March 2018 - Notes - Oblicon

NOTES IN OBLIGATIONS AND CONTRACTS
Prof. Rolando B. Faller
OBLIGATIONS
Nature and Concept
1. Right and obligation are legal terms with specific legal meaning. A right
is a claim or title to an interest in anything whatsoever that is enforceable by
law. An obligation is defined in the Civil Code as a juridical necessity to give,
to do or not to do. For every right enjoyed by any person, there is a
corresponding obligation on the part of another person to respect such right.
(Makati Stock Exchange, Inc. v. Campos, G.R. No. 138814, April 16, 2009)
2. An obligation imposed on a person, and the corresponding right

granted to another, must be rooted in at least one of these five sources. The
mere assertion of a right and claim of an obligation in an initiatory pleading,
whether a Complaint or Petition, without identifying the basis or source
thereof, is merely a conclusion of fact and law. A pleading should state the
ultimate facts essential to the rights of action or defense asserted, as
distinguished from mere conclusions of fact or conclusions of law. (Makati
Stock Exchange, Inc. v. Campos, G.R. No. 138814, April 16, 2009)
Bar Notes By Prof. RBFaller

3. A provision forfeiting payments already made was held to be valid,
provided the parties clearly agree on it. (Daleon v. Tan, G.R. No. 186094,
August 23, 2010)
Breach of Obligations
4. Breach of obligation is the failure, without legal excuse, to perform any

promise which forms the whole or part of the obligation. (Nakpil vs. Manila
Towers Development Corp., 502 SCRA 470 [2006]
5. In this jurisdiction, the following requisites must be present in order that

the debtor may be in default: (1) that the obligation be demandable and
already liquidated; (2) that the debtor delays performance; and (3) that the
creditor requires the performance judicially or extrajudicially. (J Plus Asia
Development Corporation v. Utility Assurance Corporation, G.R. No.
199650, June 26, 2013)
6. A demand is only necessary in order to put an obligor in a due and

demandable obligation in delay, which in turn is for the purpose of making the
obligor liable for interests or damages for the period of delay. Thus, unless
stipulated otherwise, an extrajudicial demand is not required before a judicial
demand, i.e., filing a civil case for collection, can be resorted to. (Autocorp
Group v. Intra Strata Assurance Corporation, G.R. No. 166662, June 27,
2008)
7. A provision on waiver of notice or demand has been recognized as
legal and valid in Bank of the Philippine Islands v. Court of Appeals, wherein
[the Court] held:
The Civil Code in Article 1169 provides that one incurs in delay or
is in default from the time the obligor demands the fulfillment of
the obligation from the obligee. However, the law expressly
provides that demand is not necessary under certain
circumstances, and one of these circumstances is when the
parties expressly waive demand. Hence, since the co-signors
expressly waived demand in the promissory notes, demand was
unnecessary for them to be in default.
(Spouses Agner v. BPI Family Savings Bank, Inc., G.R. No. 182963, June
03, 2013)
8. In reciprocal obligations, as in a contract of sale, the general rule is that

the fulfillment of the parties' respective obligations should be simultaneous.
Hence, no demand is generally necessary because, once a party fulfills his
obligation and the other party does not fulfill his, the latter automatically incurs
in delay. But when different dates for performance of the obligations are fixed,
the default for each obligation must be determined by the rules given in the
first paragraph of the present article, that is, the other party would incur in

delay only from the moment the other party demands fulfillment of the
former's obligation. Thus, even in reciprocal obligations, if the period for the
fulfillment of the obligation is fixed, demand upon the obligee is still necessary
before the obligor can be considered in default and before a cause of action
for rescission will accrue. (Solar Harvest, Inc. v. Davao Corrugated Carton
Corp., G.R. No. 176868, July 26, 2010)
9. Unless demand is proven, one cannot be held in default. It is only when

demand to pay is made and subsequently refused that respondents can be
considered in default and petitioner obtains the right to file an action to collect
the debt or foreclose the mortgage. (Development Bank of the Philippines
v. Spouses Licuanan, G.R. No. 150097, February 26, 2007)
10. Demand is generally necessary even if a period has been fixed in the
obligation. And default generally begins from the moment the creditor
demands judicially or extra-judicially the performance of the obligation.
Without such demand, the effects of default will not arise. (Philippine Export
and Foreign Loan Guarantee Corporation v. V.P. Eusebio Construction,
Inc., G.R. No. 140047, July 13, 2004)
11. Fraud or malice (dolo) has been defined as a "conscious and

intentional design to evade the normal fulfillment of existing obligations" and
is, thus, incompatible with good faith. (Spouses Tumibay v. Spouses Lopez,
G.R. No. 171692, June 03, 2013)
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12. It is true that mere silence is not in itself concealment. Concealment
which the law denounces as fraudulent implies a purpose or design to hide
facts which the other party sought to know. Failure to reveal a fact which the
seller is, in good faith, bound to disclose may generally be classified as a
deceptive act due to its inherent capacity to deceive. Suppression of a
material fact which a party is bound in good faith to disclose is equivalent to a
false representation. Moreover, a representation is not confined to words or
positive assertions; it may consist as well of deeds, acts or artifacts of a
nature calculated to mislead another and thus allow the fraud-feasor to obtain
an undue advantage. (Guinhawa v. People, G.R. No. 162822, August 25,
2005)
13. The test to determine the existence of negligence in a particular case

may be stated as follows: did the defendant in committing the alleged
negligent act, use reasonable care and caution which an ordinarily prudent
person in the same situation would have employed? If not, then he is guilty of
negligence. (Perla Compania de Seguros, Inc. v. Spouses Sarangaya,
G.R. No. 147746, October 25, 2005)
14. The negligence of the obligor in the performance of the obligation

renders him liable for damages for the resulting loss suffered by the obligee.
Fault or negligence of the obligor consists in his failure to exercise due care
and prudence in the performance of the obligation as the nature of the
obligation so demands. (Crisostomo v. Court of Appeals, G.R. No. 138334,

August 25, 2003)
Force majeure/fortuitous event
15. This article (Art. 1267), which enunciates the doctrine of unforeseen
events, is not, however, an absolute application of the principle of rebus sic
stantibus, which would endanger the security of contractual relations. The
parties to the contract must be presumed to have assumed the risks of
unfavorable developments. It is, therefore, only in absolutely exceptional
changes of circumstances that equity demands assistance for the debtor. (So
v. Food Fest Land, Inc., G.R. No. 183628, April 07, 2010)
16. A real estate enterprise engaged in the pre-selling of condominium

units is concededly a master in projections on commodities and currency
movements, as well as business risks. The fluctuating movement of the
Philippine peso in the foreign exchange market is an everyday occurrence,
hence, not an instance of caso fortuito. (Megaworld Globus Asia, Inc. v.
Tanseco, G.R. No. 181206, October 09, 2009)
17. Broadly speaking, force majeure generally applies to a natural

accident, such as that caused by a lightning, an earthquake, a tempest or a
public enemy. Hence, fire is not considered a natural disaster or calamity.
(Edgar Cokaliong Shipping Lines, Inc. v. UCPB General Insurance
Company, Inc., G.R. No. 146018, June 25, 2003)
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18. Be that as it may, it is settled that an accident caused either by defects
in the automobile or through the negligence of its driver is not a caso fortuito
that would exempt the carrier from liability for damages. (Yobido v. Court of
Appeals, G.R. No. 113003, October 17, 1997)
19. Where the contract between the parties stipulated that in the event of a
fortuitous event, the period provided in the contract for the delivery of certain
products shall be suspended, the Supreme Court ruled that the period of time
(6 years) when the contract was suspended cannot be deducted from the
term of the contract because to add the said years upon the resumption of the
contract would in effect be an extension of the contract.(Victorias Planters
Association, Inc. vs. Victorias Milling Co., 97 Phil 318)
Remedies for Breach of Obligations
20. It is thus apparent that an action to rescind, or an accion pauliana,

must be of last resort, availed of only after the creditor has exhausted all the
properties of the debtor not exempt from execution or after all other legal
remedies have been exhausted and have been proven futile. (Metropolitan
Bank and Trust Company v. International Exchange Bank, G.R. No.
176008, August 10, 2011)
Different Kinds of Obligations

21. It is a condition precedent. The non-compliance of a suspensive
condition is not a breach, casual or serious, but simply an event which
prevented the obligation from acquiring obligatory force. (Buot vs. CA, 357
SCRA 846 [2001])
22. In a Contract to Sell, the payment of the purchase price is a positive

suspensive condition, the failure of which is not a breach, casual or serious,
but a situation that prevents the obligation of the vendor to convey title from
acquiring an obligatory force. It is one where the happening of the event gives
rise to an obligation. Thus, for its non-fulfillment there will be no contract to
speak of, the obligor having failed to perform the suspensive condition which
enforces a juridical relation. In fact with this circumstance, there can be no
rescission of an obligation that is still non-existent, the suspensive condition
not having occurred as yet. Emphasis should be made that the breach
contemplated in Article 1191 of the New Civil Code is the obligor's failure to
comply with an obligation already extant, not a failure of a condition to render
binding that obligation. (Cheng vs. Genato, 1998)
23. The disputed stipulation in the lease contract: "for as long as the
defendant needed the premises and can meet and pay said increases" is a
purely potestative condition because it leaves the effectivity and enjoyment of
leasehold rights to the sole and exclusive will of the lessee. It is likewise a
suspensive condition because the renewal of the lease, which gives rise to a
new lease, depends upon said condition. It should be noted that a renewal
constitutes a new contract of lease although with the same terms and
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conditions as those in the expired lease. It should also not be overlooked that
said condition is not resolutory in nature because it is not a condition that
terminates the lease contract. The lease contract is for a definite period of
three (3) years upon the expiration of which the lease automatically
terminates. (Lao Lim vs. Court of Appeals, 191 SCRA 150)
24. Moreover, even if this significant detail is to be ignored, the mere

intention to prevent the happening of the condition or the mere placing of
ineffective obstacles to its compliance, without actually preventing fulfillment is
not sufficient for the application of Art. 1186. Two requisites must concur for
its application, to wit: (1) intent to prevent fulfillment of the condition; and, (2)
actual prevention of compliance. (Spouses Bonrostro v. Spouses Luna,
G.R. No. 172346, July 24, 2013)
25. Article 1186 enunciates the doctrine of constructive fulfillment of

suspensive conditions, which applies when the following three (3) requisites
concur, viz.: (1) The condition is suspensive; (2) The obligor actually prevents
the fulfillment of the condition; and (3) He acts voluntarily. Suspensive
condition is one the happening of which gives rise to the obligation. It will be
irrational for any Bank to provide a suspensive condition in the Promissory
Note or the Restructuring Agreement that will allow the debtor-promissor to be
freed from the duty to pay the loan without paying it. (Lim v. Development
Bank of the Philippines, G.R. No. 177050, July 01, 2013)

Reciprocal Obligations/Rescission
26. Consequently, even if the right to rescind is made available to the

injured party, the obligation is not ipso facto erased by the failure of the other
party to comply with what is incumbent upon him. The party entitled to
rescind should apply to the court for a decree of rescission. The right
cannot be exercised solely on a party's own judgment that the other
committed a breach of the obligation. The operative act which produces the
resolution of the contract is the decree of the court and not the mere act of the
vendor. Since a judicial or notarial act is required by law for a valid rescission
to take place, the letter written by respondent declaring his intention to rescind
did not operate to validly rescind the contract. (EDS MANUFACTURING,
INC., vs. HEALTHCHECK INTERNATIONAL, INC.,G.R. No. 162802.
October 9, 2013)
27. "Resolution," the action referred to in Article 1191 of the Civil Code, is
based on the defendant's breach of faith, a violation of the reciprocity between
the parties. As an action based on the binding force of a written contract,
therefore, rescission (resolution) under Article 1191 prescribes in 10 years.
Article 1144 of the Civil Code provides that an action upon a written contract
must be brought within 10 years from the time the right of action accrues.
(Heirs of Paclit v. Spouses Belisario, G.R. No. 189418, June 20, 2012)
28. Article 1191 of the NCC is clear that "the power to rescind obligations
is implied in reciprocal ones, in case one of the obligors should not comply
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with what is incumbent upon him." The respondent can not be deprived of his
right to demand for rescission in view of the petitioner's failure to abide with
item nos. 2 and 3 of the agreement. This remains true notwithstanding the
absence of express stipulations in the agreement indicating the
consequences of breaches which the parties may commit. To hold otherwise
would render Article 1191 of the NCC as useless. (Villamar v. Mangaoil,
G.R. No. 188661, April 11, 2012)
29. Articles 1191 of the Civil Code does not thus apply to a contract to sell
since there can be no rescission of an obligation that is still non-existent, the
suspensive condition not having occurred. In other words, the breach
contemplated in Article 1191 is the obligor's failure to comply with an
obligation already extant, like a contract of sale, not a failure of a condition to
render binding that obligation. (Sta. Lucia Realty & Development, Inc. v.
Uyecio, G.R. No. 176217, August 13, 2008)
30. Indeed, mutual restitution is required in all cases involving rescission.

But when it is no longer possible to return the object of the contract, an
indemnity for damages operates as restitution. The important consideration is
that the indemnity for damages should restore to the injured party what was
lost. (Coastal Pacific Trading, Inc. v. Southern Rolling Mills, Co., Inc.,
G.R. No. 118692, July 28, 2006)
31. Under settled doctrine, nonpayment is a resolutory condition that

extinguishes the transaction existing for a time and discharges the obligations
created thereunder. The remedy of the unpaid seller is to sue for collection or,
in case of a substantial breach, to rescind the contract. These alternative
remedies of specific performance and rescission are provided under Article
1191 of the Civil Code. (Soliva v. Intestate Estate of Villalba, G.R. No.
154017, December 8, 2003)
Obligations with a Period
32. And under Art. 1306 of the Code, the parties may establish stipulations
mutually acceptable to them for as long as such are not contrary to law,
morals, good customs, public order, or public policy. And where a determinate
period for a contract's effectivity and expiration has been mutually agreed
upon and duly stipulated, the lapse of such period ends the contract's
effectivity and the parties cease to be bound by the contract. (Manila
International Airport Authority v. Olongapo Maintenance Services, Inc.,
G.R. Nos. 146184-85, January 31, 2008)
33. It must be recalled that Article 1197 of the Civil Code involves a two-
step process. The Court must first determine that "the obligation does not fix a
period" (or that the period is made to depend upon the will of the debtor)," but
from the nature and the circumstances it can be inferred that a period was
intended" (Art. 1197, pars. 1 and 2). This preliminary point settled, the Court
must then proceed to the second step, and decide what period was "probably
contemplated by the parties" (Do., par. 3). So that, ultimately, the Court can
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not fix a period merely because in its opinion it is or should be reasonable, but
must set the time that the parties are shown to have intended. As the record
stands, the trial Court appears to have pulled the two-year period set in its
decision out of thin air, since no circumstances are mentioned to support it.
Plainly, this is not warranted by the Civil Code.
In this connection, it is to be borne in mind that the contract shows that the
parties were fully aware that the land described therein was occupied by
squatters, because the fact is expressly mentioned therein (Rec. on Appeal,
Petitioner's Appendix B, pp. 12-13). As the parties must have known that they
could not take the law into their own hands, but must resort to legal processes
in evicting the squatters, they must have realized that the duration of the suits
to be brought would not be under their control nor could the same be
determined in advance. The conclusion is thus forced that the parties must
have intended to defer the performance of the obligations under the contract
until the squatters were duly evicted, as contended by the petitioner Gregorio
Araneta, Inc. (Gregorio Araneta, Inc. vs. Phil. Sugar Estates Dev’t Co., 20
SCRA 330)
Joint and Solidary Obligations
34. An instrument which begins with "I", "We", or "Either of us" promise to
pay, when signed by two or more persons, makes them solidarily liable. Also,
the phrase "joint and several" binds the makers jointly and individually to the

payee so that all may be sued together for its enforcement, or the creditor
may select one or more as the object of the suit. (Astro Electronics Corp. v.
Philippine Export and Foreign Loan Guarantee Corporation, G.R. No.
136729, September 23, 2003)
35. The Court of Appeals is correct insofar as it held that when the
spouses are sued for the enforcement of the obligation entered into by them,
they are being impleaded in their capacity as representatives of the conjugal
partnership and not as independent debtors. Hence, either of them may be
sued for the whole amount, similar to that of a solidary liability, although the
amount is chargeable against their conjugal partnership property. Thus, in the
case cited by the Court of Appeals, Alipio v. Court of Appeals, the two sets of
defendant-spouses therein were held liable for P25,300.00 each, chargeable
to their respective conjugal partnerships. (Spouses Carandang v. Heirs of
de Guzman, G.R. No. 160347, November 29, 2006)
36. 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.
(Malayan Insurance v. Philippines First Insurance, G.R. No. 184300, July
11, 2012)
37. Solidary liability cannot be presumed but must be established by law or

contract. Article 1207 of the Civil Code pertinently states that "there is solidary
liability only when the obligation expressly so states, or when the obligation
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requires solidarity." (Gonzales v. Philippine Commercial and International
Bank, G.R. No. 180257, February 23, 2011)
38. These Civil Code provisions establish that in case of concurrence of

two or more creditors or of two or more debtors in one and the same
obligation, and in the absence of express and indubitable terms characterizing
the obligation as solidary, the presumption is that the obligation is only joint. It
thus becomes incumbent upon the party alleging that the obligation is indeed
solidary in character to prove such fact with a preponderance of evidence.
(Escaño v. Ortigas, Jr., G.R. No. 151953, June 29, 2007)
39. If a solidary debtor pays the obligation in part, he can recover

reimbursement from the co-debtors only in so far as his payment exceeded
his share in the obligation. This is precisely because if a solidary debtor pays
an amount equal to his proportionate share in the obligation, then he in effect
pays only what is due from him. If the debtor pays less than his share in the
obligation, he cannot demand reimbursement because his payment is less
than his actual debt. (Republic Glass Corporation v. Qua, G.R. No. 144413,
July 30, 2004)
40. It must be noted that in a solidary obligation, the creditor is entitled to

demand the satisfaction of the whole obligation from any or all of the debtors.
It is up to the former to determine against whom to enforce collection. (Garcia
v. Llamas, G.R. No. 154127, December 08, 2003)

Obligation with a Penal Clause
41. 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. It functions to strengthen the coercive force of
obligation and to provide, in effect, for what could be the liquidated damages
resulting from such a breach. 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. (J Plus Asia Development Corporation v.
Utility Assurance Corporation, G.R. No. 199650, June 26, 2013)
42. In obligations with a penal clause, the penalty generally substitutes the
indemnity for damages and the payment of interests in case of non-
compliance. Usually incorporated to create an effective deterrent against
breach of the obligation by making the consequences of such breach as
onerous as it may be possible, the rule is settled that a penal clause is not
limited to actual and compensatory damages. (Heirs of Manuel Uy Ek Liong
v. Castillo, G.R. No. 176425, June 05, 2013)
43. Article 1226 of the Civil Code further provides that if the obligor refuses
to pay the penalty, such as in the instant case, damages and interests may
still be recovered on top of the penalty. Damages claimed must be the natural
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and probable consequences of the breach, which the parties have foreseen or
could have reasonably foreseen at the time the obligation was constituted.
(Continental Cement Corp. v. Asea Brown Boveri, Inc., G.R. No. 171660,
October 17, 2011)
44. "Penalty fee" is entirely different from "bank charges". The phrase
"bank charges" is normally understood to refer to compensation for services.
A "penalty fee" is likened to a compensation for damages in case of breach of
the obligation. (Spouses Viola v. Equitable PCI Bank, G.R. No. 177886,
November 27, 2008)
45. The enforcement of the penalty can be demanded by the creditor only
when the non-performance is due to the fault or fraud of the debtor. The non-
performance gives rise to the presumption of fault; in order to avoid the
payment of the penalty, the debtor has the burden of proving an excuse — the
failure of the performance was due to either force majeure or the acts of the
creditor himself. (Development Bank of the Philippines v. Go, G.R. No.
168779, September 14, 2007)
46. As a general rule, courts are not at liberty to ignore the freedoms of the
parties to agree on such terms and conditions as they see fit as long as they
are not contrary to law, morals, good customs, public order or public policy.
Nevertheless, courts may equitably reduce a stipulated penalty in the
contracts in two instances: (1) if the principal obligation has been partly or

irregularly complied with; and (2) even if there has been no compliance if the
penalty is iniquitous or unconscionable in accordance with Article 1229 of the
Civil Code. (Florentino v. Supervalue, Inc., G.R. No. 172384, September
12, 2007)
47. The essence or rationale for the payment of interest, quite often
referred to as cost of money, is not exactly the same as that of a surcharge or
a penalty. A penalty stipulation is not necessarily preclusive of interest, if there
is an agreement to that effect, the two being distinct concepts which may
separately be demanded. What may justify a court in not allowing the creditor
to impose full surcharges and penalties, despite an express stipulation
therefor in a valid agreement, may not equally justify the nonpayment 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. (Ligutan v. Court of Appeals, G.R. No. 138677, February
12, 2002)
Payment or Performance
48. The creditor's possession of the evidence of debt is proof that the debt
has not been discharged by payment. A promissory note in the hands of the
creditor is a proof of indebtedness rather than proof of payment. In an action
for replevin by a mortgagee, it is prima facie evidence that the promissory
note has not been paid. Likewise, an uncanceled mortgage in the possession
of the mortgagee gives rise to the presumption that the mortgage debt is
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unpaid. (Spouses Agner v. BPI Family Savings Bank, Inc., G.R. No.
182963, June 03, 2013)
49. Conversely, the principle of substantial performance is inappropriate

when the incomplete performance constitutes a material breach of the
contract. A contractual breach is material if it will adversely affect the nature of
the obligation that the obligor promised to deliver, the benefits that the obligee
expects to receive after full compliance, and the extent that the non-
performance defeated the purposes of the contract. (International Hotel
Corporation v. Joaquin, Jr., G.R. No. 158361, April 10, 2013)
50. Under Art. 1235 of the Civil Code, the obligation is deemed fully
complied with when an obligee accepts the performance thereof knowing its
incompleteness or irregularity, and without expressing any protest or
objection. An obligee is deemed to have waived strict compliance by an
obligor with an obligation when the following elements are present: (1) an
intentional acceptance of the defective or incomplete performance; (2) with
actual knowledge of the incompleteness or defect; and (3) under
circumstances that would indicate an intention to consider the performance as
complete and renounce any claim arising from the defect.(Hanjin Heavy
Industries and Construction Co. v. Dynamic Planners and Construction
Corp., G.R. Nos. 169408 & 170144, April 30, 2008)
51. A person entering into a contract has a right to insist on its

performance in all particulars, according to its meaning and spirit. But if he
chooses to waive any of the terms introduced for his own benefit, he may do
so. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is
deemed fully complied with. (Empire East Land Holdings v. Capitol
Industrial Construction Groups, Inc., G.R. No. 168074, September 26,
2008)
52. Petitioners' invocation of Article 1236 of the Civil Code does not help
them. They cannot deny their indebtedness to respondent on the basis of said
Article since the payment advanced by respondent on petitioners' behalf
redounded to their benefit and Divinia never objected to it when she came to
learn of it. It is thus immaterial that Divinia was unaware of respondent's
action for the law ultimately allows recovery to the extent that the debtors-
petitioners were benefited. (Publico v. Bautista, G.R. No. 174096, July 20,
2010)
53. In general, a payment in order to be effective to discharge an

obligation, must be made to the proper person. Thus, payment must be made
to the obligee himself or to an agent having authority, express or implied, to
receive the particular payment. Payment made to one having apparent
authority to receive the money will, as a rule, be treated as though actual
authority had been given for its receipt. Likewise, if payment is made to one
who by law is authorized to act for the creditor, it will work a discharge. The
receipt of money due on a judgment by an officer authorized by law to accept
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it will, therefore, satisfy the debt. (Spouses Dela Cruz v. Concepcion, G.R.
No. 172825, October 11, 2012)
Dacion en pago
54. As a dation in payment, the assignment of credit operates as a mode of

extinguishing the obligation; the delivery and transmission of ownership of a
thing (in this case, the credit due from a third person) by the debtor to the
creditor is accepted as the equivalent of the performance of the obligation.
(Spouses Serfino v. Far East Bank and Trust Company, Inc., G.R. No.
171845, October 10, 2012)
55. Dation in payment extinguishes the obligation to the extent of the value
of the thing delivered, either as agreed upon by the parties or as may be
proved, unless the parties by agreement — express or implied, or by their
silence — consider the thing as equivalent to the obligation, in which case the
obligation is totally extinguished. (Tan Shuy v. Spouses Maulawin, G.R. No.
190375, February 08, 2012)
56. Corollary thereto, in dacion en pago, as a special mode of payment,

the debtor offers another thing to the creditor who accepts it as equivalent of
payment of an outstanding debt. In order that there be a valid dation in
payment, the following are the requisites: (1) There must be the performance
of the prestation in lieu of payment (animo solvendi) which may consist in the

delivery of a corporeal thing or a real right or a credit against the third person;
(2) There must be some difference between the prestation due and that which
is given in substitution (aliud pro alio); (3) There must be an agreement
between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that
due. The undertaking really partakes in one sense of the nature of sale, that
is, the creditor is really buying the thing or property of the debtor, payment for
which is to be charged against the debtor's debt. As such, the vendor in good
faith shall be responsible, for the existence and legality of the credit at the
time of the sale but not for the solvency of the debtor, in specified
circumstances.
Like in all contracts, the intention of the parties to the dation in payment is
paramount and controlling. The contractual intention determines whether the
property subject of the dation will be considered as the full equivalent of the
debt and will therefore serve as full satisfaction for the debt. "The dation in
payment extinguishes the obligation to the extent of the value of the thing
delivered, either as agreed upon by the parties or as may be proved, unless
the parties by agreement, express or implied, or by their silence, consider the
thing as equivalent to the obligation, in which case the obligation is totally
extinguished." (Luzon Development Bank v. Enriquez, G.R. No. 168646,
January 12, 2011)
57. To be sure, the Dation in Payment has no express warranties relating

to existing contracts to sell over the assigned properties. As to the implied
11
warranty in case of eviction, it is waivable and cannot be invoked if the buyer
knew of the risks or danger of eviction and assumed its consequences.
(Luzon Development Bank v. Enriquez, G.R. No. 168646, January 12,
2011)
Payment in foreign currency/value of currency
58. There is no legal impediment to having obligations or transactions paid

in a foreign currency as long as the parties agree to such an arrangement. In
fact, obligations in foreign currency may be discharged in Philippine currency
based on the prevailing rate at the time of payment. (Development Bank of
the Philippines v. Court of Appeals, G.R. No. 138703, June 30, 2006)
59. Inflation has been defined as the sharp increase of money or credit, or
both, without a corresponding increase in business transaction. There is
inflation when there is an increase in the volume of money and credit relative
to available goods, resulting in a substantial and continuing rise in the general
price level. In a number of cases, this Court had provided a discourse on what
constitutes extraordinary inflation, thus:
Extraordinary inflation exists when there is a decrease or increase in the

purchasing power of the Philippine currency which is unusual or beyond the
common fluctuation in the value of said currency, and such increase or
decrease could not have been reasonably foreseen or was manifestly beyond

the contemplation of the parties at the time of the establishment of the
obligation. (Almeda v. Bathala Marketing Industries, Inc., G.R. No. 150806,
January 28, 2008)
60. For extraordinary inflation (or deflation) to affect an obligation, the

following requisites must be proven: (a). that there was an official declaration
of extraordinary inflation or deflation from the Bangko Sentral ng Pilipinas
(BSP); (b). that the obligation was contractual in nature; and (c). that the
parties expressly agreed to consider the effects of the extraordinary inflation
or deflation. (Equitable PCI Bank v. Ng Sheung Ngor, G.R. No. 171545,
December 19, 2007)
61. The existence of extraordinary inflation must be officially proclaimed by

competent authorities, and the only competent authority so far recognized by
this Court to make such an official proclamation is the BSP. (Citibank, N.A. v.
Sabeniano, G.R. No. 156132, February 06, 2007)
62. Lest it be overlooked, Article 1250 of the Code, as couched, clearly

provides that the value of the peso at the time of the establishment of the
obligation shall control and be the basis of payment of the contractual
obligation, unless there is "agreement to the contrary." It is only when there is
a contrary agreement that extraordinary inflation will make the value of the
currency at the time of payment, not at the time of the establishment of
obligation, the basis for payment. (Telengtan Brothers & Sons, Inc. v.
United States Lines, Inc., G.R. No. 132284, February 28, 2006)
12
Application of payment
63. Additionally, in contracts involving installment payments with interest

chargeable against the remaining balance of the obligation, the creditor is
duty-bound to inform the debtor of the amount of interest that falls due, and
that he is applying the installment payments to cover said interest. Without
notifying the debtor, the creditor cannot apply the payments to the interest and
then later on hold the debtor in default for nonpayment of installments on the
principal. (Orix Metro Leasing and Finance Corporation v. M/V "Pilar-I",
G.R. No. 157901, September 11, 2009)
64. Indeed, the debtor's right to apply payment has been considered
merely directory, and not mandatory, following this Court's earlier
pronouncement that "the ordinary acceptation of the terms 'may' and 'shall'
may be resorted to as guides in ascertaining the mandatory or directory
character of statutory provisions." (Premiere Development Bank v. Central
Surety & Insurance Company , G.R. No. 176246, February 13, 2009)
65. Verily, the debtor's right to apply payment can be waived and even
granted to the creditor if the debtor so agrees. (Premiere Development Bank
v. Central Surety & Insurance Company, G.R. No. 176246, February 13,
2009)

Tender of Payment and Consignation
66. Tender of payment is but a preparatory act to consignation. It is the

manifestation by the debtor of a desire to comply with or pay an obligation. If
refused without just cause, the tender of payment will discharge the debtor of
the obligation to pay but only after a valid consignation of the sum due shall
have been made with the proper court. (Allandale Sportsline, Inc. v. The
Good Development Corporation, G.R. No. 164521, December 18, 2008)
67. Mere sending of a letter by the vendee expressing the intention to pay
without the accompanying payment is not considered a valid tender of
payment. (San Lorenzo Development Corp. v. Court of Appeals, G.R. No.
124242, January 21, 2005)
68. Settled is the rule that tender of payment must be made in legal tender.
A check is not legal tender, and therefore cannot constitute a valid tender of
payment.( Abalos v. Macatangay, Jr., G.R. No. 155043, September 30,
2004)
69. Consignation is the deposit of the proper amount with a judicial

authority, before whom the debtor must establish compliance with the
following mandatory requirements: (1) there was a debt due; (2) the
consignation of the obligation had been made because the creditor to whom
tender of payment was made refused to accept it, or because he was absent
or incapacitated, or because several persons claim to be entitled to receive
13
the amount due, or because the title to the obligation has been lost; (3)
previous notice of the consignation had been given to the person interested in
the performance of the obligation; (4) the amount due was placed at the
disposal of the court; and (5) after the consignation had been made, the
person interested was notified thereof. Failure to prove any of these
requirements is enough ground to render a consignation ineffective.
(Allandale Sportsline, Inc. v. The Good Development Corporation, G.R.
No. 164521, December 18, 2008)
70. Consignation and tender of payment must not be encumbered by

conditions if they are to produce the intended result of fulfilling the obligation.
(Spouses Rayos v. Reyes, G.R. No. 150913, February 20, 2003)
Loss of the thing due
71. Under the law on obligations and contracts, the obligation to give a
determinate thing is extinguished if the object is lost without the fault of the
debtor. And per Art. 1192 (2) of the Civil Code, a thing is considered lost when
it perishes or disappears in such a way that it cannot be recovered. (Osmeña
III v. Social Security System of the Philippines, G.R. No. 165272,
September 13, 2007)
72. Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a
generic thing, the loss or destruction of anything of the same kind does not

extinguish the obligation." If the obligation is generic in the sense that the
object thereof is designated merely by its class or genus without any particular
designation or physical segregation from all others of the same class, the loss
or destruction of anything of the same kind even without the debtor's fault and
before he has incurred in delay will not have the effect of extinguishing the
obligation. This rule is based on the principle that the genus of a thing can
never perish. Genus nunquan perit. An obligation to pay money is generic;
therefore, it is not excused by fortuitous loss of any specific property of the
debtor. (Gaisano Cagayan, Inc. v. Insurance Company of North America,
G.R. No. 147839, June 08, 2006 )
Compensation
73. Agreements for compensation of debts or any obligations when the

parties are mutually creditors and debtors are allowed under Art. 1282 of the
Civil Code even though not all the legal requisites for legal compensation are
present. Voluntary or conventional compensation is not limited to obligations
which are not yet due. The only requirements for conventional compensation
are (1) that each of the parties can fully dispose of the credit he seeks to
compensate, and (2) that they agree to the extinguishment of their mutual
credits. (Traders Royal Bank v. Castañares, G.R. No. 172020, December
06, 2010)
74. Legal compensation requires the concurrence of the following

conditions: (1) That each one of the obligors be bound principally, and that he
14
be at the same time a principal creditor of the other; (2) That both debts
consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated; (3) That
the two debts be due; (4) That they be liquidated and demandable; (5) That
over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor. (Mondragon
Personal Sales, Inc. v. Sola, Jr., G.R. No. 174882, January 21, 2013)
75. A claim is liquidated when the amount and time of payment is fixed. If
acknowledged by the debtor, although not in writing, the claim must be treated
as liquidated. When the defendant, who has an unliquidated claim, sets it up
by way of counterclaim, and a judgment is rendered liquidating such claim, it
can be compensated against the plaintiff's claim from the moment it is
liquidated by judgment. We have restated this in Solinap v. Hon. Del Rosario
where we held that compensation takes place only if both obligations are
liquidated. (Lao v. Special Plans, Inc., G.R. No. 164791, June 29, 2010)
76. However, it is settled that legal compensation under Article 1279 of the
Civil Code cannot take place between an agent of the principal creditor on
one hand, and the principal debtor on the other, where the agent holds funds
of the principal debtor. (United Planters Sugar Milling Co., Inc.
(UPSUMCO) v. Court of Appeals, G.R. No. 126890, July 11, 2007)
77. Concededly, the Civil Code lists compensation as one of the modes of

extinguishing the obligations of persons who, in their own right, are creditors
and debtors of each other. Compensation may be legal or conventional. Legal
compensation takes place ipso jure when all the requisites of law are present,
as opposed to conventional or voluntary compensation, which occurs when
the parties agree to the mutual extinguishment of their credits or to
compensate their mutual obligations even in the absence of some of the legal
requisites. (Mavest (U.S.A.) Inc. v. Sampaguita Garment Corp., G.R. No.
127454, September 21, 2005)
Novation
78. Novation is not a ground under the law to extinguish criminal liability.
Article 89 (on total extinguishment) and Article 94 (on partial extinguishment)
of the Revised Penal Code list down the various grounds for the
extinguishment of criminal liability. Not being included in the list, novation is
limited in its effect only to the civil aspect of the liability, and, for that reason, is
not an efficient defense in estafa. This is because only the State may validly
waive the criminal action against an accused. The role of novation may only
be either to prevent the rise of criminal liability, or to cast doubt on the true
nature of the original basic transaction, whether or not it was such that the
breach of the obligation would not give rise to penal responsibility, as when
money loaned is made to appear as a deposit, or other similar disguise is
resorted to. (Degaños v. People, G.R. No. 162826, October 14, 2013)
15
79. To begin with, the cause in a contract of lease is the enjoyment of the
thing; in a contract of deposit, it is the safekeeping of the thing. They thus
create essentially distinct obligations that would result in a novation only if the
parties entered into one after the other concerning the same subject matter.
(RCJ Bus Lines, Inc. v. Master Tours and Travel Corp., G.R. No. 177232,
October 11, 2012)
80. Well-settled is the rule that, with respect to obligations to pay a sum of
money, the obligation is not novated by an instrument that expressly
recognizes the old, changes only the terms of payment, adds other obligations
not incompatible with the old ones, or the new contract merely supplements
the old one. (Philippine National Bank v. Soriano, G.R. No. 164051,
October 03, 2012)
81. The indispensability of a prior contractual relation between the

complainant and the accused as requisite for the application of novation in
criminal cases was underscored in People v. Tanjutco. In that case, the
accused, who was charged with Qualified Theft, invoked People v. Nery to
support his claim that the complainant's acceptance of partial payment of the
stolen funds before the filing of the Information with the trial court converted
his liability into a civil obligation thus rendering baseless his prosecution. The
Court rejected this claim and held that unlike in Nery, there was, in that case,
no prior "contractual relationship or bilateral agreement, which can be
modified or altered by the parties," (Social Security System v. Department

of Justice, G.R. No. 158131, August 08, 2007)
82. This Court first recognized the possibility of applying the concept of
novation to criminal cases in People v. Nery, involving a case for Estafa. In
that case, the Court observed that although novation is not one of the means
recognized by the Revised Penal Code to extinguish criminal liability, it may
"prevent the rise of criminal liability or to cast doubt on the true nature of the
original basic transaction," provided the novation takes place before the filing
of the Information with the trial court. (Social Security System v.
Department of Justice, G.R. No. 158131, August 08, 2007; (I) People v.
Nery, G.R. No. L-19567, February 5, 1964)
83. In Di Franco v. Steinbaum, the appellate court ruled that as to the

consideration necessary to support a contract of novation, the rule is the
same as in other contracts. The consideration need not be pecuniary or even
beneficial to the person promising. It is sufficient if it be a loss of an
inconvenience, such as the relinquishment of a right or the discharge of a
debt, the postponement of a remedy, the discontinuance of a suit, or
forbearance to sue. (Aquintey v. Spouses Tibong, G.R. No. 166704,
December 20, 2006; (I) Di Franco v. Steinbaum, 177 S.W. 2d 697)
84. In Young v. CA, this Court ruled that a change in the incidental
elements of, or an addition of such element to, an obligation, unless otherwise
expressed by the parties will not result in its extinguishment. (California Bus
16
Lines, Inc. v. State Investment House, G.R. No. 147950, December 11,
2003; (C) Young v. Court of Appeals, G.R. No. 83271, May 8, 1991)
CONTRACTS
Autonomy of Contract
85. The freedom to contract is not absolute; all contracts and all rights are
subject to the police power of the State and not only may regulations which
affect them be established by the State, but all such regulations must be
subject to change from time to time, as the general well-being of the
community may require, or as the circumstances may change, or as
experience may demonstrate the necessity. (Goldenway Merchandising
Corporation v. Equitable PCI Bank, G.R. No. 195540, March 13, 2013)
86. It is a long established doctrine that the law does not relieve a party
from the effects of an unwise, foolish or disastrous contract, entered into with
all the required formalities and with full awareness of what she was doing.
Courts have no power to relieve parties from obligations voluntarily assumed,
simply because their contracts turned out to be disastrous or unwise
investments. (Toledo v. Hyden, G.R. No. 172139, December 08, 2010)
87. Verily, a lawyer's compensation for professional services rendered are

subject to the supervision of the court, not just to guarantee that the fees he

charges and receives remain reasonable and commensurate with the services
rendered, but also to maintain the dignity and integrity of the legal profession
to which he belongs. (Municipality of Tiwi v. Betito, G.R. No. 171873, July
09, 2010)
88. Finally, in Consulta v. Court of Appeals, [the Court] considered a non-

involvement clause in accordance with Article 1306 of the Civil Code. While
the complainant in that case was an independent agent and not an employee,
she was prohibited for one year from engaging directly or indirectly in
activities of other companies that compete with the business of her principal.
[The Court] noted therein that the restriction did not prohibit the agent from
engaging in any other business, or from being connected with any other
company, for as long as the business or company did not compete with the
principal's business. Further, the prohibition applied only for one year after the
termination of the agent's contract and was therefore a reasonable restriction
designed to prevent acts prejudicial to the employer. (Tiu v. Platinum Plans
Phil., Inc., G.R. No. 163512, February 28, 2007; (I) Consulta v. Court of
Appeals, G.R. No. 145443, March 18, 2005)
89. However, in Del Castillo v. Richmond, [the Court] upheld a similar

stipulation as legal, reasonable, and not contrary to public policy. In the said
case, the employee was restricted from opening, owning or having any
connection with any other drugstore within a radius of four miles from the
employer's place of business during the time the employer was operating his
drugstore. [The Court] said that a contract in restraint of trade is valid
17
provided there is a limitation upon either time or place and the restraint
upon one party is not greater than the protection the other party
requires. (Tiu v. Platinum Plans Phil., Inc., G.R. No. 163512, February 28,
2007)
90. The duty of the court is confined to the interpretation of the agreement
that the contracting parties have made for themselves without regard to its
wisdom or folly as the court cannot supply material stipulations or read into
the contract words which it does not contain. (Limpo v. Court of Appeals,
G.R. No. 144732, February 13, 2006)
Mutuality of Contract
91. Basic is the rule that there can be no contract in its true sense without
the mutual assent of the parties. If this consent is absent on the part of one
who contracts, the act has no more efficacy than if it had been done under
duress or by a person of unsound mind. Similarly, contract changes must be
made with the consent of the contracting parties. The minds of all the parties
must meet as to the proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan contracts, the interest
rate is undeniably always a vital component, for it can make or break a capital
venture. Thus, any change must be mutually agreed upon, otherwise, it
produces no binding effect. (Philippine Savings Bank v. Spouses Castillo,
G.R. No. 193178, May 30, 2011)

92. Article 1308 of the Civil Code expresses what is known in law as the
principle of mutuality of contracts. It provides that "the contract must bind both
the contracting parties; its validity or compliance cannot be left to the will of
one of them." This binding effect of a contract on both parties is based on the
principle that the obligations arising from contracts have the force of law
between the contracting parties, and there must be mutuality between them
based essentially on their equality under which it is repugnant to have one
party bound by the contract while leaving the other free therefrom. The
ultimate purpose is to render void a contract containing a condition which
makes its fulfillment dependent solely upon the uncontrolled will of one of the
contracting parties. (Manila International Airport Authority v. Ding Velayo
Sports Center, G.R. No. 161718, December 14, 2011)
93. Escalation clauses are not void per se. However, one "which grants the
creditor an unbridled right to adjust the interest independently and upwardly,
completely depriving the debtor of the right to assent to an important
modification in the agreement" is void. Clauses of that nature violate the
principle of mutuality of contracts. Article 1308 of the Civil Code holds that a
contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them. (Equitable PCI Bank v. Ng Sheung Ngor,
G.R. No. 171545, December 19, 2007)
94. Not all contracts though which vest to one party their determination of
validity or compliance or the right to terminate the same are void for being
18
violative of the mutuality principle. Jurisprudence is replete with instances of
cases where this Court upheld the legality of contracts which left their
fulfillment or implementation to the will of either of the parties. In these cases,
however, there was a finding of the presence of essential equality of the
parties to the contracts, thus preventing the perpetration of injustice on the
weaker party. (GF Equity, Inc. v. Valenzona, G.R. No. 156841, June 30,
2005)
95. Hence, even assuming that the P1.8 million loan agreement between
the PNB and the private respondent gave the PNB a license (although in fact
there was none) to increase the interest rate at will during the term of the loan,
that license would have been null and void for being violative of the principle
of mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not bargain
on equal footing, the weaker party's (the debtor) participation being reduced
to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance
Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party
whom the courts of justice must protect against abuse and imposition.
(Philippine National Bank v. Court of Appeals, G.R. No. 88880, April 30,
1991)
Relativity of Contract
96. It is clear that under Article 1311 of the Civil Code, contracts take effect

only between the parties who execute them. Where there is no privity of
contract, there is likewise no obligation or liability to speak about. The civil law
principle of relativity of contracts provides that contracts can only bind the
parties who entered into it, and it cannot favor or prejudice a third person,
even if he is aware of such contract and has acted with knowledge thereof.
Since a contract may be violated only by the parties thereto as against each
other, a party who has not taken part in it cannot sue for performance, unless
he shows that he has a real interest affected thereby. (Spouses Borromeo v.
Court of Appeals, G.R. No. 169846, March 28, 2008)
97. In an earlier case, Teves v. People's Homesite and Housing

Corporation, this Court also allowed the Complaint for annulment of title and
the deed of sale between PHHC and its grantee on the allegation that the
deed of sale was executed contrary to public policy and that fraud was
exercised by defendants. In remanding the case to the trial court, the High
Court ruled that the plaintiff is entitled to the relief prayed for if the allegations
in the Complaint are supported by evidence. The same case likewise allowed
one who is not a party to a contract to ask for its annulment if he is prejudiced
in his rights with respect to one of the contracting parties, and can show the
detriment which would positively result to him. (National Housing Authority
v. Pascual , G.R. No. 158364, November 28, 2007; (I) Teves v. People's
Homesite and Housing Corporation, G.R. No. L-21498, June 27, 1968)
98. The death of a party does not excuse nonperformance of a contract

which involves a property right and the rights and obligations thereunder pass
19
to the personal representatives of the deceased. Similarly, nonperformance is
not excused by the death of the party when the other party has a property
interest in the subject matter of the contract. (Spouses Santos v. Spouses
Lumbao, G.R. No. 169129, March 28, 2007)
99. In any event, the compromise agreement cannot bind a party who did
not voluntarily take part in the settlement itself and gave specific individual
consent. It must be remembered that a compromise agreement is also a
contract; it requires the consent of the parties, and it is only then that the
agreement may be considered as voluntarily entered into. (Philippine
Journalists, Inc. v. National Labor Relations Commission, G.R. No.
166421, September 5, 2006)
100. The parties to a contract are the real parties in interest in an action
upon it, as consistently held by the Court. Only the contracting parties are
bound by the stipulations in the contract; they are the ones who would benefit
from and could violate it. Thus, one who is not a party to a contract, and for
whose benefit it was not expressly made, cannot maintain an action on it. One
cannot do so, even if the contract performed by the contracting parties would
incidentally inure to one's benefit. (Spouses Oco v. Limbaring, G.R. No.
161298, January 31, 2006)
Contractual interference

101. To prove that respondents were guilty of malicious interference,
petitioner had to show the following: the existence of a valid contract,
knowledge by respondents that such a contract existed and acts (done in bad
faith and without legal basis) by respondents which interfered in the due
performance by the contracting parties of their respective obligations under
the contract. (U-Bix Corporation v. Milliken & Company, G.R. No. 173318,
September 23, 2008)
102. In the very early case of Gilchrist v. Cuddy, the Court declared that a
person is not a malicious interferer if his conduct is impelled by a proper
business interest. In other words, a financial or profit motivation will not
necessarily make a person an officious interferer liable for damages as long
as there is no malice or bad faith involved. (Lagon v. Court of Appeals, G.R.
No. 119107, March 18, 2005)
103. In the case of Lagon v. Court of Appeals, [it was] held that to sustain a
case for tortuous interference, the defendant must have acted with malice or
must have been driven by purely impure reasons to injure the plaintiff; in other
words, his act of interference cannot be justified. We further explained that the
word "induce" refers to situations where a person causes another to choose
one course of conduct by persuasion or intimidation. (Go v. Cordero, G.R.
No. 164703, May 04, 2010)
104. The rule is that the defendant found guilty of interference with
contractual relations cannot be held liable for more than the amount for which
20
the party who was inducted to break the contract can be held liable. (Go v.
Cordero, G.R. No. 164703, May 04, 2010)
Consent
105. Consent is manifested by the meeting of the offer and the acceptance
upon the thing and the cause which are to constitute the contract. The offer
must be certain and the acceptance absolute (Yuviengco vs. Dacuycuy, 104
SCRA 668).
106. The acceptance must be identical in all respects with that of the offer
so as to produce consent or meeting of the minds. Where a party sets a
different purchase price than the amount of the offer, such acceptance was
qualified which can be at most considered as a counter-offer; a perfected
contract would have arisen only if the other party had accepted this counter-
offer. (Heirs of Ignacio v. Home Bankers Savings and Trust Company,
G.R. No. 177783, January 23, 2013)
107. A qualified acceptance or one that involves a new proposal constitutes

a counter-offer and a rejection of the original offer. A counter-offer is
considered in law, a rejection of the original offer and an attempt to end the
negotiation between the parties on a different basis. Consequently, when
something is desired which is not exactly what is proposed in the offer, such
acceptance is not sufficient to guarantee consent because any modification or

variation from the terms of the offer annuls the offer. The acceptance must be
identical in all respects with that of the offer so as to produce consent or
meeting of the minds. (Development Bank of the Philippines v. Medrano,
G.R. No. 167004, February 7, 2011)
108. An offer is a unilateral proposition made by one party to another for the
celebration of a contract. For an offer to be certain, a contract must come into
existence by the mere acceptance of the offeree without any further act on the
offeror's part. The offer must be definite, complete and intentional. In Spouses
Paderes v. Court of Appeals, the Court held that, "There is an 'offer' in the
context of Article 1319 only if the contract can come into existence by the
mere acceptance of the offeree, without any further act on the part of the
offeror. Hence, the 'offer' must be definite, complete and intentional." (Korean
Air Co., Ltd. v. Yuson, G.R. No. 170369, June 16, 2010)
109. Since a bid partakes of the nature of an offer to contract with the
government, the government agency involved may or may not accept it.
Moreover, being the owner of the property subject of the bid, the government
has the power to determine who shall be its recipient, as well as under what
terms it may be awarded. In this sense, participation in the bidding process is
a privilege inasmuch as it can only be exercised under existing criteria
imposed by the government itself. (National Power Corporation v. Pinatubo
Commercial, G.R. No. 176006, March 26, 2010)
21
110. In Keng Hua Paper Products Co., Inc. v. Court of Appeals, [the Court]
held that once the bill of lading is received by the consignee who does not
object to any terms or stipulations contained therein, it constitutes as an
acceptance of the contract and of all of its terms and conditions, of which the
acceptor has actual or constructive notice. (MOF Company v. Shin Yang
Brokerage Corporation, G.R. No. 172822, December 18, 2009)
111. Where a time is stated in an offer for its acceptance, the offer is
terminated at the expiration of the time given for its acceptance. The offer may
also be terminated when the person to whom the offer is made either rejects
the offer outright or makes a counter-offer of his own. (Villegas v. Court of
Appeals, G.R. No. 111495, August 18, 2006)
112. When the offeror has not fixed a period for the offeree to accept the
offer, and the offer is made to a person present, the acceptance must be
made immediately. (Malbarosa v. Court of Appeals, G.R. No. 125761, April
30, 2003)
113. Ang Yu Asuncion vs. Court of Appeals, 238 SCRA 602 (1994),
provides the rules in case the offeror has allowed the offeree a certain period
of time to accept the offer:
a. If the period is not itself founded upon or supported by a consideration,

the offeror is still free and has the right to withdraw the offer before its

acceptance, or, if an acceptance has been made, before the offeror’s coming
to know of such fact, by communicating that withdrawal to the offeree. The
right to withdraw must not be exercised whimsically or arbitrarily; otherwise, it
could give rise to a damage claim under Article 19 of the Civil Code.
b. If the period has a separate consideration, a contract of “option” is

deemed perfected, and it would be a breach of that contract to withdraw the
offer during the agreed period. The option however is an independent contract
by itself, and it is to be distinguished from the projected main agreement. If
the consideration is part of the purchase price, or an earnest money, such is
an evidence of perfected contract.
Capacity of Parties
114. Capacity to act is supposed to attach to a person who has not

previously been declared incapable, and such capacity is presumed to
continue so long as the contrary be not proved; that is, that at the moment of
his acting he was incapable, crazy, insane, or out of his mind. The burden of
proving incapacity to enter into contractual relations rests upon the person
who alleges it; if no sufficient proof to this effect is presented, capacity will be
presumed. (Alamayri v. Pabale , G.R. No. 151243, April 30, 2008)
115. The law presumes that every person is fully competent to enter into a
contract until satisfactory proof to the contrary is presented. The burden of
proof is on the individual asserting a lack of proof to the contrary is presented.
22
The burden of proof is on the individual asserting a lack of capacity to
contract, and this burden has been characterized as requiring for its
satisfaction clear and convincing evidence. (Spouses Yason v. Arciaga,
G.R. No. 145017, January 28, 2005)
116. Article 1327 of the Civil Code provides that minors are incapable of
giving consent to a contract. Article 1390 provides that a contract where one
of the parties is incapable of giving consent is voidable or annullable.
(Samahan ng Magsasaka sa San Josep v. Valisno, G.R. No. 158314, June
3, 2004)
117. A person is not incapacitated to contract merely because of advanced

years or by reason of physical infirmities. Only when such age or infirmities
impair his mental faculties to such extent as to prevent him from properly,
intelligently, and fairly protecting his property rights,is he considered
incapacitated. (Loyola v. Court of Appeals, G.R. No. 115734, February 23,
2000)
Vices of Consent
118. In order that mistake may invalidate consent and constitute a ground
for annulment of contract based on Article 1331, the mistake must be material
as to go to the essence of the contract; that without such mistake, the
agreement would not have been made. The effect of error must be

determined largely by its influence upon the party. If the party would have
entered into the contract even if he had knowledge of the true fact, then the
error does not vitiate consent. (Cebu Winland Development Corporation v.
Ong Siao Hua, G.R. No. 173215, May 21, 2009)
119. Mistake may invalidate consent when it refers to the substance of the
thing which is the object of the contract or to those conditions which have
principally moved one or both parties to enter into the contract. Mistake of law
as a rule will not vitiate consent. (Dandan v. Arfel Realty & Management
Corp., G.R. No. 173114, September 8, 2008)
120. Where a party is unable to read or when the contract is in a language

not understood by the party and mistake or fraud is alleged, the obligation to
show that the terms of the contract had been fully explained to said party who
is unable to read or understand the language of the contract devolves on the
party seeking to enforce the contract to show that the other party fully
understood the contents of the document. If he fails to discharge this burden,
the presumption of mistake, if not, fraud, stands unrebutted and controlling.
(Feliciano v. Spouses Zaldivar, G.R. No. 162593, September 26, 2006)
121. An error so patent and obvious that nobody could have made it, or one
which could have been avoided by ordinary prudence, cannot be invoked by
the one who made it in order to evade liability, let alone annul a contract.
(Olbes v. China Banking Corp., G.R. No. 152082, March 10, 2006)
23
122. Where a party is unable to read, and he expressly pleads in his reply
that he signed the voucher in question "without knowing (its) contents which
have not been explained to him," this plea is tantamount to one of mistake or
fraud in the execution of the voucher or receipt in question and the burden is
shifted to the other party to show that the former fully understood the contents
of the document; and if he fails to prove this, the presumption of mistake (if
not fraud) stands unrebutted and controlling. (Leonardo v. Court of Appeals,
G.R. No. 125485, September 13, 2004)
123. Corollarily, the threat to foreclose the mortgage would not in itself
vitiate consent as it is a threat to enforce a just or legal claim through
competent authority. It bears emphasis that the foreclosure of mortgaged
properties in case of default in payment of a debtor is a legal remedy given by
law to a creditor. In the event of default by the mortgage debtor in the
performance of the principal obligation, the mortgagee undeniably has the
right to cause the sale at public auction of the mortgaged property for
payment of the proceeds to the mortgagee. (Development Bank of the
Philippines v. Court of Appeals, G.R. No. 138703, June 30, 2006)
124. There is undue influence when a person takes improper advantage of

his power over the will of another, depriving the latter of a reasonable freedom
of choice. One who alleges any defect, or the lack of consent to a contract by
reason of fraud or undue influence, must establish by full, clear and
convincing evidence, such specific acts that vitiated the party's consent;

otherwise, the latter's presumed consent to the contract prevails. For undue
influence to be present, the influence exerted must have so overpowered or
subjugated the mind of a contracting party as to destroy his free agency,
making him express the will of another rather than his own. (Naranja v. Court
of Appeals, G.R. No. 160132, April 17, 2009)
125. For undue influence to be present, the influence exerted must have so
overpowered or subjugated the mind of a contracting party as to destroy the
latter's free agency, making such party express the will of another rather than
its own. The alleged lingering financial woes of a debtor per se cannot be
equated with the presence of undue influence. (Development Bank of the
Philippines v. Court of Appeals, G.R. No. 138703, June 30, 2006)
126. In the absence of a confidential or fiduciary relationship between the

parties, the law does not presume that one person exercised undue influence
upon the other.(Loyola v. Court of Appeals, G.R. No. 115734, February 23,
2000)
127. To prove a confidential relationship from which undue influence may

arise, the relationship must reflect a dominant, overmastering influence which
controls over the dependent person. (Loyola v. Court of Appeals, G.R. No.
115734, February 23, 2000)
128. Deceit is also present when one party, by means of concealing or

omitting to state material facts, with intent to deceive, obtains consent of the
24
other party without which, consent could not have been given. Art. 1339 of the
Civil Code is explicit that failure to disclose facts when there is a duty to reveal
them, as when the parties are bound by confidential relations, constitutes
fraud.
Insidious words or machinations constituting deceit are those that ensnare,

entrap, trick, or mislead the other party who was induced to give consent
which he or she would not otherwise have given. (Spouses Lequin v.
Spouses Vizconde, G.R. No. 177710, October 12, 2009)
Simulation of Contract
129. In absolute simulation, there is a colorable contract but it has no

substance as the parties have no intention to be bound by it. "The main
characteristic of an absolute simulation is that the apparent contract is not
really desired or intended to produce legal effect or in any way alter the
juridical situation of the parties." "As a result, an absolutely simulated or
fictitious contract is void, and the parties may recover from each other what
they may have given under the contract." (Heirs of Intac v. Court of
130. If the parties state a false cause in the contract to conceal their real
agreement, the contract is only relatively simulated and the parties are still
bound by their real agreement. Hence, where the essential requisites of a

contract are present and the simulation refers only to the content or terms of
the contract, the agreement is absolutely binding and enforceable between
the parties and their successors in interest. (Heirs of Intac v. Court of
131. Article 1345 of the Civil Code provides that the simulation of a contract
may either be absolute or relative. In absolute simulation, there is a colorable
contract but it has no substance as the parties have no intention to be bound
by it. The main characteristic of an absolute simulation is that the apparent
contract is not really desired or intended to produce legal effect or in any way
alter the juridical situation of the parties. As a result, an absolutely simulated
or fictitious contract is void, and the parties may recover from each other what
they may have given under the contract. However, if the parties state a false
cause in the contract to conceal their real agreement, the contract is only
relatively simulated and the parties are still bound by their real agreement.
(Spouses Villaceran v. De Guzman, G.R. No. 169055, February 22, 2012)
132. Where the essential requisites of a contract are present and the
simulation refers only to the content or terms of the contract, the agreement is
absolutely binding and enforceable between the parties and their successors
in interest. (Spouses Villaceran v. De Guzman, G.R. No. 169055, February
22, 2012)
133. Article 1412 is not applicable to fictitious or simulated contracts,

because they refer to contracts with an illegal cause or subject-matter. This
25
article presupposes the existence of a cause, it cannot refer to fictitious or
simulated contracts which are in reality non-existent. (Heirs of Ureta, Sr. v.
Heirs of Ureta, G.R. No. 165748, September 14, 2011)
134. A simulated contract of sale is without any cause or consideration, and

is, therefore, null and void; in such case, no independent action to rescind or
annul the contract is necessary, and it may be treated as non-existent for all
purposes. (Heirs of Ureta, Sr. v. Heirs of Ureta, G.R. No. 165748,
September 14, 2011)
135. The most protuberant index of simulation of contract is the complete

absence of an attempt in any manner on the part of the ostensible buyer to
assert rights of ownership over the subject properties. Policronio's failure to
take exclusive possession of the subject properties or, in the alternative, to
collect rentals, is contrary to the principle of ownership. Such failure is a clear
badge of simulation that renders the whole transaction void. (Heirs of Ureta,
Sr. v. Heirs of Ureta, G.R. No. 165748, September 14, 2011)
136. When the parties do not intend to be bound at all, the contract is
absolutely simulated; if the parties conceal their true agreement, then the
contract is relatively simulated. An absolutely simulated contract is void, and
the parties may recover from each other what they may have given under the
simulated contract, while a relatively simulated contract is valid and
enforceable as the parties' real agreement binds them. Characteristic of

simulation is that the apparent contract is not really desired or intended to
produce legal effects, or in any way, alter the juridical situation of the parties.
(Taghoy v. Spouses Tigol, Jr., G.R. No. 159665, August 3, 2010)
137. Suffice it to state that the concept of inadequacy or non-payment of

price is irreconcilable with the concept of simulation. If there exists an actual
consideration for transfer evidenced by the alleged act of sale, no matter how
inadequate it be, the transaction could not be a "simulated sale". (Aliño v.
Heirs of Lorenzo, G.R. No. 159550, June 27, 2008)
138. The legal presumption is in favor of the validity of contracts and the
party who impugns its regularity has the burden of proving its simulation.
(Tating v. Marcella, G.R. No. 155208, March 27, 2007)
139. Simulation of contract and gross inadequacy of price are distinct legal
concepts, with different effects. When the parties to an alleged contract do not
really intend to be bound by it, the contract is simulated and void. A simulated
or fictitious contract has no legal effect whatsoever because there is no real
agreement between the parties. (Bravo-Guerrero v. Bravo, G.R. No.
152658, July 29, 2005)
Object of Contract
140. Well-entrenched is the rule that all things, even future ones, which are
not outside the commerce of man may be the object of a contract. The
26
exception is that no contract may be entered into with respect to future
inheritance, and the exception to the exception is the partition inter vivos
referred to in Article 1080. (J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882,
March 11, 2005)
141. Unlike shares of stock, money is a generic thing. It is designated

merely by its class or genus without any particular designation or physical
segregation from all others of the same class. This means that once a certain
amount is added to the cash balance, one can no longer pinpoint the specific
amount included which then becomes part of a whole mass of money.
(Cordova v. Reyes Daway Lim Bernardo Lindo Rosales Law Offices, G.R.
No. 146555, July 3, 2007)
142. The failure of the parties to state its exact location in the contract is of
no moment; this is a mere error occasioned by the parties' failure to describe
with particularity the subject property, which does not indicate the absence of
the principal object as to render the contract void. (Camacho v. Court of
Appeals, G.R. No. 127520, February 9, 2007)
143. The object of a contract, in order to be considered as "certain," need

not specify such object with absolute certainty. It is enough that the object is
determinable in order for it to be considered as "certain." (Domingo Realty,
Inc. v. Court of Appeals, G.R. No. 126236, January 26, 2007)

Cause of Contract
144. Lack of ample consideration does not nullify the contract: Inadequacy
of consideration does not vitiate a contract unless it is proven which in the
case at bar was not, that there was fraud, mistake or undue influence. (Article
1355, New Civil Code). We do not find the stipulated price as so inadequate
to shock the court's conscience, considering that the price paid was much
higher than the assessed value of the subject properties and considering that
the sales were effected by a father to her daughter in which case filial love
must be taken into account. (Cojuangco, Jr. v. Republic, G.R. No. 180705,
November 27, 2012)
145. In Samanilla v. Cajucom, the Court clarified that the presumption of a

valid consideration cannot be discarded on a simple claim of absence of
consideration, especially when the contract itself states that consideration was
given. (Cojuangco, Jr. v. Republic, G.R. No. 180705, November 27, 2012)
146. A contract is presumed to be supported by cause or consideration. The

presumption that a contract has sufficient consideration cannot be overthrown
by a mere assertion that it has no consideration. To overcome the
presumption, the alleged lack of consideration must be shown by
preponderance of evidence. The burden to prove lack of consideration rests
upon whoever alleges it, which, in the present case, is respondent.
(Mangahas v. Brobio, G.R. No. 183852, October 20, 2010)
27
147. Under Article 1354 of the Civil Code, it is presumed that consideration
exists and is lawful unless the debtor proves the contrary. Moreover, under
Section 3, Rule 131 of the Rules of Court, the following are disputable
presumptions: (1) private transactions have been fair and regular; (2) the
ordinary course of business has been followed; and (3) there was sufficient
consideration for a contract. A presumption may operate against an adversary
who has not introduced proof to rebut it. The effect of a legal presumption
upon a burden of proof is to create the necessity of presenting evidence to
meet the legal presumption or the prima facie case created thereby, and
which, if no proof to the contrary is presented and offered, will prevail. The
burden of proof remains where it is, but by the presumption, the one who has
that burden is relieved for the time being from introducing evidence in support
of the averment, because the presumption stands in the place of evidence
unless rebutted. (Pentacapital Investment Corp. v. Mahinay, G.R. No.
171736, July 5, 2010)
148. The cause or essential purpose in a contract of lease is the use or

enjoyment of a thing. A party's motive or particular purpose in entering into a
contract does not affect the validity or existence of the contract; an exception
is when the realization of such motive or particular purpose has been made a
condition upon which the contract is made to depend. (So v. Food Fest
Land, Inc., G.R. No. 183628, April 7, 2010)
149. Gross inadequacy of price by itself will not result in a void contract.

Gross inadequacy of price does not even affect the validity of a contract of
sale, unless it signifies a defect in the consent or that the parties actually
intended a donation or some other contract. Inadequacy of cause will not
invalidate a contract unless there has been fraud, mistake or undue influence.
(Bacungan v. Court of Appeals, G.R. No. 170282, December 18, 2008)
150. Cause is the essential reason which moves the contracting parties to
enter into it. In other words, the cause is the immediate, direct and proximate
reason which justifies the creation of an obligation through the will of the
contracting parties. Cause, which is the essential reason for the contract,
should be distinguished from motive, which is the particular reason of a
contracting party which does not affect the other party. (Uy v. Court of
Appeals, G.R. No. 120465, September 9, 1999)
151. Ordinarily, a party's motives for entering into the contract do not affect
the contract. However, when the motive predetermines the cause, the motive
may be regarded as the cause. In Liguez vs. Court of Appeals, this Court,
speaking through Justice J.B.L. Reyes, held:
. . . It is well to note, however, that Manresa himself (Vol. 8, pp.

641-642), while maintaining the distinction and upholding the
inoperativeness of the motives of the parties to determine the
validity of the contract, expressly excepts from the rule those
contracts that are conditioned upon the attainment of the
motives of either party.
28
The same view is held by the Supreme Court of Spain, in its decisions of
February 4, 1941, and December 4, 1946, holding that the motive may be
regarded as causa when it predetermines the purpose of the contract. (Uy v.
Court of Appeals, G.R. No. 120465, September 9, 1999)
Form
152. Article 1358 of the Civil Code, which requires the embodiment of
certain contracts in a public instrument, is only for convenience, and
registration of the instrument only adversely affects third parties. Formal
requirements are, therefore, for the benefit of third parties. Non-compliance
therewith does not adversely affect the validity of the contract nor the
contractual rights and obligations of the parties thereunder. (Zamora v.
Zamora, G.R. No. 162930, December 05, 2012)
153. Notarization, or the requirement of a public document under the Civil

Code, is only for convenience, and not for validity or enforceability. (Spouses
Sabitsana, Jr. v. Muertegui, G.R. No. 181359, August 05, 2013)
154. Although it is true that the absence of notarization of the deed of sale
would not invalidate the transaction evidenced therein, yet an irregular
notarization reduces the evidentiary value of a document to that of a private

document, which requires proof of its due execution and authenticity to be
admissible as evidence. (Riosa v. Tabaco La Suerte Corporation, G.R. No.
203786, October 23, 2013)
155. A defective notarization will strip the document of its public character
and reduce it to a private instrument. Consequently, when there is a defect in
the notarization of a document, the clear and convincing evidentiary standard
normally attached to a duly-notarized document is dispensed with, and the
measure to test the validity of such document is preponderance of evidence.
(Spouses Martires v. Chua, G.R. No. 174240, March 20, 2013)
156. True it is that the Civil Code requires certain transactions to appear in
public documents. However, the necessity of a public document for contracts
which transmit or extinguish real rights over immovable property, as
mandated by Article 1358 of the Civil Code, is only for convenience; it is not
essential for validity or enforceability. Thus, in Cenido v. Apacionado, this
Court ruled that the only effect of noncompliance with the provisions of Article
1358 of the Civil Code is that a party to such a contract embodied in a private
document may be compelled to execute a public document. (Teoco v.
Metropolitan Bank and Trust Company, G.R. No. 162333, December 23,
2008)
157. The mere fact that neither party signs a contract does not prevent it
from assuming legal existence. Consent may either be express or implied,
unless the law specifically requires a particular format or manner of
29
expressing such consent. The signature of a party in a contract is one way of
expressing it; a tacit or constructive acceptance of the offer involved in the
contract is another. Once there is manifestation of the concurrence of the
parties' wills, written or otherwise, the stage of negotiation is terminated and
the contract is finally perfected. (Luzon Development Bank v. Spouses
Angeles, G.R. No. 150393, July 31, 2006)
158. In Manuel v. Rodriguez, et al., the Court ruled that to be a written

contract, all the terms must be in writing, so that a contract partly in writing
and partly oral is in legal effect an oral contract. (Spouses Ramos v.
Spouses Heruela, G.R. No. 145330, October 14, 2005)
159. [The Court held:] Article 1358 of the Civil Code requires that the form of
a contract that transmits or extinguishes real rights over immovable property
should be in a public document, yet it is also an accepted rule that the failure
to observe the proper form does not render the transaction invalid. Thus, it
has been uniformly held that the form required in Article 1358 is not essential
to the validity or enforceability of the transaction, but required merely for
convenience. We have even affirmed that a sale of real property though not
consigned in a public instrument or formal writing, is nevertheless valid and
binding among the parties, for the time-honored rule is that even a verbal
contract of sale or real estate produces legal effects between the parties.
(Tigno v. Spouses Aquino, G.R. No. 129416, November 25, 2004)

160. A certain form may be prescribed by law for any of the following
purposes: for validity, enforceability, or greater efficacy of the contract. When
the form required is for validity, its non-observance renders the contract void
and of no effect. When the required form is for enforceability, non-compliance
therewith will not permit, upon the objection of a party, the contract, although
otherwise valid, to be proved or enforced by action. Formalities intended for
greater efficacy or convenience or to bind third persons, if not done, would not
adversely affect the validity or enforceability of the contract between the
contracting parties themselves. (Cenido v. Spouses Apacionado, G.R. No.
132474, November 19, 1999)
Reformation of instrument
161. In order that an action for reformation of instrument as provided in

Article 1359 of the Civil Code may prosper, the following requisites must
concur: (1) there must have been a meeting of the minds of the parties to the
contract; (2) the instrument does not express the true intention of the parties;
and (3) the failure of the instrument to express the true intention of the parties
is due to mistake, fraud, inequitable conduct or accident. (Quiros v. Arjona,
G.R. No. 158901, March 9, 2004)
162. An action for reformation is in personam, not in rem, . . . even when

real estate is involved. . . . It is merely an equitable relief granted to the parties
where through mistake or fraud, the instrument failed to express the real
agreement or intention of the parties. While it is a recognized remedy afforded
30
by courts of equity it may not be applied if it is contrary to well-settled
principles or rules. It is a long-standing principle that equity follows the law. It
is applied in the absence of and never against statutory law. . . . Courts are
bound by rules of law and have no arbitrary discretion to disregard them. . . .
Courts of equity must proceed with outmost caution especially when rights of
third parties may intervene. . . ." (Huibonhoa v. Court of Appeals, G.R. No.
95897, December 14, 1999)
163. A cause of action for the reformation of a contract only arises when one
of the contracting parties manifests an intention, by overt acts, not to abide by
the true agreement of the parties. (Marquez v. Espejo, G.R. No. 168387,
August 25, 2010)
Interpretations of contracts
164. Courts cannot supply material stipulations, read into the contract words
it does not contain or, for that matter, read into it any other intention that
would contradict its plain import. Neither can they rewrite contracts because
they operate harshly or inequitably as to one of the parties, or alter them for
the benefit of one party and to the detriment of the other, or by construction,
relieve one of the parties from the terms which he voluntarily consented to, or
impose on him those which he did not. (Spouses Cabahug v. National
Power Corporation, G.R. No. 186069, January 30, 2013)

165. It should be emphasized that in case of conflict between the text of a
contract and the intent of the parties, it is the latter that prevails, for intention
is the soul of a contract, not its wording which is prone to mistakes,
inadequacies or ambiguities. To hold otherwise would give life, validity, and
precedence to mere typographical errors and defeat the very purpose of
agreements. (Global Resource for Outsourced Workers (GROW), Inc. v.
Velasco, G.R. No. 196883, August 22, 2012)
166. Provisions in a contract must be read in conjunction with statutory and

administrative regulations. This finds basis on the principle "that an existing
law enters into and forms part of a valid contract without the need for the
parties expressly making reference to it." (St. Mary's Academy of Dipolog
City v. Palacio, G.R. No. 164913, September 08, 2010)
167. On several occasions, [the Court has] decreed that in determining the
nature of a contract, courts are not bound by the title or name given by the
parties. The decisive factor in evaluating an agreement is the intention of the
parties, as shown, not necessarily by the terminology used in the contract but,
by their conduct, words, actions and deeds prior to, during and immediately
after executing the agreement. Thus, to ascertain the intention of the parties,
their contemporaneous and subsequent acts should be considered. Once the
intention of the parties is duly ascertained, that intent is deemed as integral to
the contract as its originally expressed unequivocal terms. (Rockville Excel
31
International Exim Corporation v. Spouses Culla, G.R. No. 155716,
October 02, 2009)
168. If some stipulations of any contract should admit of several meanings,

it shall be understood as bearing that import which is most adequate to render
it effectual. The various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them
taken jointly. When it is impossible to settle doubts by the rules established in
the preceding articles, and the doubts refer to incidental circumstances of an
onerous contract, the doubt shall be settled in favor of the greatest reciprocity
of interests. (Security Bank Corporation v. Court of Appeals, G.R. No.
141733, February 08, 2007)
Rescissible contracts
169. It bears stressing that the right to ask for the rescission of a contract
under Article 1381 (4) of the Civil Code is not contingent upon the final
determination of the ownership of the thing subject of litigation. The primordial
purpose of Article 1381 (4) of the Civil Code is to secure the possible
effectivity of the impending judgment by a court with respect to the thing
subject of litigation. It seeks to protect the binding effect of a court's
impending adjudication vis-a-vis the thing subject of litigation regardless of
which among the contending claims therein would subsequently be upheld.
Accordingly, a definitive judicial determination with respect to the thing subject

of litigation is not a condition sine qua non before the rescissory action
contemplated under Article 1381 (4) of the Civil Code may be instituted. (Ada
v. Baylon, G.R. No. 182435, August 13, 2012)
170. The rescission of a contract under Article 1381 (4) of the Civil Code
only requires the concurrence of the following: first, the defendant, during the
pendency of the case, enters into a contract which refers to the thing subject
of litigation; and second, the said contract was entered into without the
knowledge and approval of the litigants or of a competent judicial authority. As
long as the foregoing requisites concur, it becomes the duty of the court to
order the rescission of the said contract.
The reason for this is simple. Article 1381 (4) seeks to remedy the presence
of bad faith among the parties to a case and/or any fraudulent act which they
may commit with respect to the thing subject of litigation. (Ada v. Baylon,
G.R. No. 182435, August 13, 2012)
171. The action to rescind contracts in fraud of creditors is known as accion

pauliana. For this action to prosper, the following requisites must be present:
(1) the plaintiff asking for rescission has a credit prior to the alienation,
although demandable later; (2) the debtor has made a subsequent contract
conveying a patrimonial benefit to a third person; (3) the creditor has no other
legal remedy to satisfy his claim; (4) the act being impugned is fraudulent; (5)
the third person who received the property conveyed, if it is by onerous title,
32
has been an accomplice in the fraud. (Spouses Lee v. Bangkok Bank
Public Company, G.R. No. 173349, February 9, 2011)
172. Elementary is the principle that the validity of a contract does not
preclude its rescission. Under Articles 1380 and 1381 (3) of the Civil Code,
contracts that are otherwise valid between the contracting parties may
nonetheless be subsequently rescinded by reason of injury to third persons,
like creditors. In fact, rescission implies that there is a contract that, while
initially valid, produces a lesion or pecuniary damage to someone. (Coastal
Pacific Trading, Inc. v. Southern Rolling Mills, Co., Inc., G.R. No. 118692,
July 28, 2006)
Voidable contracts
173. A voidable or annullable contract is one where (i) one of the parties is
incapable of giving consent to a contract; or (ii) the consent is vitiated by
mistake, violence, intimidation, undue influence or fraud. The action for
annulment must be brought within four (4) years from the time the
intimidation, violence or undue influence ceases, or four (4) years from the
time of the discovery of the mistake or fraud. (Dailisan v. Court of Appeals,
G.R. No. 176448, July 28, 2008)
174. The action for the annulment of contracts may be instituted by all who
are thereby obliged principally or subsidiarily. However, persons who are

capable cannot allege the incapacity of those with whom they contracted; nor
can those who exerted intimidation, violence, or undue influence, or employed
fraud, or caused mistake base their action upon these flaws of the contract.
Any action for the annulment of the contracts thus entered into by the
minors would require that: (1) the plaintiff must have an interest in the
contract; and (2) the action must be brought by the victim and not the party
responsible for the defect. Thus, Article 1397 of the Civil Code provides in part
that "[t]he action for the annulment of contracts may be instituted by all who
are thereby obliged principally or subsidiarily. However, persons who are
capable cannot allege the incapacity of those with whom they contracted."
(Samahan ng Magsasaka sa San Josep v. Valisno, G.R. No. 158314, June
3, 2004)
Unenforceable contracts
175. Unenforceable contracts are those which cannot be enforced by a

proper action in court, unless they are ratified, because either they are
entered into without or in excess of authority or they do not comply with the
statute of frauds or both of the contracting parties do not possess the required
legal capacity. An unenforceable contract may be ratified, expressly or
impliedly, by the person in whose behalf it has been executed, before it is
revoked by the other contracting party. (Mercado v. Allied Banking
Corporation, G.R. No. 171460, July 27, 2007)
33
176. With respect to real property, Article 1358(1) of the Civil Code
specifically requires that a contract of sale thereof be in a public document.
However, an otherwise unenforceable oral contract of sale of realty under
Article 1403(2) of the Civil Code may be ratified by the failure to object to the
presentation of oral evidence to prove it or by the acceptance of benefits
granted by it. (Soliva v. Intestate Estate of Villalba, G.R. No. 154017,
December 8, 2003)
177. A contract entered into in the name of another by one who ostensibly
might have but who, in reality, had no real authority or legal representation, or
who, having such authority, acted beyond his powers, would be
unenforceable. (Regal Films, Inc. v. Concepcion, G.R. No. 139532, August
9, 2001)
178. The Statute of Frauds expressed in Article 1403, par. (2), of the Civil
Code applies only to executory contracts, i.e., those where no performance
has yet been made. Stated a bit differently, the legal consequence of non-
compliance with the Statute does not come into play where the contract in
question is completed, executed, or partially consummated. (Orduña v.
Fuentebella, G.R. No. 176841, June 29, 2010)
179. The effect of noncompliance with this requirement (Statute of Frauds)

is simply that no action can be enforced under the given contracts. If an action
is nevertheless filed in court, it shall warrant a dismissal under Section 1 (i),

Rule 16 of the Rules of Court, unless there has been, among others, total or
partial performance of the obligation on the part of either party (Municipality
of Hagonoy, Bulacan v. Dumdum, Jr., G.R. No. 168289, March 22, 2010)
180. When a verbal contract has been completed, executed or partially

consummated, as in this case, its enforceability will not be barred by the
Statute of Frauds, which applies only to an executory agreement. Thus, where
one party has performed his obligation, oral evidence will be admitted to prove
the agreement. (Ainza v. Spouses Padua, G.R. No. 165420, June 30, 2005)
181. We have previously held that not all agreements "affecting land" must
be put into writing to attain enforceability. Thus, we have held that the setting
up of boundaries, the oral partition of real property, and an agreement
creating a right of way are not covered by the provisions of the statute of
frauds. The reason simply is that these agreements are not among those
enumerated in Article 1403 of the New Civil Code. (Rosencor Development
Corporation v. Inquing, G.R. No. 140479, March 8, 2001)
182. Lest it be overlooked, a contract that infringes the Statute of Frauds is

ratified by the acceptance of benefits under the contract. (Orduña v.
Fuentebella, G.R. No. 176841, June 29, 2010)
Void or inexistent contracts
34
183. A void contract is equivalent to nothing; it produces no civil effect; and
it does not create, modify or extinguish a juridical relation. (Borromeo v.
Mina, G.R. No. 193747, June 05, 2013)
184. A void contract is also not susceptible of ratification, and the action for
the declaration of the absolute nullity of such a contract is imprescriptible.
(Spouses Binayug v. Ugaddan, G.R. No. 181623, December 5, 2012)
185. The law will not aid either party to an illegal contract or agreement; it
leaves the parties where it finds them. Indeed, one cannot salvage any rights
from an unconstitutional transaction knowingly entered into. (Beumer v.
Amores, G.R. No. 195670, December 3, 2012)
186. Invalid stipulations that are independent of, and divisible from, the rest
of the agreement and which can easily be separated therefrom without doing
violence to the manifest intention of the contracting minds do not nullify the
entire contract. (Cojuangco, Jr. v. Republic, G.R. No. 180705, November
27, 2012)
187. The right to set up the nullity of a void or non-existent contract is not
limited to the parties, as in the case of annullable or voidable contracts; it is
extended to third persons who are directly affected by the contract. Thus,
where a contract is absolutely simulated, even third persons who may be
prejudiced thereby may set up its inexistence. (Heirs of Ureta, Sr. v. Heirs of

Ureta, G.R. No. 165748, September 14, 2011)
188. Although a void contract has no legal effects even if no action is taken
to set it aside, when any of its terms have been performed, an action to
declare its inexistence is necessary to allow restitution of what has been given
under it. This action, according to Article 1410 of the Civil Code does not
prescribe. (Spouses Fuentes v. Roca, G.R. No. 178902, April 21, 2010)
189. A void agreement will not be rendered operative by the parties' alleged
performance (partial or full) of their respective prestations. A contract that
violates the law is null and void ab initio and vests no rights and creates no
obligations. It produces no legal effect at all. (Nunga, Jr. v. Nunga III, G.R.
No. 178306, December 18, 2008)
190. This rule, however, is subject to exceptions that permit the return of
that which may have been given under a void contract to: (a) the innocent
party (Arts. 1411-1412, Civil Code); (b) the debtor who pays usurious interest
(Art. 1413, Civil Code); (c) the party repudiating the void contract before the
illegal purpose is accomplished or before damage is caused to a third person
and if public interest is subserved by allowing recovery (Art. 1414, Civil Code);
(d) the incapacitated party if the interest of justice so demands (Art. 1415,
Civil Code); (e) the party for whose protection the prohibition by law is
intended if the agreement is not illegal per se but merely prohibited and if
public policy would be enhanced by permitting recovery (Art. 1416, Civil
Code); and (f) the party for whose benefit the law has been intended such as
35
in price ceiling laws (Art. 1417, Civil Code) and labor laws (Arts. 1418-1419,
Civil Code). (Hulst v. PR Builders, Inc., G.R. No. 156364, September 3,
2007)
191. The good faith of a party in entering into a contract is immaterial in

determining whether it is valid or not. Good faith, not being an essential
element of a contract, has no bearing on its validity. No amount of good faith
can validate an agreement which is otherwise void. A contract which the law
denounces as void is necessarily no contract at all and no effort or act of the
parties to create one can bring about a change in its legal status.
(Ballesteros v. Abion, G.R. No. 143361, February 9, 2006)
192. While the law bars recovery in a case where the object of the contract
is contrary to law and one or both parties acted in bad faith, we cannot here
apply the doctrine of in pari delicto which admits of an exception, namely, that
when the contract is merely prohibited by law, not illegal per se, and the
prohibition is designed for the protection of the party seeking to recover, he is
entitled to the relief prayed for whenever public policy is enhanced thereby.
Under the Public Land Act, the prohibition to alienate is predicated on the
fundamental policy of the State to preserve and keep in the family of the
homesteader that portion of public land which the State has gratuitously given
to him, and recovery is allowed even where the land acquired under the
Public Land Act was sold and not merely encumbered, within the prohibited
period. (Heirs of Manlapat v. Court of Appeals, G.R. No. 125585, June 8,

2005)
193. One who loses his money or property by knowingly engaging in a

contract or transaction which involves his own moral turpitude may not
maintain an action for his losses. To him who moves in deliberation and
premeditation, the law is unyielding. The law will not aid either party to an
illegal contract or agreement; it leaves the parties where it finds them.
(Frenzel v. Catito, G.R. No. 143958, July 11, 2003)
Estoppel
194. Estoppel is an equitable principle rooted in natural justice; it is meant to

prevent persons from going back on their own acts and representations, to the
prejudice of others who have relied on them. (Philippine Realty and
Holdings Corporation v. Ley Construction and Development
Corporation, G.R. No. 165548, June 13, 2011)
195. A party to a contract cannot deny the validity thereof after enjoying its
benefits without outrage to one's sense of justice and fairness. (Toledo v.
Hyden, G.R. No. 172139, December 08, 2010)
196. It has long been a settled rule that the government is not bound by the
errors committed by its agents. Estoppel does not also lie against the
government or any of its agencies arising from unauthorized or illegal acts of
public officers. This is particularly true in the collection of legitimate taxes due
36
where the collection has to be made whether or not there is error, complicity,
or plain neglect on the part of the collecting agents. (Intra-Strata Assurance
Corporation v. Republic, G.R. No. 156571, July 09, 2008)
197. Estoppel by deed is "a bar which precludes one party from asserting as
against the other party and his privies any right or title in derogation of the
deed, or from denying the truth of any material facts asserted in it." [The Court
has] previously cautioned against the perils of the misapplication of the
doctrine of estoppel:
Estoppel has been characterized as harsh or odious, and not favored in law.
When misapplied, estoppel becomes a most effective weapon to establish an
injustice, inasmuch as it shuts a man's mouth from speaking the truth and
debars the truth in a particular case. Estoppel cannot be sustained by mere
argument or doubtful inference; it must be clearly proved in all its essential
elements by clear, convincing and satisfactory evidence. (The Learning
Child, Inc. v. Ayala Alabang Village Association, G.R. No. 134269, July
07, 2010)
198. There are generally three kinds of estoppel: (1) estoppel in pais; (2)
estoppel by deed; and (3) estoppel by laches. In the first classification, a
person is considered in estoppel if by his conduct, representations or
admissions or silence when he ought to speak out, whether intentionally or
through culpable negligence, "causes another to believe certain facts to exist

and such other rightfully relies and acts on such belief, as a consequence of
which he would be prejudiced if the former is permitted to deny the existence
of such facts." Estoppel by deed, on the other hand, occurs when a party to a
deed and his privies are precluded from denying any material fact stated in
the said deed as against the other party and his privies. Estoppel by laches is
considered an equitable estoppel wherein a person who failed or neglected to
assert a right for an unreasonable and unexplained length of time is presumed
to have abandoned or otherwise declined to assert such right and cannot later
on seek to enforce the same, to the prejudice of the other party, who has no
notice or knowledge that the former would assert such rights and whose
condition has so changed that the latter cannot, without injury or prejudice, be
restored to his former state. (Spouses Chien v. Sta. Lucia Realty &
Development, Inc., G.R. No. 162090, January 31, 2007)
-end-
37

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NOTES IN OBLIGATIONS AND CONTRACTS

Prof. Rolando B. Faller

Nature and Concept

2. An obligation imposed on a person, and the corresponding right

Bar Notes By Prof. RBFaller

4. Breach of obligation is the failure, without legal excuse, to perform any

5. In this jurisdiction, the following requisites must be present in order that

6. A demand is only necessary in order to put an obligor in a due and

8. In reciprocal obligations, as in a contract of sale, the general rule is that

Bar Notes By Prof. RBFaller

9. Unless demand is proven, one cannot be held in default. It is only when

11. Fraud or malice (dolo) has been defined as a "conscious and

13. The test to determine the existence of negligence in a particular case

14. The negligence of the obligor in the performance of the obligation

Bar Notes By Prof. RBFaller

Force majeure/fortuitous event

16. A real estate enterprise engaged in the pre-selling of condominium

17. Broadly speaking, force majeure generally applies to a natural

Remedies for Breach of Obligations

20. It is thus apparent that an action to rescind, or an accion pauliana,

Different Kinds of Obligations

Bar Notes By Prof. RBFaller

22. In a Contract to Sell, the payment of the purchase price is a positive

24. Moreover, even if this significant detail is to be ignored, the mere

25. Article 1186 enunciates the doctrine of constructive fulfillment of

Bar Notes By Prof. RBFaller

26. Consequently, even if the right to rescind is made available to the

30. Indeed, mutual restitution is required in all cases involving rescission.

31. Under settled doctrine, nonpayment is a resolutory condition that

Bar Notes By Prof. RBFaller

Obligations with a Period

Joint and Solidary Obligations

Bar Notes By Prof. RBFaller

37. Solidary liability cannot be presumed but must be established by law or

38. These Civil Code provisions establish that in case of concurrence of

39. If a solidary debtor pays the obligation in part, he can recover

40. It must be noted that in a solidary obligation, the creditor is entitled to

Bar Notes By Prof. RBFaller

41. A penalty clause, expressly recognized by law, is an accessory

Bar Notes By Prof. RBFaller

49. Conversely, the principle of substantial performance is inappropriate

51. A person entering into a contract has a right to insist on its

Bar Notes By Prof. RBFaller

53. In general, a payment in order to be effective to discharge an

54. As a dation in payment, the assignment of credit operates as a mode of

56. Corollary thereto, in dacion en pago, as a special mode of payment,

Bar Notes By Prof. RBFaller

57. To be sure, the Dation in Payment has no express warranties relating

Payment in foreign currency/value of currency

58. There is no legal impediment to having obligations or transactions paid

Extraordinary inflation exists when there is a decrease or increase in the

Bar Notes By Prof. RBFaller

60. For extraordinary inflation (or deflation) to affect an obligation, the

61. The existence of extraordinary inflation must be officially proclaimed by

62. Lest it be overlooked, Article 1250 of the Code, as couched, clearly

63. Additionally, in contracts involving installment payments with interest

Bar Notes By Prof. RBFaller

66. Tender of payment is but a preparatory act to consignation. It is the

69. Consignation is the deposit of the proper amount with a judicial

70. Consignation and tender of payment must not be encumbered by

Loss of the thing due

Bar Notes By Prof. RBFaller

73. Agreements for compensation of debts or any obligations when the