Sie sind auf Seite 1von 58

Art. 1156- an obligation is a juridical necessity to give, to do or not to do.

Civil Obligation v Natural Oblligation


Elements of an obligation:
1. Active subject (called the oblige or the creditor)- he who has a right to demand
2. Passive subject (called the obligor or the debtor)- he who has the duty of giving, doing or not doing
3. Object or prestation: the subject matter of the obligation
4. Vinculum or juridical tie: the reason why the obligation exists.
Ang Yu Asuncion v CA
General Classifications
➢ As to sanction
➢ As to subject matter
➢ As to affirmativeness or the negativeness of the obligation
➢ As to persons obliged

Obligations distinguished fom the cause of action


Subject matter distinguished from cause of action
Cases:
1. De la rama v Mendiola
2. Bachrach Corporation v CA
Obligation as defined by JBL Reyes: An obligation is a juridical relation whereby a person may demand from another the
observance of a determinative conduct and in case of breach, may demand satisfaction from the assets of the latter.
In an option to buy, performance of one obligation is conditioned on the simultaneous fulfillment of the other obligation.
The payment of the purchase price by creditor is contingent upon the execution and delivery of deed of sale by the debtor.
In a case, only upon A’s actual execution and delivery of the deed of sale were tey rewired to pay. The latter was
contingent upon the former.

SOURCE OF OBLIGATION
Art 1157. Obligations arise from
1. Law
2. Contracts
3. Quasi-contracts
4. Acts or omissions punished by law
5. Quasi-delicts
The list above is exclusive. Hence, no obligation exists if its source is not one of the aforementioned.
1. Pelayo v Lauron
2. De La Cruz v Northern Theatrical Enterprises
Art 1158. Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws
are demandable, and shall be regulated by the precepts of the law which established them; anda as to what has not been
foreseen, by the provisions of this book.
Obligation v Cause of Action- See- Bachrach v a cause of action is an act or omissionof one party of the legal right of
another. Subject matter- prestation, the contract; coa- the legal right has been violated, the breach.
This means that the obligation must be clearly (expressly or impliedly) set forth in the law. Thus, an employer is ordinarily
not required to furnish his employees legal assistance, for no law requires this. In De La Cruz v Northern Theatrical
Enterprises, a movie house guard was acquitted for killing a gate crasher but was not awarded attorney’s gees from the
theater owner.
ART. 1159. Obligations arising from contracts have the force of law between the contracting parties and should
be complied with in good faith.

Contractual obligations. The above article speaks of contractual obligations or obligations arising from contracts or
voluntary agreements.

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. (Art. 1305.) It is the formal expression by the parties of their rights and obligations
they have agreed upon with respect to each other.
(1) Binding force- Obligations arising from contracts are governed primarily by the agreement of the contracting parties.
Once perfected, valid contracts have the force of law between the parties who are bound to comply therewith in good
faith, and neither one may without the consent of the other, renege therefrom. (Tiu Peck vs.
Court of Appeals).

1
The law will not permit a party to be set free from liability of any kind. The mere proof of the existence of the contract and
the failure to comply with it justify, prima facie, a corresponding right of relief.
Whatever fairly puts a person on inquiry is sufficient notice. This, where Mrs Dio, purchased a memorial lot on installment
basis, had full knowledge of the terms and conditions of the sale, and further obliged herself to abide, cannot later feign
ignorance of said rules (Dio v St. Ferdinand Memorial Park)
When there is a defect in the contract- such alleged defect must be proved by him by convincing evidence since its
validity or compliance cannot be left to the will of one of them.
Courts have no alternative but to enforce contracts- as they were agreed upon the terms of the parties, and leaves no
room of interpretation. To have the force of law between parties, it must have the valid requisites of a contract; for it to be
valid, it must be not contrary to law, morals, good customs, public order, and public policy. It is invalid if otherwise.
What is compliance in good faith? It means compliance or performance in accordance with stipulations or terms of the
contract or agreement.
Actionable injury is inhered with every contractual breach.
Courts can disregard contracts between attorneys and clients if the amount fixed is unreasonable (Bachrach v Golingco)
If there is an insertion of a fraudulent term in a contract, would that render the whole contract void? No. oblt the additional
prvision should be disregarded, and the original terms should be considered valid and subsisting.
Aldaba v CA:
Where a person does not expect to be paid, then there cannot be a contract implied to give compensation.

Cases:
1. Eduardo Manzano v Lazaro
2. William Golangco Construction Corp v PCIB
3. Dio v St Ferdinand Memorial Park Inc
4. NHA v CA
5. Tiu Peck v CA
Art 1160. Obligations derived from quasi-contracts shall be subject to the provisions of Chapter ….
Quasi-contract defined: that juridical relation resulting from a lawful, voluntary and unilateral act and which has
for its purpose the payment of indemnity to the end that no one shall be unjustly enriched at the expense of
another.

2 Principal Kinds of Quasi- Contract:


1. Negotiorum Gestio: unauthorized management
2. Solution Indebiti: Undue payment
Negotiorum gestio rakes place when a person voluntarily takes charge of another’s abandoned busuiness or property
without the owner’s authority. Reimbursement must be made to the gestor for necessary and useful expenses.
Solutio Indebiti: takes place when something is received when there is no right to demand it, and it was unduly delivered
thru mistake. The recipient has the duty to return it.
Requisites of solution indebiti:
1. He who paid was not under an obligation to do so
2. Payment was made by reason of an essential mistake of fact.
Is a quasi- contract an implied contract? No. Since there is no meeting og minds, there is no implied ocontract in a quasi
contract.
Examples of a Quasi Contract: During a calamity, a person saved your house without your consent, then you are bound to
pay the former just compensation.
Any person who was constrained to pay taxes from another shall be entitled to reimbursement.

Quasi contract v quasi delict, distinguished.


- Lawful voluntary unilateral act which creates a juridical relation…
- Quasi-Delict: fault or an act thru negligence causing damage to another without pre existing / injury thru fault
Solutio indebiti: undue payment- unjust

Art 1161: Civil obligations arising from criminal offenses shall be governed by penal laws…
Art 100 of the RPC: Every person criminally liable for a felony is also civilly liable. The crime causes not only moral evil but
also material damage.
Rule 3, Sec 1, RC: Whenever a criminal action is instituted, the civil action for the civil liability is also impliedly instituted.
Together with the criminal action.
General Rule: Death of an accused before final judgment extinguishes criminal liability
Except: In an independent civil action directed against the estate of the deceased.
In a case, death is not a valid cause of the extinguishment of the civil obligation.

An accused in a criminal case may be sued civilly whether or not he is found guilty or is acquitted. But the victim cannot
recover damages for both cases.

Art 1162. Obligations derived from quasi-delicts shall be governed by Chapter 2 of


Quasi delict- a fault or act of negligence which can cause damage to another there being no pre existing contractual
relations between parties.
Failure f one to observe for the protection of the interests of others, that degree of care, precaution, and vigilance which
circumstances justly demand which failure results in injury.
Negligence, defined. The failure to observe for the protection of the interests of another person, that defree of care,
precaustion, and vigilance which the circumstances justly demand, whereby such other person suffers injury.

The omission of that diligence required by the circumstances of person, place or time,
Requisites before a persion can be held liable for a quasidelict:
1. Fault or negligence is attributable to the person
2. There must be damage or injury
3. Proximate cause between the fault or negligence and the damage complained of.

Art 1163-
Every person obliged to give something is also obliged to take care of it with the proper diligence of a good
father of a family, unless the law or the stipulation of the parties requires another standard of care.
The above provision refers to an obligation to give a specific or determinate thing.

GENERIC/INDETERMINATE THING VS. SPECIFIC OR DETERMINATE THING.


A thing is generic or indeterminate when it refers only to a class or a particular genus and cannot be pointed out with
particularity.
Generic/indeterminate thing- G-I Specific/ determinate thing- S-D
Refers to a class Segregated from a class
Not particular Very particular
Debtor can give anything of the same class as long Debtor cannot substitute it with another
as it is of the same kind

Obligation to take care of the thing due


1. General Rule: Diligence of a good father of a family- equated with ordinary care or that diligence which an
average person or a reasonably prudent man exercises over his own property
2. Exception: Extraordinary care- that which is provided for by law or stipulation
Contract of carriage and banks!
Factors to be considered- the diligence required depends upon the nature and circumstances of the obligation.
He must exercise diligence to insure that the thing to be delivered would subsist in the same condition as it was when the
obligation is contracted.
What are the duties of the debtor to deliver a generic thing?
1. To deliver a thing which is of the quality intended by the parties taking into consideration the purposes of the
obligation
2. To be liable for damages in case of fraud, negligence or delay in the performance of his obligation.

OBLIGATIONS TO GIVE:

ART. 1164.

3
The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall
acquire no real right over it until the same has been delivered to him.

I. DETERMINATE THINGS:
a. Real right vs. Personal Rights:

Real Personal
The right of a person over a specific thing like an Right of a person to demand from another the
ownership or possession fulfillment of an obligation, to do or not to do
Enforceable against the whole world. Enforceable only against a particular person
There is definitive active and passive subject Only a definite active subject,

KINDS OF DELIVERY:

1. ACTUAL DELIVERY: physically, the property changes hands.


2. LEGAL DELIVERY: that where the physical transfer is implied
- Mere consent or pointing out the object: pointing out the car, which is the object of the sale
- By short hand: where the possessor becomes an owner
- Opposite of short hand: owner retains possession but no longer the owner
- Tradition by the execution of legal forms and solemnities: the execution of a public instrument or document.

When Does the Obligation to Deliver Arise? ANS.: It depends:


(a) If there is no term or condition, then from the perfection of the contract. Perfection refers to the birth of the
contract or the meeting of the minds between parties.

(b) If there is a term or a condition, then from the moment the term arrives or the condition happens. If the
obligation is with a period, it arises upon fulfillment of the condition or the arrival of the period.

(c) In a contract of sale, it arises from the perfection of the contract even if the obligation is subject to a suspensive
condition or period.

CASE: SAN LORENZO DEV’T CORP V CA AND BABASANTA

Babasanta made a downpayment of 50k, and demanded to Lu the execution of a final deed of sale so that he could effect
full payment of the purchase price. He then learned that the spouses Lu sold the property to SLDC without this consent
and demanded that the second sale to SLDC be cancelled, by filing a specific performance and damages against Lu. Lu
answered that Babasanta requested for a reduction of the price and when she refused, Babasanta backed out of the sale.
SLDC intervened, and said that it had legal interest since they bought the land in good faith.

Babasanta argued that the latter had no legal interest in the case because the two parcels of land involved herein had
already been conveyed to him by the Spouses Lu and hence, the vendors were without legal capacity to transfer or
dispose of the two parcels of land to the intervenor.

RTC rendered a decision in favor of SLDC. Why? The trial court ruled that since both Babasanta and SLDC did not
register the respective sales in their favor, ownership of the property should pertain to the buyer who first acquired
possession of the property. ).

Was there really a delivery of ownership of title to Babasanta?

It was found out that the agreement between Babasanta and Lu is a CONTRACT TO SELL AND NOT A CONTRACT OF
SALE. The two concepts are different in the sense that, the former is via an agreement such that the ownership is
reserved in the vendor until the full payment of the price. For the latter, that is the contract of sale, the title is passed upon
the vendee upon delivery of the thing sold, such that the vendor cannot anymore recover said property unless contract is
rescinded.

➢ It is delivery, that actually transfers ownership. Babasanta did not acquire ownership by the issuance of the
receipt of the down payment. Their agreement, although valid, was not embodied in a public instrument,
therefore, there is no actual delivery of the thing, and consequently, Babasanta did not acquire ownership.
Doctrine: Actual delivery of the thing transfers ownership.

The law recognizes two principal modes of delivery, to wit: (1) actual delivery; and (2) legal or constructive delivery.
Actual delivery consists in placing the thing sold in the control and possession of the vendee. Legal or constructive
delivery, on the other hand, may be had through any of the following ways: the execution of a public instrument
evidencing the sale; symbolical tradition such as the delivery of the keys of the place where the movable sold is being
kept… The SC, reversed the decision of CA. The decision of the RTC was reinstated. SLDC won, as there is no
constructive delivery of Babasanta’s ownerhip in absence of the embodiment in a public instrument, and that full
payment has not been effected.

Concept applied: Ownership acquired by delivery


The creditor does not become the owner until the specific thing has been delivered to him. Hence, if there is no delivery
yet, the proper action of the creditor is not one for recovery of possession and ownership, but one for specific performance
or rescission of the obligation.
ART. 1165.
When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by Article
1170, may compel the debtor to make the delivery.

If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the
debtor.

If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the
same interest, he shall be responsible for any fortuitous event until he has effected the delivery.

CLASSIFICATION OF OBLIGATIONS ACCORDING TO SUBJECT MATTER (1165)


(a) real obligations (to give):
1) to give a specific thing (set apart from a class);
2) to give a generic or indeterminate thing (one of a class).
(b) personal obligations (to do or not to do).

REMEDIES OF CREDITOR IF DEBTOR FAILS TO GIVE:

1. Specific Real Obligation: (SRD)


- Specific performance or fulfillment
- Rescission or cancellation of the obligation
- Damages if it is only the feasible remedy

2. Generic Real Obligation:


- Performance can be done by a third party (depends upon the nature)
- Not necessary for the creditor to compel the debtor
- Demand damages in case of breach

EFFECTS OF FORTUITOUS EVENTS

General Rule: A specific obligation, that is, an obligation to deliver a specific or determinate thing, is, as a rule,
extinguished by a fortuitous event or act of God. Thus, the debtor cannot be held liable for its non-performance. This
only applies to specific/determinate things. Upon the other hand, GENERIC OBLIGATIONS ARE NEVER
EXTINGUISHED BY FORTUITOUS EVENTS, as a generic or indeterminate thing cannot be the object of destruction by a
fortuitous event because genus nunquam perit (genus never perishes).

Examples:
(a) A is obliged to give B this 458 Ferrari car. Before delivery, an earthquake destroys completely the car. The obligation
to deliver is extinguished.
(b) A is obliged to give B a book. Since this is a generic thing, even if one particular book is lost, other books may take its
place. Hence, the obligation is NOT extinguished (genus nunquam perit).

EXCEPTIONS WHERE EVEN FORTUITOUS EVENTS DO NOT EXTINGUISH LIABILITY :


(a) if the obligor “delays” (This is really default or “mora”, after a demand was made).

5
(b) if the obligor is guilty of BAD FAITH (for having promised to deliver the same thing to two or more persons who do not
have the same interest — as when one is not the agent merely of the other)

ORDINARY DELAY VS LEGAL DELAY


Ordinary: mere non-performance at the agreed time
Legal/ Default: delay which amounts to a virtual non-fulfillment of the obligation. To put him at fault, there must be a
demand for fulfillment, the demand being either judicial or extrajudicial.

‘Ordinary Delay’ Distinguished from ‘Default’


Ordinary delay is different from legal delay (default). The first is merely non-performance at the stipulated time; default is
that delay which amounts to a virtual non-fulfillment of the obligation

Examples
(a) For when no demand is made- A is obliged to give B his Jaguar car on Dec. 7, 2005. If on the said day, A does not
deliver, he is in ordinary delay (not default). If on Dec. 8, 2005, an earthquake destroys the Jaguar car, A is not liable
because the obligation is extinguished.
(b) A demand is made, still liable even if it’s due to a fortuitous event- If, however, on Dec. 8, demand was made
for delivery, A would be in legal delay (default) and if later, the car is destroyed by a fortuitous event, he would still be
liable (in that the obligation to deliver the lost specific thing would be impossible, then the obligation is converted into a
monetary claim for damages). (See Art. 1165, Civil Code). However, if the car would have been destroyed at any rate
even if no demand had been made, the amount of damage would be reduced. (Art. 2215, No. 4, Civil Code).
Art. 1166.
The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even
though they may not have been mentioned.

WHAT THE OBLIGATION TO GIVE A DETERMINATE THING INCLUDES


If I am obliged to deliver a particular car, I must also give the accessories (like the “jack”). If I am obliged to deliver a piece
of land, I must give also the accessions (like a building constructed thereon). (This is true even if no mention of them was
made in the contract.)

(A) Accessories — those joined to or included with the principal for the latter’s better use, perfection, or enjoyment.
(Examples: the keys to a house, the dishes in a restaurant.)

(B) Accessions — additions to or improvements upon a thing. These include alluvium (soil gradually deposited by the
current of a river on a river bank) and whatever is built, planted, or sown on a person’s parcel of land. (Examples: e.g.,
house or trees on a land; rents of a building; aircondition in a car; profits or dividends accruing from shares of stocks; etc.)

Right of creditor to accessions and accessories. The general rule is that all accessions and accessories are
considered included in the obligation to deliver a determinate thing although they may not have been mentioned. This rule
is based on the principle of law that the accessory follows the principal. In order that they will be excluded, there must
be a stipulation to that effect.

Unless otherwise stipulated, an obligation to deliver the accessions or accessories of a thing does not include
the latter. Thus, a sale of the improvements (e.g., house) upon a thing (e.g., land) is not sufficient to convey title or any
right to the thing. But the lease of a building or house naturally includes the lease of the lot, and the rentals
include those of the lot for the occupancy of a building or house not only suggests but also implies the tenancy or
possession in fact of the land on which it is constructed. (Caleon vs. Agus Development Corp., 207 SCRA 748 [1992].)

CASE: CALEON V AGUS DEV’T CORPORATION

Agus Development Corporation is the owner of a parcel of land leased to petitioner Caleon for a monthly rental of
P180.00. Petitioner constructed on the lot leased a 4-door apartment building (the construction was the accession.)
Without the consent of the private respondent, the petitioner sub-leased the apartment to Guevarra and Estrada. Upon
learning of the sub-lease, private respondent demanded that the petitioner vacate the leased premises. Caleon did not,
and so, Agus filed a complaint for ejectment with the MeTC. Caleon contended, that Batas Pambansa Blg. 25 is not
applicable because what I leased was my own apartment house.

Petitioner's contention is untenable. Issue is already settled in Duellome v. Gotico, where this Court ruled that the
lease of a building naturally includes the lease of the lot, and the rentals of the building includes those of the lot.
Thus, SC denied the petition. The lease contracted by Caleon naturally includes the lease of the lot, and the rentals of the
building. She has violated the provisions of BP 25 by sub-leasing an already leased property.

RIGHTS OF CREDITOR IN GENERIC OBLIGATIONS


1. To have the obligation performed at debtor’s expense
2. To recover damages

OBLIGATIONS TO DO OR NOT TO DO
Art. 1167.
If a person obliged to do something fails to do it, the same shall be executed at his cost.

This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may
be decreed that what has been poorly done be undone.

CASE: CHAVEZ v. GONZALES

A typewriter owner delivered the same to a repairman for repairs agreed upon orally. Eventually the repairman returned
the machine, unrepaired and worse, several parts were missing, thus the description “cannibalized and unrepaired.” The
owner was then constrained to have the typewriter repaired in another shop. Owner now claims damages from the first
repairman.

Can the defendant be liable for damages?


Yes, defendant contravened the tenor of his obligation because he not only did not repair the typewriter but
returned it “in shambles.” The defendant can be held for damages under Art. 1167 — “If a person obliged to do
something fails to do it, the same shall be executed at his cost. The same rule shall be observed if he does it in
contravention of the tenor of the obligation.” Furthermore, what has been poorly done should be undone.

How about the failure of the owner to first ask the court for the fixing of the period? The failure is of no
significance. In view of his returning of the machine, the time for compliance may be deemed to have already expired.
There is, therefore, no more period to be fixed, there already being a breach of contract by non-performance. Said
non-performance may be said to have been impliedly admitted when the notebook was returned unrepaired and with
some of its essential parts missing.
CASE: TANGUILIG V CA
Tanguilig was contracted by Herce to construct a windmill system for him. Strong winds hit their place which caused the
structure to collapse. Tanguilig said that such is not attributable to him because of fortuitous events. Is the collapse of the
windmill attributed to force majeure extinguishing liability of Tanguilig? ---- NO. In order to relieve one of obligation via
force majeure, the event must be:
WUIP: independent of the will of the debtor, unforeseeable, impossible to fulfill, and that he must have no
participation or aggravation.

In the case at bar, Tanguilig merely stated that there was a strong wind, and such is not a fortuitous event, as it was
foreseeable and avoidable. Places with strong winds are perfect locations to put up a windmill, since it needs strong
winds for it to work. Petitioner was ordered to reconstruct the defective windmill system.
ART. 1168.
When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also be
undone at his expense.

In an obligation not to do, the duty of the obligor is to abstain from an act. Here, there is no specific performance.
The very obligation is fulfilled in not doing what is forbidden. Hence, in this kind of obligation the debtor cannot be guilty of
delay. As a rule, the remedy of the obligee is the undoing of the forbidden thing plus damages.

DELAY OR MORA 1169-1170

ART. 1169.
Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extra-judicially
demands from them the fulfillment of their obligation.

However, demand is not necessary:


(1) When the obligation or the law expressly so declares; or

7
(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when
the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the
contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay
by the other begins.

(1) Ordinary delay is merely the failure to perform an obligation on time.


(2) Legal delay or default or mora is the failure to perform an obligation on time which failure, constitutes a breach of the
obligation.

Necessity in General of Demand


To put a debtor in default, as a rule, DEMAND is needed. The demand may be judicial, as when a complaint for specific
performance is filed; or extrajudicial, without court proceedings.

Kinds of delay (mora).


(1) MORA SOLVENDI the delay on the part of the debtor to fulfill his obligation (to give or to do) by reason of a cause
imputable to him;
(2) MORA ACCIPIENDI or the delay on the part of the creditor without justifiable reason to accept the performance
of the obligation;
(3) COMPENSATIO MORAE or the delay of the obligors in reciprocal obligations (like in sale), i.e., the delay of the obligor
cancels the delay of the obligee, and vice versa.

Requisites of Mora Solvendi


- There is a demand, judicial or extrajudicial by the creditor
- Debtor failed to comply with such demand

Effects of Delay via Mora Solvendi:


- Debtor is guilty of breach of obligation
- Liable for damages.
If there is no extrajudicial demand, the interest shall commence from the filing of the complaint.
- He is still liable even if it’s a fortuitous event when the obligation is a specific/determinate thing. When the giving
of the specific thing would be impossible, the obligation to give is converted to monetary damages.

Effects of Mora Accipendi


- The creditor is guilty of breach of obligation
- Debtor now can recover damages from creditor
- Bears the risk of losing the thing due
- Debtor may release himself of obligation

Compensatio morae (reciprocal obligations)


The delay of the obligor cancels out the effects of the delay of the oblige and vice versa.

WHEN DEMAND IS NOT NEEDED TO PUT DEBTOR IN DEFAULT


The general rule is that delay begins only from the moment the creditor demands, judicially or extrajudicially, the
fulfillment of the obligation. The demand for performance marks the time when the obligor incurs mora or delay and is
deemed to have violated his obligation. Without such demand, the effect of default will not arise unless any of the
exceptions mentioned below is clearly proved.

No demand needed in the following-

(a) When the law so provides. (Example: Taxes should be paid within a definite period, otherwise penalties are imposed
without need of demand for payment.)

(b) When the obligation expressly so provides.


[NOTE: The mere fixing of the period is not enough; there must be a provision that if payment is not made when due,
default or liability for damages or interests automatically arises.
(c) When time is of the essence of the contract (or when the fixing of the time was the controlling motive for the
establishment of the contract). Examples: The making of a wedding dress, if the wedding is scheduled at the time the
dress is due; agricultural contracts where implements are needed at a particular time; the selling of land with payment at
specified time, so that the seller could pay off certain debts that were due on said date; money needed to finance mining
installations if said installations had to be made on a certain date.

(d) When demand would be useless, as when the obligor has rendered it beyond his power to perform.
(Examples: When before the maturity, the seller has disposed of it in favor of another, or has destroyed the subject
matter, or is hiding.)

(e) When the obligor has expressly acknowledged that he really is in default (But it should be noted that his mere
asking for extension of time is not an express acknowledgment of the existence of default on his part).

(f) When there is performance by a party in reciprocal obligations- the performance of one is conditioned upon the
simultaneous fulfillment on the part of the other. Thus, from the moment a party fulfils his obligation, delay by the other
begins.

* The mere fixing of period is not enough. The arrival of the period merely makes the obligation demandable. It must first
expressly so declare that demand is not necessary.

CASE: PICZON V PICZON

ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extra-
judicially demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be
necessary in order that delay may exist:

(1) When the obligation or the law expressly so declares;

CFI Samar: sustained that the defendants will only pay the interests at the time when the plaintiffs made the first demand.
SC: Reversed this ruling and held that it be payable from the execution of the said agreement as per the “interest agreed
upon”.

FACTS: Esteban Piczon, President of Sosing-Lobos Company, and as a stockholder, contracted a loan of 12,500 pesos
as a surety cash deposit for the registration with the SEC. and according to the obligation agreed upon, return the same
amount with 12% interest per annum, starting from the date of execution, to the Piczon and Co. as soon as the said
papers are registered and issued by SEC.

ISSUE: W/N the payment of 12% interest should commence to run from the plaintiff’s first demand or from when to
obligation becomes due and demandable. And consequently, whether or not Esteban was liable as a guarantor or a
surety?

Here, there was a stipulation agreed, the “Interest agreed upon” by the parties. As per Art 1169 Par 1, demand was not
necessary because the obligation was express- that interest agreed upon was to commence from the execution of
said document and not from when the obligation becomes due and demandable.

Therefore, Esteban is liable to pay the amount of loan, that is P12,500, plus the stipulated interest of 12% per annum as a
guarantor and not as surety payable from the execution of the said agreement.
CASE: PCIC V CCP
Central College of the Philippines (CCP): educational instituition who contracted the services of
Dynamic Planners Contruction Corporation (DPCC): the general contractor to build a 5-storey school building
Phil. Charter Insurance Corporation (PCIC): Issued the surety bond for DPCC for the latter to fulfill the obligation of
construction.

The CA found that DPCC was already in delay. PCIC contended that DPCC was already in default as early as Sep 4,
2003, hence the 10-day reglementary period to file a claim on the bonds should be on or before Sep 14. PCIC claims that
CCP notified and wrote the letter on October 29, 2003, beyond the limitation set forth.

ISSUE: W/N the period to file a claim on the bonds by the CPP has prescribed after the alleged delay of its filing or the
passing beyond the reglementary period.

Ruling: Partly granted. “Those obliged to deliver or to do something incur in delay from the time the obligee judicially
or extrajudicially demands from them the fulfillment of the obligation.”

9
DPCC incurred delay from the time CCP called its attention that it has breached the contract and demanded of its
fulfillment of its commitment against the bonds. Thus, DPCC was in delay on October 29, 2003, when CCP informed it
in writing of the breach of the agreement and demanded the fulfillment of obligation.

CASE: PALMARES V CA
MB Lending extended a 20k loan to Sps Azarvaga and Estrella Palmares. Palmares bound herself as co-maker and
surety of the principal debtor spouses via a promissory note, that in case of default or delay of payment of Azarrvaga, MB
Lending Corp may demand payment from Palmares. The spouses were only able to pay 16.3k, and so MB Lending filed
a complaint against Palmates as the lone defendant, due to the spouses’ insolvency. Palmares then contended that she is
liable only upon the default of the principal debtor Sps Azarvaga.

On appeal, CA reversed RTC’s decision, and declared Palmares is liable to pay MB the outstanding balance of 13.7k with
6% monthly interest. This is so because, she is considered as a surety, when she bound herself to be jointly and
severally liable (solidary) with the spouses. She is primarily liable and may be sued for the entire obligation.

Is Palmares a guarantor or a surety? Is she liable?


She is a surety, and yes, she is liable. She bound herself expressly as per the promissory note with the spouses. Her
ignorance of the contents of the note does not affect the liability.

Re: Demand not necessary when obligation expressly declares:


Palmares argument that complaint was prematurely filed for lack of demand- unmeritorious.
Promissory note says: “Should I fail to pay in accordance with the above schedule of payment, I hereby waive my right to
notice and demand.”

Art 1169- (1) When the obligation xxx expressly so declares;


Hence, the creditor is no longer bound to demand payment since the contract expressly so declares that demand wasn’t
necessary. As a surety, Palmares is equally bound by such waiver.

Even if otherwise, the demand on the sureties is not necessary before bringing suit against them since the
commencement of the suit is a sufficient clear demand. A surety is not even titled to be given notice of the
principal’s delay, as the he is bound to take notice of the principal’s default to perform the obligation. Thus, SC
dismissed the petition for lack of merit. Palmares lost and is bound for the payment of outstanding fees + interest.
CASE: BINALBAGAN TECH V CA
On 1967, Echaus executed a Contract to Sell and a Deed of Sale of 42- subdivisions lots to Binalbagan, and in turn, the
latter executed an acknowledgement of debt mortgaging the said lots in favor of Puentebella. Binalbagan operated a
school in it on 1967. But spouses Dela Cruz filed a claim on the property, and so Binalbagan filed a restraining order
against the sale of the properties to the spouses. This order was denied and property was given to the spouses.
Binalbagan then transferred its school to another location.
In 1982, Binalbagan was restored possession. From 1974 to 1982, it should be noted that he was not in possession of the
property.

After recovering possession, Echaus demanded payment from Binalbagan 367k representing the price of land and
accrued interest. Binalbagan failed to pay, and so Echaus filed for recovery of title and damages. Binalbagan is with the
contention that the action to recover has already prescribed, under Art 1144, as it is already beyond 10 years from the
execution of deed of sale.

ISSUE: W/N Echaus’ cause of action was barred by prescription?

A party to a contract cannot demand performance of the other party's obligations unless he is in a position to
comply with his own obligations. (Art 1169, par 4) Similarly, the right to rescind a contract can be demanded only if a
party thereto is ready, willing and able to comply with his own obligations thereunder. Here, Echaus breached the
guaranty against eviction, and so she cannot demand payment.

In a contract of sale, a vendor is bound to transfer the ownership of and deliver the object of the sale, he warrants that the
buyer from the time of the ownership is passed, have and enjoy the legal and peaceful possession of the thing. (Art 1495
and 1547) Binalbagan was evicted on 1974 and only recovered possession in 1982, breaching the warranty against
conviction and guarantee of possession. During 1974-1982, Echaus was not in a legal position to demand payment, and
such right to demand was suspended during that period.
The prescriptive period to institute an action upon a written contract is 10 years (Art 1144, CC). The cause of action of
Echaus is based on the deed of sale. The period of 1974-1982, that is, seven years, suspended the running of the
prescription, thereby rendering the action still within the reglementary period of 10 years.

Thus, SC declared that Echaus’ action is well within the prescriptive period, and can so demand from Binalbagan
the payment of the obligation.
ART. 1170.
Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any
manner contravene the tenor thereof, are liable for damages.

Grounds for Liability in the Performance of Obligations


Here, the breach of the obligation is voluntary; in Article 1174, it is involuntary.

(1) Fraud (deceit or dolo) — As used in Article 1170, it is the deliberate or intentional evasion of the normal fulfillment of
an obligation. What is contemplated as fraud here is fraud employed for the purpose of evading the normal fulfillment of
an obligation.

(2) Negligence- Any voluntary act or omission there being no malice which prevents fulfillment of obligation

(3) Delay- for purposes under Art 1170, delay must either be malicious or negligent.

(4) Contravention of the terms of the obligation- the violation of the terms and conditions stipulated. Such
contravention must not be due to force majeure

DAMAGES: One injured by a breach of a contract shall have a fair and just compensation commensurate the loss
sustained as consequence of defendant’s act.

Kinds of Damages (Keyword — MENTAL)

(a) MORAL — (for mental and physical anguish). Moral damages cannot be recovered unless proved. A mere prayer for
the same is not sufficient.
(b) EXEMPLARY — (corrective or to set an example)
(c) NOMINAL — (to vindicate a right — when no other kind of damages may be recovered)
(d) TEMPERATE — (when the exact amount of damages cannot be determined)
(e) ACTUAL — (actual losses as well as unrealized profit)
(f) LIQUIDATED — (predetermined beforehand — by agreement)

CASE: BARZAGA V CA (Liable because he was in delay)


Barzaga’s wife was suffering from an ailment, and she had a dying wish to lay her to rest before Christmas. After she
passed away, on Dec 21, Barzaga contracted Angelito to contruct the niche in Dasmarinas. He however failed to deliver
the obligation on Dec 27, and was 2 and a half days behind schedule. Barzaga filed an action to claim damages.
Resisting this, Angelito said that there was no specific time of delivery agreed between them. The invoices did not contain
any stipulation as to the exact delivery of the said materials to the cemetery.

Was there was delay on the performance of the obligation?

RULING: YES. This is a case of non-performance of a reciprocal obligation. The petitioner had already done his part,
which is the payment of the price. It was incumbent upon Angelito to immediately fulfill his obligation to deliver the goods
otherwise delay will attach. ART. 1170 says that those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages.
CASE: TANGUILIG V CA (Liable because he was negligent)
Tanguilig was contracted by Herce to construct a windmill system for him. Strong winds hit their place which caused the
structure to collapse. Tanguilig said that such is not attributable to him because of fortuitous events.

Was the collapse of the windmill attributed to force majeure extinguishing liability of Tanguilig?
Yes. In order to relieve one of obligation via force majeure, the event must be:
WUIF: independent of the will of the debtor, unforeseeable, impossible to fulfill, and that he must have no participation or
aggravation.
ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in
any manner contravene the tenor thereof, are liable for damages.

11
In the case at bar, Tanguilig was negligent, thereby violating the provisions aforestated. He merely stated that there was
a strong wind, and such is not a fortuitous event, as it was foreseeable and avoidable. Places with strong winds are
perfect locations to put up a windmill, since it needs strong winds for it to work. Petitioner was ordered to reconstruct the
defective windmill system.
Aerspace, Rudlin

DEGREE OF DILIGENCE REQUIRED


CASE: PICZON V PICZON:
Factors to be considered. — The diligence required depends upon the nature of the obligation and corresponds
with the circumstances of the person, of the time, and of the place. (Art. 1173.) It is not necessarily the standard of
care one always uses in the protection of his own property. As a general rule, the debtor is not liable if his failure to
preserve the thing is not due to his fault or negligence but to fortuitous events or force majeure.

TC: defendants will only pay the interests at the time when the plaintiffs made the first demand.
SC: Reversed this ruling and held that it be payable from the execution of the said agreement.

FACTS: Esteban Piczon, President of Sosing-Lobos Company, contracted a loan of 12,500 pesos as a surety cash
deposit for the registration with the SEC. He shall then return the same amount with 12% interest per annum, starting from
the date of execution of the said agreement, to the Piczon and Co. as soon as the said papers are registered and issued
by SEC.

ISSUE: W/N the payment of 12% interest should commence to run from the plaintiff’s first demand or from when to
obligation becomes due and demandable.

The “Interest agreed upon” by the parties was to commence at the execution of the document and not from when
the obligation becomes due and demandable.

Therefore, Esteban is liable to pay the amount of loan, that is P12,500, plus the stipulated interest of 12% per annum as a
guarantor and not as surety, payable from the execution of the said agreement.

ART. 1175.
Usurious transactions shall be governed by special laws.

Meaning of simple loan or mutuum.


Simple loan or mutuum is a contract whereby one of the parties delivers to another, money or other consumable thing,
upon the condition that the same amount of the same kind and quality shall be paid. It may be gratuitous or with a
stipulation to pay interest. (Art. 1933.)

Meaning of usury.
Usury is contracting for or receiving interest in excess of the amount allowed by law for the loan or use of money, goods,
chattels, or credits. In other words, usury is the exaction of excessive interest.

There are two kinds of interest (Paras):


(a) Interest given for compensation or use of the money (also called by some authors as MORATORY INTEREST).
Example: I borrowed P1 million at 8% interest per annum for 3 years. (This is the kind of interest regulated by the Usury
Law.)
(b) Interest given by way of damages (also referred to by some authors as COMPENSATORY INTEREST, i.e., it
compensates the damage caused).
Example: I borrowed P1 million with no interest for 3 years. If I pay at the end of three years, I pay no interest. If I incur
default (do not pay even after demand), I will now be responsible for interest (by way of damages) at the rate of 6% per
annum, to be counted from default.

Kinds of interest (De Leon)


They are:
(1) Simple interest. — when the rate of interest is stipulated by the parties (Art. 2209.);
(2) Compound interest. — when the interest earned is upon interest due (Arts. 2212, 1959.);
(3) Legal interest. — when the rate of interest intended by the parties is presumed by law, as when the loan mentions
interest but does not specify the rate thereof. (Art. 2209.) The same rate is allowed in judgments where there is no
express contract between the parties in anticipation of the same. Its use is not justifi ed where there is a stipulated rate of
interest in the loan contract;
(4) Lawful interest. — when the rate of interest is within the maximum allowed by (usury) law (Secs. 2, 3, Usury Law, Act
No. 2655, as amended.); and
(5) Unlawful interest. — when the rate of interest is beyond the maximum fixed by law.

Interest rules. Under the Usury Law, they are:


(1) Legal rate. — 12% per annum. (see Sec. 1, Ibid.) The legal rate is 12% (from default until fully paid) if the transaction
is a loan or forbearance of money, goods, or credits or the judgment involves a loan or forbearance of money, goods or
credits, as prescribed in Central Bank Circular No. 416 (infra.); otherwise (e.g., indemnity for damages occasioned by an
injury to person or loss of property), it is only 6% as provided in Article 2209 of the Civil Code.
(2) Maximum rate:
(a) 12% per annum — if the loan is secured in whole or in part by a mortgage upon real estate with a Torrens Title or by
any agreement conveying such real estate (also registered) or an interest therein. For purposes of the ceiling, loans
secured by government securities such as treasury bills, CB certificates of indebtedness, etc., qualify as secured loans;
and
(b) 14% per annum — if the loan is not secured as provided above; or
(c) The rate prescribed by the Monetary Board of the Central Bank. (Secs. 1, 1-a, 2, 3, [Usury Law].)

Requisites for recovery of monetary interest


(1) The payment of interest must be expressly stipulated (Art.1956.);
(2) The agreement must be in writing; and
(3) The interest must be lawful. (Art. 1957.)
A stipulation for the payment of usurious interest is void, that is, as if there is no stipulation as to interest.

CAUTON V CA- GR NO 158382


On January 5, 1993, respondent Rebecca Salud, joined by her husband Rolando Salud, instituted a suit for foreclosure of
real estate mortgage with damages against petitioner Mansueto Cuaton and his mother, Conchita Cuaton, with the
Regional Trial Court of General Santos City, Branch 35. The trial court rendered a decision declaring the mortgage
constituted on October 31, 1991 as void, because it was executed by Mansueto Cuaton in favor of Rebecca Salud
without expressly stating that he was merely acting as a representative of Conchita Cuaton, in whose name the
mortgaged lot was titled. The court ordered Cauton to pay Salud the loan secured by the mortgage in the amount of One
Million Pesos plus a total P610, 000.00 representing interests of 10% and 8% per month for the period February 1992 to
August 1992.

On August 31, 2001, the Court of Appeals rendered the assailed decision affirming the judgment of the trial court. Cauton
filed a motion for partial reconsideration of the trial court’s decision with respect to the award of interest in the amount of
P610,000.00, arguing that the same was iniquitous and exorbitant. This was denied by the Court of Appeals on May 7,
2003.

Issue: Whether or not the 8% and 10% monthly interest rates imposed on the one-million-peso loan obligation of Cauton
to respondent Salud are valid.

Held: Yes. In Ruiz v. Court of Appeals, the Supreme Court declared that the Usury Law was suspended by Central Bank
Circular No. 905, s. 1982, effective on January 1, 1983, and that parties to a loan agreement have been given wide
latitude to agree on any interest rate. However, nothing in the said Circular grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. The
stipulated interest rates are illegal if they are unconscionable. In the present case, the 10% and 8% interest rates
per month on the one-million-peso loan of Cauton were even higher than those cases they previously invalidated.
Accordingly, the reduction of said rates to 12% per annum was fair and reasonable. Stipulations authorizing iniquitous or
unconscionable interests are contrary to morals if not against the law.

LIAM LAW V. OLYMPIC SAWMILL CO., 129 SCRA 439 (1984)


On or about September 7, 1957, the petitioner loaned P10,000.00, without interest, to the respondent. The loan became
ultimately due on January 31, 1960 but was not paid. The petitioner asked for a 3-month extension, or up to April 30,
1960. On March 17, 1960, the parties executed another loan document for the payment of P10, 000.00 extended up to
April 30, 1960 but the obligation was increased by P6,000.00 to answer for the attorney’s fees, legal interest, and other
cost incident thereto. The petitioner again failed to pay their obligation by April 30, 1960. On September 23, 1957, the
respondent instituted a collection case. The petitioner admitted the P10, 000.00 principal obligation but claimed that the
additional P6, 000.00 constituted usurious interest.

Is the additional P6, 000.00 a usurious interest?

13
No. Usury has been legally non-existent. Interest can now be charged as lender and borrower may agree upon. In the
present case, the petitioner had not proven that the P6, 000.00 additional obligation was illegal.

ART. 1176.
The receipt of the principal by the creditor, without reservation with respect to the interest, shall give rise to the
presumption that said interest has been paid.

The receipt of a later installment of a debt without reservation as to prior installments, shall likewise raise the
presumption that such installments have been paid.

Meaning of presumption.
By presumption is meant the inference of a fact not actually known arising from its usual connection with another which is
known or proved.

D borrowed P1,000.00 from C. Later, D shows a receipt signed by C. The fact not actually known is the payment by D.
The fact known is the possession by D of a receipt signed by C. The presumption is that the obligation has been paid
unless proved otherwise by C as, for example, that D forced C to sign the receipt.

Two kinds of presumption.


They are:
(1) Conclusive presumption. — one which cannot be contradicted like the presumption that everyone is conclusively
presumed to know the law (see Art. 3.); and
(2) Disputable (or rebuttable) presumption. — one which can be contradicted or rebutted by presenting proof to the
contrary like the presumption established in Article 1176. (see Sec. 69[i], Rule 123, Rules of
Court.)

(1) Example of Par. 1 (Receipt of Principal Without Reservation as to Interest)


A creditor of P1,000,000, with 8% interest, received P1,000,000 in payment of the principal. Interest was not referred to in
the payment. It is presumed that the 8% interest had already been previously paid. This is because under Art. 1253, Civil
Code, payment of the interest as a rule precedes payment of the principal. (Of course, Art. 1176 establishes merely
a rebuttable, not a conclusive presumption).
Thus, even if there is a receipt evidencing payment of the principal, the accumulated interest may in certain cases still be
recovered.

(2) Example of Par. 2 (Receipt of a Later Installment)


If a creditor receives the fourth installment of a debt, it is understood that the first three installments have been paid.
(NOTE: In Manila Trading and Supply Co. v. Medina, it was ruled that for the presumption in par. 2, Art. 1176 to apply, it is
not enough that the receipt for the installment paid be dated; it must also specify that the receipt is for the payment of
a particular installment due, for example, on a certain month. Thus, if the date of the receipt is January, 1999, this fact
alone by itself cannot justify the inference that the January installment had been paid. The receipt may have been for a
prior installment.)
MANILA TRADING & SUPPLY CO. V. MEDINA, 2 SCRA 549 (1961)
Prior to May 7, 1956, Mariano Medina had certain accounts with Manila Trading & Supply Co. On January 8, 1957,
Manila Trading & Supply Co. filed a complaint against Medina in the Court of First Instance of Manila, claiming that
Medina had failed to meet the installments due on the note for the months of September, 1956 up to and including
January 7, 1957. Medina averred that the genuine receipts dated January 1957 should raise the presumption that prior
installments were paid.

Was Medina correct in saying that genuine receipts dated January 1957 raise the presumption that prior installments were
paid?

NO. Appellant avers that the genuine receipts dated January, 1957 raise the presumption that prior installments were
paid. This might be true if such receipts recited that they were issued for the installments corresponding to the month of
January, 1957; but nowhere does that fact appear. And even if such recital had been made, the resulting presumption
would only be prima facie, and the evidence before us is clear that the payments made do not correspond to the
installments falling due on the dates of the genuine receipts

LEDESMA V REALUBIN
Alberto Realubin owned the Baguio Caltex service station where Salud Ledesma purchased on credit, on different dates,
through her drivers, gasoline and motor oil, from June to September, 1956.
At the time of the trial, Realubin was in possession of the original or white copies of the invoices for purchases made in
the months stated, all of which were signed by the petitioner's truck drivers. Even after repeated verbal demands,
Ledesma still failed to pay her obligation. She claimed that she already paid for her October purchases so it should be
presumed that her prior purchases were already paid applying the presumption of payment under Article 1176 of the Civil
Code because her account with Realubin was a running account.

Was Ledesma correct in invoking the presumption of payment under Article 1176 of the Civil Code?

NO. Realubin proved as a fact that the prior purchases were not paid, and that the October purchases were for cash.
Therefore, the presumption of payment of prior obligations cannot prevail. Between a proven fact and a presumption pro
tanto, the former stands, and the latter falls.

15
Remedies of the Creditor
ART. 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.

Remedies available to creditors for the satisfaction of their claims.


In case the debtor does not comply with his obligation, the creditor may avail himself of the following remedies to satisfy
his claim:

1. Exact payment
2. Exhaust debtor’s properties (levying and attachment, ie, proceeds of the sale from an auction will pay off the
obligation.)
3. Accion subrogatoria- exercise all rights and actions
4. Accion pauliana- rescission of contract.

✓ exact fulfillment (specific performance) with the right to damages;


✓ pursue the leviable property of the debtor;
✓ “after having pursued the property in possession of the debtor,’’ exercise all the rights (like the right to redeem)
and bring all the actions of the debtor (like the right to collect from the debtor of his debtor) except those inherent
in or personal to the person of the latter (such as the right to vote, to hold office, to receive legal support, to
revoke a donation on the ground of ingratitude, etc.); and
✓ ask the court to rescind or impugn acts or contracts which the debtor may have done to defraud him when he
cannot in any other manner recover his claim. (see Arts. 1380-1389.)
✓ The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the
exemptions provided by law (see Art. 2236.)

EXAMPLE:
On the due date, D could not pay C his obligation in the amount of P300,000.00. However, D owns a car worth about
P160,000.00 and X is indebted to him for P40,000.00. Before the due date of the obligation, D sold his land worth
P200,000.00 to Y. Under the circumstances, the rights granted to C under the law are as follows in order:
(a) He may bring an action for the collection of the amount of P300,000.00 with the right to damages.
(b) If, inspite of the judgment rendered, D fails to pay the amount due, C can ask for the attachment of D’s car so that the
car may be sold and payment made from the proceeds of the sale.
(c) He may ask the court to order X not to pay D so that payment may be made to him (C).
(d) He may ask the court to rescind or cancel the sale made by D to Y on the ground that the transaction is fraudulent in
case he (C) cannot recover in any other manner his credit. Note that this last remedy can be resorted to only if C could not
collect in full his credit. (see Arts. 1381[3],
1387.) He must first exhaust the properties of the debtor or subrogate himself in the latter’s transmissible rights and
actions.

ADORABLE VS CA (GR 119466, November 25, 1999)


P is D’s creditor. P learned that D sold his lot to A. P filed for the annulment of the sale on the ground that the sale was
fraudulently prepared or executed.
Issue: Whether P is the real party in interest.
Held: No. As creditors, P do not have material interest as to allow them to sue for rescission of the contract of
sale. At the outset, P’s right against D is only a personal right to receive payment for the loan; it is not a real right over the
lot subject of the deed of sale. The Petitioner must exhaust all legal means for Bareng to paid the debt since Bareng
has other property or other means to pay the said loan to the Petitioner. The lessees ( Petitioner) has personal right
but not real right therefore the lot is not subject for payment unless it is the only property remained to the defendant.

TRANSMISSIBILITY OF RIGHTS
ART. 1178.
Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation
to the contrary.

Transmissibility of rights.
All rights acquired in virtue of an obligation are generally transmissible. (see Art. 1311.) The exceptions to this rule are the
following:
(1) Prohibited by law. — When prohibited by law, like the rights in partnership, agency, and commodatum which are
purely personal in character.
(a) By the contract of partnership, two or more persons bind themselves to contribute money, property or industry to a
common fund, with the intention of dividing the profits among themselves.
(b) By the contract of agency, a person binds himself to render some service or to do something in representation or on
behalf of another, with the consent or authority of the latter. (Art. 1868.)
(c) By the contract of commodatum, one of the parties delivers to another something not consumable so that the latter
may use the same for a certain time and return it. Commodatum is essentially gratuitous. (Art. 1933.)
(2) Prohibited by stipulation of parties. — When prohibited by stipulation of the parties, like the stipulation that upon the
death of the creditor, the obligation shall be extinguished or that the creditor cannot assign his credit to another. The
stipulation against transmission must not be contrary to public policy. (see Art. 1306.) Such stipulation, being contrary to
the general rule, should not be easily implied, but must be clearly proved, or at the very least, clearly inferable from the
provisions of the contract itself.

CHAPTER 3
NATURE AND EFFECT OF OBLIGATIONS

(1) Primary classification of obligations under the Civil Code:


(a) Pure and conditional obligations (Arts. 1179-1192.);
(b) Obligations with a period (Arts. 1193-1198.);
(c) Alternative (Arts. 1199-1205.) and facultative obligations (Art. 1206.);
(d) Joint and solidary obligations (Arts. 1207-1222.);
(e) Divisible and indivisible obligations (Arts. 1223-1225.);
(f) Obligations with a penal clause. (Arts. 1226-1230.)

(2) Secondary classification of obligations under the Civil Code:


(a) Unilateral and bilateral obligations (Arts. 1169-1191.);
(b) Real and personal obligations (Arts. 1163-1168.);
(c) Determinate and generic obligations (Art. 1165.);
(d) Civil and natural obligations (Art. 1423.); and
(e) Legal, conventional, and penal obligations. (Arts. 1157, 1159, 1161.)

(3) Classification of obligations according to Sanchez Roman:


(a) By their juridical quality and efficaciousness:
1) Natural. — according to natural law;
2) Civil. — according to civil law; and
3) Mixed. — according to both natural and civil law.
(b) By the parties or subject:
1) unilateral or bilateral;
2) individual or collective (see Arts. 1207, 1208.); and
3) joint or solidary.
(c) By the object of the obligation or prestation:
1) specific or generic;
2) positive or negative (see Art. 1168.);
3) real or personal;
4) possible or impossible (see Arts. 1183, 1306.);
5) divisible or indivisible;
6) principal or accessory (see Art. 1226.); and
7) simple or compound (see Art. 1199.); if compound, it may be:
a) conjunctive. — demandable at the same time; or
b) distributive. — either alternative or facultative.
(d) By their juridical perfection and extinguishment:
1) Pure or conditional; and
2) With a period. (Vol. 8, pp. 20-24.)

PURE AND CONDITIONAL OBLIGATIONS

Art. 1179.

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event
unknown to the parties, is demandable at once.

Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects
of the happening of the event.

Pure Obligation — one without a condition or a term, one which is not subject to any condition and no specific date is
mentioned for its fulfillment.

Conditional Obligation — when there is a condition; one whose consequences are subject in one way or another to the
fulfillment of a condition. This is suspensive for the results will be awaited.

When an Obligation Is Demandable at Once


(a) When it is pure;
(b) Or when it has a resolutory* condition.
* Resolutory condition (condition subsequent) or one the fulfillment of which will extinguish an obligation (or right) already
existing.
(c) when it is subject to a resolutory period.

Classification of Conditions
(a) — 1) suspensive — the happening of the condition gives rise to the obligation.
2) resolutory — the happening of the condition extinguishes the obligation.
(b) — 1) potestative — depends upon the will of the debtor
(Example: I’ll sell you my car if I like.)
2) casual — depends on chance or hazard or the will of a third person (if I win in the lotto).
3) mixed — depends partly on the will of one of the parties and partly on chance or the will of a third person (if I pass the
bar).
(c) — 1) divisible (capable of partial performance).
2) indivisible (not capable of partial performance because of the nature of the thing, or because of the intention of the
parties).
(d) — 1) positive — an act is to be performed.
2) negative — something will be omitted.
(e) — 1) express — the condition is stated.
2) implied — the condition merely inferred.
(f) — 1) possible — capable of fulfillment in nature and in law.
2) impossible — not capable of fulfillment due to nature or due to the operation of the law or morals or public policy; or
due to a contradiction in its terms.
(g) — 1) conjunctive — if all the conditions must be performed.
2) alternative — if only a few of the conditions have to be performed.

SUSPENSIVE AND RESOLUTORY CONDITIONS: DISTINGUISHED

SUSPENSIVE RESOLUTORY
Once condition is happens, the obligation arises Once condition happens, the obligation is extinguished.
If condition does not happen the legal tie does not appear If it appears, the tie of law is consolidated
Until the condition takes place, the existence of the Its effects flow but over it hovers the possibility of
obligation is a mere hope termination

Past event unknown to the parties.


A condition really refers only to an uncertain and future event. A past event cannot be said to be a condition since the
demandability of an obligation subject to a condition depends upon whether the event will happen or will not happen.
What is really contemplated by the law is the knowledge to be acquired in the future of a past event which at the moment
is unknown to the parties interested, for it is only in that sense that the event can be deemed uncertain. This knowledge
determines whether the obligation will arise or not.

CASE: THE INSULAR LIFE ASSURANCE CO. VS TOYOTA BEL-AIR


Toyota Bel-Air and Insular Life entered into a contract of lease over a lot and building owned by Insular Life in Makati City,
the contract is for a 5-year period from April 16, 1992 to April 15, 1997. The conflict began upon the expiration of the lease
wherein Toyota Bel-Air refused to vacate the property, this actually forced Insular Life to file a complaint in Metropolitan
Trial Court (MeTC) for unlawful detainer against Toyota Bel-Air where the verdict was in favor of the petitioner Insular Life.

Whether or not the petitioner Insular Life has the right to oust Toyota Bel-Air in the building?
The Supreme Court declared the writ of execution issued by MeTC valid. The compromise agreement is an
agreement subject to a suspensive condition which will only give rise to the obligation if all the stipulated conditions are
followed which clearly in this case the respondent Toyota Bel-Air was not able to comply with.

CORONEL V CA
This case is about a sale of land in Roosevelt Avenue, Quezon City by the vendor Romulo Coronel to the vendees
Conception Alcaraz and her daughter Ramona Patricia Alcaraz with the following conditions:
• The Coronels will immediately transfer the certificate of title in their name upon receipt of the down payment which
is ₱50,000.
• Upon the transfer in their names of the subject property, the Coronels will execute the deed of absolute sale in
favor of Ramona and then Ramona shall immediately pay the Coronel’s the whole balance of ₱1,190,000.

On January 15, 1985, Conception paid the down payment of ₱50,000 and then on February 6, 1985, the property was
now registered under the name of Coronels. By Feb. 18, 1985, the Coronels sold the property to Catalina B. Mabanag for
₱1,580,000 after she made a ₱300,000 down payment. This is the reason why the Coronel’s cancelled and rescind the
contract with the Alcaraz by depositing back the ₱50,000 to Ramona’s bank account.

Whether or not the “Receipt of Down payment” embodied a perfected contract of sale or just a mere contract to sell?

HELD:
• CONTRACT OF SALE- contracting parties obligates himself to transfer the ownership and to deliver a
determinate thing and the other to pay a price certain in money or its equivalent.
• CONTRACT TO SELL- the prospective seller explicitly reserves the transfer of the title to the prospective buyer,
meaning the seller does not yet agree or consent to transfer the ownership of the property until the happening of a
contingent event like full payment of price.

When the “Receipt of Down Payment” document was prepared and signed by Romulo Coronel, the parties had agreed to
a conditional contract of sale the consummation of the contract is subject only to the successful transfer of the certificate
of Title.

According to Supreme Court, the receipt of down payment document manifests a clear intent of the Coronels to transfer
the title to the buyer, but since the title is still in the name effect the transfer even though the buyers are able and willing to
immediately pay the purchase price. The agreement as well could not have been a contract to sell because the seller or
the Coronel’s made no express reservation of ownership or the title of the land. On Feb. 6, 1985, the Contract of Sale
between the Coronel’s and the Alcaraz’ became obligatory.
CENTRAL PHILIPPINE UNIVERSITY V CA
In 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of Trustees of the Central Philippine
College (now Central Philippine University [CPU]), executed a deed of donation in favor of the latter of a parcel of land
identified as Lot No. 3174-B-1 of the subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which Transfer
Certificate of Title No. T-3910-A was issued in the name of the donee CPU with the following annotations copied from the
deed of donation —

(2) On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr., filed an action for annulment of
donation, reconveyance and damages against CPU alleging that since 1939 up to the time the action was filed the latter
had not complied with the conditions of the donation.

RTC: On 31 May 1991, the trial court held that petitioner failed to comply with the conditions of the donation and declared
it null and void.; CA: 18 June 1993 ruled that the annotations at the back of petitioner's certificate of title were
resolutory conditions breach of which should terminate the rights of the donee thus making the donation
revocable.

SC: Affirmed. If there was no fulfillment or compliance with the condition, such as what obtains in the instant case, the
donation may now be revoked and all rights which the donee may have acquired under it shall be deemed lost and
extinguished.

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
Oscar Jacinto & Librada Jacinto, petitioner Vs Rogelio Kaparaz, et al, respondent

FACTS: Jacinto and Kaparaz entered into an agreement in which Kaparaz agreed to sell and convey to Jacinto a parcel
of land for ₱1,800, the down payment is ₱800 which was paid upon the execution of the agreement. The balance of
₱1,000 is going to be paid by the petitioner Jacinto on installment basis of ₱100 per month directly to DBP as payment to
Kaparaz’ loan in the said bank.

Since Kaparaz refuse to execute a deed of sale, Jacinto filed a complaint for specific performance against Kaparaz.
Kaparaz on the other hand, alleged that the sale did not materialize because Jacinto fail to pay DBP on timely basis as
stipulated in their agreement, as a result of the failure, Kaparaz failed to secure the release of the mortgage property, they
then prayed the declaration of the agreement null and avoid.

ISSUE: Whether or not the respondents have the right to rescind the agreements?

SUPREME COURT: No. Since in a contract of sale, the non-payment of the price is a resolutory condition, the remedy of
the seller under Article 1191 of the Civil Code is to exact fulfillment or to rescind the contract.
In the case at bar, there was non-compliance with the requirements prescribed in there provisions. It is not controverted
that private respondents had neither filed an action for specific performance nor demand the rescission of the agreement
either judicially or by a notarial act before the filing of the complaint. It is only in their Answer that they belatedly raised the
defense of resolution of the contract pursuant to Article 1191 by reason of petitioner’s breach of their obligation. Moreover,
the delay incurred by petitioners was but a casual or slight breach of the agreement, which did not defeat the object of the
parties in entering in the agreement. A mere casual breach does not justify rescission. Rescission of the agreement was
not available to private respondents. Furthermore, the prompt payment of monthly amortization of the unpaid balance of
the loan was not a condition precedent to the execution of the final deed of sale.

POTESTATIVE, CASUAL, AND MIXED CONDITIONS


Agapito Ducusin and Agapito Ducusin, Jr., petitioner Vs Court of Appeals, Virgilio Baliola and Lilia
Baliola, respondent

On Feb. 1975, petitioner Ducusin leased a one door apartment to the respondents Baliola spouses. The Baliola spouses
occupied the apartment for almost 2 years. On Jan. 1977, Ducusin sent a “Notice to Terminate Lease Contract” for the
reason that his two children were getting married and they be the ones to use the property. Respondent Ducusin again
sent another letter to the petitioner asking them on their actions regarding the termination of the lease contract.

Soon on April 1977, the respondents filed an action for ejectment alleging that the sole purpose of constructing the
apartment was for the eventual use of their children when they will get married and that the Baliola violated their contract
by subleasing the premises and using the premises for manufacturing commercial goods. The respondent on the other
hand, denied the allegations stating that the ejectment suit is a well-planned scheme to evict them out of the apartment
and to raise the rent.

ISSUE:

1. Whether or not the contract of lease can be unilaterally terminated by the lessor/ petitioner?
2. Whether or not the happening of the resolutory condition is established by a preponderance of evidence?

SUPREME COURT RULING: Basing on what is stipulated in their contract of lease there are causes that will in effect
extinguish the contract:

1. Termination by mutual consent.


2. Lessor elects to terminate the contract on the ground that his children need the premises for their own use.
3. Any cause provided and in accordance with law.

Art. 1382: Validity or compliance cannot be left to the will of one them.

Art. 1182: If it depends upon chance or hazard or upon the will of a third person, the obligation shall be valid.
Since the happening of the condition depends on the lessor’s/ respondent’s children which are considered third person.
Whenever they will require the leased premises, the contract shall be deemed terminated, and this affirmed by Supreme
Court.
RUSTAN PULP VS. INTERMEDIATE APPELLATE COURT
A paper mill started operations and accepted offers to supply raw materials from several suppliers. One supplier executed
a contract with the paper mill with a condition that the paper mill has the right to stop accepting deliveries whenever the
supply was sufficient. The paper mill exercised that right, but continued accepting periodic deliveries from other suppliers.

Rule of Law: When the fulfillment of the condition depends on the sole will of the debtor, the conditional obligation shall
be void. —Article 1182, Civil Code.

Facts: When Rustan Pulp & Paper Mills (D) started operations Romeo Lluch (P) offered to supply raw materials. Rustan
Pulp (D) proposed a non-exclusive contract to buy wood pulp from Lluch (P). However, a condition in the contract gave
Rustan Pulp (D) the right to stop accepting deliveries when the supply became sufficient until such time the raw materials
are needed.

During the test run of the pulp mill, major defects on the machinery were discovered prompting the Japanese supplier of
the machinery to recommend the stoppage of the deliveries. The suppliers were informed to stop deliveries, but were not
informed as to the reasons for the stoppage.

Lluch (P) sought to clarify the tenor of the notice as to whether stoppage of delivery or termination of the contract of sale
was intended, but Rustan Pulp (D) failed to reply. This alleged ambiguity notwithstanding, Lluch (P) and the other
suppliers resumed deliveries after a series of talks between Lluch (P) and Romeo Vergara, the manager of Rustan Pulp
(D).

Later, Lluch (P) filed a complaint for breach of contract. The case was dismissed, but at the same time, the court enjoined
Rustan Pulp (D) to honor the contract. On appeal, the court ruled that Rustan Pulp's (D) suspension of deliveries was not
in the lawful exercise of its rights under the contract of sale.

Issues: Is the suspension of deliveries by Rustan (D) a proper exercise of its rights under the contract of sale?

Ruling: No. There is basis for the apprehension on the illusory resumption of deliveries at Rustan Pulp (D) because the
prerogative suggests a condition solely dependent upon its exclusive will. The literal import of contested condition is that
Rustan Pulp (D) can stop delivery of pulp wood from Lluch (P) if the supply at the plant is sufficient as ascertained by
Rustan Pulp (D), subject to re-delivery when the need arises as determined likewise by Rustan Pulp (D). Because of
the purely potestative imposition, the stipulation should be stricken out without affecting the other validly
stipulated conditions relating to the fulfillment of an already existing obligation. The condition which is both
potestative and resolutory may be valid however it would only be valid at the beginning of the contract and not during the
fulfillment of an already existent obligation.
OSMENA VS RAMA, 14 PHIL. 99
On November 15, 1890, Don Victoriano Osmena loaned P200 to Dona Cenona Rama with an interest of half a cuartillo
(quarter) per month on each peso with the promise that if Dona Rama does not comply, she will sell all the sugar she has
harvested, and pledge as security all her present and future properties, and as special security, her house in which she
lives in in Pagina. On October 27, 1891, Don Victoriano Osmena loaned P70 to Dona Cenona Rama, P50 of which she
has loaned to Don Evaristo Penares which they will pay in sugar. There was no date supplied in the case. Don Victoriano
Osmena died between the execution and delivery of the contracts and they are passed down to one of his heirs, Agustina
Rafols.The plaintiff commenced the present action in the Court of First Instance of the Province of Cebu and demanded
for payment wherein the failure to pay will have a judgment. The defendant filed a general denial.
Issue of the case:
Dona Cenona Rama failed to comply with her promise to pay Don VictorianoOsmena P200 with additional P20
(P50 paid by Don EvaristoPenales) with interest
Ruling of the Supreme Court:
Dona Victoriano Osmena won the case by the decision of the supreme court.
“If my land is sold” is a mixed imposition, such that, it is party dependent of the will of the debtor; and party casual,
since the sale of land is dependent of whoever purchases the land.
NAGA TELEPHONE CO., INC. (NATELCO) & Luciano Maggay, petitioners, vs. COURT OF APEALS and Camarines
Sur II Electric Cooperative, Inc. (CASURECO II), respondents [1994]
 NATELCO: telephone co. rendering local & long distance services in Naga
 CASURECO II: private corporation w/c operates electric power service in Naga

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
 The 2 companies entered into a contract wherein NATELCO will be using CASURECO electric light posts in Naga in
operating its telephone services. In return, former will install 10 phone connections for the use of the latter free of
charge. Term/period will be as long as former needs to use the latter’s posts. Contract will be terminated if the latter
will forced to stop, abandon its operation as a public service & it becomes necessary to remove the posts.
 Trial Court: contract has become disadvantageous to CASURECO due to increase in volume of NATELCO’s
subscribers. Contract should be reformed to abolish the inequities. NATELCO should pay for the use of
CASURECO’s posts at P10.00/post while the latter should pay the monthly bills for the use of former’s phone lines in
Naga. Amount should be computed from the date of filing of the complaint. Same has been held for the 2 nd cause of
action. While the 3rd cause of action was not sufficiently proven.
 CA: affirmed trial court decision based on the ff grounds:
1. New Civil Code Art. 12671. Although the contract was fair to both parties at the time of its execution (then,
NATELCO still had very limited capability), supervening circumstances (NATELCO’s expansion) have made the
contract too one-sided in favor of NATELCO to the great disadvantage of CASURECO. Continued enforcement
of the contract has gone beyond the contemplation of the latter, thus it should be released therefrom. Equity
demands certain economic equilibrium between the prestation the counter-prestation & does not permit the
unlimited impoverishment of one party for the benefit of the other by the excessive rigidity of the principle of the
obligatory force of contracts.
2. Contract was subject to a potestative condition w/ rendered the condition void.

Issues & Ratio:


1. WON Art. 1267 is applicable. -YES
 NATELCO claims it’s not since contract in this case doesn’t involve rendition of service/personal prestation and it’s not
for future service w/future unusual change. It invokes Occena vs. Jabson. And the article was never raised by
CASURECO.

2. Prestations are not purely potestative. Conditions do not depend solely on the will of either party. CA, in ruling that
the term/period (3rd bullet, Facts part) of the contract is potestative, overlooked the condition that the contract will be
terminated when CASURECO will be forced to stop, abandon its operation as a public service & it becomes
necessary to remove the electric light post. They are actually casual conditions w/c depend on chance, hazard or will
of a 3rd person. The contract is subject to mixed conditions w/c don’t invalidate the contract stipulations.

ONG VS BOGNALBAL G.R. NO 149140


On January 2, 1995, Architect Ernesto Bognalbal (E.B. Bognalbal Construction) was hired by petitioner, Victoria Ong, for
the construction of her boutique on a contract price of P200,000 but subject to change in respect to economic factors and
change of order. The agreement was to complete the work within 45 days and payment shall be made every two weeks
based on the accomplishment of work value.
Petitioner wanted a change of order within 3 days from vinyl tiles to kenzo flooring on April 22, 1995. Kenzo flooring took
time to construct because of the curing process and additional costs shall be incurred. The rushed work of kenzo flooring
was not acceptable to petitioner Victoria Ong. She refused to pay the 4 th billing. Demand of respondent Bognalbal for
petitioner Ong to pay for the kenzo flooring was made on or before April 24, 1995. Petitioner Victoria Ong didn’t pay,
respondent Bognalbal abandoned the kenzo flooring job on April 25, 1995. (Petitioner Ong hired another contractor, she
incurred P 78,000 and additional damages, and the completion of the kenzo flooring was delayed for 82 days.)
Issue: Is Bognalbal liable to pay? Yes.
SC (Petition for Certiorari is dismissed) ruled in favor of respondent Bognalbal. MeTC’s decision was reinstated.
(Respondent Victoria Ong is liable pay.)
“Novation is never presumed. Unless it is clearly shown either by express agreement of the parties or by acts of
equivalent import, defense will never be allowed.”
“…assuming that there was indeed a novation of the obligation of Petitioner Ong to pay the fourth billing so as to include
as additional condition the completion of the Kenzo flooring, such new condition would, nevertheless, be deemed fulfilled.
This is pursuant to Article 1186 of the Civil Code which provides:
Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.”
(This could mean that the prevention of petitioner Ong of the fulfillment of the vinyl tiles, made the condition of the
contract fulfilled, without due course to any of her change order.)
“…(petitioner) Ong has not sufficiently proven the alleged contract novation…”
Breach of contract was her [petitioner Ong] failure to pay what she was legally bound to pay under her contract with
respondent Bognalbal. “Payment, being the very consideration of the contract, is certainly not a mere casual or slight
breach but a very substantial and fundamental breach as to defeat the object of the parties making the agreement, due to
which rescission of the contract may be had (Ang vs. CA, 170 SCRA 286, 296).”

1
Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in
part.
Enriquez v Ramos-
ownership retroacts to the time rights have been acquired. Except for fruits and interests.

On November 24, 1958 Enriquez and spouses Dizon sold to Ramos 20 subdivision lots in Quezon City for the
sum of P235,056 of which only P35,056 had been paid. The balance of P200,000 was to be liquidated within 2
years from the date of the execution of the deed of sale, with interest at 6% for the 1st year and 12%
thereafter until fully paid. To secure the payment of that balance, Ramos executed in the same document a
deed of mortgage in favor of the vendors on several parcels of land variously situated in Quezon City,
Pampanga and Bulacan. The deed of mortgage embodies certain stipulations which Ramos invoked. But
according to the appellants the defendant violated the terms of their agreement in the following respects: The
defendant refuse to pay the sum of P200,000 within the stipulated period. The mortgage on Bulacan property
was never registered and, The realty tax for 1959 on the lots mortgage were not paid by the defendant. Ramos
admit that she has not paid the realty taxes and has not registered the mortgage on Bulacan property but
argues that it was a minor ones and still her obligation to pay the sum of P200,000 has not arisen as no
previous notice and demand for payment has been made and according to her the road is not completed
because the appellants have not yet planted trees nor put up water facilities as required by the ordinance. The
court held that the non-payment of 1959 realty taxes as well as the non-registration of the mortgaged on
Bulacan estate by the defendant were minor matters. On the issue of the completion of road the appellant
adduced the testimonies of 2 witnesses that the road was completed on May 9, 1960 in accordance with the
ordinances of Quezon City and there is nothing in Ordinance 2969 which would indicate that a street may be
considered completed with water facilities are built on the subdivision and these activities are definitely
segregable. As to be alleged lack of previous notice completion and demand for payment, the filling of the case
is sufficient notice to the defendant of the completion of theroads in question and of the appellee’s desire to be
paid the purchase price of the questioned lots.

ISSUES 1. WON Ramos should pay her balance to Enriquez and spouses Dizon even though she is not yet fully
satisfied with her demand.

RULING: YES. The effect of such demand retroacts to the day of the constitution of the defendant obligation a s
it was stated in Art. 1187 provides that “THE EFECTS OF A CONDITIONAL OBLIGATION TO GIVE, ONCE
THE CONDITION HAS BEEN FULFILLED, SHALL RETROACT TO THE DAY OF THE CONSTITUTION OF THE
OBLIGATION.” her demand on the road is already considered completed and the filling of the case against her is
sufficient notice to her therefore she is obligated to pay her balance of P200,000 to the appellant’s within 2
years from the date the roads in question are completed.

Preservation of Rights
Rules in case of loss, deterioration, or improvement
Resolutory Conditions
Rescission in reciprocal obligations

TAN V COURT OF APPEALS


DE LEON, JR; October 19, 2001

NATURE
Petition for review on certiorari of a decision of the CA

FACTS
- On May 14, 1978 and July 6, 1978, petitioner Antonio TAN obtained two (2) loans from respondent Cultural Center of the
Philippines (CCP), each in the principal amount of Two Million Pesos. This is evidenced by 2 promissory notes with
maturity dates on May 14, 1979 and July 6, 1979.
- TAN defaulted but after a few partial payments, he had the loans restructured by CCP. TAN executed a promissory note
on Aug 31, 1979 in the amount of P3,411,421.32 payable in 5 installments. He failed to pay any installment, the last one
falling due on December 31, 1980.
- In a letter dated Jan 26, 1982, petitioner requested and proposed to CCP a mode of paying the restructured loan, i.e., (a)
20% of the principal amount of the loan upon CCP’s conformity to the proposal; and (b) the balance on the principal
obligation payable in 36 equal monthly installments until fully paid.
Sempron, Joesil Dianne C.
University of San Carlos Obligations and Contracts
- Oct 20, 1983 – TAN again sent a letter to CCP requesting for a moratorium on his loan obligation until the following year
allegedly due to a substantial deduction in the volume of his business and on account of the peso devaluation. No
favorable response was made to these letters.
- Instead, CCP wrote TAN a letter dated May 30, 1984 demanding full payment of the petitioner’s restructured loan (as of
April 30, 1984 amounted to P6,088,735.03 within 10 days from receipt of the letter.
- Aug 29, 1984 – CCP filed in the RTC of Manila a complaint for collection of a sum of money. TAN interposed the
defense that he merely accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan from
CCP and he has not been able to locate Lucmen. While the case was pending in the trial court, the petitioner filed a
Manifestation wherein he proposed to settle his indebtedness to respondent CCP by proposing to make a down payment
of P140,000.00 and to issue 12 checks every beginning of the year to cover installment payments for one year, and every
year thereafter until the balance is fully paid. However, respondent CCP did not agree to the petitioner’s proposals and so
the trial of the case ensued.
- On May 8, 1991, the trial court ruled against Tan, ordering him to pay CCP the amount of P7,996,314.67, representing
his outstanding account as of August 28, 1986, with the corresponding stipulated interest and charges, until fully paid,
plus attorney’s fees in an amount equivalent to 25% of said outstanding account, plus P50,000.00, as exemplary
damages.
Trial Court’s Ruling
(1) gave little weight to the petitioner’s contention that the loan was merely for the accommodation of Wilson Lucmen for
the reason that the defense propounded was not credible in itself.
(2) assuming, that the petitioner did not personally benefit from the said loan, he should have filed a third party complaint
against Wilson Lucmen, but he did not.
(3) in fact, Tan offered to settle his loan obligation with respondent CCP thrice.
(4) he may not avoid his liability to pay his obligation under the promissory note, which he must comply with in good faith
pursuant to Article 1159 of the New Civil Code.
(5) he is estopped from denying his liability or loan obligation to the private respondent.
CA’s Ruling
- His liability cannot be modified on account of partial or irregular performance because there is none. His offer or tender
of payment cannot be deemed as a partial or irregular performance of the contract, not a single centavo appears to have
been paid by the defendant.
Petitioners' Claim
- If penalty is to be awarded, he is asking for the non-imposition of interest on the surcharges because the compounding
of interest on surcharges is not provided in the promissory note. HE also contests the computation whereby the interest,
surcharge and the principal were added together and that on the total sum interest was imposed.
- There is no basis in law for the charging of interest on the surcharges for the reason that the New Civil Code is devoid of
any provision allowing the imposition of interest on surcharges.
- His obligation to pay the interest and surcharge should have been suspended because this obligation has become
conditional, which consists of whether the petitioner’s request for condonation of interest and surcharge would be
recommended by the Commission on Audit and the Office of the President to the House of Representatives for approval.
Since the condition has not happened due to respondent’s reneging on its promise, his liability to pay the interest and
surcharge on the loan has not arisen.

ISSUES
1. WON there are contractual and legal bases for the imposition of the penalty
2. WON interest may accrue on the penalty or compensatory interest without violating Art. 1959 2 of NCC
3. WON the penalty should be reduced pursuant to Art. 1229 3
4. WON imposition of interest should be suspended for the period of time that respondent failed to assist petitioner in
applying for relief of liability through COA and Office of the President
5. WON CA erred in not deleting award of attorney’s fees and in reducing penalties

HELD
1. YES
Article 1226 of the New Civil Code 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

2
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due
and unpaid, which as added principal, shall earn new interest.
3
Art. 1229: “The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may be also be reduced by the courts if it is iniquitous or unconscionable.”
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.”
Reasoning The promissory note expressly provides for the imposition of both interest and penalties in case of default on
the part of the petitioner in the payment of the restructured loan.
- The stipulated 14% per annum interest charge until full payment of the loan constitutes the monetary interest on the note
and is allowed under Article 1956 of the New Civil Code. The stipulated 2% per month penalty is in the form of penalty
charge which is separate and distinct from the monetary interest on the principal.
- The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the
petitioner. The penalty charge is also called penalty or compensatory interest.
2. YES
Since penalty clauses can be in the form of penalty or compensatory interest, the compounding of the penalty or
compensatory interest is allowed pursuant to Art. 1959.
Reasoning First, there is an express stipulation in the promissory note permitting the compounding of
interest. Second, Article 2212 of the NCC provides that “Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this point.” In this case, interest began to run on
the penalty interest upon the filing of the complaint in court.
3. YES
- The continued monthly accrual of the 2% penalty charge on the total amount due is “unconscionable” inasmuch as it is
compounded monthly. (But it shall not be reduced to 10% of the unpaid balance as the petitioner contends)
Reasoning Considering petitioner’s several partial payments and the fact he is liable under the note for 21 years since his
default in 1980, it is equitable to reduce the penalty charge to a straight 12% per annum on the total amount due starting
Aug 28, 1986 (the date of the last Statement of Account)
- Also considered were petitioner’s offers to enter into a compromise for the settlement of his debt by presenting proposed
payment schemes to CCP. This showed his good faith despite difficulty in complying with his loan obligation due to his
financial problems.
4. NO
Reasoning It was the primary responsibility of petitioner to inform the Commission on Audit and the Office of the
President of his application for condonation of interest and surcharge.
- Also, the letter dated Sept 28, 1988 alleged to have been sent by the CCP to the petitioner is not part of the formally
offered documentary evidence of either party in the trial court. It also does not contain any categorical agreement on the
part of respondent CCP that the payment of the interest and surcharge on the loan is deemed suspended while his appeal
for condonation of the interest and surcharge was being processed.
5. NO
- The appellate court ruled correctly and justly in reducing the trial court’s award of twenty-five percent (25%) attorney’s
fees to five percent (5%) of the total amount due.
Disposition Decision appealed from is AFFIRMED with MODIFICATION in that the penalty charge of two percent (2%)
per month on the total amount due, compounded monthly, is hereby reduced to a straight twelve percent (12%) per
annum starting from August 28, 1986.
G.R. No. 108346, July 11, 2001 ]
SPS. MARIANO Z. VELARDE AND AVELINA D. VELARDE, petitioners
VS. COURT OF APPEALS, DAVID A. RAYMUNDO AND GEORGE RAYMUNDO, respondents

FACTS

On August 8, 1986, a Deed of Sale with Assumption of Mortgage was executed by defendant David Raymundo, as
vendor, in favor of plaintiff AvelinaVelarde, as vendee upon payment of Php800,000 over a parcel of land, together with
the house and other improvements, located at Kamias St., Dasmariñas Village, Makati.

The said property was still under mortgage by David Raymundo to BPI for Php1.8M

Part of the condition of the sale was that the Velardes will assume payment of the mortgage obligations on the property
amounting to Php1.8M and will strictly comply to terms and conditions.Velardes also issued Undertaking for purposes of
attesting and confirming their understanding concerning the assumption of mortgage obligations and that it was not yet
approved by BPI. They also agreed that in the event they violate the T&C of the Deed of Real Estate Mortgage, the
downpayment of P800,000 plus all payments made with BPI shall be forfeited in favor D. Raymundo and he shall resume
total and complete ownership and possession of the property sold by way of Deed of Sale with Assumption of Mortgage,

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
and the same shall be deemed automatically cancelled and be of no further force or effect, in the same manner as if the
same had never been executed or entered into.

Plaintiff paid BPI the monthly interest on the loan for the period of 3 months. However, BPI did not approved the
assumption of mortgage so that prompted plaintiffs not to make any further payment. Defendants informed plaintiff that
their non-payment to the mortgage bank constituted non-performance of their obligation.

Plaintiff, however, demanded from the defendant following:


(a) delivery of actual possession of the property not later than January 15, 1987 for her immediate occupancy;
(b) defendant to release title and mortgage from the BPI and make the title available and free from any liens and
encumbrances; and
(c) you execute an absolute deed of sale in favor free from any liens or encumbrances not later than January 21, 1987.

Defendant sent plaintiff a notarial notice of cancellation/rescission of the intended sale of the subject property allegedly
due to the latter's failure to comply with the terms and conditions of the Deed of Sale with Assumption of Mortgage and
the Undertaking

Petitioners filed complaint against private respondents for specific performance, nullity of cancellation, writ of possession
and damages at RTC Makatibut the complaint was dismissed. Thereafter, petitioners filed a Motion for Reconsideration
which was grantedand the court directed the parties to proceed with the sale. He instructed petitioners to pay the balance
of P1.8 million to private respondents who, in turn, were ordered to execute a deed of absolute sale and to surrender
possession of the disputed property to petitioners.

Private respondents appealed to the CA.

CA Ruling

CA uphold the validity of the rescission made by private respondents.

The assumption of the mortgage obligation is part of the obligation of Velardes where they agreed to strictly and faithfully
comply with all the terms and conditions. Moreover, it was stipulated that in the event of violation, the downpayment of
P800,000.00 plus all payments made with BPI or the mortgage loan would be forfeited and the Deed of Sale with
Assumption of Mortgage would thereby be cancelled automatically and of no force and effect.

The application with BPI would only mean that in case of approval, payment of the mortgage obligation will now be in the
name of Velarde. And in the event said application is disapproved, Velarde had to pay in full. Hence, the non-payment of
the mortgage obligation would result in a violation of the contract. And, upon Velarde's failure to pay the agreed price,
thenRaymundo may choose either:

(1) demand fulfillment of the contract,or


(2) demand its rescission (Article 1191, Civil Code).

The disapproval of BPI cannot be used as an excuse for Velardes non-payment of the balance. Instead of paying the
balance in cash, they presented 3 conditions mentioned above which would constitute a new undertaking or new
agreement not subject to the consent or approval of Raymundo and not among those previously agreed upon. These are
mere offers or, at most, an attempt to novate. Butthere can be no novation because there was no agreement of all the
parties to the new contract.

While it is true that even if the contract expressly provided for automatic rescission upon failure to pay the price, the
vendee may still pay, he may do so only for as long as no demand for rescission of the contract has been made upon him
either judicially or by a notarial act (Article 1592, Civil Code). In the case at bar, Raymundo sent Velarde a notarial notice
dated January 8, 1987 of cancellation/rescission of the contract due to the latter's failure to comply with their obligation.

The agreement of the parties involved a reciprocal obligation wherein the obligation of one is a resolutory condition of the
obligation of the other, the non-fulfillment of which entitles the other party to rescind the contract. Thus, the non-payment
of the mortgage obligation by appellees Velarde would create a right to demand payment or to rescind the contract, or to
criminal prosecution. Upon appellees' failure, therefore, to pay the balance, the contract was properly rescinded.
Consequently, appellees Velarde having violated the contract, they have lost their right to its enforcement and hence,
cannot avail of the action for specific performance.

Petitioner appealed CA ruling and interpose that CA erred in justifying the rescission of agreement

Issue: W/N the CA erred in holding that the rescission of the contract by private respondents was justified

SC Ruling:

Rescission is affirmed but with modification that private respondents are ordered to return to petitioners the amount of
P874,150, which the latter paid as a consequence of the rescinded contract, with legal interest thereon from January 8,
1987, the date of rescission.

A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract,
entitles the injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires a
mutual restitution of benefits received.

"Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.

In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of
petitioners to comply with their obligation to pay the balance of the purchase price.

Although petitioners expressed their willingness to pay the balance of the purchase price one month after it became due,
this was not equivalent to actual payment as would constitute a faithful compliance of their reciprocal obligation. Here,
petitioners not only paid the balance but they also imposed upon private respondents new obligations as preconditions to
the performance of their own obligation. Hence, private respondents were left with the legal option of seeking rescission to
protect their own interest.

Considering that the rescission of the contract is based on Article 1191, mutual restitution is required to bring back the
parties to their original situation prior to the inception of the contract. The initial payment of P800,000 and the 3 months
mortgage payments totaling P874,150.00 advanced by petitioners should be returned by private respondents, or the latter
unjustly enrich themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who
demands rescission can return whatever he may be obliged to restore. To rescind is to declare a contract void at its
inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further
obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no
contract has been made.

SIY V. CA
FACTS:
● The private respondents, spouses Valdez are the owners of a parcel of land containing an area of 155 square
meters, more or less, and a house is constructed there (TCT No. 32718). There is no dispute regarding the
contract of sale of the said property by both parties but the controversy stemmed from subsequent agreements
executed by both.
● The first agreement entered into by both parties was the Deed of Conditional Sale whereby for and in
consideration of P22,000, the private respondents as vendors agreed to sell to the petitioner as vendee the said
lot with all the improvements thereon (TCT No. 32718). The sale was subject to the condition that immediately
upon the approval of the petitioner’s loan with the Social Security System (SSS) and its payment to the
respondents, the vendor shall execute the deed of absolute sale in favor of the vendee (petitioner).
● The petitioner, Siy, applied for a loan with the SSS, through the Home Financing Commission (HFC). Since the
property in question was mortgaged to the Government Service Insurance System (GSIS), the HFC requested
Sempron, Joesil Dianne C.
University of San Carlos Obligations and Contracts
both parties to execute a Deed of Sale with Assumption of Mortgage which both parties did, stating among others
that the respondents sell, transfer, and convey to the petitioner the property for and in consideration of the sum pf
P22,000, of which P6,400 (representing the amount allegedly incurred by the petitioners for improvements on said
property) had been paid and the balance of 15,600 payable upon approval of the petitioners loan with the SSS.
● In reality, however, the respondents had not received a single centavo from the petitioner at the time.
Subsequently, the parties executed three more contracts:
(1) Executed more than one month after the Deed of Conditional Sale provided that the respondents agreed to
sell the property to the petitioner at P14,000 while the latter must negotiate a loan with the SSS in order to
settle the amount within a period of thirty days from March 17, 1963. The contract also provided for the
payment of rentals by the petitioner at P50 a month from March 1, 1963 until the date of final settlement and
damages at the rate of P30 a day for each day of delay. The next day, another contract was executed;
(2) The same contract (1) but the Respondent, Valdez, explained that she did not agree with the granting of
another thirty-day extension to the petitioner and so the first contract (1) was torn up. But later on, the
respondent changed their minds after the mother of the petitioner pleaded for another extension and so the
second contract came into being. It provided that the full amount of P14,000 would be paid on or before the
30th day from the date of the execution of the contract and that failure of the petitioner to settle his obligation
within that period shall make him liable for damages at P30 for every day of delay.
(3) The third contract entered by the parties, provided among others that the respondents agreed to receive the
partial amount of P12,000 on the condition that the balance of P4,376 is completely paid for forty-five (45)
days after the date fixed by them and that failure of the petitioner to pay the said balance on the agreed time
will entitle the respondents to damages at P20 for every day of delay until said balance shall have been fully
paid.
● Within the forty-five (45) days deadline, however, the petitioner failed to pay both the P12,000 which was
supposed to be received by the respondents upon the execution of the agreement (3) and the balance of
P4,376.00. Thus, when the petitioner’s loan with the SSS was finally ready for release, he requested the
respondents to sign the deed of absolute sale and other papers required by the SSS but the latter refused on the
ground that the petitioner had already breached their latest agreement (3).
● The petitioner filed an action for specific performance with the writ of preliminary mandatory injunction seeking to
compel the respondents to execute the deed of absolute sale of the property and other such documents required
by the SSS for the immediate release of the approval loan.
● The TRIAL COURT ruled in favor of the petitioner and the private respondents filed a motion for reconsideration
which led the TRIAL COURT to render another decision but this time, in favor of the private respondents.
Petitioner appealed and the Court of Appeals affirmed the decision of the lower court in toto.
ISSUES:
(1) WON CA erred in sustaining the trial court in ruling that the first decision of the trial court was not final when
the same was set aside and superseded by the second decision and thus, the trial court had no more
jurisdiction to render said second decision.
(2) WON CA erred in sustaining the trial court in ordering the rescission of the agreement (Contract 3) and the
payment of damages and attorney’s fee.
RULING:
1. NO. Firstly, the very purpose of a motion for reconsideration is to point out the findings and conclusions of the decision
which in the movant’s view, are not supported by law or the evidence. The movant is, therefore, very often confined to the
amplification or further discussion of the same issues already passed upon by the court. Otherwise, his remedy would not
be a reconsideration of the decision but a new trial or some other remedy. Secondly, the same should not be strictly
construed as a motion for reconsideration although captioned as such because in reality, it is merely a supplementary
pleading aimed to call the court’s attention to the fact that it had given the respondents five days to file their rejoinder, with
which they complied and, therefore, said rejoinder should have been considered before the court acted upon the
respondent’s first motion for reconsideration. Supplemental pleadings are meant to supply deficiencies in aid of original
pleadings, not to entirely substitute the latter, and neither should they be considered independently nor separately from
such original pleadings.
2. NO. But the payment for damages in the amount of P4,376 is unwarranted. By failing to pay the amount of P12,000 and
the balance of P4,376 as stipulated in the contract within the forty-five (45) days period, the petitioner clearly committed a
breach of contract which sufficiently and justly entitled the respondents to ask for the rescission of the contract.
Wherefore, the decision appealed from is MODIFIED in that the award of damages in the amount of P4,376,00 is set
aside. The petitioner is ordered to vacate the disputed property and pay P50 as monthly rentals with interest at the legal
rate from March, 1963 up to the time he and his successors-in-interest vacate the property in question. In all other
respects, the decision is AFFIRMED.

UP V DE LOS ANGELES
REYES; September 29, 1970

NATURE
Petition for certiorari and prohibition

FACTS
- Nov. 2, 1960 – UP entered into a logging agreement with ALUMCO wherein ALUMCO was granted the exclusive
authority to cut, collect and remove timber from the Land Grant. The said logging agreement began on the date of
agreement to Dec. 31, 1965, extendible for a period of five years.
- Dec. 8, 1964 – ALUMCO accumulated unpaid dues of P219,362.94 which it failed to pay despite repeated demands.
- UP sent a notice to ALUMCO, saying that the former would terminate/rescind the contract. ALUMCO then drew up an
“Acknowledgment of Debt and Proposed Mariner of Payments” dated Dec. 9, 1964 and was approved by the UP
president.
- ALUMCO should pay its outstanding balance to UP on or before June 30, 1965
- If ALUMCO fails to do that, UP will have the right to rescind the contract without the necessity of a judicial suit
and UP shall have the right to P50,000 in damages.
- ALUMCO continued the logging concession but once more incurred an outstanding balance of P61,133.74 from Dec. 9,
1964 to July 15, 1965 on top of its existing outstanding obligation.
- July 19, 1965 – UP rescinded the contract and filed a civil suit against ALUMCO on September 7 of the same year.
- Sept. 30, 1965 – UP obtained an order which prevented ALUMCO from continuing its logging activities.
- Before the preliminary injunction was granted, UP already conducted a bidding and eventually awarded the concession
to Sta. Clara Lumber. The contract with Santa Clara was signed on Feb. 16, 1966.
- Feb. 25, 1966 – ALUMCO obtained an order which enjoined UP from awarding logging rights to a different
concessionaire.
- April 12, 1966 – UP declared in contempt of court and Sta. Clara was told to stop the logging activities.
Respondents’ Comments:
- Respondents blame their former manager for their financial turmoil because he did not turn over the company to
ALUMCO.
- It was unable to comply with the manner of payments stated in the “Acknowledgement” because the logs they harvested
were rotten.
- It is only upon a judicial declaration that the contract can be considered rescinded.

ISSUE
WON UP can treat the contract with ALUMCO as rescinded without any judicial pronouncement

HELD
Yes, UP can treat the contract with ALUMCO as rescinded without any judicial pronouncement.
Ratio The party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. It is only the final judgment of the corresponding court that will and
finally settle whether the action taken was or was not correct in law.
Reasoning
- The “Acknowledgement ” already indicated that should ALUMCO fail to pay its dues on time, the contract would be
rescinded.
- But since the decision finding UP in contempt is on appeal in the CA, the SC decided not to make any comment.
Palay Inc. v. Clave
G.R. No. L-56076 September 21, 1983
Facts:
1. On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott sold a parcel of land owned by the
corporation to the private respondent, Nazario Dumpit, by virtue of a Contract to Sell. The sale price was P23,300.00 with
9% interest per annum, payable with a down payment of P4,660.00 and monthly instalments of P246.42 until fully paid.
Sempron, Joesil Dianne C.
University of San Carlos Obligations and Contracts
Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly
instalment after the lapse of 90 days from the expiration of the grace period of one month, without need of notice and with
forfeiture of all instalments paid.
2. Respondent Dumpit paid the down payment and several instalments amounting to P13,722.50 with the last payment
was made on December 5, 1967 for instalments up to September 1967. Almost six (6) years later, private respondent
wrote petitioner offering to update all his overdue accounts and sought consent to the assignment of his rights to a certain
Lourdes Dizon. Petitioners informed respondent that his Contract to Sell had long been rescinded pursuant to paragraph 6
of the contract, and that the lot had already been resold.
3. Respondent filed a letter complaint with the National Housing Authority (NHA) questioning the validity of the
rescission. The NHA held that the rescission is void in the absence of either judicial or notarial demand. Palay, Inc. and
Onstott in his capacity as President of the corporation, jointly and severally, was ordered to refund Dumpit the amount
paid plus 12% interest from the filing of the complaint. Petitioners' MR was denied by the NHA. Respondent Presidential
Executive Assistant, on May 2, 1980, affirmed the Resolution of the NHA. Reconsideration sought by petitioners was
denied for lack of merit. Thus, the present petition.

Issue: W/N demand is necessary to rescind a contract

Ruling: As held in previous jurisprudence, the judicial action for the rescission of a contract is not necessary where the
contract provides that it may be revoked and cancelled for violation of any of its terms and conditions. However, even in
the cited cases, there was at least a written notice sent to the defaulter informing him of the rescission. A written notice is
indispensable to inform the defaulter of the rescission. Hence, the resolution by petitioners of the contract was ineffective
and inoperative against private respondent for lack of notice of resolution (as held in the U.P. vs. Angeles case). The act
of a party in treating a contract as cancelled should be made known to the other.
Later, RA 6551 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Instalment Payments,”
emphasized the indispensability of notice of cancellation to the buyer when it specifically provided:
Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice
of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender
value to the buyer. (Emphasis supplied).

Moreover, there was no waiver on the part of the private respondent of his right to be notified under paragraph 6 of the
contract since it was a contract of adhesion, a standard form of petitioner corporation, and private respondent had no
freedom to stipulate. Finally, it is a matter of public policy to protect buyers of real estate on instalment payments against
onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real
estate on instalment payments.
As a consequence of the resolution by petitioners, rights to the lot should be restored to private respondent or the same
should be replaced by another acceptable lot but since the property had already been sold to a third person and there is
no evidence on record that other lots are still available, private respondent is entitled to the refund of instalments paid plus
interest at the legal rate of 12% computed from the date of the institution of the action. It would be most inequitable if
petitioners were to be allowed to retain private respondent's payments and at the same time appropriate the proceeds of
the second sale to another.

Onstott not personally liable


Onstott was made liable because he was then the President of the corporation and the controlling stockholder but there
was no sufficient proof that he used the corporation to defraud private respondent. He cannot, therefore, be made
personally liable just because he "appears to be the controlling stockholder". Mere ownership by a single stockholder or
by another corporation is not of itself sufficient ground for disregarding the separate corporate personality.
Finally, there are no badges of fraud on the petitioners' part. They had literally relied, albeit mistakenly, on paragraph 6
(supra) of the contract when it rescinded the contract to sell extrajudicially and had sold it to a third person.
Petitioner Palay, Inc. is liable to refund to respondent Dumpit the amount of P13,722.50, with interest at twelve (12%) p.a.
from November 8, 1974, the date of the filing of the Complaint.

MANUEL CAMUS, petitioner vs. PRICE Inc., defendant.


G.R. No. L-17858-9. July 13, 1962.

TOPIC: Both parties in breach of obligation


FACTS:
Camus entered Price into a contract of lease for all a building with the lot and parcel of land No 15 and 16, in Malabon,
Rizal for 10 years from April 1951 to March 1960. It was clearly stipulated in the contract that Camus was to ensure
the property, to register vacant portion of the lot along the river with an area of about 500 square meters of increase
its elevation, and build concrete stone walls with barbed wires on top.
Price filed a case saying the Camus failed to comply with make a contract for the vacant portion of land along the river
and the building of the stone walls. Camus also filed a case of unlawful detainer against Price for failure to pay rental
fees.
RTC ruled in favor of Camus ordering Price to leave the premises and pay the rentals until finally delivery of possession to
Camus. Price appealed and it was held that obligations of the parties in the contract being reciprocal, the Lessee did
not incur delay until the Lessor complies with what was incumbent upon him applying Article 1169 of the Civil Code. It
was found out that Price did fail to pay the rental but Camus also failed to comply with his obligations (walls were
lacking barbed wires and failure to file the construction).

a) Petitioner’s Arguments (Camus – Lost)


Refer to facts

b) Respondent’s Argument’s (Price - Lost)


Refer to facts

ISSUE:
WON both parties committed pari delicto?

FINDINGS OF THE Lower Court:


They committed pari delicto thus Price is to pay Camus 200 until vacation from premises.

FINDINGS OF THE Court of Appeals:


Affirmed

RULING: (of the Supreme Court)


Affirmed.

Rule:
ART. 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.

Application:

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
The partied were clearly both in default. It appears that the strip of land, with an area of 1,425 square meters, was not
originally part of lots 15 and 16 subject of the contract. Camus also did not comply with the building of the wall and
failed to secure insurance. Price also failed to pay.
Since the court could not determine who first violated the contract, both parties are to bear their own damages and the
contract is deemed extinguished.

Conclusion:
Thus, the decision of the RTC was affirmed in full.

OBLIGATIONS WITH A PERIOD


Art. 1193.
Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain.
A day certain is understood to be that which must necessarily come, although it may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is conditional and it shall be
regulated by the rules of the preceding Section.

Meaning of period or term.


A period is a future and certain event upon the arrival of which the obligation (or right) subject to it either arises or is
terminated. It is a day certain which must necessarily come (like the year 2005; next Christmas), although it may not be
known when, like the death of a person. (Art. 1193, par. 3.)
A period is a certain length of time which determines the effectivity or the extinguishment of obligations.

Meaning of obligation with a period.


An obligation with a period is one whose consequences are subjected in one way or another to the expiration of said
period or term.

Kinds of period or term.


(1) According to effect:
(a) Suspensive period (ex die). — The obligation begins or arises only from a day certain upon the arrival of the period
(Art. 1193, par.1.); and
(b) Resolutory period (in diem). — The obligation is valid up to a day certain and terminates upon the arrival of the period.
After this, the obligation is extinguished. (par. 2.)

EXAMPLES:
Ex die:
(1) “I will pay you 30 days from today.” (or on Jan. 1 next year, or at the end of this month.) Here, what is suspended is not
the obligation itself (or right acquired) but merely its demandability.
(2) “I will support you from the time your father dies.” Here, the uncertainty consists not in whether the day (death) will
come or not,but only in the exact date or time of its taking place. (pars. 3 and 4, Art. 1193.)
(3) “I will pay you when my means permit me to do so.” This is considered by law as an obligation with a period. (Art.
1180.)

In diem/ Resolutory: Note the word ‘until’.


(1) “I will give you P1,000.00 a month until the end of the year.”
(2) “I will support you until you die.”

GAITE V. FONACIER-
Existence of obligation to pay is recognized and merely the exact date for payment is undetermined.
Fonacier, owner of a mining claim, appointed Gaite as attorney-in-fact to enter into a contract with any individual or
juridical person for the exploration and development of said claim on a royalty basis. Gaite himself embarked upon the
exploitation of the claim. Subsequently, Fonacier revoked the authority granted by him to Gaite, who assented thereto
subject to certain conditions. As a result, a document was executed wherein Gaite transferred to Fonacier all of Gaite’s
rights and interests over the “24 tons of iron ore, more or less” that Gaite had already extracted from the mineral claims in
consideration of the sum of P75,000.00, P10,000.00 of which was paid upon the signing of the agreement, and “the
balance of P65,000.00 will be paid from and out of the first letter of credit covering the first shipment of iron ores and of
the first amount derived from the local sale of iron ore” from said claims. To secure the payment of the balance, Fonacier
executed in favor of Gaite a surety bond. No sale of approximately 24,000 tons of iron ore had been made nor had the
balance of P65,000.00 been paid to Gaite.

Issue: Is the shipment or local sale of the iron ore a condition precedent (or suspensive condition) to the payment of the
balance, or only a suspensive period or term?

Held: The sale of the iron ore is not a condition precedent to the payment of the balance but was only a suspensive
period or term, intended merely to fix the future date of the payment. The obligation of X is one with a term. The words
of the contract express no contingency in the buyer’s obligation to pay. There is no uncertainty that the payment will have
to be made sooner or later; what is undetermined is merely the exact date at which it will be made. From the words of the
contract, “the balance of P65,000 will be paid out of the letter of credit covering the first shipment of iron ore.” There is no
uncertainty that the payment will have to be made sooner or later, what is undetermined is the exact date. The existence
of the obligation to pay is recognized, only its maturity or demandability is deferred.

By the very terms of the contract, therefore, the existence of the obligation to pay is recognized; only its maturity or
demandability is deferred (postponed/delayed). Furthermore, to subordinate X’s obligation to the sale or shipment of the
ore as a condition precedent, would be tantamount to leaving the payment at his discretion (Art. 1182.), for the sale or
shipment could not be made unless he took steps to sell the ore.

ART. 1195.
Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or believing
that the obligation has become due and demandable, may be recovered, with the fruits and interests.

Payment before arrival of period.


Article 1195 applies only to obligations to give. It is similar to Article 1188, paragraph 2, which allows the recovery of what
has been paid by mistake before the fulfillment of a suspensive condition. The creditor cannot unjustly enrich himself by
retaining the thing or money received before the arrival of the period.

Debtor presumed aware of period.


The presumption, however, is that the debtor knew that the debt was not yet due. He has the burden of proving that he
was unaware of the period. Where the duration of the period depends upon the will of the debtor (see Art. 1197, par. 3.),
payment by him amounts, in effect, to his determination of the arrival of the period. The obligor may no longer recover
the thing or money once the period has arrived but he can recover the fruits or interests thereof from the date of
premature performance to the date of maturity of the obligation.

ART. 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.

Presumption as to benefit of period.


In an obligation subject to a period fixed by the parties, the period is presumed to have been established for the benefit
of both the creditor and the debtor. This means that before the expiration of the period, the debtor may not fulfill the
obligation and neither may the creditor demand its fulfillment without the consent of the other especially if the latter would
be prejudiced or inconvenienced thereby.

In a reciprocal contract like a lease, the period must be deemed to have been agreed upon for the benefit of both parties,
absent language showing that the term was deliberately set for the benefit of the lessee or the lessor alone (Fernandez
vs. Court of Appeals).

FERNANDEZ V. COURT OF APPEALS

The controversy revolves around the appropriate reading of a clause in a lease contract that was executed 15 years ago.
Respondent Miguel Tanjangco, as lessor, and petitioner Celso A. Fernandez, lessee, entered into a 10-yr contract of
lease, over a piece of land in Pandacan MNL. The parties agreed that the lease would be “renewable for another 10 years
at the option of BOTH parties under such terms, conditions and rental reasonable at that time”. And that upon expiration
of the lease, whatever improvements were then existing thereon should automatically belong to the Miguel without having
to pay the Fernandez.

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
Before the 10 yr contract has ended, Miguel said that he does not want to renew the lease. However, Fernandez replied
that he had opted to renew the contract for another 10 yrs so that he could recover all the expenses he had incurred in the
construction of the market. Miguel, through his lawyer, advised that he could not accept Fernandez’s unilateral action to
renew the lease because, under the contract, any renewal or extension was possible only “at the option of both parties”

SUPREME COURT:

The intention of the parties to the lease agreement is clearly discernible in the words of that agreement. The contract
clause may be seen to consist of 2 parts:
1) The contract is renewable for 10 yrs at the option of both parties – The option to renew was given not to the
lessee alone not to the lessor by himself, but to the both of them, hence both must exercise the option to renew if a new
contract is to come about.

2) Renewable under such terms, conditions and rental reasonable at that time – addresses the future and directs
the parties to negotiate and reach mutual agreement on the terms and conditions of the new contract. The important task
in contract interpretation is always the ascertainment of the intention of the contracting parties and that task is of course to
be discharged by looking to the words they used to project that intention in their contract.

The period of the lease must be deemed to have been agreed upon for the benefit of both parties, absent language
showing that the term was deliberately set forth for the benefit of the lessee or lessor alone. We are not aware of any
presumption in law that the term of lease is designed for the benefit of lessee alone.
ABESAMIS VS. WOODCRAFT WORKS LTD
Plaintiff/Seller – East Samar Lumber Mills; Defendant/Buyer – Woodcraft Works, Ltd.
This case involves an agreement to purchase 300k board feet (BF) of PH round logs at 60php/thousand board feet. Due
to bad weather only 13, 068 board feet of logs were delivered. Parties entered a new contract. The previous one
cancelled, with seller’s waiver of all its claims. Only two shipments were made (March and April), total of 462k BF
Seller Abesamis filed in the CFI: Action for rescission of contract and Recovery of damages because of Buyer Woodcraft’s
failure to comply with obligation. Granted. Buyer filed answer & later amended answer thru Denying allegations and
Counterclaims
Was Woodcraft liable for damages?
Seller divides his claim for damages into three categories, each based on a separate breach of contract by buyer.
1. First, failure of Woodcraft to send a vessel. The storm on May 5, 1951 swept away almost all the logs then
awaiting shipment. 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 contract between the parties was a reciprocal one, buyer to furnish the vessel and seller 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 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 buyer Woodcraft, and the
corresponding loss must be shouldered by seller Abesamis.
Second, buyer was advised of the quantity of logs ready for shipment and was urged to send a vessel to take delivery. It
gave assurance that a vessel, the "SS ALBAY," with a capacity of 450,000 board feet, was coming to Dolores,
Samar, to load on June 25, 1951. Seller Abesamis 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. It may be observed in this respect
that although the obligation would not become due until July 31, 1951 buyer Woodcraft waived the benefit of the
period by (PREMATURE DELIVERY) assuring seller that it would take delivery of the logs on June 25, 1951. (1
MONTH PRIOR TO DUE)
On that date seller was ready to comply, but buyer failed on his commitment, without any satisfactory explanation for such
failure. Therefore, buyer should bear the corresponding loss.
2. Third, by the end of July 1951, seller had sufficient logs ready for shipment in accordance with the contract. But
buyer, in spite of the representations made by the former, failed to send a vessel on the aforesaid date.
There is no evidence that such failure was due to circumstances beyond buyer's control. As a result, logs totalling
800,000 board feet were destroyed by marine borers. For which, buyer should be held liable.
Woodcraft Works, Ltd. is sentenced to pay seller the aggregate sum of P69,685.26 by way of damages, plus P5,000 as
attorney's fees, without costs in this instance.
The debtor has no right to accelerate the time of payment … The acceptance of a partial payment by a creditor
amounts to a waiver of the period agreed upon during which payment should not be made. If no explanation is given why
the creditor received such partial payment before the maturity of the obligation, it may be presumed that his
relinquishment was intentional, and his choice to dispense with the term, voluntary (Lopez v Ochoa).
ART. 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.

Court generally without power to fix a period.


The period mentioned in the above provision refers to a judicial period as distinguished from the period fixed by the
parties in their contract which is known as contractual period.
GREGORIO ARANETA INC. V. PHIL SUGAR ESTATES DEV
Power of court to determine, where the period contemplated is within a reasonable time, if such period had already
elapsed or not; applicability of Article 1197.

S (seller) obligated itself to construct streets around the perimeter of the land sold (site of the Sto. Domingo Church in
Quezon City). The parties were aware that the land, on which the streets would be constructed were occupied by
squatters. No definite date was fixed within which the streets would be constructed. An action for specific performance
with damages was brought against S.

Issues:
(1) Has the court the power under Article 1197 to fix the period for the performance of S’s obligation?
(2) If so, when should the obligation be performed?

Held: The court found the decision appealed from is untenable.


The decision appealed from is reversed, and the time for the performance of the obligations of petitioner Gregorio
Araneta, Inc. is hereby fixed at the date THAT ALL THE SQUATTERS ON AFFECTED AREAS ARE FINALLY EVICTED
therefrom. The fixing of a period by the courts under Article 1197 of the Civil Code of the Philippines is sought to be
justified on the basis that petitioner (defendant below) placed the absence of a period in issue by pleading in its answer
that the contract with respondent Philippine Sugar Estates Development Co., Ltd. gave petitioner Gregorio Araneta, Inc.
"reasonable time within which to comply with its obligation to construct and complete the streets."

The SC noted that neither of the 2 courts below seem to have noticed that, on the hypothesis stated, what the answer put
in issue was not whether the court should fix the time of performance, but whether or not the parties agreed that the
petitioner should have reasonable time to perform its part of the bargain.
If the contract so provided, then there was a period fixed, a "reasonable time;" and all that the court should have done was
to determine if that reasonable time had already elapsed when suit was filed if it had passed, then the court should
declare that petitioner had breached the contract, as averred in the complaint, and fix the resulting damages.
Article 1197 is part and parcel of all obligations contemplated therein. Hence, whenever the court fixes the term of an
obligation, it does not thereby amend or modify the same. It merely enforces or carries out the intention of the parties. It
cannot arbitrarily fix a period out of thin air for the law expressly prescribes “that the courts shall determine such period as
may under the circumstances have been probably contemplated by the parties.” (Art. 1197, par. 3.)

No period is fixed but a period was intended. In a case, the space for the date on which the installment should have
commenced was left blank; held: this did not necessarily mean that the debtors were allowed to pay as and when they
could, where such intention was not indicated in the promissory note. (see Art. 1180.) On the contrary, the fact that an
acceleration clause and a late payment penalty were provided in the promissory note, showed the intention of the parties
that the installments should be paid at a definite date. (Radiowealth Finance Co. vs. Del Rosario, 335 SCRA 288 [2000].)

Radiowealth Finance Co v. Del Rosario


Spouses Vicente and Maria Sumilang del Rosario (respondents), jointly and severally executed, signed and delivered in
favor of Radiowealth Finance Company (petitioner), a Promissory Note for P138, 948. The note stated that demand was
not necessary. A consecutive monthly payment of P11, 579 for 12 moths and 2.5% late penalty charge per month will be
added to each unpaid installment from due date until fully paid.

The Note also stipulated that if default be made, the total principal sum then remaining unpaid, together with the agreed
late payment charges thereon, shall at once become due and payable without need of notice or demand. Finally,
the Note stipulated that “If any amount due on this Note is not paid at its maturity and this Note is placed in the hands of
an attorney or collection agency for collection, I/We jointly and severally agree to pay, in addition to the aggregate of the
principal amount and interest due.” The respondents eventually defaulted despite demands to pay.

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
The petitioners then filed a complaint to collect the money where they claimed that respondents are liable for the whole
amount of their debt and the interest thereon, after they defaulted on the monthly installments.
Respondents, on the other hand, counter that the installments were not yet due and demandable.
This was supposedly evidenced by the blank space left for the date on which the installments should have commenced.
In other words, respondents theorize that the action for immediate enforcement of their obligation is premature
because its fulfillment is dependent on the sole will of the debtor (themselves).

ISSUE: Whether or not the leaving of blank the due date means that payment is dependent on the debtor’s will.
HELD- No. This contention is untenable.
• The act of leaving blank the due date of the first installment did not necessarily mean that the debtors were
allowed to pay as and when they could.
• If this was the intention of the parties, they should have so indicated in the Promissory Note. However, it did not
reflect any such intention.
• The Note clearly provided that each installment should be payable each month.
• The contemporaneous & subsequent acts of the parties manifest their intention and knowledge that the monthly
installments would be due and demandable each month.
• The respondents did not contest the amount and the CA correctly found that the ambiguity in the Note was human
error.
• Therefore, Petition granted. Respondent ordered to pay P138, 948, plus 2.5 percent penalty charge per month
beginning April 2, 1991 until fully paid, and 10 percent of the amount due as attorney’s fees.

ALLEN VS THE PROVINCE OF ALBAY

On February 25, 1913, the Director of Public Works acting for the Provinces of Albay and Ambos Camarines, advertised
for sealed proposals, to be opened March 15,1913, for the construction of a reinforced concrete bridge over the Argos
River on the Albay-Ambos Camarines boundary.

At the request of the plaintiff, the opening of the bids was postponed until March 20, on which date plaintiff submitted his
bid to construct the proposed bridge for the sum of P 30,690.

The project was solely awarded to Mr. Allen bid’s who agrees on the construction of the project to be completed
on or before (within) 4 months. The bridge was completed and accepted by respondents on April 1, 1914 and plaintiff
was paid the contract price less P1,301.45:

This action was instituted for the purpose of recovering the amount of P1,301.45, P200 overcharges on steel
not delivered, P2,000 for damages caused by the defendants' delay, and P878 for extra work and material
furnished on the bridge at defendants' request.

RTC: ruled in favor of the defendant province (Albay).

Issue: WON the defendants were entitled to deduct from the contract price for the construction of the bridge total sum of
P1,301.45.

Ruling: NO. Where a contract for the construction of a reinforce concrete bridge fixes a certain sum as liquidated
damages for each day's delay in completing the work within the time agreed, and it appears that the owners failed to
promptly deliver the steel and changed the plans, and the Government imposed a strict quarantine on all draft animals,
thereby causing a substantial delay, the time limit was waived and the contractor was bound only to finish the
construction within a reasonable time.

Where a strict performance of a contract by the contractor has been prevented or waived by the owners and the
contractor failed to complete the work within a reasonable time, such time cannot be apportioned by the courts, the only
remedy left to the owners being a right of action for the actual damages suffered.

The result is that the provinces are limited to such damages which they may have suffered on account of an unreasonable
delay on the part of the plaintiff in completing the bridge, if there were, in fact, an unreasonable delay. It would seem,
however, that as the plaintiff asked for an extension on December 1, sometime after the quarantine had been raised and
also after the change in the plans had been made, until February 15, 1914, he should have finished the work on or before
the latter dated and all time thereafter would constitute an unreasonable delay.

ALTERNATIVE AND FACULTATIVE OBLIGATIONS


ART. 1199.
A person alternatively bound by different prestations shall completely perform one of them.
The creditor cannot be compelled to receive part of one and part of the other undertaking.

Meaning of alternative obligation.


An alternative obligation is one wherein various prestations are due but the performance of one of them is sufficiently
determined by the choice which, as a general rule, belongs to the debtor.

D borrowed from C P10,000. It was agreed that D could comply with his obligation by giving C P10,000, or a color
television set, or by painting the house of C.

The delivery of the P10,000, or a color television set, or the painting of the house of C, is sufficient to comply with the
obligation. Performance must be complete. C cannot be compelled to accept, for instance, P5,000 and half of the
television, thereby establishing a co-ownership between them, or P5,000, and the painting of a part of his house. (Art.
1199, par.2.)

ART. 1200.
The right of choice belongs to the debtor, unless it has been expressly granted to the creditor.
The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not
have been the object of the obligation.

Right of choice, as a rule, given to debtor. As a general rule, the right to choose the prestation belongs to the debtor.
By way of exception, it may be exercised by the creditor but only when expressly granted to him (Art. 1205.), or by a third
person when the right is given to him by common agreement. (Art. 1306.)

EXAMPLES:
(1) D insured his house with R, an insurance company. It is agreed that, if the house is destroyed or damaged, R may
either pay the damage or loss or “reinstate or rebuild the house.” Since nothing is said in the contract as to who has the
right of choice, it belongs to R, as debtor.

(2) S binds himself to deliver item one or two to B on November 10 and to communicate his choice on or before
November 5. If S delays in making his selection, B cannot exercise the right because it is not expressly granted to him.
But judgment in the alternative cannot be defeated by S by refusing to make a choice. In such case, the court can give the
right of choice to B.

Right of choice of debtor, not absolute.


The right of choice of the debtor is subject to limitations. Thus —
(1) The debtor cannot choose those prestations which are: (a) impossible, (b) unlawful, or (c) which could not
have been the object of the obligation. These prestations are void. Their presence do not invalidate the obligation if it
includes other undertakings otherwise free from such defects. In other words, under Article 1200, the debtor’s right of
choice is not extinguished altogether but limited to the remaining valid prestations.

(2) The debtor has no more right of choice, when among the prestations whereby he is alternatively bound, only
one is practicable. (Art. 1202.) In this case, there is not only a limitation but a loss of the right of choice belonging to the
debtor. The obligation becomes simple. The right does not pass to the creditor, nor may it be exercised by any one.

(3) The debtor cannot choose part of one prestation and part of another prestation.

Art. 1201.
The choice shall produce no effect except from the time it has been communicated.

(1) Means of Notification or Communication to Other Party of Choice


Since the law requires no specific form, it is believed the choice can be communicated orally or in writing, expressly, or
impliedly, such as by performance of one of the obligations.

(2) Effect of Notice that Choice Has Been Made


Once notice has been made that a choice has been done, the obligation becomes a simple obligation to do or deliver the
object selected. An election once made is binding on the person who makes it, and he will not, therefore, be permitted to
renounce his choice and take an alternative which was first open to him.

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
(3) Reason for Communicating the Choice to Creditor
In the case of Ong Guan Can and Bank of the Phil. Islands v. Century Insurance Co., 46 Phil. 592, the Supreme Court
stated that the debtor must notify the creditor “in order to give the creditor opportunity to express his consent or to impugn
the election made the debtor.” However, according to Paras, this is an error because if this were so, the debtor is really
being deprived of his right, under the law, to make his own choice. The real purpose of the notice is TO INFORM THE
CREDITOR THAT THE OBLIGATION IS NOW A SIMPLE ONE, NO LONGER ALTERNATIVE, and if already due, for
the creditor to receive the object being delivered, if tender of the same has been made.

(4) Requisites for the Making of the Choice: it must be—


(a) made properly so that the creditor or his agent will actually know;
(b) made with full knowledge that a selection is indeed being made. (Thus, ERROR in appreciating the meaning of
alternative obligations will give rise to vitiated consent, and the choice can later on be annulled.);
(c) made voluntarily and freely (without FORCE, INTIMIDATION,
COERCION, or UNDUE INFLUENCE);
(d) made in due time, that is, before or upon maturity (otherwise, the creditor can sue him in court with an alternative relief
as “give this or that, depending upon your choice”); (e) made to all the proper persons (Hence, if there be joint creditors,
all of them must be notified.);
(f) made without conditions unless agreed to by the creditor (otherwise, it can be said that no real choice is being made);
(g) waived, expressly or impliedly (since all rights in general may be waived).
ONG GUAN CAN vs. CENTURY INSURANCE

● A building of plaintiff, Ong Guan Can, was insured against fire by defendant company Century Insurance in the
amount of P30k plus P15k worth of goods. The house including the material were burnt while the insurance policy
were in force.

● According to defendant insurance company, one of the conditions of the insurance policy as stated in the contract is
that they can instead rebuild the house burnt although it may be smaller and that it is enough to indemnify the
damage suffered by the plaintiff.

● The clause cited by the defendant company is : “The Company may at its option reinstate or replace the property
damaged or destroyed, or any part thereof, instead of paying the amount of the loss or damage, or may join with any
other Company or insurers in so doing, but the Company shall not be bound to reinstate exactly or completely, but
only as circumstances permit and in reasonable sufficient manner, and in no case shall the Company be bound to
expend more in reinstatement than it would have cost to reinstate such property as it was at the time of the
occurrence of such loss or damage, nor more than the sum insured by the Company thereon."

ISSUE: WON the obligation of the defendant insurance company is an alternative one and WON it may opt to choose to
build the house instead of paying the amount lost.

RULING: Yes. It is an alternative obligation for the clause states that it may either pay the value of the house or
rebuild it at its option. However, in alternative obligation, the debtor (the insurance company in this case) must notify
the creditor (Ong Guan Can in this case) of his election, stating which of the two prestations he wish to fulfill.

● The purpose of the notice is to give the creditor an 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 by a competent court**.

● In this case, the defendant insurance company did not give a formal notice of his choice to rebuild the house. And
although the reconstruction of the house was proposed to the plaintiff, the latter did not give his assent thereto.

● Thus, defendant company, having not notified to the plainitff of his choice, may not choose to rebuild the house
instead of paying its value.

**“This statement is an error because if it were so, the debtor is really being deprived of his right, under the law, to make
his own choice. The real purpose of the notice is to inform the creditor that the obligation is now a simple one, no longer
an alternative, and if already due, for the creditor to receive the object being deliver, if the tender of the same has been
made”

Art. 1202.
The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only one
is practicable.
Effect when only one prestation is practicable.
If more than one is practicable, it is Article 1200 that will apply.
The obligation is still alternative because the debtor still retains the right of choice. Under Article 1202, if only one is
practicable (e.g., the others have become impossible), the obligation is converted into a simple one.

ART. 1203.
If through the creditor’s acts the debtor cannot make a choice according to the terms of the obligation, the latter
may rescind the contract with damages.

When debtor may rescind contract. 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. (Art. 1385, par. 1.)

It is the very nature of an alternative obligation that the debtor can make his choice without the consent of the creditor.
Hence, the right given the debtor to rescind the contract and recover damages if, through the creditor’s fault, he cannot
make a choice according to the terms of the obligation. The debtor, however, is not bound to rescind.

EXAMPLE:
D borrowed from C P20,000.00. It was agreed that instead of P20,000.00, D could deliver item one, or item two, or item
three. If through the fault of C, item one is destroyed, D can rescind the contract if he wants. In case of rescission, the
amount of P20,000.00 must be returned by D with interest. C, in turn, must pay D the value of item one plus damages.
D, instead of rescinding the contract, may choose item two or three with a right to recover the value of item one with
damages. If D chooses item one, his obligation is extinguished. C is not liable for damages.

ART. 1204.
The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things
which are alternatively the object of the obligation have been lost, or the compliance of the obligation has
become impossible. 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.

Effect of loss or becoming impossible of objects of obligation.


Articles 1203 and 1204 apply when the right of choice belongs to the debtor. Under Article 1205, the creditor has the right
to choose.
(1) Some of the objects. — If some of the objects of the obligation debtor, the latter is not liable since he has the right of
choice and the obligation can still be performed. This is an exception to the general rule established in Article 1170
regarding liability for damages arising from negligence.

(2) All of the objects. — If all of them have been lost or have become impossible through the debtor’s fault, the creditor
shall have a right to indemnity for damages since the obligation can no longer be complied with. Of course, if the cause of
the loss is a fortuitous event, the obligation is extinguished. The phrase “or the compliance of the obligation has become
impossible” refers to obligations “to do.”

EXAMPLE:
S agreed to deliver item one, or item two, or item three. If item one is lost through the fault of S, he can still select either
item two or item three. The loss of item one and two with or without the fault of S will reduce the obligation to a simple
one. If all the items are lost through his fault, liability will attach; if through a fortuitous event, the obligation will be
extinguished.

Basis of indemnity. The indemnity shall be fixed taking as basis the value of the last thing which disappeared
(referring to obligations to give) or that of the service which last became impossible (referring to obligations to do). In case
of disagreement, it is incumbent upon the creditor to prove such value, or which thing last disappeared or which service
last became impossible. Other damages may also be awarded. (Art. 1204, pars. 2 and 3.)

EXAMPLE:
In the above example, if items one and two are lost, S will be bound to deliver item three.
If subsequently, item three is also lost through the fault of S, the basis for indemnity is the value of item three since S
would have been bound to deliver it had it not also been lost. The liability of S is not affected although the loss of items
one and two was through a fortuitous event. If item three is lost without the fault of S, his obligation is extinguished
and he shall not be liable for damages although the loss of items one and two was due to his fault. The reason is that
after the loss of items one and two, the obligation is converted into a simple one to deliver item three. (Art. 1202.)
Sempron, Joesil Dianne C.
University of San Carlos Obligations and Contracts
S cannot be held responsible for the loss of items one and two through his fault because having the right of choice, he
was not bound to deliver either. The rule is just since he could have been liable for damages if item three instead was lost
through his fault and items one and two, through a fortuitous event.

Art. 1205.
When the choice has been expressly given to the creditor, the obligation shall cease to be alternative from the
day when the selection has been communicated to the debtor.
Until then the responsibility of the debtor shall be governed by the following rules:

Rules in case of loss before creditor has made choice.


(1) When a thing is lost through a fortuitous event. —
EXAMPLE: S obliged himself to deliver to B item one, or item two or item three, or item four. If item one is lost through a
fortuitous event, B can choose from among the remainder or that which remains if three of the items are lost.

(2) When a thing is lost through debtor’s fault. —


EXAMPLE: If the loss of item one occurs through the fault of S, B may claim item two or item three or item four with a right
to damages or the price of item one also with a right to damages.

(3) When all the things are lost through debtor’s fault. —
EXAMPLE: If all the items are lost through the fault of S, then B can demand the payment of the price of any one of them
with a right to indemnity for damages.

(4) When all the things are lost through a fortuitous event. —
EXAMPLE: The obligation of S shall be extinguished if all the items which are alternatively the object of the obligation are
lost through a fortuitous event. In this case, Article 1174 shall apply.

For the choice to be given the creditor, the right must expressly be given to him. It cannot just be implied. Of
course, the communication of choice by him may be express or implied, such as when suit is made for one of the objects.

As in the case of the debtor, it should be understood that the creditor loses the right to choose if only one of the
prestations is practicable. The debtor’s obligation had ceased to be alternative and had become a simple one. Art. 1205
does not apply when the contract does not state to whom the right to choose is given, for in such case it is the debtor who
can choose.

Effect if Creditor Delays in Making the Choice


If the creditor delays in choosing, he cannot yet hold the debtor in default, notwithstanding the lapse of maturity, for the
debtor does not know what to deliver. Upon the other hand, if the debtor wants to relieve himself, he may petition the court
to compel creditor to accept, in the alternative, at the creditor’s option, with resultant damages if any.

Art. 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.

COMMENT:
(1) ‘Facultative Obligation’ Defined: It is one where only one prestation has been agreed upon but the obligor may
render another in substitution.
Example: D promised to give C his diamond-studded ring but it was stipulated that D could give his BMW car as a
substitute.

Distinguished: Alternative vs Facultative Obligations


Alternative Facultative
Number of Prestations Several prestations Only one is due but
Debtor is allowed to substitute
Compliance of such prestation Compliance with one is sufficient
another

the right to make the substitution is


Right of Choice given to the debtor or creditor.
given only to the debtor

loss of one or more does not loss of the thing due extinguishes the
Loss through fortuitous event
extinguish the obligation obligation

the loss of one thru debtor’s fault the loss of the thing due through his
Loss thru the fault of the debtor
does not render him liable fault makes him liable

where the choice belongs to the


the loss of the substitute before the
creditor, the loss of one alternative
substitution through the fault of the
through the fault of the debtor gives
debtor does not render him liable;
rise to liability,
If one of the prestations is illegal, the If the principal obligation is void, and
others may be valid and the there is no necessity of giving the
Nullity of prestation obligation remains. The nullity of a substitute. Nullity of the prestation
prestation does not invalidate the agreed upon invalidates the
others obligation

the debtor or creditor shall choose the debtor is not bound to choose the
from among the remainder, substitute.
If it is impossible to give the principal,
the substitute doesn’t have to be
If it is impossible to give all except
Substitution given; if it is impossible to give the
one, that last one must still be given
substitute, the principal must still be
given.

Alternative obligations and alternative remedies distinguished.


In ordinary alternative obligations, a mere choice categorically and unequivocally made and then communicated by the
person entitled to exercise the option concludes the parties. The creditor may not thereafter exercise any other option,
unless the chosen alternative proves to be ineffectual or unavailing due to no fault on his part. This rule, in essence, is the
difference between alternative obligations, on the one hand, and alternative remedies, upon the other hand, where, in the
latter case, the choice generally becomes conclusive only upon the exercise of the remedy.

JOINT AND SOLIDARY LIABILITY


Art. 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.

PALMARES vs. CA (288 SCRA 422)

Private respondent M.B. Lending Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga, together
with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with compounded
interest at the rate of 6% per annum to be computed every 30 days from the date thereof.

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
On four occasions after the execution of the promissory note and even after the loan matured, petitioner and the Azarraga
spouses were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after
the last payment on September 26, 1991. Consequently, on the basis of petitioner's solidary liability under the promissory
note, respondent corporation filed a complaint 3 against petitioner Palmares as the lone party-defendant, to the exclusion
of the principal debtors, allegedly by reason of the insolvency of the latter.

ISSUES:

(1) Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the
principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the former deemed to be that
of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of the debtor? Or WON Palmares is
liable

(2) WON the penalty charge of 3% per month and attorney's fees equivalent to 25% of the total amount due are highly
inequitable and unreasonable

HELD:

(1) YES. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this
Book shall be observed. In such case the contract is called a suretyship. A surety is bound equally and absolutely with
the principal, and as such is deemed an original promisor and debtor from the beginning. This is because in suretyship
there is but one contract, and the surety is bound by the same agreement which binds the principal. In essence, the
contract of a surety starts with the agreement, which is precisely the situation obtaining in this case before the Court.

It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulation shall control. In the case at bar, petitioner expressly
bound herself to be jointly and severally or solidarily liable with the principal maker of the note. The terms of the contract
are clear, explicit and unequivocal that petitioner's liability is that of a surety.

(2) YES. It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been
paid even before the filing of the present case. Article 1229 of the Civil Code provides that the court shall equitably reduce
the penalty when the principal obligation has been partly or irregularly complied with by the debtor. And, even if there has
been no performance, the penalty may also be reduced if it is iniquitous or leonine.

The grant of attorney's fees equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate,
considering the minimal unpaid amount involved and the extent of the work involved in this simple action for collection of a
sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be sufficient in this
case.
RAUL SESBREÑO vs HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK
G.R. No. 89252 May 24, 1993
FACTS: Raul Sesbreno made a money market placement in the amount of P300,000 with PhilFinance, with a term of 32
days. PhilFinance issued to Sesbreno the Certificate of Confirmation of Sale of a Delta Motor Corporation Promissory
Note (DMC PN No. 2731), the Certificate of Securities Delivery Receipt indicating the sale of the Note with notation that
said security was in the custody of Pilipinas Bank, and postdated checks drawn against the Insular Bank of Asia and
America for P304,533.33 payable on 13 March 1981. The checks were dishonored for having been drawn against
insufficient funds. Philfinance delivered to petitioner Denominated Custodian Receipt (DCR).
Petitioner later made similar demand letters again asking private respondent Pilipinas for physical delivery of the original
of DMC PN No. 2731. Petitioner also made a written demand upon private respondent Delta for the partial satisfaction of
DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of
P307,933.33. Delta, however, denied any liability to petitioner on the promissory note.
As petitioner had failed to collect his investment and interest thereon, he filed an action for damages against private
respondents Delta and Pilipinas.
ISSUE: WON Pilipinas Bank is solidarily liable with Philfinance and Delta?
SOLIDARY OBLIGATIONS; EXPRESS ASSUMPTION OF SOLIDARY LIABILITY, REQUIRED; ABSENCE OF
EVIDENCE TO SUPPORT ALLEGATION IN CASE AT BAR. — We find nothing in the DCR that establishes an obligation
on the part of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in solidum with
Philfinance and Delta under DMC PN No. 2731.

We find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into an obligor
under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or at any other time.
We note that both in his complaint and in his testimony before the trial court, petitioner referred merely to the obligation of
private respondent Pilipinas to effect physical delivery to him of DMC PN No. 2731. Accordingly, petitioner's theory that
Pilipinas had assumed a solidary obligation to pay the amount represented by the portion of the Note assigned to him by
Philfinance, appears to be a new theory constructed only after the trial court had ruled against him.

The solidary liability that petitioner seeks to impute to Pilipinas cannot, however, be lightly inferred. Under Article 1207 of
the Civil Code, "there is a solidary liability only when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity." The record here exhibits no express assumption of solidary liability vis-a-vis
petitioner, on the part of Pilipinas. Petitioner has not pointed us to any law which imposed such liability upon Pilipinas nor
has petitioner argued that the very nature of the custodianship assumed by private respondent Pilipinas necessarily
implies solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold
Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731

Philippine National Bank v. Sta. Maria, 29 SCRA 303


A Special power of the attorney to mortgage real estate is limited to such authority and does not bind the grantor
personally to other obligations contracted by the grantee. The sugar crop loans were obtained by Maximo from the
plaintiff bank under the power of the attorney, executed in his favor by his brothers and sisters to mortgage a 16-odd
hectare parcel of land, jointly owned by all of them
· Valeriana the sister of Maximo, alone also executed in favor of her brother Maximo a special power of attorney to
borrow money and mortgage any real estate owned by her.
· Maximo applied for two separate crop loans with the PNB, one in the amount of P15,000 but only P13,216.11 was
extended by the PNB and the other for P23,000 but only P12,427.57 was extended by the PNB
· As security for the two loans, Maximo executed it in his own name in favor of PNB two chattel mortgages,
guaranteed by the surety bonds for the full authorized amounts of loans executed by the Associated Insurance & Surety
Co., Inc.
· Plaintiff Bank filed the case on February 10,1961 against Defendant Maximo Sta. Maria and his six brothers and
sisters and the Associated Insurancs & Surety Co., Inc. for the collection of unpaid balances of two sugar crop loans
· The Trial Court rendered judgement in favor of the PNB
· Maximo did not appeal but his siblings appealed and contended that they had given their brother Maximo the
authority to borrow money but only to mortgage the real estate jointly owned by them and that if they are liable, the liability
should not go beyond the value of the property which9 they had authorized to be given as security of the loans obtained
by Maximo. They further contended that they did not benefit whatsoever from the loans.

Issue: W/N the siblings are only liable for the value of the land?

Held:
· Yes, except for Valeriana who issued a separate Special Power of Attorney authorizing Maximo to borrow money.
· In Bank of P. I. v. De Coster, "where in an instrumentpowers and duties are specified and defined, that all of such
powers and duties are limited andconfined to thosewhich are specified and defined, and all other powers andduties are
excluded.”
· In De Villa vs. Fabricante, where the power of attorneygiven to the husband by the wife was limited to a grant of
authority to mortgage a parcel of land titled in the wife'sname, the wife may not be held liable for the payment of the
mortgage debt contracted by the husband, as the authority to mortgage does not carry with it the authorityto contract
obligation.
· Maximo and Valeriana are the only ones liable for the loans and that the other siblings’ liability only correspond to
real estate mortgage and the foreclosure and sale of mortgage.
· Maximo’s argument that "a mortgage is simply anaccessory contract, and that to effect the mortgage, aloan has to
be secured" falls, far short of the mark.Maximo had indeed, secured the loan on his own accountand the defendants-
appellants had authorized him tomortgage their respective undivided shares of the realproperty jointly owned by them as
security for the loan. But that was the extent of their authority land consequentliability, to have the real property answer for
the loan incase of non-payment.
· The outcome might be different if there had been anexpress ratification of the loans by defendants-appellantsor if it
had been shown that they had been benefited bythe crop loans so as to put them in estoppel.
· Under the Art. 1207, Valeriana is only jointly liable with Maximo

Pacific Banking Corp vs. Intermediate Appellate Court and Roberto Regala, Jr.

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
Petitioner bank issued a credit card to private respondent’s wife, Celia SyjucoRegala. She applied on Oct. 24, 1975 and
was issued and became effective on Oct. 29, 1975, going over the credit limit and even extending from the Oct. 29, 1976
one-year deadline. As a condition, private respondent, Roberto Regala, Jr., the husband, executed a Guarantor’s
Undertaking that makes him “jointly and severally liable for any and all indebtedness, obligations, charges or liabilities due
and incurred by Celia Regala.”
Celia’s incurred charges reached up to P92,803.98 after more than one year of using the credit card but she failed to
settle her account. the bank then sent demand letters to both Celia and Roberto. They still failed to settle, thus the bank
filed a complaint with the trial court.
In his demand letter, Roberto contended that his liability was limited only to P2,000.00 a month, the agreed credit limit.
Celia, on the other hand, remained silent. Having failed to appear at their pre-trial conference, they were both declared in
default by the court.
The RTC decided in favor of the petitioner bank, declaring Roberto to be jointly and severally liable to pay the total
charges with wife Celia. Upon appeal, however, appellant court decided in favor of Roberto in that he is liable only for
P2,000.00.
ISSUE/S: Is Roberto liable only to the extent of P2,000.00?
HELD: No. The Guarantor’s Undertaking was, in substance, a contract of surety. In suretyship, the surety binds
himself solidarily with the principal debtor. As provided in Roberto’s Guarantor’s Undertaking, he bound himself
“solidarily and jointly to pay Pacific Banking Corp. any and all indebtedness, obligations, charges or liabilities due and
incurred by Celia Regala.” This was also a condition in applying for the bank’s credit card (#5 of the Terms and
Conditions).
Art. 2054 is not applicable in this in limiting the guarantor’s liability as Roberto expressly bound himself up to the
extent of debtor’s indebtedness, also waiving any “discharge in case of any change or novation of the terms and
conditions in connection with the issuance of the credit card”. He bound himself as a surety continuously until all liabilities
have been fully paid - including additional and future debts of Celia.
Therefore, Roberto is held liable to the same extent as Celia.

Ronquillo vs. CA

This is a case of solidary liability. Ronquillo was one of four debtors for the sum of P117, 498.98 from Antonio So. The
amount represents the checks signed by the debtors in exchange for foodstuffs delivered by So.
When they failed to pay, So filed a civil case for collection before the Court of First Instance of Rizal. Ronquillo and his co-
debtors negotiated with So, who agreed to reduce the debt to P110,000, with the payment to be done in two installments
of P55,000 each. The compromise agreement stated that the debtors agreed to pay “individually and jointly” before June
1980 and that in case of failure to comply with the terms of the agreement, the innocent party will be entitled to an
execution of the decision based on this compromise agreement and the defaulting party agrees and hold themselves to
reimburse the innocent party for attorney’s fees, execution fees and other fees related with the execution.
So filed a motion for execution when the debtors failed to pay the first tranche in December 1979, but Ronquillo said they
could not find So on the December 24, the last date for payment. Ronquillo and his co-debtor, Pilar Tan, later deposited
half of the P55,000 with the clerk of court because So at first wanted the full amount paid, but So later withdrew the
deposited amount.
The lower court however issued a motion for execution against the two other co-debtors, for the remaining half of the
initial payment. So moved for the execution of the order “against all defendants, jointly and severally.” Ronquillo opposed
this, saying that the lower court’s order did not declare the defendants’ liability to be solidary.
The court however noted that only one-fourth of the debt had been paid, and ordered a writ of execution for the remaining
P82,500. The sheriff issued a notice of sale for certain appliances and furnitures in Ronquillo’s residence to satisfy the
debt.
Ronquillo filed an appeal with the Court of Appeals, which was then denied. The issue was elevated to the Supreme
Court, which noted that Ronquillo and his co-debtors individually and jointly agreed to pay the debt.
“Clearly then, 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, 14 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.”
• Ronquillo was one of the four defendants of the Civil case filed by Antonio So (private respondent) for collection of money
amounting to 117K
• The amount sought to be collected represented the value of the checks issued by defendants in payment for foodstuffs
delivered to and received by them
• They entered into a compromise agreement. In said agreement both parties agree that failure of either party to comply
with the terms and conditions stipulated, the innocent party will be entitled to an execution of the decision based on the
compromise agreement and the defaulting party agrees and hold themselves to reimburse the innocent party for attys
fees and other feesBecause of failure of the other two defendants to pay their obligation, private respondent filed for the
issuance of writ of execution
• A writ of execution was issued for the satisfaction for the claim against the properties of the defendants including
petitioner, single and jointly liable
• The decision of RTC based on the compromise agreement provides that “defendants individually and agree to pay” within
a periods of six months from January 1980 or before June 30, 1980
Issue: W/N Ronquillo is solidarily liable with the other defendants in the civil case
Ruling: Yes. 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 which
binds himself to perform the whole obligation

Summary: Spouses Saligo (D) contended that the other solidary creditor must be included as co-plaintiff being an
indispensable party to the claim.

Rule of Law: Either one of the solidary creditors my file a claim against the debtor.

Facts: Spouses Saligo (D) contracted Quiombing (P) and his co-creditor Bischoco to construct a house for them. The
Construction and Service Agreement between the parties stated that the creditors Quiombing (P) and Bischoco "jointly
and severally" bound themselves to construct a house for the debtors. Upon completion, Quiombing (P) was paid partially,
but was unable to collect the balance after repeated demands. Quiombing (P) alone filed for recovery of the balance plus
charges and interests.

Issues: (1) 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?

(2) In such a case, is the defendant entitled to the dismissal of the complaint on the ground of non-joinder of the second
creditor as an indispensable part? (3) More to the point, is the second solidary creditor an indispensable party?

Ruling: Yes. The question of who should sue the private respondents was a personal issue between creditors Quiombing
and Biscocho. It did not matter who as between them filed the complaint because the private respondents were liable to
either of the two as a solidary creditor for the full amount of the debt. Full satisfaction of a judgment obtained against them
by Quiombing would discharge their obligation to Biscocho, and vice versa; hence, it was not necessary for both creditors
Quiombing and Biscocho to file the complaint. Inclusion of Biscocho as a co-plaintiff when Quiombing was competent to
sue by himself alone, would be a useless formality.

Where the obligation of the parties is solidary, either one of the parties is indispensable, and the other is not even
necessary (now proper) because complete relief may be obtained from either.
—Feria, Civil Procedure, 1969, p. 153.

A joint obligation is one in which each of the debtors is liable only for a proportionate part of the debt, and each creditor
is entitled only to a proportionate part of the credit.

A solidary obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to
demand the whole obligation.

Hence, in the former, each creditor can recover only his share of the obligation, and each debtor can be made to pay only
his part; whereas, in the latter, each creditor may enforce the entire obligation, and each debtor may be obliged to pay it in
full.

QUIOMBING VS. CA
• In a “Construction and Service Agreement” concluded on August 30, 1983,Nicencio Tan Quiombing and Dante
Biscocho, (First Party) jointly and severally bound themselves to construct a house for private respondents
Francisco and ManuelitaSaligo (Second Party), for the contract price of P137, 940 which the second party agreed
to pay
• On October 10, 1984, Quiombing and ManuelitaSaligo entered into a second written agreement under which the
latter acknowledged the completion of the house and undertook to pay the balance of the contract price in the
manner prescribed in the said second agreement.
Sempron, Joesil Dianne C.
University of San Carlos Obligations and Contracts
• On November 19, 1984, ManuelitaSaligo signed a promissory note for P125,363.50 representing the amount still
due from her and her husband, payable on or before December 31, 1984, to Nicencio Tan Quiombing

• October 9, 1986, Quiombing filed a complaint for recovery of the said amount which the private respondents had
acknowledged and promised to pay
• Instead of filing an answer, the defendants moved to dismiss the complaint contending that Biscocho was an
indispensable party and therefore should have been included as a co-plaintiff.
• The complaint was dismissed, but without prejudice to the filing of an amended complaint to include the other
solidary creditor as a co-plaintiff
• Quiombing chose to appeal the order of dismissal, where he argued that as a solidary creditor he could act by
himself alone in the enforcement of his claim against the private respondents. Moreover, the amounts due were
payable only to him under the second agreement, where Biscocho was not mentioned at all.
• CA affirmed the trial court contending that the “second agreement referred to the Construction and Service
Agreement as its basis and specifically stated that it (was) merely a ‘part of the original agreement.”

ISSUE: Whether the second solidary creditor is an indispensable party to the complaint.

RULING:No.
- Article 1212 of the Civil Code provides: 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.
- Suing for the recovery of the contract price is certainly a useful act that Quiombing could do by himself alone.
- It does not matter who between them filed the complaint because the private respondents were liable to either of
the two as a solidary creditor for the full amount of the debt.
- Full satisfaction of a judgment obtained against them by Quiombing would discharge their obligation to Biscocho,
and vice versa; hence, it was not necessary for both Quiombing and Biscocho to file the complaint.
- although he signed the original Construction and Service Agreement, Biscocho need not be included as a co-
plaintiff in the complaint filed by the petitioner against the private respondents.
- Quiombing as solidary creditor can by himself alone enforce payment of the construction costs by the private
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.
- In either case, the participation of Biscocho is not at all necessary, much less indispensable.

Regarding joint vs. solidary obligations:


- A joint obligation is one in which each of the debtors is liable only for a proportionate part of the debt, and each
creditor is entitled only to a proportionate part of the credit.
o each creditor can recover only his share of the obligation, and each debtor can be made to pay only his
part
- A solidary obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to
demand the whole obligation.
o each creditor may enforce the entire obligation, and each debtor may be obliged to pay it in full.
- The same work describes the concept of active solidarity thus: The essence of active solidarity consists in the
authority of each creditor to claim and enforce the rights of all, with the resulting obligation of paying every
one what belongs to him; there is no merger, much less a renunciation of rights, but only mutual representation.

INCIONG VS COURT OF APPEALS


On February 3, 1983, petitioner Baldomero L. Inciong, Jr. together with Rene C. Naybe and Gregorio D. Pantanosas
signed a promissory note in the amount of P50, 000.00 holding themselves jointly and severally liable to private
respondent Philippine Bank of Communications. The promissory note was due on May 5, 1983. Said due date expired
without the promissors having paid their obligation.
On November 14, 1983 and on June 8, 1984, private respondent sent petitioner telegrams demanding payment thereof.
On December 11, 1983, private respondent also sent registered mail a final letter of demand to Rene C. Naybe. Since
both obligors did not respond to the demand made, private respondent filed on January 24, 1986 a complaint for collection
of the sum of P50, 000.00 against the three (3) obligors. On January 27, 1987, the lower court dismissed the case against
defendant Pantanosas as prayed by herein private respondent. Meanwhile, only the summons addressed to petitioner
was served for the reason that defendant Naybe had gone to Saudi Arabia.
The lower court rendered its decision holding petitioner solidarily liable and to pay herein respondent bank the amount of
P50, 000.00 plus interest thereon. Petitioner appealed the said decision to the Court of Appeals. The respondent court,
however, affirmed the decision of the lower court. The petitioner moved for reconsideration, which was later on denied by
the respondent Court of Appeals.

ISSUE: Whether or not the dismissal of the complaint against Naybe, the principal debtor, and against Pantanosas, his
co-maker, constituted a release of his obligation.
HELD:
The dismissal of the complaint against Naybe and Pantanosas did not constitute a release of petitioner‘s obligation,
especially because the dismissal of the case against Pantanosas was upon the motion of private respondent itself.
Petitioner signed the promissory note as a solidary co-maker and not as a guarantor. A solidary or joint and several
obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole
obligation. The promissory note involved in this case expressly states that the three signatories therein are jointly and
severally liable, any one, some or all of them may be proceeded against for the entire obligation. The choice is left to the
solidary creditor to determine against whom he will enforce collection
Under Article 1207 of the Civil Code, when there are two or more debtors in one and the same obligation, the presumption
is that the obligation is joint so that each of the debtors is liable only for a proportionate part of the debt. There is solidary
liability only when the obligation expressly so states, when the law so provides or when the nature of the obligation so
requires.

Divisible and Indivisble Obligations

PASAY CITY GOVT V CFI


Vicente David Isip entered into a contract with Pasay City for the Construction of the new Pasay City Hall.
The construction, as reflected by the contract:
➢ shall be done in stages to be determined by the City Engineer,
➢ considering the structural criteria and consistent with funds available for the purpose.
➢ Contractor shall advance the necessary amount needed for each stage of work and
➢ Pasay city to reimburse the amount spent before proceeding to the next stage.

The contractor finished various stages of the construction equivalent to a value of 1.7 Million of the total contract price of
4.9 Million. Pasay City paid only 1.1 Mil leaving some 600k yet to be paid, which pushed contractor to file an action for
specific performance with respondent CFI.

Parties instead agreed to a Compromise Agreement which was subsequently approved by the Court,
Terms in the agreement consisted of:
➢ the duration of construction,
➢ remittance of Pasay city of 600k,
➢ the attorneys fees which was fixed at 3% of the 600k,
➢ and that the claims of the contractor against Pasay City and its officials are relinquished and such cases are
dismissed with prejudice.

A writ of execution was effected and garnishment were made upon the funds of Pasay City Govt to give to contractor.
Pasay filed motion to set aside order and to quash the writ, because:
1. Execution was still premature, the period of 90 days hasn’t elapsed yet.
2. That the obligation was reciprocal and the contractor has not put up a performance bond equivalent to the 20% of
the remaining cost of construction, Pasay city couldn’t be obliged to pay the sum due yet
3. Sheriff has no power or authority to levy or garnish funds.
Court ordered: the enforcement of garnishment.
➢ W/N respondent court erred in executing the garnishment?
➢ W/N the 20% performance bond is proper?
No. Posting of performance bond is not a condition precedent to the payment of P600k. Nowhere in the contract nor in the
compromise agreement could it be found.
No. It is apparent that the parties envisioned a stage by stage construction and payment. Here, the obligation to
construct the town hall was a divisible obligation. For the Court to allow Pasay City to stick to the 20% bond would be
tantamount to allowing them to evade obligation in the compromise agreement It would be unreasonable to compel
contractor to submit a bond equal to the cost of the next project, if not being known when the City of Pasay shall have the
funds for completion. The premium of the bond will be sizeable and will eat up the profit of the contractor given with the
fluctuation of prices and materials due to inflation.

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
Obligations with a Penal Clause
SOLEDAD LEONOR PEA SUATENGCO AND ANTONIO ESTEBAN SUATENGCO VS. CARMENCITA O. REYES,
G.R. NO. 162729, DECEMBER 17, 2008

DOCTRINE: Liquidated damages, such as attorney’s fees stipulated in a promissory note, are those agreed upon by the
parties to a contract to be paid in case of breach thereof. Said fees so provided are awarded in favor of the litigant in the
nature of a penalty or liquidated damages, not a compensation for the respondent’s counsel.

FACTS: Congressman Reyes, herein respondent, lends petitioners estimated P1.3 Million. In the loan contract, it is
stipulated that in the event of default, Suatengco must pay the balance plus 12% interest per annum plus 5% attorney’s
fees for the total award. Atty. Edmundo Reyes, son of the respondent, appeared as the attorney-in-fact of the respondent,
and files a case for collection of sum of money, the 12% interest and 20% attorney’s fees. The lower and appellate courts
award the same. The petitioners countered alleging that the stipulated attorney’s fees is only 5%.

ISSUE: Whether or not 20% of the outstanding balance prevails over the 5% stipulated in the promissory note as basis for
the attorney’s fees.

HELD: The attorney’s fees herein litigated are in the nature of liquidated damages and not the attorney’s fees recoverable
as between attorney and client enunciated and regulated by the Rules of Court. Liquidated damages are those agreed
upon by the parties to a contract to be paid in case of breach thereof. The stipulation on attorney’s fees contained in
the said Promissory Note constitutes what is known as a penal clause. A penalty clause, expressly recognized by
law, is an accessory undertaking to assume greater liability on the part of the obligor in case of breach of an
obligation. The obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the
existence and on the measure of damages caused by the breach. It is well-settled that so long as such stipulation does
not contravene law, morals, or public order, it is strictly binding upon the obligor. The attorney’s fees so provided are
awarded in favor of the litigant, not his counsel. It is improper for both the RTC and the CA to increase the award of
attorney’s fees despite the express stipulation contained in the said Promissory Note since it is not intended to be the
compensation for the respondent’s counsel but was rather in the nature of a penalty or liquidated damages.

Thus, the Supreme Court modified the award for the attorney’s fees from 20% to 5% of the total balance of the
outstanding indebtedness but affirmed the decision of the appellate court in all other respects.

SOLEDAD LEONOR PEASUATENGCO and ANTONIO ESTEBAN SUATENGCO, Complainants vs. CARMENCITA O. REY
Respondent.
G.R. No. 162729December 17, 2008

Facts: This is an action for Sum of Money with Damages filed by Carmencita O. Reyes against defendants [petitioners]
Spouses Soledad Leonor Pea and Antonio Esteban Suatengco, wherein plaintiff (respondent) claimed that sometime in
the first quarter of 1994, defendant Sylvia (Soledad) approached her for the purpose of borrowing a sum of money in
order to pay her obligation to Philippine Phosphate Fertilizer Corporation (PhilPhos).

On May 31, 1994, plaintiff paid Philphos the amount ofP1,336,313.00 and by reason thereof defendants Spouses Sylvia
(Soledad) and Antonio executed on June 24, 1994 a Promissory Note binding themselves jointly and severally to pay
plaintiff the said amount in 31 monthly installments beginning June 30, 1994.

Of the amount, however, only one (1) payment in the amount of P15,000.00 onJuly 27, 1994 have been made by
defendants; and that pursuant to a specific clause in the Promissory Note, defendants have unequivocally waived
the necessity of demand to be made upon them to pay.

As of March 31, 1995 defendants owe plaintiff P1,321,313.00 exclusive of interest, other charges which is already due
and demandable but remains unpaid, hence this collection suit with prayer for moral damages and attorneys fees.

A perusal of the record showed that notwithstanding the leniency graciously observed by this court in giving defendants
several extensions of time to file their answer with responsive pleading, they failed to do the same thus, upon motion of
plaintiffs counsel, defendants were declared as in default on October 27, 1995 and the ex-partereception of plaintiffs
evidence was delegated to the Clerk of Court.

Thereafter, trial ex parte was delegated to the Clerk of Court to receive respondent’s evidence. Testimonial and
documentary evidence were all admitted. RTC rendered decision in favor of plaintiff ordering defendants to pay plaintiff
actual damages in the amount of P1,321,313.00 plus interest at 12% per annum; moral damages in the amount of
P1,000,000.00;attorneys fees in the amount of 20% of the sum collected; andcosts of suit.

In their appeal to the CA, petitioners did not question the amount of the judgment debt for which they were held liable but
limited the issue to the award of attorney’s fees.

On October 29, 2003, the CA promulgated a decision affirming with modification the trial courts decision. It upheld the
award of attorneys fees equivalent to 20% of the balance of petitioners obligation and modified the decision of the trial
court by lowering the award of moral damages from One Million Pesos (P1,000,000.00) to Two Hundred Thousand Pesos
(P200,000.00). Dispositively, the decision reads:

Petitioners moved for the reconsideration of the CAs decision, but the same was denied.

Issue: Whether or not the CA erred in affirming the award of attorney’s fees equivalent to 20% of their total indebtedness
instead of the over the 5% stipulated in the promissory note.(Basis is when RTC upheld the oral evidence of Atty.
Edmundo O. Reyes, and disregarding the written agreement of the parties.)

Held: The petition is partly meritorious.

The fifth paragraph of the Promissory Note executed by petitioners in favor of respondent undeniably carried a
stipulation for attorneys fees and interest in case of the latters default in the payment of any installment due. It specifically
provided that:

Failure on the part of Sylvia and/or Antonio Suatengco to pay any installment due will render the
entire unpaid balance immediately, due and demandable and Cong. Reyes becomes entitled not only for
the unpaid balance but also for 12% interest per annum of the outstanding balance of P1,336,313.00
from May 31, 1994 until fully paid plus attorneys fees equivalent to 5% of the total outstanding
indebtedness.

The RTC and CA, in awarding attorneys fees equivalent to 20% of petitioners total obligation, disregarded the
stipulation expressly agreed upon in the Promissory Note and instead increased the award of attorneys fees by
giving weight and value to the testimony of prosecution witness Atty. Reyes. In agreeing to the reasonableness of the
attorneys fees, the CA erroneously took into account the time spent, the extent of the services rendered, as well as the
professional standing of the lawyer. ORAL EVIDENCE CERTAINLY CANNOT PREVAIL OVER THE WRITTEN
AGREEMENTS OF THE PARTIES. The courts need only to rely on the faces of the written contracts to determine
their true intention on the principle that when the parties have reduced their agreements in writing, it is presumed
that they have made the writings the only repositories and memorials of their true agreement.

The stipulation on attorney’s fees contained in the said Promissory Note constitutes what is known as a penal
clause. A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on
the part of the obligor in case of breach of an obligation.

In sum, we find it improper for both the RTC and the CA to increase the award of attorney’s fees despite
the express stipulation contained in the said Promissory Note which we deem to be proper under these
circumstances, since it is not intended to be compensation for respondents counsel but was rather in the nature
of a penalty or liquidated damages.

WHEREFORE, the Decision dated October 29, 2003 of the Court of Appeals is hereby MODIFIED in that the
amount of attorneys fees is reduced to five percent (5%) of the total balance of the outstanding indebtedness but the said
Decision is AFFIRMED in all other respects.

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
TITAN CONSTRUCTION CORPORATION, Petitioner, vs. UNI-FIELD ENTERPRISES, INC., Respondent.

Titan purchased on credit various construction supplies and materials from Uni-Field. Out of P7,620,433.12 total purchase
price, petitioner was only able to pay P6,215,795.70, leaving a balance of P1,404,637.42. The balance remain unpaid
despite demand so Uni-Field filed a compaint for collection of sum of money with damages against Titan. Titan filed a
counterclaim.

TC rendered judgment in favor of Uni-Field. It ordered Titan to pay Uni-Field liquidated damages - P324,147.94, aside
from the principal amount (P1,404,114.00), interest charges (P504,114.00 plus accrued interest charges at 24% per
annum compounded yearly reckoned from July 1995 up to the time of full payment), attorney's fees (25% of whatever
amount is due and payable and accumulated appearance fees at P1,000.00 per hearing) and costs of suit.

CA affirmed TC. Titan contends that the TC and CA had no legal basis to award interest, liquidated damages, and
attorney’s fees because the delivery receipts and sales invoices, which served as the basis for the award, were not
formally offered as evidence by Uni-Field. It also alleges that the delivery receipts and sales invoices were in the nature of
contracts of adhesion and Titan had no option but to accept the conditions imposed by respondent.

ISSUE relevant to damages: W/N there is legal basis to award interest, liquidated damages, and attorney’s fees in favor
of Uni-Field

RULING: Yes.

The delivery receipts and sales invoices (which formed part of Titan's formal offer of evidence) expressly stipulated the
payment of interest, liquidated damages, and attorney’s fees in case of overdue accounts and collection suits. Titan did
not only bind itself to pay the principal amount, it also promised to pay (1) interest of 24% per annum on overdue
accounts, compounded with the principal obligations as they accrue; (2) 25% liquidated damages based on the
outstanding total obligation; and (3) 25% attorney’s fees based on the total claim including liquidated damages. Since
petitioner freely entered into the contract, the stipulations in the contract are binding on petitioner. Thus, the TC
and CA did not err in using the delivery receipts and sales invoices as basis for the award of interest, liquidated damages,
and attorney’s fees.

On the allegation that the delivery receipts and sales invoices are in the nature of contracts of adhesion, contracts of
adhesion are as binding as ordinary contracts. Considering that Titan and Uni-Field have been doing business from 1990
to 1993 and that Titan is not a small time construction company, Titan is "presumed to have full knowledge and to have
acted with due care or, at the very least, to have been aware of the terms and conditions of the contract." Moreover,
Titan failed to show that in its transactions with Uni-Field it was the weaker party or that it was compelled to
accept the terms imposed by the respondent. The Court then upheld the validity of the contract between the two
parties.

DISCUSSION ON THE AWARD OF ATTY'S FEES IN RELATION TO LIQUIDATED DAMAGES


Reduced by the court.

The law allows a party to recover attorney’s fees under a written agreement. In Barons Marketing Corporation v. Court
of Appeals, the Court ruled that: "The attorney’s fees here are in the nature of liquidated damages and the stipulation
therefor is aptly called a penal clause. It has been said that so long as such stipulation does not contravene law, morals,
or public order, it is strictly binding upon defendant. The attorney’s fees so provided are awarded in favor of the litigant,
not his counsel."

On the other hand, the law also allows parties to a contract to stipulate on liquidated damages to be paid in case of
breach. A stipulation on liquidated damages is a penalty clause where the obligor assumes a greater liability in case of
breach of an obligation. The obligor is bound to pay the stipulated amount without need for proof on the existence and on
the measure of damages caused by the breach.

Articles 1229 and 2227 NCC empower the courts to reduce the penalty if it is iniquitous or unconscionable. The
determination of whether the penalty is iniquitous or unconscionable is addressed to the sound discretion of the court and
depends on several factors such as the type, extent, and purpose of the penalty, the nature of the obligation, the mode of
breach and its consequences.

The Court notes that Uni-Field had more than adequately protected itself from a possible breach of contract because of
the stipulations on the payment of interest, liquidated damages, and attorney’s fees. The Court finds the award of
attorney’s fees "equivalent to 25% of whatever amount is due and payable" to be exorbitant because it includes (1) the
principal; (2) the interest charges; and (3) liquidated damages. Moreover, the liquidated damages and the attorney’s fees
serve the same purpose, that is, as penalty for breach of the contract.

CA DECISION AFFIRMED WITH MODIFICATION AS TO THE AMOUNT OF ATTORNEY'S FEES AWARDED → 25%
of the principal obligation =P351,028.50

Corazon G. Ruiz v. Court of Appeal and Consuelo Torres- G.R. No. 146942 April 22, 2003

Herein petitioner Ruiz made several loans with respondent Torres. The loan was summed up at 750,000 pesos on one set
of transactions which is evidenced by one promissory note. Another, 300,000 pesos was further loaned after the
execution of the first promissory note.

The first promissory note states that surcharges at 1% compounded interest per month and a penalty charge of 10%
compounded interest per month was imposed upon default, and the obligation to pay 750,000 pesos shall subsist from
April 1995 to April 1996, during which the outstanding obligation shall accrue 3% compounded interest per month. All
loans are secured with mortgages in the form of jewelries pledged and real property.

Ruiz eventually defaulted and the mortgaged property are about to be subjected for auction, Ruiz petitioned for an
injunction against the auction proceedings in the trial court, which was approved, but it was set aside by the Court of
Appeals. The trial court contended that it was a unilateral contract of adhesion which was invalidated by the same,
because of its repugnancy to public policy and that Ruiz, being the weaker party, was disadvantaged because of the
transaction. This contention was reversed by the Court of Appeals, which now contends that Ruiz made multiple loan
agreements with Torres with almost similar imports of the promissory notes, there being only minor differences in interest
rates; there being no contract of adhesion, Ruiz gave her consent.

Issue: The 1% surcharge on the principal loan was valid?

ID.; DAMAGES; SURCHARGES. — The 1% surcharge on the principal loan for every month of default is valid. This
surcharge or penalty stipulated in a loan agreement in case of default partakes of the nature of liquidated
damages under Art. 2227 of the New Civil Code, and is separate and distinct from interest payment. Also referred to
as a penalty clause, it is expressly recognized by law. It is an accessory undertaking to assume greater liability on the part
of an obligor in case of breach of an obligation. The obligor would then be bound to pay the stipulated amount of
indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach.
Although the courts may not at liberty ignore the freedom of the parties to agree on such terms and
conditions as they see it that contravene neither law nor morals, good customs, public order or public policy, a stipulated
penalty, nevertheless, may be equitably reduced if it is iniquitous or unconscionable.

As for the contract of adhesion, the Supreme Court ruled that there was no contract of adhesion; Ruiz could not have
her consent to the transaction vitiated. It was clear in the records that Ruiz made multiple loan agreements with Torres, all
of which had similar imports when it comes to the period of payment, interests, charges and penalties, she had all those
chances to ensure that she knows what she was consenting herself to do. She was not compelled to give her
consent and agree to the stipulations in the promissory notes; she had all the choice to reject the imports of the document.
There is nothing in the records that show that she was compelled to agree to the stipulations. She had every
opportunity to study the agreement and make her decision from the same. The Supreme Court affirms the deletion
of the 3% monthly compounding interest, and the 10% compounding interest by the trial court and Court of Appeals for
being usurious.

Social Security System v. Moonwalk Development & Housing Corporation G.R. No. 73345 (April 7, 1993)

1. Plaintiff (SSS) approved the application of the defendant (Moonwalk) for an interim loan.
2. The loan was released to the Moonwalk.
3. Moonwalk made a payment to SSS for the loan principal released to it.
4. The last payment made by Moonwalk was based on the Statement of Account prepared by the SSS.
Sempron, Joesil Dianne C.
University of San Carlos Obligations and Contracts
5. After the settlement of the account, SSS issued to Moonwalk the Release of Mortgage of Moonwalk’s mortgaged
properties.
6. In the letters to Moonwalk, SSS alleged that it committed an honest mistake in releasing Moonwalk (in the mortgage).
7. Moonwalk replied in a letter that it had completely paid its obligations to SSS.
Issue/s:

1. Whether or not the 12% penalty is demandable even after the extinguishment of the principal obligation
2. Whether or not Moonwalk was in default (mora)
Ruling:

1. No. Obligation was already extinguished by the payment by Moonwalk of its indebtedness to SSS and by the latter’s act of
cancelling the real estate mortgages executed in its favor by defendant moonwalk.
What is sought to be recovered in this case is not the 12% interest on the loan but the 12% penalty for failure to pay on
time the amortization. What is sought to be enforced therefore is a penal clause of the contract entered into between the
parties.
Penal clause is an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the
performance thereof by imposing on the debtor a special presentation in case the obligation is not fulfilled or is irregularl y
or inadequately fulfilled. Accessory obligation is dependent for its existence on the existence of 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. Here, the 12% interest sought to be recovered was extinguished from the moment
Moonwalk paid the loan, the principal obligation.

2. No. A penalty is demandable in case of non performance or late performance of the main obligation. There must be a
breach of the obligation either by total or partial non fulfillment or there is non-fulfillment in the point of time which is called
mora or delay. There is no mora or delay unless there is a demand.
In the present case, during all the period when the principal obligation was still subsisting, although there was late
amortizations, there was no demand made by the creditor for the payment of the penalty. Therefore, up to the time of the
letter of SSS there was no demand for the payment of the penalty. Hence, the debtor was not in default.
SSS issued its statement of account showing total obligation of Moonwalk, and forthwith demanded payment from
Moonwalk. Because of the demand for payment, Moonwalk made a complete payment of its obligation. Because of this
payment the obligation of Moonwalk was considered extinguished, and pursuant to said extinguishment, the real estate
mortgages given by Moonwalk were released. For all purposes therefor the principal obligation of Moonwalk was
deemed extinguished as well as the accessory obligation of real estate mortgages.
The demand for payment of the penal clause made by SSS in its demand letter (November 28, 1989) are therefore
ineffective as there was nothing to demand.
If demand was made before the extinguishment of the obligation, then the obligation of Moonwalk would consist of (1)
principal obligation, (2) an interest of 12% on the principal obligation, and (3) the penalty of 12% for the late payment for
after demand. Moonwalk is not in default since there was no mora prior to the demand.
Notes/Doctrine:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no performance, the penalty may be also be reduced by the courts if it
is iniquitous.

• If the penalty can be reduced after the principal obligation has been partly or irregularly complied with by the debtor which
is nonetheless a breach of the obligation, with more reason the penal clause is not demandable when full obligation has
been complied with since in that case there is no breach of obligation.
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of
interest in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the payment or is guilty of fraud in the fulfillment of the obligation.
Function of a Penal Clause:

1. to provide for liquidated damages, and


2. strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach.
Art. 1169. Those obliged to deliver or to something incur in delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation.
Requisites for a debtor to be in default (mora):

1. The obligation be demandable and already liquidated;


2. the debtor delays performance; and
3. the creditor requires the performance judicially and extrajudicially.
Instances when demand is not necessary:

1. When the obligation or the law expressly so declares;


2. When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is
to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or
3. When the demand would be useless, as when the obligor has rendered it beyond his power to perform.

ALLEN v. THE PROVINCE OF ALBAY AND THE PROVINCE OF AMBOS CAMARINES


• On February 25, 1913, the Director of Public Works, acting for the Provinces of Albay and Ambos Camarines,
advertised for the sealed proposals, to be opened March 15, 1913, for the construction of a reenforced concrete
bridge over the Agus River on the Albay-Ambos Camarines boundary.
• At the request of the plaintiff, the opening of the bids was postponed until March 20, on which date plaintiff
submitted his bid to construct the proposed bridge for the sum of P30,690.
• The project was solely awarded to plaintiff Allen. The formal construct was duly executed on June 26, 1913. The
bridge was completed and accepted by the defendant provinces on April 1, 1914. The plaintiff was paid the
construct price less P30k, minus P1,301.45 as follows:
➢ P925 being retained as liquidated damages (penalty clause) at the rate of P25 per day from February
15, 1914, to March 31, 1914;
➢ P175.03 for expenses of inspection from November 1, 1913, to February 15, 1914; and
➢ P201.42 for the operation and maintenance of a ferry across the Agus River during the last mentioned period.
• This action was instituted for the purpose of recovering the amount of P1,301.45, P200 overcharges on steel not
delivered, P2,000 for damages caused by the defendants' delay, and P878 for extra work and material furnished
on the bridge at defendants' request.
• The lower court ruled in favor of the defendant province (Albay).
Issue: WON the defendants were entitled to deduct from the contract price for the construction of the bridge total sum of
P1,301.45.
Ruling: NO. The construction fixed a penal clause that should there be delay in the job, a rate of P25 is incurred
by Allen. It appears here that the owners failed to promptly deliver the steel needed for Allen’s construction of
the bridge, changed plans, and had quarantine on draft animals, all of which caused substantial delay on the
project. Albay cannot deduct P1,301.45 because by their delay, the time limit was waived and the contractor was
bound only to finish the construction within a reasonable time.
• The result is that the provinces are limited to such damages which they may have suffered on account of an
unreasonable delay on the part of the plaintiff in completing the bridge, if there were, in fact, an unreasonable
delay.
• It would seem, however, that as the plaintiff asked for an extension on December 1, sometime after the
quarantine had been raised and also after the change in the plans had been made, until February 15, 1914, he
should have finished the work on or before the latter dated and all time would have finished the construction on
time.
• Moreover, Allen did the job and finished the bridge.

• If the penalty can be reduced after the principal obligation has been partly or irregularly complied with by the debtor which
is nonetheless a breach of the obligation, with more reason the penal clause is not demandable when full obligation has
been complied with since in that case there is no breach of obligation.
For the foregoing reasons the judgment appealed from is reversed and judgment will be entered in favor of the
plaintiff and against the defendants for the sum of P1,301.45, with legal interest from April 1, 1914. No costs will be
allowed in this instance. So ordered.

STATE INVESTMENT HOUSE V CA


SYNOPSIS
When private respondent failed to pay its obligation to petitioner SIHI, the two mortgaged properties of the former were
foreclosed and sold for P4,233,874. Allegedly, the obligation is P6,833,021.62 at the time of the foreclosure sale and
hence, SIHI is still entitled to a deficiency payment. Both the trial court and appellate court, however, rejected the claim
after considering the penalty charge of 3% a month imposed on the principal obligation as a result of default in payments.
EaHIDC
The Court noted that the principal obligation of about P2,558,073.75 by private respondent would not have ballooned to
such horrendous amounts if not for the penalty charge of 3% per month or 36% per annum which is iniquitous and
unconscionable. Thus, it is in accordance with Art. 1229 of the Civil Code to disallow the payment of deficiency here
as this is merely a court reduction, not deletion, of the penalty charges.

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
The Malonjaos failed to pay the obligation to petitioner SIHI, the obligation of the private respondent was computed to be
P4,809,187.12 inclusive of interest and penalty charges. Since the private respondent failed to fulfill its obligation,
petitioner then decided to foreclose the real estate mortgage on two properties of the private respondent. At the time of
the auction sale on February 14, 1983, the properties were sold in the amount of P4,223,874.00 with the petitioner as the
highest bidder. Deducting this amount from the outstanding obligation of P4,809,187.12 as stipulated in the Statement of
Account, there would therefore be a balance of only about P575,313.12.

Whether or not the alleged deficiency from the foreclosure sale was P575,313.12 or P2,601,147.62 as claimed by
petitioner was of no moment. The respondent court disallowed the payment of the deficiency altogether because it found
that the principal obligation of the private respondent would not have ballooned to such a horrendous amount of P4.8M as
of September 21, 1991 if not for the penalty charge of 3% pa month or 36% per annum.
The lower courts found that 36% oer annum is unconscionable.
While the Court recognizes the right of the parties to enter into contracts and are expected to comply with the terms and
obligations, this rule is not absolute. The Court allowed to temper interest rates when necessary. Article 1229 of the New
Civil Code clearly provides:

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.

Ursula Solangon vs. Jose Avelino Salazar

On 1986, 1987, and 1990 the Solangons’ executed 3 real estate mortgages in which they mortgaged a parcel of land
situated in Sta. Maria, Bulacan, in favor of the Salazar to secure payment of a loan of P60, 000.00 payable within a period
of four (4) months, with interest thereon at the rate of 6% per month, to secure payment of a loan of P136, 512.00,
payable within a period of one (1) year, with interest thereon at the legal rate, and to secure payment of a loan in the
amount of P230, 000.00 payable within a period of four (4) months, with interest thereon at the legal rate.
This action was initiated by the Solangons to prevent the foreclosure of the mortgaged property. They alleged that they
obtained only one loan from the defendant-appellee, and that was for the amount of P60, 000.00, the payment of which
was secured by the first of the above-mentioned mortgages. The subsequent mortgages were merely continuations
of the first one, which is null and void because it provided for unconscionable rate of interest. They have already
paid the defendant-appellee P78, 000.00 and tendered P47, 000.00 more, but the latter has initiated foreclosure
proceedings for their alleged failure to pay the loan P230, 000.00 plus interest.

ISSUES OF THE CASE: Is a loan obligation that is secured by a real estate mortgage with an interest of 72% p.a. or 6%
a month unconscionable?

- Yes, although the C.B. Circular No 905 lifted the ceiling on interest rates there is nothing in the said circular that grants
lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to
hemorrhaging of their assets.
ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.
- In the case of Medel vs. C.A. the S.C. has held that 5.5% per month was reduced for being iniquitous, unconscionable
and exorbitant hence it is contrary to morals (contra bonos mores)
- In this case the Solangons’ are in a worse situation than the Medel case (6% per month interest rate) the said interest
rate should be reduced equitably.

HELD: WHEREFORE, the appealed decision of the Court of Appeals is AFFIRMED subject to the MODIFICATION that
the interest rate of 72% per annum is ordered reduced to 12 % per annum.

Legal Interest- the legal rate of interest for the loan or forbearance of any money, goods or credits, where such loan or
renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered,
in the absence of express contract as to such rate of interest, shall be 12% per annum, unless it is unconscionable or
contrary to laws, morals, public policy.

Barons Marketing Corp vs Court of Appeals and Phelp Dodge Phils Inc [G. R. No. 126486. February 9, 1998] 286
SCRA 96 Case Digest

Article 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to
receive the prestation in which the obligation consists. Neither may the debtor be required to make partial
payments. However, when the debt is in part liquidated 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.
Facts: August 31, 1973. Phelps Dodge appointed Barons Marketing as one of its dealers of electrical wires and cables
effective Sept. 1, 1973. Defendant was given 60 days credit for its purchases of Phelps Dodge’s electrical products.
· Barons Marketing purchased, on credit, from Phelps Dodge’s electrical wires and cable in the total amount of
P4,102,483.30. This was then sold to MERALCO, Baron Mktg being the accredited supplier of the electrical requirements
of MERALCO.
· Under the sales invoices issued by Phelps Dodge to Barons Mktg for the subject purchases, it is stipulated that interest at
12% on the amount of atty’s fees and collection. Baron’s Mktg paid P300,000 out of its total purchases leaving an unpaid
account of P3,802,478.20. Phelps Dodge wrote Barons Mktg demanding payment of its outstanding obligations due
Phelps Dodge. Baron Mktg responded by requesting if it could pay its outstanding account in monthly installments of
P500,000 plus 1%interest per month until full payment, this request was rejected and Phelps Dodge demanded full
payment
Phelps Dodge then filed a complaint before the Pasig Trial Court for the recovery of P3,802,478.20 and it also prayed to
be awarded with attorney’s fee at the rate of 25% of the amount demanded, exemplary damages in the amount of
P100,000, the expenses of litigation and the costs of suit. The court ruled in favor of Phelps Dodge with the exemplary
damages of P10,000 and recovery of P3,108,000
Both parties appealed. Phelps Dodge claimed that court should have awarded the sum of P3,802,478.20. It also said that
the amount awarded was a result of a typographical error.
Barons Mktg claimed that Phelps Dodge’s claim for damages is a result of “creditor’s abuse” and it also claimed that
Phelps Dodge failed to prove its cause of action against it. CoA ruled in favor of Phelps Dodge with the correct amount but
only with the 5% for the Atty’s fee. No costs.
Barons Mktg then alleged that the Coa erred its decision
Issue: W/ON private respondent is guilty of abuse of right
Held: No, a creditor cannot be considered in delay if he refuses to accept partial performance because, unless otherwise
provided by law or stipulated by the parties, a creditor cannot be compelled to accept partial performance; however, if
good faith necessitates acceptance or if the creditor abuses his right in not accepting, the creditor will incur in delay if he
does not accept such partial performance.

BARONS MARKETING CORP., petitioner, vs.


COURT OF APPEALS and PHELPS DODGE PHILS., INC. respondents.
PRINCIPLE: Human Relations Provision
ISSUE: two issues: (1) whether or not private respondent is guilty of abuse of right; and (2) whether or not private
respondent is entitled to interest and attorney's fees.
FACTS:

1. On August 31, 1973, plaintiff [Phelps Dodge, Philippines, Inc. private respondent herein] appointed defendant
[petitioner Barons Marketing, Corporation] as one of its dealers of electrical wires and cables effective September
1, 1973 (Exh. A). As such dealer, defendant was given by plaintiff 60 days credit for its purchases of plaintiff's
electrical products. This credit term was to be reckoned from the date of delivery by plaintiff of its products to
defendant.
2. During the period covering December 1986 to August 17, 1987, defendant purchased, on credit, from plaintiff
various electrical wires and cables in the total amount of P4,102,438.30 (Exh. B to K). These wires and cables
were in turn sold, pursuant to previous arrangements, by defendant to MERALCO, the former being the
accredited supplier of the electrical requirements of the latter. Under the sales invoices issued by plaintiff to
defendant for the subject purchases, it is stipulated that interest at 12% on the amount due for attorney's fees and
collection (Exh. BB). 1 On September 7, 1987, defendant paid plaintiff the amount of P300,000.00 out of its total
purchases as above-stated (Exh. S), thereby leaving an unpaid account on the aforesaid deliveries of
P3,802,478.20. On several occasions, plaintiff wrote defendant demanding payment of its outstanding obligations
due plaintiff (Exhs. L, M, N, and P). In response, defendant wrote plaintiff on October 5, 1987 requesting the latter
if it could pay its outstanding account in monthly installments of P500,000.00 plus 1% interest per month
commencing on October 15, 1987 until full payment (Exh. O and O-4). Plaintiff, however, rejected defendant's
offer and accordingly reiterated its demand for the full payment of defendant's account (Exh. P).
3. On 29 October 1987, private respondent Phelps Dodge Phils., Inc. filed a complaint before the Pasig Regional
Trial Court against petitioner Barons Marketing Corporation for the recovery of P3,802,478.20 representing the
value of the wires and cables the former had delivered to the latter, including interest. Phelps Dodge likewise
prayed that it be awarded attorney's fees at the rate of 25% of the amount demanded, exemplary damages
amounting to at least P100,000.00, the expenses of litigation and the costs of suit.
4. Petitioner, in its answer, admitted purchasing the wires and cables from private respondent but disputed the
amount claimed by the latter. Petitioner likewise interposed a counterclaim against private respondent, alleging
Sempron, Joesil Dianne C.
University of San Carlos Obligations and Contracts
that it suffered injury to its reputation due to Phelps Dodge's acts. Such acts were purportedly calculated to
humiliate petitioner and constituted an abuse of rights.
DECISION OF LOWER COURTS
RTC: the Court finds Phelps Dodge Phils., Inc. to have preponderantly proven its case and hereby orders Barons
Marketing, Inc. to pay Phelps Dodge

1. P3,108,000.00 constituting the unpaid balance of defendant's purchases from plaintiff and interest thereon at 12% per
annum computed from the respective expiration of the 60 day credit term, vis-a-vis the various sales invoices and/or
delivery receipts;

2. 25% of the preceding obligation for and as attorney's fees;

3. P10,000.00 as exemplary damages;

4. Costs of suit.
Court of Appeals: modifying the decision of the trial court

The Court of Appeals finds Phelps Dodge Phils., Inc. to have preponderantly proven its case and hereby orders Barons
Marketing, Inc. to pay Phelps Dodge the following:

1. P3,802,478.20 constituting the unpaid balance of defendant's purchases from plaintiff and interest thereon at 12% per
annum computed from the respective expiration of the 60 day credit term, vis-a-vis the various sales invoices and/or
delivery receipts; and

2. 5% of the preceding obligation for and as attorney's fees.


RATIO DECIDENDI OF SUPREME COURT
Actions; Damages; It is an elementary rule that good faith is presumed and that the burden of proving bad faith
rests upon the party alleging the same.—The question, therefore, is whether private respondent intended to prejudice
or injure petitioner when it rejected petitioner’s offer and filed the action for collection. We hold in the negative. It is an
elementary rule in this jurisdiction that good faith is presumed and that the burden of proving bad faith rests upon the party
alleging the same. In the case at bar, petitioner has failed to prove bad faith on the part of private respondent. Petitioner’s
allegation that private respondent was motivated by a desire to terminate its agency relationship with petitioner so that
private respondent itself may deal directly with Meralco is simply not supported by the evidence. At most, such
supposition is merely speculative.
Same; Same; A person who, in exercising his rights, does not act in an abusive manner is not deemed to have
acted in a manner contrary to morals, good customs or public policy as to violate the provisions of Article 21 of
the Civil Code.—Moreover, we find that private respondent was driven by very legitimate reasons for rejecting petitioner’s
offer and instituting the action for collection before the trial court. As pointed out by private respondent, the corporation
had its own “cash position to protect in order for it to pay its own obligations.” This is not such “a lame and poor
rationalization” as petitioner purports it to be. For if private respondent were to be required to accept petitioner’s offer,
there would be no reason for the latter to reject similar offers from its other debtors. Clearly, this would be inimical to the
interests of any enterprise, especially a profit-oriented one like private respondent. It is plain to see that what we have
here is a mere exercise of rights, not an abuse thereof. Under these circumstances, we do not deem private respondent to
have acted in a manner contrary to morals, good customs or public policy as to violate the provisions of Article 21 of the
Civil Code.
Contracts; Principle of Autonomy of Contracts; Since a contract has the force of law between the parties, each is
bound to fulfill what has been expressly stipulated therein.—It may not be amiss to state that petitioner’s contract
with private respondent has the force of law between them. Petitioner is thus bound to fulfill what has been expressly
stipulated therein. In the absence of any abuse of right, private respondent cannot be allowed to perform its obligation
under such contract in parts. Otherwise, private respondent’s right under Article 1248 will be negated, the sanctity of its
contract with petitioner defiled. The principle of autonomy of contracts must be respected.
Same; Penalty Clauses; Attorney’s Fees; The attorneys’ fees so provided in penal clauses are awarded in favor of
the litigant, not his counsel, and it is the litigant, not counsel, who is the judgment creditor entitled to enforce the
judgment by execution.—Petitioner nevertheless urges this Court to reduce the attorney’s fees for being “grossly
excessive,” “considering the nature of the case which is a mere action for collection of a sum of money.” It may be pointed
out however that the above penalty is supposed to answer not only for attorney’s fees but for collection fees as well.
Moreover: x x x the attorneys’ fees here provided is not, strictly speaking, the attorneys’ fees recoverable as between
attorney and client spoken of and regulated by the Rules of Court. Rather, the attorneys’ fees here are in the nature of
liquidated damages and the stipulation therefor is aptly called a penal clause. It has been said that so long as such
stipulation does not contravene law, morals, or public order, it is strictly binding upon defendant. The attorneys’ fees so
provided are awarded in favor of the litigant, not his counsel. It is the litigant, not counsel, who is the judgment creditor
entitled to enforce the judgment by execution.
Same; Same; Same; Courts are empowered to reduce the penalty if the same is “iniquitous or
unconscionable.”—Nonetheless,courts are empowered to reduce such penalty if the same is “iniquitous or
unconscionable.” Article 1229 of the Civil Code states thus: ART. 1229. The judge shall equitably reduce the penalty when
the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance,
the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (Italics supplied.)
Same; Same; Same; Attorney’s fees and collection fees equivalent to twenty-five percent (25%) of the principal
and interest—with the interest running to some P4.5 Million, which interest even exceeds the principal debt—are
manifestly exorbitant.—It is true that we have upheld the reasonableness of penalties in the form of attorney’s fees
consisting of twenty-five percent (25%) of the principal debt plus interest. In the case at bar, however, the interest alone
runs to some four and a half million pesos (P4.5M), even exceeding the principal debt amounting to almost four million
pesos (P4.0M). Twenty five percent (25%) of the principal and interest amounts to roughly two million pesos (P2M). In real
terms, therefore, the attorney’s fees and collection fees are manifestly exorbitant. Accordingly, we reduce the same to
ten percent (10%) of the principal.
Same; Same; Same; Appeals; Supreme Court; Equity Jurisdiction; The Supreme Court is clothed with ample
authority to review matters, even if they are not assigned as errors in the appeal, if it finds that their
consideration is necessary in arriving at a just decision of the case.—Private respondent, however, argues that
petitioner failed to question the award of attorney’s fees on appeal before respondent court and raised the issue only in its
motion for reconsideration. Consequently, petitioner should be deemed to have waived its right to question such award.
Private respondent’s attempts to dissuade us from reducing the penalty are futile. The Court is clothed with ample
authority to review matters, even if they are not assigned as errors in their appeal, if it finds that their consideration is
necessary in arriving at a just decision of the case.

THE MANILA RACING CLUB, INC., plaintiff-appellant, vs . THE MANILA


JOCKEY CLUB, ET AL.,
1936, Campos entered into a contract with Manila Jockey Club, where he purchased a parcel of land with its
improvements. The price agreed upon is P1.2 Million, payable as follows:
➢ P50,000- upon signing of contract
➢ 50,000- on or befor Sept 28, 1936
➢ 300,000- Dec 24, 1936
➢ 200,000 on or before March 24, 1937
➢ 600,000- Sep 24, 1937
It was agreed that failure to pay amount in each installment in due time, the vendor may rescind th contract and keep the
amount paid for itself.

As the third installment of P300,000 became due on December 24, 1936, and the purchaser could not pay it, the vendor,
on January 11, 1937, declared the contract cancelled and kept the amount of P100,000 already paid, corresponding to the
􀁅rst two installments.
➢ This action is filed for the recovery of the forfeited P100,000.

PURCHASE AND SALE; VALIDITY OF CLAUSE REGARDING FORFEITURE OF PARTIAL PAYMENT; PENAL
CLAUSE. — The clause of the contract referring to the forfeiture of the P100,000 already paid, should the
purchaser C fail to pay the subsequent installments, is valid. It is in the nature of a penal clause which may be legally
established by the parties (articles 1152 and 1255 of the Civil Code).

In its double purpose of:


1. insuring compliance with the contract and
2. measuring beforehand the damages which may result from non-compliance.

It is not contrary to law, morals or public order because it was voluntarily and knowingly agreed upon by the parties.
Viewing concretely the true effects thereof in the present case, the amount forfeited constitutes only eight percent of the
stipulated price, which is not excessive if considered as the profit which would have been obtained had the contract been
complied with. There is, moreover, evidence that the defendants, because of this contract with C., had to reject other
propositions to buy the same property. At any rate, the penal clause does away with the duty to prove the existence and
measure of the damages cause a by the breach.

Sempron, Joesil Dianne C.


University of San Carlos Obligations and Contracts
LIGUTAN vs. COURT OF APPEALS, GR. No. 138677, February 12, 2002

FACTS: Petitioners obtained a loan from respondent bank in the amount of P120,000.00 at 15.189% interest per annum
with a 5% penalty per month in case of default and 10% attorney's fees if a suit were instituted for collection. When
petitioners defaulted in payment, respondent bank sued for recovery of the amount due. Two years after the case was
submitted for decision without petitioners presenting their evidence, petitioners filed a motion for reconsideration of the
order declaring them as having waived their right to present evidence and prayed that they be allowed to prove their case.
The motion was denied by the trial court which eventually rendered a decision in favor of respondent bank ordering
petitioners to pay the amount due with the agreed interest rate of 15.189%, 5% penalty charge and 10% attorney's fees.
The decision was affirmed on appeal by the Court of Appeals. On reconsideration, the appellate court reduced the penalty
interest from 5% to
3%. Petitioners filed a second motion for reconsideration and to admit newly discovered evidence that the real estate
mortgage they executed novated the contract of loan. The mortgage, however, did not contain an express stipulation that
the parties intended to supersede the existing loan agreement but was an accessory contract to secure the loan.

➢ The Court of Appeals denied the same. Hence, this recourse, with petitioners raising for the first time the
reasonableness of the interest rate.

A penalty clause is an accessory undertaking to strengthen the coercive force of the obligation and that the 3%
penalty interest rate considering the repeated acts of breach of petitioners' contractual obligations is not
iniquitous.

The issue of reasonableness of interest rate cannot be raised for the first time on appeal. In any event, the Court
held that the stipulated interest of 15.189% per annum is not excessive.

An obligation to pay a sum of money is not extinctively novated by a new instrument which merely supplements the old
contract.

Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan from private respondent Security Bank and Trust
Company. Petitioners executed a promissory note to pay the sum loaned with an interest of 15.189% per annum upon
maturity and to pay a penalty of 5% every month on the outstanding principal and interest in case of default. On maturity
of the obligation, petitioners failed to settle the debt despite several demands from the bank. Consequently, the bank filed
a complaint for recovery of the due amount. After trial of the case, the Trial court ruled in favour of the Bank, ordering
petitioners to pay the respondent the sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 5%
per month penalty charge among others. On appeal of the case, petitioners prayed for the reduction of the 5% stipulated
penalty for being unconscionable. The Court of Appeals ruled that in the interest of justice and public policy, a penalty of
3% per month or 36% per annum would suffice. But still, petitioners dispute the said decision.

ISSUE: Whether or not the 15.189% interest and the penalty of three (3%) percent per month or thirty-six (36%) percent
per annum imposed by private respondent bank on petitioners’ loan obligation are exorbitant, iniquitous and
unconscionable.

HELD: The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the penalty,
the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and
relationship of the parties, and the like, the application of which, by and large, is addressed to the sound discretion of the
court. The essence or rationale for the payment of interest is not exactly the same as that of a surcharge or a penalty. A
penalty stipulation is not necessarily preclusive of interest. What may justify a court in not allowing the creditor to impose
full surcharges and penalties, despite an express stipulation therefor in a valid agreement, may not equally justify the non-
payment or reduction of interest. Indeed, the interest prescribed in loan financing arrangements is a fundamental part of
the banking business and the core of a bank's existence. The Court of Appeals, exercising its good judgment in the
instant case, has rightly reduced the penalty interest from 5% a month to 3% a month.

Das könnte Ihnen auch gefallen