal consideration, or the principal inducement, that led plaintiff
to enter into the partnership agreement.
We conclude from the above that while the representation that plaintiff had the exclusive franchise did not
vitiate defendant's consent to the contract, it was used by plaintiff to get from defendant a share of 30 per
cent of the net profits; in other words, by pretending that he had the exclusive franchise and promising to
transfer it to defendant, he obtained the consent of the latter to give him (plaintiff) a big slice in the net
profits. This is the dolo incidente defined in article 1270 of the Spanish Civil Code, because it was used to
get the other party's consent to a big share in the profits, an incidental matter in the agreement.
Cacho vs. Bonifacio
Respondent Bonifacio spouses leased 3 commercial stalls to Edira Food Corporation owned by the
spouses David. Due to nonpayment despite repeated demands, respondents filed a complaint for unlawful
detainer against David.
Meanwhile, a new lease contract was executed by petitioner Cacho and David (lessees) and respondents
(lessors) over the same premises. Judgment was rendered by the MTC against David concerning the 1st
lease and a writ of execution was issued.
The writ was served upon petitioners son, levying upon the personal properties found inside the leased
premises. Petitioner filed a complaint for annulment of the MTC decision and damages with the RTC
alleging that the decision and the writ of execution was obtained by fraud, malice and bad faith, as a
consequence of which, she suffered damages.
RTC dimissed the complaint for annulment of the MTC decision but declared the execution of the writ as
void and awarded damages to the plaintiff.
CA alleged that the RTC erred in awarding the damages while dismissing the prayer for annulment of the
MTC decision.
Is the petitioner entitled to damages due to the writ of execution being obtained by fraud? YES
The RTC found that respondents had the writ of execution implemented against petitioner even if she was
not a party in Civil Case No. 1800 and that, in doing so, respondents acted in bad faith. In the course of
the implementation of the writ of execution, they ordered the sheriff to padlock the leased premises.
The closure of the premises caused damage to petitioner by way of unrealized profits of P2,000 for each
day the restaurant did not operate.
The appellate court itself found that respondents' act of reviving Civil Case No. 1800 without impleading
petitioner (who, as respondents were very much aware, was the one already occupying and actively
managing the restaurant) was "very revealing of their dishonest intention and bad faith that resulted to
(sic) [the] prejudice and damage" of petitioner.
Araneta vs. De Paterno
Paz Tuason owns a residential land in Santa Mesa, Manila where it was occupied by lessees. Their
contract of lease contained a provision that should Paz Tuason sell the land, the lessees shall be give
preferential right to buy their leaseholds.
Paz Tuason obtained a loan from Vidal which was secured the by the subject land.
When Paz Tuason decided to sell the land to Gregorio Araneta, Inc., most of the tenants took advantage
of their preferential rights to buy their leaseholds.
When there were only 11 unencumbered lots, Paz Tuason and Gregorio Araneta, entered into an absolute
deed of sale (Exhibit A). Paz Tuason offered to pay his mortgage obligation but Vidal refused.
Gregorio Araneta now files an action to compel Paz Tuason to deliver to him a clear title to the lots.
It was alleged that Attorneys Salvador Araneta and J. Antonio Araneta who Paz Tuason said had been her
attorneys and had drawn Exhibit A, and not informed or had misinformed her about its contents; that
being English, she had not read the deed of sale; that if she had not trusted the said attorneys she would
not have been so foolish as to affix her signature to a contract so one-sided.
Was there fraud in obtaining the consent of Paz Tuason? NO
It is difficult to believe that the defendant was deceived into signing Exhibit A, as she had been intelligent
and well educated in managing her affairs, she had an able attorney who was assisting her in the suit
against Vidal, a case which was instituted precisely to carry into effect Exhibit A or Exhibit 1, and a son
who is leading citizen and a business-man and knew the English language very well if she did not.
If the defendant signed Exhibit A without being apprised of its import, it can hardly be conceived that she
did not have her attorney or her son read it to her afterward.
Only after she was confronted with the signed copy of the document on the witness did she spring up the
defense of fraud. It would look as if she gambled on the chance that no signed copy of the deed had been
saved from the war.
Tuason vs. Marquez
Respondent Marquez gave an option to Antonio Tuason for the purchase of the Lucena electric light
plant. The option was taken advantage of by petitioner Mariano Tuason and the contract was then
formulated.
It appears that Lucena Electric Co. was granted a 35-year franchise but prior to the accomplishment of the
contract between Tuason and Marquez, Marquez announced his intention to give up the franchise.
Subsequent to the accomplishment of the contract, Public Utility Commissioner declared the cancellation
of the franchise
Tuason asks for judgment against Marquez and for the rescission of the contract on the ground of
misrepresentation and fraud.

Is Marquez guilty of fraud? NO
It must be emphasized that in making mention of the property of the electric light company, merely
renewed a previous inventory of the property. The franchise, therefore, was not a determining cause of the
purchase.
The franchise was then in force and either party could have easily ascertained its status by applying at the
office of the Public Utility Commissioner.
The innocent non-disclosure of a fact does not affect the formation of the contract or operate to discharge
the parties from their agreement. The maxim caveat emptor should be recalled.
Songco vs. Sellner
Sellner, the defendant, entered into a contract with Songco, plaintiff. Sellner conceived the idea of buying
the cane of the latter, expecting to run his own cane in that same time the other should be milled.
Accordingly, Sellner bought Songco's cane as it stood in the fields for the agreed sum of P12,000 and
executed therefor three promissory notes of P4,000 each.
Two of these notes were paid; and the present action was instituted to recover upon the third.
The petitioner was contending that promissory note in question was obtained from the defendant by
means of certain false and fraudulent representations therein specified. Songco estimated that this cane
would produce 3,000 piculs of the sugar and that Sellner bought the crop believing this estimate to be
substantially correct. As the crop turned out it produced 2,017 piculs, gross, and after the toll for milling
was deducted the net left to Sellner was very much less.
Was the contract void because Sellners consent was obtained through fraud? NO
We think it is fairly shown by the evidence that Songco knew at the time he made the representation in
question that he was greatly exaggerating the probable produce of his fields, and it is impossible to
believe that his estimate honestly reflected his true opinion. He knew what these same fields had been
producing over a long period of years; and he knew that, judging from the customary yield, the harvest of
this year should fall far below the amount stated. Sellner was bound and that he must pay the price
stipulated.
The representation in question can only be considered matter of opinion as the cane was still standing in
the field, and the quantity of the sugar it would produce could not be known with certainty until it should
be harvested and milled.
Undoubtedly Songco had better experience and better information on which to form an opinion on this
question than Sellner. Nevertheless the latter could judge with his own eyes as to the character of the
cane, and it is shown that he measured the fields and ascertained that they contained 96 1/2 hectares.
A misinterpretation upon a mere matter of opinion is not an actionable deceit, nor is it a sufficient ground
for avoiding a contract as fraudulent.
It is not every false representation relating to the subject matter of a contract which will render it void. It
must be as to matters of fact substantially affecting the buyer's interest, not as to matters of opinion,
judgment, probability, or expectation.
Azarraga vs. Gay
Plaintiff Azarraga sold two parcels of land to Gay for the lump sum of Php47,000 by a public document
Exhibit A. The conditions of the payment include delivery of the Torrens title by plaintiff to defendant,
and defendant reciprocating it by paying in installments.
Plaintiff complied, but defendant failed to pay the whole amount.
According to Gay, plaintiff led her to believe that the second parcel of land contains 98 hectares, when in
fact, it is only 60 hectares.
Was there fraud in obtaining the consent of Gay? NO
Before the execution of the agreement, Gay went over to the lands in question to make her own
calculations, but despite this, she still was not able to ascertain the difference in the land area.
Another document was also delivered to Gay before the execution of the contract, which contains that the
second parcel has 70 hectares, and yet, despite knowing this discrepancy, she still proceeded with
purchasing the land. If the land area is so important, the sale could have been made at a price per unit
measure.
But this is a lump sum sale, where any increase or decrease in the land area would not warrant any
increase and decrease in the price purchase.
Articles 1340 to 1369

7. Usual exaggerations in trade:
Article 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts,
are not in themselves fraudulent. (n)
Usual Exaggerations in Trade known as Tolerated Fraud, Not Fraudulent by Themselves:

These exaggerations are also known as dealers talk or traders talk or dolus bonus which
constitute tolerated fraud as long as the other party has the opportunity to check and know the facts.
What Tolerated Fraud Covers:

Tolerated fraud usually refers to misrepresentation of traders tending to minimize the perceived defects of
the thing or service advertised, or magnification of its qualities.
They generally do not affect the validity of the contract. They will constitute fraud when
misrepresentations are set to deceive such as faking the quality of the thing purposely to mislead, and
preventing attempts at verification by the other party.
When there is a written contract, what does not appear on the face of the contract should be regarded as
traders talk.
Caveat Emptor:
Let the buyer beware. The buyer has the duty to check the title of the seller over the property plus other
circumstances necessary for his own protection. Otherwise, he would be buying the property at his own
risk.
There is a presumption that a person takes ordinary care of his concerns, followed by another
presumption that the ordinary course of business has been followed. Accordingly, let the buyer beware
for he will assume the burden and consequences of his imprudence and credulousness
8. Mere expression of an opinion:
Article 1341. A mere expression of an opinion does not signify fraud,

unless made by an expert and the other party has relied on the former's special knowledge. (n)
Significance:
A mere expression of opinion by an ordinary person does not signify fraud. However, if it is made by an
expert offered by one party and the other party relied on the expertise of the said expert, there is fraud if
the opinion contemplated in the article is not an honest-to-goodness opinion but a false representation
precisely given to mislead the victim.
An expert has a special knowledge on his field of discipline. He is a recognized authority in his line of
business or profession. As such, his opinion is like a statement of fact and if it is false, may be considered
fraudulent giving rise to an action for annulment.
When Expert was Engaged by the Plaintiff:

If it is the plaintiff himself who hired the expert and he relied on the supposed special knowledge of the
said expert, and by reason of which he entered into the contract but unfortunately, the experts opinion
turned out to be wrong, the plaintiffs action for annulment must fall.
The expert is considered the plaintiffs own employee.
The plaintiffs recourse is against the expert.

Songco vs. Sellner
Sellner, the defendant, entered into a contract with Songco, plaintiff. Sellner conceived the idea of buying
the cane of the latter, expecting to run his own cane in that same time the other should be milled.
Accordingly he bought Songco's cane as it stood in the fields for the agreed sum of P12,000 and
executed therefor three promissory notes of P4,000 each. Two of these notes were paid; and the present
action was instituted to recover upon the third.
Songco estimated that this cane would produce 3,000 piculs of the sugar and that Sellner bought the crop
believing this estimate to be substantially correct. As the crop turned out it produced 2,017 piculs.
It appears that in the course of negotiations Sellner requested Songco to guarantee the quantity which the
latter claimed to be in fields but he would not do so.
He, however, repeated that he was sure the fields contained the quantity estimated by him.
Was the consent of Sellners consent was vitiated due to the fact that there was misrepresentation done
by Songco? NO
Sellner was bound and that he must pay the price stipulated. The representation in question can only be
considered matter of opinion as the cane was still standing in the field, and the quantity of the sugar it
would produce could not be known with certainty until it should be harvested and milled.
Undoubtedly Songco had better experience and better information on which to form an opinion on this
question than Sellner. Nevertheless the latter could judge with his own eyes as to the character of the
cane, and it is shown that he measured the fields and ascertained that they contained 96 1/2 hectares.
A misinterpretation upon a mere matter of opinion is not an actionable deceit, nor is it a sufficient ground
for avoiding a contract as fraudulent.
When the purchaser undertakes to make an investigation of his own, and the seller does nothing to
prevent this investigation from being as full as he chooses to make it, the purchaser cannot afterwards
allege that the seller made misrepresentations.
9. Misrepresentation:
(1) By a third person:
Article 1342. not vitiate consent,

Misrepresentation by a third person does
substantial mistake and the same is mutual. (n)
unless such misrepresentation has created
General Rule: Misrepresentation by Third persons Does not Vitiate Consent:

Misrepresentation or fraud committed by a third person inducing a party to enter into the contract does
not vitiate consent and cause the nullity of the contract.
It may, however, give occasion for an action for damages against the third person by the injured party.
Exception: if the third party acted in collusion with a party who benefited thereby, the contract may be
annulled by the injured party. The complicity of a party and the third person make them solidarily liable
to the innocent party.
Exception to the General Rule:

The fraud committed by the third person will make the contract voidable only if the following requisites
concur: The representation created substantial mistake, and the mistake is mutual.
The cause of the voidability of the contract is a complex one, that is, the misrepresentation of the third
person resulting in substantial mistake on the part of both parties.
Rule in Case of Force and Intimidation Exerted by a Third Person:

The rule is different where the violence or intimidation is exercised by a third person who did not
participate in the contract. The contract shall be annulled by such violence or intimidation. Whereas, the
fraud made by the third person does not vitiate consent.
Hill vs. Veloso
Veloso and Franco executed a promissory note wherein they promised to pay Michael and Co 6,000
pesos. The note was indorsed to Hill in which 2000 was already collected. For the collection of the
remaining amount, this case was filed by Hill.
Defendants alleged that when Franco was still alive, Atty. Levering suggested to him that they execute a
document wherein the Velosos would promise to pay Atty. Levering, the guardian of the minor children
of the Velosos, 8,000 pesos so that he can pay the debt of the Velosos which they owed their former
guardian. Franco allegedly made them sign a blank sheet of paper, which he said would be filled out in
his office afterwards. After his death, it turned out that Franco never executed the document, and a
promissory note was created in the paper instead.
Defendants alleged that they had had no transaction whatever with Michael & Co., S. en C., nor with the
plaintiff, and as they had not received any kind of goods whatever from said firm.
Can the defense of deceit be used in this case to nullify the promissory note? NO
The deceit, in order that it may annul the consent, must be that which the law defines as a cause.
Domingo Franco is not one contracting party with regard to Maximina Ch. Veloso as the other
contracting party. They both are but one single contracting party in contractual relation with, or as
against, Michael & Co.
Domingo Franco, like any other person who might have been able to to induce Maximina Ch. Veloso to
act in the manner she is said to have done, under the influence of deceit, would be, for this purpose, but a
third person . There would then not be deceit on the part of the one of the contracting parties exercised
upon the other contracting party, but deceit practiced by a third person.
Deceit by a third person does not in general annul consent, and in support of this opinion it is alleged that,
in such a case, the two contracting parties act in good faith.
(2) In good faith:
Article 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n)

Effect of Misrepresentation:
If the misrepresentation is done in bad faith, which means, it is deliberate and intended, and the other
party was induced to agree to the contract by the act of misrepresentation, there is fraud. The contract is
voidable.
If the misrepresentation is made in good faith, the contract just the same is voidable, not because of the
misrepresentation but because of substantial error. This error is tantamount to vitiated consent.
Example: Rico sold a fighting cock to Patch, an amateur in cock-fighting. Patch needed a Texas fighting
cock, a kind of cock which lasts long during engagements. Rico honestly believed that the cock he gave
to patch is a Texas cock. When the cock was pitted to another, it didnt last long as its nature was too soft.
It turned out that the cock is just an ordinary one. The sale of the cock is voidable, not because of the
honest misrepresentation of Rico, but because of the substantial error on the part of the parties.
Asiain vs. Jalandoni

Asiain is the owner of Hacienda Maria while Jalandoni is the owner of another hacienda adjoining that of
Asiain.
Asiain offered to sell a portion of his hacienda to Jalandoni affirming that it contained MORE OR LESS
between 25 and 30 hectares and would produce not less than 2,000 piculs of sugar. Jalandoni was
doubtful as to the extent of the land and the amount of crop on it but sometime later, the two eventually
entered into an agreement for the sale.
Once in the possession of the land, Jalandoni was able to find out that the land is only 18 hectares and is
capable of producing only 800 piculs. Asiain filed a complaint to recover the unpaid balance of the price
from Jalandoni while Jalandoni filed a counter-complaint to annul the contract.
Was the misrepresentation made in good faith, and does it constitute as a ground for rescission? YES

There was no fraud on Asiasins part but rather a mutual mistake on both parties. Since the mistake is so
material as to go to the essence of the contract, it is a ground for relief and rescission. Innocent and
mutual mistake alone are sufficient grounds for rescission.
It is well settled hat a purchaser of land, when it is sold in gross, or with the description more or less
does not thereby ipso facto take all the risk of quantity in the tract.
If the difference between the real and represented quantity is very great, both parties act obviously under
a mistake which it is the duty of the court of equity to correct.
Mutual mistake of the contracting parties which is so material as to go to the essence of the contract is a
ground for relief and rescission.
Article 1344. In order that fraud may make a contract voidable,

been employed by both contracting parties.
it should be serious and should not have
employing it to pay damages. (1270)
Incidental fraud only obliges the person
Character of Fraud to Render a Contract Voidable:

The fraud must be serious to vitiate consent. Moreover, it must not be mutual.
When fraud is sufficient to induce an ordinary prudent person into error, the fraud is said to be serious. If
it cannot deceive an ordinary prudent man, it is not serious.
Personal circumstances of the victim should be weighed and considered in determining the influence of
the fraudulent act upon a person.
If both parties are in pari-delicto, the law will leave them where it finds them. Neither of the parties could
seek the annulment of the contract.
Incidental Fraud:
Incidental fraud is not the reason why the party has entered into the contract; it does not vitiate consent.
Even without it, the party just the same, would still have agreed to the contract.
10. Simulation of a contract:

(1) Absolute vs. relative:
Article 1345. Simulation 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. (n)
Article 1346. An absolutely simulated or fictitious contract is void.

A relative simulation, when it does not prejudice a third person

and is not intended for any purpose contrary to law, morals, good customs,
public order or public policy binds the parties to their real agreement. (n)
Concept of Simulation:
Simulation of a contract is the deliberate act of making a fictitious agreement by the parties for purposes
of deception, when in fact the juridical act that appears on the contract does not really exist or is different
from what is actually agreed upon.
It takes place when the parties do not really want the contract they have executed to produce the legal
effects expressed by its wordings.
Simulation of contract involves a defect in the declaration of the will of the parties.
Two Juridical Acts Involved in Simulation:
1. Ostensible act this is the apparent but fictitious document or conduct executed by the parties. It has the
semblance or color of a contract. This act is always void.
2. Hidden act this is the true or real agreement contemplated by the parties. The real agreement which is
disguised under another contract is valid and binding between the parties, if it does not prejudice a third
person, or is not contrary to the law, morals, good customs, public order or public policy.
Kinds of Simulated Contracts and their Effects:

1. Absolute Simulation is one where the parties do not intend to be bound by the contract. The parties do
not really intend to produce any legal effects between the parties. If the contract is absolutely simulated, it
is void.
Example: In a sale of a fishpond, it was made to appear that the price was paid when actually it was not.
The sale being without consideration is fictitious.
2. Relative Simulation is one where the parties conceal their real agreement by disguising it under
another contract. If the contract is relatively simulated, it can be void or valid depending upon the
circumstances. If it prejudices a third person or is contrary to law, morals, good customs, public order or
public policy, it is void. Otherwise, the real agreement which was concealed shall be binding provided
that all essential elements of a contract are present. The apparent contract will not be recognized by law, it
is only the concealed agreement which has a chance to be recognized as valid.
Example: A donor is donating a property to a donee. However, instead of executing a deed of donation,
the donor instead executed a deed of sale to conceal the donation intended.
Reason For Invalidity of Absolutely Simulated Contracts:

Absolutely simulated contracts are void because they lack the element of true consent. The parties do not
intend to be bound at all. More, the act is executed to prejudice a third person and is generally fraudulent.
May the Owner-Simulator Recover?:

If the absolutely simulated contract does not have any illegal purpose, the interested party may prove the
simulation to recover whatever he might have given under the fictitious contracts.
In the event that the contract was intended for an illegal purpose, the contract is void and the parties have
no cause of action against each other. (Article 1411)
Right of a Third Person Prejudiced by the Simulation:
A third person or creditor who is prejudiced by the simulated contract may attack the nullity of the
contract. If the third person is in bad faith, he can have no better right than the person from whom he had
acquired title. However, if the third person acted in good faith in acquiring title over the property, the said
third person will be protected by law. The apparent contract will then be considered as a real contract.
Example: To frustrate an impending writ of execution, Aldrin fictitiously transferred in a deed of sale
some of his properties to Aimee. Without the knowledge of Aldrin, Aimee sold these properties to
Annarose who was acting in good faith. The apparent contract between Aldrin and Aimee will be
considered as a true contract. The sale in favor of C will be sustained.
Absolute simulation Fraudulent alienation

There is no valid existing contract between the parties There is a true and existing contract between the parties
Contract can be attacked by any creditor even by one who Only creditors before the alienation of the property can
became such after the simulation attack the contract
Insolvency of the simulating debtor is not necessary for the Insolvency of the debtor is necessary. The creditor cannot
nullification of the contract recover in any manner what is due him
Action to declare nullity of contract does not prescribe Action to rescind (Accion Pauliana) the contract prescribes
in four years

Simulation Different from Inadequacy of Price:
Simulation of contract and gross inadequacy of price are distinct legal concepts, with different effects
the concept of a simulated sale is incompatible with inadequacy of price.
When the parties to an alleged contract do not really intend to be bound by it, the contract is simulated
and void. Gross inadequacy of price by itself will not result in a void contract, and it does not even affect
the validity of a contract of sale, unless it signifies a defect in the consent or that the parties actually
intended a donation or some other contract.
Rodriguez vs. Rodriguez
Concepcion, a widow, entered into a second marriage with Domingo.
As under her paraphernal property, Concepcion sold two of her fishponds to her daughter (of the first
marriage) for the sum of 2500. Subsequently, Concepcions daughter transferred the same properties to
her mother Concepcion and stepfather Domingo.
When Domingo died, Concepcion and the children of Domingo (of his first marriage) partitioned the
fishponds named under the conjugal properties among themselves. When the relationship of Concepcion
with Domingos children turned problematic, she filed an action to declare the conveyances made upon
the fishponds null and void.
She contends that the transfer was based on the alleged employment or exercise Domingo of force and
pressure on her; that the conveyances of the properties from Concepcion to her daughter and then to
the conjugal partnership of her marriage with Domingo are both without consideration;
Were the contracts simulated and without consideration, thus void? NO
The characteristic of simulation is the fact that the apparent contract is not really desired or intended to
produce legal effects or in way alter the juridical situation of the parties.
Concepcion and her daughter must have intended the two conveyance to be real and effective; for
appellant could not intend to keep the ownership of the fishponds and at the same time vest half of them
in her husband.
Since in each conveyance the buyer became obligated to pay a definite price in money, 2.5k in the first
and 3k in the second, such undertaking constituted in themselves actual causa or consideration for the
conveyance of the fishponds. The considerations need not pass from one party to another at the time the
contract is entered into.
Gonzales vs. Trinidad
Respondents Primitivo Trinidad and Ynares executed in favor of petitioners Gonzales and Alfredo
Trinidad a deed of sale of an urban property in Manila. As the property was mortgaged to the Bureau of
Lands for P6,500, the purchasers assumed the encumbrance.
The sale was simulated but the supposed vendors did not receive the alleged price, the idea being to save
the property, which was fictitiously sold, from attachment by Dr. Ramon Papa to whom Lorenzo Perez
had endorsed a note for P4,000 executed and signed by Primitivo.
Dr. Papa however died and the credit represented by the note was adjudicated to Carmen Papa with whom
the said Primitivo had a subsequent agreement to the effect that he would pay the note as soon as he had
the money. Thus the litigation and attachment which Primitivo feared were averted.
Was the contract of sale null and void for being simulated? YES
The contract of sale, being onerous has for its cause or consideration the price of P10,000; and both this
consideration as well as the subject matter of the contract namely, the property, are lawful and not
penalized by law. However, as the contract was fictitious and simulated and the supposed vendors did not
receive the stipulated price, the consideration being thus lacking, said contract is null and void per se or
non-existent.
Borromero vs. Borromeo
Johanna Borromeo, widow of the late Dr. Maximo Borromeo, brought an action alleging that before the
death of her husband and at the time when he was seriously ill and bedridden, her husband signed, or was
made to sign, a fictitious deed of sale of said property in favor of the defendants purporting to convey a
conjugal property to them for P3k when the property was assessed to be worth P42k and had a market
value of P80k.
Petitioner sought to declare the sale as null and void.
Was the sale during the lifetime of Johannas husband fictitious? YES
In the case at bar the sale is alleged to be fictitious because no payment of the stated price was made. The
sale, therefore, was non-existent, because one of the elements, that of consideration, was absent.
In cases where no consideration exists, the contracts or agreements lack one of the essential elements for
their validity , namely, cause or consideration, and, therefore, they are considered as non-existent. It is
under this category (of non-existent contracts) that the fictitious sale, alleged in the case at bar to have
been executed by the husband without consideration or with false consideration, falls.
Bravo Guerrero vs. Bravo
Spouses Mauricio and Simona owned two parcels of land with. Simona executed a general power of
attorney in favor of Mauricio, granting him authority to mortgage or sell the properties.
Mauricio carried out a Deed of Sale to his son Roland, and grandchildren, Ofelia and Elizabeth (as
vendees). The sale was conditioned on the payment of Php1, 000. Mauricio and Simona died.
In 1997, Edward, one of the spouses grandchildren, filed for judicial partition of the lands, and for the
annulment of the Deed of Sale on the ground that it was simulated to prejudice the other heirs as shown
by the grossly inadequate consideration.
Was the deed of sale simulated? NO
Respondents had not proved any of the instances that would invalidate the Deed of Sale. If anything, the
deed only has gross inadequacy (two parcels of land for only Php1,000) of price. Besides, the Deed of
Sale was executed in 1970; the consideration might be considered inadequate in the present time, but in
1970, it might have been sensible.
Simulation of contract and gross inadequacy of price are distinct legal concepts. The former shows no
real agreement between the parties, hence, void. The latter may embody a true agreement between the
parties, especially as to the price negotiation in contracts of sale. It does not affect the validity of the
contract.
Object of Contracts
1. Commerce of Men:
Article 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. (1271a)
What Can Be the Object of a Contract:

It can be a thing, right, or service arising from a contract.
If the object is a thing, it should be within the commerce of man, that is, its alienation or free exchange is
not restricted by law. In other words, it can be the subject of lawful negotiation. Example: Public plazas
cannot be alienated, thus they are outside the commerce of man.
A future thing which has a potentiality of existence at some future time may be the object of a contract.
Future right may also be an object of a contract. Example: A composer or author can sell an intellectual
work which he intends to compose or write even before the work is actually composed or written.
Right As Object Of Contract:

Not all rights may be the object of contracts but only transmissible rights. Rights like the right to vote
which is political in nature, marital rights, right to receive future support, are intransmissible rights which
cannot be the subjects of contracts.

Future Inheritance; Concept:
This is any property or right not in existence or capable of determination at the time of the execution of
the contract which a person may acquire in the future by succession.
While future inheritance is a future thing, it cannot be the subject of a contract. The reason is that a future
inheritance is just an inchoate right which comes into realization only after the death of the predecessor.
Its amount cannot exactly be determined until the final settlement of the estate of the deceased. It cannot
be the subject of compromise.
Any partition agreement of the estate of a living person by the supposed heirs, is void, but partition made
by the decedent himself of his estate during his lifetime is valid.
Conversely, a contract of renunciation of the right to inherit from someone who is still alive is equally
void.
Exceptions to the Rule on Future Inheritance:

1. In case of marriage settlements, future inheritance may be the object of donation
2. In case of partition of property inter vivos made by the deceased himself as long as no legitime is
impaired.
Services as Object of Contract:

Services may also be the subject of contract provided they are not contrary to law, morals, good customs,
public order, or public policy. Thus, requiring a person to render perpetual services to another without
salary, being tantamount to involuntary servitude, is void for being contrary to the fundamental law.
Blas vs. Santos

Simeon Blas contracted second marriage without liquidating the conjugal properties of his former
marriage. In order to avoid claims from the heirs of his first wife(deceased), Simeon Blas before his death
asked his second wife Maxima Santos to execute a contract (Exhibit A) wherein Maxima promised to
give half of her share in their conjugal properties to the heirs and legatees or the beneficiaries named in
the will of Simeon Blas.
Was the contract void because it involved future inheritance? NO
The court ruled that the contract was valid because the object was existing at the time of the agreement
and it did not concern future inheritance.
The properties subject of the contract Exhibit "A" are well defined properties, existing at the time of the
agreement, which Simeon Blas declares in his statement as belonging to his wife as her share in the
conjugal partnership.
Certainly his wife's actual share in the conjugal properties may not be considered as future inheritance
because they were actually in existence at the time Exhibit "A" was executed.
Uson vs. Del Rosario

Maria Uson is the lawful wife of Faustino Nebreda. When Faustino died, he left 5 parcels of land which is
the subject of dispute in this case. Uson claims ownership over the parcels of land being the sole heir of
his husband.
On the other hand, respondents (common-law wife and illegitimate children of Faustino) claims
ownership over said parcels saying that Maria Uson renounced her right to inherit from her husband by
virtue of a public document that Uson and her husband executed whereby they agreed to separate as
husband and wife and, in consideration of their separation, Maria Uson was given a parcel of land by way
of alimony and in return she renounced her right to inherit any other property that may be left by her
husband upon his death.
Was the public document void because it involved future inheritance? YES
The claim of the defendants that Maria Uson had relinquished her right over the lands in question because
she expressly renounced to inherit any future property that her husband may acquire and leave upon his
death in the deed of separation they had entered into cannot be entertained for the simple reason that
future inheritance cannot be the subject of a contract nor can it be renounced.
Furthermore, the rights of inheritance of Maria Uson over the lands in question became vested at the
moment that her husband died.
2. Impossible Things or Services:

Article 1348. Impossible things or services cannot be the object of contracts. (1272)

Applicability of Article:
Applies only to absolute or objective impossibility that is, the impossibility of the object.
Impossible Things or Services, Meaning:

Things which are not susceptible of existence are impossible things like a square circle, flying
elephant, visible wind, or a love life.. kidding on the last one.
Things outside the commerce of man are also impossible things such as public plazas.
Personal services are impossible when they are beyond the physical strength or power of man to perform
such as resurrecting a dead person, pushing the earth closer to the moon, crossing the pacific ocean by
foot.
Kinds of Impossibility and its Effect:

1. As to the cause
a. Impossibility due to the nature of the thing or service such as things or services which could
not be performed.
b. Impossibility because of the law such as illegal things or those beyond the commerce of man.
2. As to the extent of fulfillment
a. Absolute/Objective Impossibility the thing or service cannot be done by any man. When the
impossibility of the object of the obligation is absolute, the contract is void.
b. Relative/Subjective Impossibility the thing or service cannot be done by a particular person
but may be done or complied with by another who is qualified or competent. If the impossibility
is relative or subjective but not permanent, the obligation is not nullified. Thus, a partner who
failed to contribute to the partnership as it is beyond his means is merely a relative impossibility
because sooner or later, he can produce the amount or thing he has agreed to contribute. If the
relative impossibility is permanent like blindness, and the contract requires the use of eyesight,
like a contract to operate the ailing heart of a patient, this will nullify the contract.
Partial Impossibility and Partial Possibility:

If the thing or service is partly impossible and partly possible, the effect will be dependent upon the
divisibility of the thing or service.
If it is divisible, the possible part will be valid and impossible part will be void.
If it is indivisible by reason of law or by stipulation, the contract is entirely void because partial
performance in indivisible obligation is equivalent to non-performance.
Difficulty of Performance is not identical with Impossibility of Performance:

When there is a mere difficulty or great inconvenience, that is not an impossibility. Equity will not excuse
the debtor from the bad bargains which he had entered into. He is liable for damages if he does not
perform his prestation.
Exception: When the debtor has obligated himself to do something which will prove dangerous to his life
and property. To compel someone to fulfill a contract which is undesirable and harmful is contrary to law
and public policy.
Damages Arising From Impossible Things or Services:

If both parties are fully aware of the impossibility, there is no liability for damages.
If the debtor knew of the impossibility or could have known it by exercising ordinary diligence, he is
liable for damages because he is in bad faith or is negligent.

Castro vs. Longa
Hacienda Biason is co-owned by the Castros and some heirs of a certain Montenegro. Simeona de Castro
executed a contract of lease in favor of Jose Longa for six agricultural years. A supplemental contract was
executed providing for payment of rental in sugar piculs through quedans. Longa failed to pay such
obligation because the administrator of Central Azucarera absented himself and no quedan can be issued
without his authority.
Can Longa allege force majeure as a defense to relieve himself from his obligations due to the war?
YES
The administrator of Central Azucarera absented himself due to the war. Longa could not comply with
said obligation either because of the order of President Quezon suspending the milling of sugar cane or
prohibiting its planting during the Japanese occupation, or because he was prevented from doing so in
view of the uncertain condition of peace and order then prevailing in the municipality due to the war.
Article 1349. 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. (1273)
Object of A Contract; Concept:

A contract cannot exist without an object. The object is the subject matter in the contract which is the
thing to be delivered/given or the service to be performed by the debtor.
The object of the contract and the object of the obligation created are thereby identical.
Requisites of Object of Contract:

1. It must be determinate as to its kind although not definite as to its quantity provided the quantity can be
determined without need of a new contract.
2. It must be existing or has the potentiality to exist subsequent to the contract or in the future;
3. It must be licit, that is, not contrary to law, morals, good customs, public order, or public policy.
4. It must be within the commerce of man which means, it is susceptible of appropriation or capable of
being owned privately and is at the same time transmissible.
Determinate In Kind, Meaning:

A thing is determinate in kind when the specie is indicated such as a horse, a cow, a dog.
Its particularization may be established by evidence. However, if the object is merely described as an
animal, the contract is void because there are millions of animals, and even some people can be animals
too if you know what I mean.
Where the kind is undefined, there is no object and thus no contract is created by the parties.
Where the subject matter of the contract is land, it must be sufficiently described to allow its proper
identification without need of entering into a new contract between the parties.
Effect of Indeterminate Quantity:

It can happen that the kind or specie of the object is determinate but not the quantity. In such a case, the
contract may be valid or not, depending upon the circumstances.
If the quantity can ultimately be determined, the present character of the quantity will not affect the
validity of the contract as long as it is possible to determine the quantity without need of a new contract.
Thus, if there is a basis for determining the quantity of the object such as the needs of a family, the
provisions needed for a factory, the materials required for a particular work and similar others, the
contract is valid. However, if there is no possibility of determining the quantity, the contract is void.
Cause
1. Presumption:
Article 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful,

unless the debtor proves the contrary. (1277)
Is it Necessary to State the Cause of A Contract? Presumption:

In the event that the contract does not state its cause, the presumption of the law operates, that the cause
exists and is lawful. The presumption is however rebuttable.
The principle applies to contracts which must be evidenced by writing under the statute of frauds.
The presumption cannot be overcome by a bare assertion that there was no consideration for the contract.
The alleged lack of consideration must be established in an appropriate action, and the burden of proof
lies with the debtor.
Raet vs. CA
Spouses Raet negotiated with Gatus to buy units in a subdivision developed by Phil-Ville Devt. Housing
Corp. (PVDHC) for parties qualified to obtain loans from GSIS. Petitioners applied with PVDHC for the
purchase of units but its approval is dependent on petitioners loan application with GSIS. Meanwhile,
they were allowed to occupy some units. GSIS disapproved their loans and petitioners werent able to
raise money, hence PVDHC asked them to vacate the units they were occupying.
Petitioners filed a complaint for specific performance and damages against Gatus and PVDHC with the
Housing and Land Use Arbiter which gave judgment in petitioners favor.
Was there a perfected contract of sale between the Spouses and PVDHC? NO
There were no meeting of the minds as to terms of the contract of sale. At best, only a proposed contract
to sell was obtained. Without perfected contracts, there can be no specific performance of a contractual
obligation as yet non-existent.
There were no written contracts to evidence the sale. The records also do not show the total cost of the
units and the payment schemes, and figures given were just estimates of Gatus, who is not even an agent
of PVDHC. PVDHC had no knowledge of the figures given by Gatus, thus it could not have ratified the
same.
PBC vs. Lui She

Justina Santos (substituted by PBC) executed various contracts in favor of Wong Heng (substituted by
Lui She) as a grateful acknowledgment of the personal services of the latter. One of the contracts
extended the lease term to 99 years and another granted Wong an option to buy the leased premises
within the 50-year period.
After some time, Justina sought for annulment of the contracts on various grounds, one of which was
because the lease contract, like the rest of the contracts, is absolutely simulated due to a lack of
consideration.
Were the contracts void? YES, but because of illegal purpose (transfer of lands to aliens), not lack of
consideration
Although Atty. Alonzo (lawyer who prepared the contracts) declared that he saw no money paid at the
time of the execution of the documents, his negative testimony does not rule out the possibility that the
considerations were paid at some other time as the contracts in fact recite.
What is more, the consideration need not pass from one party to the other at the time a contract is
executed because the promise of one is the consideration for the other. The illicit purpose, which was to
transfer ownership to an alien, becomes the illegal causa" rendering the contracts void.
Saquid vs. Security Finance Inc.

Respondent Security Finance alleged that petitioner Spouses Saguid defaulted in complying with the
terms and conditions of the Promissory Note (loan contract) and the Mortgage in consideration for a
Toyota Corolla car by failing to pay the installments when they were due.

Petitioners contended that they bought the car in cash, and not thru the proceeds of the loan that
respondent alleged that the petitioners secured with them. Petitioners argue that the contract does not bind
them for lack of cause.
Were the petitioners bound by the promissory note and the mortgage? NO
The third element (cause) is lacking because there was no transaction between the parties for the proceeds
of the loan which were used in purchasing the subject motor vehicle.
Under Article 1354 of the NCC, it is presumed that consideration exists and is lawful unless the debtor
proves the contrary. The presumption cannot be overthrown by mere assertion that it has no
consideration; alleged lack of consideration must be shown by preponderance of evidence.
The following evidence were presented to show that they bought the car in cash, and not in installment
basis: vehicle sales invoice, vehicle delivery note, certificate of registration, official receipts.
Since it has been established that there was no cause for the principal obligation in the promissory note, it
follows that the mortgage, which is an accessory, has no validity.
2. Kinds:
Article 1350. 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;
and in contracts of pure beneficence, the mere liberality of the benefactor. (1274)
Cause of Contract, Concept:

This is the reason why a party entered into the contract.
Cause is the essential reason which moves the parties to enter into the contract.
It is the immediate, direct, and proximate reason which justifies the creation of an obligation through the
will of the contracting parties. Thus, in a contract to export logs abroad, the consideration for the logger is
the distribution of the logs in the areas agreed upon, whereas on the part of the distributor, the
consideration is the commission on the sale.
In this jurisdiction, cause and consideration are the same. The terms are used interchangeably.
Kinds of Contracts as to Cause:

1. Onerous Contracts Contracts where the cause for each contracting party is the prestation or promise
of a thing or service by the other. Example: In a deed of sale, the cause for the seller is the price and the
cause for the buyer is the delivery of the thing sold.
2. Remuneratory Contracts Contracts where the cause is the service or benefit remunerated. Such
service or benefit may or may not have the character of recoverable debt. Example: Isabel rendered her
services to Mitch for free. Sometime in the future, Mitch gave Isabel a car in remuneration for the said
past services which do not constitute a demandable debt. The same applies if the services of Isabel were
not for free, and Mitch was just unable to pay due to lack of money. The giving of the car would still be
remuneratory.
3. Contracts for Pure Beneficence (or gratuitous contracts) Contracts where the cause is the mere
liberality of the donor or benefactor. In simple donations, pure liberality is the consideration of the
contract. Example: Mary donated to Ramos a certain property in accordance with the formalities required
by law. The cause is the mere liberality of the donor or benefactor.
Cause in Accessory Contracts:

In accessory contracts like mortgage or pledge, the cause is identical with the cause of the principal
contract, that is, the loan from which it derives its life and existence.
A mortgagor who mortgaged his own property to secure the loan of the principal debtor, is not directly
benefited by the mortgage executed. But there is a cause. It is the loan given to the principal debtor. It is
not necessary that the mortgagee be benefited. It is enough that the principal debtor was favored with the
a loan.
Can A Moral Obligation Be a Valid Cause for an Onerous Contract:

If the moral obligation is based on previous civil obligation but rendered ineffective due to the
prescription of the action, it constitutes a sufficient cause or consideration to support an onerous contract.
This is in effect a performance of a natural obligation. If the moral obligation arises entirely from ethical
considerations, it cannot constitute as a sufficient cause.
Remedy of Vendor, If Buyer does not Pay Balance of Purchase Price:
The failure of the vendee to pay the full price, does not convert the sale into a void contract for lack of
consideration.
The proper remedy of the seller is for specific performance or rescission.
But if the sale is fictitious or without consideration, it is void. The remedy is declaration of nullity.
The consideration need not pass from one party to the other at the time the sale is made. The reason is that
the promise of one is the consideration for the other.
Distinctions Between Cause and Object:
The cause, for each contracting party is the prestation or promise of a thing or service by the other.
Whereas, the object of the contract is the very thing or service itself. Example: In a sale of a particular
car, as to the vendor, the cause is the obligation of the vendee to pay the price, and as to the vendee, the
cause is the obligation of the vendor to deliver the car. The object is the car being the root of the
agreement of sale. If there is no car, the sale would not have arisen at all.
Cause Need Not Be The Exact Equivalent of the Others Prestation:

In onerous contracts, it is not necessary that the value paid or thing delivered is the exact equivalent of the
value of the prestation or promise of the other.
Thus, a nominal consideration of one peso for a contract is an effectual consideration as long as the
parties had stipulated on it in good faith. It is as valid as a bigger sum.
3. Cause vs. Motive:

Article 1351. entering into a contract
The particular motives of the parties in
are different from the cause thereof. (n)
Cause MOTIVE
Cause is the direct reason for the contract. Motive is the indirect reason for the contract
Cause is the objective and juridical reason for the Motive is the psychological or personal purpose of a
establishment of a contract. party in getting the object.
Cause is always the same in each kind of contract. Motive differs with each person.
A contract without motive or even with illegal

A contract without a cause is void. motives does not affect validity of the contract.
Exception: If the motive predetermines the purpose

of the contract, motive may be regarded as cause.
Thus, if a debtor has alienated his properties with the
motive to defraud his creditors, the alienation is
rescissible.

Example: Sei purchased a long Samurai for 500 pesos from Pua. The motive of Sei is to use the sword to
kill somebody. While the motive is illegal, that will not invalidate the purchase of the sword from Pua.
Presence of Motives Does Not Cure Absence of Cause:

A contract without cause or consideration is void and this inefficiency cannot be cured by the presence of
motives. Consequently, a simulated contract for lack of consideration cannot be sustained by the simple
reason that the vendor had some motives in entering into the contract like his desire to avoid the effects of
an attachment or execution.
Liguez vs. CA
Liguez filed a case against the wife of Lopez and his heirs (respondent) to recover a parcel of land in
Davao. She contended that she is the legal owner of such property pursuant to a deed of donation of said
land executed by the late owner, Lopez.
The private respondents countered that the donation was null and void for having an illicit causa or
consideration, which was the plaintiff's entering into marital relations with Salvador P. Lopez, a married
man.
CA found that (1) the donation was made in view of the desire of Salvador P. Lopez, a man of mature
years, to have sexual relations with appellant Conchita Liguez; and (2) that Lopez had confessed to his
love for appellant to the instrumental witnesses, with the remark that her parents would not allow Lopez
to live with her unless he first donated the land in question.
Was the donation void for having an illicit cause? YES
SC, citing Manresa, ruled that while maintaining the distinction and upholding the inoperativeness of the
motives of the parties to determine the validity of the contract, expressly excepts from the rule those
contracts that are conditioned upon the attainment of the motives of either party.
In the present case, it is scarcely disputable that Lopez would not have conveyed the property in question
had he known that appellant would refuse to cohabit with him; so that the cohabitation was an implied
condition to the donation, and being unlawful, necessarily tainted the donation itself.
In making the donation in question, the late Salvador P. Lopez was not moved exclusively by the desire to
benefit appellant Conchita Liguez, but also to secure her cohabiting with him, so that he could gratify his
sexual impulses.
Gonzales vs. Trinidad

A property mortgaged was fictitiously sold by Trinidad to Gonzales. The sale was simulated and the
supposed vendors did not receive the alleged price. Court of First Instance declared the deed of sale null
and void and dismissing, under articles 1305 and 1306 (illegal cause) of the Civil Code, the action of the
plaintiffs as well as the counterclaim of the defendants.
Was the contract void? Was the cause illegal? YES, NO
The court ruled that there was a consideration (10,000) and the subject matter was lawful. However as the
contract in itself was fictitious and simulated price, the consideration being thus lacking, the contract was
null and void per se or nonexistent.
4. Legality:
Article 1352. Contracts without cause, or with unlawful cause, produce no effect whatever.
The cause is unlawful if it is contrary to law, morals, good customs,
public order or public policy. (1275a)
Effect of Absence of Cause, and When Unlawful + Others:

A contract without cause is void. If it has a cause but the same is unlawful, the contract is also void.
A cause is unlawful if it is contrary to law, morals, good customs, public order or public policy.
Failure to pay consideration is different from lack of consideration, the former results in a right to demand
the fulfillment or cancellation, the latter prevents the execution of a valid contract.
Where the consideration in a deed of sale constituted nothing more than the accumulated usurious
interests, the said consideration is null and void because the cause is illegal.
Requisites for a Good Cause:

1. The cause must be existing at the time of the perfection of the contract. It need not exist later.
2. It must be a lawful cause, not contrary to law, morals, good customs, public order or public policy.
3. It must be a true cause (Art. 1353, the next article)
Velez vs. Ramas
Restituta Quirante was an employee in the pawnshop owned by spouses Velez (plaintiffs). Restituta
abstracted various sums of money belonging to the plaintiffs which constituted estafa. When this was
found out by the petitioners, the husband and father of Restituta executed a document in order to prevent
the matter from reaching litigation.
The contract executed by both parties stated that the Spouses Velez shall suspend bringing legal action
against Restituta, and the husband and father of Restituta would pay the Spouses the amount abstracted
until fully paid, with 12 percent interest per annum.
Spouses instituted an action for the collection of the unpaid amount. Respondent defense was that the
alleged contract was illegal on its face.
Was the agreement between the parties valid? NO
The Court held that an action cannot be maintained upon the contract because the consideration is clearly
illicit, which fact is apparent on the face of the contract. It has been considered contrary to public policy
to allow parties to make agreements designed to prevent or stifle prosecutions for crime and a contract
based upon an unlawful consideration or designed to promote an unlawful object is an always has been
void ad initio by the common law, by the civil law, moral law, and all laws whatsoever.
Liam Law vs. Olympic Sawmill
Liam Law loaned P10,000, without interest, to the defendant partnership. The said partnership failed to
pay on the due date. Another document was executed by the parties extending the deadline for payment
but the obligation was increased by 6,000 pesos. The partnership still failed to pay, thus Liam filed this
collection case. Olympic argues that this additional amount constituted usurious interest.
Was the additional obligation legal? YES
In regards to the agreement of the parties relative to the P6,000 obligation, "it is presumed that the cause
exists and is lawful, unless the debtor proves the contrary".
Olympic Sawmill had not proven that the P6,000 obligation was illegal. Confirming the Trial Court's
finding, we view the P6,000 obligation as liquidated damages suffered by plaintiff, as of March 17, 1960,
representing loss of interest income, attorney's fees and incidentals.
If the entity sued shall not file its answer under oath denying the allegation of usury, he shall be deemed
to have admitted the usury. The provision does not apply to a case, as in the present, where it is the
defendant, not the plaintiff, who is alleging usury.
Article 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. (1276)
Effect of Statement of False Cause:

If a false cause is stated in the contract, the general rule is that the contract is void.
Exception: If the interested part can prove that the contract is founded upon another cause which is true
and lawful, the contract will be saved from invalidity.
Applicability to Simulated Contracts; Void Contracts Not Subject to Ratification:

The article can apply to absolutely simulated contracts which are void contracts. If it can be established
that there is another cause for it which is valid, the contract will be considered valid. If the contract is
relatively simulated, only the real agreement remains binding between the parties, unless it prejudices
rights of third persons, or is contrary to law, morals, good customs, public order or public policy.
Void contracts cannot be ratified. However, even if the cause is void, the contract can still be valid if
another cause which is true and lawful could be shown to support it.

5. Lesion: (Art 1381, NCC)
Article 1355. inadequacy of cause shall not invalidate a contract,

Except in cases specified by law, lesion or

unless there has been fraud, mistake or undue influence. (n)
Effect of Lesion or Inadequacy of Cause:

Generally, a contract is not subject to annulment simply because of lesion or inadequacy of cause or
consideration. However, in cases provided by law such as those mentioned in Art. 1381 and Art. 1098
lesion is a good ground for rescission of the contract.
Lesion or inadequacy of cause will also be a basis for rescission of the contract if the lesion or inadequacy
is the result of fraud, mistake or undue influence.
When the inadequacy of the cause is gross, that fact will naturally suggest fraud and is evidence thereof,
so that it may be sufficient to prove the fraud when taken in connection with other circumstances.
Effect of Bad Bargain:
The fact that the bargain was a hard one, coupled with mere inadequacy of price, when both parties are in
a position to form an independent judgment concerning the sale, is not a sufficient ground for cancellation
of the contract.
Form
1. Forms
Article 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
or that a contract be proved in a certain way,
in order that it may be valid or enforceable,
that requirement is absolute and indispensable.
In such cases, the right of the parties stated in the following article cannot be exercised. (1278a)
a. No Form:
General Rule: Form is not Required in Consensual Contracts,:
As long as the essential requisites of the contracts are present, they are binding upon the contracting
parties regardless of whatever form they may have been entered into.
Exceptions:
1. When the law requires that a contract be in certain form for its validity
2. When the law requires that a contract be in certain form for its enforceability
The first refers to solemn or formal contracts, while the second refers to the agreements covered by the
The statute of frauds statute of frauds. A contract falling under the statute of frauds cannot be proved or established without the
refers to the note, writing, or memorandum thereof, unless there has been a waiver such as when the party who can
requirement that certain
kinds of contracts be invoke the benefits of the statute does not object to the presentation of oral evidence, or has received any
memorialized in a benefits therefrom. It is understood that the statue is applicable only to executory contracts and not to
writing, signed by the executed contracts, whether completely or partially executed, which execution however must be proved
party to be charged,
with sufficient content either by documentary or oral evidence.
to evidence the
contract. Examples of Formal Contracts: Donation of real property which requires a public instrument for its
validity. Donation of personal property the value of which is more than five thousand pesos. Sale or
transfer of large cattle requires registration and a certificate of transfer. Negotiable instruments must be
made in the form required by the Negotiable Instruments Law. Sale of a piece of land through an agent
requires the authority of the agent to be in writing.
Examples of Agreements which must be in Writing to be enforced: An agreement that by its terms is not
to be performed within a year from the making thereof. A special promise to answer for the debt, default,
or miscarriage of another. An agreement made in consideration of marriage, other than a mutual promise
to marry.
Contract of Partition not Covered By Statue of Fraud:

A note or memorandum is not necessary for the contract of partition. A writing of the contract of partition
is not constitutive of its validity but merely evidential.
Tan vs. Lum
The 488 sq m. property in question was formerly owned by brothers Victoriano and Joaquin who are both
dead. Victorianos share was inherited by Flora, et al while the other was inherited by Ambrocio, et al.
Ambrocio et al sold their property to respondent Lim while Flora et al leased their property to petitioner
Tan. In this case, Lim argues that since there was no note, memorandum or any deed of partition which
evidenced the oral agreement of co-owners, he owns the entire property (including Lims).
Was the oral partition of the lands valid and binding? YES
The Court held that contracts are obligatory in whatever form they may have been entered into provided
that all essential requirements are present. The fact that both lease contract and deed of sale provides a
definite portion of the land (1/18th share, southeastern portion), indicates that there was a partition or
else they could not have specified such. Moreover, there was a judicial admission by Flora et al that there
was indeed a partition.
San Lorenzo Devt Corp. vs. CA

Spouses Lu purportedly sold two parcels of land to respondent Pablo Babasanta. He made a P50k
downpayment as evidenced by a receipt. Babasanta demanded the execution of a final deed of sale in his
favor so that he could pay the full purchase price. Babasanta requested for a reduction of the purchase
price which was refused by the spouses. Babasanta filed a Complaint for Specific Performance and
Damages against the Spouses Lu.
SLDC filed a Motion for Intervention alleging that it had legal interest because the two parcels of land
involved had been sold to it in a Deed of Absolute Sale with Mortgage.
Who between SLDC and Babasanta has a better right to the said lands? SLDC
Contracts shall be obligatory in whatever form they may have been entered into, provided all the essential
requisites for their validity are present.
An analysis of the facts and evidences leads to the conclusion that the agreement between Babasanta and
the Spouses Lu is a contract to sell and not a contract of sale.
After SLDC had paid more than one half of the agreed purchase price, the Spouses Lu subsequently
executed a Deed of Absolute Sale in favor or SLDC.
At the time both deeds were executed, SLDC had no knowledge of the prior transaction of the Spouses
Lu with Babasanta. SLDC qualifies as a buyer in good faith since there is no evidence extant in the
records that it had knowledge of the prior transaction in favor of Babasanta.
c. Prescriptibility:
Article 1357. If the law requires a document or other special form,

as in the acts and contracts enumerated in
the following 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. (1279a)
Applicability:
Applicable only when the form is needed for convenience and not for validity or enforceability.
The contracting parties may compel each other to observe the required form once the contract has been
perfected and is enforceable under the Statute of Frauds. Otherwise, the action for specific performance
will not prosper.
Example: Ghelyn leased a parcel of land belonging to Ysa for five years which lease contract was done in
a private instrument. Desiring to register the lease with the registry of Deeds, Ghelyn filed a case for
specific performance against Ysa to compel Ysa to execute the necessary document. Here, the action will
prosper because the contract of lease is both valid and enforceable.

Action Not Imprescriptible:
The right to demand the execution of the document required under Article 1358 is not imprescriptible. It
is subject to prescription. It must be pursued within the period prescribed by law (check the case).
Vda de Espiritu vs. CFI of Canta
Petitioner alleges that sometime in 1948, private respondents verbally sold to her two parcels of land.
Despite demands, respondents failed to deliver the land and the title certificates. Respondents also insist
that the transaction was not a sale, but a loan for which petitioner demanded the delivery of lands and
titles as security. In 1964, petitioner instituted this case.
Respondents contend that the action has already prescribed, therefore the case must be dismissed.
Has the action already prescribed? YES
Being an oral contract, the applicable provision here is Art. 1145 which reads:
The following actions must be commenced within six years: 1) upon an oral contract; 2) upon a quasi-
contract.
The other possibility would be Art. 1149:
All other actions whose periods are not fixed in this Code or in other laws must be brought within five
years from the time the right of action accrues.
In this case, the action was brought 16 years later, thus petitioners action had already prescribed.
2. Form for Convenience:

Article 1358. The following must appear in a public document:
(1) Acts and 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 articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of hereditary rights

or of those of the conjugal partnership of gains;
(3) The power to administer property,

an act appearing
or any other power which has for its object
or which should appear in a public document,
or should prejudice a third person;
(4) The cession of actions or rights proceeding from an act appearing in a public document.
All other contracts where the amount involved exceeds five hundred pesos
must appear in writing, even a private one. But sales of goods, chattels or things in action
are governed by articles, 1403, No. 2 and 1405. (1280a)
Form Required under the Article merely for Convenience, Not for Validity/Enforcability:
The article is couched in mandatory terms, however, even if the contract is not in writing, it does not
necessarily mean that the contract is void.
The form (public document) is only for convenience, not validity or enforceability.
Registration of the instrument only adversely affects third parties. Formal requirements, therefor, are for
the benefit of third persons. Example: The sale of land must appear in a public instrument in order to be
enforceable against third persons, the registration of the document is essential to affect third persons.
Shaffer vs. Palma
Shaffer filed a complaint against the defendant spouses Palma to recover sums of money and shares of
stock. She prayed in her complaint that judgment be rendered ordering the defendants, in solidum, to pay
plaintiff the sum of P118,000.
Lower court ruled that the action is based on an agreement which involves the amount of P118,000.00
and that unless the agreement is in writing it is unenforceable.
Was the agreement involving 118k pesos unenforceable for not being in writing? NO
The contract is valid even if it is not in writing because contracts are binding upon the parties in whatever
form they may have been entered into unless the law requires otherwise.
It is true that Article 1358 of the Civil Code provides that contracts involving more than P500.00 must
appear in writing but nothing is said therein that such requirement is necessary for their validity or
enforceability. It has been held that the writing required under Article 1358 is merely for convenience,
and so the agreement alleged in the amended complaint in the present case can be enforced even if it may
not be in writing.
Hawaiian Phil. Co. vs. Hernaez

Hernaez failed to pay his indebtedness arising from a real mortgage on his land in favor of Kappeler,
which assigned the real estate mortage to Hawaiian Company. Hernaez set up the defense that when he
paid the interest, he was allowed to extend the time of payment for two years by a verbal agreement.
Was the time of payment extended by the verbal agreement? NO
The common-law rule is to the effect that a verbal agreement to extend the time of payment of a mortgage
is binding, and suspends the right to foreclose if founded on a good consideration and otherwise valid; but
if made without consideration, it amounts to nothing, and the mortgage may be foreclosed at any time.
The courts in a series of decisions have held that the Civil Code permits a verbal agreement for the sale of
real estate, and that it is not necessary that such an agreement be evidenced by a public document.
However, Hernaez failed to specify that the extension of time for payment of his debt was pursuant to an
oral agreement supported by a valuable consideration.
We rule that a mortgage deed of registered land may only be legally extended by a form of written
instrument sufficient in law for the purpose. We rule that a consideration is necessary for a modification
of a contact such as an agreement for the extension of time of performance of a mortgage, and that the
moving party must plead and prove such consideration.
Dauden vs. delos Angeles

Petitioner Marlene Dauden-Hernaez, a motion picture actress, had filed a complaint against herein private
respondents to recover P14k representing a balance allegedly due said petitioner for her services as
leading actress in two motion pictures produced by the company, and to recover damages.
The respondent court ordered the complaint dismissed, mainly because the "claim of plaintiff was not
evidenced by any written document, either public or private" and the complaint "was defective on its
face" for violating Articles 1356 and 1358 of the Civil, Code.
Was the lower court correct in invalidating the contract ? NO
The Court held that the contract (compensation for services) is valid and enforceable. It is true that it
appears included in Article 1358, last clause, providing that "all other contracts where the amount
involved exceeds five hundred pesos must appear in writing, even a private one."
But Article 1358 nowhere provides that the absence of written form in this case will make the agreement
invalid or unenforceable. On the contrary, Article 1357 clearly indicates that contracts covered by Article
1358 are binding and enforceable by action or suit despite the absence of writing. It is not enough that the
law should require that the contract be in writing, as it does in Article 1358. The law must further
prescribe that without the writing the contract is not valid or not enforceable by action.

Reformation of Instruments (Articles 1359 to 1369)
1. Basis:
Article 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.
Definition and Rationale:

Reformation is a remedy in equity by means of which a written instrument is made or construed so as to
express or confirm the real intention of the parties when some error or mistake is committed.
It would be unjust and inequitable to allow the enforcement of a written instrument which does not reflect
or disclose the real meeting of the minds of the parties. The finality and inflexibility of a written
instrument is tempered to forestall the effects of mistake, fraud, inequitable conduct, or accident.
A New Contract is Not Created:

The court which orders the reformation of an instrument does not make a new contract for the
participating parties in the document but merely orders that the instrument express their true agreement.
The court is therefor following a rule of equity.
Requisites of Action for Reformation:

1. There is a contract agreed upon where there is a meeting of the minds.
2. The real intention of the parties was not expressed in the instrument.
3. The reason for the failure of the instrument to express the real intention of the parties is mistake, fraud,
inequitable conduct, or accident.
4. The said intervening mistake, fraud, inequitable conduct, or accident did not prevent the meeting of the
minds of the parties.
Illustrations: In a contract for the construction of a building, the parties agreed that payment be in dollars.
The dollar sign was used in the original draft. However, what was typewritten in the contract, occasioned
by mistake, was the peso sign. Reformation was ordered by the court.
Quantum of Evidence Needed:

The evidence must be strong, clear, and convincing. Mere preponderance will not suffice.
Prescriptive Period to Reform a Fictitious Sale with Pacto de Retro:

The prescriptive period for an action to reform a fictitious deed of sale with pacto de retro begins from the
day the alleged buyer has executed an affidavit of consolidation of ownership.
When Does Annulment and not Reformation Become the Appropriate Remedy?:
An action for annulment of the contract becomes the appropriate remedy when the mistake, fraud,
inequitable conduct or accident has prevented a meeting of the minds between the parties. Example:
Where a party is leasing is property to another, the latter through fraud was able to make him sign an
absolute deed of sale, the action is not for reformation but for annulment.
If it did not and there was merely a failure to express the true intention of the parties, reformation is the
proper remedy. Expediency and convenience are not grounds for the reformation of an instrument.
Reformation Annulment
There is a meeting of the minds between the parties There is no meeting of the minds. Consent is
as to the object, cause of the contract. Vitiated.
The instrument failed to express the true intention The meeting of the minds was prevented by reason of
of the parties due to mistake, fraud, inequitable mistake, fraud, inequitable conduct, or accident
conduct, or accident. perpetrated by one party against the other.
The purpose of reformation is to establish the true The purpose of annulment is to render inefficacious
agreement of the parties and not to create a new the contract in question.
one.
San Miguel Brewery vs. Law Union and Rock

D.P. Dunn mortgaged a property to San Miguel Brewery. D.P. Dunn agreed to keep the property insured
at his expense so he requested San Miguel Brewery to effect said insurance. Through the general manager
of San Miguel Brewery, the property was insured by Law Union and Rock Insurance Company.
When asked about the owner of the property, Brias stated that San Miguel Brewery is only interested as a
mortgagee and no further information on the owner of the property was provided. The policies were
issued in the name of San Miguel Brewery as the assured and containd no reference to any other party in
interest as regards the property.
Can there be reformation of the contract in this case? NO
In order to justify a reformation, it must be made clearly to appear that the minds of the contracting
parties did actually meet in agreement and that they labored under some mutual error or mistake in
respect to the expression of their purpose.
The court held that the court would have the power to reform the contract if it was apparent that it had
been agreed between the contracting parties that the insurance should be so written as to protect not only
the interest of the mortgagee but also the interest of the owner. In this case, however, it is by no means
that the parties intended for the policy to cover the risk of the owner in addition to that of the mortgagee.
2. Definition:
Sarming vs. Dy
Petitioners are the successors-in-interest of Silveria Flores while the respondents are the successors-in-
interest of Alejandra Delfino. Lot 5743 was inherited by Jose, Venancio and Silveria, each occupying 1/3
portion.
The portion of Jose, now owned by his grandchildren, was the subject of a contract of sale with Alejandra
Delfino. When Atty.Pinili asked for the title of the land, Silveria through her daughter delivered another
title and not the correct title covering Lot 4163.
The parties knew the location of Lot 4163 but not its OCT No. Believing that it was the correct title, Pinili
prepared the Settlement of Estate and Sale (deed).
2 years after Alejandra bought and took possession of Lot 5743, she discovered that what was designated
in the deed was the wrong lot. Alejandra demanded for reformation of the deed of sale, however Silveria
did not turn over the title of Lot 4163.
Can there be reformation by reason of mistake as to the correct lot number? YES
All of the requisites for an action for reformation to prosper are present in this case. There was a meeting
of the minds of the parties but the deed did not express the true intention of the parties due to the mistake
in the designation of the lot subject of the deed.
The subsequent and contemporaneous acts of the parties such as Alejandra occupying Lot 4163, and that
Silveria did not object to this, clearly indicated that what was intended to be sold to Alejandra was Lot
4163 and not Lot 5734.

3. Requisites:
Dizon vs. Gaborro
Dizon owned three parcels of land subject to mortgages in favor of DBP and PNB. Gaborro, who was
interested in the lands, entered into a Deed Of Sale With Assumption Of Mortgage with Dizon over the
said lands.
By virtue of the said Deed of Sale, Gaborro offered to pay to DBP the outstanding obligation, under the
same terms and conditions as embodied in the original contract of mortgage within 10 years. The Board
of Governors of DBP approved the offer of Gaborro. Accordingly, DBP and Gaborro executed a
conditional sale of the properties. After the execution of the conditional sale to him, Gaborro made
several payments to DBP and PNB.
Dizon instituted a complaint alleging that the Deed of Sale did not express the true intention and
agreement between the parties, and that their real agreement was not an absolute sale but merely to
reimburse Gaborro the amounts Gaborror paid to DBP and PNB and that Gaborro shall enjoy the use of
the property before such reimbursement takes place.
Can the contracts be subjected to reformation? - YES
In this case, after the extrajudicial foreclosure and sale of his properties, Dizon retained the right to
redeem the lands, the possession, use and enjoyment of the same during the period of redemption. And
these are the only rights that Dizon could legally transfer, cede and convey unto Gaborro.
The true intention of the parties is that respondent Gaborro would assume and pay the indebtedness of
petitioner Dizon to DBP and PNB, and in consideration therefor, respondent Gaborro was given the
possession, the enjoyment and use of the lands until petitioner can reimburse fully the respondent the
amounts paid by the latter to DBP and PNB.
City of Cabanatuan vs. Lazaro

Petitioner seeks the reformation of a lease agreement with respondent Lazaro, specifically the deletion of
Paragraph 6 which gives respondent an option to renew the lease for another 10 years after expiration of
the period.
Can the instrument be reformed in this case? YES
The real intention of the parties was not expressed in the instrument. Petitioner successfully proves this
by invoking Resolution No. 1030 of the Municipal Board which authorizes the city mayor to enter into a
lease contract for a period of 10 years, it does not provide for authority to extend the period.
Petitioner proves that Paragraph 6 was inserted due to mistake or accident, therefore, it does not reflect
the true intention of the parties.
Despite the mistake in inserting Paragraph 6, both parties were still able to enter into a contract without
any vitiated consent consent, cause and object of the contract are still there.
Emilio vs. Rapal

Emilio executed a Sale and Transfer of of Rights over a Portion of a Parcel of Land whereby she sold to
Rapal 27 sq. m. of her lot, together with the house constructed thereon, for a consideration of P90,000.00.
However, Emilio later claimed that she signed the deed, without its contents having been explained to
her. She alleged that the deed of sale and transfer must be reformed, there being no intention on her part
to sell the property. Emilio thus is seeking for the reformation of the document.
Can the instrument be reformed in this case? NO
The second and third requisites are lacking. Notarized documents, like the deed in question, enjoy the
presumption of regularity which can be overturned only by clear, convincing and more than merely
preponderant evidence. This petitioner failed to discharge.
Petitioner could have presented PAO lawyer-notary public Atty. Balao-Ga or the witnesses to the deed,
but she failed to do so. Atty. Balao-Ga, in fact, in a Certification dated April 28, 2006, stated that the deed
was one of sale, not a real estate mortgage.
4. When Available:
Jayme vs. Alampay
Petitioners prayed for the reformation of the contract they entered into with Ong. They claimed that the
contract should have been a real estate mortgage rather than sale which was their true intention.
They only agreed because of their great confidence to Ong. Ong set up the defense of prescription
because it was alleged that the proper remedy should be annulment prescribing for four years.
Has the action prescribed in the case at bar? NO
The complaint for reformation of instrument clearly alleged that the deed of sale did not express the true
agreement of the parties and should be reformed into the mortgage that it actually was and prayed that
petitioners be allowed to redeem the property by repaying the loan of P16,500.00 (the true value of the
property being much more, as evidenced by the mortgage loan for P100,000.00 which respondent in turn
secured on it).
Such allegations are binding for purposes of the dismissal motion and therefore the applicable
prescription period for such actions based upon a written contract and for reformation thereof as provided
by law is ten years (10 years as provided in Article 1144, Civil Code.)
Ong Chua vs. Carr

Spouses Henry Teck and Magdalena Lim owned parcels of land that was sold to herein petitioner Ong
Chua subject to the spouses right to repurchase said parcels of land within a specified period.
Carr entered into negotiations with Ong Chua for the purchase of said lots from the former. Ong Chua
informed Carr of the spouses right to repurchase said lots and stated that he consented to sell on the
condition that the spouses should retain the right to repurchase. Carr agreed.
The deed of sale was prepared without including therein the condition that sale was subject to Teck's and
Lim's rights to repurchase.
Can the instrument be subjected to reformation? YES
The evidence is conclusive that the plaintiff had no clear conception of the contents of the deed. That he
was anxious to protect the rights of redemption held by the parties who sold the land to him, is very
obvious; but the deed was written in the English language, with which the plaintiff was unfamiliar.
Carr, on the other hand, knew the contents of the deed. He took immediate advantage of that
circumstances and hastened to have the document presented to the register of deeds for the issuance of
certificates of title even before the right to repurchase expired. It is elementary that such conduct
constitutes fraud and was calculated to obtain an unfair advantage over the plaintiff.
Article 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.
General Law on Reformation:

The governing law is Article 17 of the Civil Code:
Article 17: The forms and solemnities of contracts, wills, and other public instruments shall be
governed by the laws of the country in which they are executed. When the acts referred to are
executed before the diplomatic or consular officials of the Republic of the Philippines in a foreign
country, the solemnities established by Philippine laws shall be observed in their execution.
Since the Chapter on Reformation is of an American Extract, American jurisprudence will be
persuasive, though not necessarily binding, as long as it does not contradict the Civil Code.

Article 1361. When a mutual mistake of the parties

causes the failure of the instrument to disclose their real agreement,

said instrument may be reformed.
Applicability of the Article:

The article applies when the mistake is mutual, that is, both parties committed the same mistake
which caused the failure of the instrument to express their true agreement.
Proof necessary to establish the mutual mistake must be clear and convincing.
Reformation will not be granted unless the proof of mutual mistake is of the clearest and most
satisfactory character. Litigations could be minimized, if not prevented, by holding that the parties
are conclusively bound by their agreement, unless there is clear contrary proof.
Effect of Unilateral Mistake:

Where only one party is guilty of negligence in not informing himself as to the contents of a written
contract and signs it or accepts it with the full opportunity to advise himself as to its contents, he
cannot later on escape liability on the pretext of mistake, unless there is fraud or misrepresentation.
However, a unilateral mistake under the succeeding articles may justify reformation.
Article 1362. If one party was mistaken and the other acted fraudulently or inequitably
in such a way that the instrument does not show their true intention,

the former may ask for the reformation of the instrument.
Unilateral Mistake of One part and Fraud/Inequitable Conduct on the Part of the Other:
The article covers a situation where one party has committed a mistake, while the other party is guilty of
fraud or inequitable act causing the failure of the instrument to express the true intention of the parties.
Ordinarily, if there is no fraud on the part of the other, the unilateral mistake of the first party will not
exempt the latter from the effects of the contract. The presence of fraud or inequitable conduct justifies
the reformation of the contract.
Article 1363. When one party was mistaken and the other knew
or believed that the instrument did not state their real agreement,

but concealed that fact from the former, the instrument may be reformed.
Unilateral Mistake of One Party and Concealment on the Part of the Other:
Just like in the preceding article, the mistake of one party is unilateral with the difference however that
the other party is guilty of concealment rather than fraud or inequitable conduct.
The party guilty of concealment knew or believed that the instrument failed to state their real agreement.
Hence, the concealment is necessarily attended with bad faith. Reformation is authorized to avoid
injustice and inequity.
If the second party is not aware of the imperfection in the contract and he is in good faith as the first
party, then mistake becomes a mutual one and under the obtaining circumstances, reformation is
authorized.
Article 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.
Mistake of the Drafter, Clerk or Typist:

The mistake of the drafter, clerk or typist who did the mechanical act of preparing the instrument, must
be due to his ignorance, lack of skill, or bad faith. If due to any of these, the instrument may be
reformed.
Example: The writing of the figure 15% as the share of a lessee-co-owner was a clear clerical mistake
because there are four co-owners. The figure 15% should be reformed to read 25%.
Article 1365. If two parties agree upon the mortgage or pledge of real or personal property,

but the instrument states that the property is sold absolutely or with a right of repurchase,
reformation of the instrument is proper.
Applicability:
Article refers to a mortgage of real property or pledge of personal property but the instrument signed
is an absolute sale or sale with pacto de retro. The reformation of the instrument is authorized to
express the real intention of the parties.
Factors in Determining the Intention of Parties:
Intention may be inferred from their simultaneous or subsequent acts, as well as from their
stipulations in the contract. For example, the use of the word debt would imply the existence of a
creditor-debtor relationship, which is not in accord with a purchase and sale transaction wherein the
relationship of the parties is vendor and vendee.
Parol Evidence is Admissible:
Parol evidence is admissible to prove that the agreement of the parties is not one of sale but only a
mortgage, although the instrument signed is a deed of sale or with a right of repurchase or that the
deed of sale was merely used as security for the payment of the loan.
Article 1366. There shall be no reformation in the following cases:

(1) Simple donations inter vivos wherein no condition is imposed;
(2) Wills;
(3) When the real agreement is void.
Reasons Why Reformation is Not Allowed:

1. Unconditional Simple Donations Cannot be Reformed the reason for this is that such unconditional
donations are essentially gratuitous. Being acts of liberality, courts should not interfere in such kind of
donation. The donee has not paid anything and consequently, it is inappropriate for him to sue the donor
to reform the deed of donation which the latter has executed unilaterally.
Exception: If the donation is subject to a condition, it partakes of the nature of a contract. If the contract
failed to express the intention of the parties on the agreed condition, the deed of donation can be
reformed.
2. Wills are not allowed to be reformed. The reason for tis is that the execution of a will is a personal act
which can be revoked anytime by the testator. If the testator has changed his mind and desires to cancel
his testamentary dispositions, all he has to do is to revoke the will by another will or codicil or execute
overt acts of revocation like tearing, burning, cancelling, or obliterating the will with the intention of
revoking it.
Exception: When there are imperfect or erroneous descriptions of persons or property, the mistakes and
omissions must be corrected, if the error or error s appear from the context of the will or from extrinsic
evidence but excluding oral declarations of the testator as to his intention. It must be noted it is only on
these specific matters of misdescriptions that a will may be corrected by the court, that is, in the course of
the probate proceedings. The testamentary dispositions themselves cannot be corrected by the court. The
only person allowed to amend or add something to testamentary dispositions is the testator himself. When
the exception to correct is allowed, it is because the testator is already dead and the court simply reads the
intention of the testator on the correct person/property imperfectly described.
3. Void Agreements are not reformable because courts of justice should not be wasting their time
reforming instruments which will not in any way produce legal effects.

Article 1367. When one of the parties has brought an action to enforce the instrument,

he cannot subsequently ask for its reformation.
An Action Filed to Enforce the Instrument Bars Subsequent Action of Reformation:

When a party has previously filed an action for the enforcement of the instrument, he is no longer
allowed to bring a subsequent action for the reformation thereof. He is placed under estoppel
because in seeking the enforcement of the instrument, he is considered to have ratified it.
A party is not allowed to pursue two inconsistent positions regarding an instrument, one for its
affirmance and the other for its disaffirmance.
Article 1368. Reformation may be ordered at the instance of either party or his successors in interest,

if the mistake was mutual; otherwise,
heirs and assigns.
upon petition of the injured party, or his
Who can Initiate an Action for Reformation?:

1. If the mistake is mutual, either party or his successor in interest may file the case for reformation.
2. If the mistake is only on one side, the injured party or his heirs or assigns may file the action.
Indispensible Allegations in an Action for Reformation:

1. The meeting of the minds on the real intention or agreement of the parties.
2. The instrument did not express the real intention or agreement of the parties.
3. The reason for the failure of the instrument to express the real intention or agreement of the parties.
Prescriptive Period:
An action for reformation of a contract prescribes after ten years.
Article 1369. The procedure for the reformation of instrument

shall be governed by rules of court to be promulgated by the Supreme Court.
Rule on Reformation of Instrument:

An action for reformation of an instrument, to quiet title to real property or remove clouds therefrom, or
to consolidate ownership under Article 1607, may be brought under Rule 63, declaratory relief and
similar remedies.
Jurisdiction:
An action for reformation of instrument necessarily falls under the jurisdiction of the Regional Trial
Court. Any disagreement as to the nature of the parties relationship which would require first an
amendment or reformation of their contract is an issue which the courts may and can resolve without the
need of the expertise and specialized knowledge of the Housing and Land Use Regulatory Board.
CHAPTER 5
Interpretation of Contracts
General Rule:
Article 1370. If the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties,
control.
the literal meaning of its stipulations shall

If the words appear to be contrary to the evident intention of the parties,
the latter shall prevail over the former. (1281)
Heirs of Amparo del Rosario vs. Santos

Atty. Santos was hired by Teofilo Custodio to do the necessary registration of a parcel of land in his
name. They agreed that Custodio would assign and deliver to Santos a share of the whole property.
Truly, Custodio conveyed to Santos two lots plus a one half interest in one of the lots (road lot, lot no.6)
as payment for attorneys fees.
Santos now executed a deed of sale upon his one-half interest in the road lot (lot 6) in favor of Amparo
del Rosario. The del Rosarios now claim specific performance of the deed of sale. They claim that there
were other other conditions orally made thus should also be complied with.
Can conditions alleged orally agreed upon constitute as an addition to the written instrument? NO
The Court ruled that the Rules of Court prohibits the contradiction or addition to the terms of a written
instrument by testimony. When they reduced their agreement to writing, it is presumed that "they have
made the writing the only repository and memorial of truth, and whatever is not found in the writing must
be understood to have been waived and abandoned.
Labasan vs. Lacuesta

The Lacuestas, owner of an unregistered and irrigated riceland, executed in favor of the Labasans a
contract which stipulated that the Lacuestas would sell the their land for 225 pesos, with a right to
repurchase such lot for a period of 10 years.
After some years, Lacuestas filed a complaint against petitioner because the latter refused to accept the
tendered payment of the loan as agreed upon in their contract. Labasan said that the right to repurchase
the land was within 10 years only and that because of Lacuestas failure to exercise such right, the
vendees a retro have became the absolute owners of the land.
Is the contract a contract of sale or a mortgage? LOAN with a SECURITY (Mortgage)
Court held that since the terms of the contract are not clear, it is necessary to inquire into the reason
behind the transaction to determine the true intent of the parties. The contract is a mere loan with security
and not a sale with the right to repurchase. The reason behind the execution of the contract was that the
Lacuestas were in "urgent necessity for money" and had to secure a loan of P225 from Labasan for which
the riceland was given as "security."
The transaction between the parties to be a loan instead of a sale of real property notwithstanding the
terminology used in the document, after taking into account the surrounding circumstances of the
transaction.
Prisma Construction vs. Pantaleon

Pantaleon, the President and Chairman of the Board of PRISMA, obtained a P1M loan, evidenced by a
promissory note, from the respondent with a monthly interest of P40k payable for six months, or a total
obligation of P1.24M to be paid within six (6) months.
The petitioners failed to completely pay the loan within the stipulated six-month period. The respondent
filed a complaint for sum of money with the RTC to enforce the unpaid balance, plus 4% monthly
interest.

Petitioners admitted the loan of P1.24M, but denied the stipulation on the 4% monthly interest, arguing
that the interest was not provided in the promissory note.
Did the parties agree to the 4% interest even though there is no such stipulation? NO
Interest due should be stipulated in writing; otherwise, 12% per annum.
Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith. When the terms of a contract are clear and leave no doubt as to the intention
of the contracting parties, the literal meaning of its stipulations governs.
Therefore, as agreed by the parties, the loan of P1M shall earn P40k/month for a period of six (6) months,
or from December 8, 1993 to June 8, 1994, for a total principal and interest amount of P1.24M.
Thereafter, interest at the rate of 12% per annum shall apply.
Martin vs. DBS Bank

Petitioners entered into a lease agreement with DBS. Heavy rains flooded the leased property and
submerged the DBS offices along with its repossessed cars. DBS demanded that the petitioners make
repairs on the property to make it acceptable and usable again.
While the petitioners made some repairs, they failed to meet the needs of DBS. The respondent made a
final demand on the petitioners, and for failure to do so, petitioners would rescind the contract.
Petitioners claimed that, according to Paragraph X of the contract, pre-termination of the lease is barred.
Can DBS validly rescind the contract? YES
The stipulations must be read together and given effect as their meanings warrant. Paragraph VIII of the
contract allows for rescission by either party should the property become untenable because of natural
causes.
Therefore, DBS carries authority to rescind the contract, the authority coming from the contract itself.
1. Intention of the Parties:
Article 1371.
In order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be principally considered. (1282)
Ramos vs. Heirs of Ramos

Lucio Ramos and SaludAbejuela are spouses. Out of their marriage they begot four children namely: Juan
Ramos, Honorio Ramos, Josefa Ramos and Ramon Ramos.
The spouses owned real properties situated at Macasandig, Cagayan de Oro City.
In 1954, a Deed of Absolute Sale was executed by Salud Abejuela in favor of Ramon Ramos.
The heirs of Honorario Ramos contended that the 1954 deed of absolute sale executed by Salud was
fictitious.
They further contended that the understanding and agreement with his parents Lucio and Salud Ramos
was that, Ramon Ramos should hold said land in trust for his brother, Honorio and same should be
divided between the two in equal shares.
The burden of proving the alleged simulation of a contract falls on those who impugn its regularity and
validity. A failure to discharge this duty will result in the upholding of the contract.
The primary consideration in determining whether a contract is simulated is the intention of the parties as
manifested by the express terms of the agreement itself, as well as the contemporaneous and subsequent
actions of the parties.
Evidence clearly shows that petitioner hired tenants to take care of and to harvest coconuts from Lot
2961. Without any protest from Salud or respondents, he declared the property for taxation and paid
realty taxes on it in his name. His actions negated respondents allegation that the parties never intended
to be bound by the assailed contract.
Carceller vs. CA
Carceller and SIHI entered into a lease contract with option to purchase. In view of the expiration of said
contract, SIHI sent a letter to Carceller asking him for his decision about the option to purchase.
In a reply, Carceller asked for an extension to raise sufficient funds for payment. In a letter, SIHI denied
the extension for payment but offered the land for lease for another year. Four days after, Caceller
notified SIHI of his intention to pay SIHI the downpayment.
However SIHI rejected and claimed that the time to exercise the option has lapsed.
Can Carceller be allowed to exercise the option despite the alleged delay? YES
Petitioner's letter to SIHI, dated January 15, 1986, was fair notice to the latter of the former's intent to
exercise the option, despite the request for the extension of the lease contract.
SIHI's agreement to enter first into a lease contract with option to purchase with herein petitioner, is a
clear proof of its intent to promptly dispose said property although the full financial returns may
materialize only in a years time. Furthermore, its letter reminding the petitioner of the short period of
time left within which to consummate their agreement, clearly showed its desire to sell that property.
Also, SIHI's letter dated February 14, 1986 supported the conclusion that it was bent on disposing said
property. For this letter made mention of the fact that, "said property is now for sale to the general
public".
On the part of the petitioner, he introduced permanent improvements on the leased property,
demonstrating his intent to acquire dominion in a year's time. To increase his chances of acquiring the
property, he secured an P8 Million loan from the Technology Resources Center (TRC), thereby
augmenting his capital.
Almeda vs. Bathala Marketing

Respondent Bathala Marketing Industries, Inc., as lessee renewed its Contract of Lease with Ponciano L.
Almeda, as lessor. Under the said contract, Ponciano agreed to lease a portion of the Almeda Compound,
located at 2208 Pasong Tamo Street, Makati City.
The sixth clause of the contract of lease provides that in case the assessment should be increased or any
new tax, charge or burden be imposed by authorities on the lot and building where the leased premises
are located, the rental payments shall be correspondingly increased.
In a letter dated December 29, 1997, petitioners advised respondent that the former shall assess and
collect Value Added Tax (VAT) on its monthly rentals.
Respondent refused to pay the VAT and adjusted rentals as demanded by petitioners but continued to pay
the stipulated amount set forth in their contract.
Was respondent liable to pay the VAT? NO
Court held that since the sixth clause in the agreement refers to a new tax, the VAT cannot be imposed
since it took effect before the parties entered into the lease agreement and thus cannot be considered as a
new tax.
Article 1372. However general the terms of a contract may be,

they shall not be understood to comprehend things that are distinct
and cases that are different from those upon which the parties intended to agree. (1283)
Article 1373. If some stipulation of any contract should admit of several meanings,
which is most adequate to render it effectual. (1284)
it shall be understood as bearing that import
2. Interpretation as a Whole:
Article 1374. be interpreted together,

The various stipulations of a contract shall

attributing to the doubtful ones that sense which may result from all of them taken jointly. (1285)
Bundalian vs. CA
Bundalian purchased three parcels of land. The next day Bundalian sold the same property to Littawa and
Camcam under a contract denominated as Deed of Sale with Right to Repurchase. The contract contained
a provision on the escalating repurchase price per month.
Was the deed of sale with a right to repurchase an equitable mortgage? YES
The contracts involving the subject properties came one after another in the space of two (2) days. This
already indicates, at a very early stage, that the two transactions must be intimately related.
Such intimate relation between the aforementioned Deed of Absolute Sale and Deed of Sale with Right to
Repurchase is already clear in the statement in the latter instrument that the subject property had just been
purchased by Jose R. Bundalian with funds loaned to him by the respondents Littawa and Camcam.
Having just purchased the property from the estate by way of Deed of Absolute Sale on July 1, 1975, for
which he had just paid P499, 200.00 as purchase price, it would have been utterly senseless for petitioner
Jose R. Bundalian to sell the same property to private respondents the very next day. The Deed of Sale
with Right to Repurchase is precisely the security - the equitable mortgage.
Article 1375.
Words which may have different significations shall be understood in that
and object of the contract. (1286)
which is most in keeping with the nature
3. Custom or Usage:
Art. 12 NCC, Sec. 2-3, Rule 129 New
Rules of Evidence; Sec. 10-19, Rules of Court;
Article 1376. The usage or custom of the place shall be borne in mind
in the interpretation of the ambiguities of a contract,

and shall fill the omission of stipulations which are ordinarily established. (1287)
Andreas vs. BPI

Andreas applied to BPI for a foreign credit to enable him to purchase coal in Australia. He signed a
written request for foreign credit, agreeing to pay BPI commission at the rate of of 1% for such part
of the foreign credit. It appears that in addition to that commission specified, BPI charged Andreas
interest at the rate of 9% per annum on the amount of each draft.
The drafts drawn by the American Trading Co. on Andreas, payable to the Bank of New South Wales,
already included the interest on the price of coal which was included in the amount of the drafts which
Andreas paid to BPI.
The 9% interest was not authorized by the Bank of New South Wales and it was only for the sole benefit
of BPI. At the time Andreas paid such, Andreas knew that he was to pay ALL charges, including interest,
of the Australian bank and that he did not know that he was to pay ANY interest to BPI.
BPI contends that there was an established usage and custom of the banks in Manila in like cases of
charging and collecting such interest on drafts drawn upon foreign credits.
Was the usage and custom alleged by BPI valid? NO
Nothing is said about the payment of interest to BPI in the request for foreign credit. If it had been the
purpose and intent of BPI to collect and receive the interest in question, it should have specified and
provided for in the contract. If in the making of such interest charges, BPI relied upon an established
usage and custom, it should have alleged that fact as a further and separate defense and the existence of
them would then become a question of fact.
4. Obscure words:
Article 1377.
The interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity. (1288)
Ildefonso vs. Sibal

Ildefonso and Sibal entered into a compromise agreement which set forth, among others, that the
defendant promises that within two (2) years from the date hereof, he shall course through the plaintiff as
Realtor the former's real estate purchase or transaction and should he (Sibal) fail thereof, that is, to make
such real estate purchase and to course the same to the plaintiff as said Realtor, the defendant is liable
further to pay the plaintiff an additional sum of P2k. Sibal did not buy any of the properties offered by
Ildefonso.
Did Sibal violate the agreement by failing to purchase the real estate? - NO
There is nothing in the disputed paragraph that can be construed to mean that appellee bound himself to
purchase real property and to pay penalty of P2,000.00 in case he failed to do so.
Appellee's principal undertaking was to "course" or make his real estate purchases and sales through
appellant for a period of two years from the date of the execution of the compromise agreement.
There is, to be sure, ambiguity in the provision of the compromise agreement in question as a result of the
explanatory clause ("that is, to make such real estate purchase and to course the same to the plaintiff as
Realtor") inserted after the phrase "should he fail thereof" which follows the statement of appellee's
obligation. But following the rule that ambiguities or obscure clauses in contracts cannot favor the one
who has caused them (Article 1377 NCC), and it appearing that the compromise agreement was drawn by
appellant through his counsel, with the paragraph in dispute creating an obligation in his favor, the
ambiguity found therein must be construed in favor of herein appellee.
Ong Yong vs. Tiu

In order to recover from a financial distress, respondent Tius invited petitioner Ongs to invest in the
formers company FLADC which used to manage a commercial complex, called Masagana Citimall,
along Taft Avenue. A Pre-Subscription Agreement was executed where they both agreed that certain
deeds of assignment would also be carried out to maintain their equal shareholdings in FLADC.
The controversy arose when both parties committed breaches, prompting the Tius to unilaterally rescind
the contract. One of the breaches was the Ongs refusing to credit the number of FLADC shares in the
name of Masagana Telemart corresponding to its property contribution.
The Ongs maintained that their group cannot be faulted because the Deed of Assignment executed by
Masagana in favor of FLADC was incomplete (not dated, no instrumental witness signed the Deed), and
that the necessary documentary stamp taxes, capital gains, and transfer taxes had not been paid.
Essentially, the Ongs found ambiguity in the agreement, such that the FLADC should not pay for the
taxes arising from the assignment.
Who has the obligation to pay the taxes incident to the assignment? - FLADC, the assignee
The Deed of Assignment stipulates that FLADC, as assignee, accepts said assignment and assumes all
obligations of performing all the terms and conditions including, but not limited to, the transfer of the said
parcel of land in the name of FLADC within a reasonable time. Thus, FLADC should shoulder all
obligations, such as taxes and legal fees, for the conveyance to be registered and the title to the property
placed in the name of FLADC.
The alleged ambiguity raised by the Ongs can only be resolved against the Ongs for it was their lawyer,
the late Atty. John Uy, who prepared the Deed of Assignment. Where the provisions of a contract are
ambiguous, such ambiguity must be construed against the party who drafted it.
Govt of the Phil vs. Derham Bros

Derham Brothers entered into negotiations with the Director of Lands for the purpose of securing from
the Government of the Philippine Islands a lease covering block 49 of Reclamation No. 1, Manila Harbor,

commonly known as the Luneta Fill, an area reclaimed from the sea by the process of dredging the harbor
and filling in the reclaimed territory.
A portion contract stated that the rental and taxes to commence upon the grading to the official line and
grade and metalling thereof of the roadway of the streets of the three blocks on the south, east, and the
west, contiguous to said property, and the grading to the official line and grade and metalling the
roadway thereof of the street on the north of said property to its entire length. From what has been stated
it appears that the block in question is surrounded on all four sides by streets which have been prepared
and opened for use. Defendant contended that the roadway of the street covers the entire breadth of the
street.
Were the conditions which would initiate the period for the rent complied with? YES
It should be noted that the language of paragraph 4 is to the effect that the street on the north of said
property shall have a metalled roadway "to its entire length." This language is nor clear because the
pronoun "its" might be taken to refer to the word "property" with as much propriety as to the more remote
antecedent "street."
If this ambiguity be considered to exist, the proper construction to be given to this expression is
determined by article 1288 of the Civil Code, wherein it is declared that the interpretation of obscure
clauses in a contract shall not favor the party who caused the obscurity.
If, on the other hand, the ambiguity does not exist, we think that this specification is limited by the words
contained in the communication of the Director of Lands wherein this official uses the expression "the
completion of the four streets surrounding said blocks, together with an outlet to street already
constructed or to be constructed."
By these words the Director of Lands either expressed his interpretation of the specifications referred to
or he qualified it by making a new offer in which the obligation as to the making of streets was limited to
streets surrounding block 49. In either view Derham Brothers were bound.
Article 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles,
and the doubts refer to incidental circumstances of a gratuitous contract,
the least transmission of rights and 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. (1289)
Article 1379.
The principles of interpretation stated in Rule 123 of the Rules of Court

shall likewise be observed in the construction of contracts. (n)
Interpretation of Contracts
General Rule:
Article 1370. If the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties,
control.
the literal meaning of its stipulations shall

If the words appear to be contrary to the evident intention of the parties,
the latter shall prevail over the former. (1281)
Literal Meaning of Provisions of a Contract:

Literal meaning of the words used in a contract shall be controlling when the terms used are clear and
leave no doubt upon the real intention of the parties.
The contents of a contract when done in writing constitutes the sole repository of the terms of the
contract, and what is not found in the writing is understood to have been waived and abandoned, unless
alleged and proved that the intention of the parties is otherwise.
Rule When the Terms Contradict the Intention of The Parties:
When the words used in a contract appear to contradict the intention of the parties, the intention prevails.
The real agreement may be proved as against the terms of the written agreement by stating that there is an
intrinsic ambiguity, mistake, or imperfection in the written agreement, or that the agreement failed to
express the true intent and agreement of the parties thereto.
Mutual Intent:
In determining the intention of the parties, it is the mutual intent and not just the intent of one of the
parties which the court should look into when evaluating the evidence presented.
Presumption That Terms Are used in their Primary and General Acceptation:
Terms of an agreement or writing are presumed to have been used in their primary and general
acceptation. However, evidence may be admitted to show that they have a local, technical, or otherwise,
peculiar signification, and were used and understood in that particular instance, in which case, the
agreement or writing must be construed accordingly. (Rule 130, Sec. 14)
Jurisdiction and Laws Applicable:
Interpretation of contracts is beyond the jurisdiction of the Municipal Trial Court to hear and determine.
The Regional Trial Court has jurisdiction.
Only laws existing at the time of the execution of the contract are applicable to it and not the later statues,
unless the latter are specifically intended to have retroactive effect.
Circumstances Which Could be considered as indications of the Existence of An Equitable Mortgage:
1. Urgent necessity for money of the apparent vendor
2. Inadequacy of the purchase price
3. Possession of property remaining in the apparent vendor
4. Non-declaration of the property in the name of the vendee for purposes of tax declaration
5. Failure to consolidate ownership of land by the alleged vendee
Heirs of Amparo del Rosario vs. Santos
Atty. Santos was hired by Teofilo Custodio to do the necessary registration of a parcel of land in his
name. They agreed that Custodio would assign and deliver to Santos a share of the whole property.
Truly, Custodio conveyed to Santos two lots plus a one half interest in one of the lots (road lot, lot no.6)
as payment for attorneys fees.
Santos now executed a deed of sale upon his one-half interest in the road lot (lot 6) in favor of Amparo
del Rosario. The del Rosarios now claim specific performance of the deed of sale. They claim that there
were other other conditions orally made thus should also be complied with.
Can conditions alleged orally agreed upon constitute as an addition to the written instrument? NO

The Court ruled that the Rules of Court prohibits the contradiction or addition to the terms of a written
instrument by testimony. When they reduced their agreement to writing, it is presumed that "they have
made the writing the only repository and memorial of truth, and whatever is not found in the writing must
be understood to have been waived and abandoned.
Labasan vs. Lacuesta

The Lacuestas, owner of an unregistered and irrigated riceland, executed in favor of the Labasans a
contract which stipulated that the Lacuestas would sell the their land for 225 pesos, with a right to
repurchase such lot for a period of 10 years.
After some years, Lacuestas filed a complaint against petitioner because the latter refused to accept the
tendered payment of the loan as agreed upon in their contract. Labasan said that the right to repurchase
the land was within 10 years only and that because of Lacuestas failure to exercise such right, the
vendees a retro have became the absolute owners of the land.
Is the contract a contract of sale or a mortgage? LOAN with a SECURITY (Mortgage)
Court held that since the terms of the contract are not clear, it is necessary to inquire into the reason
behind the transaction to determine the true intent of the parties. The contract is a mere loan with security
and not a sale with the right to repurchase. The reason behind the execution of the contract was that the
Lacuestas were in "urgent necessity for money" and had to secure a loan of P225 from Labasan for which
the riceland was given as "security."
The transaction between the parties to be a loan instead of a sale of real property notwithstanding the
terminology used in the document, after taking into account the surrounding circumstances of the
transaction.
Prisma Construction vs. Pantaleon

Pantaleon, the President and Chairman of the Board of PRISMA, obtained a P1M loan, evidenced by a
promissory note, from the respondent with a monthly interest of P40k payable for six months, or a total
obligation of P1.24M to be paid within six (6) months.
The petitioners failed to completely pay the loan within the stipulated six-month period. The respondent
filed a complaint for sum of money with the RTC to enforce the unpaid balance, plus 4% monthly
interest.
Petitioners admitted the loan of P1.24M, but denied the stipulation on the 4% monthly interest, arguing
that the interest was not provided in the promissory note.
Did the parties agree to the 4% interest even though there is no such stipulation? NO
Interest due should be stipulated in writing; otherwise, 12% per annum.
Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith. When the terms of a contract are clear and leave no doubt as to the intention
of the contracting parties, the literal meaning of its stipulations governs.
Therefore, as agreed by the parties, the loan of P1M shall earn P40k/month for a period of six (6) months,
or from December 8, 1993 to June 8, 1994, for a total principal and interest amount of P1.24M.
Thereafter, interest at the rate of 12% per annum shall apply.
Martin vs. DBS Bank

Petitioners entered into a lease agreement with DBS. Heavy rains flooded the leased property and
submerged the DBS offices along with its repossessed cars. DBS demanded that the petitioners make
repairs on the property to make it acceptable and usable again.
While the petitioners made some repairs, they failed to meet the needs of DBS. The respondent made a
final demand on the petitioners, and for failure to do so, petitioners would rescind the contract.
Petitioners claimed that, according to Paragraph X of the contract, pre-termination of the lease is barred.
Can DBS validly rescind the contract? YES
The stipulations must be read together and given effect as their meanings warrant. Paragraph VIII of the
contract allows for rescission by either party should the property become untenable because of natural
causes.
Therefore, DBS carries authority to rescind the contract, the authority coming from the contract itself.
1. Intention of the Parties:
Article 1371.
In order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be principally considered. (1282)
Applicability:
Applies only when the terms of the contract are not clear and leave some doubts on the intention of the
contracting parties. If there are no doubts, the literal meaning of the terms used shall control.
Determination of Intention:
The judge should give special consideration to the circumstances surrounding the execution of the
contract and the conduct of the parties as it appears on record and by a review of the circumstances under
which the agreement was executed.
The reasons which induced the parties to enter into the contract and the circumstances surrounding the
execution of the contract are of paramount importance in interpreting it. The rule favors the conservation
of a right, not its impairment, loss, abandonment, or forfeiture.
The intent of the contracting parties may be deduced from the stipulation of facts they made in court.
A supplemental agreement made by the contracting parties will be given weight in the interpretation of
the original contract executed by them.
When the parties themselves placed an interpretation to the terms used in their contract, such
interpretation, in general, be followed by the court.
Acts done in the course of the performance of the contract are admissible in evidence upon the question
of the meaning of the terms used.
Ramos vs. Heirs of Ramos
Lucio Ramos and SaludAbejuela are spouses. Out of their marriage they begot four children namely: Juan
Ramos, Honorio Ramos, Josefa Ramos and Ramon Ramos.
The spouses owned real properties situated at Macasandig, Cagayan de Oro City.
In 1954, a Deed of Absolute Sale was executed by Salud Abejuela in favor of Ramon Ramos.
The heirs of Honorario Ramos contended that the 1954 deed of absolute sale executed by Salud was
fictitious.
They further contended that the understanding and agreement with his parents Lucio and Salud Ramos
was that, Ramon Ramos should hold said land in trust for his brother, Honorio and same should be
divided between the two in equal shares.
The burden of proving the alleged simulation of a contract falls on those who impugn its regularity and
validity. A failure to discharge this duty will result in the upholding of the contract.
The primary consideration in determining whether a contract is simulated is the intention of the parties as
manifested by the express terms of the agreement itself, as well as the contemporaneous and subsequent
actions of the parties.
Evidence clearly shows that petitioner hired tenants to take care of and to harvest coconuts from Lot
2961. Without any protest from Salud or respondents, he declared the property for taxation and paid
realty taxes on it in his name. His actions negated respondents allegation that the parties never intended
to be bound by the assailed contract.
Carceller vs. CA
Carceller and SIHI entered into a lease contract with option to purchase. In view of the expiration of said
contract, SIHI sent a letter to Carceller asking him for his decision about the option to purchase.
In a reply, Carceller asked for an extension to raise sufficient funds for payment. In a letter, SIHI denied
the extension for payment but offered the land for lease for another year. Four days after, Caceller
notified SIHI of his intention to pay SIHI the downpayment.
However SIHI rejected and claimed that the time to exercise the option has lapsed.
Can Carceller be allowed to exercise the option despite the alleged delay? YES

Petitioner's letter to SIHI, dated January 15, 1986, was fair notice to the latter of the former's intent to
exercise the option, despite the request for the extension of the lease contract.
SIHI's agreement to enter first into a lease contract with option to purchase with herein petitioner, is a
clear proof of its intent to promptly dispose said property although the full financial returns may
materialize only in a years time. Furthermore, its letter reminding the petitioner of the short period of
time left within which to consummate their agreement, clearly showed its desire to sell that property.
Also, SIHI's letter dated February 14, 1986 supported the conclusion that it was bent on disposing said
property. For this letter made mention of the fact that, "said property is now for sale to the general
public".
On the part of the petitioner, he introduced permanent improvements on the leased property,
demonstrating his intent to acquire dominion in a year's time. To increase his chances of acquiring the
property, he secured an P8 Million loan from the Technology Resources Center (TRC), thereby
augmenting his capital.
Almeda vs. Bathala Marketing

Respondent Bathala Marketing Industries, Inc., as lessee renewed its Contract of Lease with Ponciano L.
Almeda, as lessor. Under the said contract, Ponciano agreed to lease a portion of the Almeda Compound,
located at 2208 Pasong Tamo Street, Makati City.
The sixth clause of the contract of lease provides that in case the assessment should be increased or any
new tax, charge or burden be imposed by authorities on the lot and building where the leased premises
are located, the rental payments shall be correspondingly increased.
In a letter dated December 29, 1997, petitioners advised respondent that the former shall assess and
collect Value Added Tax (VAT) on its monthly rentals.
Respondent refused to pay the VAT and adjusted rentals as demanded by petitioners but continued to pay
the stipulated amount set forth in their contract.
Was respondent liable to pay the VAT? NO
Court held that since the sixth clause in the agreement refers to a new tax, the VAT cannot be imposed
since it took effect before the parties entered into the lease agreement and thus cannot be considered as a
new tax.
Article 1372. However general the terms of a contract may be,

they shall not be understood to comprehend things that are distinct
and cases that are different from those upon which the parties intended to agree. (1283)
General Terms Not Necessarily Comprehensive in Scope:

No matter how general the term used in a contract, they do not comprehend things that are distinct and
different from those agreed upon by the parties.
Article 1373. If some stipulation of any contract should admit of several meanings,
which is most adequate to render it effectual. (1284)
it shall be understood as bearing that import
Several Meanings:
When a stipulation may be interpreted in several ways, that meaning which is the most adequate to make
it legally effectual should be followed.
Conflicting provisions should be harmonized to give effect to all.
2. Interpretation as a Whole:
Article 1374. be interpreted together,

The various stipulations of a contract shall
attributing to the doubtful ones that sense which may result from all of them taken jointly. (1285)
All The Stipulations Interpreted Jointly to Give Effect to the Whole:

When there are several provisions, the construction that should be adopted must be the one which will
give effect to all provisions.
Titles given to sections of a contract may be used as guides in interpreting its scope.
Contents of the contract should not be interpreted piecemeal, but to be considered from an overall view of
the document itself.
When there is a controversy because the name given to the contract is different from what the parties are
doing, performance prevails because it clearly indicates more intention than the name or title given to the
contract.
Bundalian vs. CA
Bundalian purchased three parcels of land. The next day Bundalian sold the same property to Littawa and
Camcam under a contract denominated as Deed of Sale with Right to Repurchase. The contract contained
a provision on the escalating repurchase price per month.
Was the deed of sale with a right to repurchase an equitable mortgage? YES
The contracts involving the subject properties came one after another in the space of two (2) days. This
already indicates, at a very early stage, that the two transactions must be intimately related.
Such intimate relation between the aforementioned Deed of Absolute Sale and Deed of Sale with Right to
Repurchase is already clear in the statement in the latter instrument that the subject property had just been
purchased by Jose R. Bundalian with funds loaned to him by the respondents Littawa and Camcam.
Having just purchased the property from the estate by way of Deed of Absolute Sale on July 1, 1975, for
which he had just paid P499, 200.00 as purchase price, it would have been utterly senseless for petitioner
Jose R. Bundalian to sell the same property to private respondents the very next day. The Deed of Sale
with Right to Repurchase is precisely the security - the equitable mortgage.
Article 1375.
Words which may have different significations shall be understood in that
and object of the contract. (1286)
which is most in keeping with the nature
Words Susceptible to Two or More Significations:

Words with two or more meanings shall be understood to have that meaning which is most in keeping
with the nature and object of the agreement.
3. Custom or Usage:
Article 1376. The usage or custom of the place shall be borne in mind
in the interpretation of the ambiguities of a contract,

and shall fill the omission of stipulations which are ordinarily established. (1287)
Usages and Customs of the Place of Execution of the Contract:

In the interpretation of ambiguities, the usage or custom of the place where the contract was executed
shall be considered. A custom must be proved as fact, according to the rules of evidence.
Thus, where a contract of lease failed to provide for the amount of compensation, that which is
customarily charged in the place is applied.
Payment in pesetas was executed where Mexican pesetas were more commonly used than Spanish
pesetas. It was held that the term pesetas should mean Mexican pesetas.

Custom and Usage Distinguished:
Usage is a repetition of acts, and Custom is the law or general rule which arises from such repetition.
There may be usage without custom, but there cannot be custom without usage.
Kinds of Customs:
1. General Customs those which prevail throughout a country and become the law. Their existence is to be
determined by the court. As applied to usage of trade and business, a general custom is one that is
followed in all cases by all persons in the same business in the same territory, and which has been so long
established that persons sought to be charged thereby, and all others living in the vicinity, may be
presumed to have known of it and to have acted upon it as they had occasion.
2. Local Customs those which prevail only in some particular district or locality, or in some city, county,
or town.
3. Particular Customs those which are nearly the same, being such as affect only the inhabitants of some
particular district.
No Judicial Notice of Customs, Exception:

A custom must be proved as a fact according to the rules of evidence.
If a custom and usages are general, they may be proved even if not specifically pleaded. However if the
custom or usage is a local one, they must be pleaded, otherwise, they may not be proved.
By way of exception, a court may take judicial notice of a custom if there is already a decision rendered
by the same court recognizing the custom, specially if the decision had already been affirmed on appeal
and the decision is already final and executory.
Judicial notice may also be taken of a custom which is of public knowledge.
Different Customs in the Same Place, Rule:

If the evidence presented is not sufficient to establish a custom, it is considered non-existent.
If it is proved, there is a presumption that the person whose acts are the subject of the controversy acted in
accordance with the custom of the place where the acts were performed and not in accordance with the
customs of the place where the court is located. This rule is applied when there are different customs in
the said places.
Andreas vs. BPI

Andreas applied to BPI for a foreign credit to enable him to purchase coal in Australia. He signed a
written request for foreign credit, agreeing to pay BPI commission at the rate of of 1% for such part
of the foreign credit. It appears that in addition to that commission specified, BPI charged Andreas
interest at the rate of 9% per annum on the amount of each draft.
The drafts drawn by the American Trading Co. on Andreas, payable to the Bank of New South Wales,
already included the interest on the price of coal which was included in the amount of the drafts which
Andreas paid to BPI.
The 9% interest was not authorized by the Bank of New South Wales and it was only for the sole benefit
of BPI. At the time Andreas paid such, Andreas knew that he was to pay ALL charges, including interest,
of the Australian bank and that he did not know that he was to pay ANY interest to BPI.
BPI contends that there was an established usage and custom of the banks in Manila in like cases of
charging and collecting such interest on drafts drawn upon foreign credits.
Was the usage and custom alleged by BPI valid? NO
Nothing is said about the payment of interest to BPI in the request for foreign credit. If it had been the
purpose and intent of BPI to collect and receive the interest in question, it should have specified and
provided for in the contract. If in the making of such interest charges, BPI relied upon an established
usage and custom, it should have alleged that fact as a further and separate defense and the existence of
them would then become a question of fact.
4. Obscure words:
Article 1377.
The interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity. (1288)
Interpretation of Obscure Words or Terms:

It is not fair to allowed the opposite rule to prevail. It is but sensible and logical that the one who caused
the ambiguity should not benefit therefrom.
This rule impliedly directs drafters to be extra careful in the choice of words or terms. This is for the
mutual benefit of all the parties.
Rigid application of this rule has become necessary because of current business practices, wherein
companies nowadays impose cunningly prepared documents such as contracts of adhesion. This calls for
greater strictness and vigilance on the part of the courts of justice to prevent unwary people from being
trapped by such schemes.
Ildefonso vs. Sibal

Ildefonso and Sibal entered into a compromise agreement which set forth, among others, that the
defendant promises that within two (2) years from the date hereof, he shall course through the plaintiff as
Realtor the former's real estate purchase or transaction and should he (Sibal) fail thereof, that is, to make
such real estate purchase and to course the same to the plaintiff as said Realtor, the defendant is liable
further to pay the plaintiff an additional sum of P2k. Sibal did not buy any of the properties offered by
Ildefonso.
Did Sibal violate the agreement by failing to purchase the real estate? - NO
There is nothing in the disputed paragraph that can be construed to mean that appellee bound himself to
purchase real property and to pay penalty of P2,000.00 in case he failed to do so.
Appellee's principal undertaking was to "course" or make his real estate purchases and sales through
appellant for a period of two years from the date of the execution of the compromise agreement.
There is, to be sure, ambiguity in the provision of the compromise agreement in question as a result of the
explanatory clause ("that is, to make such real estate purchase and to course the same to the plaintiff as
Realtor") inserted after the phrase "should he fail thereof" which follows the statement of appellee's
obligation. But following the rule that ambiguities or obscure clauses in contracts cannot favor the one
who has caused them (Article 1377 NCC), and it appearing that the compromise agreement was drawn by
appellant through his counsel, with the paragraph in dispute creating an obligation in his favor, the
ambiguity found therein must be construed in favor of herein appellee.
Ong Yong vs. Tiu

In order to recover from a financial distress, respondent Tius invited petitioner Ongs to invest in the
formers company FLADC which used to manage a commercial complex, called Masagana Citimall,
along Taft Avenue. A Pre-Subscription Agreement was executed where they both agreed that certain
deeds of assignment would also be carried out to maintain their equal shareholdings in FLADC.
The controversy arose when both parties committed breaches, prompting the Tius to unilaterally rescind
the contract. One of the breaches was the Ongs refusing to credit the number of FLADC shares in the
name of Masagana Telemart corresponding to its property contribution.
The Ongs maintained that their group cannot be faulted because the Deed of Assignment executed by
Masagana in favor of FLADC was incomplete (not dated, no instrumental witness signed the Deed), and
that the necessary documentary stamp taxes, capital gains, and transfer taxes had not been paid.
Essentially, the Ongs found ambiguity in the agreement, such that the FLADC should not pay for the
taxes arising from the assignment.
Who has the obligation to pay the taxes incident to the assignment? - FLADC, the assignee
The Deed of Assignment stipulates that FLADC, as assignee, accepts said assignment and assumes all
obligations of performing all the terms and conditions including, but not limited to, the transfer of the said

parcel of land in the name of FLADC within a reasonable time. Thus, FLADC should shoulder all
obligations, such as taxes and legal fees, for the conveyance to be registered and the title to the property
placed in the name of FLADC.
The alleged ambiguity raised by the Ongs can only be resolved against the Ongs for it was their lawyer,
the late Atty. John Uy, who prepared the Deed of Assignment. Where the provisions of a contract are
ambiguous, such ambiguity must be construed against the party who drafted it.
Govt of the Phil vs. Derham Bros

Derham Brothers entered into negotiations with the Director of Lands for the purpose of securing from
the Government of the Philippine Islands a lease covering block 49 of Reclamation No. 1, Manila Harbor,
commonly known as the Luneta Fill, an area reclaimed from the sea by the process of dredging the harbor
and filling in the reclaimed territory.
A portion contract stated that the rental and taxes to commence upon the grading to the official line and
grade and metalling thereof of the roadway of the streets of the three blocks on the south, east, and the
west, contiguous to said property, and the grading to the official line and grade and metalling the
roadway thereof of the street on the north of said property to its entire length. From what has been stated
it appears that the block in question is surrounded on all four sides by streets which have been prepared
and opened for use. Defendant contended that the roadway of the street covers the entire breadth of the
street.
Were the conditions which would initiate the period for the rent complied with? YES
It should be noted that the language of paragraph 4 is to the effect that the street on the north of said
property shall have a metalled roadway "to its entire length." This language is nor clear because the
pronoun "its" might be taken to refer to the word "property" with as much propriety as to the more remote
antecedent "street."
If this ambiguity be considered to exist, the proper construction to be given to this expression is
determined by article 1288 of the Civil Code, wherein it is declared that the interpretation of obscure
clauses in a contract shall not favor the party who caused the obscurity.
If, on the other hand, the ambiguity does not exist, we think that this specification is limited by the words
contained in the communication of the Director of Lands wherein this official uses the expression "the
completion of the four streets surrounding said blocks, together with an outlet to street already
constructed or to be constructed."
By these words the Director of Lands either expressed his interpretation of the specifications referred to
or he qualified it by making a new offer in which the obligation as to the making of streets was limited to
streets surrounding block 49. In either view Derham Brothers were bound.
Article 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles,
and the doubts refer to incidental circumstances of a gratuitous contract,
the least transmission of rights and 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. (1289)
Applicability:
Applies only when the doubts or obscurities in a contract could not possibly be determined by the
application of the rules provided in the preceding articles.
Thus, this article is invoked only as a last resort.
Two Kinds of Doubts:

1. Doubs on the incidental circumstances of the contract covered by the first paragraph. Thus, as to whether
a contract is a sale or mortgage, this is considered an incidental circumstance.
2. Doubts on the principal object of the contract covered by the second paragraph. Thus, if the intention of
the parties cannot be determined, the contract shall be void.
Rules on Doubts on Incidental Circumstances:

If the contract is gratuitous, the least transmission of rights and interests shall prevail.
Example: If there is doubt whether the gratuitous delivery of a personal thing to someone constitutes a
commodatum or donation, it shall be construed as commodatum because this will involve lesser
transmission of rights. In a case whether a mortgage is onerous or gratuitous, it is interpreted as
gratuitous.
If the contract is onerous, the doubt shall be construed in favor of the greatest reciprocity of interests.
Example: If there is doubt as to the nature of a mortgage contract, it is presumed that the debtor assumed
liability which permits the greatest reciprocity of rights and interests. The document should not be
considered as a pacto de retro sale.
Article 1379.
The principles of interpretation stated in Rule 123 of the Rules of Court

shall likewise be observed in the construction of contracts. (n)
Rules on Interpretation of Documents under the Rules of Court:

Rule 123 is now Rule 130, Sections 10 to 19 of the Revised Rules of Court
Section 10. Interpretation of a writing according to its legal meaning. 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. (8)
Section 11. Instrument construed so as to give effect to all provisions. 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. (9)
Section 12. Interpretation according to intention; general and particular provisions. 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. (10)
Section 13. Interpretation according to circumstances. For the proper construction of an instrument, the circumstances
under which it was made, including the situation of the subject thereof and of the parties to it, may be shown, so that the
judge may be placed in the position of those who language he is to interpret. (11)
Section 14. Peculiar signification of terms. The terms of a writing are presumed to have been used in their primary and
general acceptation, but evidence is admissible to show that they have a local, technical, or otherwise peculiar
signification, and were so used and understood in the particular instance, in which case the agreement must be construed
accordingly. (12)
Section 15. Written words control printed. When an instrument consists partly of written words and partly of a printed
form, and the two are inconsistent, the former controls the latter. (13)
Section 16. Experts and interpreters to be used in explaining certain writings. When the characters in which an
instrument is written are difficult to be deciphered, 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. (14)
Section 17. Of Two constructions, which preferred. 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,
and when different constructions 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. (15)
Section 18. Construction in favor of natural right. When an instrument is equally susceptible of two interpretations,
one in favor of natural right and the other against it, the former is to be adopted. (16)
Section 19. Interpretation according to usage. An instrument may be construed according to usage, in order to
determine its true character. (17)

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E 1
Article 1380.
Contracts validly agreed upon may be rescinded in the cases established by law. (1290)

Concept of Rescissible Contract:
A rescissible contract is one which contains all the essential requisites of a contract which make it valid,
but by reasons of injury or damage to either of the contracting parties or to third persons, such as
creditors, may be rescinded.
An action to rescind under this article or an accion pauliana must be of last resort, availed of only after all
other legal remedies have been exhausted and have been proved futile.
Characteristics of a Rescissible Contract:
1. It has all the elements of valid contract:
2. It has a defect consisting in an injury to one of the contracting parties or third, generally in the form of
economic damage or lesion, fraud, and alienation of property subject of case in court without the consent
of the litigants or of the court;
3. It is valid and effective until rescinded;
4. It can be attacked only directly, either by one of the contracting parties or by an affected third person,
who is injured or defrauded by the contract;
5. It is susceptible of convalidation only by prescription. Ratification does not apply.
Can a Voidable Contract be Rescinded:
The article speaks of contracts validly agreed upon. It does not however confine the action for rescission
to valid contracts only.
The article does not require the validity of contracts as a sine qua non (essential condition) for rescission.
Voidable contracts which are also defective contracts, may be the subject of rescission.
In other words, voidable contracts may either be annulled or rescinded. (Art. 1380 and 1391)
Basis Article 1191 Rescission (Resolution) Article 1381 Rescission
A principal action which seeks the resolution or A subsidiary action limited to cases or rescission
Nature cancellation of the contract. for lesion as enumerated in Art. 1381.
Prescriptive period: 10 years Prescriptive period: 4 years
Only ground is the non-performance of ones Five grounds enumerated in Art. 1381. Non-
Grounds obligation or what is incumbent upon him. performance by the other party is not important.
Applicability It applies only to reciprocal obligations. Applies to both unilateral and reciprocal
obligations.
Person who Only the a party to the contract may demand the Even a third person who is prejudiced by the
may institute fulfillment or seek the rescission (cancellation) of contract may demand the rescission of the contract.
the action the contract.
Fixing of Court may fix a period or grant extension of Court cannot grant extension of time for the
period by the time for the fulfillment of the obligation. fulfillment of the obligation.
court
Purpose To cancel the contract. To seek reparation for the damage or injury
caused, thus allowing partial rescission of contract.
if you've been searching for a sign, this is probably it.

Rescission By Mutual Consent is Not Rescission Proper Under Art. 1381:

When the parties mutually agree to rescind their contract, it is not a rescission proper because it is not
based on any of the grounds of rescission stated in Articles 1381 and 1382, but based on the will of the
parties who are withdrawing from their contract.
Requisites For An Action For Rescission (1381 Rescission):

1. The contract subject of the action must be a rescissible one, that is, it must be one of those mentioned in
Articles 1381 and 1382.
2. The plaintiff must have no other recourse to obtain reparation for the damages he suffered except the
rescission of the contract. (Art. 1383) It must be noted that the action is only subsidiary.
3. The plaintiff must be able to return whatever he is obliged to restore, if the action would be sustained
(Art. 1385).
4. The object/s of the contract must not have already passed unto the ownership or possession of a third
person who is acting in good faith (Art. 1385).
5. The action must be brought within the prescriptive period, that is, within four years from the accrual of
the cause of action. (Art. 1389)
Right to Rescind May be Noted in the Certificate of Title:

Direct action is needed to attack a rescissible contract. Indirect attack is not allowed.
If a real property is involved and covered by title, the right to rescind, which is an interest on real property
may be preserved by the court, and registered.
Can There be a Valid Extrajudicial Rescission of a Contract?:

Yes. A judicial rescission of a contract is not necessary where the contract itself provides that it may be
revoked and cancelled for violation of any of its terms and conditions.
Article 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion
by more than one-fourth of the value of the things which are the object thereof;
(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 claims due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission. (1291a)
Coverage of Article:
The Article listed five cases of rescissible contract. The last paragraph (no. 5) is all-embracing as it covers
all other contracts specially declared by law as rescissible like those stated in Articles 1189, 1382, 1098,
1526, 1534, 1539, 1542, 1556, 1560, 1567, and 1659.
Rescission in 1381 different from Rescission in 1191 and 1592:
In Article 1191 and 1592, the rescission is a principal action seeking the resolution or cancellation of the
contract. The prescriptive period for this action is 10 years from the time the right of action accrues.
In Article 1381, the action is a subsidiary one limited to cases or rescission for lesion as enumerated in
said article. The prescriptive period under this article is four years.
the hurrier you go, the behinder you get.
Rescissible Contracts Due to Economic Lesion of More than 25% of the Value:
Contracts entered into by guardians whenever the wards whom they represent suffer lesion by more than
of the value of the things disposed of can be rescinded.
It is understood that there is no judicial approval of the contracts entered into by the guardians because if
there is, whether the contracts involve acts of ownership or acts of administration, the contracts will not
be rescissible. (Art. 1386)
If a guardian alienates properties of the ward without judicial approval, the contract is unenforceable for
lack of authority irrespective of the value of the economic lesion or damage. (Art. 1403)
Even if the act constitutes merely an act of administration such as causing the painting of a building
owned by the ward but under the management of the guardian where the latter contracted the services of a
painter for a price higher by more than 25% of the ordinary charge of the painter, the contract is
rescissible. The reason is that the ward suffered more than of the actual value of the services of the
painter.
If the guardian is managing a hacienda belonging to the ward and the former sold the corps harvested
therefrom for a price lower than 25% of the value thereof, the sale is rescissible because of the economic
lesion of more than the value of the crops.
The principles above are also applicable to acts of the representatives of absentees there being a parity
of reasoning and identical law applicable.
Contracts Undertaken Deliberately In Fraud of Creditors:

Not all fraudulent transactions entered into by a debtor can be the subject of rescission by the creditor.
The contract must be intended to defraud the creditor/s, and that the creditor/s cannot in any manner
collect the claim due him/them.
Fraudulent intent must be proved. Without the needed proof establishing the fraudulent intent, the
contract cannot be rescinded.
Nature of Action for Rescission:

Rescission is a subsidiary action. It is popularly known as accion pauliana. It cannot be instituted if the
plaintiff has other legal means to obtain reparation for the perceived damage or injury he suffered.
For example, Trisha extended a loan to Emmanuel which loan is secured by a real estate mortgage that is
duly registered. In order to escape his creditors, Emmanuel sold his properties to third persons. Trisha
cannot rescind the contracts entered into by Emmanuel, because Trisha has other means of collecting
what is due to her. She can always foreclose the existing mortgage at maturity time.
Badges of Frauds:
In determining whether or not a certain conveyance is fraudulent, the question in every case is whether
the conveyance was a bona fide transaction or merely a trick or contrivance to defeat creditors. It is not
sufficient that it is founded on a good or valuable cause or consideration or is made with bona fide intent:
it must have both elements. If defective in either of these particulars, although good between the parties, it
is rescissible as far as the creditors are concerned.
The following are some circumstances attending sales denominated by courts as badges of frauds:
a. Consideration of the conveyance is fictitious or inadequate
b. The transfer is made by the debtor after suit has begun and while it is pending against him
c. A sale upon credit by an insolvent debtor
d. Evidence of large indebtedness or complete insolvency
e. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or
greatly embarrassed financially
f. Transfer is made between father and son, when the other circumstances above are present
g. The failure of the vendee to take exclusive possession of all the property

Accion Pauliana Requisites:
1. Plaintiff asking for rescission has a credit prior to the alienation
2. The debtor has made a subsequent contract conveying a patrimonial benefit to a third person
3. Creditor has no other legal remedy to satisfy his claim
4. The act being impugned is fraudulent
5. Third person who received the property conveyed, if it is by onerous title, has been an accomplice in the
fraud
Illustrations:
A creditor may file an accion pauliana in behalf of the administrator of the estate of the decedent if the
creditor believes that the decedent during his lifetime had conveyed properties in fraud of creditors.
A labor arbiter is incompetent to determine whether a sale was made in fraud of creditors. This task is
judicial in nature.
No contract may be rescinded on ground of economic lesion or damage except in the cases mentioned in
paragraph 1 and 2 of Art. 1381.
Rescission of the sale cannot be pursued after the creditor had elected to foreclose the mortgage.
Where a creditor fails to show that he has no other legal recourse to obtain the satisfaction for his claim,
then he is not entitled to the rescission asked. For a contract to be rescinded for being in fraud of
creditors, both contracting parties must be shown to have acted maliciously so as to prejudice the
creditors who were prevented from collecting their claims.
Rescission is generally unavailing should a third person, acting in good faith, is in lawful possession of
the property, that is to say, he is protected by law against a suit for rescission by the registration of the
transfer to him in the registry.
Accion pauliana complements Art. 1177 which is known as Accion Subrogatoria.
Jurisdiction:
Accion pauliana is incapable of pecuniary estimation. Jurisdiction is with the Regional Trial Court, the
court of general jurisdiction.
Accion Pauliana and Action to Declare The Nullity Of an Absolutely Simulated Contract:
Action to declare nullity of

Basis Accion Pauliana
absolutely simulated contract
Nature There is a true alienation of property. There is no alienation of property but only
pretension of alienation.
To declare the inexistence of the absolutely

simulated contract which prejudices the rights
Purpose To set aside a contract validly entered into. of a third person and/or is intended contrary to
law, morals, good customs, public order, or
public policy.
Possibility of Satisfaction of plaintiffs claim is not possible Non-satisfaction of plaintiffs claim is not
Satisfaction of Claim except through the rescission. required.
Creditors who can Only creditors prior to the alienation may file All creditors, whether before or after the
pursue the case the action. simulation, may file the action.

Alienation of Thing/s Under Litigation:

A property is said to be under litigation when the summons and complaint, seeking the rescission of the
contract involving the property, had been received by the debtor who alienated it.
If during the pendency of the case, the debtor alienated the subject property without the knowledge and
approval of the litigants or of the proper court, the sale or alienation is rescissible. It can be set aside.
For the protection of the rights of the complaining creditor, he should cause the registration of a notice of
lis pendens. This will place all persons under notice that there is a claim over the property. If the property
is personal, the creditor may apply for the issuance of a writ of attachment.
Contracts Specially Declared as Rescissible By Law May Also Be Rescinded:

The following are instances of contracts specially declared as rescissible by law:
Article 1098. A partition, judicial or extra-judicial, may also be rescinded on account of lesion, when any one of the co-heirs received
things whose value is less, by at least one-fourth, than the share to which he is entitled, considering the value of the things at the time
they were adjudicated. (1074a)
Article 1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the
following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition:
(4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its
fulfillment, with indemnity for damages in either case;
Article 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the
time they were effected, are also rescissible. (1292)
Article 1534. An unpaid seller having the right of lien or having stopped the goods in transitu, may rescind the transfer of title and
resume the ownership in the goods, where he expressly reserved the right to do so in case the buyer should make default, or where the
buyer has been in default in the payment of the price for an unreasonable time. The seller shall not thereafter be liable to the buyer
upon the contract of sale, but may recover from the buyer damages for any loss occasioned by the breach of the contract.
The transfer of title shall not be held to have been rescinded by an unpaid seller until he has manifested by notice to the buyer or by
some other overt act an intention to rescind. It is not necessary that such overt act should be communicated to the buyer, but the giving
or failure to give notice to the buyer of the intention to rescind shall be relevant in any issue involving the question whether the buyer
had been in default for an unreasonable time before the right of rescission was asserted. (n)
Article 1539. The obligation to deliver the thing sold includes that of placing in the control of the vendee all that is mentioned in the
contract, in conformity with the following rules:
If the sale of real estate should be made with a statement of its area, at the rate of a certain price for a unit of measure or number, the
vendor shall be obliged to deliver to the vendee, if the latter should demand it, all that may have been stated in the contract; but,
should this be not possible, the vendee may choose between a proportional reduction of the price and the rescission of the contract,
provided that, in the latter case, the lack in the area be not less than one-tenth of that stated.
The same shall be done, even when the area is the same, if any part of the immovable is not of the quality specified in the contract.
The rescission, in this case, shall only take place at the will of the vendee, when the inferior value of the thing sold exceeds one-tenth
of the price agreed upon. Nevertheless, if the vendee would not have bought the immovable had he known of its smaller area of
inferior quality, he may rescind the sale.
Article 1542. In the sale of real estate, made for a lump sum and not at the rate of a certain sum for a unit of measure or number, there
shall be no increase or decrease of the price, although there be a greater or less area or number than that stated in the contract.
The same rule shall be applied when two or more immovables as sold for a single price; but if, besides mentioning the boundaries,
which is indispensable in every conveyance of real estate, its area or number should be designated in the contract, the vendor shall be
bound to deliver all that is included within said boundaries, even when it exceeds the area or number specified in the contract; and,
should he not be able to do so, he shall suffer a reduction in the price, in proportion to what is lacking in the area or number, unless the
contract is rescinded because the vendee does not accede to the failure to deliver what has been stipulated. (1471)

Article 1556. Should the vendee lose, by reason of the eviction, a part of the thing sold of such importance, in relation to the whole,
that he would not have bought it without said part, he may demand the rescission of the contract; but with the obligation to return the
thing without other encumbrances that those which it had when he acquired it.
He may exercise this right of action, instead of enforcing the vendor's liability for eviction.
The same rule shall be observed when two or more things have been jointly sold for a lump sum, or for a separate price for each of
them, if it should clearly appear that the vendee would not have purchased one without the other. (1479a)
Article 1560. If the immovable sold should be encumbered with any non-apparent burden or servitude, not mentioned in the
agreement, of such a nature that it must be presumed that the vendee would not have acquired it had he been aware thereof, he may
ask for the rescission of the contract, unless he should prefer the appropriate indemnity. Neither right can be exercised if the non-
apparent burden or servitude is recorded in the Registry of Property, unless there is an express warranty that the thing is free from all
burdens and encumbrances.
Within one year, to be computed from the execution of the deed, the vendee may bring the action for rescission, or sue for damages.
One year having elapsed, he may only bring an action for damages within an equal period, to be counted from the date on which he
discovered the burden or servitude. (1483a)
Article 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between withdrawing from the contract
and demanding a proportionate reduction of the price, with damages in either case. (1486a)
Article 1659. If the lessor or the lessee should not comply with the obligations set forth in articles 1654 and 1657, the aggrieved party
may ask for the rescission of the contract and indemnification for damages, or only the latter, allowing the contract to remain in force.
(1556)
Violation of Right of First Refusal:

The prevailing doctrine is that a contract of sale entered into in violation of a right of first refusal of
another person is rescissible. It is not covered by the statute of frauds.
Right of first refusal (ROFR or RFR) is a contractual right that gives its holder the option to enter a
business transaction with the owner of something, according to specified terms, before the owner is
entitled to enter into that transaction with a third party.
Cannu vs. CA
Galangs sold their house and lot to Cannu for P120,000. In addition to the money paid, Cannu also
assumed the mortgage on said house and lot. Cannus were only able to pay P75, 000 and they also failed
to regularly pay NHMFC, the mortgagee of said house and lot.
Galangs paid NHMFC in full amount to settle the obligation. Cannu opposed the release of title to Galang
in view of their sale.
Was the breach substantial to warrant rescission and is this a rescission under 1383? YES, NO
In the case at bar, we find petitioners failure to pay the remaining balance of P45,000.00 to be
substantial. Even assuming arguendo that only said amount was left out of the supposed consideration of
P250,000.00, or eighteen (18%) percent thereof, this percentage is still substantial.
Taken together with the fact that the last payment made was eighteen months before the respondent
Fernandina Galang paid the outstanding balance of the mortgage loan with NHMFC, the intention of
petitioners to renege on their obligation is utterly clear.
The rescission on account of breach of stipulations is not predicated on injury to economic interests of the
party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties.
It is not a subsidiary action. (Art. 1383) Article 1191 rescission applies.
This rescission is a principal action retaliatory in character, it being unjust that a party be held bound to
fulfill his promises when the other violates his.

3. Fraud of Creditors:
CBC vs. CA
In the first civil case, judgment was rendered against Alfonso and in favor of China bank, wherein a
property of Alfonso was levied in favor of the bank. Meanwhile, China Bank filed an action for the
collection of sums of money against Alfonso, which is the 2nd civil case. The trial again ruled in favor of
China bank.
Alfonso then assigned his rights to redeem the one-half undivided portion of the property to his son,
Paulino. Paulino redeemed said one-half share from MBTC on the very same day.
Two years after, another notice of levy on execution was issued in connection with the 2nd civil case on
the same lot in favor of China Bank. Paulino alleges that the property has already been redeemed by him
long before the execution sale of China Bank.
Was the assignment of rights to Paulino done to defraud China Bank? YES
The Court held that the Assignment of Rights to Redeem in favor of Paulino is to be rescinded since it
was done to defraud China Bank.
Despite Alfonso Roxas Chuas knowledge that it is the only property he had which his other creditors
could levy, he still assigned his right to redeem his one-half share of the conjugal property in question
from Metrobank in favor of his son, Paulino.
Also, the presumption that the conveyance is fraudulent has not been overcome. This presumption is
strengthened by the fact that the conveyance has virtually left Alfonsos other creditors with no other
property to attach.
Oria vs. McMicking

When the members of the company of Oria Hermanos & Co. dissolved their relations and liquidated the
assets of the company, the other Orias sold to Manuel Oria all of the property of which the said Oria
Hermanos & Co. was owner.
In a civil case, the Gutierrez Hermanos received a favourable judgment against the said company. When
execution was placed in the hands of the sherifff, the Oria Hermanos replied that there were no funds to
pay the civil liability. A steamship was then subjected to public auction where the highest bidder were the
Gutierrez Hermanos. Oria claims that he is the owner of the steamship due to the earlier sale by the
company to him. the Guttierez Hermanos contends that the sale made to Oria was fraudulent as against
the creditors of Oria Hermanos & Co., thus VOID.
Was the sale against the creditors fraudulent? YES
The sale in the form in which it was made leaves the creditors substantially without recourse. The
property of the company is gone, its income is gone, the business itself is likely to fail, the property is
being dissipated, and is depreciating in value. As a result, even if the claims of the creditors should live
twelve years and the creditors themselves wait that long, it more than likely that nothing would be found
to satisfy their claim at the end of the long wait.
The court below was correct in finding the sale fraudulent and void as to Gutierrez Hermanos in so far as
was necessary to permit the collection of its judgment.
5. Alienation of Things under Litigation:

Contreras vs. CBC
Spouses Arcadio Gingco and Dolores Contreras were the owners of 2 accesorias in Tondo.
Dolores died, leaving as her only heirs the widower and their daughter Jerusalem.
Arcadio who was still alive, sold the 2 accesorias to spouses Molina.
CFI declared the sale null and void as to the one half of said accesorias, Jerusalem being the owner
thereof, and ordering Jerusalem to pay spouses Molina P1,500, representing the repairs made in the
property.
Notwithstanding said decision, spouses Molina mortgaged the 2 accesorias in favor of China Banking
Corp. (CBC), to answer for a loan obtained by them from said bank in the amount of P2,000.
Was the deed of mortgage valid? NO

The deed of mortgage in question has for its object a property in litigation, and it was executed by
spouses Molina without the knowledge and approval of neither the petitioner nor the court having
cognizance of the litigation. Spouses Molina cannot allege that the belonging to them was free from
litigation because the action involved the whole property.
The deed of mortgage as to the other belonging to spouses Molina must be cancelled and rescinded.
6. Others:
Rosencor Devt Corp. vs. Inquing
Herein defendants Inquing are lessees of apartment owned by Tiangco spouses. Heirs substituted the
spouses upon their death. Defendants received a letter from de Leon (representative of the heirs) offering
to sell to them the property they were leasing for P2M. They counter-offered P1M.
Thereafter, the lessees received a letter from de Leon advising them that the Tiangco heirs have already
sold the property to Rosencor. Defendants filed the present action praying for the rescission of the Deed
of Absolute Sale between de Leon and Rosencor, and the CA ordered the rescission.
Was CA correct in ordering the rescission of the contract? NO
Under Article 1385, rescission shall not take place when the things which are the object of the contract
are legally in the possession of third persons who did not act in bad faith.
The Court held that as there was no showing of bad faith on the part of the petitioners, CA thus erred in
ordering the rescission.
This does not mean that respondents are left without any remedy for the unjustified violation of their right
of first refusal. Their remedy however is an action for damages against the heirs of the spouses Tiangco
for the unjustified disregard of their right of first refusal.
Article 1382. Payments made in a state of insolvency for

obligations
to whose fulfillment the debtor could not be compelled at the time they were effected,
are also rescissible. (1292)

Applicability; Payments:
The article does not refer to a contract but to payments made, that is why the same were not included
among the enumeration in Art. 1381.
What is rescissible are the payments for obligations which are not yet due. Payments must have been
made by a payer-debtor who is in a state of insolvency.
State of Insolvency, Meaning:

The word insolvency is understood in its vulgar and not technical sense as defined under the Insolvency
Law. In its vulgar sense, a person is considered insolvent when it is impossible for him to fulfill his
obligations because of financial constraints. He has more obligations than assets.
The law does not require a judicial declaration of insolvency to make the payments rescissible.
Requisites of Action For Rescission Under Article 1382:

1. Payment or payments were made by the debtor to a creditor
2. Payment or payments were made while the debtor is in state of insolvency
3. Obligations paid were not yet due and demandable
Example: An insolvent corporation owed a Kingsman 70k. Although, the debt is not yet enforceable, the
corporation delivered a deed of sale covering one of its properties to the Kingsman as payment, to abide
by the saying that Manners maketh man. However, the value of the property is much greater than the
amount of indebtedness. The sale is rescissible because it was made by the debtor who is in a state of
insolvency, in payment of an obligations which is not yet due.
An insolvent will not be permitted to alienate his property without a full and fair consideration where the
conveyance was not done in good faith.
Kinds of Premature Obligations Covered:

The premature obligation which was paid by the insolvent debtor may include a void, natural, condoned,
or prescribed obligation.
Article 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. (1294)
Nature of Action for Rescission, Only Subsidiary:

An action to rescind a rescissible contract is not a principal action. It is just a subsidiary action, which
means it cannot be instituted except when the party suffering damages has no other legal means to obtain
reparation for the damages suffered.
What to Alleged and Prove; Consequences of Failure To Do So:

The creditor seeking rescission of a contract as fraudulent must prove first that he is really a creditor, and
secondly that he could not collect his credit in any other way.
Exception: If it can be proven that the property alienated was the only property of the debtor at the time of
the transaction, the action for rescission is certainly maintainable because it is clear that the creditor has
no other remedy under the circumstances.
Persons Allowed to Institute the Action:

The persons allowed to file the rescissory action are the
a. Parties who suffered the economic lesion
b. The affected creditor
c. Other persons authorized by law.
In case of their death or incapacity, their heirs may institute the action or may continue the same if
already commenced.
However, the heirs of the debtor who alienated the properties in fraud of creditors cannot represent the
debtor to institute the action. The heirs are not allowed because that will give them benefit arising from
the wrongs committed by their own predecessor. A wrongdoer is not allowed to benefit from his own
wrong whether directly or indirectly.
Can Apparent Heirs Rescind Contracts entered into by Their Predecessors In Succession?
If a deceased person alienated his properties during his lifetime for the purpose of depriving or
diminishing the legitimes of his compulsory heirs, the latter may rescind the contracts made for that
illegal purpose. The heirs are placed in a position similar to that of creditors. Their legitimes will be the
equivalent of the credit of creditors.
Legitime is that part of the testators property which he cannot dispose of because the law has reserved it
for certain heirs who are, therefore, called compulsory heirs.
Prescription:
The 4 year period to rescind a fraudulent contract must be counted from the time the action accrues and
not from the date of registration of the conveyance for that would run counter to Art. 1383 as well as
settled jurisprudence.
7. Subsidiary Action:
Suria vs. IAC
Private respondents filed a case for rescission of contract and damages, invoking Art. 1191 (rescission in
reciprocal obligations).
The contract in question is a Deed of Sale with Mortgage, and respondents alleged that petitioners
violated the terms and conditions of the contract by failing to pay the stipulated installments.
Petitioners, on the other hand, posed that the rescission is ineffective, because a remedy of foreclosure
was stipulated in the contract.

Was the remedy of rescission the correct remedy? NO
The relationship between the parties was no longer one of buyer and seller because the contract of sale
had been perfected. It is already one of mortgagor and mortgagee.
The petitioners breach of obligations was not with respect to the perfected contract of sale but in the
obligations created by the mortgage contract. In this case, the remedy of rescission is not a principal
action but becomes a subsidiary one which by law is available only in the absence of any other legal
remedy. Since foreclosure was a specific provision found in the contract as the principal remedy, the
action of respondents must first be foreclosure.
Regalado vs. Luchsinger
Jose Regalado, the father, was prosecuted for the crime of estafa, alleged to have been committed in the sale
of the warehouse to his son Pedro, the plaintiff in this case. Rescission was sought due to the fraudulent sale.
The issues in this case are whether or not:
(1) The sale made in 1900, by Jose Regalado to his son of the warehouse in question, was fraudulent as to the
defendants Luchsinger& Co., who were then creditors of the Jose Regalado;
(2) it was alleged that at the time of the sale in question, and at the time of the trial of this case the father, Jose
Regalado, had property other than the warehouse in question.
Was the sale fraudulent? Should rescission be granted? YES, YES
SC stated that it is more than probable that at the time of the sale in question Pedro Regalado, the son, did
not have 15,000 pesos, or any other sum of importance, with which to buy, or pay for this property.
The action to set aside the contract on the ground that it is fraudulent as to creditors is subsidiary, and
cannot be maintained if the debtor has other property with which to pay the debt; but in this case we agree
with the court below that the evidence shows that the father had no such other property, either at the time
the sale was made or at the time this action was tried out of which the defendants could have collected
this debt. The only property which it is said he had consisted of various debts owing to him, as he
claimed, from third persons. All of these debts were created prior to the year 1888. One of them, the most
important, for 10,000 pesos, was in litigation.
Goquiolay vs. Sycip
Goquiolay and Tan Sing An formed a partnership wherein Tan Sing An was the managing partner.
Tan Sing An bought 3 lands in account of partnership and another 46 in his name, all lands under
mortgage. Tan Sing An died and was survived by Kong Chai Pin.
Sycip paid the unpaid balance of mortgage and the companys president offered to buy the interest of
Goquiolay in the partnership in which Goquiolay rejected. Sycip filed a claims against the estate of Tan
Sing An in view of their payment in for the mortgages which the court granted.
To pay the said claim, the widow of Tan Sing An sold the land owned by her husband and the partnership
to Sycip et al. The sale was objected by Goquiolay and alleged that the widow was only a limited partner
and the sale was intended to defraud Goquiolay.
Can the sale be rescinded? NO
Widow was not a mere agent, because she had become a partner upon her husband's death, as expressly
provided by the articles of copartnership. She was even recognized as a general partner by Goquiolay.
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". Since there is no allegation, or evidence, that
Goquiolay cannot obtain reparation from the widow and heirs of Tan Sin An, the present suit to rescind
the sale in question is not maintainable, even if the fraud charged actually did exist.
Article 1384.
Rescission shall be only to the extent necessary to cover the damages caused. (n)

Extend of Rescission, Total or Partial as the case may be:
The primary purpose of rescission is reparation for damage or injury suffered either by a contracting party
or by a third person. The injury or damage may not cover the entirety of the thing sought to be recovered.
Partial rescission is allowed. Thusly, the scope of the rescission shall only be to that extent necessary to
satisfy the damages caused.

Persons Who Can Benefit From The Rescission:

If rescission is allowed by the court, only the particular creditor/s who instituted the action shall be
benefited.
If the rescission is partial, and there is a remainder after the satisfaction of the claims of the suing
creditor/s, the same shall remain in the hands of the transferee because the alienation of the property or
thing is valid up to this limit or extent.
Goldenrod vs. CA
BARRETTO & SONS/BARRETTO REALTY owned forty-three (43) parcels of registered land which
were mortgaged with UCPB. The obligation of the corporation with UCPB remained unpaid making
foreclosure of the mortgage imminent.
GOLDENROD offered to buy the property from BARRETTO & SONS. The former wrote a letter to the
latter confirming the latters acceptance of the offer to buy and enclosed in said letter is the earnest
money of P1 million which shall form part of the purchase price.
GOLDENROD failed to comply with the terms of payment and so BARRETTO & SONS sold the parcels
of land to ASIAWORLD.
GOLDENROD is now demanding for the refund of the earnest money but the demand was unheeded.
Was the sale validly rescinded thus warranting the return of the earnest money? YES
The Court held that when GOLDENROD informed private respondents that it would no longer push
through with the sale by reason of its failure to make payment, petitioner resorted to extrajudicial
rescission of its agreement with private respondents. Private respondents did not interpose any objection
to the rescission by petitioner of the agreement.
Article 1385 of the Civil Code provides that rescission creates the obligation to return the things which
were the object of the contract together with their fruits and interest. BARRETTO & SONS is therefore
obliged to return the earnest money (as part of the purchase price) paid to him by GOLDENROD.
Article 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and 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 third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss. (1295)
Applicability of Mutual Restitution:

Mutual restitution is applicable only when there is delivery on both sides. It is not applicable when
creditors are rescinding fraudulent contracts executed by their debtors in favor of other persons. This is so
because such creditors have not received anything from their debtors and have nothing to restore.
Applies in Rescission of Reciprocal Obligations as well as in Mutual Dissent:
The rule of mutual restitution was applied in reciprocal obligations governed by Article 1191 which
speaks of rescission in the sense of cancellation of contract based only on non-performance of what is
incumbent upon a party in reciprocal obligations.
The same rule applies to cases of mutual dissent where the parties agreed to back out from their contract.
The complaining party who cannot return whatever he may be obliged to restore, is not entitled to
rescission. His case will be dismissed for lack of condition precedent.
No Rescission when Property had already been Legally Transferred to Third Person:
If the property had already been alienated in favor of a third person, such as by way of sale, and he is in
good faith, the transfer of the property to him will be respected, as he has a better and superior right than
that of the complaining party whose claim or right had not been preserved. If in bad faith, the property
transferred to him could still be recovered, aside from the imposition of damages for the injury suffered
by the complaining party.

Although a transferee is in good faith, if he got the property gratuitously from the debtor, he is obliged to
return the thing under the principle that no person shall be enriched at the expense and prejudice of other
persons like the creditors. He will restore the property in the condition it may be found without any
liability to pay for the fruits he had received, if there are any. More, he is entitled to reimbursement or
necessary and useful expenses which he incurred. Even more, he is not liable for the deterioration or loss
of the thing possessed except when he acted with fraudulent intent or negligence, after judicial summons
had been received by him.
Persons Liable for Indemnity for Damages:

If creditors who desire to recover the property alienated to defraud them, failed in their quest for
rescission due to the lawful transfer of the possession or ownership of property to a third person who
acted in good faith, their recourse is to go after the person who had caused the loss.
Thus, if it is guardian who is involved, he will be liable to indemnify the ward for the value of the
economic damage or lesion suffered by the latter.
Persons who can Benefit from the Rescission:

If rescission is allowed by the court, only the particular creditor or creditors who instituted the action will
be benefited. If the rescission is partial, and there is a remainder of the things recovered after satisfying
the claims of the plaintiff-creditor, the remainder will remain in the transferee because the alienation up to
that limit is recognized.
Literal Interpretation of Article Shunned:

In many instances, the Court has refused to apply the literal import of a particular person provision of law
when to do so would lead to unjust, unfair, and absurd results after all, it is the function of courts to see
to it that justice is dispensed, fairness is observed and absurdity prevented.
Were the Court to follow the letter of Article 1385 of the Civil Code, it will in effect be paving the way to
an absurd situation whereby subdivision developers who have reneged on their contractual and legal
obligation to provide utility systems and facilities for the use of subdivision lot owners may themselves
profit from their very own wrongs and shortcomings. In case the subdivision developer fails to deliver the
lot the buyer, it should pay not the purchase price paid plus interest but the current market value thereof.
Article 1385 has a Parallel Rule in Article 1402:

The present article has a parallel rule in the Chapter on Voidable Contracts:
Article 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. (1308)
Article 1386. Rescission referred to in Nos. 1 and 2 of article 1381

approved by the courts. (1296a)
shall not take place with respect to contracts
Contracts Entered Into By Guardians and Representatives of Absentees:

If the contracts entered into by guardians or representatives are approved by the court having jurisdiction
over the proceedings, the contracts could not be rescinded.
Opposition to these contracts should have been timely made before the court. The lack of opposition is
deemed a waiver of the right to rescind.
Unless this presumption is rebutted with strong, clear, and convincing evidence, contracts entered into by
guardians and representatives which have been approved by the court, cannot be the subject of rescission.
The court must, however, be a competent court and had observed due process.

Article 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,
and 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. (1297a)
Nature of Fraud:
Fraud is deception. It consists of any means or ways, usually through insidious words or machinations,
perpetrated by one of the contracting parties, by reason of which, the other party is persuaded to enter into
contract which, without them, he would not have agreed to.
Presumptions of Good Faith:
Generally, when a person acts, he is presumed to be acting in good faith.
Good faith is always presumed and upon him who alleges and imputes bad faith on the part of the
possessor of the property rests the burden of proof. Further, a person is presumed to take ordinary care of
his concerns and that the law has been obeyed.
When the law presumes a transaction as fraudulent, that presumption is an exception to the general rule of
good faith stated in Art. 527.
Statutory Presumptions of Fraud in Article 1387:

Certain alienation of property are considered fraudulent:
a. Alienation by gratuitous title when a debtor donates his property without reserving sufficient
property to pay all his pre-existing debts, the law presumes that the gratuitous dispositions are
made in fraud of creditors.
b. Alienation by onerous title when a debtor alienates property by onerous title, that is, even for a
valuable consideration, the contract is presumed fraudulent if at the time of the alienation,
i. Some judgment has been rendered against him, whether it is on appeal or has already
become final and executory, or
ii. Some writ of attachment has been issued against him in any case.
The decision or writ of attachment need not refer to the very property subject of the alienation. The
person who obtained the judgment or writ of attachment need not be the same person seeking the
rescission.
It suffices if the debtor lost a case which generally is a civil case; however, the case may also be criminal.
If it is a criminal case, the decision must have imposed some civil liability upon the judgment debtor.
What is important is that there is a court judgment promulgated against the debtor and there is a property
alienated whether such property is the subject of litigation or not.
Similarly, if there is a writ of attachment issued against the debtor in any case, the alienation will also be
presumed as fraudulent. The coverage of the presumption is therefore all-sweeping.
Presumptions of Fraud are Rebuttable:

The legal presumption in Article 1387 are rebuttable, which means, they may be overcome by clear,
strong, and convincing evidence.
Unless sufficiently controverted, the presumptions will maintain the existence of fraud with all the
consequences attendant thereto.

The presumption of fraudulent transaction is not overcome by the mere fact that the deeds of sale in
question were in the nature of public instruments. Their being notarized does not render them immune
and free from their fraudulent and deceptive elements.
Requisites to Overcome Statutory Presumption of Fraud:

1. It must be proved affirmatively that the conveyance was done in good faith.
2. It must also be established that the conveyance was for a sufficient and valuable consideration.
The establishment of these two requisites will mean that the presumption of fraud has been overthrown.
Effect if there is no judgment against alienating debtor nor writ of preliminary attachment
If there is no judgment rendered or any writ of preliminary attachment issued against the debtor, the
presumption of fraud under the article will not apply.
These two circumstances are conditions precedent which must be established. Otherwise, no fraud is
presumed. However, if there is actually a fraud committed, it may still be proven by available competent
evidence.
Complaining creditor not confined to the Presumption to Prove Existence of Fraud:

The creditor if he so desires may present other evidence to establish the existence of the fraud more
convincingly, although he already enjoys a favorable presumption.
Thus, the last paragraph of the law says, In addition to these presumptions, the design to defraud
creditors may be proved in any other manner recognized by the law on evidence.
A Rescissible Contract is Valid Before its Rescission:

Just like a voidable contract, a rescissible contract, until it is finally rescinded, is considered a valid
contract. It is legally effective and can transfer or convey title. It cannot be attacked collaterally like in a
land registration proceeding. There is a need for direct attack, that is, a specific action for rescission.
Badges of Frauds:
In determining whether or not a certain conveyance is fraudulent, the question in every case is whether
the conveyance was a bona fide transaction or merely a trick or contrivance to defeat creditors. It is not
sufficient that it is founded on a good or valuable cause or consideration or is made with bona fide intent:
it must have both elements. If defective in either of these particulars, although good between the parties, it
is rescissible as far as the creditors are concerned.
The following are some circumstances attending sales denominated by courts as badges of frauds:
h. Consideration of the conveyance is fictitious or inadequate
i. The transfer is made by the debtor after suit has begun and while it is pending against him
j. A sale upon credit by an insolvent debtor
k. Evidence of large indebtedness or complete insolvency
l. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or
greatly embarrassed financially
m. Transfer is made between father and son, when the other circumstances above are present
n. The failure of the vendee to take exclusive possession of all the property
Existence of Fraud Does not Necessarily Bring About Rescission:
The presence of fraud in a transaction concluded by a debtor does not by itself make the contract
rescissible.
Thus, if the transferee acted in good faith and the transaction was for a valuable consideration, rescission
will not be granted.
9. Presumption of Fraud:
Cabaliw vs. Sadorra
Isidora Cabaliw was the second wife of Benigno Sadorra. During the marriage, they acquired two parcels
of land. When Benigno abandoned Isidora, the latter sought for support in which the same was granted to
her by the CFI of Manila.
Prior to this, unknown to Isidora, Benigno already sold the two parcels of land to Sotero, his son-in-law
(by the first marriage). Isidora now claims that the sale was fictitious.
Can fraud be presumed given the circumstances of this case? YES
The Court held that there is a presumption of fraud in this case. The circumstances involved shows that
Benigno intended to defraud Isidora by selling the parcels of land knowing that the same were subject to a
judgment for support.
Alpuerto vs. Perez Pastor
The property in question formerly belonged to Juan Llenos. Alpuerto, son-in-law of Llenos, claims it by
virtue of Exhibit A (contract of sale with the privilege of repurchase).
At the time of the supposed sale, an action was pending for 2 years which Pastor was the plaintiff and
Llenos the defendant. In this case, Pastor sought to recover money from Llenos. Months after judgment
was rendered in favor of Pastor, and execution was issued, the property was sold at public sale to Pastor.
Should exhibit A be pronounced as fraudulent? YES
Court held that the transaction is fraudulent and wholly fictitious because of the circumstances
surrounding the case: (1)Alpuerto is the son-in-law of Llenos, (2)an action was pending at the time of
conveyance and this was known by Alpuerto, (3)consideration for transfer is less than half of the value of
the property and (4) it does not appear that Alpuertos resources are sufficient to enable him to readily
command that sum.
Ayles vs. Reyes
Felipe Garay, owned several real properties. He assigned Samesa, an attorney-in-fact and his relative,
with the fullest powers. Upon Garay's death, Nemesio Reyes was appointed to administer the estate.
Reyes, knowing that one of the said properties had been sold by Samesa and a certain Dondis to Juliana
Mendizabal, brought suit for recovery.
In the said case for recovery, according to the findings, Dondis knew that Garay had died prior to the
purchase of the property from Samesa, and that Samesa and Dondis had proceeded with the sale, knowing
of the death of Garay, with no other purpose than that to defraud the latter's legitimate heirs.
They claimed that as they acquired the two rural properties for a valuable consideration, such an
alienation could only be presumed to be fraudulent if a condemnatory judgment had been previously
rendered against the transferer in any instance, or a writ of seizure of property had been issued. However,
there was none so it follows that the alienation cannot be presumed fraudulent.
Can the fraud in conveyances be proved by different means other than that which is established in
article 1387? YES
Fraud in conveyances may be proved by means different and independent from the cases of presumption
established in the said article. There was fraud in this case.
The court held that due to the fact, from the whole of the evidence, independent of such presumptions,
that the debtor went into a complete state of insolvency, selling the property in question to his wife's
parents, and the sales were simulated, the purchasers being accomplices in the fraud all with the
purpose of frustrating the legitimate rights pertaining to the Garay estate, and the liabilities contracted
it is obvious that there was no infringement of the said article and the doctrine connected therewith.
Lee vs Bangkok Bank
Bangkok Bank alleged that a Real Estate Mortgage (REM) was fraudulently instituted against it by
petitioner spouses Lee and Asiatrust over the Antipolo properties of private petitioners.
The mortgage was in consideration of a loan secured by MDEC, owned by the Lee family, with Asiatrust.
MDEC and another Lee-owned company MHI had credit line agreement with Bangkok Bank. The Lees,
as private individuals, secured guarantees in favor of Bangkok Bank in case MDEC and MHI would fail
to comply with their obligations.
Bangkok Bank invoked the presumption of fraud under Art. 1387 and asked for the rescission of the
REM.
Can presumption of fraud apply to this case? NO
The Court ruled in favor of petitioners. First, Bangkok Bank failed to establish the alleged fraud. Second,
the presumption of fraud on alienations by onerous title contemplated in the article implies a complete
transfer and conveyance of ownership of real properties. In this case, the contract in question is a
mortgage contract. Mortgages do not contemplate absolute transfer of ownership; the property is only
subject to a lien. Therefore, the presumption of fraud in Art. 1387 cannot apply in this case

Article 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 two or more alienations,
the first acquirer shall be liable first, and so on successively. (1298a)
Rule When Transferee Is In Bad Faith; Sanctions:

Any person who being aware of the intention of the debtor to defraud his creditors, still insisted on
acquiring or purchasing the debtors property, will be liable to return the same to the particular creditor/s
who had successfully instituted the complaint for rescission.
In case restitution is not possible, the transferee being in bad faith will be liable to pay indemnity to the
suing creditor for the damages the latter suffered by reason of the alienation, even if the loss or
destruction of the property is due to fortuitous event. This is an imperative legal consequence because the
law clearly states that the reason for the impossibility of returning could be due to any cause.
Rule When There is A Second Transferee or More:

If the property had been alienated by the first transferee, the subsequent transferee/s will be liable only if
an action lies against the first transferee. This means that rescission will not take place when the property
alienated by the debtor had been legally placed in the possession (or ownership) of a third person who did
not act in bad faith. When the first transferee was in good faith, the property ceases to be part of the
patrimony of the debtor, and the latters creditors can not do anything to recover it.
If the first transferee is in bad faith, the liability of the second transferee will now depend upon his good
faith or bad faith. If he is in good faith, he is not liable. If he is in bad faith, he is liable to restore the
thing. If that is no longer possible, he will pay indemnity for the damages suffered by the creditor/s
occasioned by the act of alienation of the property.
Article 1389. The action to claim rescission must be commenced within four years.

For persons under guardianship and for absentees,
the termination of the former's incapacity,
the period of four years shall not begin until
or until the domicile of the latter is known. (1299)
Prescriptive Period For Rescissory Actions; Reckoning Time:

Generally, the prescriptive period within which to file a rescissory action is four years. The reckoning
time however, may vary depending upon the circumstances:
a. If the complaining party is a third person who has no participation in the contract, the prescriptive
period is four years reckoned from the discovery of the fraudulent contract, or from the
registration thereof, if real property is involved.
b. If the complaining party is a ward who intends to rescind the contracts entered into by his
guardians which prejudiced him, there being a sufferance of economic lesion up to at least one-
fourth of the value of the thing disposed of, the action must be filed within four years from the
time of attainment of the age of majority.
c. If the complaining party is an absentee, he should file the action for rescission within four years
from the time his domicile has been known. An absentee is one who disappears from his domicile
and his whereabouts are unknown, without leaving an agent to administer his properties.
Consequently, when he appears in his domicile, he ceases to be an absentee as long as he informs
the court of his presence.
d. When the contract is one of those specially declared by law as rescissible, the prescriptive period
of four years shall commence to run from the execution of the contract.
To count the four-year period to rescind an allegedly fraudulent contract from the date of registration of
the conveyance with the register of deeds would run counter to Article 1383 of the civil code as well as
settled jurisprudence. The reckoning should be from the time the action accrues.
Voidable Contracts
Article 1390. The following 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;
violence, intimidation, undue influence or fraud.
(2) Those where the consent is vitiated by mistake,
These contracts are binding, unless they are annulled by a proper action in court.
They are susceptible of ratification. (n)
Voidable Contract, Concept:

A voidable contract is one which has all the essential elements of a valid contract, except that the element
of consent is vitiated or weakened either by the incapacity of one of the contracting parties, or by mistake,
violence, intimidation, undue influence, or fraud.
A void or annullable contract is one in which the essential requisites for validity under Article 1318 of the
Civil Code are vitiated by want of capacity, error, violence, intimidation, undue influence, or deceit.
Status of a Voidable Contract:

A voidable contract is valid and obligatory between parties before its final annulment. Unlike a void
contract which can be attacked indirectly or collaterally, a voidable contract could be attacked only
directly either by an action for that purpose or by seeking its annulment in a counter-claim and not merely
by way of special or affirmative defense.
Ratification:
Ratification is an act by virtue of which efficacy is given to a contract or obligation which suffers from a
vice of curable nullity. Voidable contracts are susceptible of ratification.
If they are not assailed within four years from the time the cause of action for annulment has accrued, the
contract is said to have been convalidated by prescription. Thereafter, it is no longer subject to attack.
basis Voidable contract Void contract

Nature of defect Consent of one of the parties is vitiated. Consent is absent or is lacking. Presence of
other defects will also render a contract void.
Effectivity Effective and binding until annulled. Ineffective because it does not exist in
contemplation of the law.
Susceptibility to Susceptible to consolidation by ratification Not susceptible to consolidation by ratification

consolidation or by prescription. or by prescription.
Prescriptibility of Action Action for annulment prescribes. Action or defense based on its inexistence or
absolute nullity does not prescribe.
Waiver of Defect Defect may be waived. Right to set up the defense of illegality cannot
be waived.

Damage Not Essential to Render a Contract Voidable:
The contracts enumerated in Article 1390 are voidable even if no damage is suffered by any of the
contracting parties. The same could be annulled just the same.
basis Voidable contract Rescissible contract

Nature of Defect Defect is intrinsic. There is a vice of Defect is External. It consists in damage or
consent which vitiates consent. prejudice suffered by one of the contracting
parties or a third person like a creditor.
Effect of damage or Whether there is damage or not, contract is If there is no damage or prejudice, contract
prejudice voidable. cannot be rescissible.
Basis of Defect Annulability of the contract is based on Rescissibility of the contract is based on
law. equity.
Predominance of Public Public interest predominates. Private interest predominates.

Interest
Susceptibility to It is susceptible to ratification. Not susceptible to ratification.

Ratification
Sanction It is a sanction. It is not a sanction but a remedy.
Persons who can assail Only parties to the contract can assail it. Third persons who are affected may assail it.
contract
Nature of Action Action is a principal action. Action is subsidiary.

Pursuable
Annulment Distinguished from Other Remedies in Attacking Defective Contracts:

1. The remedy of annulment applies to voidable contracts.
2. The remedy of rescission applies to rescissible contracts.
3. The remedy of declaration of nullity applies to void or inexistent contracts.
Defenses:
The defendant may put up the defense of annulability or relative nullity of a voidable contract and the
absolute nullity of a void or inexistent contracts. In the latter case, the action or defense for the
declaration of the inexistence of the contract does not prescribe.

Article 1391. The action for annulment shall be brought within four 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. (1301a)
Applicability and Prescription:

Article only applies to the parties in the contract. It does not apply to third persons when the law allows
them to question the validity of a contract.
Actions prescribe by the mere lapse of time fixed by law. It is one of the grounds for extinguishing
obligations. Failure to pursue an action within the period prescribed by law will have the effect of
extinguishing the action. When the contract is voidable, the four year prescription applies.
Time of Reckoning of the Four-Year Period:

1. If the vice consists in intimidation, violence, or undue influence, the reckoning begins from the cessation
of such vice.
2. If it consists in mistake or fraud, the reckoning begins from the discovery thereof.
3. If it consists in the incapacity of the contracting parties who is under guardianship, the reckoning begins
from the cessation of the guardianship.
Fraud Thru Public Instruments Involving Registered Lands, Special Reckoning Period:
With regard to fraudulent conveyances registered with Registry of Property, the prescriptive period is
counted not from the actual knowledge of the fraud by the plaintiff but from the registration of the public
document with the said registry.
The act of registration is a notice to the whole words. It is the operative act which binds registered lands
under the Torrens System. Hence, the period of prescription begins not from the discovery of the fraud
but from the registration of the fraudulent instrument.
Article 1392. a voidable contract. (1309a)

Ratification extinguishes the action to annul

Confirmation, Ratification, and Recognition:
1. Confirmation The term previously used to refer to the act of curing a voidable contract of its vice or
defects. Example: A agreed to deliver a ring made of pure gold. But he delivered only a gold-plated ring.
However, before the discovery of the deception, he changed the ring he already delivered with a real one.
2. Ratification Originally, this term was used exclusively to refer to the act by which a contract entered
into by someone in behalf of another without authority or in excess of authority is cured of its vice or
defect by the subsequent act or conduct of the latter. Example: A sold the land of B without the latters
authority. B however got the proceeds from A and/or conformed to the contract. There is ratification by
acceptance of benefits and/or by recognizing the authority of the agent.
3. Recognition or Acknowledgment The term used to refer to an act whereby a defect of proof in the
contract is cured. Example: An oral contract was reduced into a public document to conform with the
formal requisites required by law.

Confirmation tends to cure a vice of nullity, and ratification is for the purpose of giving authority to a
person who previously acted in the name of another without authority,. Recognition, on the other hand, is
merely to cure a defect of proof. In recognition, there is no vice to be remedied such as fraud, violence, or
mistake, so that the case is distinguished from confirmation. In recognition, the person acting on behalf of
another is duly authorized to do so, so the situation is different from ratification.
When a person confirms a voidable contract, it is presupposed that he has participated in the very act
which is the object of the action for annulment. Whereas, a person who ratifies has no participation in the
act but only approves the act executed by another.
IMPORTANT: TODAY, THERE IS NO MORE DISTINCTION BETWEEN THE THREE TERMS.
THEY ARE NOW REFERRED TO AS RATIFICATION.
Article 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 and such reason having ceased,
the person who has a right to invoke it should execute an act
which necessarily implies an intention to waive his right. (1311a)
Concept of Ratification:
It is an act or means by virtue of which efficacy is given to a contract which suffers from a vice of curable
nullity. This concept covers voidable contracts.
It is an act of curing the defect of lack of authority or defect due to excess of authority of the party who
entered into the contract in the name of another without the latters authorization. This concept
specifically refers to unenforceable contracts.
Coverage of the Term Ratification Made Broader:

The New Civil Code did not consider technical differences of the terms ratification, confirmation, and
acknowledgment. Ratification as now used covers both the ideas of confirmation and acknowledgment. It
may be defined as the validation of a transaction otherwise without validity or partly valid.
Requisites of Ratification:
In the sense of confirmation, to differentiate it with Chapter 7 which refers to voidable contracts),
ratification must have the following requisites:
1. The contract is a voidable one
2. The confirmation is made by the injured contracting party
3. The confirming party has full knowledge of the vice or defect of the contract
4. The cause of voidability should have already ceased or disappeared at the time of the ratification.
Otherwise, if the cause of voidability is still present, such as subsisting intimidation, the act of
confirmation would also suffer from the very vice or defect it is attempting to cure.
These requisites will be applicable to ratification of unenforceable contracts except that the ratifying
person need not be the one who had directly participated in the act which is the object of the ratification.
Forms of Ratification:
1. Express This takes place when the desire of the innocent party to convalidated the contract, or his
waiver or renunciation of his right to annul the contract is clearly manifested verbally or formally in
writing.
2. Tacit or Implied This takes place when the innocent party with full knowledge of the vice which
renders the contract voidable, and the same having ceased already, he executed act/s or displayed conduct
which necessarily implies his intention to waive his right to annul the contract.
Example: A person who has the right to attack the validity of a voidable contract of sale instead of
demanding its annulment, collected the greater part of the purchase price as set out in the promissory
note, has made a tacit confirmation of the contract.
A minor entered into a contract of sale and when he turned 18, did not repudiate such sale. Instead he
spent most of the purchase price having full knowledge of facts. This constitutes tacit confirmation.
A person after knowing the nullity, still performed the obligation. This is tacit ratification.
Effect of Lapse of Time:

An injured party in a contract who remained silent for a certain period of time is deemed to have ratified
such contract.
A voidable contract if not questioned within the prescriptive period of the action for annulment, remains
valid and effective.
Effects of Ratification:
1. The contract is purged or cleansed of its defects from the moment of its constitution or establishment. The
validation is retroactive to the day of its creation.
2. Corrolarily, there being a convalidated contract which is clean, any action for its annulment is
extinguished.
An annullable contract may be rendered perfectly valid by ratification, which can be express or implied
such as by accepting and retaining the benefits of a contract.
Right to Ratify is a Transmissible Right:

The right to ratify, if not exercised by the proper party during his lifetime, may be exercised by his heirs it
being a transmissible right.
Effect of Lack of Ratification:

A defective contract like a voidable one, if not ratified, remains valid until annulled. Within the
prescriptive period for the filing of an action for annulment, the contract is open to assailment.
An unenforceable contract if not ratified remains ineffective. It cannot be enforced.
Void Contracts cannot be ratified because in the contemplation of the law, they do not exist. Only
existing contracts, though defective, may be ratified.
Uy Soo Lim vs. Tan Unchuan

Santiago married Candida Vivares and they had two daughters, Francisca and Concepcion.
During Santiagos stay in China, he had illicit relations with Chan Quieg to which an illegitimate child
was born, Uy Soo Lim (only son). Santiago died testate (may will), and a large portion of his estate was
given to Uy Soo Lim.
Actions were filed by Candida, Francisca, Concepcion and even Chan Quieg to put in question the right
of Uy Soo Lim to seven-ninths of the property as left him by Santiago in his will and even to put in
question his right to receive anything at all. Later, Chan Quieg, Candida Vivares and Concepcion
Pastrano, then of age, executed separate deeds by where they relinquished and sold to Francisca Pastrano
all their right, title, and interest in the estate left by Santiago.
Also, Chan Quieg executed a public document in which she gave her consent to the sale by Uy Soo Lim
(minor at the time) of his right and interest in said estate "in case the same should be necessary by virtue
of any legal requirements of the laws of the Philippine Islands."
Such contract was alleged by Uy Soo Lim as voidable upon the ground that his consent was obtained by
fraud/undue influence and that he has a right to rescind the sale since he was a minor when it was made.
Is the contract voidable due? NO
SC ruled that the contract had been ratified by the petitioner. It stated that the assumption that Uy Soo
Lim might have had a right to rescind this contract on the ground of minority, his action fails because
with a full knowledge of his rights in the premises, he failed to disaffirm his contract within a reasonable
time after reaching majority.
Not only should plaintiff have refunded all moneys in his possession upon filing his action to rescind, but,
by insisting upon receiving and spending such consideration after reaching majority, knowing the rights
conferred upon him by law, he must be held to have forfeited any right to bring such action.

De Luna vs Linatoc
The wife sold the portion of her land in the name of husband. It was made during the marriage and there
was no judicial order authorizing separation of property between the husband and the wife.
Petitioner spouses wanted to annul the contract alleging that did not know the prohibition against partition
of the conjugal partnership property during marriage.
Was the subsequent letter of the husband agreeing to such sale tantamount to ratification? NO
The letter is not a ratification of the sale, nor a confirmation of authorizing another who acted without
authority. The letter is one of recognition wherein the husband stated that his wife sold the said property
with his knowledge and consent, and such that the requirement that an agents authority be in writing is
fulfilled. Thus the wife is the husbands agent.
Mistake of law does not make a contract voidable, because ignorance of the law does not excuse anyone
from its compliance. That the petitioners did not know the prohibition against partition of the conjugal
partnership property during marriage is no valid reason why they should ask for the annulment of the
sales.
The prohibition in said article affects public policy, as it is designed to protect creditors of the conjugal
partnership and other third persons. Petitioners shall not, therefore, be allowed thus to rest their cause of
action to recover the lands sold, upon the illegality of the partition which they attempted to make.
Otherwise, they would profit by their own unlawful act.
Rosales vs. Reyes

Rivera sold a parcel of land to Reyes and Ordoveza for 800 pesos under pacto de retro sale (sale with a
right to repurchase).
In this document Rivera states that he was of age. Subsequently, Rivera sold his right to repurchase to
Rosales for 1,075 pesos.
In the document evidencing this sale, Rivera states that he is 23 years of age. Rosales, who is the plaintiff
in this case, alleges that in January, 1908, he tendered 800 pesos to Reyes and Ordoveza with the request
that the land be surrendered to him in accordance with the contract entered into between them and Rivera
in 1902, but that they refused to accept the money and comply with his request.
Plaintiff asks that the contract in question be annulled on the ground that Rivera was a minor when he
entered into it in 1902, and then asks that the defendants be required to deliver the land to him upon
payment to them of 800 pesos, as per its terms.
Can the contract be annulled on the ground of Riveras minority? NO
The Court held that the contract of 1902 cannot be annulled because Rivera ratified it by entering into the
contract with Rosales in 1903, wherein he stated he was 23 years of age, thus making applicable the
provisions of article 1311 of the Civil Code, which provides: "It shall be understood that there is an
implied confirmation when, being aware of the cause of the nullity and such cause having ceased to exist,
the person who may have a right to invoke should execute an act which necessarily implies his wish to
renounce such a right."
Article 1394. of the incapacitated person. (n)

Ratification may be effected by the guardian

If the persons enumerated in 1327, or those who are incapacitated to give consent, continue with their
condition of not being able to give consent, their guardian may affect the ratification of the defective
contract.
Article 1395. of the contracting party

Ratification does not require the conformity

who has no right to bring the action for annulment. (1312)

It is the innocent party who has the prerogative to annul or not to annul a voidable contract. The one who
cause the vice of consent personally or through a third person is not allowed to file a case of annulment
because of the principle that he who comes to court, must come with clean hands, and a guilty party is not
allowed to benefit from his own wrong.

To require such conformity from the guilty party as a condition precedent, enables the guilty party to
scheme a way to back out of the contract by just refusing to give his conformity. Absurdity is the result.
Article 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. (1313)

Consequences of Ratification:
One of the consequences of ratification of the contract is its legal purification and its being made as a
regular and untainted contract. The cleansing of the voidable contract retroacts to the time of its
constitution.
Action for annulment of the contract based on its original curable defects, can no longer prosper after its
due ratification or confirmation.
Exceptions to the Effect of Retroactivity:

The rule of retroactivity shall not prejudice the rights of innocent third persons for that will result in
injustice which is not the intention of the law. In case of doubt in the interpretation of laws it is presumed
that the lawmaking body intended right and justice to prevail.
Example: Joyce who is a minor sold her property to Patch. The sale is voidable due to Joyces minority.
After reaching the age of majority, Joyce borrowed money from Ghelyn, a money lender. Joyce could not
pay Ghelyn. Since Ghelyn was charging high interest rates, Joyce, now being of legal age, ratified the
sale she made in favor of Patch. Joyces intention was to avoid paying her obligation to Ghelyn. Joyce has
no other property by which she could satisfy the claim of Ghelyn. May Ghelyn rescind the sale made by
Joyce when she was still a minor but which she ratified when she became of age? Yes. Before the belated
ratification, Ghelyn had already acquired a valid credit as against Joyce. The retroactive effect of the
ratification which cleanses the voidable contract of its defect from its inception will not affect or
prejudice the right of Ghelyn, who is an innocent third person. Otherwise, injustice will result. If Ghelyn
was aware of the sale from the beginning, she is in bad faith and Patch will get the property.
Article 1397. The action for the annulment of contracts may be instituted by 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 flaws of the contract. (1302a)
Persons Who Can Institute Action for Annulment:

Action for annulment may be instituted only by persons who are parties bound either principally or
subsidiarily by the contract and who are innocent of the act or acts constituting the reason for the
voidability or annullability of the contract. The plaintiffs must be persons with interest in the contract.
Example: A corporation acquired a lot and building which was being occupied by several tenants. The
tenants assailed the validity of the sale where they were not privies. They being not parties to the contract,
have no right to question the same.
Exception to the Rule: A person who is not obliged principally or subsidiarily may exercise an action for
nullity of the contract if he is prejudiced in his rights with respect to one of the contracting parties, and
can show the detriment which could positively result to him from the contract in which he had no
intervention.
Meaning of Principal And Subsidiary Liability:

The liability of the principal party is principal liability and that of a subsidiary party is subsidiary liability.
Illustration: The principal debtor is principally bound to the creditor while the guarantor is only
subsidiarily bound. The guarantor becomes liable only if the debtor has no property to answer for his
obligation and only after all proper remedies against the debtor had been resorted to but failed.

Contract Between Capacitated and Incapacitated Persons:
Where the contract is between a person who has full civil capacity and one who has no capacity to give
consent to a contract such as a minor or an insane person, the former cannot invoke the incapacity of the
latter to set aside the contract.
In brief, the former cannot have his cake and eat it too. He cannot win by betting on both sides of the
coin. He who comes to court must come with clean hands.
When it comes to minors, if there is active misrepresentation, the minors are estopped from annulling
their contract based on their minority.
Article 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. (1303a)
Applicability:
Applies only if the contract had been consummated. If the contract has not been performed yet, it is
understood, there is no obligation to restore as nothing had been received by the parties.
Strangers to the contract cannot avail of themselves the benefit of mutual restitution under the article.
Innocent third parties, who are not privies to the contract, cannot be obliged to restore.
Damages may be imposed upon the guilty party, which is justified by Articles 19, 20, and 21 of the civil
code.
Duty of Mutual Restitution:

If the obligation has been annulled, the contracting parties shall restore to one another what they have
received by virtue of the contract. This duty of mutual restitution covers:
1) The return of things received together with the fruits or value thereof.
2) The return of the subject matter with interest at the legal rate.
Article Speaks of Annulment of Obligation and Not of Contract:
The Article uses the phrase annulment of obligation instead of annulment of contract because of the
possibility that a contract may cover several prestations which are divisible. Some may be voided, but
others may be retained.
Obligations to Render Service:
If services had already been rendered, and the obligation was annulled, damages, if suffered, may be
recovered using as basis of estimation, the value of the services rendered.
The last paragraph of the article refers to obligations to do or not to do while the first refers to obligations
to give.
Rule of Mutual Restitution is not Absolute:
Because of the recognized principle of unjust enrichment in our legal system, if and when the application
of mutual restitution will result in an unjust enrichment of one party at the expense of another, the rule of
mutual restitution must give way.
Example: A land is leased for a year, with the land delivered and rent paid in advanced for the full period.
After four months, contract is annulled. The mutual restitution cannot be total because the one who rented
the land has already made use of the land, thus the amount of rent paid for the period actually used shall
not be returned, because the benefit of the use of the land for said period cannot be returned to the lessor.
Meaning of Except In Cases Provided by Law:
With the annulment of the contract, there must be restoration of things received with their fruits, and the
price with interest except in cases provided by law. Insofar as fruits are concerned, the rules on
possession must be applied, particularly, the following:

Article 544. A possessor in good faith is entitled to the fruits received before the possession is legally interrupted.
Natural and industrial fruits are considered received from the time they are gathered or severed.
Civil fruits are deemed to accrue daily and belong to the possessor in good faith in that proportion. (451)
Article 549. The possessor in bad faith shall reimburse the fruits received and those which the legitimate possessor could
have received, and shall have a right only to the expenses mentioned in paragraph 1 of article 546 and in article 443. 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 objects for which such expenses have been incurred, provided that the thing suffers no injury
thereby, and that the lawful possessor does not prefer to retain them by paying the value they may have at the time he
enters into possession. (445a)
Rule of Compensation:
If the contracting parties have reciprocal prestations which consist of sum of money or fungible thing of
the same kind, compensation will take place by operation of law to the concurrent amount.
Philippine Trust Co. vs. Roldan

Socorro Roldan was appointed as the guardian of Mariano Bernardo who inherited 17 parcels of land
from his deceased father. Socorro obtained an authority to sell the parcels of land from the court for the
purpose of investing the proceeds of the sale in a residential house for the benefit of Mariano.
Socorro, in her capacity as guardian, sold the parcels to Fidel Ramos. After one week, the same parcels of
land were conveyed by Ramos personally to Socorro. Socorro subsequently sold 4 out of the 17 parcels to
a certain Emilio Cruz.
Phil. Trust Co., as the newly appointed guardian of Mariano Bernardo, seeks to annul the contracts
previously entered into by Socorro.
Are the sales voidable? YES
Guardianship is a trust of the highest order, and the trustee cannot be allowed to have any inducement to
neglect his wards interest and in line with the courts suspicion whenever the guardian acquires the
wards property. We have no hesitation to declare that in this case, in the eyes of the law, Socorro Roldan
took by purchase her wards parcels thru Dr. Ramos, and that Article 1459 of the Civil Code applies.
From both the legal and equitable standpoints these three sales should not be sustained: the first two for
violation of article 1459 of the Civil Code; and the third because Socorro Roldan could pass no title to
Emilio Cruz.
The annulment carries with it (Article 1303 Civil Code) the obligation of Socorro Roldan to return the
17 parcels together with their fruits and the duty of the minor, through his guardian to repay P14,700
with legal interest.
Article 1399. the incapacity of one of the parties,

When the defect of the contract consists in
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. (1304)
Incapacitated/Disadvantaged Person Is Generally Favored by Law:

Article 24 of the code provides, In all contractual, property or other relations, when one of the parties is
at a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness, tender age
or other handicap, the courts must be vigilant for his protection.
This is anchored on the doctrine of Parens Patriae: the inherent power of the state to provide protection of
the person and property of a sovereign power of guardianship over persons under disability. Thus, the
state is considered the parens patriae of minors.
Exception: However, to balance things, where the minor had received something by virtue of a contract,
which is voidable solely and exclusively because of his incapacity, he must make a restoration insofar as
he has been benefited by the thing or price received by him. If he did not benefit, he has no duty to make
restoration.

Rule With Respect To The Capacitated Party:
Whether or not the capacitated party has benefited from what he received from a minor, he must return
the same except when he received the thing from the minor in the performance of the latters natural
obligation, and what had been received had been spent or consumed in good faith. The reason is that the
minor cannot recover what he had paid in fulfillment of a natural obligation.
Article 1400. Whenever the person obliged by the decree of annulment to return the thing

can not do so because it has been lost through his fault,
he shall return the fruits received and the value of the thing at the time of the loss,
with interest from the same date. (1307a)
Effect When Thing was lost Without the Fault of Defendant Obligor:
The article will not apply if the thing ordered to be returned which is determinate was destroyed or got
lost without the fault of the debtor.
Example: A determinate thing supposed to be returned got lost due to a fortuitous event. The debtor should not be
made liable for the loss of the thing because it as provided in Article 1174, a person shall not be responsible for
those events which are fortuitous.
Consequences: If the thing is lost due to a fortuitous event, the debtor will not be required to make
restitution. Corollarily, the creditor cannot be compelled to make restitution because the debtor could not
fulfill what is incumbent upon him. Ultimately, Article 1402 shall apply.
Effect When Thing was lost Through the Fault of Defendant Obligor
The rule is different if the thing was lost through the fault of the obligor, in which case, he is obliged to
return the value of the thing at the time of loss and to pay 6% interest per annum on the value of the thing.
Example: A contract was entered into between Chelle and Ventura. The contract was annulled. The subject matter
or object of the contract is a plow carabao which died while in the possession of the Ventura. The court held that
the value of 120 should be paid by the defendant with interest as an indemnity for the detriment cause to its
owner.
Article 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,
to the success of the action,
the loss of the thing shall not be an obstacle
unless said loss took place through the fraud or fault of the plaintiff. (1314a)
Applicability:
Applies when the object of the contract is lost due to the fraud or fault of the creditor himself.
Accordingly, his complaint must be dismissed. The creditor has no cause of action because he himself
caused the loss of the thing. It is absurd to require the debtor to return a thing which got lost due to the
fault of the creditor himself.
Even without the article, this principle is understood and universally recognized because he who comes to
court must come with clean hands.
Annulment Can Prosper Despite the Loss of The thing If Plaintiff is not at Fault:
The action for annulment can prosper even if the object of the contract had been lost as long as the loss is
not attributable to the plaintiff. After all, if the cause is won, the thing will be substituted by its value in
money with legal interest.
However, the law says, the ground for annulment must be the incapacity of any one of the contracting
parties. There seems to be no difference, if the ground would be any of the vices of consent committed by
the defendant. The reasons and principle involved are the same.
Whether the loss of the thing happened during the incapacity of the plaintiff or after he acquired capacity
jut the same, the action for annulment will be extinguished under the first paragraph of the article because
he was at fault.
The action may also be extinguished by prescription or by ratification.
Article 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. (1308)

Duty of Restitution is Mutual:
After the case had been decided, and the court has required the parties to restore what they received from
each other, no one can file motion for execution to implement the decision unless he himself has first
restored what he is bound to return.
In case neither party takes the initiative, the best solution is to make a simultaneous delivery in court of
what is incumbent upon them. The inability to make restitution may apply to both parties.
If one cannot restore what he is bound to return, he cannot compel the other to comply what is incumbent
upon the latter. To require so is obviously unfair.

Basis Rescissible Voidable Unenforceable Void
It was entered into in

Economic damage or Incapacity of one of the behalf of another person
lesion to one of the contracting parties to without authority or in Absence of any of the
Origin of the Defect parties or to a third give consent, or vitiated excess thereof; essential requisites of a
person; a special consent due to presence noncompliance with the contract.
declaration by law that of vices of consent. statute of frauds;
the contract is subject to Incapacity of both
rescission. contracting parties to
give consent.
There must be
Damage or Prejudice damage/lesion or Damage or prejudice to Damage or prejudice is Damage or prejudice is
prejudice to one of the the other party is not not necessary. not necessary.
contracting parties or necessary.
third person.
They are considered They are considered They are inoperative Generally, they do not
Legal Effect valid and legally valid, binding, and until ratified. They are produce legal effects;
enforceable until enforceable until not enforceable in court there are few exceptions
judicially rescinded. judicially annulled. without proper (void marriages produce
ratification. legitimate children)
This is just a personal

defense when the
Remedy/Action Rescission or rescissory Annulment of contract. plaintiff pursues a Declaration of nullity of
action. specific performance the contract.
case or complain for
damages based on
breach of contract.
It must be a direct Direct action is needed Indirect attack is It may be attacked

Nature of Action action. Collateral attack either in the complaint allowed in the form of a directly or indirectly.
is not allowed. or as a counter-claim. defense.
Generally a contracting
party principally or
Persons Who Can File Contracting party. subsidiarily obliged Contracting party. Third Third persons cannot
Exceptions: Creditors under the contract. persons cannot assail it. assail the contract unless
who are defrauded. Exception: A third his interests are direcly
person who is affected.
prejudiced.
Susceptible to
Can it be Ratified? convalidation but not of Yes. Yes. No.
ratification proper.
When does it Four years. Four years. 10 years if written, Does not prescribe.
Prescribe? 6 years if unwritten.

Oblicon - Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado and Sabrina DAYAO 1-E 1
Unenforceable Contracts (Articles 1403 to 1408)
Article 1403. The following 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 following cases an agreement hereafter made shall be unenforceable by action,
unless the same, or some note or memorandum, thereof, be in writing,
and subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be received without the writing,
or a secondary evidence of its contents:
(a) An agreement that by its terms is not to be performed within a year from the making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of another;
(c) An agreement made in consideration of marriage, other than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in action,
at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods
and chattels, or the evidences, or some of them, of such things in action or pay at the time some
part of the purchase money; but when a sale is made by auction and entry is made by the
auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms
of sale, price, names of the purchasers and person on whose account the sale is made, it is a
sufficient memorandum;
(e) An agreement for the leasing for a longer period than one year,
or for the sale of real property or of an interest therein;
(f) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a contract.
Unenforceable Contracts, Concept:

Unenforceable contracts are those which cannot be enforced by action or complaint in court, unless that
have been ratified by the parry or parties who did not give their consent thereto.
They are midway between void and voidable contracts.
Kinds of Unenforceable Contracts:

1. Those entered into in the name of another person by one who has no authority/who acted beyond his powers.
2. Those that do not comply with the Statute of Frauds.
3. Those where both parties are incapable of giving consent to a contract.
Distinctions/Differences of the Three Kinds of Unenforceable Contracts:

The unenforceable contracts mentioned suffer from defects which are substantially different from each other:
1. In the first kind, there is a lack of consent on the part of the person whose name the contract was entered into.
2. In the second kind, there is no written proof whatever by which the contract may be proved.
3. In the third kind, while there is consent, the same is absolutely vitiated because both parties are incapable of
giving their consent to the contract.
Similarities:
1. They cannot be enforced or pursued in court
2. They can be ratified, which means, they can be convalidated and become enforceable in court.
3. They cannot be attacked or assailed by third persons. The remedy of the third person is against the agent
who acted without authority or acted beyond his authority.
Wala pang nananalo sa lotto na di tumataya. - Anton Mercado

2
Oblicon - Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado and Sabrina DAYAO 1-E
According to Pineda, the grouping of the three unenforceable contracts is not logical because the second group
which suffers from mere defects of formalities are placed in the category of contracts which suffer from lack of
consent which affects not only their enforceability but also their validity.
Unauthorized Contracts:
The first kind refers to unauthorized contracts.
Examples: A lawyer signed a compromise agreement for and in behalf of the client without the authority of
the latter. An agent enters into a contract of sale in behalf of the principal after the death of the principal and
with the knowledge of such death. Check the cases for further explanation.
Statute of Frauds:
The term statute of frauds is descriptive of those laws, statutes, or provisions which require certain
agreements to be in writing before they can be proved and enforced in a judicial action.
The term is the name given to the well-celebrated statute passed in 1676 by the English Parliament requiring
certain agreements to be reduced in writing before they could be proved and enforced in court.
The statute does not deprive the parties of the right to contract with respect to the matters therein involved,
but merely regulates the formalities of the contract necessary to render it enforceable.
Purpose of the Statute:

The purpose of the statute is to prevent fraud and perjury in the enforcement of obligations, depending for
their existence on the unassisted memory of witnesses, by requiring certain enumerated contracts and
transactions to be evidenced by a writing signed by the party to be charged.
It is obviously intended to close the door to the numerous frauds and perjuries to be perpetrated when alleged
obligations could be enforced based merely on the recollection of witnesses whose memories as the years go
by, may no longer be defendable and reliable to serve them with perfection.
Applicability of Statute of Frauds and Reason for Such Applicability:

The statue only applies to executory (not executed) contracts. It cannot be invoked in contracts which had
been already executed whether partially or completely.
When there has been performance by one party in an oral contract, equity dictates that all evidence be
admitted to prove the existence of the alleged contract.
The reason why the Statute is made applicably only to executory contracts is the greater possibility of fraud in
such contracts than in other contracts. If the rule were otherwise not applicable, many would perjure
themselves on the witness stand.
The reason for excluding partially executed contracts from the rule is that fraud would otherwise be promoted,
instead of prevented if one party would be able to keep the benefit.
Enumeration of Contracts/Agreements Under the Statute is Exclusive:

The statute of frauds refers to specific kinds of transactions and cannot apply to any other transaction that is
not enumerated therein. The enumeration is exclusive. Thus, an agreement creating an easement of right-of-
way is not covered because it is not a sale of real property or of an interest therein.
Consequence of Non-Compliance with the Statute of Frauds:

If a contract is among those covered by the Statute but not done in writing, such deficiency does not make the
oral contract invalid or void. It merely renders the action for specific performance ineffective.
The effect therefore of non-compliance with the Statute is that no action for the enforcement of the contract
can be proved. Thus, any oral evidence being presented may be objected for being inadmissible evidence. But
the objection must be timely made. The absence of an objection at the proper time will result in an implied
waiver of the right to invoke this defense. In which case, the oral contract shall become binding upon the
parties as if it were done in writing.
Specific Actions Where the Statute of Frauds May be Invoked:

The Statute of Frauds is a matter of personal defense and is also a ground for a motion to dismiss. It can be
invoked before an answer is filed as a ground for a motion to dismiss, or it can be interposed as an affirmative
defense provided it is not waived during the trial.
"When in doubt, twirl your hair. If you don't have hair/enough hair to twirl, I wish you good luck." Sabrina dayao
It can only be invoked in two kinds of cases, namely:
1. In complaints for specific performance where the defendants may frustrate the actions by showing that the
contracts in issue are among those covered by Article 1403, par. 2 and are not evidenced by any written
document, not or memorandum.
2. In complaints for damages for violation of the contract. If there is no enforceable contract, naturally, there
can be no basis for damages grounded on violation thereof.
Waiver:
The right to invoke the Statue of Frauds is deemed waived by failure to object to the presentation of oral
evidence, or by cross-examining the witness on the issue.
Cases On The Inapplicability of the Statute Because The Action is not one for Specific Performance or Damages:
First of all, check the cases under the heading Statute of Frauds.
In a case where the lessor leased his property to the to the lessee for 7 years. The lease was made in
writing. The agreement requires the lessee to construct a building of strong wooden materials on the
premises. Later, the lessor gave the lessee an extension of three years in addition to the original 7 years.
So, the lessee was induced to build a semi-concrete building where he spent more. The issue is whether or
not testimonial evidence is admissible to prove the oral extension of the lease. It was held that testimonial
evidence is admissible because there was a partial performance of the agreement.
A landlord and his tenant had a contract of lease for two years which is not reduced in writing. The
parties also agreed that they would divide equally the crops derived from the property. The landlord
harvested the crops but refused to give the share of the tenant. The tenant filed a case against the landlord
for the recovery of damages. The landlord puts up the Statute of Frauds as defense. The issue is whether
or not oral evidence may be admitted to prove the oral agreement of lease. It was held that the tenant
could prove the oral agreement of lease because he was not seeking damages for breach of the contract of
lease but for violation of the sharing agreement on the crops. The Statute of Frauds is inapplicable.
Can Oral Evidence Be Admitted To Prove Performance:
In proving total or partial payment or performance of the contract itself, the plaintiff is allowed to present
oral evidence to prove the total or partial payment or performance.
If documentary evidence would still be required to prove the payment or performance, the precise evil
which the statute of frauds seeks to prevent, would be present, that is, one who has received some benefits
out of the oral contract would be allowed to defraud the other party.
Example: A loan of money of whatever amount, although not in writing may be proved by oral evidence
because loan is not included among the contracts covered by the statute. But a mortgage covering land
must be in writing because it constitutes an interest on a real property. In another case, an implied
contract for the rendition of service as an interpreter is not covered by the Statute of Frauds. It can be
proved by oral testimony. And in another, a breach of a mutual promise to marry is not covered by the
statute of frauds. Hence, it can be proved by oral evidence.
Meaning of Note, Memorandum or Writing:
The six enumerated contracts or agreements in Article 1403, paragraph 2, require that the same be
evidenced by some note, memorandum or writing, subscribed by the party charged, or by his agent,
otherwise, the said contracts shall be unenforceable.
The note, memorandum, or writing may consist of any kind of writing showing the intention of the
parties. The law does not require any particular form of instrument or any language unlike the formal
requisites of a notarial will. It may be executed on any paper and done in ink, pencil and similar other
writing instruments.
Requisites of the Note/Memorandum/Writing Must be Sufficient To Prove Agreement:
No form or language is specifically required, but it must contain the following details:
1. Names of the Parties
2. Terms and Conditions of the Agreement
3. Description of the Subject Matter for the Proper Identification Thereof
4. Place and Date of the Making of the Agreement
5. Signature/s of the parties who are assuming the obligation

4
Cause or consideration need not be stated because it is presumed to be both present and legal.
The contents of the note/memorandum/writing shall be considered the contract itself except as to form. It
can be made in two or more documents.
In the absence of any of the requisites, the proponent of the contract cannot prove its existence by oral
evidence. The oral testimony will be excluded. The Statute of Frauds is a rule of exclusion. It is not
concerned with the weight of the evidence but only with its admissibility.
Example: Where a telegram was sent to the prospective buyer advising him to come to a certain place to
complete the purchase of the land which was orally promised to said buyer, it was held that the telegram,
as a note or memorandum is clearly insufficient, because it did not state the purchase price, and neither
did it describe the property. Moreover, the telegram was not signed by any person authorized by the
seller.
Discussion of the Six Contracts Mentioned in Number 2 of Article 1403:

1. An Agreement Not To Be Performed Within One Year.
The one year period is counted from the perfection of the contract and not from the day the
performance of the contract is to begin.
By force of the Statute of Frauds, an agreement that by its terms is not to be performed within a year
from the making thereof shall be unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing and subscribed by the party charged.
If the contract is silent as to its period of performance, the same is not covered by the statute. It can be
proven by oral evidence.
When by the terms of the contract, the same will not be performed within one year, but one of the
parties has complied with his obligation within the year, the other party cannot avoid the contract by
using the Statute of Frauds as defense. The statute is intended to prevent and not to protect fraud.
An agreement which by its terms will be performed within one year is enforceable even if not reduced
to writing. This is the clear implication of the law.
2. A Special Promise To Answer For The Debt, Default, Or Miscarriage Of Another.
Special promise does not refer to the original or independent promise of the debtor to his own
creditor. It refers rather to a collateral promise such as a contract of guaranty where the guarantor
answers for the liability of the principal debtor if the latter fails to comply with his obligation. A
guaranty therefore must be in writing to be enforceable. So also a surety bond.
At least three parties are involved the debtor, the creditor, and the promisor.
The true test is whether the promise is an original or a collateral one. If the promise is an original or
an independent one, that is, if the promisor becomes thereby primarily liable for the payment of the
debt, the promise is not within the statute. But, on the other hand, if the promise is collateral to the
agreement of another and the promisor becomes thereby merely a surety, the promise must be in
writing.
While a promise, absolute in form, to pay or to be responsible or to be the paymaster, is an original
promise, and while on the other hand, if the promisor says, I will see you paid/I will pay if he does
not, or uses equivalent words, the promise standing alone is collateral, yet under all circumstances of
the case, an absolute promise to pay, or a promise to be responsible may be found to be collateral, or
promises deemed prima facie collateral may be adjudged collateral. This is because the general rule is
that the parties making a promise of this nature rarely understands the legal and technical difference
between an original and collateral promise, thus the precise form of words used is not always
conclusive, even when established by undisputed testimony.
3. An Agreement Made In Consideration of Marriage Other Than A Mutual Promise To Marry:
The agreement may be one entered into by reason of marriage such as a marriage settlement and
donations propter nuptias. They are entered into by reason of an impending marriage.
The term in consideration of marriage should read by reason of marriage because the cause of a
donation propter nuptias is not the marriage but the liberality of the giver.
As long as the agreement is in consideration of a marriage to be celebrated yet, it must be in writing
to make it enforceable.
However, a mutual promise to marry is not covered by the Statute of Frauds. Testimonial evidence is
therefore admissible to prove the promise in an action for actual damages for breach of promise.
4. An Agreement For The Sale of Goods, Chattels, or Things In Action, At a Price Not Less Than 500
The sale of goods, thing, and other as indicated in the law must be in writing if the price is at least
500. Otherwise, the sale is unenforceable and cannot be proved by oral evidence. The writing, note
or memorandum must be signed by the person charged or by his representative.
However, the signature of the seller is dispensed with, if the sale was effected at an auction sale. The
law did not say public auction. Hence, private auctions are included as the law made no distinction.
The entries made in the sales book of the auctioneer at the time of the sale of the kind of property
sold, its amount, terms of the sale, price, names of purchasers and persons on whose account the sale
is made, is considered a sufficient memorandum to make the sale enforceable.
Pineda observes that the amount of 500 is now very impractical, and that Congress must amend it.
5. An Agreement For Leasing For A Longer For A Longer Period Of More Than One Year, Or For The Sale
of Real Property Or Of An Interest Therein.
Paragraph (e) of the law applies to the following kinds of contracts:
a. Lease, for more than one year of a real property like lands, buildings, and the like. If the lease is
exactly for one year, it is enforceable even if not in writing. It must be for more than one year to
require its reduction to writing.
i. An alleged promise of the representative of the lessor to the effect that the lessee should
be given priority or a renewal of the lease is unenforceable. The reason is, the promise
was not done in writing, note, or memorandum subscribed by the party charged, or by his
agent.
b. Sale of real property or an interest therein regardless of the amount of the purchase price. An oral
agreement to sell a parcel of land is unenforceable. However, if there has been already payment
made, it is take out of the coverage of the Statute of Frauds.
i. Also, when there has been delivery the Statute is not applicable.
ii. Also, a promise to give the land is not a sale of real property or any interest therein.
iii. All executory contracts of realty unless made in writing are unenforceable.
iv. A deed of extrajudicial partition and sale of conjugal property executed by the widow,
who represented her minor children, is unenforceable as to the minors.
Partition Among Heirs, Not Deemed A Conveyance of Property, Not Covered By SoF:
The partition of inherited property need not be embodied in a public document so as to be effective as
regards the heirs that participated therein. Neither does the Statute of Frauds under Article 1403 of the
New Civil Code apply because partition among heirs is not legally deemed a conveyance of real
property.
Interest in Real Property:

Interest in real property refers to any claim or right on a real property such as voluntary easement,
usufruct, right of a mortgage of real estate, right of a transferee of a co-owners share over a real
property.
6. A Representation As To The Credit Of A Third Person
Representation, Meaning:
This is an assurance given by a person as to the good credit of a third person. There is an assurance
that somebody has a certain amount of credit, that is, capacity to pay his obligation, with the intention
of enabling the person in whose favor it is made to obtain credit by virtue of such assurance or
representation. In effect, a contractual relation is established between two persons because of the
representation.
Representation Distinguished From Guaranty:

This is different from a guaranty. In a guaranty, there is a promise to answer for the debt of another,
whereas in representation, there is merely an assurance that somebody has a certain amount of credit
to influence the supposed creditor to give or grant a favor to the supposed debtor.
In guaranty, the guarantor participates directly in the contract, whereas in representation the one
making the representation does not take part in the contract proper.

6
However, the persons assurance to the supposed creditor who is going to give credit to a third
person, creates some sort of an agreement. This must be put in writing to make it valid and
enforceable. If it is not in writing, it is unenforceable.
Example: Ghelyn filed an application with a bank for a loan. She mentioned the name of Anton, a
man of repute as her reference. When inquired about the capacity of Ghelyn, Anton assured the bank
that Ghelyn is very reliable and a trustworthy person as she owns several real properties although
short of cash money at the moment. This representation is not enforceable against Anton because it
was not made in writing. Thusly, if the representation is false, the bank cannot pursue a complaint for
damages against Anton because the representation not being in writing is unenforceable.
Note from Pineda: According to J.B.L. Reyes, this paragraph on representation is improperly included
among the unenforceable contracts. It is not a liability ex-contractu but a matter of tort. It is not even
included in the original Statute of Frauds.
Nature of The Representation:

The representation must be done in good faith. It must not be intended to deceive or defraud.
A false representation that a person is a partner in a company, done for the purpose of inducing the
other party to sell goods to the company, is not within the coverage of the Statute of Frauds.
The act may be proved by parol evidence in an action for damages against the deceiving parties.
Similarity of Express Trust (Involving Real Property) With Statute of Frauds:

Under Article 1443, it is provided that: No express trusts concerning an immovable or any interest
therein may be proved by parol evidence. This principle in trust conforms with the principle of the
Statute of Frauds.
Requirement in Article 1724 Is Not Covered By the Statute of Frauds:

Article 1724. The contractor who undertakes to build a structure or any other work for a stipulated price, in conformity with
plans and specifications agreed upon with the land-owner, can neither withdraw from the contract nor demand an increase in
the price on account of the higher cost of labor or materials, save when there has been a change in the plans and
specifications, provided:
(1) Such change has been authorized by the proprietor in writing; and
(2) The additional price to be paid to the contractor has been determined in writing by both parties. (1593a)
The requirement that the change in the plans and specifications must be in writing is not part of the
Statute of Frauds. This requirement is a substantive provision or is a condition precedent to allow
recovery on the part of the contractor. The requirement that the change be in writing is not a mere
prohibition against the admission of oral testimony but a condition precedent.
Article 1404. Unauthorized contracts are governed by article 1317

and the principles of agency in Title X of this Book.
Laws That Govern Unauthorized Contracts:

The other provisions of law which govern unauthorized contracts are the following:
Article 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. (1259a)
Articles 1868-1932 in the law on agency under Title X of the Code
Unauthorized Contracts Are Susceptible To Ratification:

The ratification of an unauthorized contract has the effect of cleansing the contract from all its defects
from the moment it was constituted (Art. 1396). It has a retroactive effect.
(a) No authority:
Bumanlag vs. Alzate
Bumanlag sued Alzate for the partition of lots inherited by both parties from their deceased father.
Azlate moved to dismiss on the ground that a judgment was rendered several years ago which was based
on a compromise agreement that both parties signed, thus the case constitutes res judicata.
Bumanlag argues that the compromise agreement was signed by their lawyer who had not been
authorized to do so.
Was the compromise agreement void? No, it is unenforceable
However, The petitioners by their silence for 16 years and by their overt acts of exchanging or bartering
some lots with the private respondents have doubtless ratified the act of their lawyer; ergo, the requisites
of res judicata being all present, the principle applies to the instant case.
Rallos vs Felix Go Chan

Simeon Rallos, an agent granted with SPA by Concepcion to sell a lot, sold the undivided share of
Concepcion in the land after the death of Concepcion herself.
The administrator of the estate sought to declare the sale unenforceable and to recover the disposed share,
due to the fact that the sale was made by the agent after the death of the principal (Concepcion).
Was the sale valid? NO, it is unenforceable
In this case, the agent, Ramon, executed the sale notwithstanding notice of the death of his principal
Accordingly, the agent's act is unenforceable against the estate of his principal for having acted without
authority.
Art. 1259 (Art. 1317 NCC) provides that a contract entered into in the name of another by one who has no
authority or the 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.
Under Art. 1931, an act done by the agent after the death of his principal is valid and effective only under
two conditions, viz: (1) that the agent acted without knowledge of the death of the principal and (2) that
the third person who contracted with the agent himself acted in good faith. These two requisites must
concur and the absence of one will render the act of the agent invalid and unenforceable.
Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403,
are ratified by the failure to object to the presentation of oral evidence to prove the same,
or by the acceptance of benefit under them.
Modes of Ratification of Contract Infringing The Statute of Frauds:

Unenforceable contracts are all susceptible of ratification. But unenforceable contracts in paragraph 2
of Article 1403 may be ratified in two ways, namely:
a. Failure to object to the presentation of oral evidence. This is tantamount to a waiver. Contracts
which infringed the Statute of Frauds ratified by the failure to object to the prestation of parol
evidence are enforceable.
b. Acceptance of benefits under these contracts. This is equivalent to waiver or estoppel. Hence, it
only applies to executory contracts.
If the oral contract was reduced into writing by the party charged, such exercise is called recognition.
It is in effect an express ratification of the contract.
Effect of Cross-Examination of the Witness:

If the party in whose favor the statute may be invoked, cross-examined the witness who is testifying
on the oral contract, the former is deemed to have waived the right to object to the admission of the
testimonial evidence.

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The remedy of the party is to promptly object to the presentation of the witness once it becomes
apparent that no evidence in writing could be presented to prove the contract. The objection must be
invoked during the offer of the testimony of the witness, that is, before he testifies. Or, a motion to
dismiss may be filed before answer to the complaint is filed.
Article 1406. When a contract is enforceable under the Statute of Frauds,

and a public document is necessary for its registration in the Registry of Deeds,
the parties may avail themselves of the right under Article 1357.
Applicability and Availment of Article 1357:

Applies only when the contract involved is both valid and enforceable. The other party cannot be
compelled to execute a public instrument to cover a contract which is not valid and enforceable under the
Statute of Frauds.
If the contract is enforceable under the Statute of Frauds because it is duly evidenced in by a writing,
note, or memorandum, but it cannot be registered because it is not in a public instrument, the party
concerned may compel the opposite party to formalize it in the proper form required by law.
If the latter refuses, the court will issue the necessary order to that effect. If despite the order, the
concerned party continues to refuse to execute the contract, the Court may authorize the Deputy Clerk of
Court to execute the document in behalf of the refusing party.
(b) Statute of Frauds:

Almirol vs. Monserrat
Applicant-appellants Almiral and Cario seek the registration of the land in question under their name
pursuant to a verbal agreement they had with deceased Bartolome and Maria Ricanor, grandparents of the
appellee-minors in thiscase represented by Montserrat.
According to the evidence the appellants presented, they had partially paid the land, and that Bartolome
and Maria had delivered the land to them, including the documents pertaining thereto, in 1912.
The lower court ruled against the appellants, invoking Section 335 of the Civil Procedure (Statute of
Frauds): being a verbal agreement, said contract could not be used to prejudice the minors in this case.
Does the Statute of Frauds apply to such case? NO
Section 335 refers to executory rather than executed contracts. In this case, the contract was partially
executed since a part of the price was paid by the applicants in 1912, and pursuant to said contract,
spouses delivered the land and documents pertaining thereto. Otherwise, injustice or unfairness will
result as the other party had already benefited therefrom.
Hernandez vs. Andal
Cresencia Hernandez (petitioner) and Maria and Aquilina Hernandez, and Pedro and Basilia Hernandez
(intervenors) are brothers and sisters. They acquired in common by descent from their father a parcel of
land. The intervenors sold 1800 square meters of this parcel, a portion which is particularly described in
the deed of conveyance Exhibit A, to Zacarias Andal, the defendant, and Andal's wife inconsideration of
P860 (verbal agreement).
After the sale, Cresencia (petitioner) attempted to repurchase the land sold to Andal. This was rejected by
Andal. Petitioner now contends that the requirement that it be in writing is necessary for the validity of
the contract or the effectiveness of such between the parties.
Does the fact that an agreement under the Statute of Frauds which was not done in writing, affects the
validity of such agreement? NO
The Civil Code requires the accomplishment of acts or contracts in a public instrument, not in order to
validate the act or contract but only to insure its efficacy so that after the existence of the acts or contracts
has been admitted, the party bound may be compelled to execute the document.
When the essential requisites for the existence of a contract are present, the contract is binding upon the
parties, and, although required to be in writing by article 1280 of the Civil Code, the plaintiff can
maintain an action under article 1279 to compel the execution of a written instrument. It says that "Article
1279 does not impose an obligation, but confers a privilege upon both contracting parties, and the fact
that the plaintiff has not made use of same does not bar his action."
Robles vs. Lizarraga,
Robles was occupying the land which was originally owned by her mother and subsequently awarded to
Lizzaraga for payment of P40. Robles already introduced improvements on such property.
Lizarraga increased the rate of rent to P60 which Robles refused to pay. The Robles was contending that
she was entitled to be reimbursed on said improvements amounting to P4,500.
In order to be reimbursed, Robles was required to prove that she was a possessor in good faith. She
introduced Exhibit A as an evidence for such good faith even if it was just a statement of account and not
a valid agreement in writing.
Exhibit A is a memorandum which showed that Robles would pay 16k to become the owner of the house
but at the same she will assume the liability of all amounts in the said memorandum.
Is the document inadmissible as evidence? NO, it is admissible to prove good faith
When a document, which is a statement of accounts, is offered in evidence not to prove such accounts,
but for the only purpose of showing the possessor's good faith, section 335 of the Code of Civil Procedure
is not applicable, and such a document is admissible in evidence although it is not signed.
In this case, the court rule that even if Exhibit A was unenforceable it could be used as evidence since it
was not intended to prove what was there but only to prove that Robles was a possessor in good faith.
Reiss vs. Memije
Memije entered into a contract with Kabalsa for the latter to repair the house of the former. Kabalsa
undertook to furnish the necessary materials, including a considerable amount of lumber, to be used in the
repairs. Since Kabalsa is a man of no commercial standing in the community, he was unable to secure
credit for the materials needed from Reiss who owned the lumber yard.
Memije accompanied Kabalsa to Reiss lumberyard, and after satisfying plaintiffs as to his own financial
responsibility, entered into an agreement with them whereby they were to deliver the necessary lumber to
the contractor for use in the repair of his house. This action was filed for the unpaid balance of the
purchase price of the lumber.
Memije contends that his transaction of guaranty to pay the purchase price is covered by the statute of
frauds and thus is unenforceable since it is not in writing.
Is Memijes guaranty of the payment covered by the Statute of Frauds? NO
Taking into consideration all the circumstances of the case at bar, the Court is satisfied that the credit for
the lumber delivered by the plaintiffs to defendant's contractor was extended solely and exclusively to the
defendant under the verbal agreement had with him, and therefore, that the provisions of the statue did
not require that it should be made in writing.
From the testimony of the contractor himself, it seems clear that when the agreement for the delivery of
lumber was made, the credit was extended not to the contractor but to the defendant.
While it is true that one of the plaintiffs in his disposition, made in the United States, refers to the
agreement as one whereby defendant "guaranteed" payment for the lumber, we are satisfied from all the
evidence that the word was not used by this witness in its technical sense, and that he did not mean
thereby to say that defendant guaranteed payment by the contractor, but rather that after satisfying
plaintiffs as to his own financial responsibility, he obligated himself to pay for the lumber delivered to his
contractor for use in his house.
Syquia vs. CA
The Dutch Inn Building and the lot where it is built was adjudicated to Edward Litton as his share in the
partition from the Litton co-ownership.
Petitioner Syquia is among the lessees of the building who seeks for a renewal of the contract alleging
that he was given verbal assurance by the predeccessors-in-interest of Litton that he shall be given
priority or renewal of lease upon the expiration of the contract. Litton invokes Statute of Frauds as well as
the Parol Evidence Rule to support his claim that contract cannot be extended.
Was the verbal assurance sufficient to grant Syquia an extension of lease. NO
The Court ruled that the Statute of Frauds requires that a period of lease for more than a year should be
put into writing and the Parol Evidence Rule provides that when an agreement is put into writing, it shall
be considered that all terms are contained therein that anything not expressed is deemed not agreed upon.

10
In this case, the contract of lease was clear and was not ambiguous. It did not provide for an extension of
lease. Syquia, being an experienced businessman, should have taken steps to protect his investment and
have the alleged assurance be reduced in writing.
Article 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.
Effect When Both Contracting Parties Are Incapable of Giving Consent:

When both parties to the purported contract are not capacitated to give consent, the contract is
unenforceable. It cannot be enforced in court. It may however, be ratified:
1. If ratification is only on the side of one of the contracting parties, that is, by the parent or guardian,
the contract is transformed into a voidable contract on the part of the party who did not ratify. It
means it is now valid and binding unless annulled by the court. Of course, instead of ratifying the
contract, the party who did not ratify may opt to pursue the annulment of the voidable contract.
2. If ratification is made by both sides that is, by the parents or guardians, the contract is validated from
its inception. The validation is retroactive.
Can the Incapacitated Persons Themselves Ratify the Contract? :

If the parties ground for incapacity like minority had disappeared such as by attainment of majority age,
or if the incapacity is due to insanity and they regained their sanity, there is no question that they can
ratify their previous acts. There is no need for the law to include this expressly because it is deemed
understood.
(c) Both parties incapacitated
2. Ratification:
Averia vs. Averia
Herein petitioners and respondents are children of Macaria from her first marriage, among them was
Gregorio. Macaria was widowed and she contracted a second marriage.
Upon the death of her second husband, a 150 sqm house and lot at Extremadura Street was apportioned to
her. An additional 30 sqm was awarded to her in a Civil Case. While the Civil Case was pending, Macaria
lived together with Gregorios family at Extremadura.
Years after Macarias death, her other children (respondents) filed for judicial partition of the
Extremadura property against their brother Gregorio.
Gregorio contends that he spend for the litigation expenses in the Civil Case upon Macarias request; that
they took care of her; that in consideration of such kindness, Macaria verbally sold to them of her
Extremadura property.
Petitioners claimed that there was a total performance of the contracts, full payment of the objects and
that Gregorio has continued to occupy the subject property.
Were the contracts which infringed the Statute of Frauds ratified by respondents failure to object to
the presentation of parol evidence, hence enforceable. - YES
Statute of Frauds applies only to executory contracts and not to contracts which are either partially or
totally performed. In proving the fact of partial or total performance, oral evidence may be received.
However, it is not enough for a party to allege partial performance in order to render the Statute of Frauds
inapplicable; such partial performance must be duly proved by either documentary or oral evidence.
The testimonies the witnesses bearing on the verbal sale to Gregorio by Macaria of the property were not
objected by respondents. These testimonies were straightforward and credible. They were also sufficient
to prove that half of the property was verbally sold to Gregorio, and that even the lawyer of Macaria
affirmed such sale.
Abrenica vs. Gonda
These proceedings were brought by the Gonda to compel the Abrenica to return to him the subject two
parcels of land which he alleges were sold by him under right of repurchase for the period of seven years.
The justice of the peace concluded that the proofs introduced by the Gonda were entitled to the greater
credit, and thereby entered judgment against Abrenica.
They appealed to the Supreme Court. In this instance, one error assigned by the Abrenica was that the
court founded its judgment on inadmissible and illegal evidence. The plaintiff testified at length and
answered all the questions asked him with respect to the said contract and yet the defendants' counsel
raised no objection to the examination.
It seems that only when the examination was terminated did counsel for defendant move to strike out all
of the testimony given and statements made by Gonda in regard to the contract, on the ground that the
period for the fulfillment of the contract exceeded one year and that it could not be proven except by
means of a written instrument.
Was there a waiver of the benefit of the Statute of Frauds? YES
A protest or objection against the admission of any evidence must be made at the proper time, and that if
not so made it will be understood to have been waived. The proper time to make a protest or objection is
when, from the question addressed to the witness, or from the answer thereto, or from the presentation of
the proof, the inadmissibility of the evidence is, or may be, inferred.
It is held in general that by failing to object to the proof of an oral contract a party waives the benefit of
the statute and cannot afterward claim it.
The court held that as no timely objection or protest was made to the admission of the testimony of the
plaintiff with respect to the contract; and as the motion to strike out said evidence came too late, such is a
waiver of the right to have such evidence stricken out.
Article 1408. by third persons.

Unenforceable contracts cannot be assailed

Third Persons Cannot Attack Unenforceable Contracts:
As the defense of the Statute of Frauds is personal to the availing party in the contract, it cannot set up as
a defense by strangers to the transaction. Only the contracting parties may attack unenforceable contracts.
However, void contracts may be attacked even by strangers whose interests are directly affected.
Voidable contracts may also be attacked by third persons who are prejudiced thereby. Rescissible
contracts are subject to attack by creditors who are being defrauded\by their debtors.
Ayson vs. CA
Basilio Yalung and Arambulo entered into an oral agreement to sell the land in question. Arambulo had
already made improvement on the land, but Basilio still refused to execute a formal deed of sale,
prompting Arambulo to make an investigation, in which he found out that the land was still under
Basilios sister Paulina and his mothers name, and it was originally mortgaged to Ayson by his mother.
After their mothers death, the Yalungs, in consideration of the original mortgage, agreed to sell the
land to Ayson, subject to a reserved right to repurchase. The said agreement was not recorded. But
subsequently, Basilio also agreed to sell the land to Arambulo. During the pendency of the case,
Ayson was able to transfer the title under his name.
The Court of Appeals ruled in favor of Arambulo.
Ayson now questions the decision, invoking the Statute of Frauds as defense because the agreement
between Basilio and Arambulo was not in writing, and thus, is unenforceable.
Can Ayson assail the enforceability of the agreement between Basilio and Arambulo? NO
Invoking Statute of Frauds as a defense is a personal act, and only the parties involved in the
unenforceable contract may cite it. In this case, the records do not show that neither Basilio and Paulina
invoked the statute as a defense.
Paulina also agreed to convey her share to Arambulo. She also did not appeal, but actually waived her
right to object to the conveyance of her share on the ground of lack of written memorandum. The
successors-in-interest (Ayson and Lumanlan) cannot invoke the statute of frauds waived by their
predecessor-in-interest (Paulina).

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Void and Inexistent Contracts
Article 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose
is contrary to law, morals, good customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;

(4) Those whose object is outside the commerce of men;

service;
(5) Those which contemplate an impossible
(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.
The Article Provides For the Second Type of Void Contracts:

The first type of void contract refers to Article 1318, or those which are lacking an essential element
thus rendering the contract void. The present Article provides for the second type of void contracts.
Void or Inexistent Contracts; Concept:

The code uses the words void contracts interchangeably with inexistent contracts, referring to
contracts which have no force and effect from the beginning and which cannot be ratified or validated
by lapse of time.
What does not exist cannot be ratified. However, there are void contracts which may give rise to
certain legal effects. Thus contracts of marriage tainted with psychological incapacity are void, yet the
children conceived prior to the nullification of the marriage are legitimate children.
Void contracts generally refer to agreements which are tainted with illegality or immorality.
Illustrations: A contract of service for killing a person is void for being contrary to law. A bigamous
marriage is a void contract. It is both illegal and immoral.
An inexistent contract is one which lacks one or more of the essential elements of a contract, that is, it
lacks any, some, or all of the following elements: consent, object, or cause. Illustrations: A deed of
sale where the appearing purchase price had not been paid by the buyer is an inexistent contract. It is a
simulated contract and, therefore, without effect between the parties. A donation of real property not
done in a public instrument is also an inexistent contract.
Article 1409 provides that contracts which are expressly prohibited or declared void by law are
considered inexistent and void from the beginning.
Characteristics of Void or Inexistent Contracts:

1. Generally, they produce no civil effects either in favor of or against anyone.
2. They are not susceptible to ratification.
3. The right to set up the defense of their inexistence or absolute nullity cannot be waived.
4. The action or defense for the declaration of the inexistence of the contracts does not prescribe.
5. The defense of illegality of contracts cannot be invoked by third persons whose interests are not
directly affected.
6. No action is needed to set them aside because their nullity exists ipso jure. However, if there has been
performance already, the intervention of the court is necessary to declare its nullity and decree the
restitution of what has been given by virtue thereof. No one should take the law into his own hands.
The judgment of nullity is merely declaratory. If the void contract is still completely executory, no
action is needed to declare its nullity. Anybody who tries to enforce it may be resisted by the other
party by putting up the defense of nullity of the contract.
7. Parties to a void agreement cannot expect the aid of the law the courts leave them as they are,
because they are deemed in pari delicto or in equal fault.
8. They cannot give rise directly to another contract.
Void Contract Cannot Be Ratified:

The nullity of void or inexistent contract is permanent and fixed and the same cannot be cured by
ratification. Thus, if the cause of the nullity had ceased, or even if the terms thereof had been complied
with voluntarily by the parties, there is no ratification. A contract which does not exist in the eyes of the
law cannot be confirmed or ratified.
However, if a new contract had been entered into, and at the time of its execution the cause of the nullity
of the first contract had already ceased, the new and second contract is valid, although its effect will not
retroact to the date of the first contract.
Defense of Illegality Cannot Be Waived:

A void contract is inexistent from the beginning, and the right to set up the defense of its illegality
cannot be waived. Persons who are not parties in the deed of donation can set up its nullity if they are
directly affected by the same.
Illustrations of Void or Inexistent Contracts:

A. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy:
i. Sale of the husband to his concubine of the conjugal house, without consent of legal wife.
ii. Promissory note executed to be used in bribing NARIC officials.
iii. A contract involving Kabit System where a holder of a certificate of public convenience permits
another person to operate for a consideration the latters motor vehicles under the franchise of the
former.
iv. A contract which deprives a court of justice of its jurisdiction.
B. Those which are absolutely simulated or fictitious:
i. Mother sold a property to her child for a very low price which she bought just three months ago.
ii. A sale simulated to avoid a judgment for damages is void
C. Those whose cause or object did not exist at the time of the transaction:
i. Sale without actual consideration paid is void, and produces no effect whatsoever.
ii. The phrase the cause or object did not exist at the time of the transaction which renders the contract
void, will not apply to contracts involving future things which may legally be the object of a valid
contract.
D. Those whose object is outside the commerce of men:
i. A compromise agreement adjudicating a creek in favor of a private person is void because it is a
property of public dominion, and as such, is outside the commerce of men.
ii. A public plaza cannot be the subject of a lease contract.
E. Those which contemplate an impossible service:
i. Where the contract requires the performance of a service which is physically impossible to perform or
which is a legal impossibility like the delivery of prohibited drugs, the same is void.
F. Those where the intention of the parties relative to the principal object of the contract cannot be
ascertained:
i. This paragraph is just a reiteration of the second paragraph of Article 1378 which provides 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.
G. Those expressly prohibited or declared void by law:
i. A contract for professional services entered into between an incumbent judge and a corporation is
void. Judges cannot practice law.
ii. The sale of shares of stocks of a travel agency without prior notice to the Department of Tourism is
void being prohibited by law.

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Basis Void Contract Rescissible Contract
Nature of Defect The defect is inherent in the contract itself. The defect is in its effects, which is either
against one of the parties or a third person.
Interest Served Nullity is a matter of law and public interest. It is based on equity and is more a matter of
private interest.
Consequences When There are no legal effects even if no action is Contract remains valid if no action is filed. It
No Action is Filed filed to set it aside. produces legal effects.
Prescription Action to declare its nullity does not Action to rescind contract prescribes within
prescribe. four years.
Basis Void Contract Voidable Contract

Cause of Defect Absence of essential elements of a contract. Consent is vitiated or there is incapacity to
give consent.
Effect It has no effect even if not set aside, because It is a valid contract until it is set aside.
it is non-existent.
Ratification It cannot be ratified. It can be ratified.
Against whom can Its nullity can be set up against any person Its nullity can be set up only against a party
nullity be set up asserting a right arising from it, and his thereto.
successors in interest not protected by law.
Prescription Action to declare nullity of contract does not Action to annul contract prescribes within four
prescribe. years.
Basis Void Contract Unenforceable Contract

Status There is no contract at all. There is a contract but which cannot be
enforced.
Ratification It is not subject to ratification. It is subject to ratification.
Attack by third persons It can be assailed by third persons whose It cannot be assailed by third persons.
interests are directly affected.
Causes Causes of nullity are those enumerated in Cause of unenforceability are enumerated in
Article 1409. Article 1403.
1. Kinds:
Ariaga vda. de Gurrea vs. Suplico
Ricardo Garrea was represented by Atty. Suplico in a civil case. In consideration of said representation,
Ricardo Gurrea agreed to pay Atty. Suplico "a contingent fee of twenty (20%) of whatever is due me,
either real or personal property".
A deed of Transfer of Rights and Interest was drafted by the defendant and later on Ricardo signed the
deed. Thereafter, Atty. Suplico registered the deed and obtained a title/TCT to the San Juan property
under his name. Ricardo died.
After his death, his heirs instituted Special Pro. No. 2722 for the settlement of Ricardo Gurreas estate.
Atty. Suplico filed several claims for unpaid attorneys.
Was the contract of attorneys fees invalid? YES
Having been established that the subject property was still the object of litigation at the time the subject
deed of Transfer of Rights and Interest was executed, the assignment of rights and interest over the
subject property in favor of respondent is null and void for being violative of the provisions of Article
1491 of the Civil Code which expressly prohibits lawyers from acquiring property or rights which may be
the object of any litigation in which they may take part by virtue of their profession.
Article 1409 of the same Code provides, among others, that contracts which are expressly prohibited or
declared void by law are considered inexistent and void from the beginning.
Tongoy vs. CA
Other co-owners of Tongoy in Hacienda Pulo and Basilisa Cuaycong, owner of Cuaycong property,
purportedly executed deeds of transfer in favor of Luis Tongoy so Hacienda Pulo and Cuaycong property
were placed under his name where he mortgaged the two properties.
He was able to pay all of his obligations but before his death he received a letter from his co-owners
demanding the return of their share. It was alleged that they transferred their interests on the two lots in
question to Luis D. Tongoy by means of simulated sales.
The heirs of Tongoy set up the defense of prescription since actions to enforce an implied trust created
under the old Civil Code prescribes in ten years.
Were the sales simulated? Was the action filed beyond the prescriptive period? YES, NO
The deeds of transfer executed in favor of Luis Tongoy were from the very beginning absolutely
simulated or fictitious, since the same were made merely for the purpose of restructuring the mortgage
over the subject properties and thus preventing the foreclosure by the PNB.
There is no implied trust that was generated by the simulated transfers; because being fictitious or
simulated, the transfers were null and void ab initiofrom the very beginningand thus vested no rights
whatsoever in favor of Luis Tongoy or his heirs. That which is inexistent cannot give life to anything at
all.
The right of action against a simulated, void ab initio contract does not prescribe.
Rongavilla vs. CA
Private respondents unmarried aunts of Rongavilla and although unschooled in English, they are however
able to read and write in Tagalog.
Private respondents borrowed the amount of P2,000 from the petitioners for the purpose of having their
(respondents') dilapidated rooftop repaired. A month later, petitioner Dolores Rongavilla and her sister
Juanita Jimenez visited their aunt's home, bringing with them a document for the signature of their aunts.
The document is admittedly typewritten in English. When asked in Tagalog by one of the aunts,
respondent Mercedes de la Cruz, what the paper was all about, Dolores Rongavilla answered also in
Tagalog, that it was just a document to show that the private respondents had a debt amounting to P2,000.
On account of that representation, private respondent signed the document. After a lapse of over four
years, petitioner Dolores Rongavilla went to private respondents' place and asked them to vacate the
parcel in question, claiming that she and her husband were already the new owners of the land. Private
respondents filed an action to have the purported deed of sale declared void and inexistent, for being
fictitious and simulated, and secured by means of fraud and misrepresentation. They also alleged that they
did not receive any consideration on the supposed sale.
Was the deed of sale void and has the action prescribed? YES, NO

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It is absurd where private respondents would sell their only house, in which they have lived for so many
years, in order to secure the measly sum of P2,000.00 to repair the roof of their only house, which would
all be lost to them anyway upon the consummation of the sale.
As there is no indication that private respondents were in dire need of money, except for few [sic] amount
necessary for the repair of the roof of their house for which they obtained a loan of P2,000.00 from
petitioners, there was no reason for private respondents to dispose of their property.
The right of action against a simulated, void ab initio contract does not prescribe.
Calimlim Canullas vs. Fortun

Fernando Canullas, married to Mercedes Calimlim- Canullas, inherited a land from his father wherein
their conjugal home was built.
When Fernando abandoned his family and lived with his concubine, he sold the land where the conjugal
home was erected to his concubine Corazon Daguines.
Corazon now institutes a case against Mercedes because she cannot take possession of the land she
bought. Corazon contends that the sale was null and void because the land together with the house,
conjugal property, was sold without her consent.
Was the contract void? YES
The land and the building belong to the conjugal partnership but the conjugal partnership is indebted to
the husband for the value of the land.
The contract of sale was null and void for being contrary to morals and public policy. The sale was made
by a husband in favor of a concubine after he had abandoned his family and left the conjugal home where
his wife and children lived and from whence they derived their support. That sale was subversive of the
stability of the family, a basic social institution which public policy cherishes and protects.
Mapalo vs. Mapalo

Spouses Mapalo decided to donate the eastern half of their lot to Maximo, brother of petitioner Miguel,
out of love and affection since he was about to get married.
As a result however, the spouses were deceived into signing a deed of absolute sale over the entire land
instead of a deed of donation over the eastern half.
Although the deed of sale stated a consideration of P500, the spouses did not receive anything. Maximo
registered the entire land in his favor and was able to get a Transfer Certificate of Title.
Was the sale void? YES
It is null and void because there was no cause. The P500 consideration was totally absent. A contract of
purchase and sale is null and void and produces no effect where the same is without cause or
consideration in that the purchase price which appears on the document as paid has in fact never been
paid by the purchaser to the vendor.
Manzano vs. Garcia

A parcel of land was the subject of a deed of pacto de retro sale allegedly executed by Garcia in favor of
Manzano. Vicente (administrator of Manzanos estate) instituted a petition for consolidation of ownership
over the property.
Garcia filed an opposition alleging that the document evidencing the pacto de retro sale was a forgery.
Garcia testified that the signatures appearing in the pacto de retro sale were not his and his wifes. He
presented his passport and drivers license, both of which bear an entirely different signature than what
appeared in the pacto de retro sale document.
Witnesses also testified that the Marcelino who executed and signed the document was different from the
one in court during trial. CA reversed the decision of the trial court and declared the pacto de retro sale
void ab initio.
Was the CA correct in declaring the contract void? YES
From a diligent examination of the records of the case, it is plainly apparent that the alleged signature of
Garcia in the pacto de retro sale is utterly dissimilar from his customary signature appearing in the
evidence on record, as well as in the verifications of the pleadings. However, it should be clarified that
the proper basis for the nullity of the forged pacto de retro sale is not Article 1409 (which enumerates
examples of void contracts) but Article 1318 of the Civil Code.
There are two types of void contracts: (1) those where one of the essential requisites of a valid contract as
provided for by Article 1318 of the Civil Code is totally wanting (consent, object,cause); and (2) those
declared to be so under Article 1409 of the Civil Code.
Conveyances by virtue of a forged signature are void ab initio. The absence of the essential requisites of
consent and cause or consideration in these cases rendered the contract inexistent.
Article 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.

Action To Declare Inexistence Of A Contract, Imprescriptible:
If a contract is null and void, the action to declare its inexistence does not prescribe.
The action can be filed at any time. The defense that a contract is null and void and therefore could not
be enforced, can be put up despite the passage of time.
The mere lapse of time does not invalidate a contract unlike voidable ones.
Is it Necessary to go to Court to Declare the Nullity of A Void Contract?

A void contract remains void even if no court has declared its inexistence or illegality.
However, there are certain contracts the nullity of which is not apparent on their faces. And considering
that there is a presumption of regularity of contracts, it is the better part of prudence that the interested
party should go to court first to avoid inconvenience or to avoid taking the law into his own hands when
the other party refuses to restore what he had received out of the void contract. Taking the law into ones
hands may lead to coercion which is a criminal offense.
Remarriage Based on the Nullity of A Previous Marriage:

A person who enters into a subsequent marriage on the premise that his previous marriage is void will be
liable for bigamy if the previous marriage had not been previously declared void by the court.
Before the advent of the Family Code, the rule regarding void bigamous marriages is that being null and
void, they need not have to be declared void by the court.
The rule had been changed under Article 40 of the Family Code which provides, The absolute nullity of
a previous marriage may be invoked for purposes of remarriage on the basis solely of final judgment
declaring such previous marriage void.
Effect of Laches on Imprescriptibility of Action to Attack A Void Contract:

Laches has been defined as the failure or neglect, for an unreasonable length of time, to do that which by
exercising due diligence could or should have been done earlier; it is negligence or omission to assert a
right within a reasonable time, warranting a presumption that the party entitled to assert it either has
abandoned it or declined to assert it.
The prevailing doctrine is that the right to have a contract declared void ab initio may be barred by laches
although not barred by prescription
Elements of Laches:
1. Conduct on the part of the defendant or one under whom he claims, giving rise to the situation
complained of;
2. Delay in asserting complainants right after he had knowledge of the defendants conduct and after he has
an opportunity to sue;
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 in the event relief is accorded to the complainant. Unlike estoppel,
laches as an equitable defense usually bars only the equitable enforcement of a right but not the right
itself. It is an affirmative defense and the burden of proving it rests on the defendant.
Laches is Inapplicable if Action is Filed Within The Prescriptive Period:

The doctrine of laches is inapplicable when the claim was filed within the prescriptive period set forth
under the law. An action to demand partition cannot be barred by laches.

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Basis of Doctrine of Laches:
The doctrine of laches or stale demands is based upon grounds of public policy which requires for the
peace of society, discouragement of stale claims. And unlike the statute of limitations, it is not a mere
question of time but is principally a question of inequity or unfairness of permitting a right or claim to be
enforced or asserted.
The question of laches is addressed to the sound discretion of the court, and since it is an equitable
remedy, its application is controlled by equitable considerations. It cannot work to defeat justice or to
perpetrate fraud and injustice. A party cannot be held guilty of laches when he has not incurred undue
delay in the assertion of his rights.
2. Imprescriptibility:
Ras vs. Sua

In 1958, Alejandro Ras leased a parcel of land he acquired from NAFCO to spouses Sua, unaware that
under Section 8 of RA 477, lease of such land was prohibited.
Under the lease contract, the spouses were obliged to pay the government the yearly taxes and
installments, and failure to do so would lead the other party to rescind the contract.
The Suas failed to pay, prompting Ras to rescind the contract in a case he instituted in 1963. According to
the Suas, under Art. 1191 of the NCC, action to rescind contracts prescribe in 4 years, and Ras action
clearly went beyond the prescriptive period.
Was the action filed beyond the prescriptive period? NO
The Court ruled in favor of Ras, saying that because the lease contract was in violation of a law, thus
void, the action to declare its inexistence does not prescribe, and it may be initiated any time.
Angeles vs. CA
In 1935, homestead patent No. 31613 was issued for a parcel of land in Nueva Ecija.
On May 1937, Juan Angeles sold such land to defendants Gregorio Santa Ines and Anastacia David who
thereupon took possession thereof. Juan Angeles died in the year 1938, and thereafter his heirs, the
petitioner herein, sought to recover the land from the defendants on the ground that the sale was null and
void.
Petitioners were contending that defendants' possession of the land was the virtue of the sale which is
against the law and therefore did not convey title to them, since the law states that a five-year period must
first pass from the issuance of the homestead before the land can be sold.
The defendants answered that the plaintiffs are guilty of laches for having allowed 12 years to pass, after
the death of the original homesteader, before they brought the action;
Was the contract void? Can it still be declared a nullity? YES, YES
SC ruled in favor of petitioners. SC stated that there is no question that the sale in March 1937 having
made within five years from 'the date of the issuance of the patent' was 'unlawful and null and void from
its execution', by expressed provision of sections 116 and 122 of Act No. 2874.
Under the existing classification, such contract would be 'inexistent' and' the action or defense for
declaration' of such inexistence 'does not prescribe'.
However, the amount of 2500 (price of the sale) should be returned to the defendants.
Terre vs. Terre
Complainant Dorothy B. Terre charged respondent Jordan Terre, a member of the Philippine Bar with
"grossly immoral conduct," consisting of contracting a second marriage and living with another woman
other than complainant, while his prior marriage with complainant remained subsisting.
Jordan convinced Dorothy to marry him since Dorothys first marriage was void ab initio due to the fact
that Dorothy and her husband are first cousins. However, there was no judicial declaration of nullity of
marriage.
Years after they were married, Jordan disappeared and Dorothy later found out that he married another
woman name Vilma.
Was the first marriage still subsisting when the second marriage was contracted? YES
Respondent Jordan Terre, being a lawyer, knew or should have known that such an argument ran counter
to the prevailing case law of this Court which holds that for purposes of determining whether a person is
legally free to contract a second marriage, a judicial declaration that the first marriage was null and void
ab initio is essential.
Respondent Jordan Terre is disbarred.
Atienza vs. Brillantes

Atienza filed this complaint against Judge Brillantes after finding out that the Judge married to one
Zenaida Ongkiko with whom he has five children, is cohabiting with Yolanda De Castro, to whom
complainant Atienza has two children.
Respondent Judge argues that his two marriages were invalid due to lack of marriage license on both
instances.
He also argued that the provision of the Family Code which provides that the absolute nullity of a
previous marriage may be invoked for the purposes of remarriage on the basis solely of a final judgment
declaring such previous marriage void does not apply to his case since his first marriage with Zenaida
was celebrated before the effectivity of the family code.
Can Article 40 of the Family Code apply to Judge Brillantes marriage with Zenaida?
The Court held that Article 40 is applicable to remarriages entered into after the effectivity (remarriage
with De Castro was on 1991, after the effectivity of the code in 1988) of the Family Code on August 3,
1988 regardless of the date of the first marriage.
Respondent Judge is thus DISMISSED from the service.
MWSS vs. CA
MWSS leased an area of land to CHGCII. Later on, MWSS wished to cancel the lease instead offered
CHGCCI to exercise its preferential right to buy. MWSS, with the approval of then Pres. Ferdinand
Marcos sold the subject property to Silhouette, an assignee of CHGCCI.
Subsequently, Silhouette sold the some parts of subject property to Ayala which developed what is now
known as the Ayala Heights Subdivision.
After almost a decade, MWSS now files an action seeking for the declaration of nullity of the MWSS-
Silhouette sales agreement. MWSS contends that the action was imprescriptible because the agreement
was void ab initio.
Was the contract void? Was the action filed beyond the prescriptive period? NO only voidable, YES
Petitioner MWSS admits that it consented to the sale of the property, with the qualification that such
consent was allegedly unduly influenced by then President Marcos
The alleged vitiation of MWSS consent did not make the sale null and void ab initio. Thus, a contract
where consent is given through mistake, violence, intimidation, undue influence or fraud, is voidable.
Hypothetically, the prescriptive period to annul the same would have begun on February 26, 1986 which
this Court takes judicial notice of as the date President Marcos was deposed. Prescription would have set
in by February 26, 1990 or more than three years before petitioner MWSS complaint was filed.

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Article 1411. When the nullity proceeds from the illegality of the cause or object of the contract,
and the act constitutes a criminal offense, both parties being in pari delicto,
they shall have no action against each other, and 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,
and shall not be bound to comply with his promise. (1305)
Nullity of Contract Due to Illegality of Cause or Object:

If a contract is void because of the nullity of the cause or object and it happens that the transaction
constitutes a criminal offense, both parties are in pari delicto, they shall have no cause of action against
each other.
This means, if the contract is still in the executory stage, they cannot compel one another to fulfill their
respective promises.
If the contract was already executed, they cannot get back what they had already paid or delivered to one
another. The law will leave them where they are. Furthermore, the parties will be prosecuted for the crime
committed. The things or price subject of the contract may be confiscated by the State.
Applicability of Article 1411:

1. The contract entered into by the contracting parties is null and void and nullity arises from the illegality
of the cause or object of the contract. Illegality of motives is different.
2. The transaction agreed in the contract constitutes a crime.
3. The contracting parties are in pari delicto, that is, the fault of one party is more or less equal or equivalent
of the fault of the other party.
Consequences:
The consequences of the above in pari delicto rule are:
a. The parties shall have no action against each other;
b. Both parties shall be prosecuted criminally for their crime;
c. The things or price of the contract may be confiscated by the State in accordance with Art. 45 of
the Revised Penal Code, which is made applicable.
Example: The contracting parties involved in importation of contrabands have no remedy against each
other if one has violated his undertaking. Where a man and a woman had sex not amounting to seduction,
and the man did not fulfill his promise of marriage to the woman, the latter cannot recover damages from
the former as both parties are at fault.
Extended Applicability:
The Article will apply even if there is no in pari delicto situation provided one of the contracting parties is
guilty of the act which made the contract unlawful. The innocent party may claim what he has given to
the party and is not bound to comply with his promise.
Example: A public official pilfered office supplies in a government office under his control and sold them
to a buyer who was acting in good faith. The buyer paid partial payments leaving a sizable balance
unpaid. The buyer can recover what he had paid and he cannot be compelled to pay the balance.
However, he must return the supplies he got. The public official will be prosecuted criminally for the
crime.
Batarra vs. Marcos
Petitioner Batarra filed a complaint to recover damages for breach of promise of marriage by respondent
Marcos, the respondent inducing her to submit herself to sexual relations with him on account of such
promise of marriage.
The facts do not show the commission of the crime of seduction as defined by the Penal Code because
petitioner Batarra was not under 23 years of age.
Can Batarra recover damages? NO
A promise of marriage based upon carnal connection is founded upon an unlawful consideration and no
action can be maintained by the woman (over the age of 23) against the man because the act does not
constitute the crime of statutory rape, for the woman voluntarily participated in the act.
Santos vs. Roman Catholic Church

On December 9, 1938, a homestead patent covering a tract of land was granted to Julio Sarabillo. On
December 31, 1940, Sarabillo sold two hectares of said land to the Roman Catholic Church of Midsayap.
Such sale was made before the expiration of the period of five years from the date of the issuance of the
patent and as such is null and void it being in contravention of section 118 of Commonwealth Act No.
141.
Catalina de los Santos, the administratrix, prayed that the sale be declared null and void and of no legal
effect. Defendants, among others, set up as a defense the doctrine of pari delicto.
Will the present action fail due to pari delicto? NO
The principle of pari delicto has been applied by this Court in a number of cases wherein the parties to a
transaction have proven to be guilty of having effected the transaction with knowledge of the cause of its
invalidity subject to certain exceptions one of them being when its enforcement or application runs
counter to an avowed fundamental policy or to public interest.
Ordinarily, the principle of pari delicto would apply because her predecessor-in-interest has carried out
the sale with the presumed knowledge of its illegality, but because the subject of the transaction is a piece
of land, public policy requires that she, as heir, be not prevented from re-acquiring it because it was given
by law to her family for her home and cultivation.
Article 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense,
the following 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 other's 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 his promise. (1306)
When Unlawful or Forbidden Cause is Not Constitutive Of A Crime; Consequences:

In the preceding Article, the nullity of the contract arises from the illegality of the cause or object.
In the present Article, the act does not constitute a criminal offense. In which case, the rule in Art. 1411
shall not apply specifically the criminal prosecution of the parties and the possible confiscation of the
thing or price of the contract.
Rules to Follow:
A. If both parties are in pari delicto, they cannot recover what they had given under the contract;
moreover, they cannot demand the performance of the undertaking or promise of the other party.

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A party who voluntarily entered into an illegal compromise cannot withdraw or render ineffective
acts already performed in connection with his part of the unlawful agreement.
Where the plaintiff alienated a fishpond to her daughter, who then resold it to her mother and her
stepfather for the purpose of circumventing the prohibition against donations between husband and
wife, the sale was not simulated but illegal. Plaintiff could not recover since they were in pari delicto.
B. If only one of the contracting parties is at fault, the one at fault cannot recover what he has given
under the contract; further, he cannot demand the fulfillment of the promise of the other. On the
other hand, the one who is not at fault, may demand the return of what he has given without any
obligation to comply with his promise or undertaking to the other.
A married man living under the property regime of absolute separation of property and without
children and creditor donated a piece of land to a woman. The donation was accepted by the latter
following the formalities required by law. The man cannot recover what he had delivered and he
cannot compel the woman to live with him, although, the consideration for the donation is actually
the promise of the woman to live with him as his concubine.
Principle of In Pari Delicto is Not Absolute; Exceptions:

The principle of in pari delicto non oritur acto is not absolute. Under this principle, the law will not
aid either party to an illegal contract but will leave them where they are.
The supposition is that both parties are more or less equal in their faults. If they are not equally
guilty, the principle will not apply. The law will give relief to the party who is the more excusable
than the other.
Examples: Basically, Articles 1413-1419 are some of them. Also, one who lost in gambling because
of the fraudulent schemes practiced on him is allowed to recover his losses even if the gambling is a
prohibited one.
(a) Exceptions: (Articles 1413 1419)
Article 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 No Longer Operative:
Usury law criminalizes the act of imposing an interest on a loan in excess of the interests allowed by the
law. Circular No. 905 of the Central Bank has rendered the Usury law as legally inexistent because the
parties can now agree on any amount of interest on the principal loan extended to the former.
Article 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.
Timely Repudiation of Unlawful Contract; Effects:

A party in an unlawful contract may repudiate the contract provided the purpose/s for which the contract
was constituted had not yet been accomplished, or before any damage has been cause to a third person.
At this stage, if the repudiating party had paid money or delivered property as consideration for the
contract, he may be allowed to recover the same if public interest will be subserved as determined by the
court using its sound discretion.
After the accomplishment of the purpose/s of the illegal contract, the parties could not longer repudiate
the act already performed. It is just too late to invoke the benefits accorded under the Article. The parties
will face the consequences of their act.
If the act constitutes a crime, they will be prosecuted for the commission of the said crime.
The article constitutes an exception to the general rule of in pari delicto. Despite the fact that the
repudiating party is privy to the illegal transaction, nonetheless, the law allows him to recover what he
had paid or delivered by reason of his timely repudiation of the transaction. This is one way of
encouraging a would-be criminal to desist from the projected crime or illegal conduct.
Even if the contracting parties are not equally guilty, the article will apply if public policy will be
subserved. Relief is given to the less guilty of the two parties or to the one more excusable.
Example: Two persons including a certain Bough, induced a wife to transfer her several properties to them
through fraudulent misrepresentation. The misrepresentation consists in the declaration that the wifes husband
was in town and is bent on suing her to take and deprive her of the properties which she received out of the
martial separation of property previously agreed upon. To prevent the husband from taking the properties she was
constrained to sign a deed of sale in favor of Bough. Although, the wife was part of the fraudulent transaction, it
was held that while she was in delicto she was not in pari delicto with the other party. She was allowed to be
placed at the position she was before the transaction which she had entered into.
Article 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 To Give Consent; Effect:

If a party who entered into an illegal contract is not capacitated to give his consent, he may be allowed to
recover the money or property he had delivered by reason thereof.
The recover, however, will be allowed only if the interest of justice so demands. The matter is left to the
sound discretion of the court. It will be on a case to case basis there being no criteria provided by the law.
In the preceding article, the party who repudiates has capacity to give consent unlike in the present one
where the party is incapacitated to give consent.
Article 1416. is merely prohibited,

When the agreement is not illegal per se but
and the prohibition by the law is designed for the protection of the plaintiff,
recover what he has paid or delivered.
he may, if public policy is thereby enhanced,
Agreement Prohibited By Law, Effects:

When a law is merely prohibitive, and designed to protect the plaintiff, the latter may be allowed, if
public policy is enhanced, to recover what he has paid or delivered to the other party.
Depending upon the circumstances, the court may opt to pursue a strict interpretation of a penal provision
under Article 1416.
The clear implication is that if the agreement is illegal per se, the plaintiff will not be allowed to make
recovery.
Concept of Illegal Per Se:

When by universally recognized standards, an act or contract is by its very nature bad, improper,
immoral, or contrary to conscience, said act or contract is set to be illegal per se.
Illegal per se contracts are forbidden because of public interest.
Illustration of a Prohibitive Law:
Article 750. The donation may comprehend all the present property of the donor, or part thereof, provided he reserves, in full
ownership or in usufruct, sufficient means for the support of himself, and of all relatives who, at the time of the acceptance of
the donation, are by law entitled to be supported by the donor. Without such reservation, the donation shall be reduced in
petition of any person affected. (634a)
Donation under this article is not illegal per se, it is intended merely for the protection of the donor. If the
donor violates this law, he is allowed to recover at least that portion of the donation which is necessary
for his own support and that of his relatives who are entitled to be supported by him under Article 195 of
the Family Code.

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Distinctions and Similarities Between Article 1414, 1415, and 1416:
Article 1414 speaks of public interest.
Article 1415 speaks of interest of justice.
Article 1416 speaks of public policy.
In all the three, even if a party is in pari delicto, he will be given relief if the said interests will be
suvserved.
Article 1417. is determined by statute, or by authority of law,

When the price of any article or commodity
any person paying any amount in excess of the maximum price allowed may recover such excess.

Applicability:
Article applies only if there is a law or regulation issued by competent authority fixing the maximum
price for the sale of any article or commodity.
The aim of the law is to prevent profiteering which is inimical to the interest of the people. Any payment
made in excess of the maximum limit is revocable.
If there is a special law providing for the maximum price of an article or commodity and provides for
other sanctions not covered by the article, the special law shall govern.
Example: A regulation was promulgated by the government fixing the maximum price of a particular
brand of rice at 700 pesos per cavan. If a buyer paid 1k per cavan, whether or not he knew the regulation,
he is allowed to recover the excess of 300 pesos which he paid for the price of each cavan.
Article 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.
Maximum Number of Hours of Labor:

Employees are required to observe not more than eight-hour labor work each day of employment under
the eight-hour labor law. They are entitled to additional compensation for services rendered beyond the
time limit.
Social legislations and labor laws will govern the rights and obligations of employees and laborers.
Article 1419. of a minimum wage for laborers,

When the law sets, or authorizes the setting
and a contract is agreed upon by which a laborer accepts a lower wage,

he shall be entitled to recover the deficiency.
No Waiver of Minimum Wage:

If a laborer has agreed to receive a wage lower than the minimum wage fixed by law, he is not barred
from recovering the deficiency. Such contract or agreement is void under the Minimum Wage Law which
provides: No worker or organization of workers may voluntarily or otherwise, individually or
collectively, waive any rights established under this Act, and no agreement or contract, oral or written, to
accept a lower wage or less than any other benefit required under this Act shall be valid. (R.A. No. 602)
Article 1420. terms can be separated from the legal ones,

In case of a divisible contract, if the illegal
the latter may be enforced.

Applicability:
The article applies only if there are several stipulation, terms or conditions in the contract. if some of the
stipulations are illegal and others are valid, the latter if separable from the former shall be effective and
enforceable.
The rule of divisibility or separability cannot apply in two situations:
a) When the contract by its nature requires indivisibility
b) When the parties intended the contract to be entire or indivisible
Examples: Ysa agreed to sell and deliver to Joel certain amount of illegally cut logs including the towing
vessel to be used. The sale of the illegal logs may be avoided by leaving the transaction on the towing
vessel enforceable. However, if they intended the transaction to be entire, that is, without the logs the
vessel would not be purchased, the entire transaction is void. In another case where there is a contract of
loan, the borrower as security for the payment executed a real estate mortgage using a fake title. The
mortgage is void but the loan remains valid.
Presumption:
In case of doubt on whether the terms of a contract are indivisible or divisible, the same will be presumed
as divisible.
Article 1421. The defense of illegality of contract is not available to third persons
whose interests are not directly affected.

Defense of Illegality of Contracts, To Whom Available:
The article refers to illegal contracts.
Under the principle of relativity of contracts, only the parties, their assigns and heirs are bound. The
reason is that such contracts do not determine the rights and obligations of third persons who are not
privies thereto. They cannot produce any effects insofar as third persons are concerned.
However, there are exceptions to the rule. The article clearly implies that third persons may be allowed to
put up the defense of illegality of contracts if their interests are directly affected. If not, they cannot
invoke the illegality of a contract.
Thus, if a contract is absolutely simulated, third persons who may be prejudiced by the simulation may
invoke its inexistence as a defense.
Example: Pong is the owner of a building which is being leased by Baby. To defraud his creditors, Pong
simulated a deed of sale covering the building in favor of Nenet. Pong and Nenet did not intend to be
bound. The sale is absolutely simulated. Before the expiration of the lease contract which is unregistered,
Nenet made a demand upon Baby to vacate the premises on the ground that Nenet allegedly needs it for
business purposes. Here, Baby can raise the illegality of the sale to Nenet as a defense. While Baby is not
the owner of the property, nevertheless, her interest is directly affected.
Another example would be a creditor attaching a property alienated by a debtor in fraud of creditors
asserting the nullity of the alienation.
Article 1422.
A contract which is the direct result of a previous illegal contract, is also void and inexistent.

Two Contracts Are Involved:
The Article speaks of two contracts. The first one is illegal or unlawful. This illegal contract is superseded
by another contract between the same parties. As the latter contract is the direct result of the illegal
contract, it is also void and inexistent.
Example: Reyes purchased prohibited drugs from Millares. Reyes paid a down payment of 2 million
pesos for the purchase of the drugs. As the governments campaign against these drugs has been
intensified and it has become very dangerous to make delivery, instead of delivering the drugs, it was
subsequently agreed that Millares would just deliver a costly Mercedes Benz to Reyes. The contract to
deliver the car to Reyes is void because it is the direct result of a previous illegal contract.

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NATURAL OBLIGATIONS
Article 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 and 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 following articles.
Rationale Behind The Inclusion of Natural Obligations:

The Code Commission stated the reasons for the legal recognition of natural obligations:
In all the specific cases of natural obligations recognized by the present code, there is a moral but not a
legal duty to perform or pay, but the person thus performing or paying feels that in good conscience he
should comply with his undertaking, which is based on moral grounds. Why should the law permit him to
change his mind, and recover what he has delivered or paid? Is it not wiser and more just that the law
should compel him to abide by his honor and conscience? Equity, morality, positive law. A broad policy
justifies a legal principle that would encourage persons to fulfill their moral obligations.
Futhermore, when the question is viewed from the side of the payee, the incorporation of natural
obligations into the legal system becomes inoperative. 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. But the
payee knows that by all considerations of right and justice he ought to keep what has been delivered to
him. He is, therefore, dissatisfied over the law, which deprives him of that which in honor and fair
dealing ought to pertain to him. Is it advisable for the state, thus, to give grounds to the citizens to be
justly disappointed. To recapitulate: because they rest upon morality and because they are recognized in
some leading civil codes, natural obligations have again become part and parcel of the Philippine law.
Natural Obligations, Basis:

Natural obligations are not based on positive law like statues. They are not written or promulgated laws,
but derived merely from reason and nature.
They are based on equity and natural law. They are based on good conscience and compliance to which is
anchored on some moral grounds. Consequently, if not fulfilled, there is no cause of action based on the
breach thereof. Their performance cannot be enforced in court as they are not legal obligations.
Nature of Natural Obligations:

Natural obligations are obligations without sanction susceptible of voluntary fulfillment and not through
compulsion by legal means.
Compliance with natural obligations is discretionary. If a person chose to fulfill, he cannot recover what
he had delivered in compliance therewith. This is the juridical effect of such obligations. Fulfillment
places the debtor into estoppel from recovering what had been paid or delivered.
According to Valverde, natural obligations do not exist because it is inconceivable that there can be an
obligatory relation between the parties when the law does not provide a sanction for their enforcement.
In some countries like Argentine, Italy, France, Lousiana, natural obligations are accorded legal standing,
that is, they can be enforced in court. The Philippine Civil Code, however, recognizes natural obligations
with legal effects only after their voluntary fulfillment.
Conditions For Natural Obligations:

For natural obligations to arise, it is necessary that what has been fulfilled as an obligation is not
prohibited by law, nor contrary to morals and good customs.
If it is prohibited by law, or contrary to morals and good customs, there can be a recovery of what has
been delivered or paid provided the supposed debtor is not privy to the unlawful or immoral act.
There must be a previous juridical relationship between two persons for a natural obligation to arise, but
due to certain intervening circumstances like prescription or invalidity of a will, it lost its legal
enforceability leaving its fulfillment entirely to the free will or discretion of the supposed debtor.
While equity urges its fulfillment, the law does not put any sanction for its non-fulfillment, thereby
leaving its compliance solely to the will of the supposed debtor. The law comes into operation only after
the voluntary fulfillment, by preventing the supposed debtor from recovering what has been paid or
delivered.
Fulfillment of Natural Obligations:

Fulfillment does not refer alone to delivery of things, but also to the performance in any manner that
settles a claim. It covers the full extent of the juridical concept of payment in Article 1232 which
provides, Payment means not only delivery of money but also performance, in any manner, of an
obligation.
Voluntary Fulfillment:
For fulfillment to be voluntary, it must be spontaneous, free from any infirmity which vitiates consent. It
is done with full knowledge of the debtor that he cannot be compelled to pay the alleged obligations, and
performance is free from error and infirmity of consent.
If there is a mistake in the payment, there is no fulfillment of a natural obligations. The amount paid may
be recovered under the principle of solutio indebiti.
Payment made through coercive process, such as by writ of execution issued at the instance of the
prevailing party, is not voluntary fulfillment and as such the provisions of natural obligations cannot be
applied thereto.
May Natural Obligations Be Converted into Civil Obligations?

Natural obligations may be converted into civil obligations by acts of novation.
Thus, a prescribed debt is turned into a civil obligation when the debtor renounces the defense of
prescription, or he signed a document recognizing it with a promise to pay it at some future time. The
natural obligation becomes a valid cause for a civil obligation after it has been affirmed or ratified anew
by the debtor.
Effect of Partial Performance:

If only a part of the natural obligation has been fulfilled, this partial payment cannot be recovered. It is
converted into civil obligation if it is legally susceptible of confirmation or ratification.
However, if the fulfilled portion is not susceptible of confirmation or ratification, this portion can be the
basis of a cause of action for recovery of what has been delivered because it has not been converted into a
legal obligation.
Enumerated Natural Obligations, Not Exclusive:

The enumeration in the code is not limitative. Consequently, there are still others that may that may be
considered natural obligations which satisfy the requirements of the definition or concept of natural
obligations.
The following also constitute natural obligations:
1. Support given to unrecognized illegitimate children by their putative parents, including support given
to illegitimate children by the putative parents despite a judgment denying their recognition.
2. Interest voluntarily paid for the use of money, even if not interest is agreed upon in writing.
3. Support given to relatives for whom the law made no provision for their support.
4. Indemnification given to a woman seduced, although the seduce was acquitted of the charge of
seduction.
Natural Obligation Distinguished From Moral Obligation:

The distinctions may be summed up as follows:
In natural obligations, a previous juridical tie existed while in moral obligations, there is no juridical tie.
In natural, there is voluntary fulfillment with legal effect, in moral, there is no legal effect.
Natural obligations are within the domain of law, while moral ones are within the domain of morals.

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Natural Obligations Distinguished From Civil Obligations:
a. Natural obligations are based not on positive law but on equity and natural law, while civil obligations
arise from law, contracts, quasi-contracts, delicts, and quasi-delicts.
b. Natural obligations cannot be enforced in court because the obligee has no right of action to compel their
performance; while civil obligations can be enforced in court because the obligee has a right of action to
compel performance.
Article 1424. has lapsed by extinctive prescription,

When a right to sue upon a civil obligation
the obligor who voluntarily performs the contract cannot recover what he has delivered
or the value of the service he has rendered.

Extinctive Prescription of Civil Obligation; Consequences:

If an obligee fails to pursue a cause of action based on a civil obligation within the period fixed by law,
the obligation is extinguished. It cannot anymore be enforced in court. It becomes a stale claim.
While the prescribed claim cannot be asserted anymore in court, nevertheless, under the rule on
performance of natural obligations, it is indirectly resurrected when the obligor voluntarily pays the stale
claim.
The payment is a valid payment because of the obligors recognition of his debt. He cannot recover what
he paid or the value of the service he had rendered in cases of obligations to do.
Example: Prescribed debt may give rise to new obligations if acknowledged. Thus, the promisor who
acknowledged a promissory note made in 1940, was ordered to pay the same. Also, an obligation
originally contracted by the mother of the defendant which he assumed after the obligation had
prescribed, is revived as a new obligation. The written promise of the defendant to pay for the obligation
is enforceable.
Article 1425. When without the knowledge or against the will of the debtor,
is not legally bound to pay
a third person pays a debt which the obligor
because the action thereon has prescribed,
but the debtor later voluntarily reimburses the third person,
the obligor cannot recover what he has paid.
Payment By A Third Person; Effects:

A third person may pay the prescribed debt of a debtor either with the latters consent or without his
consent or even against his will.
The article presupposes that the payment of the third person is not intended to be a donation under article
1238, otherwise, it would not have made the implication for the need for reimbursement which when
made could no longer be recovered by the debtor.
If payment was made with the consent of the debtor, there is not much of a problem because an obligation
is created between them. The payor becomes a creditor to the debtor. Hence, the former must be
reimbursed for what he paid in addition to what they had agreed upon.
If payment is without the knowledge or against the will of the debtor, the third person can only recover as
the payment has been beneficial to the debtor. It may happen that no benefit is at all enjoyed by the
debtor, in which case, the third person shall suffer the loss. His remedy will be against the person who
received the payment using as basis for his claim the principle of solutio indebiti.
Fulfillment of Voluntary Obligation By Debtor; Effect:

If the debtor voluntarily reimburses the third person, he cannot recover anymore what he has paid. This is
a fulfillment of a voluntary obligation.
Article 1426. When a minor between eighteen and twenty-one years of age who has entered into a contract

without the consent of the parent or guardian, after the annulment of the contract
received,
voluntarily returns the whole thing or price
benefited thereby,
notwithstanding the fact that he has not been
there is no right to demand the thing or price thus returned.
Minority, Concept, and R.A. No. 6809:

Since the effectivity of R.A. No. 6809, legal age is now 18 years instead of 21 years.
The said R.A. No. 6809 modifies the article, in such a way that the article cannot apply anymore to
persons who are between 18 years and below 21 years because such persons are now possess of full civil
capacity with certain exceptions.
The article now applies only to those below 18 years. Thus, a minor who enters into a contract renders the
contract voidable. If thereafter, the contract was annulled due to his minority but later after reaching the
majority age, he voluntarily returned what he received from the other party, he cannot recover anymore
what he had returned.
Benefit to the Minor is Immaterial:

If the contract entered into by a minor without the consent of his parent or guardian is annulled due to his
minority, and he voluntarily returned the whole thing or price he received therefor, even if he had not
been benefited thereby, he can no longer demand the return of the thing or price. There is a performance
of a natural obligation, which authorizes the retention of what has been delivered or paid.
However, it must be stressed, the return of the thing or price must be voluntary. Otherwise, the minor can
recover what he returned or paid.
Rule When Minor Is Guilty Of Active Misrepresentation:

A minor who actively misrepresented himself to be of legal age and for this matter he looks as a matured
person, thus inducing the other party to contract with him, is estopped from disavowing his own contract.
Article 1427. When a minor between eighteen and twenty-one years 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. (1160A)
Modification of Article:
The present article just like the preceding article had been modified by R.A. No. 6809. It can apply only
to persons below 18 years. If a minor entered into contract without parental or guardians consent the
contract is obviously voidable. If this contract is annulled, the court may order the restoration of what had
been paid or delivered by the minor.
In other words if in the fulfillment of his commitment the minor delivered a consumable thing or paid a
sum of money, he has a right of recovery from the other party, even if the latter be in good faith and had
consumed the thing or spent the money.
However, if the minor, upon reaching the age of majority, failed to cause the annulment of the contract
within four years, he cannot recover anymore what he paid or delivered because of prescription of the
action.

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Article 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.
Winning Party In A Case Who Delivers Or Pays The Claim; Consequences:

In the ordinary course of human interactions, a party defendant who won his case will be very glad and
happy about his legal victory for he is freed from the liability imputed to him.
Nevertheless, if the winning party, through the urges of his good conscience, paid the losing party despite
his knowledge of the dismissal of the latters claim, what has been voluntarily delivered or paid by the
former to the latter cannot be recovered anymore. The retention is authorized by law as a fulfillment of a
natural obligation.
Article 1429. pays a debt of the decedent

When a testate or intestate heir voluntarily
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.
Payment of Decedents Debts by an Heir:

Under the law on succession, an heir cannot be burdened with obligations of the decedent which exceed
the value of the inheritance he inherits.
However, if the heir voluntarily pays the indebtedness of the decedent the value of which exceeds the
value of the property or money he received from the estate whether by will or by intestacy, he cannot
rescind whatever he paid or performed for the law considers it a valid payment.
Rationale: The heir has a moral duty to clear the name or credit of the decedent to whom he is related
either by blood or by other filial relationship. There is a moral duty to protect and maintain the good
name of the deceased.
Article 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 and irrevocable.
Trusts (Article 1440 to 1457)
Article 1440. A person who establishes a trust is called a trustor; one in whom confidence is reposed
person is known as the trustee;
as regards property for the benefit of another
and the person for whose benefit the trust has been created is referred to as the beneficiary.
Concept of Trust (Fideicommisso):

A fiduciary relationship created by an agreement or by law where the trustor of the property has the
equitable title while the legal title is vested in another (trustee).
The equitable ownership of the trustee entitling him to performance of certain duties and the exercise of
certain powers by the trustor.
Trust relations may be express or implied.
Legal title is usually in the name of the trustee; equitable title is in the name of the trustor or beneficiary.
Parties in a Trust:
1. Trustor establishes the trust.
2. Trustee (fiduciary) one in whom confidence is reposed as regards the property for the benefit of another
person
3. Beneficiary (cestui que trust) person for whose benefit the trust has been created
May be the trustor himself, in which case only two persons will be involved in the trust
Trust Distinguished from other Fiduciary Relationships:

May be distinguished from other fiduciary relationships such as deposit, guardianship, and agency
In a trust, the trustee has legal title to the property.
BASIS TRUST (Art 1440) STIPULATION POUR AUTRUI (Art. 1311)
1. Origin It can arise either by virtue of a contract or It can arise only by virtue of a contract and never
by a legal provision by operation of law.
2. Object Always a specific property, whether real or Can either be a specific property or other things.
personal, including an undivided interest
therein as in a co-ownership or choses in
action
3. Form It is either express or implied. It continues to It is always express, and must be accepted by the
exist unless repudiated. third person before the grant stipulated in his favor
is mutually revoked by the parties.
Trust Distinguished from Trust Receipt:

Trust is right to the beneficial enjoyment of a property but the legal title is vested in another. It is a legal
relationship which is fiduciary in nature whereby a person called trustee is holding the property for the
benefit of another called beneficiary.
Trust receipt is a commercial document which is connected to the importation of goods through letters
of credit.
It involves a security transaction intended to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be
able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased.

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Bank (entruster) releases the imported goods to the importer (entrustee) under a trust receipt which
authorizes the latter to sell the goods and apply the proceeds of the sale to the payment of the debt that is
owing the Bank.
If importer, after selling the goods failed to apply the proceeds to the debt, that failure will make him
liable for estafa under Art 315, RPC.
Article 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.
Kinds of Trusts as to Manner of Creation:

Express Trust created by the express agreement of parties or by intention of the trustor
Implied Trust 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
Kinds of Implied Trust:

1. Resulting Trust a trust which is 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 and presumed always to have
been contemplated by the parties.
The intention is to be found in the nature of their transaction, but not expressed in the deed or instrument
of conveyance.
Presumed to have been contemplated by parties.
Examples: those found in Art 1448 to 1455 of the Civil Code
Resulting trust arises in favor of one who pays the purchase money of an estate and places the title in the
name of another.
Because the presumption that he who pays for a thing intends a beneficial interest therein for himself.
2. Constructive Trust a trust raised by construction of law, or arising by operation of law
In a more restricted sense, a trust not created by any words, either expressly or impliedly envincing a
direct intention to create a trust, but by the construction of equity in order to satisfy the demands of
justice.
Does not arise by agreement or intention but by operation of law.
Not a trust in the technical sense.
Created in equity to prevent unjust enrichment, arising against one who, by fraud, duress, or abuse of
confidence, obtains or holds the legal right to property which he ought not to hold.
Created by operation of law in order to satisfy the demands of justice and prevent unjust enrichment.
Example: if a person obtains legal title to property by fraud or concealment, courts of equity will impress
upon a so-called constructive trust in favor of the defrauded party
Sotto v. Teves
Florentino Rallos married Maria Fadulon. They had two children: Concepcion and Carmen
Upon Florentino's death, the subject properties descended in testate succession to Maria, Concepcion and
Carmen. Atty. Filemon Sotto was entrusted with the settlement through an agreement of co-ownership.
Atty. Filemon later married Carmen Rallos.
Respondents (blood relatives of Florentino and Maria) seek to recover the possession and ownership of
the lands in question, with damages. They claim that a trust relation was established with respect to the
properties:
Atty Filmeon as trustee/ Maria, Carmen, and Conception as cestuis que trust (beneficiaries)
Petitioners (administrator of Atty. Filmeon's estate) contends that the only purpose of the agreement of
co-ownership is to keep the properties in a co-ownership by the heirs of Florentino, not to create a
relationship of express trust.
1. Was there an express trust relation established between Atty. Filemon and Maria et. al? YES
Co-ownership is a form of trust and every co-owner is a trustee for the other. This co-ownership was
expressed in writing and embodied in the agreement. The relationship of one co-owner to other co-
owners is fiduciary in character and attribute.
As trustee, Atty. Filemon never alienated or disposed any of the subject lands during his lifetime, thereby
recognizing his position as trustee.
Law on Trusts: It is not necessary that document expressly state and provide for the express trust
Article 1444: No particular words are required for the creation of an express trust it being sufficient that a
trust is clearly intended
2. Is Atty Filemon the constructive trustee of his wife and the widow and descendants of Florentino? -
YES.
Acts and conduct of the Ralloses and Atty. Filemon fostered a close and fiduciary relationship betweeme
them. Sotto can be considered as the constructive trustee. Evidence reveals that Ralloses looked upon
Atty. Filemon as their protector and benefactor and thus could not be held to be the one who would seek
selfish benefit for himself.
3. Is there a violation of Article 1443 (express trust relating to immovable cannot be proved by parol
evidence)? - NO. Article is not applicable.
Declaration of express trust was based on the undisputed facts (co-ownership agreement and direct
positives acts). Article 1443 is not applicable. Teves's oral testimony simply affirmed the existence of the
trust relations.
BASIS EXPRESS TRUST IMPLIED TRUST
1. Creation Created by intention of the trustor or of the Created or arises by operation of law.
parties.
2. Manner of Creation Created by direct and positives acts of the Is merely deducible from the nature of the
parties, by some writing, deed, or by words, transaction.
either expressly or impliedly, evincing an
intention to create a trust
3. Proof needed when If the express trust involves an immovable It can be proved by parol evidence
immovable or interest property, it cannot be proved by parol evidence
therein is involved
4. Prescription of It is imprescriptible, unless the trust has been It is prescriptible.

action repudiated. After 10 years from the registration of the title,
the action is barred.
Exception: when the plaintiff or person enforcing
the trust is in possession of the property, action is
imprescriptible.
5. Acquisition by Property cannot be acquired by prescription Property can be acquired by prescription.

Prescription because the possession of the trustee is not
adverse

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Article 1442. insofar as they are not in conflict with this Code,
The principles of the general law of trusts,
the Code of Commerce, the Rules of Court and special laws are hereby adopted.

Adoption of the Provisions of the General Law on Trusts:

Principles on trusts are drawn generally from Anglo-American precedents.
Article incorporates them in our Code to amplify the Philippine legal system to help in the equitable
solution of cases involving trusts.
Anglo-American trusts had no exact counterpart in Roman law and in Spanish law.
However, they are only applicable if they do not conflict with Civil Code, Code of Commerce, Rules of
Court, and special laws.
Chapter 2 Express Trusts
Article 1443. or any interest therein

No express trusts concerning an immovable
may be proved by parol evidence.

Proof Necessary to Establish Express Trust; When Property is Immovable and Movable:
If basis of complaint is the existence of an express trust over an immovable property like land or building,
there must be a statement or a mention of a written instrument to evidence trust.
Otherwise, case is out rightly dismissible
No express trust over a realty can by proved by parol evidence
Governed by Statue on Frauds, requires writing to prove it
No particular words required in the creation of an express trust
It is sufficient that an express trust in clearly intended
If property involved is personal property the trust may be established by parol evidence, by rule of implication
If trust is implied, even if property involved is immovable, it can be established by parol evidence.
Parol Evidence, Concept:

Oral or verbal evidence; that which is given by word of mouth; the ordinary evidence given by the
witnesses in court.
In a particular sense and with reference to contracts, deeds, wills, and other writings, parol evidence is the
same as extraneous evidence or evidence alinude
Parol Evidence Rule is found in Section 9, Rule 130 of the Revised Rules of Court
Examples:
1. An alleged trust covering a parcel of land cannot be proved by vague and inconclusive oral evidence
contrary to the recitals of the Torrens title
2. No express trust concerning an immovable may be proved by parol evidence
Article 1444.
No particular words are required for the creation of an express trust,

it being sufficient that a trust is clearly intended.

Creation of an Express Trust, Requisites:
1. Sufficient words to create the trust.
2. A definite subject.
3. A certain or ascertained object.
It is presupposed that:
Trustor has the capacity to convey the property
Trustee has the capacity to enter into contract
Beneficiary has capacity to receive gratuitously the property from the trustor
Otherwise, no express trust can be created.
No express words are required in the creation of an express trust, what is important is that there must be a
clear intent to establish the express trust.
There must be direct and positive acts of the parties by some writing, deed, will or by words evidence the
intention to create it.
Procedure in the Administration of Trust:

The procedure on the administration of an express trust arising from a will or written instrument is
provided under Rule 98 of the Revised Rules of Court.
Article 1445.
No trust shall fail because the trustee appointed declines the designation,

unless the contrary should appear in the instrument constituting the trust

Appointment, Exception:
If the designated trustee, upon whom confidence is reposed, has declined the appointment as such, the
designated substitute-trustee, if there is any, and who accepts the appointment will take over.
If there is no substitute, and the trustor did not provide that the trust will be rendered ineffective in case of
death, removal or refusal of the designate trustee to assume the responsibility, the court will appoint a
new trustee.
Rules of Court provide for this eventuality, otherwise, such trust will not exist.
It must be noted that the intention of the trustor to create a trust must be respected. Equity will not allow a
trust to fail for want of a trustee. Thusly, there arises the need to appoint one if the designated trustee
declines the appointment.
If not beneficiary can be found, the trust shall fail. In this case, the equitable title is merged with the legal
title.
Preference in the Designation of Trustee by the Court:

In one case, a deceased father died leaving a life insurance policy. The beneficiary is his minor child but
appointed the deceaseds brother as the trustee, to whom the insurance proceeds were paid. The mother filed a
complaint asserting her right as guardian of the minor child. It was held that between the mother and the
uncle, the former is preferred to be the trustee of the proceeds of the insurance policy.
Article 1446.
Acceptance by the beneficiary is necessary.
condition upon the beneficiary,
Nevertheless, if the trust imposes no onerous
his acceptance shall be presumed, if there is no proof to the contrary.
Beneficiary is a 3rd Person, Acceptance is Necessary; No Acceptance, No Trust Created:

If beneficiary is a third person, his acceptance is necessary under this article to make the trust effective.
If he repudiates or declines the trust, the trust does not become effective.
This is like a donation which is not perfected when there is no acceptance.
However, the acceptance in trust does not have to follow the stringent requisites of acceptance of a
donation.
Even if the real property is involved, the acceptance need not be in a public document.
Exception to the Rule:

Even if there is no express acceptance, there is a presumption of acceptance by the beneficiary if the trust
is purely gratuitous.
Exception will not apply if there is evidence to the contrary.
Presumptive acceptance is enough.

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Extinguishment of an Express Trust:
An express trust is terminated or extinguished by any of the following circumstances:
1. Accomplishment of the aims of the trust.
2. Expiration of the agreed term
3. Mutual agreement of all the parties. (A voluntary trust is irrevocable unless the right to revoke is
reserved.)
4. Happening of the resolutory condition, if one had been imposed
5. Total loss of the object of the trust
6. Annulment or recission of the trust
7. Decision of the Court declaring it as terminated
8. Merger of the rights of the trustor and the trustee, as when the trustor waived his beneficial rights in
favor of the trustee, or vice-versa
9. Prescription, which arises when there is an express repudiation of trust, and continous possession
which is public, adverse, and peaceful in the concept of an owner for the required period.
Acquisitive Prescription as a Mode of Acquiring Ownership; Applicability to Trusts:

1. As to Express Trust trustee cannot acquire by prescription the ownership of property entrusted to him.
i. Basis of rule: possession of a trustee is not adverse. In law, possession of the trustee is possession of the
beneficiary. It cannot serve as a title to prescription. The trustee's claim of ownership cannot be predicated
on his own breawch of trust.
ii. Exception: Acquisitive period may bar an action of the beneficiary against the trustee in an express trust
for the recovery of the property held in trust if the following conditions are present:
1. 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 and conclusive
4. The adverse possession of the trustee, together with other elements of prescription, must at least be
ten (10) years in the concept of an owner. It begins to run from the time the beneficiary, or trustor
gained knowledge of the repudiation by the trustee
2. As to Implied Trust same rule as in express trust when it comes to the operation of prescription as a mode
of acquisition.
Acts Which Were Held Insufficient to Constitute Repudiation:

1. A mere silent possession of the trustee unaccompanied by acts amounting to an ouster of the beneficiary
cannot be construed as an adverse possession.
2. Mere receipt of rents and profits by the trustee and the building of fences and buildings in the premises
adapted to the cultivation of the land held in trust are not unequivocal acts of ouster of the beneficiary.
3. Declaration of the property in the trustee's name for taxation purposes does not constitute acts of
repudiation amounting to an ouster of the beneficiary, and cannot constitute adverse possession as basis
for title by prescription.
Prescription of Action for Recovery of Property Held in Trust:
1. As to Express trust generally, an action to recover property held in trust does not prescribe. However, if
there is repudiation, and no action had been filed within ten (10) years from the time the beneficiary had been
informed of the repudiation, the action for recovery will prescribe.
Unrepudiated written express trusts are imprescriptible unless there is repudiation. Prescriptive period for
the enforcement of an express trust of ten (10) years stars from the repudiation of the trust by the trustee
2. As to Implied Trust :
1. Resulting Trust generally, the action does not prescribe, unless there is repudiation (similar to an
express trust)
Similarity lies in the fact that in resulting trust there is an intent to create the trust, but the same was
not expressed in the instrument
2. Constructive Trust generally, an acquisition to recover property based on constructive trust, which is not
really a trust in the technical sense prescribes, if not action is filed within ten (10) years from the
registration of the property in the name of the trustee.
Ten-year prescription period commences to run from the date of the registration of the deed of
conveyance which operates as a constructive notice
Previous Decisions of the Supreme Court Maintained Imprescriptibility of Action:

SC has held in several decision before (and even after) that the action for recovery of a property based on
implied trust does not prescribe as long as these trusts have not been repudiated
But there are also decisions to the effect that implied trusts prescribe after 10 years
In later cases, SC held that the imprescriptibility of an action for reconveyance based on implied or
constructive trust applied only when the plaintiff or the person enforcing the trust is in possession of the
property
Observation by Pineda: in view of the confusing decision on the matter of prescription of implied trusts,
Congress should do something about it.
Laches: In implied trust, whether it is resulting or constructive, the rule is that laches constitutes a bar to
action to enforce trust, and repudiation is not required, unless there is concealment of the facts giving rise
to the trust.
Ramos v. Ramos
A project of partition was submitted upon the intestate estate of Martin Ramos and Candida Tanate who
were dead. It was signed by Martin and Candida's three legitimate children (Jose, Agustin, and Granada)
and two of Martin's seven natural children (Anastacia and Timoteo) with Timoteo acting as representative
of the other five children who were minors (Modesto, Manuel, Emiliano, Maria, Federico).
It was agreed in the partition that cash adjudications would be paid to the natural children. Jose would pay
the cash adjudications to Anastacia, Timoteo, and Manuel. Agustin would pay the cash adjudications to
Modesto, Federico, Emiliano and Maria.
Plaintiffs (natural children) filed an action against defendants for the purpose of securing the
reconveyance of the supposed participations of the natural children in the subject lots.
Action is really against the heirs of Jose in whose names the said lots are now registered
Plaintiffs claim that their shares were held in trust by the defendants (heirs of Jose) though no deed of
trust was alleged and proven. Defendants denied the existence of the trust.
Were the natural children's shares held in trust by the defendants? - NO.
In this case, the plaintiffs did not prove any express trust.
The intestate proceedings negates the existences of an express trust. They prove that the estate of Martin
Ramos was settled in that proceeding and that adjudications were made to his seven natural children.
An express trust concerning immovable or any interest therein may be proven by parol evidence. A trust
must be proven by clear, satisfactory, and convincing evidence. It cannot rest on vague and uncertain
evidence.
Cuayacong v. Cuayacong
Upon Eduardo Cuaycong's death his properties were distributed among his siblings: Lino, Justo, Meliton,
and Bailisa.
8 lots of Hacienda Bacayan were all in the name of Luis, son of Justo.
Lino instituted this case to recover their alleged share over the hacienda from Justo and Luis.
Lino (and the heirs of Cuaycong) argued that Eduardo had an agreement with Justo and Luis that the two
would hold in trust what might belong to Eduardo's other siblings and to deliver them their share when
the proper time comes.
Lino also argued that it was an implied trust which can be proven by parol evidence alone
Is the alleged trust implied and capable of being proven by parol evidence? - NO. What the plaintiffs
allege was an express trust which demands written instrument in order to be proven.
Plaintiffs (Lino and Heirs) allege that trustor Eduardo expressly told the defendants his intention to
establish the trust. This situation fall under Article 1443 as an express trust.
Being an express trust, a written instrument is needed to prove its existence.
Given the plaintiff's failure to produce such instrument, the case is dismissed in favor of defendants.
Note: Parol evidence may equate to testimonies or oral evidence

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Lorenes v. Posadas
Thomas Hanley died leaving a will and a considerable amount of real and personal properties
CFI-Zamboanga appointed a trustee to administer the real property which, according to Hayley's will,
were to pass to Matthew Hanley (Thomas's nephew)
The will reads: I direct that all estate owned by me at the time of my death by not sold or otherwise
disposed for a period of 10 years after my death and that the same be handled and managed by the
executors and proceeds thereof to be given to my nephew, Matthew Hanley...
P.J. Moore, one of the executors named in the will, was appointed trustee. He acted as such until he
resigned and Pablo Lorenzo (petitioner) was appointed in his stead.
Was the creation of a trust intended by the testator? - YES. Appointment of Moore as trustee was made
by the trial court in conformity with the wishes of the testator (Thomas) as expressed in his will.
While the word trust is not mentioned, the intention to create one is clear. There is no doubt that
Thomas Hanley intended to create a trust.
No particular words are required to create a testamentary trust.
Chapter 3 Implied Trusts

Basis of Implied Trust:
Implied trust is based on equity
In American legal system, it is applied to numerous cases where injustice would result if the legal title of
the trustee will prevail over the equitable right of the beneficiary
Fairness demands creation of the juridical relationship of trustor and trustee.
Article 1447. The enumeration of the following cases of implied trust does not exclude others established
laid down in Article 1442 shall be applicable.
by the general law of trust, but the limitation

Enumerated Cases of Implied Trusts, Not Exclusive:
Chapter 3 mentions instances of implied trusts. They are not exclusive, They do not exclude others
established by the general law of trusts in Anglo-American legal system which do not violate our laws
and rules
When a disqualified alien purchased land in the Philippines and placed the property in the name of a
dummy to circumvent the law, no trust is created.
Article 1448. There is an implied trust when property is sold, and 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 of 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.
Purchase Money Resulting in Trust:

Implied trust or purchase money resulting in trust has the following elements:
1. An actual payment of money, property, or service, or an equivalent, constituting valuable
consideration.
2. Such consideration must be furnished by the alleged beneficiary of a resulting trust.
3. burden of proving the existence of a trust is on the party asserting its existence, and such proof must
be clear and satisfactorily show the existence of the trust and its elements.
Case Where Purchaser Paid for the Price, But the Legal Title (or Estate) is Granted to Another:
Article refers to an implied resulting trust as there is a clear intent to create a trust but short of the
ordinary instrument to reflect it.
There is a principle recognized in law that a person who pays for something generally does so for his own
interest and benefit.
Exception: if trustee who receives the legal title is a legitimate or illegitimate child of the one paying the
price, there is no trust implied by law.
There is a disputable presumption that there is a gift given in favor of the child instead.
No such presumption will arise if the child is the child of the spouse of the grantor by previous marriage
or relationship.
Reason: donation is void for being an indirect donation to the spouse under the Family Code, unless it is a
moderate gift given during a family rejoicing
Formalities of Donation, Not Required:

There being a legal presumption that there is a gift granted to the child, there is no need to follow the
formalities under Articles 748 and 749 of the Code
Formalities required in the Article consist merely in the payment of the purchase price, and the giving of
consent to the placing of the legal title in the name of the grantee.
Article 1449.
There is also an implied trust when a donation is made to a person

but it appears that although the legal estae is transmitted to the donee,

he nevertheless is either to have no beneficial interest or only a part thereof.
Case of a Donation Where the Donee Has No Beneficial Interest,

Or Even If He Has, It Is Only A Part of the Whole Property:
There is also a resulting trust in the contemplated situation because there is a clear intendment to create it
The donee is just like a dummy, or a part owner only of the property donated.
Example: A donated a riceland to B, but B has no beneficial interest in the rice land. B is just a
trustee of A. Similarly, if B's interest is only up to a certain portion, such as of the harvest of the
estate, there is still an implied resulting trust as to the .
Article 1450. If the price of a sale of property is loaned or paid by one person for the benefit of another
and 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 and compel a conveyance thereof to him.
Article Speaks of Constructive Trust:

Article covers a constructive trust to prevent unjust enrichment on the part of the trustee as he is not really
the buyer.
The property is placed in his name only for the purpose of securing the payment o the money he lent or
paid for the trustor.
Example: A wants to purchase a Mercedes Benz from B for P2M. A has only P1M available. He
borrowed P1M from C, who paid the sum to B to complete the purchase price. For his security, C
required that the legal title be placed in his name. The trust is created by operation of law in favor of A. C
is obliged to convey the property to A upon payment of the money loaned to the latter.
Article 1451. When land passes by succession to any person

name of another,
and he causes the legal title to be put in the
a trust is established by implication of law for the benefit of the true owner.
Case Where Land Inherited by an Heir, Is Registered in the Name of the Another Person:
Article provides for a resulting trust there being a clear intention to establish a trust.
The law refers to inherited land. There is no good reason why the principle cannot apply to personal
properties.

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Article 1452. If two or more persons agree to purchase property

and by common consent the legal title is taken in the name of one of them for the benefit of all,
a trust is created by force of law in favor of the others in proportion to the interest of each.
Case Where Purchasers of Property Placed The Legal Title in the Name of One of Them:
Resulting trust arises from instant situation because of the intention to create one.
The purchasers are co-owners of the property.
In the absence of any specific agreement to the contrary, their shares are presumed equal.
Article 1453. When property is conveyed to a person in reliance upon his declared intention to hold if for,
or transfer it to another or the grantor,

there is an implied trust in favor of the person whose benefit is contemplated.
Case Where Property Is Conveyed To a Person Who Committed to Hold or Transfer to Another:
In this situation, an implied resulting trust is created because of the declared intention of the grantee to
hold or transfer the property to the grantor of to another person.
Illustrations:
Example: Sab purchased a Pajero car which was registered in the name of her cousin, Mauwi on Mauwi's
oral commitment that she would hold it while Sab is abroad and then upon Sab's return, Mauwi would
convey the car to Sab. Here, there is a resulting trust with Sab as the beneficiary and Mauwi as the trustee.
In another case, Isabel promised to hold and manage a property belonging to Mitch temporarily until it
shall have been freed from all debts, obligations, and encumbrances. Isabel is a mere trustee of the real
owner, and is under obligation to return it to Mitch.
Article 1454. If an absolute conveyance of property is made

in order to secure the performance of an obligation
of the grantor towards 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.
Case of Absolute Conveyance Intended Merely to Secure Performance of a Prestation:

An implied resulting trust is created in this situation.
There is a clear intention to create a trust, although, it was not reflected in the deed of conveyance.
This is like the sale with right to repurchase except that the right is not stated in the documents.
The seller is beneficiary and the buyer is the trustee. When the seller offers to pay his obligation when
due, the buyer must reconvey the property.
Article 1455. When any trustee, guardian, or other person holding fiduciary relationship uses trust funds
for the purchase of property and causes the conveyance to be made to him or to a third person,
a trust is established by operation of law in favor of the person to whom the funds belong.
Case Where a Fiduciary Used Trust Funds in Purchasing Property In His Name:
An implied constructive trust is created in this situation to prevent unjust enrichment on the part of the
fiduciary.
Persons Covered by this Article:

Persons covered by this Article are those that hold fiduciary positions like a trustee, guardian, agent,
partner, a confidential employee, etc.
If fiduciary uses funds of the principal in buying a property, the acquisition shall inure to the benefit of
the principal.
Rationale Behind the Article:

Article is to prevent the fiduciary from the temptation of putting his own self-interest above that of the
principal whom he is supposed to protect.
Law is also to keep and encourage the fiduciary to remain honest and loyal to his principal.
Article 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law,
the benefit of the person for whom the property comes.
considered a trustee of an implied trust for

Case of Property Acquired Through Mistake or Fraud:
An implied trust is created in this situation with acquirer as the trustee and the real owner as the
beneficiary.
The trust is created by law to prevent unjust enrichment on the part of the acquirer to prejudice of the true
owner.
Mistake must be committed by a third person. If made by the party, there is no trust.
Illustrations:
A valuable parcel was delivered by a postman to Joseph P. when it is intended for Joseph P., a namesake.
Here, the acquisition is by mistake committed by a third person. The former, by operation of law becomes
a trustee for the latter as regards the valuable parcel.
A parcel of land belonging to Laureano was registered by mistake (due to erroneous court order) in the
name of Kilayco, although the latter never claimed it. Kilayco is not holding the property as mere trustee
for Laureano, the true owner, as the court had no jurisdiction to order the registration of the property in
Kilayco's name. Consequently, the creditors of Kilayco cannot levy and sell this land to satisfy their
credits.
Article Does Not Cover Case of Violation of a Condition in Donation:
If condition in a valid donation has been breached by the donee, no trust is created.
The property remains in the ownership of the donee subject, however, to a proper action for revocation.
If the action had already prescribed, the ownership remains with the donee.
Article 1457.

An implied trust may be proved by oral evidence.

Oral Evidence Allowed in Implied Trust Irrespective of the Nature of the Property:
If trust is implied whether the property involved is immovable or movable, parol evidence is allowed to
prove its existence
Proof Needed to Prove Trust by Parol Evidence:

Oral evidence needed to prove the establishment of an implied trust must be credible and trustworthy
because it could easily be fabricated.
Proof must be clear, satisfactory, and convincing. Intent to establish a trust cannot rest on vague,
uncertain evidence or on loose, equivocal or indefinite declarations

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Juan v. Yap
Caneda spouses (Maximo and Dulcisima) mortgaged their two lands to Juan (petitioner), an employee
and nephew of Yap (respondent) to secure a P1.68M loan.
Juan extrajudicially foreclosed the properties wherein he was the highest bidder. However, certificate of
sale was not issued because Juan did not pay the sale's commission.
Yap and Caneda spouses executed a Memorandum of Agreement wherein Caneda spouses acknowledge
Yap as their real mortgage-creditor and Juan as merely a trustee of Yap.
Three days later, Caneda spouses and Yap sued Juan in RTC-Cebu City to declare Yap as trustee of
petitioner, annul Juan's bid for foreclosed properties and declare contract superseded by the MOA.
Did implied trust arise between petitioner and respondent, binding petitioner to hold the beneficial title
over the mortgated properties in trust for respondent? - YES.
Implied trusts are remedies against unjust enrichment
Implied trust arising from mortgage is not among the trust relationships in the Civil Code but the Code
itself provided that such listing does not exclude others established by the general law on trusts.
Under general principles of trust, equity converts the holder of property right as trustee for the benefit of
another if the circumstances of its acquisition makes the holder ineligible in good conscience to hold and
enjoy it.
Proofs (based on parol evidence varying the terms of the mortgage contract, allowed in the Civil Code) of
respondent were more convincing than that of the petitioner (based on the mortgage contract)
Caneda spouses acknowledged respondent as the lender.
Yap acknowledged that the reason Juan's name was placed in the Contract as the mortgagor was because
at the time of the Contract's execution, Yap was mostly abroad and could not personally attend to his
business in the country.
It was Yap, not Juan, who shouldered the payment of the foreclosure expense.
Kiel v. Estate of P.S. Sabert

Kiel and Sabert entered into an agreement to develop the Parang Plantation Company. They were to share
and share alike the property. Partnership was formed so that the land could be acquired in the name of
Sabert as Kiel was a German citizen and not deemed eligible to acquire public lands in the Philippines
During the World War, Kiel was deported from the Philippines
After 5 years, Sabert transferred all of his rights in two parcels of land to Nituan Plantation Company
which he formed with 4 other persons.
In the same period, Kiel appears to have tried to secure a settlement from Sabert. But Sabert died before
amicable arrangements could be reached.
Was a trust established between Kiel and Sabert? - NO.
Trust will not be created when, for the purpose of evading law prohibiting one from taking or holding real
property, he takes a conveyance thereof in the name of a third person.
Parties were wrong in assuming that the trial judge found that this was an action to establish a resulting
trust in land.
Kiel is not entitled to any share of the land itself but he has clearly shown his right to of the value of the
improvements and personal property of the land to the date upon which he left the plantation.
Thomson v. Court of Appeals

Petitioner Thomson was Executive VP of American Chamber of Commerce (AmCham)
Burridge, Thomson's superior, was going to retire and return to his home country. But before that,
Burridge wanted to transfer his proprietary shares in the Manila Polo Club to Thomson
AmCham paid for the share but listed it in the name of Thomson. AmCham also paid for the transfer fee
Thomson paid upon his admission as a memver of MPC.
MPC issued Proprietary Membership Certificate in favor of Thomson. Thomson, however, did not
execute a document recognizing AmCham's beneficial ownership over said share.
Thomson later left AmCham. AmCham executed a Release and Quitclaim stateing that the corporation
was releasing Thomson from all existing claims. Quiclaim did not mention the MPC share.
Is AmCham the beneficial owner of the disputed MPC share? - YES.
There exists a trust between Thomson (trustee) and AmCham (beneficial owner).
AmCham paid for the share and Thomson was given legal title thereto. Thus, a resulting trust is presumed
by matter of law.
Trust arises in favor of one who pays the purchase money of property in the name of another because of
the presumption that he who pays for a thing intends a beneficial interest therein for himself.
AmCham's intention to hold on to the beneficial ownership was also expressed in writing at the very
outset.
Although share was in Thomson's name, his title is limited to the usufructthe enjoyment of the facilities
and privileges of such membership in the club.
Such arrangement reflects a trust relationship governed by law and equity.
Uy Aloc v. Cho Jan Ling

Some Chinese merchants purchased a land and erected a building as their clubhouse.
Since their association had no juridical personality for not being registered, they agreed to have the title
placed in the name of one of them, Cho Jan Ling (respondent)
Cho Jan Ling accepted the trust and agreed to hold the property as the agent of the association
After the construction, it was leased to another person and Cho Jan Ling collected some P25K in rents
Cho Jan Ling failed and refused to account the rent, claiming that he is the owner of the property.
Was a trust created between the Chinese merchants and Cho Jan Ling? - YES.
Respondent is a mere trustee and all the members of the association are beneficiaries.
Consequently, respondent is obliged to render an accounting after the property has been declared property
of the association.
On at least one occasion, Cho Jan Ling admitted the beneficial ownership to be in the association.
Elena Buenaventura Muller v. Helmut Muller

Muller spouses (Elena and Helmut) moved and resided permanently in the Philippines
Helmut (Respondent) sold his inheritance (a house in Germany) and bought a house and lot in Antipolo
Antipolo property was registered in the name of Elena (petitioner).
Spouses eventually separated. Respondent filed a petition for separation of properties. Trial Court granted
termination of ACP and ordered equal partition of personal property located in the Philippines. However,
Helmut was not allowed to recover the Antipolo property for violation of the Constitution.
CA considered Elena's ownership over the Antipolo property in trust for Helmut. As regards to the house,
CA ruled that there is nothing in the Constitution which prohibits Helmut from acquiring the same.
Elena (petitioner) claims that respondent, being an alien, is disqualified to own private lands in the
Philippines
Helmut (respondent) claims that he is not asking for transfer of ownership of the Antipolo property but
merely for reimbursement.
Did CA err when it considered Elena's ownership over the property in trust for Helmut? YES.
Save for the exception provided in cases of hereditary succession, Helmut's disqualification from owning
lands in the Philippines is absolute. Not even an ownership in trust is allowed.
Besides, the purchase was made in violation of an existing statute and in evasion of its express provision,
no trust can result in favor of the party who is guilty of the fraud.
Helmut cannot seek reimbursement on the ground of equity where it is clear that he willingly and
knowingly bought the property despite the constitutional prohibition.

44
Prescription:
Amerol v. Bagumbaran
Bagumabaran (defendant) applied for a free patent over land even though he knew that Liwalug (plaintiff)
was occupying and cultivating the same. His application was given due course and granted.
Liwalug never knew of Baugumbaran's free patent application nor was he ever notified of the
administrative proceedings with regards to Bagumbaran's application.
Liwalug instituted case against Bagumbaran but lost despite the abundance of evidence in his favor.
Lower court ruled that Liwalug's action prescribes in 4 years and not in 10 years as Liwalug argues.
Thus, Lower court ruled that action has prescribed.
What is the prescriptive period for the action to reconvey the title to real property arising from an
implied or constructive trust? - 10 YEARS. Commencing from the date of the issuance of title over the
real property.
Act of Bagumbaran in misrepresenting that he was in actual possession of the property in question,
obtaining a patent in his name, created an implied trust in favor of the actual possessor (Liwalug).
Article 1456 applies: 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
Right to seek reconveyance based on an implied or constructive trust is not absolute and is subject to
extinctive prescription.
Being an obligation arising from law, an action for an implied trust prescribes within 10 years.
Prescriptive period was interrupted when Liwalug instituted a counterclaim in Decembe 1964, 9 years
after the issuance of the free patent.
Marquez v. Court of Appeals

Spouses Marquez (Rafael Sr. and Felicidad) had 12 children. They also owned a parcel of land in Rizal
wherein they constructed a conjugal home.
Felicidad died intestate. 30 years later, Rafael vested upon himself sole ownership of the Rizal property.
Later, Rafael Sr. executed a Deed of Donation Inter Vivos covering subject land as well as the house
thereon to 3 of his children: Rafael Jr (petitioner), Alfredo (respondent), and Belen (respondent) to the
exclusion of the other children. New TCT was issued in the name of the private respondents.
Alfredo and Belen were in actual possession of the land. When the other children found out about the
transfer, they filed a complaint for reconveyance of the said portion of the Rizal property.
Was a constructive trust created? - YES.
Is the action barred because of prescription? - NO. The action has not yet prescribed.
When Rafael Sr misrepresented in his unilateral affidavit that he was the only heir of his wife when his
children were still alive and managed to secure a transfer certificate of title under his name, a constructive
trust under Article 1456 was established
An action for reconveyance based on an implied or constructive trust prescribed in 10 years from issuance
of the Torrens title over the property.
Since TCT was issued in Rafael Sr's name on June 16, 1982 and the action was filed by petitioners on
May 31, 1991 (9 years later), prescription has not yet barred action.
ESTOPPEL (1431-1437)
Article 1431. Through estoppel an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying thereon.
Estoppel, Concept in American Jurisprudence:

Estoppel is a bar which precludes a person from denying or asserting anything contrary to that which has
been, in contemplation of law, established as the truth either by acts of judicial or legislative officers, or
by his own deed or representations either express or implied.
Applicability:
The doctrine of estoppel applies only to questions of fact and not of law. The public policy considerations
behind forum shopping are superior to that of a partys claim of estoppel.
Origin of Doctrine of Estoppel:

The doctrine of estoppel has its origin in equity, and is based on moral rights and natural justice. Its
applicability to any case depends to a very large extent upon the special circumstances of the case.
Estoppel, being an equitable doctrine, cannot be invoked to perpetuate an injustice.
Basis and Purpose:

Estoppel is based on public policy, fair dealing, good faith and justice, and its purpose is to forbid one to
speak against his own act, representations, or commitments to the injury of one who reasonably relied
thereon.
It springs from equitable principles and the equities of the case. It is designed to aid the law in the
administration of justice where without its aid injustice might result.
Essential Elements of Estoppel:

1. Conduct of a party amounting to false representation or concealment of material facts or at least calculated to
convey the impression that the facts are otherwise than, and inconsistent with, those which the party
subsequently attempts to assert.
2. Intent, or at least expectation, that this conduct shall be acted upon by, or at least influence, the other party.
3. Knowledge, actual or constructive, of the real facts.
Reliance:
The doctrine of estoppel cannot be invoked by any one against the person who made the subject
admission or representation, unless the former has been misled.
In brief, the complaining party has relied in good faith on the admission or representation made causing
him to act in a certain way.
It is immaterial whether he was prejudiced or not. It suffices, if he was misled because of his reliance on
the representation of the other party.
Nature of the Admission or Representation:

The admission or representation must be plain and clear. Estoppel cannot be sustained on doubtful or
ambiguous inferences.
An estoppel in pais must be based upon express statements or upon positive acts or conduct intended to
influence the other party, or the inclination is toward such influence.
Essential Elements of Promissory Estoppel:

1. A promise reasonably expected to induce action or forbearance.
2. Such promise did in fact induce such action or forbearance.
3. The party suffered detriment as a result.
Promissory estoppel presupposed the existence of a promise on the part of one against whom estoppel is
claimed, and the promise must be plain and unambiguous, and sufficiently specific so that the court can
understand the obligation assumed and enforce the promise according to its terms.
A cause of action for promissory estoppel does not lie where an alleged promise was conditional.
Wala pang nananalo sa lotto na di tumataya. Anton Mercado

2
Basic Principle in Estoppel:
The basic principle in estoppel is articulated in the Rules of Court:
Section 2. Conclusive presumptions. The following are instances of conclusive presumptions:
(a) Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led to another to believe a
particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act or omission,
be permitted to falsify it:
(b) The tenant is not permitted to deny the title of his landlord at the time of commencement of the relation of landlord and
tenant between them. (3a)
Estoppel prevents a party from going back upon his own acts and representations to the prejudice of the
other party who relied upon them.
Effect of Misapplication of Estoppel:

If estoppel is misapplied, it becomes a most effective weapon to accomplish justice because it shuts a
mans mouth from speaking the truth and debars the truth in a particular case.
By weight of authority, estoppel cannot create a contract of insurance, neither can it be successfully
invoked to create a primary liability, nor can it give validity to what the law so proscribes as a matter of
public policy.
Illustrative Cases of Estoppel:

1. A party who invoked the jurisdiction of the court, or one who participated in its proceedings, is estopped from
questioning its jurisdiction. (Submission to the Jurisdiction of Court)
2. A party who takes and accepts a real estate mortgage is bound by the recitals made in the deed of mortgage.
He cannot deny the legal force and effect of such recitals. (Contractual Estoppel)
3. Where a party did not object to the construction of an electric sub-station within his property but he merely
sought an assurance that the sub-station would not be a nuisance or be dangerous, he can be said to be under
contractual estoppel. (Contractual Estoppel)
4. Estoppel cannot be predicated on a contract that is void. (Contractual Estoppel)
5. Mortgagors are estopped from questioning the validity of the Sheriffs Sale after they had repeatedly
requested for time within which to redeem the property from the Sheriff who foreclosed and sold the same at
public auction. (Contractual Estoppel)
6. He who prevents a thing from being done may not avail himself of the non-performance which he himself
occasioned, for the law says to him in effect, this is your own act, and therefore you are not damnified.
Where, therefore, a taxpayer repeatedly requested for reinvestigation of his case and therefore persuaded the
government to postpone collection of the tax, he cannot set up prescription of the action. (Conduct and
Positive Act)
7. Mirasol manifested that he had no objection to the boring of a well on his land by the municipal government
of Tabaco. The latter, relying on the statement of Mirasol began the drilling of the well. However, Mirasol
changed his mind after a few days and subsequently ordered the stoppage of the work. Mirasol is now under
estoppel to revoke the authority he gave to the municipality without reimbursing it for the expenses it incurred
therefor. (Conduct and Positive Act)
8. Where both parties are equally guilty, neither is entitled to complain against the other, having entered into the
transaction with open eyes, and having benefited from it, said parties should be held in estoppel to assail and
annul their own deliberate acts. (Conduct and Positive Act)
9. One who is silent when he ought to speak will not be heard to speak when he ought to be silent. However,
mere innocent silence will not justify an estoppel. There must be some element of turpitude or negligence
which misled another person to his damage. The silence must be shown to be unjustified and, it must also be
shown further, that there was unfair injury. Otherwise, estoppel cannot be invoked. (Silence or Inaction)
10. An owner of a land kept silent without interposing any objection despite his full knowledge that a railroad
corporation, without his authority, entered his land and began constructing a railway therein. He is under
estoppel from recovering his land, or from preventing the use thereof by the railroad corporation which
constructed the railway at great expense. (Silence or Inaction)
11. Any issue raised for the first time on appeal and not timely raised in the proceedings in the lower court is
barred by estoppel. (Silence or Inaction)
Laches:
Estoppel by laches arises from the negligence or omission to assert a right within a reasonable time,
warranting a presumption that the party entitled to assert it either has abandoned or declined to assert it.
Laches has been defined as the failure or neglect, for an unreasonable length of time, to do that which by
exercising due diligence could or should have been done earlier; it is negligence or omission to assert a
right within a reasonable time, warranting a presumption that the party entitled to assert it either has
abandoned it or declined to assert it.
The doctrine of laches or stale demands is based upon grounds of public policy which requires for the
peace of society, discouragement of stale claims. And unlike the statute of limitations, it is not a mere
question of time but is principally a question of inequity or unfairness of permitting a right or claim to be
enforced or asserted.
The question of laches is addressed to the sound discretion of the court, and since it is an equitable
remedy, its application is controlled by equitable considerations. It cannot work to defeat justice or to
perpetrate fraud and injustice. A party cannot be held guilty of laches when he has not incurred undue
delay in the assertion of his rights.
Inapplicability of Estoppel:
1. Estoppel cannot be invoked against the Government.
a. Estoppel cannot be raised against the Government if it is acting in its sovereign capacity or is
asserting governmental rights.
b. The Government is not estopped by reason of the errors or mistakes of its agents. It is hornbook
law that the principle of estoppel does not operate against the Government for the act of its agent.
The State, as represented by the Government, is not estopped by the mistakes or errors of its
official or agents.
c. As criminal actions cannot be waived or condoned, there can be no estoppel against the State in
criminal prosecution where public and social interests are involved.
d. The Solicitor General may not be excused from his shortcomings by invoking the doctrine that
the Government is estopped by the mistake or error of its officials or agents as if it were some
magic incantation that could erase the governments errors.
e. Generally, the State cannot be put in estoppel by the mistakes or errors of its officials or agents
but the government must not be allowed to deal dishonorably or capriciously with its citizens, and
must not play an ignoble part or do a shabby thing.
2. Estoppel cannot be invoked against a Municipality or City.
a. Thus, estoppel cannot be applied to validate a contract entered into by a Municipality over which
it has no power to make, although the Municipality had already accepted the benefits. To apply
estoppel in such a case would enable the Municipality to do indirectly what it cannot do directly.
3. Estoppel cannot validate unlawful acts.
a. As between the parties to a contract, validity cannot be given to it by estoppel if it is prohibited
by law or against public policy like a stipulation for attorneys fees.
4. Estoppel cannot be predicated on ignorance of the law.
a. Everyone is conclusively presumed to know the law. Ignorance of the law cannot be a basis for
estoppel.
b. Those who know the true facts and circumstances or those who through due diligence and
ascertainment could have unerringly discovered the true facts in connection with which the
representation was made, but failed to do so, or intentionally closes his eyes to the ascertainment
of the ultimate truth, he cannot later on, be heard to complain that he was misled by the other
party. However, estoppel will not arise from a conduct due to ignorance founded upon an
innocent mistake.
Exceptional Cases Where Estoppel Was Applied Against The Government:

1. The Government may be estopped through the affirmative acts of its officers acting within the scope of
their authority, but this will not cover their neglect or omissions of public duties.
2. The time-honored rule that the Government cannot be estopped by the mistake or errors of its agent is not
without exceptions; the rule on non-estoppel of the government is not designed, to perpetuate injustice.

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1. Origin:
Pio Baretto Realty vs. CA
Drepins estate was being settled, and according to his will, he had 22 creditors. In order to pay his
obligations, his properties (3 parcels of land) must be sold.
Moslares offered to buy one of the land in question in accordance with the Deed of Sale with Mortgage
entered into by him and Drepin while he was still alive, but such deed was not registered.
The probate court allowed Moslares to pay the remaining balance, gave him undue leniency (by
extending the period of time he could pay the obligations).
Moslares failed to pay, because he kept on issuing bouncing checks. The probate court had lost its
patience, and asked Moslares to pay within 10 days, and failure to do so would automatically rescind the
contract.
Moslares was now questioning the probate courts jurisdiction to rescind the contract.
Is Moslares estopped from questioning the jurisdiction of the probate court? YES
The Court said that Moslares cannot raise the issue of jurisdiction. Estoppel, originating from equity,
works to preclude respondent from questioning the jurisdiction of the court.
By offering to buy the land in question, Moslares clearly recognized the jurisdiction of the probate court.
The Court held that the probate court had jurisdiction after the finding that the probate court only wanted
to put an end to an agreement which had ceased to be a working proposition when Moslares failed to
fulfill his obligations countless times.
2. Elements:
Kalalo vs. Luz
Kalalo and Luz entered into an agreement with each other. Later, Kalalo sent to Luz a statement of
account to which an itemized statement of Luzs account.
However, Luz sent Kalalo a resume of fees due to the latter. Said fees, according to Luz, amounted to 10k
instead of the amount claimed by the Kalalo.
Luz sent Kalalo a check for said amount, which the latter refused to accept as full payment of the balance
of the fees due him. Kalalo filed a complaint against Luz.
Luz as his defense stated that Kalalo was in estoppel because of certain acts, representations, admissions
and/or silence, which led him to believe certain facts to exist and to act upon said facts.
He further stated that for estoppel to apply it is not necessary, contrary to the ruling of the trial court, that
Luz should have actually relied on the representation, but that it is sufficient that the representations were
intended to make the defendant act there on.
Does estoppel apply in the case at bar? NO
An essential element of estoppel is that the person invoking it has been influenced and has relied on the
representations or conduct of the person sought to be estopped, and this element is wanting in the instant
case.
The statement of accounts could not estop Kalalo because Luz did not rely thereon.
Cristobal vs. Gomez

Epifanio Gomez asked the help of his brother Marcelino Gomez to claim his 3 lands mortgaged to
Yangco. They borrowed money from Baas in the name of Marcelino.
The properties were redeemed in the name of Marcelio where Epifanio was the one who manage it.
Epifanio died and Marcelino took over the property. Epifanios widow Cristobal and their children were
claiming said lots.
Marcelino alleged that the heirs of Epifanio was estopped in claiming Parcel C because Epifanio certified
in a notarial document that Marceliino owned said lot.
Can Marcelino claim the defense of equitable estoppel? NO
The court ruled that Marcelino could not claim the defense of equitable estoppel because he was not
mislead of the false statement in the document.
Marcelino and Epifanio only conspired to make such document to defeat Yangcos right.
Epifanio was required to return the properties back.
Marques vs. TEBTC
Maxilite and its President, Marques, entered into a trust receipt transaction with FEBTC for the shipment
of various high-technology equipment from the United States, with the merchandise serving as collateral.
Marques further agreed to keep said merchandise insured against fire to its full value.
FEBIBI, upon the advice of FEBTC, facilitated the procurement and processing from Makati Insurance
Company of four separate and independent fire insurance policies over the trust receipted merchandise.
Maxilite shall pay the premiums for these policies through a debit arrangement wherein FEBTC would
debit Maxilites account for the premium payments. Finding that Maxilite failed to pay the insurance
premium, FEBIBI sent written reminders to FEBTC to debit Maxilites account.
On 9 March 1995, a fire gutted the Aboitiz Sea Transport Building where Maxilites office and
warehouse were located. As a result, Maxilite suffered losses amounting to at least P2.1 million, which
Maxilite claimed against the fire insurance policy with Makati Insurance Company.
Makati Insurance Company denied the fire loss claim on the ground of non-payment of premium.
Maxilite and Marques sued FEBTC, FEBIBI, and Makati Insurance Company.
Is FEBTC liable to Maxilite for failure to pay the said premiums? -YES
The Court held that FEBTC is estopped from claiming that the insurance premium has been unpaid.
FEBTC induced Maxilite and Marques to believe that the insurance premium has in fact been debited
from Maxilites account. FEBTCs conduct clearly constitutes negligence in handling Maxilites and
Marques accounts. FEBTC must be held liable for damages.
Fat Kee Computer vs. Online Networks
ONLINE sold computer printers to FAT KEE for the price of $136, 149.43. FAT KEE offered to pay in
Philippine Peso and a Statement of Account (SOA) was issued by ONLINE indicating that the exchange
rate of P40:US$1 is to be used in the computation.
About two months after the issuance of the SOA, the parties participated in a meeting where they
purportedly negotiated for the exchange rate to be applied.
When FAT KEE deferred in the payment of a balance in the purchase price, ONLINE instituted this
present case.
FAT KEE contends that ONLINE cannot apply a different exchange rate because the SOA they made
clearly indicated that the amount due was only P5, 067, 925.43 by applying the exchange rate of
P34:US$1.
Can Fat Kee invoke estoppel on the part of ONLINE on the basis of its issuance of the SOA? NO
FAT KEE cannot invoke estoppel against ONLINE for the latters issuance of the SOA. The Court agrees
with the Court of Appeals ruling that any misconception on the part of FAT KEE engendered by the
issuance of the SOA should have already been rectified when the parties subsequently met.
By their act of submitting their respective proposals and counter-proposals on the mode of payment and
the exchange rate, FAT KEE and ONLINE demonstrated that it was not their intention to be further
bound by the SOA, especially with respect to the exchange rate to be used.
3. Promissory Estoppel:
Terminal Services vs. PPA
Terminal Facilities and Services Corp. (TEFASCO) submitted a proposal to Phil. Ports Authority (PPA)
to construct a terminal complex with port facilities and services.
The PPA Board of Directors passed Resolution No.7 and a letter was sent to TEFASCO conveying the
approval the proposal.
Long after TEFASCO started with the work, PPA Board passed Resolution No.50 providing for an
additional requirement of an application for construction permit.
2 years after the completion of the work and commencement of TEFASCOs port operations, PPA issued
another permit providing more onerous conditions: 10% government share out of arrastre and stevedoring
gross income and 100% wharfage and berthing charges.
TEFASCO and PPA executed a Memorandum of Agreement providing an acknowledgement of
TEFASCOs arrears in govt. share and PPAs promise to issue the necessary permits for TEFASCOs
port activities. TEFASCO complied, PPA did not.
Is PPA estopped from backing-out of its commitments due to its resolutions and the letters? YES

6
Record shows that PPA made express representations to TEFASCO that it would authorize and support
its project under clear and categorical terms and conditions of an envisioned contract.
TEFASCO complied which resulted to the benefit of PPA, and PPA accepted the project as completed
and authorized TEFASCO to operate the same.
An estoppel may arise from the making of a promise if it was intended that the promise should be relied
upon and in fact it was relied upon, and if a refusal to enforce it would be virtually to sanction the
perpetration of fraud or would result in other injustice.
In this respect, the reliance by promise is generally evidenced by action or forbearance on their part, and
the idea has been expressed that such action or forbearance would reasonably have expected by the
promisor.
4. Estoppel vs. Laches:

Francel Realty vs. Sycip
FCR filed an illegal detainer case against Sycip.
Sycip filed a motion to dismiss on the ground of lack of jurisdiction but the trial court denied the motion.
After trial, the lower court dismissed the case for lack of jurisdiction. CA affirmed in toto the decision
assailed from.
Petitioner argues that CAs affirmation of the trial courts dismissal of its case was erroneous, considering
that a full-blown trial had already been conducted. In effect, it contends that lack of jurisdiction could no
longer be used as a ground for dismissal after trial had ensued and ended.
Was CAs affirmation of the ruling erroneous? NO
The petitioners argument is anchored on estoppel by laches espoused on Tijam v. Sibonghanoy (a party
may be barred from questioning a courts jurisdiction after being invoked to secure affirmative relief
against its opponent).
The ruling in Sibonghanoy on the matter of jurisdiction is, however, the exception rather than the rule.
Estoppel by laches may be invoked to bar the issue of lack of jurisdiction only in cases where lack of
jurisdiction must have been raised so belatedly as to warrant the presumption that the party entitled to
assert it had abandoned or declined to assert it.
The general rule remains: a courts lack of jurisdiction may be raised at any stage of the proceedings,
even on appeal.
Metromedia Times vs. Pastoria

The case started when respondent Pastorin was suspended from work after transacting a loan agreement
with one de Manuel, one of the dealers of the petitioner Metromedia the company he was working for as
field collector.
Petitioner and respondent had an agreement to transfer the latter to another department and change his
payroll in accordance with the transfer. After the said transfer,
Pastorin stopped working, and told Metromedia in a letter they he refused to accept his transfer. He then
proceeded to filing a complaint with the Labor Arbiter.
The LA ruled in his favor.
Metromedia, on appeal, raised the issue of lack of jurisdiction on the part of LA with the NLRC.
NLRC reversed LAs decision, but the CA reinstated LAs decision, hence this appeal.
Is Metromedia estopped by laches from questioning LAs lack of jurisdiction after belatedly raising it
with NLRC, when it could have done so as early as the hearing with LA? NO
Estoppel does not apply to confer jurisdiction to a tribunal, only the law can confer jurisdiction. Where it
appears that the court has no jurisdiction, then the defense may be interposed at any time, even on appeal
or even after final judgment. The Court reinstated the NLRCs decision: LA has no jurisdiction,
grievances issues such as this should fall under the Voluntary Arbitrator.
5. By Silence:
Magtira vs. CA
The parcel of rice land in controversy, situated in Bulacan belonged to Isidro Magtira who died intestate,
SOFIA Magtira as his sole heir.
Isidro for and in consideration of the amount of (P725.00), had entered into an agreement with
ZACARIAS Pangan.
It is SOFIA's submission that it was only sometime in 1955 during the cadastral in Paombong, Bulacan,
that she came to know that ZACARIAS was claiming ownership of the land which the latter wanted to be
surveyed in his name.
She also stated that the consolidation of ownership in ZACARIAs name in 1945 was kept a secret from
her and that ZACARIAS had done nothing else to her knowledge which indicated that he was claiming
the land as his own.
Is Sofia estopped due to the fact that she remained silent for a long time? YES
Not even once did she disturb ZACARIAs possession for exactly 30 years, 4 months and 10 days from
February 8, 1926, the date the first agreement.
SOFIA showed inexcusable negligence in effectively asserting and protecting her rights as the alleged
mortgagee by her failure to either seek a reformation of their agreement, or to make proper consignation
of the repurchase price, to file the action for redemption and cancellation of the alleged mortgage as early
as after the Japanese occupation when for the third time her alleged offer to redeem was refused by
ZACARIAS.
De Ynchausti vs. MERALCO
Petitioner wanted to recover part of his land where Meralco had used in construction of electric railroad
after the railroad had already been completed.
Can the petitioner recover the possession of the land when he did not complain during construction?
NO, his acquiescence to the companys taking possession is considered as a waiver
The owner of land, who stands by without objection and sees a public railroad constructed over it, cannot,
after the road is completed, or large expenditures have been made thereon upon the faith of his apparent
acquiescence, reclaim the land, or enjoin its use by the railroad company. In such case there can only
remain to the owner a right of compensation.
6. Inapplicability:
Rep vs. Go Bon Lee
The Solicitor General filed a petition for the cancellation of Go's certificate of naturalization on the
ground that the same was obtained illegally or contrary to law because Go did not then have all the
necessary qualifications to become a citizen of the Philippines.
In denying the petition of the government the lower Court expressed the view that the matter of Go's
citizenship was already res judicata and that the Government was in estoppel to question his status as a
citizen upon any ground which would have been raised before or during the hearing of the petition for
naturalization.
Is the Government estopped from questioning Gos citizenship? NO
It is settled that the doctrine of estoppel or of laches does not apply against the Government suing in its
capacity as Sovereign or asserting governmental rights. It has been held that the Government is never
estopped by mistakes or errors on the part of its agents and that estoppel cannot give validity to an act that
is prohibited by law or is against public policy.
Republic vs. CA
Paredes purchased a parcel of land in Agusan Del Sur. Two years later, he applied for a Free Patent on the
same subject land although a bigger area.
The Bureau of Lands approved his application and subsequently, Paredes built his house on said property.
The Sangguniang Bayan of San Francisco issued a resolution undertaking to recover possession of the
subject land because it was long before designated to be a school site by the Bureau of Lands.
Paredes contends that the Republic is estopped from revoking the Free Patent it granted to him because
the Bureau of Lands did not oppose when it applied for the patent.

8
Can Paredes successfully invoke the principle of estoppel? NO!
Paredes cannot successfully invoke the doctrine of estoppel against petitioner. While it is true that private
respondent obtained title to the subject land without government opposition, the government is not now
estopped from questioning the validity of his certificate of title. It is, after all, hornbook law that the
principle of estoppel does not operate against the Government for the act of its agents.
Republic vs. G Holdings

G Holdings filed a complaint to compel Republic for specific performance for a purchase and sale
agreement where the Republic shall sell 90% of shares of Maricalum Mining Corp. to G Holdings, plus
damages. The trial court rendered a judgment in favor of G Holdings.
The Solicitor General filed a notice of appeal on behalf of the Republic. Contrary to the rules of
procedure, the notice was filed with the Court of Appeals, not with the trial court which rendered the
judgment appealed from.
Republic contends that such failure was due to the extrinsic fraud employed by G Holdings.
Is the Republic estopped from appealing due to the error of the SolGen? YES
While the Republic is usually NOT estopped by the mistake/error of its officials, it cannot now take
refuge in the rule as it does not afford a blanket or absolute immunity.
The Solicitor General may not be excused from its shortcomings by invoking the doctrine as if it were
some magic incantation that could benignly, if arbitrarily, condone and erase its errors.
The unfortunate predicament of the Republic was caused by the SolGen, its own counsel.
There was NO extrinsic fraud because G Holdings had no participation. To render judgment void, fraud
must be committed by the adverse party and not by ones counsel.
Favis vs. Municipality of Subangan

Plaintiffs-appellants instituted an action for collection against the Municipality of Sabangan, Bontoc for
the payment of G.I. pipes of various sizes.
Defendant-appellee, through its mayor, alleged that "the then Municipal Mayor of Sabangan was never
authorized to contract or buy on credit from the plaintiff ... hence, defendant municipality can not in any
way, be legally bound for the acts of the then mayor.."
The records of the case do not show that the requisites for purchasing of a province, city, or municipality
have been complied with. But it is undisputed that the municipality is benefited by the installation of the
G.I. pipes.
May estoppel be invoked against a municipality or city? NO
The doctrine of estoppel cannot be applied as against a municipal corporation to validate a contract which
it has no power to make, or which it is authorized to make only under prescribed conditions, within
prescribed limitations, or in a prescribed mode or manner, although the corporation has accepted the
benefits thereof and the other party has fully performed his part of the agreement, or has expended large
sums in preparation for performance. A reason frequently assigned for this rule is that to apply the
doctrine of estoppel against a municipality in such case would be to enable it to do indirectly what it
cannot do directly.
Eugenio vs. Perdido

In 1927, a homestead patent was issued in favor of Eugenio. Five years later, he sold the land to the
defendants Perdido which was in clear violation of the Homestead Law.
In 1949, this case was instituted to recover the land. Defendants contend that the plaintiffs were estopped
from recovering the land, having executed a Deed of Sale with the conclusive presumption that they knew
about the conditions of the Homestead Law, they had waived their rights over the land.
Were the plaintiffs estopped from recovering the land due to the deed of sale? NO
Validity cannot be given to a contract by estoppel if it is prohibited by law or is against public policy.
Essentially, what the defendants were saying was that plaintiffs were estopped from recovering the land
because there was this presumption that they should know the law, and by executing the Deed of Sale
they have waived their rights over the homestead land, or at least, they led the defendants to believe that
the sale was valid when it was actually invalid.
The Court said that if we are going by the standard of presumption of knowing the law, the defendants
were also conclusively presumed to know the law, and should not be allowed to plead estoppel which was
founded in ignorance.
Cristobal vs. Gomez

Epifanio Gomez asked the help of his brother Marcelino Gomez to claim his 3 lands mortgaged to
Yangco. They borrowed money from Baas in the name of Marcelino.
The properties were redeemed in the name of Marcelio where Epifanio was the one who manage it.
Epifanio died and Marcelino took over the property. Epifanios widow Cristobal and their children were
claiming said lots.
Marcelino alleged that the heirs of Epifanio was estopped in claiming Parcel C because Epifanio certified
in a notarial document that Marceliino owned said lot.
Can Marcelino claim the defense of equitable estoppel? NO
The court ruled that Marcelino could not claim the defense of equitable estoppel because he was not
mislead of the false statement in the document.
Marcelino and Epifanio only conspired to make such document to defeat Yangcos right.
Epifanio was required to return the properties back.
7. Exceptions:
Bachrach Motors vs. Unson
A lease of land was entered between petitioner and Director of Lands requiring Bachrach to construct
improvements on such land.
Bachrach failed to provide such improvement and gave Director of Lands two options: to cancel the lease
or to extend the time for them to construct such improvement. Director of Lands sent a letter stating that
he would consider extending of time to commence improvements on such land.
Petitioner continued to pay the rent and improved the premises at a considerable expense. Director of
Lands cancelled and terminated the lease. However plaintiff refused to consent on such cancellation.
They alleged that Director of Lands was estopped in cancelling the contracts because he allowed the
petitioner to improve the premise and he also received the rent. They also alleged that there was delay on
officials to answer their request for extension.
Did the Government waive its right to demand the forfeiture of the lease? NO
The Director of Lands simply promised that proper consideration would be given the request.
It is further to be noted that the Director of Lands had no authority to grant the extension; under section
61 of Act No. 2874, such extensions can only be granted by the Secretary of Agriculture and Natural
Resources upon "recommendation of the Secretary of Commerce and Communications."
Neither can the fact that there was a long delay on the part of the officials concerned in taking action upon
the request for the extension be of any avail to the plaintiff.
It is well settled that the neglects or omissions of public officers as to their public duties will not work an
estoppel against the State.
Nilo vs. Romero

Fausto Nilo, filed with the CFI of Davao an action against the City of Davao, represented by the City
Engineer, to recover payment for the use as road way, of a part of his land by the defendant City. CFI
rendered judgment in favor of Nilo due to respondents failure to file its answer within the prescribed
period.
A motion for execution of said judgment was correspondingly issued. Subsequently, the defendant City of
Davao, thru the City Attorney A. L. Noel, filed a "Petition for Relief from Judgment", alleging for the
first time, that the trial court acquired no jurisdiction over the defendant City of Davao, because it was not
the City Engineer, but the City Mayor who is the right official to represent the City, and who should have
been served with summons.
The lower court believed that it has not acquired jurisdiction over the defendant and, therefore, orders that
the judgment previously rendered in this case be set aside and the new trial be held.
Did the judge act with grave abuse of discretion in ordering the reversal of its prior judgment? YES

10
If defendant City believed that it was wrongly represented, its City Attorney should have filed a motion to
dismiss, based on such ground. Unfortunately, however, he did not. The doctrine of estoppel now
operates against respondent City of Davao.
The erroneous designation of representative, when the defendant itself is named, is not sufficient to set
aside the proceedings had in the case.
Leca Realty vs. Republic
The Republic of the Philippines, through DPWH, sought to expropriate some properties belonging to
Leca, Leeleng, Metrobank, BPI and Cityland for the construction of the EDSA-SHAW Boulevard
Overpass Project in Mandaluyong City.
The trial court, in this case, appointed three commissioners to determine the just compensation for the
subject properties. The CA found that the commissioners and their declaration of the just compensation
was fair and impartial.
Now, the Republic, through the OSG, was given by law 15 days to file a petition for certiorari but it was
filed one year later.
Can the Republic be estopped by the negligence of the OSG in the late filing of the petition? YES
While the Republic or the government is usually not estopped by the mistake or error on the part of its
officials or agents, the Republic cannot now take refuge in the rule as it does not afford a blanket or
absolute immunity. The Solicitor-General may not be excused from its shortcomings by invoking the
doctrine as if it were some magic incantation that could erase its errors.
The rule on non-estoppel of the government is not designed to perpetrate an injustice. In general, the rules
on appeal are created and enforced to ensure the orderly administration of justice. The judicial machinery
would run aground if late petitions, like the present one, are allowed on the flimsy excuse that the
attending lawyer was grossly lacking in vigilance
Article 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 and special laws.
Rationale Behind the Article, General Principles are Suppletory:

The general principles of estoppel in American Jurisprudence are adopted to enrich Philippine law and
afford solutions to many questions which are not foreseen in our legislation.
The general principles of estoppel, which are not yet explicitly incorporated into the Code, shall only
apply suppletorily.
Thus, in case of conflict with the Civil Code, Code of Commerce, Rules of Court and special laws, the
general principles of estoppel shall not apply.
Facts which are claimed to constitute estoppel must be expressly pleaded.
Article 1433. Estoppel may in pais or by deed.
Classification of Estoppel:
1. Estoppel by Deed may be sub-classified into estoppel by deed proper and estoppel by deed record.
Their common characteristic is that both are in writing.
a. Estoppel by Deed Proper this is the kind of technical estoppel, which is in writing signed by a
party, which bars him from denying the truth of any material facts asserted in it. It may be
invoked only in a suit on the deed itself or concerning a right arising from it. It applies only
between the same parties, their privies and cannot be used against strangers.
b. Estoppel By Record this is the kind of technical estoppel where the truth set forth in a record,
whether judicial or legislative, cannot be denied. This is conclusiveness of a judgment which is
binding upon the parties to a case.
Estoppel by Court Record- the parties are precluded from raising questions involving matters
which were directly adjudged because of the principle of res judicata (direct estoppel by
judgment), and from raising questions involving matters that have not been adjudged but
could have been placed in issue and decided in the previous case because of their relation to
the issues therein. (collateral estoppel by judgment)
2. Estoppel in Pais an equitable estoppel arising from conduct or misrepresentation and includes all forms
of estoppel not arising from a record, deed, or written instrument. Equitable estoppel includes estoppel by
representation or concealment; by conduct or by acceptance of benefits; silence; omission; laches and
similar other conduct or representations which are not done in writing, deed, or record.
Purpose of Estoppel in Pais:

Its purpose is to serve the objectives of justice. It is founded on morality and fair dealing.
Requisites:
1. There must be conduct, act, language, or silence amounting to a representation or concealment of material facts.
2. These facts must be known to the party estopped at the time of his said conduct, or, at least, the circumstances
must be such that knowledge of them is necessarily imputed to him.
3. The truth concerning these facts must be unknown to the other party claiming the benefit of the estoppel at the
time when it was acted upon him.
4. The conduct must be done with the intention, or, at least, with the expectation that it will be so acted upon.
5. The conduct must be relied upon by the other party and, thus relying, he must be led to act upon it.
6. He must in fact act upon it in such a manner as to change his position for the worse.
Elements of Estoppel By Conduct:

1. There must have been a representation or concealment of material facts.
2. The representation must have been made 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.
Equitable Estoppel, Concept:

The doctrine of equitable estoppel states that when one of the two innocent persons, each guiltless of
any intentional or moral wrong, must suffer a loss, it must be borne by the one whose erroneous
conduct, either by omission or commission, was the cause of injury.
Requisites of Equitable Estoppel:

In relation to the party to be estopped On the party claiming estoppel
1) Such party commits conduct amounting 1) Such party has lack of knowledge and of
to false representation or concealment the means of knowledge of the truth on
of material facts or at least calculated to the facts in question;
convey the impression that the facts are 2) Relied, in good faith, on the conduct or
inconsistent with those which the party statements of the party to be estopped;
subsequently attempts to assert; 3) Acted or refrained from acting based on
2) Has the intent, or at least expectation such conduct or statements as to change
that his conduct shall at least influence the position or status of the party
the other party; and claiming the estoppel, to his injury,
3) Has knowledge, actual or constructive, detriment or prejudice
of the real facts.
Illustrations of Estoppel in Pais:

1. In the sale of a house, the true owner pretended to be the mere broker in the transaction. He is not allowed
later, to assert his ownership over the property. He is under estoppel.
2. A minor who made a misrepresentation that he was of age and thus inducing the other party to contract
with him, is estopped from disavowing his own contract.
3. A party who agreed that the findings of the geodetic engineer would be made the basis of the courts
decision is estopped from impugning or assailing the result of the relocation survey made by the engineer.

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Article 1434. When a person who is not the owner of a thing sells or alienates and delivers it,
and later the seller or grantor acquires title thereto,
such title passes by operation of law to the buyer or grantee.
Selling a Property Without Title, But Followed By Subsequent Acquisition; Effect:

A person who sells or alienates a property over which he did not have any title, cannot be allowed to
deny the validity of the sale or alienation after he had acquired a title thereto,.
His subsequent acquisition validates the conveyance previously made.
Article 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.
Sale or Alienation in Behalf of Another:

The seller is acting as representative of the owner of the property sold or alienated. He has a power of
attorney authorizing him to sell or alienate.
A third person, relying on the authority of the seller purchased the property, or contracted with the
representative regarding the property.
The law estops the representative from claiming later that he is the real owner of the property, and that the
sale or alienation is void because the seller whom he represented is not the true owner.
Prejudice on the part of the buyer is not essential for the operation of the estoppel.
Article 1436. A lessee or a bailee is estopped from asserting title to the thing leased or received,
as against the lessor or bailor.
Estoppel Against Lessee:

A lessee cannot assert title to the property leased to him as against the lessor.
The tenant is not permitted to deny the title of his landlord at the time of the commencement of their
relation as landlord and tenant. This rule of presumption is conclusive.
The same principle applies to a bailee who is not allowed to assert his title to the thing which he received
from the bailor.
Article 1437. When in a contract between third persons concerning immovable property,
one 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; and
(4) The party defrauded must have acted in accordance with the misrepresentation.
Applicability of Article:
The law applies only to transactions involving immovable property or an interest therein.
Requisites of Estoppel Against an Owner of An Immovable Property or Interest Therein:

If an owner of an immovable property or an interest therein misled a third person into believing that
another person is the real owner, and as a result of such fraudulent misrepresentation, the third person
contracted with the apparent owner the former cannot assert his ownership or interest in the property.
The law provides for the requisites of estoppel, the presence of all of which is necessary to preclude the
real owner of the immovable property or interest therein from asserting his rights over the property. The
requisites are:
1. There must be fraudulent misrepresentation or wrongful concealment of facts known to the party
estopped.
2. The party precluded must intend that the other should act upon the facts 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.
Some Instances When There is No Estoppel:

1. When the children of a deceased person have given their consent to the conveyance of their hereditary
rights to a third person by their surviving father, they are estopped from asserting their rights on the
property.
2. A party to a collusion who knows the facts, is estopped from asserting his rights. Neither can his
successors in interest make the assertion of the right.
3. One who claims the benefit of an estoppel on the ground that he has been misled by the representations of
another must not have been misled through his own want of reasonable care and circumspection.
Article 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 and for value.
Applicability:
Article applies only to personal property. If the property is immovable like land, it is difficult for the real
owner to clothe another with apparent ownership, especially if said property is registered under the
Torrens System, for then, only the registered owner can alienate the property either personally or through
an authorized agent or representative.
The buyer who will deal with anyone who is not the registered owner, nor the authorized agent will be
acting in bad faith and will not enjoy the protection of the law. The civil code provides:
Article 1874. 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. (n)
In the situation contemplated in Article 1438, there is no agency created, because the assumer is not
authorized to pledge the property.
While the purpose of allowing the assumption of ownership is to transfer ownership (like sale), the
authority to sell, assuming there is one, excludes the power to mortgage.
If the property was mortgaged and the real owner received the proceeds arising from the mortgage, it is
but just that the real owner be estopped from questioning the validity of the mortgage. The mortgage in
Art. 1879 can include pledge, for the principles are the same.
Basis of the Estoppel:

The basis of the estoppel is the receipt of the proceeds. No one should be unjustly enriched at the expense
of another especially through acts of misrepresentation.
Even if there are no benefits received, if the real owner who is aware of the facts did not protest the act of
the pledger and the pledgee was misled and released the money to the pledger, he (the owner) should be
placed under estoppel with damages under the Articles 19 and 21 of the Civil Code.
Article 1439. Estoppel is effective only as between the parties thereto or their successors in interest.
Applies only to questions of facts, not law, of the truth of which the other party is ignorant.

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Limited Applicability of Estoppel:
Estoppel is effective only between the parties in a transaction or in their absence, between their
successors-in-interest. Third parties who are persons not privies to the transaction are not bound by
estoppel.
The reason behind the law is the rule of mutuality, which is an essential element of estoppel.
In mutuality, both parties must be bound, otherwise, none should be.
Example: In a contract of sale, only the vendors and the vendees may charge each other with any acts of
misrepresentation regarding their transaction. Strangers cannot invoke or challenge the application of
estoppel.
Rule Of Mutuality in Estoppel is not Applicable Against the Government:

The general rule is that the Government is not bound by estoppel as a matter of public policy.
Trial on the Merits Needed to Determine Existence of Estoppel:

The existence of estoppel, laches, fraud or prescription of actions require presentation of evidence and
determination of facts, they can be best resolved after trial on the merits.
Estoppel cannot be sustained by mere argument or doubtful inference; it must be clearly proved in all
essential elements by clear, convincing, and satisfactory evidence.
Prescription
Chapter 1 General Provisions
Article 1106. By prescription, one acquires ownership and other real rights
through the lapse of time in the manner and under the conditions laid down by law.
In the same way, rights and actions are lost by prescription.
Prescription:
An acquisition of a right by a lapse of time; a limitation which refers to the time within which an action
must be brought after the right of action has accrued.
a statute of repose whose object is to suppress fraudulent and stale claims from springing up at great
distances of time and 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. (Sinaon v. Sorongon)
a mode of acquiring property rights
Types of Prescription:
1. Acquisitive Prescription acquisition of a right by the lapse of time
Other names: adverse possession and usucapcion
expressly vests property and rases a new title in the occupant
2. Extinctive Prescription rights and actions are lost by the lapse of time
Other name: limitation of action
Does nothing more than bar the right of action
Prescription as differentiated from Laches:

Prescription Laches
Concerned with fact of delay Concerned with effect of delay
Statutory Not statutory
Based on Law Based on Equity
Based on fixed time Not based on fixed time
Principally a question of time Principally a question of inequity of permitting
a claim to be enforced
Requisites of Laches:
1. Conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation of which
complaint is made and for which the complaint seeks remedy
2. Delay in asserting the complainant's rights, the complainant having had knowledge or notice of the
defendant's conduct and having been afforded an opportunity to institute a suit
3. Lack of knowledge or notice on the part of the defendant that the complaint would assert the right on which
he bases his suit
4. Injury or prejudice to the defendant in the event relief is accorded to the complainant, or the suit is not held
barred.
Other notes on Laches:

Laches applies independently of prescription. Laches has been successfully interposed even if a shorter
time had elapsed and the prescriptive period has not yet expired.
Laches can also bar the filing or prosecution of a suit.
A registered owner may lose his right to recover the possession of his registered property by reason of
laches (Catholic Bishop of Balanga v. Court of Appeals)


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Acquisitive vs. Extinctive

Morales v. CFI
Petitioner's predecessors-in-interest filed a case against Busarang and Gonzaga for the recovery of
possession, ownership, unpaid rentals and damages for of a piece of land and of the house built
thereon situatied in Ozamis City.
Trial Court dismissed complaint as well as the motion for reconsideration.
Petitioner now filed this case with allegations and reliefs substantially similar to those in the previous
case.
Respondents contend that petitioner's action was now barred by prescription and denying the allegations
of the complaint.
Has petitioner's right to recover possession and ownership of the real property prescribed? - NO.
Extinctive prescription is the kind of prescription involved the subject matter of the case being real
property
Applicable provision is Article 1141 which establishes a prescription of 30 years.
Real actions over immovables prescribe after thirty years. (par 1, Article 1141)
August 12, 1963 (released of decision for motion for reconsideration) to May 7, 1978 (filing of present
case) is less than 30 years. Action has not yet prescribed.
However, Par 2 of Article 1141 reads:
This provision is without prejudice to what is established for the acquisition of ownership and other real
rights by prescription.
Respondent judge relied on this second paragraph and has ruled to the effect that the action is barred
because the defendants have acquired the subject matter of the action by acquisitive prescription of 10
years.

Prescription vs. Laches

Serafin Tijam et al. v. Magdaleno Sibonghanoy
Spouses Tijam and Tagalog (plaintiff) filed a Civil action against spouses Sibanghanoy and Baguio
(defendant) for the recovery of a sum of P1,908.00.
Writ of attachment was issued by court against defendant's properties but this writ was dissolved upon
filing of a counter-bond by defendants and the Manila Surety and Fidelity Co, Inc. (a.k.a. Surety)
Court granted Surety a period of 5 days to answer the motion. But Surety failed to do so.
Court granted the motion for execution and the corresponding writ was issued.
15 years later, the Surety filed this motion to dismiss raising the question of lack of jurisdiction for the
first time.
Surety alleges that appellee's action was filed at CFI-Cebu a month after RA No. 296 (Judiciary Act of
1948) had become effective.
Under the RA, civil actions where the value of the subject matter does not exceed P2,000.00 fall within
the original exclusive jurisdiction of inferior courts
CFI-Cebu therefore had no jurisdiction on the case 15 years ago
Can Manila Surety invoke the CFI's lack of jurisdiction warranting the annulment of the orders it
previously issued? - NO. Surety is now barred by laches.
Surety is now barred by laches from invoking this plea at this late hour for the purpose of annulling
everything done heretofore in the case with its active participation.
The doctrine of laches or of "stale demands" is based upon grounds of public policy which requires, for
the peace of society, the discouragement of stale claims.
Unlike the statute of limitations, laches is not a mere question of time but is principally a question of the
inequity or unfairness of permitting a right or claim to be enforced or asserted.
Surety is barred not because the judgment or order of the court is valid and conclusive as an adjudication,
but for the reason that such a practice cannot be tolerated for obvious reasons of public policy.

Catholic Bishops of Balanga v. CA
Archbishop of Manila owned a parcel of land located in Balanga, Bataan
By virtue of authority given him the by the Roman Catholic Church, Archbishop donated a portion of the
land to Ana de los Reyes and her heirs as a reward for her long and satisfactory service to the Church
Acceptance of doantion as well as possession of property was indicated in a deed of donation. This deed
was refused registration at the Register of Deeds for an unknown reason.
Ana de los Reyes died 6 years later without issue. But before she died, Ana gave the land to her nephew
Armando de Leon (private respondent).
Armando built his house on the property and through the years declared the land for taxation purposes
and paid taxes thereon
49 years after the execution of the Deed of Donation, Catholic Bishop of Balanga files this instant
complaint against Armando. Bishop of Balanga claims that CA should not have applied doctrine of laches
because Armando did not assign the same as an error on appeal.
Arman, however, maintains that by virtue of the Deed of Donation, he is the lawful owner of the property.
1. Did CA properly apply the doctrine of laches in its ruling when such doctrine was not assigned as an
error in the appeal? - YES.
General rule: matters not assigned as erros on appeal may not be subject to the review of the appellate
court. This general rule is not absolute.
As an exception, matters not assigned as errors on appeal but closely related to an error assigned
(prescription) may be applied in the ruling.
Laches is closely related to prescription. Even though they are technically not the same, private
respondent's raising of the issue of prescription is adequate.
All essential elements of laches are present in this case
Conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation
complained of: Defendant's act of occupation of the property since 1945 in the concept of owner and the
donation to Ana in 1936
Delay in asserting complainant's right after he had knowledge of the defendant's conduct and after he has
an opportunity to sue: Bishop of Balanga has been aware of the occupancy for 40 years.
Lack of knowledge or notice on the part of the defendant that the complainant would assert the right on
which he bases his suit: Armando had every reason to believe that the donation of the land to his
predecessor-in-interest was recognized by the petitioner since it has been in effect for 49 years.
Injury or prejudice to the defendant in the event relief is accorded to the complainant: Aramando will
suffer irreparable injury if court was to disregard his 40-year possession of the land.
Can the Bishop of Balanga still recover the subject property? - NO. The right to recover is lost by
reason of laches.
Courts cannot look with favor at parties who, by their silence, delay and inaction, knowingly induce
another to spend time, effort, and expense in cultivating the land, paying taxes and making improvements
thereon for an unreasonable period only to spring an ambush and claim title when the possessor's efforts
and the rise of land values offer an opportunity to make easy profit at their own expense.
Considerable delay in asserting one's right before a court of justice is strongly persuasive of the lack of
merit of his claim, since it is human nature for a person to enforce his right when same is threatened or
invaded; thus, it can also be said that petitioner is estopped by laches from questioning private
respondent's ownership of the subject property.
Insurance of Phil. Islands Corporation v. Spouses Gregorio

Three loans were obtained by Spouses Gregorio from the Insurance of the Phil Islands Corp.
They executed real estate mortgages in favor of petitioner as security
1969: Spouses Gregorio failed to pay their loans. Properties mortgaged were extrajudicially foreclosed.
Foreclosure sale was held and petitioner was highest bidder.
27 years later (1996), petitioner filed complaint for damages against spouses upon discovery that the
properties were already registered in the names of third persons (discovery was made in 1995). They
claimed that Spouses Gregorio acted fraudulently in misrepresenting ownership.
Spouses contend that Insurance of the Phil Islands's cause of action and right of action has already been

18
barred by prescription and laches.
Has petitioner's cause of action been barred by prescription and laches? - NO.
Petitioner's cause of action accrued at the time it discovered the alleged fraud committed by
respondents1995.
The 4-year prescriptive period should begin in 1995. Hence, petitioner's suit for damages is well within
prescriptive period.
Laches cannot apply in this case either.
Essence of laches is the failure or neglect for an unreasonable and unexplained length of time.
Principle is not concerned with mere lapse of time. The fact of delay, standing alone, is insufficient to
constitute laches.
Article 1107. Persons who are capable of acquiring property or rights by the other legal modes
Minors and other incapacitated persons may acquire property or rights by prescription,
either personally or through their parents, guardians or legal representatives.
Who May Acquire Property By Prescription?; If Minor Acquires Property Right By

Prescription:
Person who is of majority age and who is qualified to do all acts of civil life
The acquisition of minor (and other incapacitated persons with discernment) who personally acquires
property rights without the assistance of his parent or guardian is anullable or voidable. Can be ratified
when minor comes of age.
However, if the minor acquired the property through his parent or guardian, the acquisition is valid
Article 1108. Prescription, both acquisitive and extinctive, runs against:
1. Minors and 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 and its subdivision.
Persons who are disqualified from administering their property have a right to claim damages from their
legal representatives whose negligence has been the cause of prescription.
Article 1109. Prescription does not run between husband and wife,
even though there be a separation of property agreed upon
in the marriage settlements or by juridical decree.
Neither does prescription run between parents and children, during the minority or insanity of the latter,
and between guardian and ward during the continuance of the guardianship.
Who is Subject to Prescription?
Subject to Prescription Not Subject to Prescription

Minors and incapacitated persons who have parents, Minors do not have parents, guardians, or legal
guardians, and legal representatives representatives
Absentees who have administrators appointed by them When such absentee did not leave an administrator
or by the courts and there is no way that the absentee could return
Persons abroad who left managers or administrators When such person abroad did not leave a
manager/administrator and there is no way that the
absentee could return to the domicile
Juridical person It dies not run against the State and its political
Will run against the State's political subdivisions that subdivisions acting in their sovereign capacity
act in their proprietary capacity (engaged in business,
like a normal corporation)
Husband and wife, in specific cases provided by law, Husband and wife for all other cases, even though
such as legal separation or objections to decisions there be a separation of property agreed upon in the
made by the husband over the administration of marriage settlements or by judicial decree
common property
Parents and children during the age of majority of the Parents and children during minority and/or insanity of
latter, or when the children are in the age of majority the later
and are sane
-- Guardian and ward during the time of the guardianship
Limitations and Extent of Prescription
Vda. De Alberto v. Court of Appeals

Antonio Jr. (minor, 18 years old, private respondent) filed a complaint for acknowledgement and partition
on Sept 8, 1960 with the assistance of his mother (common law wife of Antonio Sr. before he married
Natividad)
His father died and without notice to Antonio Jr, petitioner Natividad (Antonio Sr.'s legal wife) instituted
an intestate proceeding for Antonio Sr.'s estate. The proceeding was terminated in 1953.
CA declard Antonio Jr as an acknowledged natural child of Antonio Sr. and ordered Natividad to deliver
to Antonio Jr his 1/5 share of the estate
Did the CA err in holding that Antonio Jr's cause of action has not yet prescribed? - YES.
Article 1100 of the Civil Code: The action for rescission on account of lesion shall prescribe four years
from the time the partition was made
The intestate proceedings were terminated on Nov 9, 1953. Prescriptive period would have expired on
Nov. 9, 1957. An action filed on Sept. 8, 1960 which has for its object the rescission of the agreement of
partition is already barred by prescription.
Furthermore, minor Antonio cannot claim exemption from the effects of prescription under Article 1108
since he has a living parent.
Marcelino v. Court of Appeals

Petitioners Marcelino and their grandchildren are the only heirs of the late Silvestre Marcelino and
Genoveva Patricio. Silvestre and Genoveva were the registered owners of the 3 parcels of land in
question.
Private respondents aver that they have been occupying and owning the lands even before WWII and that
they have the certificate of titles thereof.
When Petitioners Marcelino were still alive, they demanded the restitution of the property by the private

20
respondents. Respondents refused for reason that the action to recover ownership has already prescribed.
RTC dismissed the case on the ground of laches. CA affirmed the decision.
Petitioners contend that both courts erred in finding them guilty of laches for failure to assert their right
for over 50 years.
Are petitioners guilty of laches? - YES.
Possession of lands registered under the Torrens system may not be acquired and lost through
prescription but through laches.
In this case, petitioners have not taken any action to recover the lands for almost 50 years.
Republic v. PNB
AFP, one of the instrumentalities of the RP, opened a current account with PNB.
Later (in 1949), PNB through negligence paid to an unnamed person P32,553.32 covered by 2 checks
drawn against the account of AFP but bearing fictitious names as payees and forged signatures of the
officers authorized to make withdrawals.
When one of the officers noticed from the statement sent by PNB that the value of the checks had been
charged against the AFP account, he called PNB's attention to it via letter dated 1950.
Despite repeated demands, PNB refused to refund the value of the 2 checks. For this reason, this action
was filed by petitioners in 1959 praying that PNB be sentences to pay the amount involved to the
Republic.
PNB moved to dismiss on the grounds that the action had prescribed.
Can the action of the Republic be barred by prescription? - NO. Prescription does not run against an
instrumentality of the Republic like the Army.
Where it is neither alleged nor shown that the AFP, in making the deposit of its funds with PNB, did so
other than as an instrumentality of the Republic, the plea of prescription cannot be maintained against the
Army because the statute of limitations does not run against the State.
Director of Forest Admin v. Fernandez

3 different cases involving the Director of Lands and Director of Forest Development with regard to
various proprties in Pangasinan.
In these cases, respondents all filed an application for the registration of parcels of land in their name
Director of Lands and Director of Forest Development opposed the application on the grounds that the
lands involved were forest lands and therefore, public domain
Can the subject lands be acquired by prescription? - NO.
The land subject for registration is forest or timberland which cannot be acquired by prescription.
Such lands are not capable of private appropriation and possession.
Republic v. Court of Appeals

This is a consolidation of two petitions.
The lot subject matter of this land registration case is situated near about 20 meters from Laguna de Bay.
This land was purchased by Benedicto del Rio and was declared for tax purposes since 1918. Upon
Benedicto's death, his heirs extrajudicially partitioned his estated and the said land passed to his son,
Santos del Rio
Santos (private respondent) filed his application for registration in 1966. Application was opposed by
Director of Lands and by private oppositors, the petitioners in the other case.
Petitioner Director of Lands claims that the land sought to be registered is part of public domain
Private oppositors allege that they reclaimed the land by dumping duck eggshells thereon and that they
have been in possession of this land for more than 20 years.
Sometime before 1966, private oppositors obtained permission from Santos to contruct a duck house on
the land.
In violation of the original agreement, private oppositors constructed residential houses on the land which
prompted private respondents to file ejectment suit.
1. Is the parcel of land in question a public land? - NO.
Director of Lands contends that because the portion of land is covered with water 4-5 times a year, the
land is part of the bed of Laguna de Bay, making it a public land.
Supreme Court says otherwise. Neither can the land in question be considered as foreshore land. It is
therefore not public land and capable of registration as private property.
2. Does the private respondent have registerable title to the land? - YES.
Santos has more right to the land than private oppositor despite oppositor's claims of reclamation.
Reclaimed land does not automatically belong to the party reclaiming the same. They may still be subject
to terms of the authority earlier granted.
Only possession acquired and enjoyed in the concept of owner can serve as the root of title acquired by
prescription. Private oppositors were tenants on the land, not owners.
Since Santos has possessed the land in the concept of owner in good faith, his possession need only last
10 years in order for ordinary acquisitive prescription to set in. Legal requirement has been satisfied.

Article 1110. Prescription, acquisitive and extinctive, runs in favor of, or against a married woman
Article 1111. Prescription obtained by a co-proprietor or a co-owner shall benefit others.
When Does Co-Ownership Arise;

Who Shall Benefit from Prescription Obtained by a Co-Owner:
Co-ownership exists whenever the ownership of an undivided thing or right belongs to different persons
Prescription obtained by a co-proprietor or a co-owner shall benefit others.
Actual possession of the other parties in the co-ownership is not a requisite for the acquisition to favor the
others
There is also no need for ratification of other co-owners in order that prescription may benefit them
Exception: when the prescription has no/distant relation with the properties owned in common.
Here, ratification is needed.
Example: Harry, Ron, and Hermione co-own a particular land and, by virtue of such co-ownership they
all reside in the same. If Ron occupies, as a co-owner with Harry and Hermione, a portion of the land
adjoining the property, and he adversely and publicly holds such adjacent portion of land continuously to
the exclusion of all others who are not in the co-ownership for the required period of time, there can be a
valid acquisition not only in Ron's favor but also in favor of Harry and Hermione even though the latter
two did not actually possess the said portion.
Article 1112. 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.
Renunciation of Prescription:
Bars remedy, but does not bar the debt
Usually happens when there is an impending debt and the prescriptive time has elapsed, but the debtor
acknowledges the debt and promises to pay it outside of the prescriptive period
Debtor effectively waives his rights to the benefits of prescription, one of which is the inability of the
creditor to collect the debt that has prescribed.
Renunciation enables the creditor to recover the original contract.


22
Waiver of Prescription:
DBP v. Adil
Spouses Patricio and Jovita obtained a loan from DBP in the amount of P2,000.00 as evidenced by a
promissory note (first promissory note). In this note, they bound themselves jointly and severally to pay
the account in 10 equal yearly amortizations
10 years lapsed but the spouses had not yet fulfilled the obligation
A second promissory note was executed. Spouses acknowledged their previous loan and promising to pay
it on or before June 15, 1961.
DBP instituted an action against the spouses for nonpayment of their obligation.
Spouses contend that the claim with regard to the first promissory note covering the same obligation has
prescribed and thus the second promisory note cannot be enforced.
Can the second promissory note be enforced considering that the first promissory note has already
prescribed? - YES.
By the execution of the second promissory note, the spouses waived prescription as a ground for
extinguishment of the obligation.
In executing the second promissory note, a new promise was made by the spouses. The second
promissory note was deemed to not be an acknowledgment of debt.
Article 1113. 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.
Objects of Prescription Not Objects of Prescription

Everything within the commerce of man and Common things (air, high seas)
can be appropriated, can be acquired by Properties of public dominion**
prescription Intramissible rights
Patrimonial property* is an exclusion from Unless otherwise provided though within
the properties of public dominion that commerce of man, following cannot be
cannot be acquired by prescription. acquired by prescription:
This interpretation is based on statutory Movables possessed through a crime
construction to reconcile conflict between Lands registered under the Torrens System
Art 1113 and Art 1108.
* Patrimonial property is private government property that is no longer intended for public use or
service, according to Art. 421 of the Civil Code.
**According to Article 240 of the Civil Code, properties of public dominion include the following:
1. Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character
2. Those which belong to the State without being for public use, or are intended for some public
service or for the development of national wealth.
Article 1114, Creditors and all other persons interested in making the prescription effective
may avail themselves thereof notwithstanding
the express or tacit renunciation by the debtor or proprietor.
Saving Clause for Creditors; Exceptions

Even if a person bound by the obligation renounces the prescription, a creditor can still plead the
prescription, thereby resisting payment
This plea does not extend to other creditors
Example: Frodo is indebted to Sam in the amount of P50,000. Gandalf guarantees the said indebtedness
and waives the benefit of excussion. This means that should Frodo fail to pay Sam, Sam need not exhaust
all remedies against Frodo for collection before he could demand payement from Gandalf, the guarantor.
In the even that the time within which to pay has already prescribed but Frodo nevertheless waives the
prescription such that Sam can still collect from him, and should Frodo again fail to pay, thereby
prompting Sam to demand payment from Gandalf, the guarantor, Gandalf can still resit payment by
invoking that the collection of debt of Frodo has already prescribed.
Article 1115. The provisions of the present Title are understood to be without prejudice
to what in this Code or in special laws is established with respect to specific cases of prescription.
In Case of Conflict Between Civil Code Provisions:

More specific provision prevails.
In Case of Conflict Between Civil Code and Other Statutes:

if different statutes are involved providing for different prescriptive periods, as well as the types of cause
of action contemplated by them are apparently conflicting, they do not exclude each other from being
availed of by the aggrieved parties
Example: Between Article 1391 (4-year prescriptive period for annulling a contract in case it is defective
due to fraud perpetuated by one of the parties) and Chapter Three of the present title (which provides that
an action on a written contract prescribes in 10 years and on an oral contract in 6 years), Article 1391 will
prevail for its specificity to fraud.

Article 1116. 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.

Transitory Nature of Article 1116:
Present Civil Code took effect on August 30, 1950.
This article is a transitory provision.

Applicable Rules:
1. If prescriptive period provided under the old law already lapsed before the effectivity of the New Civil Code, old
prescriptive period will apply.
2. If prescriptive period under the old law is has not yet elapsed upon the effectivity of the New Civil Code, the New
Civil Code will apply if the New Civil Code provides for a shorter time for prescription
3. If the prescriptive period under the Old Civil Code has not elapsed upon the effectivity of the New Civil Code, the
Old Civil Code will apply if the New Civil Code provides for a longer term for the prescription.

Prescriptive Periods
Development Bank of the Philippines v. Ozarraga
Petitioner moves for reconsideration of the SC decision affirming the dismissal of petitioner's foreclosure
complaint on the ground of prescription.
DBP contends that the prescriptive period is 20 years and that the period of the debt moratorium (EO No.
32) during which prescription was suspended expired on May 1953 when the decision of Rutter v.
Esteban was promulgated, not July 1948 when RA no. 342 was enacted.
DBP also points out that the burden of proof rests on the respondent to show that the deceased Cunat was
not a war damage claimant in order that the shorter moratorium period (up to July 1948) may be
applicable in this case.
Is the New Civil Code applicable in this case? - NO. Code of Civil Procedure applies (10 year

24
prescriptive period)
Code of Civil Procedure applies where the period of prescription started prior to the effectivity of the
New Civil Code
The law applicable in this case are Sections 40 and 43 of the Code of Civil Procedure (Act 190) and not
the Civil Code because the said period started before the effectivity of the Civil Code
Alvero v. Reas
Plaintiffs predicate their ownership of the subject land as successors of Alejandra Alvero. Alejandra
acquired the land from Cipriana by succession and purchase of the shares of her co-heirs.
Defendants however assert that four heirs of Cipriana had verbally partitioned the land in question in
1938, the other heirs of Cipriana having received other properties. Defendants assert that each partitioner
had since then possessed his respective share as exclusive owner, the oral partition having been ratified in
1949. They further pleaded title by adverse possession.
CA found that that defendants have proven preponderantly that they have been in actual, open, public,
continuous possession under claim of exclusive ownership over the land in question for more than 10
years.
Such possession has ripened into ownership by prescription.
Did the CA err in holding that the defendant's possession of the subject land has ripened into
ownership by and through prescription? - NO.
Requisites of acquisitive prescription have been complied with when CA concluded that defendants have
proven preponderantly that they have possessed the land in question for more than 10 years.
Under Article 1116 of the New Civil Code, prescription already running before the effectivity of this
Code shall be governed by laws previously in force.
In this case, the law applicable is Code of Civil Procedure, Sections 40 and 41.
Under said section, prescription continues even in the absence of good faith and just title.

Oblicon Reviewer - Anton Mercado

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Oblicon Reviewer - Anton Mercado

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OBLICON - MISON

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus

7. Fortuitous Event, Essential Conditions, Exceptions:

- Issue: Whether or not the Bank is liable for negligence.

RP vs. Luzon Stevedoring

NPC vs. Philipp Brothers

Pure and Conditional Obligations: (Articles 1179 1192)

HSBC vs. Spouses Broqueza

2. Kinds and Effects of Conditions, Suspensive vs. Resolutory:

Suspensive Condition Fulfillment of the condition gives rise to the obligation.

Resolutory Condition Fulfillment of the condition extinguishes an already existing obligation.

Santiago vs. Millar

Patente vs. Omega

Gaite vs. Fonacier

Coronel vs. Court of Appeals

Javier vs. Court of Appeals

Heirs of Atienza vs. Espidol

3. Effects of Potestative, Casual or Mixed Conditions:

Effect of Potestative (Facultative) Condition:

Parks vs. Province of Tarlac

Osmena vs. Rama

Trillana vs. Quezon Colleges

Hermosa vs. Longara

Smith Bell vs Matti

Lao Lim vs. Court of Appeals

Catungal vs. Rodriguez

4. Effects of Possible or Impossible Conditions:

Luneta Motor vs. Abad

This refers to positive conditions, while 1185 refers to negative conditions.

5. Constructive Fulfillment of Condition:

Valencia vs. RFC

Labayan vs. Talisay

6. Rules in Cases of Improvement, Deterioration, or Loss:

7. Power to Rescind in Reciprocal Obligations:

Ang vs. Court of Appeals

Heirs of Gaite vs. The Plaza Inc

Lalicon vs. NHA

Spouses Fernando and Lourdes Viloria vs. Continental Airlines Inc.

F.F. Cruz vs. HR Construction

a. Resolution vs. Rescission:

Article 1191 Rescission is different from Article 1381 Rescission.

Who has the Right to Rescind:

Remedies available to Aggrieved Party:

Not applicable in the following cases:

Prescriptive period: 10 years Prescriptive period: 4 years

b. Restrictions on the Power:

3. Power of the Court to fix period in lieu of decreeing Rescission.

4. Slight breaches of the contract will not justify Rescission.

Tan vs. Court of Appeals

c. Necessity of Judicial Approval:

However in rescission, the rule is different:

A stipulation of automatic rescission is in the nature of a facultative resolutory condition

2. If there is no express stipulation of automatic rescission in case of breach:

Heirs of JBL Reyes vs. CA

d. Effects of Slight Breaches:

Song Fo vs. Hawaiian Phil

Filoil vs. Mendoza

Obligations with a Period: (Articles 1193 1198)

1. Classification, In diem vs. Ex die, Legal, Conventional, Judicial,

Obligations with a resolutory period take effect at once,

A day certain is understood to be that which must necessarily come,

If the uncertainty consists in whether the day will come or not,

Arrival of the Term/Period is either Definite or Indefinite

Classification of Terms/Periods in Roman Law