OBLIGATIONS AND CONTRACTS
Q: If the title is a perfect sale, is prescription relevant?
Atty. Melencio Sta. Maria
The Definitive Guide to the Sacred Text
Made in 2018
Note: Class notes are in red & important points, as stated by Dean Mel, are indicated
by an *. New cases in his updated 2017 book are in purple.
PRESCRIPTION
LECTURE FROM DEAN MEL
There are two kinds of prescription – acquisitive and extinctive.
For acquisitive prescription, there are two kinds – ordinary and extraordinary.
Common to both types is that (1) both involve a period, and (2) both require
possession which is peaceful, uninterrupted, public, & in the concept of an owner.
• When it comes to extraordinary prescription, the period is 8 years for
movables, & 30 years for immovables.
• When it comes to ordinary prescription, the period is 4 years for movables &
10 years for immovables. But there are additional requirements for this type
of prescription – that is, (1) good faith and (2) just title.
For laches, despite prescription, there may still be laches. The requisites are (1)
injury to plaintiff, (2) delay on the part of the plaintiff, (3) no knowledge or
information on the part of the defendant, and (4) injury to defendant. In laches,
there must be written demand every time. Or else, the period may be stale.
• Look at the cases of Catholic Bishop and Nieto – they explain when laches
will apply to registered land though prescription will not apply.
• Vital doctrine in Catholic Bishop: Registered land CANNOT be acquired by
prescription. Despite this, however, there may be laches. Laches may set in if
there is (1) colorable title, and (2) a lot of time has already passed.
• BUT as said in Nieto, laches will not apply if even colorable title cannot be
demonstrated.
There are two kinds of interruption – natural and civil. For natural, if there is an
interruption for more than 1 year, there is natural interruption, for ANY CAUSE.
• You can be kicked out for an unlawful reason, but if you stay out of the
property for more than 1 year, there will be considered an interruption.
For civil interruption, it starts NOT from the filing of the suit, but the receipt of
SUMMONS. But note that there are exceptions which are found in the Civil Code.
Tacking in the period of the previous possessor
Mode of acquisition are the titles – these could be donation, inheritance, sale,
occupation, prescription.
1 | Katrina C. Gaw | Block C 2018
A: No, because the sale is the source of title, not prescription. If the donation was
perfectly valid, then prescription would be irrelevant for the same reason.
Prescription is a special mode of acquisition that is TRUE and VALID, but the title is
not perfect – the title is only COLORABLE.
• Is a void sale or donation a colorable title? Yes, by jurisprudence.
• A donated property to B. B stayed there for 15 years. After 15 years, A died.
The heirs of A, XYZ, told B they discovered that the notary in the deed of
donation is not really a notary & is merely an impostor, making the deed of
donation private.
o Q1: Is the donation valid?
o A1: NO. The donation of property must be in a public instrument; if it is
not, it affects validity of the donation, making the donation void.
o Q2: Can the heirs get it back?
o A2: NO. The donation was colorable title, & there was good faith, there
was 10-year possession in the concept of owner. The heirs thus get
the property by reason of PRESCRIPTION.
Prescription of Actions means prescription of civil actions. There is prescription of
criminal cases in the RPC; but the Civil Code’s statute of limitations govern civil
actions. When it comes to special proceedings, there is no prescription; SPECIAL
PROCEEDINGS DO NOT PRESCRIBE (hence, intestate proceedings do not prescribe).
• This part is mostly memory work & memorizing the relevant periods.
• HOWEVER, under Ang v. Fulton Insurance, a contract stipulation may extend
prescription or shorten it. IT’S ALLOWED.
Q: X, a creditor, was able to foreclose within 8 years out of the 10 years allowed by
law. But what is the prescriptive period in collecting the balance remaining after the
foreclosure sale, 2 years or another 10 years?
A: It’s another 10 years according to the SC.
CASE: Callanta v. Carnacion
Q: A filed a case before the labor arbiter against B in the fourth year since her cause
of action had accrued for her remaining salaries. Labor Code only grants 3 years for
collecting money claims. So A went to the RTC & filed suit for damage to A’s
property, against B. The amount sought, however, is EXACTLY the same as the
amount before the labor arbiter. B filed a motion to dismiss, arguing the NLRC
already decided the matter & it has already prescribed. Should the motion to dismiss
be granted?
A: No. The case will prosper. The cause of action in the civil case is different from the
cause of action in the labor cause. In the labor case, it is backwages. In civil case, it
is deprivation of property & violation of his rights. According to Article 1146, such an
action prescribes within 4 years.
Remember: Period during which the obligee was prevented by a fortuitous event
from enforcing his right is not reckoned against him.
• SC: ALL OF THE PERIOD BEFORE the fortuitous event is counted in this
 period. For example, if a storm is the fortuitous event, if the contract is • Other name: limitation of action
written, after the storm has passed, the obligee will have a fresh 10 new
years. Hence, the obligee will NOT just have the remaining period, but a brand Laches
new 10 years. (Providence Savings case) • Doctrine of stale demands
• Based upon grounds of public policy which requires, for the peace of society,
A demand letter, acknowledgment of debt, makes the period start ANEW. BUT when and the discouragement of stale claims
it comes to demand or acknowledgement, it must be in WRITING, or else the period • Applies independently of prescription
will not start anew. o Can be successfully interposed even if a shorter time had elapsed &
prescriptive period has not expired
Will the filing of a suit stop the prescriptive period? o Can bar the filing or prosecution of a suit
If the plaintiff had it dismissed himself through his own initiative, it is as if the • Requisites of laches (CDLI)
prescription was not interrupted; prescription continues to run even during the 1) Conduct on the part of the defendant, or of one under whom he claims,
pendency of the case. that causes INJURY to the plaintiff
If it is dismissed for reasons OTHER THAN the volition of the plaintiff, the period is o Giving rise to the situation of which complaint is made & for
interrupted, & the plaintiff will have a fresh 10-year period. which the complaint seeks a remedy
2) Delay in asserting the complainant’s rights
Q: A filed a case against B. A filed a petition for certiorari case in the CA. What A, o The complainant having knowledge or notice of the defendant’s
plaintiff, did is that he withdrew the case from above, and withdrew the case below conduct & having been afforded an opportunity to institute a suit
in the trial court, so that A can re-file the whole case. What happens to the period in 3) Lack of knowledge or notice on the part of the defendant that the
relation to A? complainant would assert the right on which he bases his suit
A: Even if it is at plaintiff’s initiative that the case was dismissed, SC still held it 4) Injury or prejudice to the defendant
would follow the rule on interruption because plaintiff did not withdraw to delay the o In the event relief is accorded to the complainant or the suit is
case, but to hasten proceedings. (Antonio v. Morales). not barred

LACHES PRESCRIPTION
CHAPTER 1. GENERAL PROVISIONS
Effect of delay Fact of delay
Article 1106. By prescription, one acquires ownership & other real rights through the A question of inequity founded on the condition of Matter of time
lapse of time in the manner & under the conditions laid down by law. the property or relation of the parties
In the same way, rights & actions are lost by prescription. Not statutory Statutory
Applies at equity Applies at law
Definition of Prescription Not based on fixed time Based on fixed time
• A statute of repose
• Object is to suppress fraudulent and stale claims from springing up at great CASE: Z.E. Lotho, Inc. v. Ice & Cold Storage
distances of time & surprising the parties or their representatives when the Lesson: Laches applies independently of prescription.
facts have become obscure from the lapse of time or the defective memory Facts: Plaintiff filed a complaint because respondent had been operating in
or death or removal of witnesses plaintiff’s franchise area since 1948, according to plaintiff’s knowledge. Plaintiff’s
material records of the period had already been lost & it made no genuine effort to
• An implied trust is subject to prescription in certain cases
stop the defendant before he filed suit in 1957. Is plaintiff’s claim barred by laches?
Held: Yes. Plaintiff had knowledge since 1948 & failed to assert its rights earlier,
Kinds of Prescription
thus making it difficult for respondent to controvert the correctness of the damages
1. Acquisitive
sought & to avoid further liability. Even if the prescriptive period of 10 years (for
• The acquisition of a right by the lapse of time (Art. 1106, par. 1)
written contracts) had not yet passed, & even if, assuming the use of the prescriptive
• Looking at the acts of the possessor (the claimant in possession) period of 4 years (for “injury to the rights of the plaintiff”) the period had already
• Other names: adverse possession & usucapcion passed, SC ruled that the case dismissed on the ground of laches.
2. Extinctive
• Rights and actions are lost by the lapse of time (Arts. 1106, par. 2 & CASE: Catholic Bishop of Balanga v. CA
1139)
• Looking at the neglect of the owner out of possession

2 | Katrina C. Gaw | Block C 2018

Lesson: Even a registered landowner can lose his right to recover possession of his
registered property by reason of laches, even where prescription fails. However,
there must be colorable title on the part of the defendant.
Facts: Alleged landowner questioned the donation of its representative to the donee,
who already possessed the property peacefully & adversely for 49 years. He claims
that the fact that the property is registered bars the effect of prescription. Is the
claim barred by laches?
Held: Yes. There was laches for failure to act on the part of the donor.
CASE: Jack Arroyo v. Bocago Inland Development
Lesson: As a registered owner, petitioner has a right to eject any person illegally
occupying his property (for example, squatters). This right is imprescriptible and can
never be barred by laches.
Class Discussion
Q: An informal settler has been in your property for 50 years. Can he acquire
property by extraordinary prescription if you did not assert you rights?
A: No, because there is no possession. Possession must have all the attributes
concurring: uninterrupted, peaceful, public, in the concept of owner – but the latter
requisite will not be met because an informal settler knows he does not own the
property. There is thus no juridical possession.
CASE: Heirs of Nieto v. Municipality of Meycuayan
Lessons: For laches & prescription to apply and bar the plaintiff from asserting rights
against the defendant, there must be colorable title on the part of the defendant.
Without any colorable title recognized by law, the rule of laches & prescription will
never apply to registered lands. Hence, the mode of acquisition by which the
possessor acquired the property must be shown.
Facts: The municipality claimed to be the owner of a parcel of land, the certificate of
title of which was in its possession. It set up a public market on the land. However,
the certificate is under the name of Anacleto Nieto; Nieto had surrendered it on the
assumption that the municipality would expropriate the property & then pay him for
the lot. However, the municipality never paid Nieto or his heirs. When the heirs
sought to recover the property from the municipality, the municipality asserted
laches, to bar the claim. Is their argument meritorious?
Held: No. The heirs are not barred by laches. In this case, the municipality failed to
show the mode by which they acquired the property – whether this was by donation,
sale, or otherwise. Instead, what was shown was only that the certificate of title was
delivered to the municipality by Nieto on the belief that the property was to be
expropriated.
Those who occupy the land of another at the latter’s tolerance or permission, without
any contract between them, are bound by the implied promise that the occupants
will vacate the property upon demand.
Furthermore, if the claimants’ possession is merely tolerated by its lawful owner, the
latter’s right to recover possession is never barred by laches. Even if it be supposed
that the Heirs of Nieto were aware of the municipality’s occupation, & regardless of
the length of time that has passed, the lawful owners have a right to demand the
3 | Katrina C. Gaw | Block C 2018
return of their property at any time as long as the possession was unauthorized or
merely tolerated, if at all.
The elements of laches were also not met in this case. Though the municipality
refused to vacate when requested by the Heirs of Nieto in Feb. 1994, the heirs, on
Dec. 1994, filed a complaint in court against the municipality already – there was
therefore no delay in asserting their rights. Since that element is missing, there can
be no laches.
CASE: Tagaytay Realty Co. v. Gacutan
Lesson: Where the one party makes periodic written demands upon the other, this
indicates his intent not to abandon his claim. Laches therefore cannot set against
him.
CASE: Pangasinan v. Disonglo-Almaroza
Lesson: When Sec. 47, P.D. 1529 (governing property registration & certificates of
title) states that registered land is imprescriptible, it refers to acquisitive prescription
– hence, registered land can never be acquired by adverse possession. However,
registered land CAN be acquired by extinctive prescription.
Facts: In 1945, Leoncia & Aquilina (the former’s granddaughter) learned their house
in Tondo, Manila was completely ruined by WW2. They borrowed money from
Conrado, a relative, so they could rebuild. In return, Leoncia entrusted the certificate
of title of a property in Laguna with Conrado. Conrado & his family occupied the
Laguna property & eventually, the name in the certificate was changed to Conrado’s.
In 1995, Aurora, descendant of Aquilina, filed a case to recover the property from
Conrado’s heirs. Will it prosper?
Held: No. All of the elements of laches are present in this case. First, Aurora & her
family entrusted the title of the property back in 1045. Second, it took 5 decades
(1945 to 1996) for the family to make their claim (they only started writing demand
letters against the heirs of Conrado in 1995). Third, Conrado’s heirs had lived all
their lives on the property & were not aware that this claim would be made against
them. Finally, Conrado’s heir would be prejudiced if the claim prospers.
Furthermore, the action has prescribed. While it is true that registered land cannot
be acquired by acquisitive prescription, prescription cannot be a bar when there is
already extinctive prescription. In this case, the action fails not because Conrado &
his family have long occupied the property, but because Aurora & her predecessors
failed to institute their action within the prescriptive period provided in Art. 1144.
Aurora argues that there was an implied trust made in this case because Conrado &
The co-heirs obtained the property through fraud. This would give Aquilina’s heirs,
including Aurora, 10 years from the time the property is registered to reclaim the
property. The property was registered under Conrado’s name in 1965. They thus had
only until 1975 to get the property back. Their failure to do so within that 10-year
period means that Aurora & her co-heirs can no longer seek relief from courts.
Article 1107. Persons who are capable of acquiring property or rights by other legal
modes may acquire the same by means of prescription.
Minors & other incapacitated persons many acquire property or rights by
prescription, either personally or through their parents, guardians or legal
representatives.

Examples of Other Legal Modes
• Donation, sale, inheritance
Acquisition of Minors
If through parents or guardian Completely valid
If acquired personally, without Annullable or voidable
assistance of parents or • BUT: When minor comes of age (e.g., turns
guardian 18), he can ratify the acquisition
Article 1108. Prescription, both acquisitive & extinctive, runs against:
(1) Minors & other incapacitated persons who have parents, guardians, or other
legal representatives;
(2) Absentees who have administrators, either appointed by them before their
disappearance, or appointed by the courts;
(3) Persons living abroad, who have managers or administrators;
(4) Juridical persons, except the State & its subdivisions.
Persons who are disqualified from administering their property have a right to claim
damages from their representatives whose negligence have been the cause of
prescription.
Rules in Art. 1108
• Prescription does not run against the ff.: (MAPSS)
1) Minors & incapacitated persons – unless they have parents,
guardians or other legal representatives
o Ex. If A is insane & has no guardian, prescription does not run
against him; BUT if he has a guardian who takes care of his
affairs, prescription can be applied against him
o GR: Prescription runs against them, because there is a
presumption that they have parents who manage their affairs
o CASE: Vda. De Alberto v. CA – An illegitimate child, represented by
his natural mother, filed for acknowledgement & partition more
than 4 years after the surviving legitimate heirs executed a
partition already. SC ruled that the period had already prescribed,
& there can be no claim of immunity for the illegitimate child
because he had a surviving parent (i.e., his mother).
2) Absentees – unless they have administrators, either self-appointed
prior to disappearance, or court-appointed
o Reason: He cannot manage his affairs because he can’t go back
to his domicile
o BUT: If the absentee CAN go back to his domicile but intentionally
does not want to return, prescription will lie against him
o Art. 381, Civil Code: A judge, at the instance of an interested
party, relative, or friend, may appoint a person to represent an
absentee when he appointed no one or the power he has
conferred has expired
3) Persons living abroad – unless they have managers or administrators
4 | Katrina C. Gaw | Block C 2018
o It must be shown that they cannot return to their domicile within
the period when prescription should have run
4) State and its Subdivisions – unless not acting in their sovereign
capacity, or acting in a proprietary character
o GR: Juridical persons are endowed by law with attributes of a
natural person, & can be subject to prescription
o EXC: Prescription does NOT run against State & its subdivisions
o BUT: State or subdivision must be acting in sovereign capacity;
when it is running a business or acting in a proprietary capacity, it
can be subject to prescription.
o CASE: Republic v. PNB – AFP filed a case for recovery of a sum of
money that PNB negligently paid to unauthorized persons. SC
ruled that prescription did not run, as this was a case against the
State, acting through its instrumentality, the AFP.
o CASE: NDC v. Tobia – NDC is a GOCC filing a collection case. SC
ruled that action had already prescribed. Even if a GOCC is
technically still an instrumentality of the government, it is the
State acting in a proprietary capacity. And even if it was made to
serve a public purpose, it is still a business corporation. Hence,
prescription can lie against a GOCC.
Article 1109. Prescription does not run between husband & wife, even though there
be a separation of property agreed upon in the marriage settlements or by judicial
decree.
Neither does prescription run between parents & children, during the minority or
insanity of the latter, & between guardian & ward during the continuance of the
guardianship.
Husband & Wife
• GR: Prescription does not apply between the husband & wife unless the law
otherwise provides
• EXC: Those provided by law
CASE: Pacio v. Billion
Lesson: There is no prescription between husband & wife, whether acquisitive or
extinctive.
Facts:
A husband made a donation to his 1st wife during their marriage, which is not
considered valid by law. The children of the 2nd wife filed a claim against the children
of the 1st wife in order to recovery the donated property.
The children of the 1st wife, hoping to resist the claims of the children of the 2nd wife,
claimed that, though the donation was void, their mother had already acquired the
lot by prescription because she possessed the property for 29 years already
Held: SC rejected the contention of the children of the 1st wife. There is no
prescription between husband & wife.
Exceptions for Husband & Wife Rules on Prescription (Family Code)
• Legal separation: Must be filed within 5 years from occurrence of the cause
 • Annulment: Must be filed 5 years from the specific point provided by law
o Ex. If the ground is impotency, it must be filed 5 years from the
marriage ceremony
Parent & Child
• GR: No prescription between parent & child during the latter’s insanity or
minority
o Reason: Natural bond of filiation – parents are the natural guardians
of the child without need of court appointment
• EXC: As provided by law, like those in the Family Code
o Ex. A husband may impugn the legitimacy of the child of his wife on
grounds provided by law within 1, 2, or 3 years from his knowledge of
the birth of the child or its recording in the civil registry, depending on
residence of husband & place of birth of child
Guardian & Ward
• GR: No prescription during the period of guardianship
• Reason: Gives adequate remedy to the ward for abuses of guardian
Article 1110. Prescription, acquisitive & extinctive, runs in favor of, or against a
married woman.
Article 1111. Prescription obtained by a co-proprietor or co-owner shall benefit the
others.
Co-Ownership
• When the ownership of an undivided thing or right (e.g. house, business)
belongs to different persons
• Ex. A, B, & C co-own a particular land & all reside in the same.
o If B also occupies a portion of land adjoining the co-owned property, &
acquires it by prescription through public, peaceful, continuous,
adverse possession, his acquisition will benefit himself, A, & C.
Examples of Co-Ownership
• Article 147/148 of Family Code – when a marriage is void or two persons live
together as husband & wife, their property regime is co-ownership
• When a person dies, those who inherit his estate co-own the properties of the
deceased prior to partition
Article 1112. Persons with capacity to alienate property may renounce prescription
already obtained, but not the right to prescribe in the future.
Prescription is deemed to have been tacitly renounced when the renunciation results
from acts which imply the abandonment of the right acquired.
CASE: DBP v. Adil
Lesson: A debt that has already prescribed cannot be enforced by the creditor. But a
new contract assuming the prescribed debt is valid. Hence, where a party
5 | Katrina C. Gaw | Block C 2018
acknowledges the correctness of a debt & promises to pay it after the same has
prescribed & with full knowledge of the prescription, he thereby waives the benefit of
prescription.
Facts:
• Feb. 10, 1940: A husband & wife obtain an agricultural loan from DBP,
evidenced by a promissory note which states they will pay in 10 equal yearly
amortizations
• Even after the lapse of the 10-year period, the obligation remained unpaid
• April 11, 1961: The couple executed a 2nd promissory note expressly
acknowledging the debt & promising to pay on or before June 15, 1961. The
note also said that upon failure to pay upon said date, DBP could foreclose
on the couple’s mortgage.
• Sept. 11, 1970: DBP filed a complaint demanding payment.
Given these facts, has the action against the couple prescribed?
Held: No. The couple waived their right to the prescription of their debt evidenced by
the 1st promissory note when they made the 2nd promissory note expressly
acknowledging their original debt. The 2nd note was not a mere acknowledgement of
a debt that has prescribed, but a new promise to pay the debt. The consideration of
the new promissory note is the pre-existing obligation under the 1st promissory note.
CASE: Caltex v. Aguirre
Lesson: Even if the defendant waives prescription already obtained, for the plaintiff
to be able to use this waiver against him, it should have been given before a
decision on their dispute declaring that prescription has barred the action becomes
final & executory. Otherwise, the plaintiff cannot use the waiver against the
defendant.
Facts: The case here was dismissed on the ground of prescription benefiting the
defendant. The dismissal became final & executory. The defendant, however,
renounced the prescription he had already obtained. May the plaintiff, in a later
case, assert this waiver by the defendant?
Held: No. SC held that it could not consider the waiver as basis to reverse the rulings
of the lower courts, as the dismissal of the complaint had already become final &
binding on both parties.
Article 1113. All things which are within the commerce of men are susceptible of
prescription, unless otherwise provided. Property of the State or any of its
subdivisions not patrimonial in character shall not be the object of prescription.
CASE: Director of Forest Administration v. Fernandez
Lesson: Forestland cannot be acquired by prescription or registered.
Facts: An application was filed for the registration of a particular forest & timber on
the ground of prescription. Will it be granted?
Held: No. Forestlands of the public domain cannot be acquired by prescription; their
possession, however long, cannot ripen into private ownership. They are not
registrable & can never vest a person with title.
CASE: Lovina v. Moreno
Lesson: The ownership of a navigable stream or of its bed is not acquired by
prescription.
CASE: Republic v. CA
Lessons: (1) A particular area adjacent to a bay, which was at times covered by
water due to rain & not due to the rising of the tide, can be registered & subject to
prescription.
(2) Only possession acquired & enjoyed in the concept of an owner can serve as the
root of a title acquired by prescription.
Facts #1: A parcel of land by the bay is covered with water 4-5 months a year due to
the rain. The Director of Lands refused to register the title to said land, claiming it is
part of the lakebed or foreshore land. The Director cited Article 74 of the Law of
Waters of 1866, which provides that a lakebed is the ground covered by the lake’s
waters when at their highest ordinary depth. Is the part of the lakebed that is
submerged only during the rainy season property of public dominion that cannot be
registered?
Held #1: No. The phenomenon is not a regular daily occurrence in the case of the
lake & has nothing to do with high tides or low tides. Note that the law provides that
lakebeds which are non-registrable are determined by the ground covered by the
lake’s water at their highest ordinary depth. The rise & ebbing is caused by the rainy
season (which means that the depth during said season is not the ordinary depth of
the water, since the rainy season lasts only 4-5 months in a given year). Hence, the
part of the property submerged only during the rainy season may be registered &
can be the subject of prescription.
The applicant could also trace his right of title to a public instrument of sale in favor
of his father, from whom he inherited the land, & has tax declarations & tax receipts.
Tax receipts are merely declarations of ownership, but become strong evidence of
ownership acquired by prescription when accompanied by proof of actual
possession of the property.
Facts #2: There were oppositors in this same case who were against the applicant’s
registration with the Director of Lands, because they claimed that they had
reclaimed the land, & were in possession of the property for more than 20 years. Is
the fact of their reclamation & possession enough to vest them with ownership?
Held #2: No. First, reclaimed land does not automatically belong to the person
reclaiming the same – the person reclaiming must get permission from the country’s
reclamation authority first. Since the oppositors failed to show they got the property
authority, their claim fails. Possession must be in the concept of owner for it to be a
root of a title acquired by prescription. In this case, the oppositors entered the
property as lessees of the applicants (from Facts & Held #1). Their eventual refusal
to pay rent cannot be argued as a claim of ownership. Their use of the land & their
non-payment of rentals were merely tolerated by the applicant & these did not ripen
the possession of the oppositors into one of ownership.
Land Registration under the Torrens System (Republic v. CA)
• NOT for the purpose of acquiring lands, but only for the registration of title
which the applicant already possesses over the land
• NOT a means of acquiring ownership
6 | Katrina C. Gaw | Block C 2018
• Even if the land sought to be registered is public land, one can still be entitled
to a judicial confirmation of an imperfect title, if he has also satisfied the
requirements of the Public Land Act (CA No. 141 as amended by RA No.
1942). Sec. 48 of said Act enumerates as among the persons entitled to
judicial confirmation of imperfect title, the following:
o Those who, by themselves or through their predecessors-in-interest,
have been in the open, continuous, exclusive, and notorious
possession and occupation of agricultural lands of the public domain,
under bona fide claim of ownership, for at least 30 years immediately
preceding the filing of the application for confirmation of title.
Things of Public Dominion (Republic v. CA)
• Those which, under existing legislation, are not subject to private ownership
& are reserved for public purposes
• The Civil Code lists the properties which are of public dominion:
o Those intended for public use
§ Ex. Rivers, roads, canals, torrents, bridges constructed by the
State, etc.
o Those which belong to the State without being for public use, for
public service or development of national wealth
• Art. 502, Civil Code lists more: continuous & intermittent waters of springs,
waters rising continuously or intermittently on lands of public domain, lakes,
& lagoons
Article 1114. Creditors and all other persons interested in making the prescription
effective may avail themselves thereof notwithstanding the express or tacit
renunciation by the debtor or proprietor.
Sample Scenario
• Q: A owes B P50,000. C guarantees the indebtedness of B & waives his
benefit of excussion (which means that if A fails to pay B, B need not exhaust
all remedies against A for collection before demanding that C pay in A’s
place). The time within which to pay & to make a demand prescribed but A
nevertheless waives the prescription such that B can still collect from A. If A
fails to pay, hence prompting B to seek payment from C, can C still invoke
prescription even after A’s waiver?
• A: Yes. C can still resist payment by invoking that the collection of A’s debt
has already prescribed; C cannot be prejudiced by A’s waiver because of Art.
1114.
Article 1115. The provisions of the present Title are understood to be without
prejudice to what in this Code or in special laws is established with respect to
specific cases of prescription.
Provisions of the Civil Code with Special Rules for Prescription
• In case of conflict between a period provided in this Title & the period in
another portion of the Civil Code, the more specific provision will prevail.
 • GR: Action on a written contract prescribes in 10 years, while actions on oral kind of case.
contracts prescribe in 6 years. 3. If the prescriptive period under the old The old prescriptive period will apply.
o BUT: Art. 1391 provides that the prescriptive period for annulling a law is still running upon the effectivity of
contract if it is defective due to fraud perpetuated by one of the the Civil Code and the remaining In the example given in Scenario No. 2, if
parties is 4 years from the time the fraud is discovered, which is the balance of such period since the the balance of the period which started
rule whether the contract is oral or written. effectivity of the Civil Code is shorter under the old law is 12 years counted
§ Because this special rule exists for the special situation of than that provided in the Civil Code for from the time of the effectivity of the
annulling a contract due to fraud, then it is this rule that will exactly the same situation Civil Code & the latter provides for 15
apply in fraud situations, not the 10-year, 6-year periods. years as the prescriptive period for
• BUT: If different statutes are involved providing for different prescriptive exactly the same case, the prescriptive
periods, & if the types of cause of action contemplated by these are period under the old law will prevail.
apparently conflicting, they do not exclude each other from being availed of
by the aggrieved parties. CHAPTER 2. PRESCRIPTION OF OWNERSHIP & OTHER REAL RIGHTS

CASE: Callanta v. Carnation Phil. Article 1117. Acquisitive prescription of dominion & other real rights may be ordinary
Held: Though the Labor Code provides that a claim for money in labor cases or extraordinary.
prescribes in 3 years, it will not bar the aggrieved party from availing of the 4-year Ordinary acquisition requires possession of things in good faith & with just title for
prescriptive period for “injury of the plaintiff” provided in Art. 1146 of the Civil Code, the period of time fixed by law.
where the claim is illegal dismissal, since illegal dismissal also results to an injury to
the plaintiff. Kinds of Acquisitive Prescription
• Ordinary – uninterrupted possession in good faith & with just title for the
Article 1116. Prescription already running before the effectivity of this Code shall be required statutory period
governed by laws previously in force; but if since the time this Code took effect the • Extraordinary – uninterrupted possession for the required statutory period,
entire period herein required for prescription should elapse, the present Code shall without good faith or just title on possessor’s part
be applicable, even though by the former laws a longer period might be required.
Ordinary Extraordinary
Rules on Transitory Period for Civil Code Requisites: Requisite: Within the statutory
*Effectivity Date of the Civil Code: Aug. 30, 1950 1. In good faith – a reasonable belief that the period of 30 years
Scenario Effect person from who the thing is received has been
1. If the prescriptive period provided The prescriptive period under the old law the owner thereof, & can transmit ownership
under the old law has already lapsed applies 2. With just title – adverse claimant comes into
before the effectivity of the Civil Code possession through one of the modes recognized
2. If the prescriptive period under the old The Civil Code prevails, provided that by law for the acquisition of ownership or other
law is still running upon the effectivity of such period counted from the effectivity real rights, but the grantor is not the owner or
the Civil Code, but the Civil Code of the Civil Code has already lapsed, cannot transmit any right *NOTE: There is no need for
provides for a different period for the although under the old law the period 3. Within the statutory period of 10 years good faith or just title.
same situation has not yet lapsed. Possession is for 10 years Possession is for 30 years
In either case, possession must be OPPU –
Ex. If under an old law previous to the 1. In the concept of Owner,
effectivity of the Civil Code, X has 30 2. Peaceful
years to file a particular suit and by the 3. Public
time the 1950 Civil Code takes effect his 4. Uninterrupted
remaining time, pursuant to the period
provided by the old law, is only 12 years, CASE: Godinez v. CA
he cannot file the case on the 12th or Lesson: When one is in holding the property in the concept of an Owner, Publicly,
even on the 11th year if the 1950 Civil Peacefully, & in an Uninterrupted manner (OPPU), possession of a piece of land for
Code provides only 10 years as more than the period of time prescribed by law, & acquired such land in good faith &
prescriptive period for exactly the same with just title, acquisitive prescription can apply despite a registered title.

7 | Katrina C. Gaw | Block C 2018

Facts: Felix divided his lot, Lot 665, in favor of his 7 children.
• The judge ordered the adjudication of the lot for a 1/6 share instead of the
1/7 share through a clerical error.
• 5/7 of the land (Lot 665-A) was sold to the Igot spouses while 2/7 (Lot 665-
B) of the land remained with Felix’s heirs
• 39 years later, the judge corrected the original clerical error, & title to the
land of Lot 665 was officially issued as OCT No. 8.
The heirs of Felix once again claimed that Lot 665-A was theirs due to the title
granted in OCT No. 8. Will the claim of the heirs of Felix prosper?
Held: No. The Igots had been in OPPU possession for more than half a century after
they bought the land from the Magsumbols, who had bought the land from the heirs.
The laws as well as common sense favored the Igots. OCT No. 8 did not nullify the
original sale.
Article 1118. Possession has to be in the concept of an owner, public, peaceful, &
uninterrupted.
Requisites for Acquisitive Prescription by Possession (OPPU)
Possession must be –
1. In the concept of Owner (concepto de dueño)– possessor asserts dominion
on the property to the exclusion of all others
o Must be an adverse possession
o Acts of possessory character executed due to license or by mere
tolerance of the owner are inadequate (e.g., as usufructuary, trustee,
an agent, lessee, or mortgagee)
o GR: Mere possession with a juridical title cannot ripen into ownership
by acquisitive prescription
§ EXC: When juridical title is expressly repudiated & such
repudiation has been communicated to the other party
o CASE: Ramirez v. CA – an antichretic creditor cannot ordinarily acquire
by prescription the land surrendered to him by the debtor, because his
possession is not in the concept of owner
o CASE: Republic v. CA – the U.S. Navy’s possession of a property for
recreational purposes only, resembling commodatum,1 without actual
claim of ownership & in the concept of a mere borrower, can never
translate to acquisitive prescription because the holding of the
property by the U.S. Navy was merely transient; hence, the original
owners remain the real owners of the contested property
o CASE: Ramos v. CA – SC ruled that acquisitive prescription had set in.
In the case, the title was already in the possessor, who was in OPEC
since 1934, & who had undertaken acts clearly showing his claim of
ownership, such as paying taxes evidenced by tax declarations &
receipts for several years
§ SC further held that the period for acquisitive prescription
began to run upon the issuance of the certificate of title in the
1 He who lends to another a thing for a definite time, to be enjoyed and used under certain conditions,
without any pay or reward (i.e., loaning or borrowing a thing to another).
8 | Katrina C. Gaw | Block C 2018
name of the possessor exclusively on May 12, 1934, & action
to recover said property prescribed after 10 years, thus barring
the petitioner’s plea, given that he filed his case in 1973.
§ Registration of deed of sale in the Office of the Registry of
Deeds serves as constructive notice to the whole world of its
contents & interests, legal & equitable, included therein
2. Public – there must be a notorious holding of the property known to the
community
o Possession must not be of surreptitious character; it must be in the
concept of owner
3. Peaceful – there must be no valid interference from others claiming or
asserting the right to the property for the period of time required by law for
acquisitive prescription to apply
4. Uninterrupted – possession must be continuous & unbroken, & not merely
intermittent or occasional
Article 1119. Acts of possessory character executed by virtue of license or by mere
tolerance of the owner shall not be available for the purposes of possession.
Possession by Consent of Owner
• That the possessor holds a property with the consent of the owner shows that
the possessor acknowledges that somebody else owns the property
• This produces no effect with respect to possession or prescription
CASE: Coronado v. CA
Lesson: When there is proof that a possessor expressly acknowledged the ownership
of another, & he never categorically claims ownership over the property in question,
he cannot have acquired said property by prescription.
Facts: Monterola executed a deed of donation in favor of Coronado, acknowledging
that the boundary owner of the property conveyed to her was Juana. During the
lifetime of the late Monterola, Juana was always allowed to enter & reap the produce
of said property. After Monterola died in 1970, Coronado prohibited Juana’s entry to
the property. Were the actions of Coronado proper?
Held: No. Even if Monterola was indeed in continuous possession of the said
property for over 10 years, said possession cannot be the basis for prescription.
Possession must be in the concept of owner, & must be adverse. Acts of possessory
character performed by mere tolerance of the owner are clearly not in the concept of
owner, & such possessory acts, no matter how long so continued, do not start the
running of the period of prescription.
Article 1120. Possession is interrupted for the purposes of prescription, naturally or
civilly.
Interruption
• Possession must be uninterrupted
• There must be a continuity in the holding of the property to strengthen the
adverse right of the possessor
• Ways to Interrupt Prescription:
 o Natural – if through any cause it shall cease for more than 1 year
o Civil – produced by judicial summons to the possessor
Article 1121. Possession is naturally interrupted if through any cause it should cease
for more than 1 year.
The old possession is not revived if a new possession be exercised by the same
adverse claimant.
Article 1122. If the natural interruption is for 1 year or less, the time elapsed shall be
counted in favor of prescription.
Example for Natural Interruption
Q: A is in possession of an unregistered property in the concept of an owner in good
faith & with a just title. The land used to be owned by B, but B became insolvent &
the property was sold in a public auction to answer for B’s indebtedness to the
government. A was the highest bidder at the auction. A had already been in
possession of the land for 4 years.
• Z appears and claims that the property is his. Z requests A to vacate the
premises so that A will not be entangled in a possible suit. A leaves to avoid
further complications.
• HOWEVER, Z was a defrauder — it was actually M who previously purchased
the property from B before A made his purchase.
o When A learns this, he returns to the property after 2 years
o A continues to stay in the said lot for 7 years, making his total time
spent actually living in the lot 11 years.
o The law requires 10 years of adverse, public, peaceful &
uninterrupted possession in the case of real property.
M comes & asserts his claim, requesting that A leave the place. Can A invoke
acquisitive prescription to counter M’s claim?
A: No. When A left the property for 2 years, his subsequent possession of 7 years
cannot be added to his previous 4 years. In effect, the period material for purposes
of prescription is the subsequent 7 years only.
• BUT: if A only left the place for 1 year or less, prescription would already have
set in — if he had left only for 1 year, he would already have stayed there for
12 years in the eyes of the law.
Article 1123. Civil interruption is produced by judicial summons to the possessor.
Article 1124. Judicial summons shall be deemed not to have been issued & shall not
give rise to interruption:
(1) If it should be void for lack of legal solemnities.
(2) If the plaintiff should desist from the complaint or should allow the
proceedings to lapse.
(3) If the possessor should be absolved from the complaint.
In all these cases, the period of the interruption shall be counted for the
prescription.
General Rule: Civil Interruption
9 | Katrina C. Gaw | Block C 2018
• Interrupted upon receipt of the possessor of the judicial summons after the
filing of the complaint
o When the possessor receives the judicial summons & the copy of the
complaint, because only then does the court acquire jurisdiction over
the person
• Does NOT start upon the filing of the complaint in court
Exceptions
• Judicial summons shall be deemed not to have been issued, & will not give
rise to interruption, when:
1) Summons is void for lack of legal solemnities
o If the summons is served by a person not authorized by the court,
it shall be deemed as not issued
2) When the plaintiff desists from the complaint or allows the
proceedings to lapse
o Desistance – voluntarily having the case dismissed
3) When the possessor is absolved from the complaint
o Absolution – the complaint has not been fully substantiated to
support any adverse claim by the complainant
o Presumption of good faith on part of possessor if there is lack of
proof
CASE: Heirs of Tanyag v. Gabriel
Lesson: A notice of adverse claim will not suffice as civil interruption for purposes of
prescription; there must be judicial summons. Judicial summons implies that the
claimants filed a case in court against the possessors AND that there was already
summons issued & received by the possessors.
Facts: Petitioners’ adverse possession of the disputed property began in 1969, with
the issuance of a tax declaration in their favor, which in turn cancelled the tax
declaration of respondents. Furthermore, since then, petitioners were in actual
possession of the property, with their caretaker living in a nipa hut on the premises
& planting vegetables in the lot. In 1979, respondents began to assert that they
were the true owners of the property. In 1998, respondents even got a certificate of
title in their favor. Are the actions of respondents enough to interrupt the
prescription that has set in favor of petitioners?
Held: No. There was never judicial summons that were sent to petitioners & it was
already held in previous cases that judicial summons is necessary; a notice of
adverse claim would not be enough for civil interruption. So long as no action is filed
against the petitioners in court by respondents within the period for prescription,
then there is no civil interruption.
In this case, from 1969 until the filing of the complaint by the petitioners (& NOT the
respondents who argued in favor of civil interruption) in 2000, the petitioners had
been in OPPU possession of the disputed property. That would mean the petitioners
had been in possession for 301 years already. This means that the petitioner have
already acquired the property, & their right to it is not defeated by the respondents’
acts of declaring again the property for tax purposes in 1979 & obtaining the
certificate of title in 1998.
Article 1125. Any express or tacit recognition which the possessor may make of the
owner’s right also interrupts possession.
Recognition
• Possession must always be in the concept of an owner to the exclusion of all
others
o One cannot consider himself possessing a property adversely in the
concept of an owner if he recognizes somebody else as having a
superior right
CASE: Diñoso v. CA
Lesson: When there is a redemption period, acquisitive prescription only begins to
run after the expiry of said redemption period.
Facts:The seller & the buyer executed a contract of sale in Apr. 6, 1940 giving the
seller the right to repurchase the property on or before Apr. 6, 1950. The buyer
immediately took possession of the property.
In 1952, the buyer filed a suit for recovery, asserting ownership over the property. Is
there already prescription in this case?
Held: No. The possession of the buyer under the sale a retro 2 did not actually
become adverse until the expiration of the redemption period, since until then he
recognized the superior right of the vendor to oust him, & his claim of ownership was
not absolute. Since the redemption period expired only in 1950, & the case was filed
in 1952, there was no acquisitive prescription yet.
Article 1126. Against a title recorded in the Registry of Property, ordinary prescription
of ownership or real rights shall not take place to the prejudice of a 3rd person,
except by virtue of another title also recorded; & the time shall begin to run from the
recording of the latter.
As to lands registered under the Land Registry Act, the provisions of that special law
shall govern.
CASE: Dimayuga v. CA
Lesson: No title to registered land in derogation to that of the registered owner shall
be acquired by prescription or adverse possession.
Facts: A couple acquired a 13-hectare household registered under the Torrens
System in 1928. The illegitimate children claimed 1/2 of the same on the ground
that they acquired it by acquisitive prescription having been in the property since
1948. Will the claim of the children prosper?
Held: No. No portion of the homestead, a registered land, may be acquired by
prescription.
CASE: Reyes v. CA
Lesson: There is no prescription when parcel of land is titled property; it belongs to
the registered owner & his successors-in-interest.
2 Sale with a right to repurchase
10 | Katrina C. Gaw | Block C 2018
Facts: The petitioner acquired a registered property through a forged document. Said
petitioner claimed acquisitive prescription against the heirs of the original owners.
Can the petitioner’s case prosper?
Held: No. The parcel of land in dispute is titled in the name of the late Bernardino
Reyes, the father of both the petitioner Florentino & the private respondents. This
fact, petitioners do not deny. Hence, even if they allege adverse possession that
would ripen into ownership due to acquisitive prescription, their title cannot defeat
the real rights of respondents who stepped into the shoes of their father as
successors-in-interest. As it is, petitioners cannot even claim adverse possession as
they admit that the respondents continue to reside on the subject property.
*CASE: Catholic Bishop of Balanga v. CA
Lesson: Although prescription will not apply to registered property, the doctrine of
laches is applicable.
Facts: The petitioner donated registered property to a person who, including his
successors-in-interest, took possession of the same adversely, continuously, publicly
and peacefully for 49 years.
Thereafter, the petitioner filed a case to recover the property contending that the
donation is invalid, & that, in either case, the property is registered & hence not
susceptible to prescription. Will the claim of petitioner prosper?
Held: No. Even if there is no prescription due to the registered title, the petitioner
was guilty of laches. Laches is an impediment to the assertion or enforcement of a
right which has become, under the circumstances, inequitable or unfair to permit.
In this case, 49 years had lapsed since the supposedly void donation & there is no
explanation for the long delay. Even if petitioner is the registered owner under the
Torrens system, he has lost his right to recover the possession by reason of laches.
BUT Recall - CASE: Heirs of Nieto v. Municipality of Meycuayan (in Art. 1106)
Lesson: Laches will not apply to registered land if the possessor did not obtain it
through any apparent mode of acquisition to assert his claim or colorable title. In
that case, there was no evidence that the property was transferred to the person
claiming laches either through a donation or an expropriation, or that any
compensation was paid by the municipality for the use of the property.
Article 1127. The good faith of the possessor consists in the reasonable belief that
the person from whom he received the thing was the owner thereof, & could
transmit his ownership.
Article 1128. The conditions of good faith required for possession in Articles 526,
527, 528, & 529 of this Code are likewise necessary for the determination of good
faith in the prescription of ownership & other real rights.
Civil Code Provisions on Good Faith
• Art. 526. Who is a possessor in good faith?
o One who is not aware that there exists in his title or mode of
acquisition any flaw which invalidates it.
o One who is aware of any flaw is in bad faith.
 § BUT: Mistake upon a doubtful or difficult question of law may
be the basis of good faith.
• Art. 527. Good faith is always presumed.
o The one who alleges bad faith on the part of the possessor has the
burden of proving his allegations.
• Art. 528. When is possession in good faith lost?
o In the case & from the moment facts exist which show that the
possessor is not unaware that he possesses the thing improperly or
wrongfully
• Art. 529. It is presumed that possession continues to be enjoyed in the same
character in which it was acquired, unless the contrary is provided
CASE: Negrete v. CFI Marinduque
Lessons: (1) When the possessor is aware of any flaw in his possession, such as
when the deed of sale giving him his right to a property stated a different property
from the one he possesses, he is in bad faith & cannot acquire by ordinary
acquisition the property in question.
(2) A deed of sale, to constitute a just title & to generate good faith for ordinary
acquisitive prescription, should refer to the same parcel of land which is adversely
possessed.
Facts: A person claimed a particular property by virtue of ordinary acquisitive
prescription of 10 years based on a deed of sale which he knew involved a different
property. Is the property his by acquisitive prescription?
Held: No. The deed of sale covers a parcel of land patently different from the
disputed land owned as to area, location & boundary owners. To claim ordinary
acquisitive prescription, one must have just title & be in good faith.
If the possessor’s position were to be sustained, it would be easy for anyone to
acquire ownership of an untitled land belonging to another person in 10 years on the
basis of a document of sale covering a distinct parcel executed by a person who is a
stranger to the land.
CASE: Reyes v. CA
Lesson: Knowingly using a forged document to base one’s just title for purposes of
acquisitive prescription is an act of bad faith.
Facts: The petitioners forged the deed of sale & simulated the signatures of the
private respondents. The land is titled. Can the petitioners now claim to have
acquired the property by ordinary acquisitive prescription?
Held: No. Petitioners cannot justify their ownership & possession of the subject
parcel of land by ordinary acquisitive prescription, since they are in bad faith. Also,
the forged deed containing respondents’ simulated signatures is a nullity & cannot
serve as a just title.
CASE: Magtira v. CA
Lesson: Good faith cannot be invoked if the claimant has actual or constructive
notice of the legal & valid rights of possession of another during the prescriptive
period. Thus, if there is constructive notice (because of a title in the Registry of
Deeds) that a possessor was occupying a lot that claimant argues is his, but the
11 | Katrina C. Gaw | Block C 2018
latter fails to file a case within 10 years to defend his right, he cannot invoke good
faith.
Facts: Zacarias filed an Affidavit of Consolidation of ownership with the Registry of
Deeds in 1945 & enjoyed OPPU possession of the litigated property. Sofia, the
person claiming to own the disputed lot in this case, only found out in a cadastral
survey conducted in 1955 that Zacarias was actually occupying the lot. Sofia filed a
complaint, arguing that the same property was hers, in 1956. Can Sofia still claim
that there was no acquisitive prescription?
Held: No. Contrary to Sofia’s claim, the period of prescription should be reckoned not
merely from the time she came to know of the claim of Zacarias during the cadastral
survey in 1955, but from the date of registration of the Affidavit for Consolidation
with the Register of Deeds because registration of an instrument in the Office of the
Register of Deeds constitutes constructive notice to the whole world.
Article 1129. For the purposes of prescription, there is just title when the adverse
claimant came into possession of the property through one of the modes recognized
by law for the acquisition of ownership or other real rights, but the grantor was not
the owner or could not transmit any right.
Article 1130. The title for prescription must be true and valid.
Article 1131. For the purposes of prescription, just title must be proved; it is never
presumed.
True & Valid Title
• NOT actually “titulo verdadero y valido” – the equivalent of a title which is
sufficient to transfer ownership without the necessity of the lapse of the
prescriptive period
• Actually refers to a colored title (titulo colorado)
o When a person buys a thing, in good faith, from one whom he believes
to be the owner
o Acts for acquisition required by law are performed, but there is a flaw in
that the grantor was not the owner & could not transmit the right
• NOT merely a putative title – one which is supposed to have preceded the
acquisition of a thing, although in fact it did not, as might happen when one is
in possession of a thing in the belief that it had been bequeathed to him
CASE: Doliendo v. Biarnesa
Lesson: Acquiring a property through a public auction, which was actually already
sold by the owner to another person prior to the auction, unbeknownst to the buyer
from the auction, is an example of just title.
Facts: A person bought property in a valid public auction & continued possession of
the property thereafter for more than 10 years.
Prior to the sale made in the public auction, there was a first purchaser of the
property previous to the death of the original owner. The officer in charge still listed
the property as one to sell in the public auction.
Held: Even if it be proved that the land in question was not lawfully included in the
list, still the defendant’s title by prescription must be sustained, since it is clear that
the sale at public auction did take place, that the transaction was in good faith, & Acquisitive Prescription for Movables
that the defendant bought the land from one whom he believed to have the right to Ordinary Extraordinary
sell. Requisites: Requisites:
1. Good faith 1. Uninterrupted possession
CASE: Solis v. CA 2. In the concept of owner, public, 2. Within the statutory period
Lesson: A donation propter nuptias is sufficient to create or establish just title of the adverse, & uninterrupted
possessors of the land as donees. 3. Within the statutory period
• Even a void donation may be the basis of a claim of ownership. Thus, 4 years 8 years
prescription can apply on void donations.
• The right given by ordinary acquisitive prescription is not dependent upon, & CASE: Dira v. Tanega
has no necessary connection, with the validity of the claim under which the Lesson: Good or bad faith is irrelevant in acquisitive prescription of movables if 8
possession is held. years have already passed.
*NOTE: This is different from the Catholic Bishop case, because there, the Facts: A & B were partners in a printing business. B borrowed money from A,
contention was more about the fact that the property was registered. If the property pledging some of his stocks to A, but neglected to pay his obligations, even after
is registered, prescription cannot apply, but laches can apply. demand. A thus conducted himself as the absolute owner of the printing equipment
of the partnership. A also assumed ownership of the stocks pledged by the
CASE: Faculan-Fudalan v. Spouses Ocial delinquent partner in connection with his obligations.
Lesson: (1) Occupation or use alone, no matter how long, cannot confer title by B filed a case for accounting of the partnership assets only after 14 years from the
prescription or adverse possession unless coupled with the element of hostility time A conducted himself as the owner of the shares & equipment. Can B still claim
towards the true owner (i.e., with possession under claim of title. the properties?
(2) A compromise agreement cannot be made the foundation that a possessor is in Held: No. SC rejected the claim of the delinquent partner that a trust relationship
good faith & has just title enough to acquire a lot by ordinary acquisitive prescription. existed between B & A, because A already acquired the movables by acquisitive
Facts: Baldomera claimed that her family had acquired ownership over the lot in prescription.
controversy by ordinary acquisitive prescription by merely occupying the lot. No
documentary evidence was shown that title was ever transferred to Baldomera or Article 559 & 1505 of the Civil Code
her ancestors. She also never denied that there was a tax declaration in the name of • Both statutes apply in the ff. cases: (LIP)
Fuderanan over the same property. However, Baldomera & the heirs of Fuderanan 1) The right of the owner to recover personal property Lost
executed a compromise agreement to settle their claims over the land, under which, 2) The right of the owner to recover that which he has been Illegally
Baldomera alleged, the heirs waived their rights over the land for a sum of P1,000. deprived
Can Baldomera claim ordinary acquisitive prescription? 3) The right of the owner over movables acquired in a Public sale, fair,
Held: No. Baldomera was not able to prove “just title” which is one of the market or merchant’s store
requirements for ordinary acquisitive prescription. There is no documentary proof or • Art. 559 – Possession of a movable property acquired in good faith is
other showing how title of the lot was transferred to Baldomera. equivalent to a title.
The compromise agreement cannot also be made her basis for claiming ordinary o If one who has lost any movable or has been unlawfully deprived
acquisitive prescription because the elements of good faith & just title would not be thereof may recover it from the person in possession of the same.
shown by this kind of agreement. A compromise agreement, by its nature, entails § If the possessor said movable lost is acquired it in good faith at
having the parties agreeing to something they may not actually want, for the sake of a public sale, the owner cannot obtain its return without
peace. It thus did not create or transmit ownership rights over the subject property. reimbursing the price paid therefor.
• Art. 1505 – When goods are sold by a person who is NOT the owner thereof,
Article 1132. The ownership of movables prescribes through uninterrupted without authority or consent of the owner, the buyer acquires no better title to
possession for 4 years in good faith. the goods than the seller had
The ownership of personal property also prescribes through uninterrupted o UNLESS the owner of the goods is, by his conduct, precluded from
possession for 8 years, without need of any other condition. denying the seller’s authority to sell
With regard to the right of the owner to recover personal property lost or of which he o HOWEVER, this Title shall not affect:
has been illegally deprived, as well as with respect to movables acquired in a public 1. The provisions of any factors’ acts, recording laws, or any other
sale, fair, or market, or from a merchant’s store, the provisions of Articles 559 & provisions of law enabling the apparent owner of goods to
1505 of this Code shall be observed. dispose of them as if he were the true owner thereof;

12 | Katrina C. Gaw | Block C 2018

 2. The validity of any contract of sale under statutory power of
sale or under the order of a court of competent jurisdiction;
3. Purchases made in a merchant’s store, or in fairs, or markets,
in accordance with the Code of Commerce and special laws.
Article 1133. Movables possessed through a crime can never be acquired through
prescription by the offender.
Movables from a Crime
• No one must benefit by illegal acts
• Ex. If A stole B’s car, A can never acquire title over the property, even if
prescription already lapsed, & even if B did not make a demand for the return
of the car
CASE: Tan v. CA
Lesson: When a movable possessed through a crime is passed on to another
person, whether the latter is in good or bad faith, prescription begins to run.
Furthermore, the act of possession must be through a crime, & not simply
unsubstantiated fraud & bad faith.
Facts: A claims that, through bad faith & fraud, he was led to assign his shares of
stocks in 1977 to 3 corporate entities. In 1987, A filed a case to reconvey the
shares. Can A still claim the shares?
Held: No. The action is barred by prescription; Article 1133 does not apply. There is
nothing in this case that shows the bad faith was criminal.
*Note: The benefits of prescription may be denied to the offender, but if the thing
was in the meanwhile passed to a subsequent holder, prescription begins to run (4
or 8 years, depending on existence of good faith).
Article 1134. Ownership and other rights over immovable property are acquired by
ordinary prescription through possession of 10 years.
Ordinary Prescription of Immovables
• 10 years of possession by the adverse claimant
o Must be by virtue of a just & valid title
o Must be in the concept of owner, uninterrupted, adverse, & public
Article 1135. In case the adverse claimant possesses by mistake an area greater, or
less, than that expressed in his title, prescription shall be based on the possession.
Actual Possession
• Extent of property subject to the prescription shall be the one actually
possessed or held by the claimant
o Regardless of size indicated or described in the title
• When someone buys or sells a property, they do so as they see it, in its actual
setting & in its physical metes & bounds, not by the lot number in the
certificate of title
Article 1136. Possession in wartime, when the civil courts are not open, shall not be
13 | Katrina C. Gaw | Block C 2018
counted in favor of the adverse claimant.
Possession During Wartime When Civil Courts are Closed
• Possession of adverse claimant during wartime will not count in acquisitive
prescription
o Because when the civil courts are closed, there is no way by which any
person claiming title over a certain property can file a case to recover
the same
• If there is a war BUT courts are functioning, possession of adverse claimant
will be counted in his favor
Article 1137. Ownership & other real rights over immovables also prescribe through
uninterrupted adverse possession thereof for 30 years, without need of title or of
good faith.
Extraordinary Prescription of Immovables
• 30 years of uninterrupted adverse possession
• No need for just title or good faith
CASE: Parcotilo v. Parcotilo
Lesson: Even if an invalid will was not executed with all the requisites for a valid will
or donation, the said document can still supply the basis for extraordinary
prescription to begin to run.
Facts: A man had adverse possession over a particular land by virtue of an invalid
will for 30 years.
Held: Extraordinary prescription had set in despite the invalid will, as the man had
uninterrupted, adverse, continuous possession for 30 years.
CASE: Heirs of Amarente v. CA
Lesson: Alienable public land held by a possessor, personally or through his
predecessors-in-interest, openly & continuously for the prescribed statutory period of
30 years under the Public Land Act, is converted into PRIVATE PROPERTY by the
merely lapse of time or completion of said period.
Facts: Petitioners were forcibly driven off a property by the local barangay, which
claimed that the land was agricultural land of the public domain.
Petitioners’ ancestor occupied the particular alienable public land, where he planted
several trees, & where his grandchildren (herein petitioners) had all grown up in,
until the trees were already 70 years old, as demonstrated by the circumference of
their trunks. Can the local barangay claim that the property is still public land?
Held: No. The petitioners are already the owners of the lot, even before the formal
confirmation of their title to the property, because they acquired it by vested right.
The property has already been acquired by extraordinary acquisitive prescription as
possession has exceeded 30 years.
CASE: Faculan-Fudalan v. Spouses Ocial
Facts: Baldomera claims that she & her family managed to obtain the property in
dispute by extraordinary acquisitive prescription. Baldomera & the heirs of
Fuderanan executed a compromise agreement to settle their claims over the land in
1994, under which, Baldomera alleged, the heirs of Fuderanan waived their rights
over the land for a sum of P1,000. Can Baldomera claim extraordinary acquisitive
prescription?
Held: No. Baldomera’s possession cannot yet have ripened into extraordinary
acquisitive prescription because 30 years had not yet lapsed (again, the
compromise was executed only in 1994 so 30 years from then would be 2024).
Furthermore, the records reveal that there was an interruption of Baldomera’s
possession, when in 2001, the Spouses Ocial filed a complaint before the barangay
captain & conciliation proceedings were held, although no settlement was reached.
On the other hand, the heirs of Fuderanan had already acquired the property by
extraordinary acquisitive prescription when they were driven out of the lot, for they
had already occupied the public land for 30 years. This also converted the property
from public land, by their possession, into private land, even before their total was
formally confirmed under the Public Land Act.
*See Art. 1311 for digest of other matters tackled in this case.
Article 1138. In the computation of time necessary for prescription the ff. rules shall
be observed:
(1) The present possessor may complete the period necessary for prescription by
tacking his possession to that of his grantor or predecessor in interest;
(2) It is presumed that the present possessor who was also the possessor at a
previous time, has continued to be in possession during the intervening time,
unless there is proof to the contrary;
(3) The first day shall be excluded & the last day included.
Rules for Computation of Time
(1) The present possessor may complete the period necessary for prescription by
tacking his possession to that of his grantor or predecessor in interest
o The words “grantor” & “predecessor in interest” connote a transfer in
a manner provided by law of property from one person to another
o Ex. B donated a property to A
§ Previously, property was already in B’s possession for 8 years
§ A can make use of the 8 years for purposes of prescription
§ If A stays for another 3 years, his period of possession will
already be 11 years
o CASE: South City Homes, Inc. v. Republic
§ Lesson: Tacking possession is allowed only when there is a
privity of contract or relationship between the previous &
present possessors. If there is no privity, the possession of the
new occupant is counted only from the time it actually began; it
cannot be lengthened by connecting it with the possession of
the former possessors.
§ Facts: Possessor X acquired Lot A by purchase & Lot B by
assignment in 1981. X wants to claim possession of a strip of
land designated as Lot C, which is adjacent to, but not included
in, Lots A & B. There was no previous owner of Lot C.
X continued to occupy Lot C, believing it was included in Lot A
& B. He claimed in a case in 1983 that the possession of the
14 | Katrina C. Gaw | Block C 2018
previous owners of Lot A, B, & C should be tacked onto his
possession. Is his contention valid for Lot C?
§ Held: No. For Lot A & B, there is no need to tack on possession
because it was acquired ownership by assignment & by
purchase; & such ownership naturally includes the right of
possession. As for Lot C, however, it was never transferred by
any previous possessor, & was not part of the contract by
assignment & purchase (which, again, only included Lots A &
B). Hence, possession of Lots A & B cannot have the effect of
allowing X to tack onto his possession of Lot C the possession
of any previous owner.
A deed does not of itself create privity between the grantor &
grantee as to land not described in the deed but occupied by
the grantor in connection therewith, although the grantee
enters into possession of the land not described & uses it in
connection with what was conveyed. Thus, where a grantor
conveys a specific piece of property, the grantee may not tack
onto the period of his holding an additional piece of property
the period of his grantor’s occupancy thereof to make up the
statutory period. His grantor did not convey such property or his
interest therein, and there is no privity.
§ Ex. from case: A acquires 40 acres by deed & 40 acres by
purchase & adverse possession. Conveyance by him of the 40
acres acquired by deed would NOT carry with it the title to the
one acquired by purchase & adverse possession.
o Art. 1135 (on possession by mistake of an area greater or lesser than
that expressed in the title) in relation to Art. 1138
§ Possession should be limited only to that of the successor-in-
interest
(2) Presumption that the present possessor who was also the possessor at a
previous time, have continued to be in possession during the intervening
time, unless there is proof to the contrary.
o Presumption must proceed from a set of facts.
§ There must be a prior showing of the FACT that the person
presently possessing the property was the same who
possessed it before the intervening time.
o Ex.: X possessed the property in 1997. It was shown he also
possessed it in 1988.
§ It is presumed that he was in possession from 1989 to 1996.
o Presumption can be destroyed if evidence can be adduced to show
that he was not in possession during the interval.
(3) First day shall be excluded & the last day included.
o Ex.: If a person possessed a property in Jan. 1, 1980 up to Jan. 15,
1990, then the counting of the period starts from Jan. 2, 1980 up to
Jan. 15, 1990.
CHAPTER 3. PRESCRIPTION OF ACTIONS
Article 1139. Actions prescribe by the mere lapse of time fixed by law.
Prescription of Actions (also known as the “statute of limitations”)
• GR: Law fixes the time within which an action may be filed
o If the prescribed time lapses, action cannot be filed anymore
• EXC: If parties agree to a different period by contract, the period the parties
agree on will prevail over the rules for prescription of actions.
Application of Rules for Prescription of Actions
• Applies only in civil cases
• NOT in criminal cases or special proceedings
Article 1140. Actions to recover movables shall prescribe 8 years from the time the
possession thereof is lost, unless the possessor has acquired the ownership by
prescription for a less period, according to Article 1132, & without prejudice to the
provisions of Articles 559, 1505, & 1133.
Rules on Movable Property
• GR: A person can recover lost personal or movable property which he claims
belong to him within 8 years.
• EXC: If all the requisites for ordinary acquisitive prescription of a movable
property are present, the possessor of the same becomes the owner after 4
years.
CASE: Tan v. CA
*Repeated discussion; see Art. 1132
Lesson: There are 2 periods for purposes of extinctive prescription, vis-a-vis
movables: (1) 4 years, if possessor is in good faith; & (2) 8 years, in all other cases.
BUT when the movable is lost due to a crime, the offender can never acquire the
movable by prescription. The action to recover the movable from the criminal is
imprescriptible. But for the action to recover to be imprescriptible, then the act must
be a crime – mere bad faith & abuse of right is not enough to make an act a crime.
Facts: Petitioner claims that he, through bad faith & fraud, was led to assign his
shares in 1977 to 3 corporate entities; he filed a case for reconveyance on 1987.
Can petitioner still claim the property?
Held: No. The action had already prescribed, because the petitioner had at most 8
years to recover the property. Further, the assignment of shares was not proven to
be criminal in character. It was, at most, in bad faith or abuse of right.
CASE: Dira v. Tanega
*Repeated discussion; see Art. 1132
Lesson: Shares to a company are movables; bad faith or good faith is irrelevant in
extraordinary acquisitive prescription, & the right to recover property prescribes
together with the title in such a case.
Facts: Partner X took possession of the shares of co-partner Y who refused to pay his
obligations & participate in the partnership. X kept the uninterrupted, adverse
possession, of the shares from 1947 to 1961. Y seeks to recover the shares, &
15 | Katrina C. Gaw | Block C 2018
claims that only a trust relationship was created in the intervening period. Can the
shares still be recovered?
Held: No. There has been extraordinary acquisitive prescription.
Other Rules Governing Prescription of Actions
*Repeated discussion; see Art. 1132
• Art. 559 – Possession of movable property in good faith is equal to title.
o But a person who loses his movable or is unlawfully deprived of it may
recover it from the person in possession of the same
o But the owner has to reimburse the new possessor for the price he
paid if the movable was acquired (1) in good faith or (2) in a public
sale
• Art. 1505 – When goods are sold by a person who is NOT the owner thereof,
without authority or consent of the owner, the buyer acquires no better title to
the goods than the seller had
o UNLESS the owner of the goods is, by his conduct, precluded from
denying the seller’s authority to sell
o BUT: This Title shall not affect:
(1) The provisions of any factors’ acts, recording laws, or any other
provisions of law enabling the apparent owner of goods to
dispose of them as if he were the true owner thereof;
(2) The validity of any contract of sale under statutory power of
sale or under the order of a court of competent jurisdiction;
(3) Purchases made in a merchant’s store, or in fairs, or markets,
in accordance with the Code of Commerce and special laws.
• Art. 1133 – Movables possessed through crime can never be acquired by
prescription.
Article 1141. Real actions over immovable prescribe after 30 years.
This provision is without prejudice to what is established for the acquisition of
ownership & other real rights by prescription.
Rules on Immovable Property
• Prescriptive period – 30 years
o IF within 30 year period, all the requisites for ordinary acquisitive
prescription are already present in favor of possessor, the possessor
becomes the owner after 10 years
o If it’s extraordinary acquisitive prescription, the right to sue prescribes
with the acquisition of the title
Article 1142. A mortgage action prescribes after 10 years.
Mortgage
• Secures a debt, so that if a debtor fails to pay the principal obligation, the
creditor can foreclose on the mortgage by selling the same in a public sale or
bidding; the proceeds will pay off the principal debt & interest if any
o If there is any deficiency after the bidding, the creditor can still go
after the debtor
 • Considered as an accessory contract
CASE: DBP v. Tomeldan
Lesson: A suit for recovery of the deficiency after the foreclosure of a mortgage is in
the nature of a mortgage action & prescribes after 10 years after the date of
extrajudicial foreclosure.
Facts: The creditor extrajudicially foreclosed the property of the debtor on Sept. 15,
1967. The creditor then filed suit in Mar. 14, 1977 to claim the deficiency. The
debtor claimed that the action already prescribed; was he correct?
Held: No. The action did not yet prescribe, because the prescriptive period was 10
years from the time the cause of action accrued, which was on Sept. 16, 1967. The
prescriptive period to claim a deficiency starts to run after the mortgage property has
been foreclosed.
Article 1143. The ff. rights, among others specified elsewhere in this Code, are not
extinguished by prescription:
(1) To demand a right of way, regulated in Article 649;
(2) To bring an action to abate a public or private nuisance.
Actions Which Do Not Prescribe (V-RN-QT-P; V Right Now, Cutie Pie!)
(1) To declare a contract null & Void
(2) To demand a Right of way, as regulated in Art. 649
(3) To abate a public or private Nuisance
(4) To Quiet title initiated by a person having possession of the property
(5) Implied Trusts, unless when expressly repudiated by the trustee
(6) To Partition a property among co-heirs (intestate)
Article 1144. The ff. actions must be brought within 10 years from the time the right
of action accrues:
(1) Upon a written contract;
(2) Upon an obligation created by law;
(3) Upon a judgment.
Contracts in Writing
• To fall under this article, agreement must be in writing
• Ex. Written contract of sale – barring applicability of laches, the purchaser
has 10 years to file a case for delivery of the property
• Cause of action – accrues when a breach or violation of the contract occurs
Right of Action
• Accrues when there exists a cause of action, which consists of 3 elements:
1) A right in favor of the plaintiff, by whatever means & under whatever
law it arises or is created
2) An obligation on the part of such defendant to respect such right
3) An act or omission on the part of such defendant violative of the right
of the plaintiff
o It is only when this last element occurs that it can be said in law
that a cause of action has arisen
16 | Katrina C. Gaw | Block C 2018
CASE: Espanol v. Philippine Veterans Association (PVA)
Lesson: When it comes to laws or policies of government, right of action against
them only begins when said laws or policies are declared by courts to be invalid.
Facts: PVA issued an administrative policy. As a result, the pension of a veteran’s
widow, which she received under RA65, was cancelled on Nov. 1, 1951.
• SC struck down said policy as invalid on June 27, 1973.
• Widow filed the complaint for collection on Feb. 25, 1974.
PVA claims the action has already prescribed. Has it prescribed?
Held: No. The contention that the action had already prescribed because it was filed
more than 10 years from the date of cancellation of the pension is without merit. It
was only when SC invalidated the questioned policy on June 27, 1973 that the
petitioner in this case had a cause of action.
Implied Trusts (Doctrines from Huang v. CA)
• This is an example of an obligation created by law
• Art. 1450: A situation where a person, using his own funds, buys property on
behalf of another, who in the meantime may not have the funds to purchase
it — title to the property is for the time being placed in the name of the
trustee, the person who pays for it, until he is reimbursed by the beneficiary,
the person for whom the trustee bought the land.
• An implied trust, whether a constructive or resulting one, is normally NOT
subject to prescription.
o BUT: If the trustee openly & repudiates the trust, it is only from that
time when prescription can set in, because that is the time when
possession becomes adverse.
§ Period: 10 years from the repudiation of the trust
• Counted from date of registration of the deed or the date
of issuance of the certificate of title over the property
• Before the period of prescription can start, it must be shown that:
1) The trustee performed unequivocal acts of repudiation amounting to
an ouster of the cestui que trust3
2) Such positive acts have been made known to the cestui que trust
3) Evidence thereon is clear & convincing
Article 1145. The ff. actions must be commenced within 6 years:
(1) Upon an oral contract;
(2) Upon a quasi-contract.
Oral Contracts
• Must be commenced within 6 years from the time the cause of action
accrues
• Ex. A orally borrowed P2,000 from B to be paid on June 1, 1997
o B failed to pay on the date despite demand from A
o A has 6 years from June 1, 1997 to file a case of collection against B
3Cestui que trust – a person who has the equitable and beneficial interest in property the legal interest in
which is vested in a trustee

Quasi-Contracts
• Certain lawful, voluntary & unilateral acts give rise to the juridical relation of
quasi-contracts such that no one shall be unjustly enriched at the expense of
another
• Governed by Book IV, Title XVII, Chapter 1 of Civil Code
• Ex. Solutio indebiti – when something is received when there is no right to
demand it, & it has been delivered through mistake; this gives rise to the
obligation to return what has been unduly received
o Ex. When a taxpayer mistakenly pays an amount which is not due,
prescriptive period is 6 years as it is a quasi-contract of solution
indebiti
Article 1146. The ff. actions must be instituted within 4 years:
(1) Upon an injury to the rights of the plaintiff;
(2) Upon quasi-delict.
CASE: Virgilio Callanta v. Carnation Phil., Inc.
Lesson: “Injury to rights of plaintiff” includes illegal dismissal cases filed by
employees who were unjustly dismissed by employers.
Facts: Employee was illegally dismissed by his employer on June 1, 1979 & filed a
case with NLRC for illegal dismissal on July 5, 1982. NLRC dismissed the case on
the ground that it had prescribed, as the Labor Code provides that such claim should
be filed within 3 years. Has the action prescribed?
Held: No. The prescriptive period is 4 years, not 3. One’s employment is also
considered a property right. Employee has 4 years from June 1, 1979 to file a case
for illegal dismissal.
Also, the action cannot be barred by laches because the employer threatened to file
a case of estafa against the employee. This justifies the employee’s delay to file suit.
Quasi-Delict
• Art. 2176: Whoever by act or omission causes damage to another, where
there is no pre-existing contractual relation between them there being fault or
negligence, shall pay for the damage done.
• Governed by Book IV, Title XVII, Chapter 2 of the Civil Code
• Ex. The fault or negligence resulting in the liability of manufacturers &
processors of foodstuffs, drinks, toilet articles & similar goods
o They are liable for death or injuries caused by any noxious or harmful
substances used, although no contractual relations exist between them
& the consumer
CASE: Coca-Cola Bottlers Philippines, Inc. v. CA
Lesson: The prescriptive period for quasi-delict begins to run from the day the quasi-
delict occurred or is committed.
Facts: A restaurant filed a complaint on May 7, 1990 against Coca-Cola, because of
the reckless & negligent manufacture of some Coke bottles, which contained “fiber-
like matter & other foreign substances” in them.
17 | Katrina C. Gaw | Block C 2018
The restaurant had served the drinks to customers on Aug. 1989, damaging its
reputation, as those who drank them suffered sickness.
Coca-Cola contends that action had prescribed, since the period should be 6 months
from the delivery of the thing sold pursuant to Article 1571 of the Civil Code. Is Coca-
Cola correct?
Held: No. The allegations in the complaint established a quasi-delict, the action of
which prescribes in 4 years.
CASE: Kramer, Jr. v. CA
Lesson: Determination of administrative body not necessary for filing a case for
quasi-delict; the period for prescription still begins from the day the quasi-delict is
committed, regardless of the date of the issuance of the related administrative
ruling
Facts: 2 vessels collided. The aggrieved party did not wait for the determination by
the Board of Marine Inquiry (an administrative body) that the collision was caused by
the fault or negligence of the other party before filing for damages & immediately
filed suit. It was argued that the action in court was premature because the
administrative body should have been allowed to decide the issue first. Is the
contention correct?
Held: No. The aggrieved party need not wait for the determination of the Board to file
suit. The part can immediately seek relief from the court by alleging negligence or
fault of the owners, agents, or personnel of the vessel.
CASE: Allied Banking Corp. v. CA
Lesson: Tortious interference is a quasi-delict & action accrues from the time the act
which causes the damage occurs (in this case, the order of the Central Bank).
Facts: The debtor filed a third party complaint on June 17, 1987, alleging that “by
reason of the tortious interference by the Central Bank with the affairs of GENBANK,
he was prevented from performing his obligation under the loan such that he should
not be held liable.” The “tortious interference” was the Central Bank’s ordering
GENBANK on Mar. 25, 1980 to desist from doing business. Can the debtor still file
the case?
Held: No. The complaint was barred by prescription, because cause of action
accrued on Mar. 25, 1980, & from then there were only 4 years left to file the case.
Article 1147. The ff. actions must be filed within 1 year:
(1) For forcible entry;
(2) For defamation.
CASE: Vda. de Borromeo v. Pogoy
Lesson: The period for filing actions for forcible entry is 1 year, & is counted from
demand to vacate the premises.
Facts: X wrote a letter against occupant Y on Aug. 28, 1982, demanding that the
latter vacate the property. Later, X filed the complaint for ejectment on Sept. 16,
1982. X did not avail of the barangay conciliation process required, but justified
such omission by citing PD 1508, which allows the direct filing of an action in court
where the same may otherwise be barred by the Statute of Limitations. Are X’s
actions of skipping barangay conciliation justified?
Held: No. The process under PD1508 for barangay conciliation only takes 60 days. X
would have had ample time within which to bring his case before the court should
the conciliation fail, because there were at least 11 months between the letter-
demand & the complaint for ejectment. Hence, X should not have skipped the
barangay conciliation process.
Article 1148. The limitations of action mentioned in Articles 1140 to 1142, & 1144
to 1147 are without prejudice to those specified in other parts of this Code, in the
Code of Commerce, and in special laws.
“Without Prejudice”
• In proper cases, the prescriptive period in this chapter may be availed of
notwithstanding other special provisions in the Civil Code, Code of Commerce
& special laws
o A statute of limitation extinguishes the remedy only.
o Although the remedy to enforce a right may be barred, that right may
be enforced by some other available remedy when it is not barred.
• Ex. In CASE: Virginio Callanta v. Carnation Phil., Inc., SC applied prescription
period in Art. 1146 (4 years for injury to the rights of the plaintiff) for a case
of illegal dismissal even if the Labor Code provided for a period of 3 years
Article 1149. All other actions whose periods are not fixed in this Code or in other
laws must be brought within 5 years from the time the right of action accrues.
Article 1150. The time for prescription for all kinds of actions, when there is no
special provision which ordains otherwise, shall be counted from the day they may
be brought.
CASE: Tolentino v. CA
Lesson: (1) In civil cases, when there is no special provisions, the general rule for
prescription is 5 years. All actions, unless an exception is provided, have a
prescriptive period.
(2) The use of someone else’s surname is not a crime, & therefore is not
imprescriptible.
Facts: C is the 2nd spouse of B. C filed an action in 1971 against A, B’s former
spouse, to prevent A from using the surname of her husband. C knew about the use
of the name since 1951. Has the action prescribed?
Held: Yes. The mere fact that the supposed violation of C’s right is continuous, in
that A constantly uses B’s name, does not change the principle that the moment the
breach of duty occurs, the right of actions accrues & the action from that moment
can be legally instituted.
Article 1151. The time for the prescription of actions which have for their object the
enforcement of obligations to pay principal with interest or annuity runs from the last
payment of the annuity or of the interest.
Article 1152. The period of prescription of actions to demand the fulfillment of
obligations declared by a judgment commences from the time the judgment
18 | Katrina C. Gaw | Block C 2018
becomes final.
Actions Regarding Payment
• Period begins to run from the last payment of the annuity or interest
Final Judgment
• The prescription period is not counted from the time the judgment was
rendered but from the time it became final
• Revival of Judgment – gives the creditor a new right of enforcement from the
date of revival
o Prevents wily debtors who conceal assets to evade attachment until
statute of limitations sets in
Article 1153. The period for prescription of actions to demand accounting runs from
the day the persons who should render the same cease in their functions.
The period for the action arising from the result of the accounting runs from the date
when said result was recognized by agreement of the interested parties.
Actions in relation to Accounting
• Actions to demand accounting – from the day the person who should render
the same ceases in his functions
• Actions arising from the result of accounting – from the date when the result
was recognized by agreement of the interested parties
CASE: Dira v. Tanega
Lesson: The right to demand accounting by one partner to another begins when the
other partner stops allowing the demanding partner to make use of the shares &
operates the business as his own.
Facts: Partner X took possession of the shares of co-partner Y, who refused to pay
his obligations & participate in the partnership despite repeated demands. X kept
the uninterrupted, adverse possession, of the shares from 1947 to 1961, &
managed the business on his own.
Y seeks to recover the shares, & claims that only a trust relationship was created in
the intervening period. Has the action prescribed?
Held: Yes. The action has prescribed in 1947, when X began to operate the business
exclusively as his own.
Article 1154. The period during which the obligee was prevented by a fortuitous
event from enforcing his right is not reckoned against him.
Fortuitous Event
• Unseen event or seen event which is inevitable; an act of God
• When, due to some fortuitous event, prescription is interrupted, an entirely
new one will commence when there is no longer a fortuitous event
o In other words, past period is not resumed
o Opposite of “suspension” in this aspect
CASE: Provident Savings Bank v. CA
Lesson: When prescription starts anew, it will be an entirely new one
Facts: A loan was granted to debtors by a bank, collateralized by their properties.
The bank was placed under receivership from 1972 until 1981 by the Monetary
Board & was prohibited from transacting business, including foreclosing properties.
The debtors failed to pay the obligation, but promised to; meanwhile, they sold the
property to a purchaser who assumed the mortgage.
• On Aug. 16, 1986, the purchaser informed the bank that he was the
judgment creditor & wanted to release the mortgage by paying the
indebtedness. He filed a case to compel the release.
• On Aug. 21, 1986, the debtors wrote a letter to the bank asking if they could
pay their debt through payment received in the Deed of Sale.
Has the action of the bank to foreclose on the mortgage already prescribed?
Held: No. The action for the bank to foreclose on the mortgage did not prescribe yet,
because of the Monetary Board prohibition between 1972-1981 (this was
considered a fortuitous event). The prescriptive period ran anew in 1981. The bank
thus had until 1991 to file a case to foreclose on the mortgage.
The express acknowledgement by the debtors of the debt also estopped them from
setting up prescription.
CASE: Tan v. CA
Lesson: Martial Law & the period from Sept. 21 1972-Feb. 25 1986 cannot be seen
as a fortuitous event which tolled prescription for all obligations; effect of fortuitous
events on prescription must be seen from a case-to-case basis.
Facts: During the Marcos Regime, Tan was detained for several offenses, & during
that time sold his shares in a particular bank in 1977, claiming he only did it due to
fraud & bad faith. Tan sought to recover the shares by filing suit for reconveyance in
1987, claiming legal standing based on fortuitous event. Has Tan’s action
prescribed?
Held: Yes. The effect of fortuitous events on an individual & on prescription should
be seen on a case-to-case basis. In this case, while in detention, Tan was still able to
file multiple suits through his counsel. Thus, detention was not a fortuitous event
that served as an impediment to a judicial challenge for Tan.
Article 1155. The prescription of actions is interrupted when they are filed before the
court, when there is a written extra-judicial demand by the creditors, & when there is
any written acknowledgment of the debt by the debtor.
Interruption of Prescription
1) When they are filed before the court
• The dismissal or voluntary abandonment by the plaintiff of a civil
action takes no time out of the period of prescription, because it
would be as if no action had been commenced at all
• The prescriptive period is interrupted from the date of filing,
regardless of the date when the summons is received
2) When there is a written extra-judicial demand by the creditors
3) When there is any written acknowledgment of the debt by the debtor
• Not all acts of acknowledgment of a debt interrupt prescription; the
acknowledgment must be written
19 | Katrina C. Gaw | Block C 2018
• Ex. A letter acknowledging the validity of a deed of sale & promising to
comply with its commitments interrupts the period & begins it anew
for another 10 years (written contract)
• Payment interrupts the running of the prescription period.
o But if acknowledgment is written BUT payment is not
accompanied by communication signed by the payor, payment
would not interrupt the running of the prescription period
CASE: Ledesma v. CA
Lesson: A written extrajudicial demand wipes out the period that has already
elapsed & starts anew the prescriptive period. Said period would commence anew
from the receipt of the demand.
• Same rule for a written acknowledgement of debt — the full period of
prescription commences to run anew from the date of interruption.
• Also, when it comes to the filing of cases, the filing arrests the period of
suspension, & the interruption lasts until the time that the dismissal becomes
final. Then, the full time for the prescription must be reckoned from the date
of the cessation of the interruption.
o While case is pending, prescription is interrupted.
Facts: Aug. 21, 1980 – RCBC filed a civil case against X to enforce the terms of a
Trust Receipt Agreement executed on April 1, 1974 which X failed to comply with
• Mar. 3, 1981 - Summons could not be served to X, so case was dismissed
without prejudice to any future proceedings
• Dec. 2, 1988 – RCBC filed another case against X for the same cause of
action & subject matter
X contends that the second action filed by RCBC already prescribed. Is X correct?
Held: No. The action did not prescribe, because the filing of the first action
interrupted the period. The period began to run again on Mar 3. 1981, when the
case was dismissed.
CASE: Cabrera v. Tiano
Lesson: The commencement of a suit prior to the expiration of the applicable
limitation period interrupts the running of the statute, as to all parties to the action.
The date of filing of summons is of no moment.
Facts: The sale of property was made on July 2, 1947. The action was filed on June
20, 1957. But summons was served upon the defendant only on July 2, 1957. Has
the action prescribed?
Held: No. The fact that summons was only served on defendant on July 2, 1957,
which incidentally or coincidentally was the end of the 10-year period, is of no
moment, since the civil actions are deemed comment from the date of the filing of
the complaint with the Clerk of Court, without taking into account the issuance &
service of summons.
CASE: Olympia International v. CA
Lesson: While a civil action stops the running of the statute of limitations, the
dismissal or the voluntary abandonment by the plaintiff of a civil case leaves the
parties in exactly the same position as if no action had commenced at all. The
commencement of an action, by reason of its dismissal or abandonment, takes no
time out of the period.
CASE: Tambunting v. Sps. Sumabat
Lesson: An action to enforce a right arising from a mortgage is to be enforced within
10 years from the time the right of action accrues.
Facts: The debtors defaulted on their obligations in May 1977. They filed a civil case
to restrain the foreclosure of their properties, but the case was dismissed on Nov. 9,
1977 for their failure to attend the hearing.
• Mar. 16, 1979 – Debtors filed a case to question the amount of their
accountability to the creditor; but the proceeding was void because the court
had no jurisdiction
• 1995 – The creditors initiated foreclosure proceedings against the debtors
Can the 1995 case filed by the creditors prosper?
Held: No. The action has prescribed. The right of action of the creditors accrued from
the time in May 1977 when the debtors defaulted on their loan. It was from that
time that the 10-year period commenced. The period was interrupted when the
debtors filed a civil case sometimes after May 1977. However, the period
commenced to run again on Nov. 9, 1977 when the case was dismissed.
CASE: Camarines Sur IV Electric Cooperative v. Aquino
Facts: The first case here was filed in 2003. After the first case was dismissed for no
cause of action, it was appealed to the higher courts. Final judgment for this first
case was made only in 2009. In 2010, the second case was filed. Has the action
prescribed?
Held: No. The second case was filed within the prescriptive period. The prescriptive
period was interrupted because it was not the plaintiff who had the case dismissed,
nor did the plaintiff abandon the case.
CASE: Antonio, Jr. v. Morales
Lesson: Even if it is the plaintiff that causes the dismissal, there will still be an
interruption if the case is dismissed precisely so that the plaintiff can file a different
one to expedite the resolution of his case. For a plaintiff’s causing of a dismissal to
cause the prescriptive period to run again, the dismissal must be because of the
plaintiff’s inaction, negligence, inaction, lack of interest, or intent to abandon a
lawful claim. Only this type of dismissal, caused by the plaintiff, would bar
subsequent suit by prescription.
Facts: X filed an action on Dec. 16, 1995 based on an oral contract, which remained
pending in the CA for more than 6 years. Feeling that the pendency of the CA case
would be indefinite, X had the case dismissed so he could re-file another case. CA
dismissed the case on June 11, 2004. Meanwhile, X re-filed the case before the
RTC, this time on Sept. 23, 2002. Has X’s action prescribed?
Held: No. While the first case was dismissed on X’s motion, the dismissal was not a
voluntary abandonment of his claim. He in fact had it dismissed to expedite the
enforcement of his rights. Furthermore, delays in the first case before the CA were
beyond his control since it was the CA that had the other party comment & which
took a long while to make a decision on the case.
20 | Katrina C. Gaw | Block C 2018
CASE: PNB v. Osete
Lesson: For the acknowledgment of a debt to interrupt prescription, the
acknowledgment must be written. Payment, if not coupled with a communication
signed by a payor, would not interrupt the running of prescription.
CASE: Ramos v. Condez
Facts: On June 25, 1952, defendant sold to plaintiff a piece of land. The same
defendant, upon demand by the plaintiff, recognized the sale on Nov. 10, 1956, &
promised to deliver the property. The action was filed by plaintiff on May 22, 1963.
Has the action prescribed?
Held: No. The defendant’s letter on Nov. 10, 1956 acknowledging the debt
interrupted the running of prescription. Hence, the action has not yet prescribed.
CASE: Republic v. Banez
Doctrine: A letter sent by the agent, on behalf of the principal, acknowledging a debt,
binds the principal, & is enough to interrupt the prescriptive period. Likewise, a letter
sent to the agent, making a demand, interrupts the prescriptive period.
Facts #1: Hojilla (agent of respondents) sent a letter dated Aug. 15, 1984 to
petitioner which stated that “the preparation of the advance survey plan &
engineer’s certificate has been submitted to the Regional Land Office & was
approved by the Register of Deeds, & that “Atty. C is preparing the papers for
submission to the local court.” Does this letter constitute acknowledgment on the
part of Hojilla of the existence of a contract enough to interrupt the prescriptive
period?
Held #1: Yes. The letter updated petitioner on the status of the subject property’s
title, an obligation the parties agreed on by contract. It would thus be specious to
argue that the contract was not acknowledged. Because Hojilla’s letter served as a
written acknowledgment of the debt, it interrupted the prescriptive period & set the
same running anew.
In a contract of agency, the agent acts for & in behalf of the principal on matters
within the scope of the authority conferred upon him, such that, the acts of the
agent have the same legal effect as if they were personally done by the principal.
Because there is an express authority granted upon Hojilla to represent the
respondents, as evidenced by the SPA, Hojilla’s actions bind the respondents.
Facts #2: Petitioner sent Hojilla respondents a letter which stated, “Under the
agreement, X shall pay the whole of the purchase price when the certificate of title is
issued. In view of this, demand is hereby made upon you & your principals to return
the properties withdrawn & to unlock the gates leading to the staff-houses within the
15 days from receipt thereof, otherwise we will be constrained to institute the
necessary action to protect the interest of X.” Another letter by petitioner also
demanded that respondents discontinue the construction, repair, demolition, &
occupancy of several staff-houses, & this letter said, “Demand is hereby made upon
you to discontinue such unauthorized acts & vacate the premises within 15 days
from receipt hereof.” Did these letters constitute a proper demand?
Held #2: Yes. Clearly, the letters called on respondents to return the property,
discontinue the construction, repair, demolition, & occupancy of several staff-
houses, & unlock the gates, which is to enforce the obligations of respondents under
the contract. This is true even if the letter was not sent to the respondents, but to
Hojilla, their agent. A letter sent to the agent making a demand interrupts the TITLE I. – OBLIGATIONS
prescriptive period.
Facts #3: The contract between the parties said that the obligation to present the CHAPTER 1. GENERAL PROVISIONS
title to the property would be due “within a reasonable time.” When did the cause of
action accrue? Article 1156. An obligation is a juridical necessity to give, to do, or not to do.
Held #3: The cause of action accrued (hence giving rise to the right to make a
demand which could have the effect of interrupting the prescriptive period) at the Obligation
point when the reasonable time within which to present title had lapsed. Reasonable • A legal bond whereby constraint is laid upon a person or group of persons to
time means so much time as is necessary under the circumstances for a reasonable act or forebear on behalf of another person or group of persons
& diligent man to do, conveniently, what the contract or duty requires that should be • “Persons” – both natural & juridical
done, having a regard for the rights & possibility of loss, if any, to the other party. • Requisites for the existence of an obligation: (JOS)
This reasonable time was clarified in the subsequent letter sent by Hojilla dated Aug. 1) Juridical tie (vinculum juris) – the efficient cause established by the
15, 1984, in which the respondents acknowledged their remaining obligation to various sources of obligations (e.g. law, contracts, quasi-contracts)
petitioner. This letter gave rise to a cause of action that could be filed against the 2) Object – the prestations or conduct required to be observed (to give,
respondents; & since the debt arose from a written contract, the petitioners had 10 to do or not to do)
years, or until Aug. 15, 1994, to file the suit. The subsequent letters then 3) Subject-persons – viewed from demandability:
continuously renewed the prescriptive period, again, giving an opportunity to sue a. Active – obligee
again for another 10 years. b. Passive – obligor
SUMMARY CHARTS FOR PRESCRIPTION OF ACTIONS Article 1157. Obligations arise from:
[Taken from Crombonds] (1) The law
(2) Contracts
Summary of Prescription of Actions (3) Quasi-contracts
Art. 1140 Movables 8 years (4) Acts or omissions punished by law (delicts)
Art. 1141 Immovables 30 years (5) Quasi-delicts
Art. 1142 Mortgages 10 years
Art. 1143 Right of way, public or private nuisance None Sources
Art. 1144 Written contracts, obligations created by law, judgment 10 years • List is exclusive – no other sources of obligations
Art. 1145 Oral contract, quasi-contract 6 years • Kinds:
Art. 1146 Injury to the plaintiff, quasi-delict 4 years 1) Civil – give a right of action to compel their performance
Art. 1147 Forcible entry & detainer, defamation 1 year 2) Natural – not based on positive law, but on equity & natural law
Art. 1149 All other actions with no fixed periods 5 years o Does not grant a right of action to enforce their performance
*Arts. 1140-1142, 1144-1147 are without prejudice to those specified in other o BUT after voluntary fulfillment by the obligor, they authorize the
parts of the Code, the Code of Commerce, and in special laws (Art. 1148) retention of what has been delivered or rendered by reason
thereof
When Prescription Shall Begin to Run
Art. 1150 All kinds of actions where no From the day they may be brought CASE: Metrobank v. Rosales
provision provides otherwise Facts: A bank withheld the deposit of a depositor pursuant to a hold-out clause in
Art. 1151 Enforcement of obligation to pay From the time of last payment the contract between the bank & the depositor. The bank’s ground for withholding
Art. 1152 Enforcement of judgment From the time judgment became the deposit was that the depositor committed a fraudulent transaction. Was the
final bank allowed to withhold the deposit?
Demand accounting From the time the person Held: No. The hold-out clause (which allowed the bank to withhold the deposit) as
responsible ceases to perform provided in the contract was supposed to be PURELY for obligations owed by the
Art. 1153 depositor to the bank. This case did not fall under the hold-out clause because the
Bring action from the result of From the day result was recognized
accounting by agreement of interested parties depositor owed no obligation to the bank. There are only 5 sources of obligations
under the Civil Code & none of them were involved here. There was only an
BOOK IV: OBLIGATIONS AND CONTRACTS allegation that there was a fraudulent transaction involved, but no obligation owed
by the depositor was established. Though a criminal case was filed by the bank

21 | Katrina C. Gaw | Block C 2018

against the depositor, this is not enough reason to hold-out the deposit of the
depositor as there is no final judgment of conviction which would make the depositor
liable under delict to the bank. Considering that the depositor is not liable under any
of the 5 sources of obligations, there was no legal basis for the bank to issue the
hold-out order.
Article 1158. Obligations derived from law are not presumed. Only those expressly
determined in this Code or in special laws are demandable, & shall be regulated by
the precepts of the law which establishes them; & as to what has not been foreseen,
by the provisions of this Book.
Law
• Most important source of obligation
• An exaction or command that is forced upon you; not dependent on the will of
the parties
• Basis must be clear & cannot be presumed
o The payment of taxes must be specifically directed by tax statutes
o Parents & children are obliged to support each other
o Even a 1-page labor contract contains the entire Labor Code
o BUT: “Thou shalt not kill” – NOT an obligation as understood herein
• Existing law enters into & forms part of a valid contract without need for the
parties expressly making references thereto
o A contract is understood to incorporate therein the provisions of law
specifying the obligations of the parties under the contract
o All other forms of obligations also have underlying statutes governing
them
*Article 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
Components of Obligations Arising from Contracts
1) Complying in good faith – unwritten, but implied
2) Observing the stipulations in the contract – expressly written
Contracts
• There are express, implied, oral, & written contracts
• A meeting of the minds between 2 persons whereby one binds himself, with
respect to another, to give something or to render some service
o May involve more than 2 persons
o May involve mutual & reciprocal obligations & duties between &
among the parties
• “Force of law between contracting parties” – obligatory nature of a binding &
valid agreement
o Willful non-fulfillment may involve sanctions
o Binding between the parties so long as they are not contrary to law,
morals, good customs, public policy, or public order
22 | Katrina C. Gaw | Block C 2018
• Once a contract is perfected, the parties are bound not only by what is
expressly stipulated, but also to all the consequences which, according to
their nature, may be in keeping with good faith, usage, & the law
CASE: Perla Compania de Seguros, Inc v. CA
Lesson: Contracts have the force of law between the parties, & the court cannot
change its stipulations & substitute the content with its own interpretation, even if
some provisions seem unfair, for as long as the essential requisites for validity are
present.
Facts: There was an insurance contract which stipulated that the insurer’s liability for
all damages arising out of death or bodily injury by one person was limited to
P12,000. It also said that, before the insured enters into a contract with the injured
party, the express written consent of the insurer must be obtained. CA substituted
these provisions with their own interpretation of equity. Was CA correct to do so?
Held: No. Contracts are the private laws between the contracting parties & should be
fulfilled according to the literal sense of their stipulations, for as long as the
stipulations are clear & leave no room for doubt as to the intention of the parties.
*CASE: Tiu v. Platinum Plans Phil.
Lesson: (1) A non-involvement or non-complete clause is valid, so long as it sets
reasonable limitations as to time, trade, & place. It is also valid to stipulate
liquidated damages would be paid by the employee if the employee fails to comply
with the non-compete clause.
(2) Liquidated damages awarded for violation of a non-compete clause may be
reduced if unjustified; but if the employee did not show, that from the beginning, she
intended to comply with the non-compete clause in good faith, the court can choose
not to reduce liquidated damages.
Facts: A contract between an employer & employee provided: “The employee
undertakes that during his engagement with the employer, & in case of separation
from the company, whether voluntarily or for cause, he shall not, for the next 2
years, be involved with any company engaged in the same business or the same pre-
need industry as the employer. Any breach would make the employee liable to pay
the employer P100,000 as liquidated damages.” Is such a contract valid?
Held: Yes. A non-involvement clause is valid & cannot be considered in restraint of
trade as long as there are reasonable limitations as to time, trade, & place. Here, the
non-involvement clause has a time limit of 2 years from the time of the end of the
employment of the employee. Also, it is limited as to trade, since it only prohibits the
employee from working in the pre-need company akin to the employer’s, & not all
industries. And finally, because the employee here was the Senior AVP in charge of
the employer’s HK & ASEAN operations, she was privy to highly confidential &
sensitive information of the employer. To allow her to engage in a rival business
soon after she leaves would make the employer’s trade secrets vulnerable,
especially given the highly competitive marketing environment.
SC thus ultimately held that the employee must pay the employer P100,000 in
liquidated damages, as stipulated in the contract. While in some cases, the SC
equitably reduced these damages, SC held it would not in this case because it
appeared even from the start that the employee did not have even the least
intention to fulfill the non-involvement clause in good faith.

Class Discussion
Q: Is a non-compete or non-involvement clause, which stops a former employee from
working in a competitor company, valid?
A: Yes, so long as it is not unreasonable. For example, one for 6 years would still be
considered reasonable under current jurisprudence.
*CASE: Deiparine v. CA
Lesson acc. to M: In all contracts, when one is in bad faith, one has absolutely no
remedy, even on equitable grounds – none whatsoever; zero!
Facts: The contractor deviated from the plans & specifications of the building. After a
testing, it was shown that there were real defects that impaired the strength of the
building. Can the contractor be made liable?
Held: Yes. Art. 19 of the Civil Code provides that “every person must, in the exercise
of his rights and in the performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith.” Also, obligations arising from contract
have the force of law between the parties & must be complied with in good faith.
Article 1160. Obligations derived from quasi-contracts shall be subject to the
provisions of Chapter 1, Title XVII, of this Book.
Quasi-contracts
• Certain lawful, voluntary & unilateral acts to the end that no one shall be
unjustly benefited or enriched at the expense of another
• Ex. Solutio indebiti – obligation to return what was obtained by mistake; when
something is received when there is no right to demand it & it was unduly
delivered by mistake, the obligation to return it arises
Class Discussion
Q: Are quasi-contracts implied contracts?
A: No. In a contract, there is a meeting of the minds. In quasi-contracts, there is no
meeting of the minds. However, a quasi-contract is enforced like a contract to avoid
unjust enrichment.
Article 1161. Civil obligations arising from criminal offenses shall be governed by the
penal laws, subject to the provisions of Article 2177, & of the pertinent provisions of
Ch. 2, Preliminary Title, on Human Relations, & of Title XVIII of this Book, regulating
damages.
Requisites of Obligations in Relation to Delicts
1. Juridical Tie – crime committed
2. Prestation – to give damages
3. Subject – obligor (offender); obligee (victim)
Civil Liability in Criminal Liability
• Civil liability attaches to any individual who is found to be criminally liable
• Civil Code Statutes on Damages:
23 | Katrina C. Gaw | Block C 2018
o Art. 2176 – defines quasi-delicts: “whoever by act or omission causes
damage to another, there being fault or negligence, is obliged to pay
for the damage done.”
§ BUT: Art. 2177 – The plaintiff shall not be entitled to recover
damages twice for the same act or omission of the defendant
even if the negligence may constitute an entirely different
cause of action
o Arts. 19-36 – give a person or persons cause of action for filing
damage suits (requires only preponderance of evidence).
§ Article 29 – When accused is acquitted because he is not
proved guilty beyond reasonable doubt, civil action for the
same act may be instituted.
• If the judgment of acquittal is based on reasonable
doubt, the court shall so declare or it may be inferred
from the text of the decision.
§ Art. 30 – When a separate civil action is brought arising from a
criminal offense & no criminal proceedings are filed during the
pendency of the civil case, preponderance of evidence is
sufficient to prove the act complained of.
§ Art. 32 – Violation of enumerated constitutional rights can
make one liable for damages, whether or not the act
constitutes a criminal offense.
• EXC: When the crime is committed by a judge, unless
his act is a violation of the Penal Code or other penal
statutes
§ Art. 33 – An entirely separate & distinct action from the
criminal case can be filed for civil damages in cases of:
• Defamaton
• Fraud
• Physical Injuries
§ Art. 34 – When a member of a city or municipal police force
refuses or fails to render aid or protection to any person in
case of danger to life or property, he can be made primarily
liable for damages.
• The municipality or city is also subsidiarily responsible.
o Title XVIII of the Civil Code – the rules covering damages
§ Rules laid down in other laws shall likewise apply so long as
they are not inconsistent with the Civil Code
Article 1162. Obligations derived from quasi-delicts shall be governed by the
provisions of Chapter 2, Title XVII of this Book & by special laws.
Quasi-delicts Defined
• The act or omission which causes damage to another, there being fault or
negligence & no pre-existing contractual relation
• Those persons liable for quasi-delicts are obliged to pay for the damage done.
CHAPTER 2. NATURE & EFFECT OF OBLIGATIONS.

Article 1163. Every person obliged to give something is also obliged to take care of it
with the proper diligence of a good father of a family, unless the law or the
stipulation of the parties requires another standard of care.
Determinate Object
• Article involves prestation “to give”
• “Something” – refers to a determinate object which is definite, known, & has
already been distinctly decided & particularly specified as the matter to be
given from among the same things belonging to the same kind
• Ex. Computer with serial no. 7777 (not just any kind of computer)
Class Discussion
Q1: X will give Y a fruit for P1. Is there a contract?
A1: There is no contract. The object must at least be generic. The thing may not exist
at the time of the execution of the contract, as long as it has a reasonable
expectation of coming into being.
Q2: X will give Y a vehicle. Is there a contract?
A2: No. This is neither generic nor determinable.
Q3: X will give Y a car. Is there a contract?
A3: Yes.
Q4: X has to deliver an apple to Y with X’s name on it & X’s spit, as promised.
Lightning struck & the apple with the spit was destroyed.
A4: The obligation is extinguished, because the apple was a specific object (X’s
apple with his name & spit) that was destroyed by a fortuitous event.
In reverse to the above scenario, if the apple was just “an apple” then obligation is
not extinguished, because it is generic.
Good Father of a Family
• Once the determinate thing is specified as the object of the prestation, the
person whose duty is to give the object must take care of it
• Synonymous with “ordinary diligence”
• If the law or contract does not state the diligence required, the diligence of a
good father of a family is required
o Varies if the law or stipulation requires another standard of care
§ In case of a contrary stipulation, it CANNOT be one
contemplating the relinquishment or waiver of the most
ordinary diligence
o Ex.: Common carriers – persons, corporations, firms or associations
engaged in the business of carrying or transporting passengers or
good or both, by land, water or air, for compensation, offering their
services to the public
§ Bound to observe “extraordinary diligence” in the vigilance over
the goods & passengers
§ Generally, negligence must be proven. But in cases requiring
extraordinary diligence, negligence is presumed.
o Ex. Banks (CASE – Prudential Bank v. Rapanot)
24 | Katrina C. Gaw | Block C 2018
§ Banks must exercise the highest degree of diligence in the
conduct of their affairs.
§ When the purchaser or mortgagee of a real property is a bank,
the rule on innocent purchasers is applied more strictly; since
they are really in the business of extending loans with
mortgages, it is presumed that banks are familiar with the rules
on land registration. Hence, banks are not allowed to simply
rely on certificates of title & cannot assume that because a
title, on its face, is free of liens & encumbrances, they are
relieved from the responsibility of taking further steps to verify
to title & inspect the properties to be mortgaged.
Class Discussion
This Article refers only to determinate things, because there is the obligation to take
care of the thing as a good father of a family. If the thing were generic, the obligation
to take good care would not be required since the thing is replaceable and the
obligation will always stand.
Class Discussion
Three cases in civil law where negligence is presumed –
1. Common carrier
2. In case of collision, the one who violates traffic rules will be considered
negligent
3. Liability of teachers, administrators, and the school (Persons and Family
Relations)
• Ex. Teacher’s back is turned. When she turns around, a student of
hers, who is a minor, has a pencil stuck in her eye. Because of the
presumption, the teacher is presumed negligent.
Article 1164. The creditor has a right to the fruits of the thing from the time the
obligation to deliver it arises. However, he shall acquire no real right over it until the
same has been delivered to him.
Explaining Art. 1164
• The Article involves a prestation “to give”
• AFTER the right to deliver the object of the prestation has arisen in favor of
the creditor, but PRIOR to actual delivery of the object, the creditor has no
real right enforceable against the whole world over the object & its fruits. The
real right only accrues when the object is actually delivered. Prior to that, the
creditor only has personal right to demand against the debtor who has the
obligation to give.
Real v. Personal Right
Personal Right Real Right
The power of one person to demand The power belonging to a person over a
from another, as a definite passive specific thing, without a passive subject
subject, the fulfillment of a prestation to individually determined, against whom
give, to do, or not to do such right may be personally exercised
Begins when the right to deliver the Begins only when the object is actually Q: B sold Lot Z to C. After having done so, B then sold the same Lot Z to D. Who has
object of the prestation has risen in delivered to the person entitled to it; the real right over Lot Z?
favor of the creditor hence, prior to the delivery, there is no A: Neither C or D, because delivery was still not made to either.
real right yet for the future receiver. *Note: When it comes to real property, whoever registers it first has the better right.
Hence, delivery creates the real right.
Enforceable only against the debtor Enforceable & binding against the whole Class Discussion
under obligation to give world over the objects & its fruits in favor Q: In a contract of sale which has been perfected, is the property the buyer’s?
of the person to whom it should be given A: No. It is not the buyer’s until it is delivered.
With a passive, definite debtor No definite debtor; passive subject
Can be defeated by a 3rd person in good Will prejudice anybody claiming the Article 1165. When what is to be delivered is a determinate thing, the creditor, in
faith who has innocently acquired the same object of the prestation addition to the right granted him by Article 1170, may compel the debtor to make
property prior to the scheduled delivery the delivery.
• WON the right to the delivery has If the thing is indeterminate or generic, he may ask that the obligation be complied
accrued in favor of the creditor is with at the expense of the debtor.
irrelevant. If the obligor delays, or has promised to deliver the same thing to 2 or more persons
• The aggrieved creditor’s remedy who do not have the same interest, he shall be responsible for any fortuitous event
is only to go against the debtor until he has effected the delivery.
for damages (& in this sense still
has a demandable right) but the Generic & Determinate Objects
creditor cannot get the object • Provision involves the prestation “to give”; object can be determinate or
back from the innocent 3rd generic
person. • Generic – any object belonging to the same kind/class/species
o In the event of non-delivery, the creditor can have it accomplished in
Example from Book any legal way & charge the debtor
• On Feb. 1, A buys a mango orchard from X, to be delivered on Mar. 1. o Creditor can ask 3rd party to deliver the same thing of the same kind
o Scenario 1: On Mar. 1, A shall have the right to the fruits of the with all expenses paid by debtor
mango orchard. If the property is delivered only on Apr. 1, A can still • Determinate – an object that is definite, known, & has already been distinctly
ask for the fruits accruing since Mar. 1. decided & particularly specified as the matter to be given from among the
o Scenario 2: If X sells the fruits on Mar. 20 to B who does not know of same things belonging to the same kind
the previous sale to A & who immediately takes possession of the o Remedy in case of non-delivery is to file an action for specific
fruits, B shall have the better right over the fruits. A’s remedy is to performance to compel the debtor to make the delivery
seek damages from X. This is because there is still no delivery of the o If the debtor is guilty of delay, fraud, negligence or contravention in the
property to A on Mar. 20, so A has no real right over it. performance of the obligation, the creditor can seek damages
o Scenario 3: If the mango orchard has already been delivered to A, A
has a real right over the fruits. If X sells the fruits to B after delivery to Class Discussion
A, A can recover from B. B can seek damages from X. Q: For P50, X will give Y a fruit. Is there a contract?
A: NO. The object must be either generic or determinate. A fruit is neither, so no
Kinds of Fruits contract is formed. The fruit must at least be a species of its own—an apple, for
• Natural – things that naturally grow instance—to be considered generic.
• Civil – rentals
• Industrial – hard work, labor Fortuitous Events
• An event which could not be foreseen, or which though foreseen, was
Class Discussion inevitable
Q: X & Y signed a contract where Y will give X a pen. The contract is valid & • GR: Debtors are relieved from obligation “to give” if the object is lost through
perfected. Who owns it now? a fortuitous event
A: Still Y, because the pen was not yet delivered to X. • EXC: A fortuitous event will not excuse the obligor from the obligation:
1) If the obligor delays, or
Class Discussion

25 | Katrina C. Gaw | Block C 2018

 2) If he has promised to deliver the same thing to 2 or more persons who
do not have the same interest
• In both exceptions, the obligor will be liable. He will either:
o Be liable for damages, or
o Will be bound to replace the lost object of the prestation in cases
when the obligee agrees to the replacement
Article 1166. The obligation to give a determinate thing includes that of delivering all
its accessions & accessories, even though they may not have been mentioned.
Explanation
• The principal always includes its accessories & accessions
• Accession – something produced by the object of an obligation (pregnant
dogs producing puppies)
• Accessories – something joined to the object (radio in a car)
Article 1167. If the person obliged to do something fails to do it, the same shall be
executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the
obligations. Furthermore, it may be decreed that what has been poorly done be
undone.
Article 1168. When the obligation consists in not doing & the obligor does what has
been forbidden, it shall also be undone at his expense.
Rules for Obligations To Do
• The creditor can ask any 3rd person to perform the obligation due should the
debtor fail to do it
o Debtor will be liable for all the expenses thereof
• The words “at his cost” imply both the right to have somebody else perform
the obligation & the right to charge the expenses to the debtor
• When the debtor poorly undertook the obligation, the creditor has the right to
have everything undone at the expense of the debtor
Rules for Obligations Not to Do
• If the obligor performs the act despite the obligation not to do it, it can be
undone at his own expense
CASE: Chaves v. Gonzales
Lesson: The remedies of a person who has hired another to do something, such as
to repair a typewriter, when such is done poorly or not done at all:
1) Damages
2) File a suit
3) Have it executed at the other’s cost
Facts: X was hired to repair Y’s typewriter.
26 | Katrina C. Gaw | Block C 2018
When Y demanded for his typewriter, X returned it with missing parts & without
having it repaired. Y had another company fix the typewriter, then sued X to obligate
him to pay for the repair. Is X liable, & if so, what for?
Held: Yes. X contravened the tenor of his obligation to Y because not only did he not
repair the typewriter; he also returned it in shambles. Because of this, X is doubly
liable in this case: he is liable & must pay for the cost of the execution of the
obligation, which is the cost of the labor expended on the repair of the typewriter.
But in addition, he is also liable for the cost of the missing parts, because he was
also bound to return the typewriter in the same condition it was when he received it.
Class Discussion
Note that there are four types of breach of contract (sources of liability):
1. Delay – according to Art. 1169, it must be tainted with negligence or malice;
absent this, it may just be an inadvertent good faith mistake
2. Fraud
3. Negligence
4. Contravention of the tenor of the obligation
Article 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.
However, the demand by the creditor shall not be necessary in order that delay may
exist:
(1) When the obligation or the law expressly so declares;
(2) When from the nature and the circumstances of the obligation it appears that
the designation of the time when the thing is to be delivered or the service is
to be rendered was a controlling motive for the establishment of the contract;
or
(3) When demand would be useless, as when the obligor has rendered it beyond
his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or
is not ready to comply in a proper manner with what is incumbent upon him. From
the moment one of the parties fulfills his obligation, delay by the other begins.
Provision Breakdown (as explained by M)
• Par. 1 – general rule
• Par. 2 – exceptions
• Par. 3 – reciprocal obligations
• Par. 2 & 3 – require no judicial or extrajudicial demand
• Par. 1 & 2 – usually, to be performed at different times (e.g. purchaser pays
carpenter in advance to go to his house & repair later)
• Par. 3 – simultaneous; normal, everyday transactions (e.g. buying pens from
a store)
o When you buy something, it is immediately given to you
Delay
• Also known as “default”
• Kinds of delay:
 o Mora solvendi – delay or default committed by debtor
o Mora accipiendi – delay or default in acceptance committed by
creditor, in which case, debtor can consign whatever is due to the
creditor in court if the circumstances so warrant
• Delay must be either malicious or negligent
o If the delay was due only to inadvertence without malice or
negligence, the obligor is not liable under Art. 1170
Requisites of Default
1) Obligation is demandable & already liquidated
2) The debtor delays performance
3) Creditor requires the performance judicially or extrajudicially
• Default generally begins from the moment the creditor demands the
performance of the obligation
CASE: Selegna Management & Dev’t Co. v. UCPB
Lesson: A debt is liquidated when the amount is known or is determinable by
inspection of the terms & conditions of the relevant promissory notes & related
documentation. Failure to furnish a debtor a detailed statement of account does not
ipso facto result in an unliquidated obligation.
Facts: Petitioners executed a promissory note where they said their principal
obligation was P103,909,710.82, with an interest of 21.75% p.a. In the agreement
between the petitioners & the creditor, it was said that any delay would be subject to
a penalty charge of 1% per month, from the due date until the obligation is paid in
full. Is the obligation considered liquidated?
Held: Yes. Based on the wording of the agreement itself, the amount of total
obligation is known, or, is at least, determinable – the penalty is essentially based on
the total principal amount outstanding, to be computed from the date of
acceleration until the obligation is paid in full. Further, when petitioners made their
partial payment, they never requested a copy of their statement of account in order
to determine how much they needed to pay. Hence, the amount can be considered
already liquidated.
Demand
• An obligor is liable for damages for delay not from the time the object is to be
delivered, but from the time of extrajudicial (e.g., notice) or judicial demand
(e.g., commencement of a suit)
o Damages for delay accrue from time of demand, not delivery date;
hence, no demand, no delay
o Ex.: X was supposed to deliver a house to Y on Nov. 19, but doesn’t.
Is X liable for delay? NO, because there must still be judicial or
extrajudicial demand first.
• Demand should be made ONLY AFTER the maturity date of an obligation
• Must be a DEMAND – If no express demand, there is no liability for damages
o Ex. “We request for you to pay” is not a demand
o Ex. Letters of reminder to pay are not demands
o Ex. A mere statement of fact that failure to fulfill the obligation will
cause the penalty to be imposed is not a categorical demand
27 | Katrina C. Gaw | Block C 2018
CASE: Macaslang v. Zamora
Lesson: Words clearly requiring the performance of a prestation are enough, even if
the usual words are not used.
Facts: The letter in this case stated, “This is to give notice that since the mortgage to
your property has long expired & the property is already in my name, I will be taking
over the occupancy of said property 2 months from the date of this letter.” There
was an argument that since the word “vacate” was not used, there was no demand
to vacate. Is this contention correct?
Held: No. Though the word “vacate” was not used, the notice relayed the desire to
take possession of the property, giving the debtor no alternative except to vacate.
The word “vacate” hence need not be used. In the Golden Gate Realty Co. v. IAC
case, the words “you either pay your unpaid rentals, or I will file a court case to have
you thrown out of the property” were also held enough to constitute a demand to
vacate.
CASE: UCPB v. Sps. Beluso
Lesson: The inaccurateness of the amount in the demand letter will not nullify the
document’s effect.
Facts: The Spouses, debtors in this case, argued that the demand made by the bank
was much bigger than what they actually owed, making the demand invalid. Since
there was an invalid demand, there was no default; hence, the interests & penalties
had not begun to run. Is this argument tenable?
Held: No. Default commences upon extrajudicial or judicial demand. The excess
amount in such a demand does not nullify the demand itself, which is valid with
respect to the proper amount. Hence, since there was a valid, albeit excessive
demand by the bank, the Spouses are in default with respect to the proper amount,
&, therefore, the interests & penalties began to run at this point.
Necessity of Demand for There to Be Delay
• GR: Delay begins from the moment the obligee demands performance of the
obligation & the obligor does not heed the demand.
o Demand is necessary even if a period has been fixed in the obligation
• Ex. The object of the prestation was to be delivered on Mar. 20, 2017. The
object becomes due & demandable on such date.
o If extrajudicial demand was made on Mar. 15, 2017, the debtor would
still be given up until Mar. 20 to comply; if he fails to do so, he can
only be declared in delay as Mar. 21, 2017.
• Why is demand necessary then? It is to put an obligor in a due &
demandable obligation in delay, so that the obligor will already be liable for
interests or damages for the period of delay.
Class Discussion
Q: “You shall deliver the house on Mar. 10, 2018.” Are you in delay on Mar. 11?
A: No, because there is no judicial or extrajudicial demand; but your creditor can
already file a case on Mar. 11.
Q: Why then do you need to make extrajudicial demand?
A: To determine when the damages will begin to accrue in favor of the creditor. The
legal rate of interest will be computed from the day of delay.
CASE: Buenaventura v. Metrobank
Facts: The creditor’s final demand letter was received on July 28, 1998, & gave the
debtor 5 days from receipt of the letter to make payment. When is the obligation
due?
Held: Aug. 3, 1998 – 5 days from receipt of the letter; it was only then that the
debtor was in default.
CASE: Selegna Management & Dev’t Co. v. UCPB
Lesson: Partial payment does not ipso facto mean an abandonment by the creditor
of his prior demand.
Facts: Debtors made a partial payment of P10 million on March 25, 1999. They
claimed that this partial payment forestalled the maturity of their loan. Is this
correct?
Held: No. Partial payment does not extinguish an obligation, especially since this
partial payment was made way past the due date of the debt. Art. 1235 provides
that when the obligee accepts the performance, knowing of its incompleteness, &
without expressing any protest, the obligation is deemed fully complied with. Thus, to
imply that creditors accept partial payment as complete performance of the
obligation, their acceptance must be made under circumstances that indicate their
intent to consider the performance complete & to renounce their claim arising from
the defect. Here, there are no circumstances indicating the creditor’s renunciation of
the right to foreclose the mortgaged properties extrajudicially. On the contrary, the
creditor immediately asserted its right to file an application for extrajudicial
foreclosure after receiving partial payment. Clearly, the creditor did not intend to give
the debtors more time to meet their obligation.
Applicability of Art. 1169; Applicability of Art. 2209 to Money
• Art. 1169 applies only in obligations to do something other than pay money;
in obligations to pay money, Art. 2209 applies. For money, the rules are –
o When the debtor is in delay, the indemnity for damages, absent any
contrary stipulations, will be the payment of the interest agreed upon
o If there is no stipulation, the legal interest of 6% per annum will apply
§ The interest replaces the damages
o Default begins after extrajudicial or judicial demand
§ UNLESS the contract stipulates from what time interest will
be counted; if the contracts stipulates time of payment of
interest, it will be payable from such time, & not from the
date of the filing of the complaint
§ THUS if no interest is stipulated or a date is not given,
interest will begin to run only from demand
Extrajudicial Demands
• GR: Extrajudicial demand is not a prerequisite for filing an action
o Commencement of a suit is, in itself, a sufficient demand
28 | Katrina C. Gaw | Block C 2018
o An action can be filed at anytime after the non-compliance of the
other party because the cause of action of will always start from such
time.
o HOWEVER, damages or interest shall start to run only after judicial or
extrajudicial demand.
o Ex.: If the obligation is due on Mar. 1, 1998, the aggrieved party can
file suit for specific performance immediately after Mar. 1, 1998
§ If, without any extrajudicial demand from the obligor, suit is filed
on Apr. 15, 1998, damages will be reckoned only from Apr. 15
§ If, however, extrajudicial demand was made on Mar. 15 & suit
subsequently field on Apr. 15, damages will be reckoned from
Mar. 15.
• EXC: 2 cases where an extrajudicial demand should first be made prior to
filing a civil suit:
1) Ejectment cases – before a lessor ejects a lessee, the lessor must
first make an extrajudicial demand for the lessee to vacate the
premises
o Without extrajudicial demand, suit will be dismissed
2) Consignment cases – the debtor must first make an extrajudicial
demand for the creditor to accept payment
o If creditor unjustifiably refuses to accept payment, the debtor
can now consign the amount in court to extinguish his
obligation
o If there is no extrajudicial demand, the consignment case
will be dismissed
§ UNLESS tender of payment prior to consignment need
not be made pursuant to the law
“In Delay” means “In Default”
• When the law uses the phrase “in delay”, it means “in default”
o Mere delinquency in payment does not necessary mean delay in the
legal concept
• To be in default – involves the beginning of a special condition or status
which has its own peculiar results & effects
When Demand is Not Necessary
1) When the obligation or the law expressly so declares
• Ex. When a promissory note providing payment shall be made on a
particular date without necessity of demand makes the debtor in
default upon his failure to pay on a particular date
• Ex. The law expressly declares that taxes be paid on a specific date
2) When time is of the essence in a particular contract
• Ex.: In stock market transactions made in the stock exchange, time is
of the essence such that there is no need of demand before the
delivery of the shares of stock ought to be made by the seller.
• Ex.: If a contract stipulates that a special car is to be delivered to the
obligee to be used solely for a particular parade at a particular time,
such as an exhibit in a one-day car fair to be held on a particular date
 • CASE: Bargaza v. CA
o Lesson: Time is of the essence when the supplier is aware that
that an item is to be used for a specific date for a specific
purpose
o Facts: A contract was entered into in time for the delivery of
materials on Dec. 22, 1990, in time to construct a niche for the
petitioner’s wife’s grave. The wife had expressed that she
wanted to be buried before Christmas day. The supplier,
despite knowing the timetable & having been paid, failed to
make the delivery despite pleas & earnest follow-ups of the
widower. As a result, the crypt could not be constructed on time
for Christmas. Is the supplier liable?
o Held: Yes. The supplier is liable for both the delay & the breach.
3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform
• Ex. A debtor promised to constitute his house as a collateral for a
particular loan which is payable at a particular date. But before the
debtor could make the mortgage, he donates the house to his friend.
o Demand from the creditor to constitute the house as a
collateral would now be useless. In this case, the debtor’s
obligation becomes immediately demandable considering that
he loses his right to the period within which to pay the loan
• *CASE: Megaworld v. Tanseco
o Facts: X bought a condominium from Y, a real estate developer.
After the expiry of the written grace periods (based on the
contract), Y still failed to deliver the condominium project (in
class, M adds the fact that the condominium is only half-built).
Should there still be demand for delivery?
o Held: No. There is no need for a demand, because at the time
the obligation was due, there was actually no condominium
unit available for delivery – the unit itself was completed only
after 3 years. Further, the fact that the contractor gave notice
to the unit buyer to occupy the condominium after almost 3
years prior to the latter’s demand for the refund of the
purchase price she had already fully paid was immaterial.
o M: SC thus held that demand would not be necessary because
the obligor has made impossible for himself to fulfill his
obligation.
CASE: Bricktown Development Co. v. Tierra Development Co.
Lesson: Demand is no longer necessary after the expiration of the grace period given
to the buyer, particularly when the contract between the buyer & seller provides a
date for the payment of an obligation, & a grace period in case the buyer fails to pay
within the provided date. This is because a grace period is a right, not an obligation,
& hence Art. 1169 would not apply.
Facts: The buyer of a condominium entered into a contract to sell with the real
estate developer which said that if he fails to pay within the stipulated period, he will
be given a grace period of 60 days, after which the developer could cancel the
29 | Katrina C. Gaw | Block C 2018
contract. The buyer failed to pay the remaining amortization for a condominium. He
was given a notice of cancellation pursuant to the contract. The buyer argued that
there should have been a demand after the expiration of the grace period for him to
be considered in default. Is his contention valid?
Held: No. A grace period is a right, not an obligation, of the debtor. When
unconditionally conferred, such as in this case, the grace period is effective without
further need of demand either calling for the payment of the obligation or for
honoring the right. The grace period must not be likened to an obligation, the non-
payment of which, under Art. 1169, would generally still require judicial or
extrajudicial demand before “default” can arise.
In this case, the grace period under the contract to sell became ipso facto operative
from the moment the due payments were not met at their stated maturities. On this
score, the provisions of Art. 1169 would find no relevance whatsoever.
The cancellation of the contracts to sell by the seller accords with the contractual
covenants of the parties, & it must be respected. Further, in a contract to sell, the
non-payment of the purchase price (which is normally the condition for the final sale)
can prevent the obligation to convey title from acquiring any obligatory force.
Class Discussion
Q: Let’s say Mar. 10, you will deliver. You made a demand on Mar. 15. You gave a
grace period of another 10 days because the debtor asked for it. After the grace
period, should you make another demand to make him in delay? Did you negate the
first delay by giving into the grace period?
A: No. The first demand is sufficient. Such is the juridical requirement of the law.
Reciprocal Obligations
• Those created & established at the same time, out of the same cause
• Results in the mutual relationship of creditor & debtor between the parties
• In reciprocal obligations, the performance of one is conditioned upon the
simultaneous fulfillment of the other
o The obligation of one is a resolutory4 condition of the obligation of the
other, the non-fulfillment of which entitles the other party to rescind
the contract
o Ex. A contract of loan – the promise of the borrower to pay is the
consideration of the obligation of the bank to furnish the loan
o Ex. Contract of sale, lease
• Where one of the parties to a contract does not perform the undertaking
which he is bound to perform under the terms of the agreement, he is NOT
entitled to insist upon the performance of the other party
o For failure of the other party to assume & perform the obligation
imposed upon him, the other party does not incur in delay
CASE: Binalbagan Tech., Inc. v. CA
4Rights & obligations come into existence immediately upon agreement between the parties. If a resolutory
condition is fulfilled, the operation of the rights & obligations cease.
Facts: Buyer X purchased a house from seller Y (making only a partial payment).
However, through no fault of seller Y, a third party-claimant, Z, through a court order,
evicted X from the said place. As a result, X was not able to take possession of the
property that he bought from the seller for 8 years. When the judicial decree of
eviction was reversed by the court, allowing X to take possession of the property, Y
wanted the contract rescinded. Y argued that since X never paid the remaining
balance of the purchase price, the contract could be considered cancelled. Can Y
rescind the contract for X’s failure to pay?
Held: No. Even if the eviction was not Y’s fault, Y was not in a legal position to
demand compliance of the prestation of X to pay the price. Y’s right to demand
payment was suspended during that period.
*CASE: Agcaoili v. GSIS
Facts: GSIS & Agcaoili entered into a contract of sale of a government housing unit
on the condition that Agcaoili should occupy the same within 3 days from receipt of
the notice. Failure to immediately occupy contractually allowed the GSIS to terminate
the contract.
Agcaoili, upon receipt of the notice, immediately went to the place & found a house
in a state of incompleteness that civilized occupation was not possible. Even the
basic amenities were non-existent. Agcaoili paid the 1st monthly installment, but
refused to make further payments until the housing unit was complete. GSIS
cancelled the award & told him to vacate the premises. Was GSIS correct to do so?
Held: No. GSIS had no right to rescind the same because it failed to do its part in the
obligation. It demanded the buyer’s immediate occupation, yet the basic amenities
were not even ready.
To say, as the GSIS does, that this was what was intended by the parties, since the
contract did not clearly impose upon it the obligation to deliver a habitable house, is
to advocate an absurdity, the creation of an unfair situation. By any objective
interpretation of its terms, the contract can only be understood as imposing on the
GSIS an obligation to deliver to Agcaoili a reasonably habitable dwelling in return for
his undertaking to pay the stipulated price.
CASE: Tanguilig v. CA
Facts: X & Y entered into a contract for the X’s construction of a windmill for
P60,000 with 1-year guaranty. After completion, X sued Y for non-payment of the
balance. Y argued that he did not pay because the windmill collapsed due to defects
in its construction within the 1-year guaranty period. X insisted that Y should bear his
own loss. Is X’s contention correct?
Held: No. When the windmill failed to function properly, it became incumbent upon X
to institute the proper repairs in accordance with the guaranty in the contract. Thus,
Y cannot be said to have incurred in delay; instead, it is X who should bear the
expenses for the reconstruction of the windmill. Ultimately, it was held that Y should
still pay X, but X must reconstruct the windmill in accordance with the 1-year
guaranty.
*CASE: Panteleon v. AMEX Co.
Lesson: The creditor-debtor relationship between a credit card holder & issuer arises
only after the credit card issuer has approved the specific purchase request of a
30 | Katrina C. Gaw | Block C 2018
cardholder. The initial credit card membership agreement entered into between the
issuer & holder is just the agreement to provide a credit facility to the cardholder. It
is the second relationship – when the credit card issuer approves the transaction –
that involves 3 contracts: (a) the sales contract between the credit card holder & the
merchant or the business establishment which accepted the credit card; (b) the loan
agreement between the credit card issuer & the credit card holder; and lastly, (c) the
promise to pay between the credit card issuer & the merchant or business
establishment.
Facts: X, a credit card holder, argues: (1) that since his AMEX card has no pre-set
credit card limit, AMEX has the obligation to approve all his charge requests; & (2)
even if AMEX has no such obligation, at the very least, AMEX is obliged to act on his
charge requests within a specific period of time. Are X’s contentions correct?
Held: No. (a) From the loan agreement perspective, the contractual relationship
begins to exist only upon the meeting of the offer & acceptance of the parties
involved. In more concrete terms, when cardholders use their credit cards to pay for
their purchases, they merely offer to enter into loan agreements with the credit card
company. Only after the latter approves the purchase requests that the parties enter
into binding loan contracts. This view finds support in the reservation found in the
card membership agreement itself, which clearly states that AMEX reserves the right
to deny authorization for any requested charge. By so providing, AMEX made its
position clear that it has no obligation to approve any & all charge requests made by
its cardholders.
Since AMEX has no obligation to approve the purchase requests of its credit
cardholders, X cannot claim that AMEX defaulted in its obligation. The 3 requisites
for a finding of default are: (a) that the obligation is demandable & liquidated; (b) the
debtor delays performance; & (c) the creditor judicially or extrajudicially requires the
debtors performance. Based on the above, the first requisite is no longer met
because AMEX, by the express terms of the credit card agreement, is not obligated
to approve X’s purchase request. Without a demandable obligation, there can be no
finding of default.
X also failed to make a demand. As established, the use of a credit card to pay for a
purchase is only an offer to the credit card company to enter a loan agreement with
the credit cardholder. Before the credit card issuer accepts this offer, no obligation
relating to the loan exists between them. A demand is defined as the assertion of a
legal right. A demand presupposes the existence of an obligation between the
parties. Thus, every time X used his AMEX credit card to pay for his purchases, what
the stores transmitted to AMEX were his offers to execute loan contracts. These
obviously could not be classified as the demand required by law to make the debtor
in default, given that no obligation could arise on the part of AMEX until after AMEX
transmitted its acceptance of X’s offers. X’s insisting on and waiting for the charge
purchases to be approved by AMEX is not the demand contemplated by Art. 1169.
For failing to comply with the requisites of Art. 1169, X’s charge that AMEX is guilty
of culpable delay in approving his purchase requests must fail.
(b) Even assuming that AMEX had the right to review his credit card history before it
approved his purchase requests, X insists that AMEX had an obligation to act on his
purchase requests, either to approve or deny, in a matter of seconds or in timely
dispatch. But since having no pre-set spending limit in a credit card simply means
that the charges made by the cardholder are approved based on his ability to pay, as
demonstrated by his past spending, payment patterns, & personal resources, every
time X charges a purchase on his credit card, the AMEX still has to determine
whether it will allow this charge, based on his past credit history. This right to review
a cardholder’s credit history, although not specifically set out in the card
membership agreement, is a necessary implication of AMEX’s right to deny
authorization for any requested charge. Given this, & since the laws governing credit
cards requires authorization within a specific time limit, AMEX is not contractually or
legally bound to act on its cardholders’ purchase requests within any specific period
of time. The standard for measuring the time should therefore be based on fairness
& reasonableness.
BUT: Given that there is no strict time in which credit card companies must act on
purchase requests, they must still exercise their unlimited right to put off action on
purchase requests without abusing their rights & causing injury to client & third
persons under Arts. 19-21 of the Civil Code. A right, though by itself legal because
recognized or granted by law as such, may nevertheless become the source of some
illegality owing to the abuse of right doctrine. When a right is exercised in a manner
which does not conform with the norms enshrined in Art. 19 and results in damage
to another, a legal wrong is thereby committed for which the wrongdoer must be
held responsible. In the context of a credit card relationship, although there is
neither a contractual stipulation nor a specific law requiring the credit card issuer to
act on the credit card holders offer within a definite period of time, these principles
provide the standard by which to judge AMEX’s actions. In this case, however, it was
shown that the delays of AMEX were because X’s spending history did not match the
transaction which he sought approval for – his first single purchase was at
US$13,826 which was not aligned with his spending history over the past 12
months, hence causing the delay as AMEX tried to verify. In this jurisdiction, good
faith is presumed & the burden of proving bad faith rests upon the party alleging it.
Although it took AMEX some time before it approved X’s charge requests, there is no
evidence to suggest that it acted with deliberate intent to cause X any loss or injury,
or acted in a manner that was contrary to morals, good customs, or public policy. SC
gave credence to AMEX’s claim that its review procedure was done to ensure
Pantaleons own protection as a cardholder and to prevent the possibility that the
credit card was being fraudulently used by a third person.
Class Discussion (based on Panteleon v. AMEX)
Q: X was going to pay using his credit card. X’s card was swiped and X spent 78
minutes waiting for his payment to come through. X called the credit card company
& demanded a notification for whether or not the payment came through. X got tired
of waiting and instead paid using cash. X then filed a case against the credit card
company for breach of contract, particularly on the ground of delay. Was X’s
contention correct?
A: One must examine the credit card transaction to decide if there is delay. When a
customer gives his credit card to the store, the store will swipe to inform the bank. At
that point in time, is there already a contract between the customer and the bank?
NO. That is only the negotiation stage. When the bank says that the credit card is
good, the contract that is created is a contract of loan. The bank will first pay your
debt and then you will pay the bank back at the end of the month. Therefore, there
31 | Katrina C. Gaw | Block C 2018
can be no applicability of delay yet at the time X was waiting for it to be good – this is
because there is no contract yet.
Q: Is this a violation of the abuse of right doctrine?
A: No, because malice and bad faith on the part of the credit card company was not
proved.
CASE: ASJ Co. v. Spouses Evangelista
Lesson: The right to retention exists in reciprocal obligations when one party is in
delay.
Facts: X retained chicks & by-products that were supposed to be given to Y, because
Y failed to pay the corresponding service fees. Was X’s retention justified?
Held: Yes. Y was in delay in paying for the service fees, & only ever offered to
partially satisfy their account. The Civil Code further provides that the creditor is
under no obligation to accept only a partial payment. More so, respondents cannot
substitute or apply as their payment the value of the chicks and by-products they
expect to derive because it is necessary that all the debts be for the same kind,
generally of a monetary character. Needless to say, there was no valid application of
payment in this case.
Furthermore, it was Y who violated the very essence of reciprocity in contracts,
consequently giving rise to X’s right of retention. This case is one among the species
of non-performance of a reciprocal obligation. Reciprocal obligations are those which
arise from the same cause, wherein each party is a debtor and a creditor of the
other, such that the performance of one is conditioned upon the simultaneous
fulfillment of the other. From the moment one of the parties fulfills his obligation,
delay by the other party begins.
Since Y is guilty of delay in the performance of their obligations, they are liable to pay
X actual damages.
CASE: Cortes v. CA
Lesson #1: Mutual delay on the part of both parties cancels out the effects of
default, such that it is as if no one is in default.
Lesson #2:There is nothing improper for the court to order the parties to comply with
their respective obligations.
Article 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, & those who in any manner contravene the tenor thereof, are
liable for damages.
Awarding of Damages
• Sources of Liability:
o Fraud
o Negligence
o Delay
o Contravention of the tenor of the obligation
• Measure of damages to be paid – under Art. 22015
5 Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is
liable shall be those that are the natural and probable consequences of the breach of the obligation, and
 • If any of the 4 co-exist or aggravate the loss caused by a fortuitous event, the
obligor cannot be excused from being liable on his obligation
CASE: GF Equity v. Valenzona
Lesson: If the breach is in good faith, only damages in the amount of the reasonable
& probable consequences of the breach, i.e., the actual damages, will be awarded to
the aggrieved party.
Facts: The company terminated the services of the coach on the basis of a
contractual provision which was later judicially declared void. What kind of damages
are due from the company?
Held: Actual damages only – hence, the company is liable for the unearned income
of the coach resulting from the termination. But it is not liable for all other damages,
like moral damages, since there was no bad faith. Complying with a stipulation that
was later declared a nullity did not necessarily mean that the other party was in bad
faith.
Class Discussion
A contract can have a void provision but the type of damages that will be paid to the
aggrieved party in the contract will only be actual if there is no bad faith. For
example, if in a contract of employment, there is a void provision placed by the
employer, the employee, X, is entitled to damages if he is terminated based on that
void provision, since that would mean that X was terminated wrongly. But X is only
entitled to actual damages – the salary X should have earned had he not been
terminated. X is not entitled to moral damages because there is no bad faith. The
provision in the contract was just declared void in a previous case; but the company
merely followed the stipulation thinking at the time that it was correct.
CASE: PNB v. Spouses Racamora
Lesson: Moral damages are not recoverable simply because a contract is breached.
They are recoverable only if the defendant acted fraudulently or in bad faith, or in
wanton disregard of his contractual obligations. Exemplary damages can likewise
only be recovered if the guilty party acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.
Facts: PNB increased interest rates to a loan & foreclosed on mortgages. Should it
as a result be liable for moral & exemplary damages?
Held: No. Bad faith cannot be imputed simply because the defendant acted with bad
judgment or with attendant negligence. Bad faith is more than these; it pertains to a
dishonest purpose, to some moral obliquity, or to the conscious doing of a wrong, a
breach of a known duty attributable to a motive, interest or ill will that partakes of
the nature of fraud. Proof of actions of this character is undisputably lacking in this
case.
Class Discussion
Q: Can a contract be breached in good faith?
which the parties have foreseen or could have reasonably foreseen at the time the obligation was
constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which
may be reasonably attributed to the non-performance of the obligation.
32 | Katrina C. Gaw | Block C 2018
A: Yes, by express provision of the law. (Art. 2201)
CASE: Bargaza v. CA
*Repeated case
Facts: A contract was entered into by a widower in time for the delivery of materials
on Dec. 22, 1990, for the construction of a crypt for the his wife’s grave. The wife
had expressed that she wanted to be buried before Christmas day. The supplier,
despite knowing the timetable & having been paid, failed to make the delivery
despite pleas & earnest follow-ups of the widower for. The employees were also
feckless when reminded by the widower, indicating gross negligence on the part of
the owner. The things were delivered 2½ days later; as a result, the crypt could not
be constructed on time for Christmas. Is the supplier liable to pay moral & exemplary
damages to the widower?
Held: Yes to both.
• As for moral damages: The widower suffered wounded feelings, mental
anguish and serious anxiety while keeping watch on Christmas day over the
remains of his wife who could not be laid to rest on the date she herself had
chosen. There is no gainsaying the inexpressible pain and sorrow borne by
the widower & his family caused by the ineptitude, cavalier behavior, & bad
faith of the supplier & his employees in the performance of an obligation
voluntarily entered into.
• As for exemplary damages: The lackadaisical and feckless attitude of the
employees of the supplier, over which he exercised supervisory authority,
indicates gross negligence in the fulfillment of his business obligations. The
supplier & his employees should have exercised fairness & good judgment in
dealing with the widower who was then grieving over the loss of his wife.
Instead of commiserating with him, they contributed to petitioner's anguish by
causing him to bear the agony resulting from his inability to fulfill his wife’s
dying wish.
Class Discussion (based on RCBC case)
Q: X just forgot to give 1 check out of many checks due. The contract says if he fails
to pay each installment of his debt on the proper date, he is in delay. Should X be
considered in delay in accordance with the law such that he must pay damages?
A: No. There was no negligence or malice that could lead to damages. This is not
delay under the law; this was inadvertent delay & X was in good faith. Inadvertent
non-compliance will not lead to delay & damages, since there remains to be good
faith, as shown by the fact that only 1 of many checks deposited had an issue.
Article 1171. Responsibility arising from fraud is demandable in all obligations. Any
waiver of an action for future fraud is void.
Fraud
• When a party complies with or performs an obligation fraudulently, he is
liable for damages
• Ex.: A buys a car from B worth P50,000. After the delivery of the car by B, A
paid B counterfeit money on due date. A is liable for damages.
 o If the contract of sale stipulated that any fraudulent act by the other in
the performance of his obligation shall not be a ground for to file a suit
against the other for fraud is a void stipulation.
• BUT the dolo or fraud which is committed to induce a party to enter into a
contract is not covered in Art. 1171.
o In such a case, the contract would be annullable
• In Art. 1171, the contract is valid, but in the performance of the same, fraud
is committed
*CASE: Banaga v. Majaduco
Lesson: Binding agreements previously made do not waive actions for future fraud.
Facts: The parties, in the lower court, agreed that they would abide by & honor the
findings of the DENR’s survey team, a survey which would be the basis of the
resolution of their dispute. As it turns out, however, there was fraud inn the conduct
of the survey. Is X, one of the parties, bound by the survey because of X’s agreement
in the lower court, & can X no longer appeal the decision based on the survey?
Held: No – X can still appeal the decision based on the survey. While it is correct that
X bound herself to abide by the findings of the survey team, the waiver does not
include future fraud. Responsibility arising from fraud is demandable in all
obligations. Any waiver of an action for future fraud is void. X brought up allegations
of discrepancy and alterations in the lot data computations used in the survey when
compared to data found in DENR records. X’s waiver cannot be taken to cover
allegations of fraud.
Class Discussion
Fraud in Art. 1170 is fraud in the implementation or the fulfillment of the contract.
Note that in contract law, there are 3 forms of fraud:
(1) Fraud as a source of liability in the implementation of the contract (Art. 1170) –
e.g., X bought a car from Y. X used fake pesos to pay Y. There is fraud in
implementation in this case. This would lead to damages.
(2) Fraud in entering into the contract (Article 1344) – this type has two kinds
• Serious – this type of fraud will make the contract annullable
• Fraud that is merely incidental, which will not annul the contract; there will
only be liability for damages (Tankeh v. DBP)
Article 1172. Responsibility arising from negligence in the performance of every kind
of obligation is also demandable, but such liability may be regulated by the courts,
according to the circumstances.
Article 1173. The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation & corresponds with the
circumstances of the persons, of the time & of the place. When negligence shows
bad faith, the provisions of Articles 1171 & 2201, par. 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be required.
Negligence
33 | Katrina C. Gaw | Block C 2018
• The omission of that diligence which is required by the nature of the
obligation & corresponds with the circumstances of the persons, of the time
& of the place
• The want of care required by the circumstances
• In the absence of stipulation, the diligence required is that of a good father of
a family (ordinary diligence)
• Relative or comparative, rather than an absolute term
o Its application depends on the situation of the parties
o Liability can be regulated by the courts depending on the
circumstances
• General rule: negligence must always be proven
• Tantamount to FRAUD when there is bad faith (gross negligence)
Class Discussion
Remember that negligence coupled with bad faith is equivalent to fraud. There is
bad faith in negligence when there is GROSS negligence.
CASE: Syquia v. CA
Lesson: Liability for negligence is dependent on the nature & circumstances of a
situation; if one thing is done to prevent another evil, then there is no negligence.
Facts: The personnel of a memorial park company, with the consent of the latter,
bore a hole on the grave of the deceased X during a rainy day to prevent the vault
from falling, consequently preventing the earth from caving in & filling-up the grave
However, the hole made possible the entry of more water & soil than was natural
had there been no hole, damaging the vault. Is the company liable to the relatives of
X?
Held: No. The memorial company was not negligent. Had the company decided not
to bore the hole, the vault would have been caved into the earth.
CASE: PNB v. CA
Lesson: Banks must be extremely diligent with the accounts of their depositors.
While a bank’s negligence may not have been attended with malice & bad faith,
nevertheless, if it caused serious anxiety, embarrassment, & humiliation to a
depositor, the depositor can be awarded reasonable moral damages.
Facts: The bank negligently dishonored the check of the depositor. Can it be made
liable?
Held: Yes. A bank is under obligation to treat the accounts of its depositors with
meticulous care whether such account consists only of a few hundred pesos or of
millions of pesos.
A customer’s check cannot be wrongfully refused payment without some
impeachment of his credit which must in fact be an actual injury, although he
cannot, from the nature of the case, furnish independent & distinct proof thereof.
Bad Faith
• A state of mind affirmatively operating with furtive design or with some
motive of ill will
• Not merely bad judgment or negligence
 • Synonymous with fraud; involves a design to mislead or deceive another, not
prompted by honest mistake as to one’s rights & duties
• Art. 1171 (on fraud) applies in cases where negligence concurs with bad faith
o Pursuant to Art. 2201, par. 2 – obligor shall be responsible for all
damages which may be reasonably attached to the non-performance
of the obligation
Mutual Negligence
• If both parties are mutually negligent in performing their obligations, the fault
or negligence of one cancels out the fault or negligence of the author.
• If someone is advantaged somehow, there will just be reimbursement
pursuant to unjust enrichment.
• M: This concept is DIFFERENT from contributory negligence.
Article 1174. Except in cases expressly specified by the law, or when it is otherwise
declared by stipulation, or when the nature of the obligation requires the assumption
of risk, no person shall be responsible for those events which, could not be foreseen,
or which, though foreseen, were inevitable.
Fortuitous Events
• Events which could not be foreseen, or which though foreseen, were
inevitable
• GR: Major casus est, cui humana infirmitas resistere non potest – “No one
shall be liable for events which could not be foreseen, or which having been
foreseen were inevitable, with the exception of the cases expressly
mentioned in the law or those in which the obligation so declares.”
• Nemo tenetur ad impossibilia – Nobody can be forced to do the impossible.
• An Act of God – an accident due directly & exclusively to natural causes
without human intervention, which no amount of foresight, pains or care or
reasonable expectation, could have been prevented
o When the effect, the cause of which is to be considered, is found to be
in part the result of the participation of man, whether it be from active
intervention or neglect, or failure to act, the whole occurrence is
thereby humanized, as it were, and removed from the rules applicable
to the acts of God
o This is true even if the immediate cause of damage is the act of God
Elements of a Fortuitous Event (Nakpil v. CA)
1) The cause of the breach of the obligation must be independent of the will of
the debtor.
2) The event must be either unforeseeable or unavoidable.
3) The event must be such as to render it impossible for the debtor to fulfill his
obligation in a normal manner.
4) The debtor must be free from any participation in, or aggravation of the injury.
*BUT: If event concurs with fraud, negligence, delay, or violation in any manner of
the tenor of the obligation, the obligor cannot escape liability.
Class Discussion
34 | Katrina C. Gaw | Block C 2018
Q: If there was fortuitous event but you were negligent, will you still be held liable?
A: Yes. For as long as one of the 4 sources of liability are present, whether before or
during the occurrence of the fortuitous event, then you will be held liable despite the
fortuitous event.
CASE: Spouses Poon v. Prime Savings Bank
Lesson: The period during which a bank cannot do business due to insolvency is not
a fortuitous event, unless it is shown that the government’s action to place a bank
under receivership & liquidation proceedings is tainted with arbitrariness, or that the
regulatory body has acted without jurisdiction.
CASE: Tanguilig v. CA
Lesson: The negligence of a party can be “implied” given the circumstances, & from
there liability can arise even when coupled with fortuitous events.
Facts: The contractor constructed a windmill, which collapsed due to a typhoon. The
contractor was sued for the destruction of the windmill, & he resisted liability by
invoking that the collapse was due to a fortuitous event. Is the contractor liable?
Held: Yes. SC ruled that the fact of the typhoon was not proven, due to there only
being proof of strong winds; also, windmills are constructed to withstand strong
winds (since precisely, there must be strong winds for a windmill to move). The
windmill would not have collapsed had there not been an inherent defect in it.
*CASE: Sia v. CA
Lesson: Failing to inform a party of a fortuitous event the one is aware of that may
lead to an aggravation of said party’s loss, when given such a responsibility, is
tantamount to negligence.
Facts: A bank failed to notify its client that there was flooding in a safety deposit box
containing the client’s valuable stamp collection. The bank already had 2 previous
incidents of flooding in the same deposit box. The bank was supposedly guarded 24
hours a day. Is the bank liable for the fortuitous event?
Held: Yes. The bank was negligent & aggravated the injury of the petitioner, failing to
exercise the prudence of a good father of a family.
CASE: Dioquino v. Laureano
Lesson: The essential element of a fortuitous event is that there is some
extraordinary circumstance independent of the will of the obligor. If such exists, then
there is no required diligence beyond what human care & foresight can provide.
Facts: X gave his car to Y, who was going to register the car. As Y drove the car to the
place of registration, some mischievous boys threw stones at the car of X, causing
damage to the car. Is Y liable for the acts of the mischievous boys?
Held: No. The throwing of the stone was a fortuitous event which could not be
foreseen by Y, or which, though foreseen, was inevitable; Y cannot be held liable for
damages.
CASE: Victorias Planters Assoc. Inc. v. Victorias Milling Co.
Lesson: A fortuitous event relieves the obligor from fulfilling a contractual obligation.
Parties cannot extend a previous contract by adding to the number of years written
in the original contract agreed upon because a fortuitous event prevented fulfillment
of the original period.
Facts: 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 contract was suspended for 6 years due to the war.
The central mill wanted to add 6 more years to the original contract to make up for
the 6-year suspension period. Should this be allowed?
Held: No. SC ruled that extending the contract 6 more years was not allowed given
that the suspension was caused by a fortuitous event. The period of time when the
contract was suspended CANNOT be deducted from the term of the contract
because, to add the said years upon the resumption of the contract would in effect
be an extension of the contract.
The stipulation that in the event of force majeure, the contract shall be deemed
suspended during said period, does not mean that the happening of those events
stops the running of the period agreed upon. It only relieves the parties from the
fulfillment of their respective obligations during that time — the planters from
delivering sugar cane and the central from milling it.
To entitle the central to demand the fulfillment of the other party of their part in the
contract, the latter must have been ABLE to perform, but FAILED to do so, not
prevented by a fortuitous event.
Class Discussion
Q: If a contracts ends on Nov. 19, 1996, but for 2 months it was impossible to
perform the object of the contract because of a fortuitous event, when will the
contract end?
A: Still on Nov. 19, 1996. The requirement to comply to an obligation need not be
done during the period of a fortuitous event.
*CASE: Ace-Agro Development Co. v. CA
Lesson: A contract of employment cannot be extended even if the laborer was not
able to perform some tasks due to a fortuitous event.
Facts: X was engaged by Company Y to clean its bottles & repair wooden shells
inside its plant from Jan. 1, 1990 up to Dec. 31, 1990.
Due to the burning on Apr. 25, 1990 of the said plant, the work of X was suspended.
X sought an extension of the contract period, refusing to work without such
extension. Should the extension be granted?
Held: No. The period during which work was suspended did not justify an extension
of the term. The contract was subject to a resolutory period which relieved the
parties of their respective obligations but did not stop the running of the period of
their contract.
Class Discussion
Q: X was contracted to work for 1 year. In the middle of the year, lightning struck and
burnt the warehouse where X worked. X’s work was thus suspended. Later, X got
back to work, but sought an extension for the time when his work was suspended (2
months) so that in effect he would be working for 1 year and 2 months. Must his
request be granted?
35 | Katrina C. Gaw | Block C 2018
A: No, because the agreement was only until 1 year. The fortuitous event did not
have the effect of extending that one year.
Generic Prestations & Fortuitous Events
• When the object is generic (e.g. the payment of money), the debtor cannot
avail of the benefit of a fortuitous event
o Ex. If the object is the payment of money as a consequence of a loan
contract, debtor cannot avail of the benefit of fortuitous event even if
the object for which the loaned money is used, such as the
construction of a factory, is wiped out by a typhoon
• No fortuitous event as an excuse for money obligations
Exceptions to Rule on Fortuitous Events
• One can still be held liable for fortuitous events when:
1) The law so requires
o Art. 1165, par. 3 – when obligor delays, or promises to deliver the
same thing to 2 or more persons who do not have the same
interest
o Art. 1268 – when the debt of a determinate thing proceeds from
a criminal offense, the debtor shall not be exempted from the
payment of its price, whatever may be the cause for the loss,
unless the thing having been offered by him to the person who
should receive it, the latter refused without justification to accept
it
o Art. 552 – a possessor in bad faith shall be liable for
deterioration or loss in every case, even if caused by a fortuitous
event
o Art. 129 (6), Family Code – unless the owner had been
indemnified from whatever source, the loss or deterioration of
movables used for the benefit of the family, belonging to either
spouse, even due to fortuitous event, shall be paid to said spouse
from the conjugal funds
o Article 1919 – if a depository, by force majeure or government
order, loses the thing & receives money or another thing in its
place, he shall deliver the sum or other thing to the depositor
o Article 1935 – the bailee6 of a commodatum is liable for the loss
of the thing, even if it should be through a fortuitous event, when:
(1) He devotes the thing to any purpose different from that
for which it was loaned
(2) He keeps it longer than the period stipulated, or after
the accomplishment of the use for which the
commodatum has been constituted
6 One who acquires the use of a thing but not its fruits; if the bailee must pay compensation, the contract
ceases to be a commodatum; it is a loan of chattels (personal property) to be returned without payment for
their use
 (3) The thing loaned has been delivered with appraisal of its
value unless there is a stipulation exempting the bailee
from responsibility in case of a fortuitous event
(4) He lends or leases the thing to a 3rd person who is not a
member of his household
(5) In applicable situations, being able to save either the
thing borrowed or his own thing, he chose to save the
latter
2) The parties expressly so stipulate
o Ex. A contract provides that the obligor shall, within 10 days,
deliver a computer with serial number 2222 & shall be liable if
the computer shall be destroyed by an Act of God for the value of
the same.
3) When the nature of the obligation so requires (assumption of risk)
o CASE: Republic v. Luzon Stevedoring
§ Lesson: The mere difficulty to foresee the happening of an
event is not the same as impossibility to foresee the
same. An event must be impossible to foresee & avoid to
constitute a fortuitous event. When precautions are set up
by a company, it could be used as a sign that the event
was, in fact, foreseeable
§ Facts: A towed barge, which usually traversed the river
passing the Nagtahan bridge, rammed against one of the
wooden piles of the bridge, smashing the post & causing
the bridge to list. The river was swollen at the time & the
currents were swift due to heavy downpour in Manila.
The barge owner contended that it should not be held
liable for the damage on the bridge as such damage was
caused by fortuitous event. He also contended that there
were many precautions taken & that the bridge’s
construction was misplaced. Should the owner be liable?
§ Held: Yes. The precautions the owner undertook
completely destroy his defense. For force majeure are
events that could not be foreseen, or which, though
foreseen, were inevitable. It is not enough that the event
should not have been foreseen or anticipated, as is
commonly believed, but it must be one impossible to
foresee or to avoid. The fact that the owner took the
precautions showed that he could foresee the risk. There
was an assumption of risk, because it knew the perils of
the swollen river & currents.
Article 1175. Usurious transactions shall be governed by special laws.
Usurious Transactions
• Higher interest rates than that normally set
o Ex. A 35% per annum interest rate is not against the law, though it
may be iniquitous in character
36 | Katrina C. Gaw | Block C 2018
• Not regulated or prohibited by the Civil Code; the Usury Law is currently
suspended
• A special law may be passed in the future to regulate, prohibit, or allow
usurious interest
Article 1176. The receipt of the principal by the creditor, without reservation with
respect to the interest, shall give rise to the presumption that said interest has been
paid.
The receipt of a later installment of a debt without reservation as to prior
installments, shall likewise raise the presumption that such installments have been
paid.
Presumptions
• Presumptions always arise from a set of facts
• To have probative value, presumptions must be provided by law
o Once facts are proven, then the presumption of law will attach
o Will hold as true unless rebutted
Presumptions in Art. 1176
• When an obligation consists in the payment of principal with interest
o Fact giving rise to presumption – payment of principal without
reservation as to the interest
o Presumption made – interest has already been paid
o Burden of proof – creditor must show interest has not been paid
§ Can be rebutted by strong evidence to the contrary (e.g., it can
be shown that the payment of the principal was made because
the debtor requested the creditor to apply the payment to the
principal first)
• The payment of the later installment shall give rise to the presumption that
prior installments have already been paid
o Fact giving rise to the presumption – payment of later installment
o Presumption made – prior installments have been paid
o Installment must clearly indicate that it indeed is the latest installment
o Burden of proof – creditor must overturn by showing clear & strong
evidence to the contrary
§ CASE: Manila Trading & Supply Co. v. Medina
• Lesson: Receipts should always explicitly state date of
payment to give rise to presumption that prior
installments have been paid (e.g. “This payment is for
Jan. 1945”).
• Facts: X made a purchase from Y, paying by installment.
X presented numerous receipts to prove his payments,
some of which, according to the court, were partly
spurious & partly genuine.
X insists that, even if some receipts are spurious, the
receipts found to be genuine were allegedly made in Jan.
1957, after the issuance of the spurious receipts; thus,
 the presumption that the prior installments had been
paid already should arise. Is X’s contention correct?
Held: No. SC held that this might have been true if such
receipts recited that they were issued for the
installments corresponding to the month of Jan., 1957;
but nowhere does that fact appear.
Also, it would just give rise to a presumption, which could
be overturned by clear evidence that the payments made
do not correspond to the installments falling due on the
dates of the genuine receipts.
Article 1177. The creditors, after having pursued the property in the possession of
the debtor to satisfy their claims, may exercise all the rights and bring all the actions
of the latter for the same purpose, save those which are inherent in his person; they
may also impugn the acts which the debtor may have done to defraud them.
Protection of Creditors
• The law protects creditors
• Civil obligations are demandable & enforceable in the court of law
• Law gives all possible remedies to creditors to satisfy the obligations of the
obligor
o The creditor, after exhausting all the means to satisfy his claim, is
given the opportunity to bring all actions which the obligor can
institute against his own debtors to protect & satisfy his claims against
said obligor
o Ultimately, if all else fails, contracts can be rescinded
• Successive measures (remedies) that must be taken by a creditor before he
may bring an action for rescission of an allegedly fraudulent sale:
1) Exhaust the properties of the debtor through levying by attachment &
execution upon all the property of the debtor, except such as are
exempt by law from execution
2) Exercise all the rights & actions of the debtor, save those personal to
him (accion subrogatoria)
3) Seek rescission of the contracts executed by the debtor in fraud of
their rights (accion pauliana)
o Art. 1381 (1): a contract entered into by the debtor is
rescissible if it were made in fraud of creditors when the latter
cannot in any other manner collect the claim due them
§ CASE: Adorable v. CA – Unless a debtor acted in fraud of
his creditor, the creditor has no right to rescind a sale
made by the debtor to someone on the mere ground
that such sale will prejudice the creditor’s rights in
collecting later on from the debtor
§ Creditor’s right is still a personal right to receive
payment for the loan
§ A deed of sale would involve the transfer of a real right
37 | Katrina C. Gaw | Block C 2018
• BUT the creditor cannot bring those which are inherent in the person of the
obligor
o Ex. Action for support – the creditor cannot file an action on behalf
of the obligor to claim support from the latter’s parents to satisfy
the indebtedness
Class Discussion
Q: X borrowed money from Y. To secure the indebtedness, X mortgages his house.
But X was going to sell his lot to Z. Y files an injunction suit to stop X from selling the
house. Will it prosper?
A: No. The contract between X & Y is merely a contract of loan. There must first be
exhaustion. The first move of Y should be to demand from X extrajudicially or
judicially.
Article 1178. Subject to the laws, all rights acquired in virtue of an obligation are
transmissible, if there has been no stipulation to the contrary.
Transmissibility
• GR: Rights growing out of an obligation are transmissible
o Ex.: The transferee of an educational insurance plan, originally
obtained by a transferor, acquires all the rights of the transferor under
said plan
§ Transferee can avail of all the bonuses provided by the plan if
the child of the transferee graduates with distinction if such
right is provided in the contract
• BUT: The person who transmits the right CANNOT transmit greater rights than
he himself has by virtue of the obligation
o Person to whom it is received also receives no greater rights than the
transferor had at the time of the transmission of the rights
• May be limited, or altogether prohibited by stipulation of the parties.
o Ex.: A contract may stipulate that the assignment of any or all rights
granted is prohibited.
o Ex.: A less prohibitive provision – not allowed unless the parties
consent
• EXC: No transmission of a particular right can be made if the personal
qualifications or circumstances of the transferor are the material ingredient
in the obligation
o Ex.: An author who specializes in horror stories written in a very
distinct style & who has been engaged by a publisher to write his (the
author’s) kind of horror stories for his magazine cannot transmit his
rights arising from such obligation to anybody else
• Must be subject to the pertinent laws
o Ex.: If the law prohibits the alienation of homesteads within 5 years
from the issuance by the government of the patent, any transmission
of rights of dominion over the same within the prohibitory period shall
be void
• General rule on real & personal rights
o Real rights – transmissible
 o Personal rights – not transmissible
Class Discussion
Q: A lessee to a condominium unit has children. The lessee dies. The lessor tries to
eject the kids. Will the case prosper?
A: No. Being a lessee is a real & not a personal right, making a contract of lease
transmissible.
CHAPTER 3. DIFFERENT KINDS OF OBLIGATIONS
SECTION 1. – PURE & CONDITIONAL OBLIGATIONS.
Kinds of Conditions
Article 1179. Every obligation whose performance does not depend upon a future or
uncertain event, or upon a past event unknown to the parties, is demandable at
once.
Every obligation which contains a resolutory condition shall also be demandable,
without prejudice to the effects of the happening of the event.
Special Notes
• The end point of an obligation is extinguishment.
o Ex.: If X gives Y a pen & Y gives X money, then there will be no more
obligation.
• The law should really say “future & uncertain,” because for something that
happens in the future to be a condition, it should be uncertain
Kinds of Obligations
1) Pure obligation – an unqualified obligation which is demandable immediately
• Performance does not depend upon a future or uncertain event, or
past event unknown to the parties
• Ex.: Bank depositor & bank
• CASE: Pay v. Vda. de Palanca
§ Lesson: Action to demand compliance with an obligation
prescribes if the creditor fails to make a demand within the
proper prescriptive period & the contract contains the phrase
“upon demand.”
§ Facts: The debtor issued a promissory note to the creditor to
pay a sum of money payable upon receipt of a particular sum
of money from the estate of a certain deceased person or upon
demand.
The case for collection on the basis of said note was filed 15
years after the execution of the promissory note. Can the
creditor still claim the sum owed?
§ Held: No. The action can no longer prosper, since the
prescriptive period for filing the action based on a written
document was 10 years & considering that the promissory
note’s payment constituted a pure obligation & thus was
demandable at once.
38 | Katrina C. Gaw | Block C 2018
Though there is nothing to indicate the 1st condition occurred,
the 2nd provides that payment shall be made “upon demand,”
& this demand was made much too late.
2) Conditional obligation – opposite of a pure obligation
• A condition – an act or event, other than a lapse of time, which, unless
the condition is excused, must occur before a duty to perform a
promise in the agreement arises or which discharges a duty of
performance that has already arisen
o The performance depends upon a future or uncertain event or
upon a past event unknown to the parties
1) Resolutory Condition
• Once the condition is established and acknowledged, the right
immediately exists; the obligation concomitant to the right can be
demanded at once
• Once the future or uncertain event happens which constitutes the
condition, it discharges the obligation
o Obligation is extinguished by operation of law
o BUT such resolution can be made effective at some later date
if the parties so stipulate in their contract, such as when the
parties stipulate that resolution becomes effective only from
the date written notice thereof is sent
• Examples:
o When the contract provides that a purchaser can obtain a
refund of their money for as long as the government continues
to allow refunds of such a character
§ In such a case, the purchaser can immediately ask for a
refund
§ BUT: As soon as the government creates a law
disallowing the refund, the purchaser can no longer do
so
o Reciprocal obligations – the obligation of one is a resolutory
condition of the obligation of the other, the non-fulfillment of
which entitles the other party to rescind the contract
o Contract of sale – when there is a breach, there is an option to
rescind
o You have the right to drive. But the law states that a constant
violator of traffic laws can have the right of his license revoked.
o When a person donates land to another on the condition that
the latter would build upon the land a school, the condition
imposed is a resolutory condition
§ NOT suspensive in character – the school did not have
to be constructed for the condition to be effective
§ If there was no fulfillment, the donation may now be
revoked & all rights which the donee may have acquired
under it shall be deemed lost & extinguished
o Obligations where there is power to rescind are resolutory
 2) Suspensive Condition § Obligation arises once it really rains the next day
• Can be demanded only upon the happening of the future or unknown o CASE: Javier v. CA
event or a past event unknown to the parties, which constitutes the § Lesson: When a contract is subject to a suspensive
condition condition, its birth or effectivity can take place only if &
• NOT demandable at once when the event which constitutes the condition
• Gives rise to the performance of the obligation happens or is fulfilled.
o If the condition does not take place, the parties would stand as § Facts: In consideration of rights to a timber license, the
if the conditional obligation never existed obligor undertook to pay the sum of P30,000 to the
• Examples: obligee as soon as the additional area for forest
o Contract to sell - where, in a purchase of property in concession has been obtained by the obligee &
installment, it is expressly provided in the contract that title approved by the government. The obligee never
remains vested on the seller until after the last payment of the obtained the additional area.
installment is made by the buyer. § Held: Obligor was not liable, as it involves the non-
§ There is no consent relative to the transfer of ownership happening of the suspensive condition—the approval by
yet, because the seller expressly reserve the transfer of the government of the new area.
title until the happening of the suspensive condition
• Seller – given the unilateral right to terminate *Differences Between Conditional Contract of Sale & Contract to Sell
the contract in case of non-payment of the price Conditional Contract of Sale Contract to Sell
§ Provides a positive suspensive condition, i.e., payment Payment Non-payment is a negative Payment is a positive
• Failure to pay is not a breach; it is simply an resolutory condition; payment suspensive condition
event which prevents the obligation of the owner is a suspensive condition
to convey title from acquiring binding force Effect of full Contract of sale is perfected Contract is not yet
§ Prior to the last payment, the purchaser has no title to payment of the considered perfected
the property. price (fulfillment
§ However, once the future event, which is the payment of of suspensive
the last installment, occurs, the obligation of the seller condition)
to execute the final deed of sale & to transfer title Presence of There is already consent, Consent to transfer is not
arises. It is from that time that the purchaser can Consent although conditioned on the present because the seller
demand transfer of the title. happening of a suspensive expressly reserves the
o Conditional contract of sale – where the seller may likewise condition – that is, payment transfer of title to the
reserve title to the property subject of the sale until the prospective buyer until the
fulfillment of a suspensive condition happening of the suspensive
§ Non-payment = negative resolutory condition condition
§ There is already consent regarding the transfer (unlike Transfer of If there was already previous Ownership will not
in a contract to sell), although it is conditioned upon the Ownership delivery of the property, automatically transfer to the
happening of a contingent event which may or may not ownership automatically buyer although the property
occur. transfers to the buyer by may have been previously
§ If the suspensive condition is not fulfilled, the perfection operation of law without any delivered to him. The
of the contract is abated further act by the seller prospective seller still has to
§ Further examples: convey title to the
• Contract to sell – There is a building being prospective buyer by
developed by Y. Y executes a contract to sell with entering into a contract of
X. This means that if building is finished sale
(suspensive condition), X & Y can negotiate for a
possible sale. After negotiations, there will be a Effect if Sold to a The fulfillment of the No double sale, since title
contract to sell. 3rd Person Not a suspensive condition will affect will only transfer to the buyer
o When an obligor promises to give an obligee a book if it rains Party to the the seller’s title thereto, & the after registration; a 3rd
the next day, which is an uncertain event Contract Despite seller will no longer have any person buying such property

39 | Katrina C. Gaw | Block C 2018

Fulfillment of the title to transfer to 3rd person.
Condition
Art. 1544 (Civil Code) - such 2nd
buyer of the property cannot be
a registrant in good faith who
may have:
• Had actual or constructive
knowledge of such defect
in the seller’s title, or
• Was charged with the
obligation to discover the
defect.
Such 2nd buyer cannot defeat
the first buyer’s title.
Reconveyance 1st buyer can seek for
reconveyance, subject to
conditions under the law
Similarities between Pure & Resolutory Conditions
• Both are demandable at once
Class Illustrations
• Obligations with a Period – I’ll give you a pen when X dies.
• Obligations with a Condition – I’ll give you a pen if X dies on Monday.
despite the fulfillment of the 4. When in rescission, there is just cause not to rescind the contract, the court shall
suspensive condition such fix a period
as the full payment of the 5. When the period depends upon the sole will of the debtor
purchase price, cannot be
deemed a buyer in bad faith; Article 1181. In conditional obligations, the acquisition of rights, as well as the
the prospective buyer cannot extinguishment or loss of those already acquired, shall depend upon the happening
seek the relief of of the event which constitutes the condition.
reconveyance of the
property. Suspensive v. Resolutory Conditions
Suspensive Conditions Resolutory Conditions
Also called a condition precedent Also called a condition subsequent
Refers to an act or event, other than a Refers to an event, the existence of
lapse of time, which must exist or occur which, by agreement of the parties,
before a duty to perform a promised operates to discharge a duty of
1st buyer cannot seek the performance arises; if the condition performance that has arisen
relief of reconveyance of does not occur & is not excused, the
property promised performance need not be
rendered
Suspends efficacy of contract Demandable at once
Article 1182. When the fulfillment of the condition depends upon the sole will of the
debtor, the conditional obligation shall be void. If it depends upon chance or upon
the will of a third person, the obligation shall take effect in conformity with the
provisions of this Code.

Article 1180. When the debtor binds himself to pay when his means permit him to
do so, the obligation shall be deemed to be one with a period, subject to the
provisions of Article 1197.
Meaning
• By its nature, “means permit him to do so” is suspensive & potestative
o If the law did not exist, it would be void
• When the debtor binds himself to pay when his means permit him to do so,
the law presumes that the debtor really intends to satisfy his obligation, but
payment, on the part of the creditor, becomes an uncertain event
o Thus, the law classifies this as an obligation with a period
• Art. 1197 – The parties may ask the court to fix the duration of the period
within which the payment is to be made especially when the period
depends upon the will of the debtor
Class Discussion
When the court is allowed to fix the period:
1. When the debtor bind himself to pay when his means permits him to do so
2. When it involves a suspensive potestative condition which is void, but refers to the
fulfillment of the obligation
3. When the contract of the parties is vague, but it is clear there is intention to
create the period
Suspensive Potestative Condition
• When the fulfillment of the suspensive condition in an obligation depends
upon the sole will of the debtor
o This type of condition is VOID
o Leads to the stipulation (only) being declared void
• Ex. I’ll pay you when I hold the book. The condition “when I hold the book” is
void, but main obligation to pay subsists.
Birth of an Obligation through Potestative Condition
• Article 1380 – When the birth of the new lease contract (renewal) depends
upon the sole will of the lessee, the whole contract is INVALID & not just that
stipulation.
o HENCE: The entire contract could be declared void if it is the birth of
the obligation depends on the sole will of the debtor
§ Ex. if the fulfillment of the suspensive conditions leads to the
“birth” of a new contract of lease, or a new contract of sale
CASE: Lao Lim v. CA
Lesson: A stipulation which states that a lessee will continue staying in the premises
as long as he wants, as long as he pays rent is void for being a suspensive
potestative condition that leads to the birth of the obligation, because it leaves to
the lessees the sole power to determine the continuation of the lease. The entire
contract is therefore void.

40 | Katrina C. Gaw | Block C 2018

Facts: A stipulation provides that the lease contract shall subsist “for as long as the
defendant needs the premises & can meet & pay said increases.” The contract also
states that a renewal of the 3-year lease period constitutes a new contract of lease
although with the same terms & conditions as those in the expired lease. (1) Is the
stipulation valid? (2) Is the contract valid?
Held: This stipulation & the entire obligation are both void.
(1) The stipulation is a purely potestative condition, leaving the effectivity of
leasehold rights to the exclusive will of the lessee. It is likewise a suspensive
condition because the renewal of the said lease, which gives rise to a new lease
depends upon said condition.
The said condition is not resolutory because it is not a condition that terminates the
lease contract. The lease contract is for a definite period of 3 years upon the
expiration of which the lease automatically terminates. If this condition were to be
allowed, the owner would never be able to discontinue it if the lessees kept paying.
(2) Furthermore, because the renewal or “birth” of the new lease also depends on
the debtor, the entire obligation & not just the stipulation is void.
CASE: Trillana v. Quezon College
Lesson: When the condition is imposed upon the birth or creation of the obligation,
the entire contract — & not just the stipulation — would be void.
Facts: The full payment of the shares in a certain school was to be made only after
the obligor harvested fish. Similar to the conditional contract of sale, no contract is
created yet because the full payment awaits the debtor’s performance of the
harvesting of the fish. Is the condition & the obligation valid?
Held: No. The condition & obligation itself is solely based on the will of the obligor.
Thus, the whole obligation is void.
Resolutory Potestative Conditions
• If a condition is both facultative & resolutory, it may be valid, though
dependent on the will of the debtor.
• Ex. If a person promises to put in the possession of his friend a house while
he (the giver) is abroad but requires that the house be returned to his
possession in the event that he returns to the Philippines, the condition is
valid as it is resolutory in nature.
CASE: Ducusin v. CA
Facts: The lease contract provides that “the term of the contract shall be on a
month-to-month basis commencing on February 19, 1975 until terminated by
mutual agreement or terminated by the lessor on the ground that his children need
the premises for their own use.” Is this valid?
Held: Yes. The condition here is a resolutory condition dependent on the sole will of
the debtor; hence it is valid. Also, the happening of the condition is not dependent
solely on the will of the lessor but on the happening of the condition dependent upon
the will of 3rd persons — the children.
Potestative Condition Imposed on the Fulfillment of the Obligation
• The condition alone is voided, but not the obligation
41 | Katrina C. Gaw | Block C 2018
• The potestative condition is not on its birth, but on its fulfillment—in this
situation, there is an acknowledgment of indebtedness already; it’s not just a
possibility.
CASE: Osmeña v. Ramos
Lesson: Where there is an acknowledgment of indebtedness, there is not just the
possibility of a birth of an obligation, but an actual obligation already — thus, a
suspensive potestative condition in relation to said obligation may be void, but the
obligation itself remains valid.
Facts: A promissory note stated: “On this date, I hereby promise that, if the house of
strong material in which I live in Q.C. is sold, I will pay my indebtedness to Don
Tomas Osmeña as set forth in this document.” Is the whole obligation void?
Held: No. The suspensive potestative condition is void, but the obligation to pay
subsists.
CASE: Security Bank & Trust Company v. CA
Lesson: Sometimes, the fact that the condition is a suspensive potestative condition
is not so clear, as when the contract states that the condition is the “mutual
agreement” of the parties, but in practice, it becomes dependent on the sole will of
one party.
Facts: A contractor spent more than the construction cost contemplated in the
contract. It applied with the owner to adjust the contract price. The owner did not act
upon the adjustment on the ground that there was “no mutual agreement of both
parties” pursuant to the contractual provision. The provisions states:
“If, at anytime prior to the completion of the work to be performed, increase
in prices of construction materials or labor supervene through no fault on
the part of the contractor, or any act of the government and its
instrumentalities which directly or indirectly affects the increase of the cost
of the project, OWNER shall equitably make the appropriate adjustment on
mutual agreement of both parties.”
Must the owner pay for the additional costs of construction?
Held: Yes. SC ruled against the owner, requiring it to pay & fulfill its obligation. The
mutual agreement stipulated is in effect a condition dependent on the owner’s will,
since the contractor would naturally give consent to such an agreement which would
allow him recovery.
Effect of Void Stipulation
• When a condition is declared void but the obligation subsists, the obligation
will become one with a period. (Patente v. Omega)
o Reason: converting it into a pure obligation may result in an
arrangement which was not in the contemplation of the parties
• The creditor can ask the court to fix the period.
Class Discussion
Q: X & Y have an agreement, where X borrowed money from Y. X tells Y later that he
is still unable to pay, & says, “I’ll pay you when I swim in the Pasig river.” Is this
valid?
A: The obligation still stands, but the condition is void. The obligation is transformed
to one with a period.
Potestative Suspensive Condition v. Potestative Resolutory Condition
Potestative Suspensive Condition Potestative Resolutory Condition
Void as a general rule; there is no Valid, because resolutory conditions are
exception at all necessarily potestative
Class Discussion
Q: But how about the obligation to which the condition is attached; is it necessary
void?
A: It is void if the condition refers to the birth of the obligation. (Patente v. Omega)
For example, X is indebted to Y for P1,000. X saw Y and said, “I’ll pay you; can I
restructure our obligation? I’ll pay you if I jump tomorrow.” Here, the condition is a
suspensive potestative condition, the condition is void. But since the condition does
not affect the birth of the obligation (the debt itself), the debt remains valid.
Class Discussion
Q1: Is a suspensive potestative condition ALWAYS void?
A1: Yes.
Q2: What’s an example of a valid potestative condition?
A2: (1) Article 1180 – when the debtor will pay when his means permit him to do so
(2) All RESOLUTORY conditions (e.g. X will give Y a pen, provided that Y will always
stay in the Philippines)
Mixed Obligations
• Those which depend not only upon the will of the debtor, but also upon
chance & some other factors.
• CASE: Romero v. CA
o Facts: A contract stipulates that the downpayment made by the buyer
to the seller regarding the sale of the property shall be returned in the
event that the seller “shall not be able to remove the squatters from
the property” within 60 days from the execution of the contract. Is the
stipulation void?
o Held: No. This is not a potestative condition & is valid. It is a mixed
condition, dependent not only on the will of the debtor but on 3rd
persons, like the squatters & the government.
CASE: Naga Telephone Inc. v. CA
Lesson: When there are other causal conditions governing (chance, hazards or the
will of a 3rd person) a stipulation which is also potestative, it is a mixed condition, & it
is valid.
Facts: X & Y stipulated that X can use the electrical posts of Y for as long as it
needed the post but the contract can nevertheless be terminated should Y be forced
to stop or abandon operations.
Held: The stipulation is valid. It is true that it is a potestative condition, since the
condition depends on the sole will of X (“for as long as it is needed”), but there are
42 | Katrina C. Gaw | Block C 2018
other factors validating the obligation, which is that I will also cease “when Y is
forced to stop or abandon its operations.”
The latter is a causal condition, dependent on chance, hazard or the will of a 3rd
person.
CASE: Catungal v. Rodriguez
Facts: The stipulation in a contract provided that the payment of the buyer of the
remainder of the price shall be made after the buyer has successfully negotiated a
right of way. Is the stipulation valid?
Held: Yes. The condition is neither on the perfection of the contract nor on the
validity of the entirety of the contract. It is imposed only on the buyer’s obligation to
pay the remainder of the purchase price. It is thus a condition which is not purely
potestative, since it is not reliant on the sole will of the debtor, but also, the will of
the third persons who own the adjacent land, & from whom the road right of way is
to be negotiated, & whether or not these owners would allow the right of way. This
type of mixed condition is expressly allowed under Art. 1182.
Article 1183. Impossible conditions, those contrary to good customs or public policy,
and those prohibited by law shall annul [Note: make VOID] the obligation which
depends upon them. If the obligation is divisible, that part thereof which is not
affected by the impossible or unlawful condition shall be valid.
The condition not to do an impossible thing shall be considered as not having been
agreed upon.
Impossible Conditions
• The condition & the obligation will be void.
• Ex. An obligation to give money as a loan only if it snows in the Philippines is
void. The condition makes the prestation void.
• Also true of cases that are against (1) good customs, (2) public policy or are
(3) prohibited by law.
Condition Not to Do an Impossible Thing
• Useless stipulation
Article 1184. The condition that some event happen at a determinate time shall
extinguish the obligation as soon as the time expires or if it has become indubitable
that the event will not take place.
Extinguishment of Obligations with Time-Based Conditions
• When the condition consists of some event that must happen at a particular
time, the obligation is extinguished should the condition not happen within
the said period.
• Ex. Y will give X a particular car (the prestation) if X is elected President on or
before 1998.
o Once Mr. X becomes the President on or before 1998, the obligor has
to give the car.
• The same situation applies if there is doubt that the event will occur in the
given time.
 o Same Ex. if X dies before he even files his candidacy, it is clear that his
becoming President will not happen anymore on or before 1998. This
will immediately extinguish the obligation to give the car.
Article 1185. The condition that some event will not happen at a determinate time
shall render the obligation effective from the moment the time indicated has
elapsed, or if it has become evident that the event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such time as
may have probably been contemplated, bearing in mind the nature of the obligation.
“Condition Will Not Happen”
• Ex. Again, the condition is the election of X as President on or before 1998 &
the prestation is the giving of a particular car by Y & the effect is the
effectivity of the obligation when the condition does NOT happen.
o Once X does not become the President prior to 1998 or on 1998, Y
has to give the car.
o If X becomes President on or before 1998, then the car should not
be given.
o If Mr. X dies before he even files his candidacy, it is clear that his
becoming president will not happen anymore on or before 1998. This
will immediately give rise to the obligation to give the car.
“No Time is Fixed”
• Ex. The condition is simply the non-election of Mr. X.
o If the law provides that elections are to be held on Aug. 1998 & Aug.
1998 passes without X being elected, the condition is deemed
fulfilled.
CASE: Wellex Group v. U-Land Airlines Co.
Facts: The parties, X & Y, entered into a MOA which states that they would enter into
a purchase of stock agreement within a 40-day period, & if nothing happened, they
would be released from their commitments. In the meantime, X delivered money to
Y, while Y delivered some stock to X. However, the parties ultimately failed to enter
into an actual purchase of stock agreement within the period they agreed on. What
happens now?
Held: X is obligated to return the stock certificates to Y, while Y must return the
money to X. In this case, the parties agreed that the non-occurrence of the share
purchase agreement would give rise to the obligation to both parties to free each
other from their respective undertakings, including returning to each other all that
they received in pursuit of entering into the share purchase agreement. Based on
the provision of their agreement, X & Y would return to each other all that they had
received after the lapse of the 40-day period.
However, the parties continued their negotiations even after the 40-day period
lapsed; they also made subsequent negotiations with the intention of entering into
the share purchase agreement. Ultimately, however, they still failed to do so.
These facts show that the first & second circumstance in Art. 1185 occurred – the
obligation in this case thus arose (a) at the lapse of the indicated 40-day period, &
(b) when it became evident that the event would not recur. Since the condition has
43 | Katrina C. Gaw | Block C 2018
happened, the parties now must return to each other everything that has been given
thus far.
CASE: Osmeña, III v. PSALM
Facts: There were two bidders, TVPI & SPC, for a project. It was agreed between
PSALM & the bidding parties that should the losing bidder not exercise his “right to
top” the winning bid, the winning bidder must enter into & faithfully comply with the
asset purchase agreement. TVPI won the bid. Later, however, the SC declared the
“right to top” provision void, such that SPC would never be able to exercise its “right
to top” under their agreement. What now happens to their agreement?
Held: The condition is deemed complied with by operation of law, & the obligation to
execute the purchase contracts in favor of TVPI is now due & demandable. In this
case, PSALM’s obligation to award the contract in TVPI’s favor was dependent on the
non-occurrence of an event: SPC’s legal & valid exercise of its right to top. The
approval of the sale to TVPI was conditional, & its consummation was dependent on
the non-exercise by SPC of its right to top. At this point however, that will never
happen, since the provision on the right to top was declared void. Hence, it is simply
deemed fulfilled by operation of law.
*Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily
prevents its fulfillment.
Class Discussion
Q: What is the implied term of the contract?
A: Must be complied with in GOOD FAITH; otherwise, there are consequences such
as the doctrine of constructive fulfillment.
Constructive Fulfillment: Act of Prevention
• The good-faith obligation includes an implied term on the part of the said
parties not to impede, hinder, obstruct or prevent the fulfillment of the
obligation.
o Undertaking these preventive acts constitutes breach of contract.
• Constructive fulfillment - If obligor voluntarily prevents the fulfillment of the
condition in an obligation, the law states that the obligation shall be deemed
fulfilled.
• Ex. X will give to a school a brand new computer if the school will donates its
old computer to charity.
o If X voluntarily destroys the old computer, the condition will be
considered as having been fulfilled. He is now bound to deliver a new
computer to the school.
Requisites for Application of Principle of Constructive Fulfillment (Lim v. DBP)
1. The condition is suspensive
2. The obligor actually prevents the fulfillment of the condition
3. He acts voluntarily
*CASE: Lim v. Development Bank
Facts: X was indebted to the bank, as evidenced by promissory notes that were due
on 1972 & 1976; these notes were subject to mortgages on particular property.
When X defaulted, the bank chose not to foreclose & instead entered into
negotiations with X to restructure the loans, & an agreement as to this was entered
into between X & the bank. From 1989 to 1994, DBP gave several extensions for X
to pay the loan, but they never did. Hence, DBP cancelled the restructuring
agreement & foreclosed on the mortgaged properties of X. X now argues that DBP’s
cancellation of the restructuring agreement justifies the extinguishment of their loan
obligation under the principle of constructive fulfillment under Art. 1186. Is X’s
argument tenable?
Held: No. The principle does not apply, as a suspensive condition is not present in
this case. It would be absurd for any bank to provide a suspensive condition in a
promissory note or restructuring agreement that will allow the debtor to be freed
from the duty to pay the loan without paying it. Besides, since the restructuring
agreement was cancelled, it could not have novated or extinguished X’s obligation.
In the absence of such an agreement, there is no impediment for DBP to exercise its
right to foreclose the mortgaged properties.
CASE: Tayag v. CA
Lesson: In reciprocal obligations, both parties are the debtors & creditors of each
other; thus, either one of them can carry out constructive fulfillment of the condition
& prevent the other from fulfillment of the obligation.
Facts: As a condition of a contract of sale of real property, the buyer, X, was required
to pay the balance of a particular loan which was collateralized by the property
subject of the sale so that the said property can be delivered to him.
The seller prematurely paid the loan, thereby preventing the buyer to fulfill the
condition. The seller claims that Art. 1186 cannot apply, because they are the
obligees while the proviso speaks of the obligor. Does Art. 1186 apply?
Held: Yes. In a reciprocal obligation like a contract of purchase, both parties are
mutually obligors & also obligees. Any of the contracting parties may, upon non-
fulfillment by the other privy of his part of the prestation, rescind the contract or
seek fulfillment. It is puerile for the sellers to say that they are the only obligees
since they are also bound as obligors to permit X to assume the loan, & would also
be obliged to execute the final deed of sale.
CASE: DBP v. Sta. Ines Melale Forest Productions Co.
Facts: The period of payment was condition on the prior execution of a share
purchase agreement. However, the fulfillment of the condition was frustrated by the
buyer (NDC), who failed to promptly submit its recommendation on the vital
information obtained from the documents given by the seller (Galleon). Does Art.
1186 apply?
Held: Yes. NDC prevented the execution of the share purchase agreement – the
condition precedent to the transfer of Galleon’s shares to NDC – by deliberately
delaying its review of Galleon’s financial assets. While Galleon submitted all its
documents early for review by NDC, the latter failed to take the review seriously,
hence causing the delay. In fact, under their agreement, NDC had only 60 days to
prepare & sign the share purchase agreement, yet it was only 8 months after the
agreement that the NDC director submitted his review on the transaction.
44 | Katrina C. Gaw | Block C 2018
Consequently, the condition for the running of the period for the payment of the
purchase price of the shares of stock in Galleon by NDC, i.e., the execution of the
share purchase agreement, was deemed fulfilled by NDC, which prevented it from
happening.
Class Discussion
Q: There is a BUYER & a SELLER. Who is the debtor & who is the creditor?
A: The question is irrelevant if the obligation is a reciprocal obligation.
• GR: All contracts are reciprocal, because both give each other something.
• Ex. Lessor & lessee, mortgagor & mortgagee (unless the lender is also the
mortgagee, like a bank, which these days happens more often).
Article 1187. The effects of a conditional obligation to give, once the condition has
been fulfilled, shall retroact to the day of the constitution of the obligation.
Nevertheless, when the obligation imposes reciprocal prestations upon the parties,
the fruits & the interests during the pendency of the condition shall be deemed to
have been mutually compensated. If the obligation is unilateral, the debtor shall
appropriate the fruits & interests received, unless from the nature & circumstances
of the obligation it should be inferred that the intention of the person constituting
the same was different.
In obligations to do & not to do, the courts shall determine, in each case, the
retroactive effect of the condition that has been complied with.
Art. 1187 Applies to Suspensive Conditions
• If the condition is resolutory, Art. 1187 is NOT relevant. Here, the fulfillment
of the event extinguishes the obligation.
• Art. 1187 applies only to suspensive condition, where the efficacy of the
obligation is merely suspended until the condition is fulfilled.
o When the suspensive condition occurs, the effect of a conditional
obligation “to give” retroacts to the day of the constitution of the
obligation.
• Ex. On Feb. 1996, X, the obligor, promises to give Y a specific car in the event
it rains on the June 1, 1996. It rains on June 1, 1996.
o X must give Y the accessories of the car as of Feb. 1996.
o The obligor is duty bound to take care of the car & its accessories from
the time the obligation has been constituted.
Unilateral Obligations
• The debtor keeps the fruits & interests received
o UNLESS from the nature & circumstances of the obligation it should
be inferred that the parties intended differently.
o Ex. Following the same example provided above, if X’s car is chosen as
a special car in a competition & wins a prize after Feb. 1996 but
before June 1996, the prize obtained by X belongs to X.
Reciprocal Obligations
• The fruits & interests during the pendency of the condition shall be deemed
to have been mutually compensated.
 o Ex. X promises to give a mango orchard to Y & Y promises to give X
P50,000. Both obligations shall take effect only if it rains on June 1.
§ Any fruit of the orchard & any interest on the money shall
mutually compensate each other. X will not get the interest on
the money, & Pedro will not get the fruits of the orchard once
the condition is fulfilled, even though technically their right to
the fruits & interest retroacts to the date the obligation has
been constituted.
Class Discussion
Q: X is buying from Y a farm for P100,000 if it rains on Tuesday next month. They
signed a contract & it is perfected, but X & Y hold it in abeyance. Y’s farm is growing
abundantly, but X’s money is decreasing in value. It rains on Tuesday. Who will have
a personal right to the fruits & instruments?
A: X technically has personal rights to the fruits. However, the law provides that in a
reciprocal obligation, the fruits & interests during the pendency of the condition shall
be deemed mutually compensated. Thus, X & Y’s fruits & interests will compensate
one another instead.
*CASE: Vda. de Ouano v. Republic of the Philippines
Facts: A GOCC expropriated land to build an airport, on the condition that it will allow
the owners to reacquire the land if the airport is not completed. The condition
happened, but for a long time the government did not allow the owners to reacquire
their properties as promised. The landowners file suit to get the properties back.
What expenses must be paid to which party, & what must be done with the fruits
earned over the property while it was with the GOCC?
Held: Justice & fair play requires that the GOCC return the properties to the
landowners. Meanwhile, the landowners should also return the just compensation
paid for them for the expropriation of their properties; they must likewise pay the
necessary expenses incurred by the GOCC & the monetary value of its services
managing the lots in question to the extent that they, as landowners, were benefited
thereby.
Also, in accordance with Art. 1187 on mutual compensation, the GOCC may keep
whatever income or fruits it may have obtained from the parcels of land
expropriated. In turn, the landowners need not require the accounting of interests
earned by the amounts they received as just compensation.
Following Art. 1189, any improvements to the property’s value need not be paid to
the GOCC by the landowners, since the value increase is merely a natural effect of
nature & time.
Obligations “To Do” & “Not To Do”
• The courts shall determine, in each case, the retroactive effect of the
condition that has been complied with.
Article 1188. The creditor may, before the fulfillment of the condition, bring the
appropriate actions for the preservation of his right.
The debtor may recover what during the same time he has paid by mistake in case
of a suspensive condition.
45 | Katrina C. Gaw | Block C 2018
Preserving Rights
• The law allows the creditor to protect his interest even if the condition has not
yet been fulfilled.
o Thus, a creditor can file an injunction suit to stop the debtor from
alienating his property, if it is supposed to be given to the creditor
once a particular condition is fulfilled.
• If, prior to the happening of the suspensive condition, the debtor pays the
creditor by mistake, the debtor can recover the payment.
o The obligation is not yet due & demandable.
o The condition may not be fulfilled, in which case he will never be
liable.
• CASE: Buot v. CA – While Art. 1188, par. 2 allows recovery if there were
payment by mistake in case of suspensive condition, recovery can likewise be
made even if there was no mistake in order to prevent unjust enrichment on
the part of the person who received the payment even if he had no right to it
because the suspensive condition did not happen.
Class Discussion
Q: An employer & employee enter into a contract. In their CBA, the employer agreed
that an employee who had served continuously for 10 years until the age of 50. But
all the employees have the same birthdays, & all turn 50 at the same time. What can
the employee do to protect his right?
A: The employee may, before the fulfillment of the condition, bring the appropriate
actions for the preservation of his right pursuant to Art. 1188.
Article 1189. When the conditions have been imposed with the intention of
suspending the efficacy of an obligation to give, the following rules shall be observed
in case of the improvement, loss, or deterioration of the thing during the pendency of
the condition:
(1) If the thing is lost without the fault of the debtor, the obligation shall be
extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay
damages; it is understood that the thing is lost when it perishes, or goes out
of commerce, or disappears in such a way that its existence is unknown or it
cannot be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment is
to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose
between the rescission of the obligation & its fulfillment, with indemnity for
damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall inure
to the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right
than that granted to the usufructuary.
Suspensive Condition
 • Art. 1189 speaks of the period pending the fulfillment of a suspensive
condition
• Usually entails a retroactive effect of personal rights
• While still unfulfilled, the obligation has not yet arisen & the determinate
thing is usually in the possession or control of the debtor
Different Ways of Losing the Object
1) It perishes.
o Ex. When, during the pendency of the suspensive condition, the
object, a car, is hit by a bomb & explodes
2) It goes out of commerce.
o Ex. If the car has been discovered to have historical value & is
deemed a national treasure & the government prohibits the sale of
the car
3) It disappears in such a way that its existence is unknown or it cannot be
recovered.
o Ex. If the car is transported from Mindanao to Luzon by ship, & the
ship has been lost at sea & cannot be found
“Fault of the Debtor”
• To be understood in relation to the Sources of Liability (Article 1170), which
constitute breach of the obligation, namely: (1) negligence; (2) delay; (3)
fraud; & (4) contravention of the tenor of the obligation
Effect of Loss During Pendency of Suspensive Condition
• If lost without fault of debtor
o If the thing is determinate, the obligation is extinguished
o If the thing is generic, the obligation remains
• If lost with fault of the debtor - debtor is liable for damages, whether or not
the thing is generic or determinate
Deterioration During Pendency of Suspensive Condition
Thing deteriorates without fault of Any impairment is to be borne by the creditor
the debtor
Deterioration is caused by the The creditor can choose between
debtor (1) Rescission of the obligation; or
(2) Fulfillment
*In either case, the creditor will get damages
Application of Rules on Deterioration
• Ex. During the pendency of the suspensive condition, the debtor uses the car,
which he is supposed to give to the creditor upon the happening of the
condition, in a racing event which causes its deterioration.
o The creditor can seek rescission of the obligation & damages in the
amount equivalent to the deterioration of the car.
o If, however, the creditor believes that he can still make use of the car,
the creditor can seek fulfillment with damages.
46 | Katrina C. Gaw | Block C 2018
• Choice of the remedies to be pursued, whether rescission or fulfillment plus
damages, belongs to the creditor, regardless of the degree of deterioration
caused by the debtor.
o Even if the object, through the fault of the debtor, has badly
deteriorated, the creditor can choose rescission plus damages,
although he can also still choose to fulfillment if he wants
o The debtor cannot say that the remedy chosen by the creditor should
have been fulfillment plus damages or vice versa.
Improvements
• If it improves (1) by nature or (1) by time, such shall inure to the benefit of the
creditor.
• If it is improved at the expense of the debtor, his only right would be that of a
usufructuary.
o Usufruct – gives a right to enjoy the property of another with the
obligation of preserving its form & substance unless the title
constituting it or the law otherwise provides.
Article 1190. When the conditions have for their purpose the extinguishment of an
obligation to give, the parties, upon the fulfillment of said conditions, shall return to
each other what they have received.
In case of the loss, deterioration, or improvement of the thing, the provisions which,
with respect to the debtor, are laid down in Article 1189 shall be applied to the party
who is bound to return.
As for obligations to do and not to do, the provisions of the 2nd par. of Article 1187
shall be observed as regards the effect of the extinguishment of the obligation.
Fulfillment of Resolutory Condition
• Extinguishes the obligation
• There must be restitution of what has been obtained
• Ex. X & Y promised that X (the debtor) will continue having possession over a
particular car, provided that X will not watch TV.
o If X watches TV, his right to the possession of the car is extinguished,
& the obligation of Y to allow X the possession is also extinguished.
o If, while the resolutory condition has not yet been fulfilled:
1) If car is destroyed without the fault of the debtor X, the
obligation to return is extinguished.
2) If the car is lost through the fault of the debtor, he shall be
liable for damages.
3) If the car deteriorates without the fault of the debtor, the
impairment is to be borne by the creditor.
4) If the car deteriorates through the fault of the debtor, the
obligee may choose between (1) rescission & (2) fulfillment,
with indemnity for damages in either case.
5) If the car is improved by its nature, or by time, the improvement
shall inure to the benefit of the obligee.
6) If the car improves at the expense of the debtor, he shall have
no other right than that granted to the usufructuary.
 • In obligations to do & not to do, the court shall determine the effect of the
extinguishment of the obligation.
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment & the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Article 1385 & 1388 & the Mortgage Law.
Reciprocal Obligations
• Those that:
o Arise from the same cause &
o In which each party is a debtor & a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other
• The obligation of one is a resolutory condition of the obligation of the other;
the non-fulfillment one of entitles the other to rescind.
• In reciprocal obligations, the right to rescind is implied, which means that
such right need not be expressly provided for in the contract for the parties to
have it
• Ex. In a contract of sale, the non-payment of the balance of the price by the
buyer gives rise to the seller’s right to rescind.
• In case of non-compliance, the aggrieved party has an implied power to
rescind or resolve the contract.
o Termination in Art. 1911 is more appropriately called resolution & not
rescission (but they are used interchangeably here)
Rescinding a Contract
• In Art. 1191, resolution & rescission are used interchangeably, though they
technically do not mean the same thing
• Rescinding – rather than just to terminate the contract & release the parties
from further obligations, it means to:
o Abrogate the contract from the beginning &
o Restore the parties to their relative positions as if no contract has
been made
• Similar to declaring the contract void at its inception
• GR: With rescission, one must always go to court if one wants damages
o EXC: If there is a stipulation in the contract giving a party the unilateral
power to rescind the contract
• Predicated on the breach of faith by any of the parties, violating reciprocity
between them.
o Must be SERIOUS & SUBSTANTIAL
o No breach of faith = no rescission
47 | Katrina C. Gaw | Block C 2018
• Ex. A property that was subject of a contract of sale was already transferred
to the buyer. The buyer cancelled the deeds of sale, on the valid ground that
there was negation of the cause of the contract, as the properties turned out
to be unsuitable for the purpose for which they were acquired without fault of
the seller.
o This cancellation of contract is NOT rescission in Art. 1911.
§ No breach of faith on the part of any party.
§ The seller complied & the buyer did not suffer direct injury.
• Applicable prescriptive period for rescission –
o 10 years if the contract is written
o 6 years if the contract is oral
Class Discussion
Q1: Must you go to court if the power to rescind is always implied?
A1: YES. There are no exceptions. It is the court that will revoke the contract.
Q2: What if there is an express power to rescind in the contract; can you rescind?
A2: YES. The notice given to the injuring party is the revocatory act.
But in certain cases, depending on the property involved, there is a special way to
rescind. For example, when it comes to real property, the rescission must be a
notarial rescission.
Q3: What kind of breach will give rise to the power to rescind?
A3: The breach must be substantial; hence, parties can go to court to question the
propriety of the rescission, & not the power to rescind, when there is an express
stipulation allowing rescission. For example, delay is not necessarily a substantive
breach. What makes delay is a substantive breach is only when time is of the
essence.
CASE: Philippine Amusement Enterprises, Inc. v. Natividad
Lesson: A mere causal breach does not justify rescission. The breach must be
serious & substantial.
Facts: The lessee of a jukebox sought rescission of the contract of lease of the said
machine because “there were times” the machine did not work. Will the court grant
the rescission?
Held: No. Rescission is ordered only when the breach is substantial as to defeat the
object of the parties in entering into the agreement. Occasional failure is not
frequent enough to render it unsuitable. There was also no claim of any damage on
the part of lessee, like a drop of income.
CASE: Tan v. CA
Lessons: WON a breach is substantial depends upon the attendant circumstances
• Slight delay when time is not of the essence is not considered substantial
breach.
• Where the fulfillment of the condition does not depend on the will of the
obligor, but on that of a 3rd person, the obligor’s part of the contract is
complied with if he does all that is in his power & it then becomes incumbent
upon the other contracting party to comply with all the terms of the contract.
Facts: A buyer bought a piece of legally-obtained public land from a seller. The buyer
tasked the seller with clearing the land & with cancelling the mortgage on the
property in favor of DBP, giving the seller earnest money to cancel the mortgage.
The seller failed to clear the lot for a few days & failed to cause the cancellation of
the mortgage as it took DBP some time to process the papers on the date set for the
execution of the deed of sale, & were delayed for 12 days. He also failed to get the
DENR permit. HOWEVER, he already did everything to effect the cancellation. Notice
of levy & execution had already been filed by the seller, though it was not yet
cancelled by the Registry of Deeds. DBP delayed the cancellation of the contract
until 12 days after it was due. Can the contract be rescinded?
Held: No. There was substantial compliance on the part of the seller to clear the
property; there can be no rescission.
There were only slight delays, & time was not of the essence in the contract. The
interest in the land was already conveyed to the buyer. Even not yet getting the
DENR permit cannot be considered as substantial breach. Prior approval by the
DENR is required only in case of sale & encumbrance of public land: (1) during the
pendency of the application by the purchaser & (2) before his compliance with the
requirements of the law. The seller here also already properly conveyed title to
buyer.
CASE: Velarda v. CA
Lesson: Even if delay is only slight & time is not of the essence, when the existing
obligation is repudiated because the debtor imposes pre-conditions for payment, or
makes it a qualified offer to pay, there can be rescission.
Facts: The debtor delayed paying the obligation for 1 month. The debtor imposed
upon the creditor pre-conditions for the payment, making the payment a qualified
offer to pay. The debtor claims this slight delay is only a causal breach. Can there be
rescission?
Held: Yes. While a delay of 20 days, 1 week, or even a month may be causal
provided that time is not of the essence, the totality of the whole case shows that
the qualified offer to pay was a repudiation of the existing obligation, which was
legally due & demandable under the contract of sale. The creditor was left with no
other legal option but to validly rescind the contract.
CASE: Consolidated Industrial Gases v. Alabang Medical Center
Facts: A contract was entered into for the installation of a medical gas pipeline
system. Rescission was sought on the ground that no test run & seminar were
conducted, even if these were stipulated. Should rescission be granted?
Held: No. The provisions on the test run of & the seminar on the medical oxygen
system are not essential parts of the installation contracts as they do not constitute
a vital part of the centralized medical oxygen system. It thus cannot be said that the
failure to do them were substantial & fundamental violations as would defeat the
very object of the parties in making the agreement.
CASE: Nolasco v. Cuerpo
Lesson: A substantial breach of a contract, unlike slight and casual breaches
thereof, is a fundamental breach that defeats the object of the parties in entering
into an agreement.
48 | Katrina C. Gaw | Block C 2018
Facts: The contract between X & Z provided –
X shall, within 90 days from the signing of the contract, cause the completion of the
transfer of registration of title of the property subject of the contract, from Y to X’s
name, at X’s own expense. Failure on the part of X to undertake the foregoing within
the prescribed period shall automatically authorize Y to undertake the same in
behalf of X & charge the costs incidental to the monthly amortizations upon due
date.
The underlined provision was breached. Is this enough for a rescission of the
contract?
Held: No. Though X failed to perform his obligation to effect a transfer of the title of
the subject land from Y to his name within the prescribed period, such failure did not
constitute a substantial breach that would entitle Z to rescind (or resolve) the
subject contract. To reiterate, for a contracting party to be entitled to rescission (or
resolution) in accordance with Art. 1191, the other contracting party must be in
substantial breach of the terms of their contract. Here, it cannot be said that X’s
failure to undertake their obligation underlined defeats the object of the parties in
entering into the subject contract, considering that the same provides Y contractual
recourse in the event of X’s non-performance of the aforesaid obligation, that is, to
cause such transfer themselves in behalf & at the expense of X.
Remedy in Case of Non-Compliance
• Either fulfillment or rescission, with damages either way
• CASE: Areola v. CA
o Facts: X was insured under an insurance company. X had a rightful
claim which the company did not comply with, because of an
erroneously canceled insurance policy on the part of the company.
X was successful in seeking the enforcement of the erroneously
canceled insurance policy by seeking the reinstatement of the same.
The insurance company argued that, because X sought the
reinstatement of the same, X in effect chose the fulfillment of the
obligation (as opposed to rescission) & thus the company need not be
paid damages. Is the company correct?
o Held: No. Whether the party demands fulfillment or rescission, he is
entitled to damages.
• Injured party may seek rescission even after he has chosen fulfillment, if the
latter should become impossible.
• CASE: Ayson Simon v. Adamos
o Facts: The buyer of a lot filed a case against the seller for delivery.
§ HOWEVER, a case was previously filed by the heirs of the
deceased original owner against the seller for delivery of the
same properties to them.
§ Both the heirs & the buyer won the cases against the seller.
The buyer sought delivery. HOWEVER, the delivery to the buyer
had become impossible, because the properties were already
validly possessed by the heirs.
§ The buyer filed another suit for rescission & damages. Is this
allowed, even if the buyer already previously chose fulfillment?
o Held: Yes. The buyer was correct to file the rescission case, because
fulfillment had become impossible.
 • BUT: The law does not authorize the injured party to rescind the obligation &
at the same time seek partial fulfillment in the guise of recovering damages.
o Thus, SC has disallowed the recovery of penalty charges stipulated in
a contract which was also sought to be rescinded.
Express Contracts
• The power to rescind can also be expressly stipulated in the contract.
o Unilateral extrajudicial stipulation
• The law does not prohibit parties from entering into an agreement providing
that the violation of the terms of the contract shall cause the cancellation,
termination or rescission thereof even without court intervention.
• The stipulation is in the nature of a facultative7 resolutory condition
• HOWEVER, notice must always be given to the defaulter before rescission can
take effect.
• Still provisional, & subject to scrutiny & review by the courts
o If the other party does not believe rescission to be justified, it can
result to judicial action
o If the court, after due hearing, decides that the rescission was not
warranted, the responsible party will be sentenced to damages
o In the contrary case, the resolution will be affirmed, & consequent
indemnity will be awarded to the party prejudiced.
• The party who deems the contract violated may consider it rescinded & act
accordingly, without previous court action, but it proceeds at its own risk.
o Only final judgment of the court will conclusively settle whether the
action taken was or was not correct in law.
o BUT the party who believes itself injured need not file suit first & wait
for a judgment before taking extra-judicial steps to protect its interest.
§ The law itself requires that he should exercise due diligence to
minimize its own damages.
• If there is an express stipulation of rescission, any court decision adjudging
its propriety extrajudicially made is NOT the revocatory act of rescission but
merely declaratory or an affirmation of the revocation.
Requisites for Effectivity of Expressly Stipulated Rescission
1. Agreement providing that the violation of the terms shall cause the rescission
without court intervention
2. Notice to be given to defaulter
CASE: Korea Technologies Co. v. Lerma
Lesson: While as a general rule, there may be rescission of a contract when there is
an express stipulation therein which will be confirmed by courts, such rule is NOT
applicable where there is a valid arbitration clause between the parties. When there
is an arbitration clause, neither party can rescind the contract; it must first be
brought to arbitration.
Facts: The parties entered into a contract with an arbitration clause, which provided
that all disputes, controversies, or differences which may arise between the parties,
7 Contingent; may or may not happen
49 | Katrina C. Gaw | Block C 2018
out of or in relation to the contract, shall be settled by arbitration in Korea, in
accordance with the commercial arbitration rules in that country. If the contract is
rescinded, can the parties go to Philippine courts for confirmation?
Held: While the SC has held that the act of treating a contract as rescinded on
account of infractions by the other contracting party is valid, albeit provisional, as it
can be judicially assailed, this doctrine does not apply here on account of the valid
arbitration clause. Where an arbitration clause in a contract is availing, neither of
the parties can unilaterally treat the contract as rescinded since whatever infractions
or breaches by a party or differences arising from the contract must be brought first
and resolved by arbitration, and not through an extrajudicial rescission or judicial
action.
Implied Power of Rescission
• The court shall decree the rescission claimed
o UNLESS there is just cause authorizing the fixing of a period.
• CASE: Roman v. CA
o Facts: The contract stipulated that the buyer shall pay the purchase
price within 60 days from receipt of the notice that the properties
have already been titled. Notice was sent on Oct. 11, 1958. Payment
however was not made. An action was filed for rescission.
§ The buyer claimed that he was not given notice & prayed for a
period within which to pay. Should a period be fixed?
o Held: There would be no just cause for fixing a period. After institution
of the action against him, what the buyer should have done, which he
did not do, was to pay the seller within 60 days after service of
summons (the notice).
• CASE: Central PH University v. CA
o Facts: The donee failed to comply with the resolutory condition
provided in the deed of donation.
o Held: There was no just cause for the fixing of a period, since a more
than reasonable period of 50 years had already been allowed the
donee to comply with the condition, even if the condition is
burdensome. The fixing of a period would be a mere technicality &
formality & would serve no purpose than to delay or lead to an
unnecessary and expensive multiplication of suits.
Valid Rescission Means Mutual Restitution
• Creates an obligation to return the things which were the object of the
contract; there will be mutual restitution by the parties
o Designed to restore parties to their former situations
• Can only be made when the one who demands the rescission can return what
he is obliged to return
• If one of the parties has already paid the price in a contract, but has not
received what should be delivered to him, he has nothing to restore.
o He is entitled to the return of what he has paid.
• BUT: If the contract stipulates liquidated damages, the injuring party must
pay said damages, despite the rescission of the contract & subsequent
mutual restitution

Contract to Sell v. Contract of Sale
• Contract to sell – the seller is given the unilateral right to terminate the
contract in case of non-payment of the purchase price; vendor remains the
owner as long as the vendee has not fully complied with the purchase price
o Termination is NOT a rescission under Art. 1191 but an
enforcement of the contract
§ Because title remains with the vendor & does not pass
to the vendee until full payment of price
§ If the vendor ejects the vendee for failure to meet the
condition, he is just enforcing the contract, not
rescinding it
o Failure to pay is NOT a mere breach, causal, or serious
§ It just PREVENTS the obligation of the vendor to convey
title from applying obligatory force
o BUT: Even in a contract to sell, if the fraudulent transfer of
ownership of the object of the sale prior to the final payment was
made, then there is a substantial breach which entitles the seller
to the rescission of the contract.
• Contract of sale – non-payment is a negative resolutory condition
o The vendor has lost ownership of the thing sold & cannot recover
it, unless the contract of sale is rescinded
CASE: Palay, Inc. v. Clave
Lesson: There must always be notice before rescission, even when there is an
express stipulation of rescission “without notice” in a contract between two parties.
Facts: The parties entered into a contract to sell a parcel of land where it was
expressly stipulated that the seller “shall have the right to declare this contract
canceled & of no effect without notice” to the buyer in case the latter fails to pay his
installment. The seller did indeed cancel the contract without notice upon failure of
the buyer to pay the installment. Was the cancellation valid, given the provision in
the contract allowing for rescission without notice?
Held: No. Cancellation is invalid, since there was no notice to the defaulter informing
him of the termination. SC disregarded the stipulation allowing “no notice.”
RA No. 6552: An Act to Provide Protection to Buyers of Real Estate on Installment
Payments
• Highlights importance of making a notice of cancellation regarding real estate
sold in installment
o The actual cancellation of the contract shall take place 30 days from
receipt by the buyer of notice of cancellation or demand for rescission
of the contract by a notarial act &
o Upon full payment of the cash surrender value to the buyer
*CASE: F.F. Cruz & Co. v. HR Construction Co.
Lesson: The right of rescission may be waived by agreement of the parties; thus, a
party may waive the power to rescind.
50 | Katrina C. Gaw | Block C 2018
Facts: The contract in this case said that if any one of the parties breaches the
contract, the obligation of the other shall continue; & while the works are continued,
there will be arbitration. Hence, the contract provided that the arbitration or
resolution of the dispute between the parties arising from a breach would not lead to
the stoppage of works required in the contract. Is such a stipulation allowed?
Held: Yes. This is a valid stipulation & is an express waiver of the right to rescind the
contract. It would thus be wrong for the party constructing the works to implement a
work stoppage.
CASE: Spouses Francisco v. Deac Construction
Lesson: Rescission under Art. 1191 is not predicated on injury to economic interests
on the part of a party, but of breach of faith which is violative of the reciprocity
between the parties.
Facts: The contractor already commenced the construction, but incipiently breached
the contract already by not procuring a building permit & making unauthorized
corrections. Should the contract be rescinded?
Held: Only partially. SC held that since the construction was already 75% complete,
partial rescission only should be granted, particularly for the undelivered or
unfinished portion of the construction. Equitable considerations justify the rescission
of the portion of the obligation that has not been delivered.
Class Discussion
GR: For rescission, you must always go to court if you want to claim damages
EXC: If there is express stipulation in the contract
• Unilateral power give to a party to rescind the contract
Class Discussion
Q1: What is the operative act that revokes the contract in court?
A1: The court decision; this is what gives the rescission finality.
Note that in reciprocal obligations, there is always an implied power to revoke. The
court’s decision is just the revocatory act.
Q2: What is the operative act of rescission in cases where there is express
stipulation?
A2: The notice of the party. But the party can go to court still to determine if there
really was substantial breach. The court decision will affirm the validity of the
decision made.
Article 1192. In case both parties have committed a breach of the obligation, the
liability of the first shall be equitably tempered by the courts. If it cannot be
determined which of the parties first violated the contract, the same shall be
deemed extinguished, & each shall bear his own damages.
Violation of Both Parties
• If the violation can be traced back to the parties & both of them committed
the breach, 1st violator is penalized only if, in fact or by evidence, such 1st
violator can be determined.
o The subsequent violator will not be held liable.
 o The liability of the 1st violator shall be equitably tempered by the court
as the injury to the 2nd violator might not have been so great had it not
for the subsequent infraction of the 2nd party-violator.
• When 1st violator cannot be determined – obligation shall be deemed
extinguished, & each shall bear his own damages.
o CASE: Camus vs. Price, Inc.
§ Facts: The lessor did not comply with his obligation to increase
the elevation of the lower portion of the lot. The lessee also did
not comply with his obligation to cover the building with
insurance. It could not be determined with definiteness which
party committed the 1st infraction of the terms of the contract.
Who should be liable?
§ Held: The parties are actually in pari delicto8 & the contract is
deemed extinguished, with the parties suffering their
respective losses.
CASE: Spouses Fernando v. Continental Airlines
Lesson: If both parties are at fault or in default in the performance of their respective
reciprocal obligations, they are both liable for damages.
Facts: X bought an airline ticket from Continental Airlines. X was given the right to
exchange his unused ticket for another, provided he pay an additional amount if any
is warranted. When X wanted the ticket exchanged, Continental Airlines wanted to
charge him extra, but X refused. Instead, X sued Continental Airlines. Can the airline
be made liable?
Held: No. The airline’s liability for damages for its refusal to issue a ticket to X is
offset by X’s liability for his refusal to pay the amount not covered by the subject
tickets. Moreover, the contract between them remains – the airline is bound to issue
new tickets for X to be chosen by X, & X is obliged to pay whatever amount is not
covered by the value of the subject tickets.
CASE: Goldloop Properties v. GSIS
Facts: X & Y entered into an agreement where Y, as contractor, would construct &
renovate certain buildings. After the construction, there would be a sharing in the
earnings in connection with the eventual sale of the properties. It was also agreed
that the owner of the building, X, will be given guaranteed payments at certain
phases of the construction & that Y will deliver the building free from all liens. Later,
the local government did not issue the building permit to the owner, on the ground
that it had unpaid taxes. X protested that it was a GOCC, & hence, exempt from tax.
As a consequence of all this, construction ceased. On the other hand, Y failed to
deliver certain portions of the guaranteed payments to X. Can there be restitution in
this case?
Held: Yes. Both parties must restitute whatever they have received from each other.
However, both parties will not be awarded damages, because both breached their
respective obligations. At the same time, in this case, it was not determinable if X or
Y was the first infractor. Though technically, X’s failure to pay tax caused the non-
8 In equal fault
51 | Katrina C. Gaw | Block C 2018
issuance of the building permit, X also believed it was exempt from tax. Given all this
uncertainty, the last portion of Art. 1192 is to be imposed.
CASE: Fong v. Duenas
Facts: X & Y entered into an oral joint venture agreement where they agreed to
incorporate a holding company for their business. X agreed to contribute P32.5M.
Later, he would inform Y that his contribution would be limited to P5M. It was also
agreed that Y would incorporate the company & integrate his on-going business into
the company, valued at P32.5M. Y failed to incorporate the company & integrate his
on-going business. Both parties accused each other of breach of contract. Does Art.
1192 apply?
Held: Yes. SC observed that it was not aware of the schedule & who was the 1st
infractor because the joint venture was only orally agreed upon. However, it was
clear that both X & Y contributed to the non-incorporation of the new company & the
failure of the business plans. Given these, SC declared their contract
extinguishment, & held that both X & Y should bear their own damages. It thus did
not award either party with damages.
Class Discussion
Mutual negligence cancels out the contract, so that the contract is extinguished.
Note this is different from contributory negligence in tort.
BUT if one of the parties had an advantage somehow, the rule on unjust enrichment
will take its course.
SECTION 2. – OBLIGATIONS WITH A PERIOD.
Article 1193. Obligations for whose fulfillment a day certain has been fixed, shall be
demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival of
the day certain.
A day certain is understood to be that which must necessarily come, although it may
not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is
conditional, & it shall be regulated by the rules of the preceding Section.
Obligations with a Period
• Period – designates a particular time which is certain to happen
o The moment when the obligation will either be effective or be
extinguished.
Kinds of Periods
• Suspensive period – gives rise to effectivity of obligation
o Ex. On Dec. 1, 1997, X promises to sing at Y’s nightclub starting Mar.
1, 1998.
§ While the obligation is constituted earlier, its effectivity only
commences on a certain future period of time, Mar. 1, 1998.
o CASE: Gaite vs. Fonacier
 § Facts: The contract provided that the balance of the purchase
price “will be paid from & out of the first letter of credit
covering the first shipment of iron ores &/or the first amount
derived from the local sale of iron ore made by the Larap
Mines Co., Inc.” Is this a condition or a period?
§ Held: The stipulation is a suspensive period, NOT a
suspensive condition, because it expresses no contingency in
the obligation to pay, even if there is no exact date given.
• By the very terms of the contract, the existence of the
obligation to pay is recognized; only its maturity or
demandability is deferred.
• Resolutory period – extinguishes the obligation
o Ex. X promises to sing at Y’s nightclub as soon as the contract is
signed on Dec. 1, 1997 up to Mar. 1, 1998
§ Obligation to sing can be demanded at once by the obligee
but the obligation shall be extinguished on a day certain, Mar.
1, 1998.
A Day Certain
• That day which must necessarily come, although it may not be known when.
o If the uncertainty consists in whether the day will come or not, it is a
condition.
• Ex An obligor commits to deliver immediately a lollipop to his 6-year-old
nephew when the nephew’s temporary front tooth naturally falls off, it is not
known when the temporary tooth will fall-off or be removed but it is certain to
happen.
o The “condition” above refers to a period.
o BUT: If the stipulation is that the candy will be given when he passes
the entrance examination at the Ateneo, a condition exists because its
happening is uncertain.
CASE: MIAA v. Olongapo Maintenance Services
Lesson: Courts cannot extend the life of a contract, as initially agreed upon by the
parties, through an injunction.
Facts: A lower court, through an injunctive relief, extended the life of a contract. Was
the action of the court correct?
Held: No. Where a determinate period for a contract’s effectivity has been agreed
upon by the parties, the lapse of such period ends the contract & parties cease to be
bound by the terms thereof.
CASE: City of Cebu v. Heirs of Rubi
Lesson: The extension of a contract cannot be implied from the failure of one party
to reply to the request for extension of another party.
Facts: The buyer requested for an extension to make payment from the seller; the
seller did not act on the buyer’s request. Was there an extension?
Held: No. There can be no implied extension of time to pay the price when the seller
did not act on the buyer’s request for extension. The general rule is that an
agreement to extend the time for payment, to be valid, must be for a definite time,
52 | Katrina C. Gaw | Block C 2018
although it seems no precise date is fixed, it being sufficient that the time can be
readily determined.
Article 1194. In case of loss, deterioration, or improvement of the thing before the
arrival of the day certain, the rules in Article 1189 shall be observed.
Applicability of Art. 1189
• Applies to obligations subject to suspensive or resolutory periods.
Article 1195. Anything paid or delivered before the arrival of the period, the obligor
being unaware of the period or believing that the obligation has become due &
demandable, may be recovered with the fruits & interests.
Payment by Mistake
• In a suspensive period, the obligation to give will not take effect until the
arrival of the period.
• The creditor has no right to obtain the thing until the arrival of the period.
o UNLESS the debtor & the creditor, with full knowledge of the period,
decide to give & accept the thing to be delivered or the payment.
Right to Recovery
• Debtor’s right to recover includes the fruits & interest for said the period he
mistakenly paid.
• Ex. X, on Oct. 1, promises to deliver to Y a mango orchard on Dec. 1.
However, on Nov. 1, X delivers the orchard believing that it is due &
demandable on that date.
o He can recover what he has delivered together with fruits and interest.
o Prior to Dec. 1, Y obviously has no right to possess the mango orchard.
o However, if Y is in the possession of the mango orchard by Dec. 1, X
can only recover the fruits & interest from the time he delivered the
property (Nov. 1) up to Dec. 1.
Article 1196. Whenever in an obligation a period is designated, it is presumed to
have been established for the benefit of both the creditor & the debtor, unless from
the tenor of the same or other circumstances it should appear that the period has
been established in favor of one or of the other.
For the Benefit of Both Parties
• Always presumed, absent any language showing that the period was set for
the debtor or creditor alone
• Ex. A lease agreement is deemed to have been made for the benefit of both
parties, not just the lessor or the lessee
CASE: Abesamis v. Woodcraft Works, Inc.
Lesson: When a fortuitous event occurs prior to the arrival of the period in an
obligation with a period, the loss cannot be borne by the debtor.
Facts: X promised Y a shipment of logs, & promises he will make the shipment
“before the end of July, but not earlier than Apr. with the option to make partial
shipment depending on the availability of logs & vessels.” Y would furnish the vessel.
A storm swept away almost all the logs awaiting shipment sometime in May. Y
demands damages from X because of the loss of the logs. Is X liable?
Held: No. The obligation is one with a period, intended for the benefit of both parties.
The obligation between the parties was a reciprocal one – Y was to furnish the
vessel & X the logs. The obligation being reciprocal & with a period, neither party
could demand performance nor incur in delay before the expiration of the period.
Consequently, when the typhoon struck in May, there was yet no delay on the part of
X. Y must shoulder the corresponding loss.
Waiver
• The benefit of the period may be waived by the person in whose favor it was
constituted
• CASE: Abesamis v. Woodcraft Works, Inc.
o Facts: X bound himself to deliver logs to Y before the end of July 31.
However, X informed Y that he will make an earlier delivery of these
subject portions of the shipment on July 25. X failed to make delivery.
Is X liable?
o Held: Yes, X was made liable for the logs due on July 25, because he
waived his right to make use of the period by his explicit notice to Y of
earlier delivery.
Class Discussion
Q: X loans P10M from Y, payable at the year 2020, with interest of 10% per annum.
5 years later, X wants to back out. X tells Y he wants to pay the P10M now, but Y
refuses. Is Y’s refusal justified?
A: YES. A period is fixed for the benefit of both parties. Normal lenders (not banks)
often use have a penalty for pre-payment, though Congress did not allow this in
banks.
Article 1197. If the obligation does not fix a period but from its nature & the
circumstances it can be inferred that a period was intended, the courts may fix the
duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of
the debtor.
In every case, the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties. Once fixed by the
courts, the period cannot be changed by them.
The Two-Step Process
1. The Courts must first determine that:
• 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 & circumstances it can be inferred that a period was
intended.
53 | Katrina C. Gaw | Block C 2018
2. If the 1st step is satisfied, the court must decide what period was probably
contemplated by the parties.
• This period must not be arbitrary, & must be based on the nature &
circumstances of the case.
CASE: Gregorio Araneta, Inc. v. Phil. Sugar Estates Development Co., Ltd.
Lesson: (1) The court cannot fix a period merely because in its opinion it is
reasonable; it must set the time that the parties are shown to have intended.
(2) The period in an obligation with a period may be indefinite, as long as it is not
uncertain.
Facts: X bound himself to deliver a piece of land to Y, but both were aware that there
were squatters occupying the lot at the time. The court set a period of 2 years for the
obligation of X. Was the court’s setting of the period correct?
Held: No. There is no justification for setting the date of performance at any other
time than that of the eviction of the squatters. The circumstances in the contract
admit no other view, even if such period is indefinite.
The parties knew that they must resort to legal processes to evict the squatters; they
realized that the duration of the suits to be brought would not be under their control.
The conclusion is that the parties must have intended to defer the performance of
the obligations under the contract until the squatters were duly evicted.
CASE: Radiowealth Finance Company v. Del Rosario
Lesson: (1) The act of leaving the exact date in a promissory note blank does not
necessarily mean that the debtors were allowed to pay when they could. If this was
the intent of the parties, they should have so indicated in the note.
(2) It is enough that the note specifies that payment shall be made, for example, in
equal installments for 12 months.
Facts: X owes Y some money, evidenced in a promissory note, to be paid in monthly
installments as agreed upon by the parties, though the exact dates were left blank.
Y allowed X to apply X’s promotion services in payment of X’s promissory note.
Y made a demand for the payment when X’s check payment to Y bounced. X
contended that, since the date was left in blank, it signified that, before their debt
would be due, the court should first fix a period of payment considering that the
payment was dependent upon the sole will of X. Is X’s contention correct?
Held: No. X is liable to Y.
• While the specific date on which each installment would be due was left
blank, the note clearly provided that each installment should be payable each
month.
• It also provided for an acceleration clause & a late payment penalty, which
showed the intention of the parties that the debt should be paid at a definite
date.
• X already tried to pay Y for the month, which further reveals their intentions.
No Changing of Period
• Once the court fixes a period, the parties cannot change it anymore.
Article 1198. The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes insolvent, unless
 he gives a guaranty or security for the debt;
(2) When he does not furnish to the creditor the guaranties or securities which
he has promised;
(3) When by his own acts he has impaired said guaranties or securities after
their establishment, & when through a fortuitous event they disappear,
unless he immediately gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in consideration of which the
creditor agreed to the period;
(5) When the debtor attempts to abscond.
Instances When Debtor Loses Right to Make Use of the Period
1) When the debtor becomes insolvent, unless he gives a guaranty or security
for the debt.
o If a debtor has been given up to Jan. 8 to pay his obligation & he
becomes insolvent, the creditor need not wait up to Jan. 8, 1996 to
demand payment
§ HOWEVER, if the debtor has asked a 3rd person to guarantee
his debt, or if the debtor puts up his house as collateral, he will
again have the benefit of the period
o Insolvency need not be judicially declared
2) When the debtor does not furnish the creditor the guaranties or securities he
has promised
o Usually, when the debtor fails to pay & the creditor has exhausted all
avenues to satisfy his claim without any favorable result, the creditor
can turn to the guarantor for payment
§ If the guarantor has committed himself solidarily, the creditor
can even go against the guarantor immediately without going
against the debtor.
o Securities can take the form of real estate mortgages or pledges.
§ If the loan is collateralized through the mortgage of a house &
the debtor does not pay, the mortgage will be foreclosed. The
house will be sold in a public bidding & a sufficient amount of
the proceeds to satisfy the indebtedness will go to the creditor.
3) When, by his own acts, the debtor impairs said guaranties or securities after
their establishment, & when through a fortuitous event they disappear,
unless he immediately gives new ones equally satisfactory
o CASE: Gaite v. Fonacier
§ Facts: Payment was secured through 2 security bonds — one
with a mining company & another with a bonding company.
• The obligor was obliged to pay the indebtedness from
the time it received the proceeds of the sale of iron ore.
• The obligor failed to renew the surety bond with the
bonding company, prior to the arrival of the period for
delivery, & did not replace it with an equivalent
guarantee.
Has the obligor lost the right to make use of the period?
54 | Katrina C. Gaw | Block C 2018
§ Held: Yes. The obligor lost the right to make use of the period,
because he had impaired 1 of the security bonds by failing to
renew it.
• The obligee’s acceptance of the surety company’s bond
with full knowledge that on its face it would
automatically expire within 1 year does not amount to a
waiver of the renewal after the expiration date.
o NOTE: The debtor loses the benefit of the period even if the guaranties
or securities disappear through a fortuitous event
§ UNLESS new ones equally satisfactory are immediately given
§ Ex. If the house used as collateral is hit by lightning, the debtor
will still lose the right to the period unless he gives another
house of the same quality as collateral
4) When the debtor violates any undertaking, in consideration of which the
creditor agreed to the period
o Ex. If X convinces Y to allow him to pay his indebtedness on May 7,
instead of Jan. 30 & Y agrees because X, who is a singer, promises to
sing in Y’s nightclub for 3 nights for only half the talent fee, & the
debtor fails to sing as promised, the debtor loses his right to the
period & the creditor can immediately demand payment of the
obligation
o CASE: DBP v. Sta. Ines – The contract provided that the
commencement of the period of payment for the seller to acquire the
corporate shares would be based on the share purchase agreement;
this latter agreement, however, would only be executed after the buyer
has approved the valuations & its officer recommends it (this
recommendation was a principal consideration in entering into the
contract). The buyer, however, delayed in approving the valuations. SC
held that the buyer lost the right to make use of the period under Art.
1198 (4) & the obligation became immediately demandable.
o CASE: Allen v. Province of Albay – If, through the act of the owner in a
construction contract, the contractor has been prevented from
finishing the works on the contractual completion date, the owner is
deemed to have waived the time limit & the contractor is bound only
to finish the construction within a reasonable time.
§ If there are liquidated damages provided for in the contract in
case of delay, a claim for such damages cannot be sustained;
§ The liquidated damages can’t be restored & made applicable
to an unreasonable length of time.
5) When the debtor attempts to abscond
o If the debtor attempts to flee from his obligations, or to move away to
evade payment of his indebtedness, the debt can be demanded from
him immediately.
Class Discussion
• In this provision, it does not matter if the period was fixed to benefit just the
debtor or both parties.
 • In reciprocal obligations, the word “debtor” in this provision would be
irrelevant, because the parties are the creditors & debtors of each other.
• Insolvency – the person still has assets, but his liabilities exceed his assets
assuming that he pays of all his debts at the same time
o Insolvent is required to leave with the Court all his properties
SECTION 3. – ALTERNATIVE OBLIGATIONS.
Article 1199. A person alternatively bound by different prestations shall completely
perform one of them.
The creditor cannot be compelled to receive part of one & part of the other
undertaking.
Complete Performance
• Partial performance of the different prestations cannot be considered
fulfillment of the obligation & cannot be done
o UNLESS the creditor accepts such partial performance as complete
performance.
• Ex. If the debtor can either give a house & a car or paint two murals to satisfy
his obligation, he cannot give the car & one mural.
o The creditor cannot even be compelled to accept it; it is considered an
incomplete satisfaction.
o The debtor must choose to either deliver the house & car or the
painting of two murals.
• The obligation will not be satisfied through partial fulfillment of several
prestations.
• If all but one of the alternatives become legally impossible to fulfill, the
obligation will no longer be alternative.
o Ex. Where a loan was payable in PHP or USD, the alternative obligation
ceased to exist when, at the time the amount became due during the
Japanese Occupation, payment in USD was prohibited.
Article 1200. The right of choice belongs to the debtor, unless expressly reserved by
the creditor.
The debtor shall have no right to choose those prestations which are impossible,
unlawful, or which could not have been the object of the obligation.
Debtor’s Choice
• The choice is given to the debtor by law
o EXCEPT when expressly reserved by or granted to creditor
o Any doubt as to who chooses must always be interpreted in favor of
the debtor
• Debtor cannot choose impossible or unlawful prestations, or those which
could not have been the object of the obligation.
o Ex. if for the accomplishment of the obligation, the debtor can either
give a car, fly to the moon, or not join the army, he has all the 3
prestations as alternatives, namely: to give, to do & not to do.
55 | Katrina C. Gaw | Block C 2018
§ The 1st & the last alternatives are possible & lawful while the
2nd, which is to fly to the moon, is impossible. The debtor
therefore has no right to choose this second alternative.
o Ex. If the alternatives are: to give opium, to sing a song or not to join
the navy –
§ The 1st alternative is clearly unlawful, so the debtor has no right
to choose this prestation.
o Ex. If the alternatives in a modeling contract are: to deliver the
dresses, to act as model, or to engage in prostitution
§ Not only is the last alternative illegal but it could not have been
the object of the prestation.
Article 1201. The choice shall produce no effect except from the time it has been
communicated.
Right of Notification of Creditor
• Communication to the creditor gives effect to the choice.
o The manner of communication can vary, provided that it clearly
conveys the unmistakable choice of the debtor.
• When the alternatives are all possible, lawful or consistent with the object of
the obligation, the creditor cannot oppose the choice.
• HOWEVER, if some of the prestations are impossible, unlawful or which could
not have been the object of the obligation, the creditor can relay his objection
so that the debtor will know
o BUT anyway, the debtor has no right to choose such proscribed
alternatives.
Article 1202. The debtor shall lose the right of choice when among the prestations
whereby he is alternatively bound, only one is practicable.
Only One Practicable
• GR: Whether only one, some, or a majority are practicable is irrelevant to the
rights of the creditor.
• If only one is practicable, the creditor has no right to complain, because it is
the debtor who will lose his right of choice.
o The creditor must accept this single choice, unless it is unlawful or
inconsistent with the object of the obligation.
• Practicable – capable of being done; feasible.
o Prestations that are not “practicable” may also include lawful,
possible prestations but, because of some special attendant
circumstances, they cannot be done.
• Ex. If the debtor has the following alternatives: to kiss a highly contagious
leper, to sing a song, or not to pay taxes, it is clear that the last alternative is
not only impracticable but also unlawful. The 1st alternative, although not
unlawful & not impossible, is still not practicable because it will endanger the
debtor’s health. In this case, the debtor loses his right of choice because only
one prestation is practicable which is to sing.
Article 1203. If through the creditor’s acts the debtor cannot make a choice
according to the terms of the obligation, the latter may rescind the contract with
damages.
Rescission in Alternative Obligations
• Ex. If the debtor has 3 alternatives: to give a particular car, to sing at a
particular night club, or not to resign from his job, & the creditor burns the
particular nightclub where he should sing, the debtor has effectively been
prevented from making a choice from the 3 alternatives, due to the fault of
the creditor.
o The debtor can ask for the rescission with damages.
o If, despite, the act of the creditor, the debtor still wants to maintain
the contract, the debtor can select from the remaining choices.
Article 1204. The creditor shall have a right to indemnity for damages when, through
the fault of the debtor, all the things which are alternatively the object of the
obligation have been lost, or the compliance of the obligation has become
impossible.
The indemnity shall be fixed taking as a basis the value of the last thing which
disappeared, or that of the service which last became impossible.
Damages other than the value of the last thing or service may also be awarded.
Liability for Debtors
• The debtor will not be liable in any way for reducing the alternatives from 3 to
2, provided what remains are lawful, practicable, possible or consistent with
the object of the obligation.
o The debtor will also not even be liable for converting his alternative
obligation to one where there is only 1 lawful & possible prestation.
o The debtor may even cause the loss of the thing, or render the service
impossible.
• The debtor must be responsible for losing ALL alternative prestations to
entitle the creditor to damages.
• Ex. If the debtor has the ff. alternative prestations: to give a car worth
P50,000 or to paint a portrait in a special canvass worth P25,000, the
debtor will be liable for damages if he willfully destroys the car & willfully
destroys the special, rendering both alternatives impossible.
o If the special canvass were first destroyed & thereafter the car,
the damages to be paid to the creditor will be the value of the last
thing which disappeared — the car worth P50,000.
• The indemnity shall be fixed, taking as a basis the value of the last thing
which disappeared, or that of the service which last become impossible.
o Also, damages other than the value of the last thing or service
may also be awarded.
Class Discussion
• In alternative obligations, the prestations need not be the same, but they
could be the same
56 | Katrina C. Gaw | Block C 2018
• An obligor with alternative obligations can only be made liable for destroying
ALL alternatives; if he destroys 1 out of 3 options with malice, that is still OK,
because at the end of the day it is that obligor’s choice anyway.
Article 1205. When the choice has been expressly given to the creditor, the
obligation shall cease to be alternative from the day when the selection has been
communicated to the debtor.
Until then, the responsibility of the debtor shall be governed by the following rules:
(1) If one of the things is lost through a fortuitous event, he shall perform the
obligation by delivering that which the creditor should choose from among
the remainder, or that which remains if only one subsists;
(2) If the loss of one of the things occurs through the fault of the debtor, the
creditor may claim any of those subsisting, or the price of that which, through
the fault of the former, has disappeared, with a right to damages;
(3) If all the things are lost through the fault of the debtor, the choice by the
creditor shall fall upon the price of any one of them, also with indemnity for
damages.
The same rules shall be applied to obligations to do or not to do in case one, some,
or all of the prestations should become impossible.
Creditor’s Choice
• When the choice is given to the creditor, the conferment must be express.
o Once the creditor’s choice is communicated to the debtor, the
obligation ceases to be alternative.
o If the debtor has 3 alternative prestations, once he receives the
selection of the creditor, the debtor is bound to deliver the choice
properly.
• The debtor is obliged to take care of it with the proper diligence of a good
father of a family, unless the law or the stipulation of the parties requires
another standard of care.
Pre-Selection Rules
1) Thing is lost through fortuitous event – the debtor delivers that which the
creditor should choose from among the remainder, or that which remains if
only one subsists.
o If the car, the truck, & the boat were lost because of a fortuitous
event, the obligation is extinguished.
o If only the car were lost, then the creditor can choose between the 2. If
only the boat remains, then the obligation becomes simple & creditor
can demand the delivery.
2) Thing is lost through the fault of the debtor – the creditor may claim any of
those subsisting, or the price of that which, through the fault of the former,
has disappeared, with a right to damages.
o If the debtor destroys the car, the creditor still has 3 choices, the
truck, the boat or the price of the car. In addition, the creditor shall be
entitled to damages regardless of which alternative he chooses.
3) Things are lost through the fault of the debtor - creditor can choose based on
the price of any one of them, also with indemnity for damages.
 o If the car, the truck and the boat were all lost through the fault of the
debtor, the creditor still has 3 choices: the price of the car, the price of
the truck, or the price of the boat. In all cases, the creditor shall be
entitled to damages.
• The same rules shall be applied to obligations to do or not to do in case one,
some, or all of the prestations should become impossible.
Article 1206. When only one prestation has been agreed upon, but the obligor may
render another in substitution, the obligation is called facultative.
The loss or deterioration of the thing intended as a substitute, through the
negligence of the obligor, does not render him liable. But once the substitution has
been made, the obligor is liable for the loss of the substitute on account of his delay,
negligence or fraud.
• The act of the debtor may constitute fraud & the whole contract may be
annulled.
o If the creditor does not try to annul the contract & accepts the giving
of the boat, he can no longer assail the contract as his acceptance
cured the defect of said voidable contract.
o BUT: If the promise to the creditor relative to the 2 substitute cars
does not constitute the reason for which the creditor entered into the
contract, the debtor would not be liable for his bad faith if the principal
obligation can still be performed.
• Once the substitution has been made, the obligor is liable for the loss of the
substitute on account of his delay, negligence, or fraud.
SECTION 4. JOINT & SOLIDARY OBLIGATIONS.

Facultative-Alternative Obligation Article 1207. The concurrence of two or more creditors or of two or more debtors in
• Ex. If the debtor is obliged to give a car, such prestation is the principal one & the same obligation does not imply that each one of the former has a right to
obligation. demand, or that each one of the latter is bound to render, entire compliance with the
o It becomes facultative if, in lieu of the car, he can undertake another prestation. There is solidary liability only when the obligation expressly so states, or
prestation like the painting of a mural. when the law or the nature of the obligation requires solidarity.
• Undertaking the substitute prestation is NOT mandatory in the event that the
principal prestation is NOT performed as the creditor only agrees that it may Solidary Obligation
be given as a substitute. • Gives anyone, some or all of the creditors the right to demand from anyone,
• BUT: If the substitute is given, the creditor cannot refuse it unless it is some or all of the debtors the satisfaction of the total obligation, not merely
unlawful. the share of each debtor in the debt
o BUT ALSO: There is nothing to prevent the parties from agreeing that • *Exists only:
the giving of the substitute prestation is mandatory in the event the o When the obligation expressly so states, or
principal obligation cannot be performed. o When the law (ex. when it comes to partners, torts) or the nature of
the obligation requires it.
Effect of Loss
• If the substitute is lost through the negligence of the debtor, it does not affect Class Discussion
the principal obligation & debtor will not be liable. The presumption is that an obligation with two or more debtors or creditors is a joint
• If there is bad faith on the part of the debtor, it depends: obligation.
o If the substitute prestation was one of the main reasons why the
creditor was induced the creditor to enter into the contract with the Surety v. Guarantor
debtor, but the latter did not really intend to constitute it as a Surety Guarantor
substitute, this could be an act of fraud on the part of the debtor, An insurer of debt; binds himself to An insurer of solvency; subsidiarily liable for
which could make the whole contract voidable. pay the obligation of the debtor when the debt of the debtor
• Ex. A debtor promises to give a particular car to the creditor. it becomes due
o The debtor negotiates so that he can give a boat to the creditor Becomes a solidary debtor Not considered solidarily or even jointly
instead of a particular car, which is preferred by the creditor. liable
o The creditor resists but he agrees on the promise of the debtor to give Creditor need not go against the GR: Can be required to pay the
not 1 but 2 cars of the same type, which the debtor represents as principal debtor first before the indebtedness of the principal debtor only
owned by him, as substitute prestation in the event that the principal creditor can collect from the surety, after the creditor has unsuccessfully
prestation is not performed. either the whole amount of the exhausted all means to collect from the
o Here, the creditor would not have agreed without this substitute indebtedness or for such amount as debtor
prestation. the surety was made liable by
o After the signing of the contract & before the fulfillment of the main contract BUT: By stipulation of the parties, the
prestation, the creditor learns that the debtor does not own the cars. guarantor can make himself solidarily liable

57 | Katrina C. Gaw | Block C 2018

 for the indebtedness
CASE: Sesbreño v. CA
Lesson: Custodianship does not equate to solidary liability.
Facts: Y was indebted to Z.
• X Co. issued a promissory note in favor of Y for the amount of P300K,
assigning such to Z as security for the payment of Y’s indebtedness to Z.
• The note was placed under the custody of Pilipinas Bank, which informed Z
via “Denominated Custodian Receipt” that it “possessed the promissory note
& that upon Z’s written instructions, the bank would undertake physical
delivery of the above securities fully assigned to Z.”
Does this make the bank a solidary debtor?
Held: No. The bank’s statement does not make it a solidary debtor. There was no
express assumption of solidary liability. The bank was just a custodian.
CASE: PNB v. Sta. Maria
Lesson: A special power of attorney does not grant the attorney the authority to bind
the principal solidarily with him on any loan the attorney might thereunder secure.
Facts: The principal, in a special power of attorney, empowered his agent to borrow
money & mortgage real estate to the creditor. The agent indeed borrowed money,
but executed a mortgage not on the account of his principal but in his own name.
The lower court ruled that this would make the obligation joint & several. Does this
create a solidary obligation?
Held: No. Such a scenario does not create a solidary obligation. This is because in
the special power of attorney, the principal did not grant the agent the authority to
bind her solidarily with him on any obligation thereunder.
Express Stipulation for Solidary Liability
• Parties can expressly stipulate solidary liability.
• CASE: Pacific Banking Corp. v. IAC
o Lesson: It is not the title of the document, but its contents, that
determine what type of obligation it is.
o Facts: The document was denominated as a “Guarantor’s Undertaking”
but the provision therein stated that the guarantor shall jointly &
severally pay the bank for any & all indebtedness of the principal
debtor. Is the guarantor solidarily liable, despite being just a guarantor?
o Held: Yes. Since the undertaking expressly stipulated the joint & several
obligation of the debtor, the nature of the obligation was clearly
solidary.
• The ff. phrases indicate that there is a solidary obligation:
o *Individually & jointly liable
o *“Collectively,” “separately,” “distinctly,” “respectively” or “severally”
o Individually liable
o Several obligation
o “Juntos o separadamente”
o “Mancomun o insolidum”
o Jointly & severally guaranteed
• The ff. scenarios also display solidary obligation:
58 | Katrina C. Gaw | Block C 2018
o Where the contract reads “I promise,” or “I hereby bind myself,” & is
signed by 2 or more promisors
o Where it reads: “I promise to pay” & is signed by one person at the
bottom & by another on the back thereof.
o An agreement between 3 creditors of a bankrupt, that it should have a
1/3 of any dividend paid on a claim filed by 2 of the debtors, has been
held joint & several contract.
o Such expressions as “we or either of us,” or “we jointly and severally
promise”
The Use of “I”
• It counts as a solidary obligation when the debtors who were referred merely
as “I” were not identified in the body or content of the document itself.
• HOWEVER, if “I promise to pay” were worded differently in that it identified
the particular person referred to as “I,” then even if there were a number of
signatures in the note, the others cannot be held liable as solidary debtors
because only 1 person as identified expressly in the promissory note made
the promise to pay.
o The others who sign are witnesses & cannot even be held liable as
joint debtors.
• Ex. The promissory note reads: “I, X, promise to pay J P1,000 on or before
Jan. 1, 2003.” The signatures of X (the debtor) & J (the creditor) appear.
o If, at the lower portion of this document, the signatures of M & N
appear, it can never be presumed that M & N also signed as solidary
debtor or creditor.
o This is so because:
§ The law does not make such a presumption.
§ There is no fact in the wording of the document from where
such a presumption could arise.
§ The names of the only debtor & the only creditor were exactly
identified in the body of the document, as Mr. X was identified
in the body immediately preceding the word “I” & he signed it.
§ Even the nature of the obligation (simple loan) does not give
rise to a solidary obligation.
• Once the terms of an agreement have been reduced into writing, it is deemed
to contain all the terms agreed upon by the parties & no evidence of such
terms other than the contents of the written agreement shall be admissible.
Effect of Judicial Decision
• Even if the parties stipulated in their contract that the obligation of the obligor
is solidary but such contract was superseded by a judicial decision declaring
the obligation to be merely joint, the said decision must be enforced in a joint
manner.
• ALSO, if a decision does not state that the obligation of the judgment debtors
is solidary, the writ of execution enforcing such a decision cannot be
implemented in a solidary manner among the judgment debtors.
Law & Solidary Obligations
 • Art. 94 & 121, last par., Family Code – If the ACP/CPG is insufficient to cover
the liabilities for which the ACP/CPG is liable, the spouses shall generally be
solidarily liable for the unpaid balance with their separate properties
• Art. 145, Family Code - If the property arrangement of the spouses is the
separation of property, the liability of the spouses to creditors for family
expenses shall be solidary.
• Art. 927, Civil Code – In inheritance, if 2 or more heirs take possession of the
estate (of the deceased), they shall be solidarily liable for the loss or
destruction of a thing devised or bequeathed, even though only one of them
should have been negligent.
• Art. 1824, Civil Code – All partners are solidarily liable with the partnership
for everything chargeable to the partnership in cases in Article 1822 & 1823
of the Civil Code.
• Art. 1894, Civil Code – 2 or more agents may agree to bind themselves
solidarily
o Art. 1895, Civil Code – If solidarity is agreed upon, each of the agents
is responsible for the non-fulfillment of the agency, & for the fault or
negligence of his fellow agents, except in the latter case when the
fellow agents acted beyond the scope of their authority
• Art. 1945, Civil Code – With respect to bailees in commodatum, when there
are 2 or more bailees to whom a thing is loaned in the same contract, they
are liable solidarily.
• Art. 2146, Civil Code – In the quasi-contract negotiorum gestio, pertinently
provides that the responsibility of 2 or more officious managers shall be
solidary, unless the management was assumed to save the thing or business
from imminent danger.
• Art. 2157 - The responsibilities of 2 or more payees, when there is payment
of what is not due, is solidary.
• Art. 2194 - The responsibility of two or more persons who are liable for quasi-
delict is solidary.
CASE: Ruks Konsult & Construction v. Adworld Sign & Advertising Co.
Lesson: Where several causes producing an injury are concurrent & each is an
efficient cause without which the injury would not have happened, the injury may be
attributed to all or any of the causes & recovery may be had against any or all of the
responsible persons although under the circumstances of the case, it may appear
that one of them was more culpable, & that the duty owed by them to the injured
person was not same. Those who cause the injury are called joint tortfeasors, & are
solidarily liable to the injured party.
Facts: Billboard X fell on Billboard Y (owned by Adworld). It was found upon
inspection that Billboard X’s lower structure did not have the proper foundation, &
that this lower part was first constructed by Transworld. At the same time, the upper
part of Billboard X also did not have proper foundations; this part was built by Ruks.
Both Ruks & Transworld relied on each other for the structural integrity of Billboard
X. Who is liable?
Held: Both Transworld & Ruks are guilty of negligence in the construction of the
billboard, & should be held liable for its collapse & the resulting damage to
Adworld’s billboard. As joint tortfeasors, they are solidarily liable to Adworld. Joint
59 | Katrina C. Gaw | Block C 2018
tortfeasors are those who command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission of a tort, or approve of it
after it is done, if done for their benefit. They are also referred to as those who act
together in committing wrong or whose acts, if independent of each other, unite in
causing a single injury. Under Art. 2194 of the Civil Code, joint tortfeasors are
solidarily liable for the resulting damage. In other words, joint tortfeasors are each
liable as principals, to the same extent and in the same manner as if they had
performed the wrongful act themselves.
*CASE: AFP Retirement & Separation Benefits System (AFPRSBS) v. Sanvictores
Lesson: When two individuals sign a contract of sale as one singular “seller,” their
obligation to the buyer is solidary.
Facts: AFRPRSBS & Prime East signed as “SELLER” in a contract of sale. Later,
however, AFRPRSBS resisted the claim of the buyer, & argued that it was Prime East
alone which should be held liable as seller. Is the contention of AFRPRSBS tenable?
Held: No. The obligation in this case is solidary since AFRPRSBS & Prime East were
clearly referred to as “SELLER” in the contract of sale. They are thus considered as
one seller in the contract.
Class Discussion
Q: AFP & Prime East signed as seller in the contract, while X signed as buyer. If they
indicated themselves as “seller” and they are two people, is the liability joint or
solidary?
A: The liability is solidary, by stipulation of the parties (SC case).
Nature of the Obligation & Solidarity
• Solidary obligations exist also if the nature of the obligation requires it
• Some provisions in the Preliminary Title, Ch. 2 on Human Relations of the
Civil Code, particularly Arts. 19-22, though not expressly providing for solidary
liability, nevertheless should give rise to solidary obligations if violated by 2 or
more persons.
CASE: R Transport Co. v. Yu
Lesson: The liability of the driver of a vehicle & the owner is solidary, unless the
owner proves he exercised due diligence in the selection & supervision of his driver.
Article 1208. If from the law, or the nature or the wording of the obligations to which
the preceding article refers the contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as there are creditors or debtors,
the credits or debts being considered distinct from one another, subject to the Rules
of Court governing the multiplicity of suits.
Joint Obligations
• Presumption of law – an obligation is always joint.
• In the absence of a finding of facts that debtors made themselves individually
liable for the debt incurred, they are obliged to pay only their share in the
indebtedness.
 o Creditors can only claim their share in the credit in proportion to own
& owe.
• It is only when the (1) law, or (2) the nature or (3) the wording of the
obligation clearly provides for solidary liability will the obligation be such.
• Unless otherwise specified, the creditors & debtors in a joint obligation shall
be entitled or shall make payment in equal proportions.
o If A & B are indebted to C & D for P1,000:
§ C can collect from A & B P250 each.
§ D can likewise collect from A & B P250 each.
• If in the same P1,000 obligation, A owes only 1/3 of the indebtedness & B
owes 2/3 while creditor C owns 1/5 of the credit & D owns 4/5:
o A is obliged to pay C only P66.67 & D only P266.67.
§ A owes only 1/3 of P1,000 which is P333.33.
§ C & D can collect only from that share of A.
§ Since C only owns 1/5 of P333.33, he can only collect P66.67
from A.
§ Since D owns 4/5 of P333.33, he can only collect P266.67
from A.
§ B is obliged to pay P133.33 to C & to D only P533.33.
§ Following the same principle, B only owes 2/3 of the P1,000
indebtedness which is P666.67. C & D can collect only from
that share of B.
§ Since C only owns 1/5 of P666.67, he can only collect
P133.33 from B.
§ Since D owns 4/5 of P666.67, he can only collect P533.33
from B.
CASE: Spouses Ibanez v. James
Lesson: Solidary obligations cannot be inferred in a compromise agreement; a
statement that the obligation in said agreement is solidary must be express.
Facts: Spouses Ibanez agreed to pay Francisco, Consuelo, & Ma. Consuelo a total
amount of P3M, with the initial payment of P2M to be sourced from a GSIS loan
secured by the spouses while the remaining balance would be due 1 year from the
date of the compromise agreement signed by the parties. The spouses Ibanez
executed a mortgage in favor of Consuelo & Ma. Consuelo, which was eventually
foreclosed & sold off, paying for the debts to the two. When Francisco ran after the
Spouses Ibanez, they argued that the obligation they owed was solidary, & since
Consuelo & Ma. Consuelo were already paid, Francisco was paid too. Is the
obligation solidary?
Held: No. The presumption is always that a credit or debt is joint, unless the contract
(in this case, the compromise agreement) between the parties expressly states that
they are solidarily liable or entitled to payment. Hence, Francisco can still run after
the Spouses Ibaniez, because not all stipulations in the agreement have been
complied with.
Article 1209. If the division is impossible, the right of the creditors may be
prejudiced only by their collective acts, & the debt can be enforced only by
proceeding against all the debtors. If one of the latter should be insolvent, the others
60 | Katrina C. Gaw | Block C 2018
shall not be liable for his share.
Effect of Impossible Division
• If the division of the obligation is impossible & the obligation is joint, the
creditors must act collectively.
• Ex. If the joint obligation is to give a house to 3 creditors, one of the creditors
cannot undertake an act which will prejudice the others.
o A waiver of the obligation cannot be made by any one of the creditors
UNLESS such waiving-creditor has been authorized by the others to
undertake such act.
o If there is no such authority & a waiver is to be made, ALL the creditors
must waive the obligation.
• If there are 3 debtors obliged to give a single house, all of the debtors must
be sued if they renege on their obligation.
o If 1 of the 3 debtors refuses to deliver the house, the obligation will be
converted into a claim for damages.
§ A joint indivisible obligation gives rise to indemnity for damages
from the time any of the debtors does not comply with the
undertaking.
§ The debtors who were ready to fulfill their promises shall not
contribute to the indemnity beyond the corresponding portion of
the value of the thing or service in which the obligation consists.
o Ex. If the house is worth P150,000, the creditors can file a case for
damages against the 3 debtors in the amount of P150,000. Each of the
debtors will be liable for P50,000.
§ The debtor who refuses to deliver or who is, in effect,
responsible for the suit by the creditor may be liable for
additional damages.
§ Those who were willing shall not contribute to the indemnity
beyond their corresponding debt.
Where One Debtor is Insolvent
• Since the obligation is joint, the debtors shall not be responsible for the share
of a debtor who is insolvent.
Article 1210. The indivisibility of an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply indivisibility.
Solidary v. Indivisibility
• Solidary - refers to the nature of the obligation attaching to the obligor &
obligee
• Indivisibility - refers to the nature of the object of the prestation
Article 1211. Solidarity may exist although the creditors & the debtors may not be
bound in the same manner & by the same periods & conditions.
Creditors & Debtors Need Not be Bound in the Same Manner
• A solidary obligation refers to the nature of the obligation.
 o It can exist even if the creditors & debtors are not bound in the same
manner & by the same periods & conditions.
o The creditor, for example, can collect an amount owed by solidary
debtors at the time when the periods imposed on the particular
debtors have been fulfilled.
• Ex. If A, B, & C are solidarily indebted to D in the amount of P15,000, D can
collect from anyone of the debtors the whole amount of the indebtedness. A
is required to pay only on Aug. 1, 1997, B only on May 1, 1998 & C
immediately.
o If D demands payment from C on Jan. 6, 1997, he can pay only
P5,000 which pertains to his share. The liability of A & B have not yet
matured.
o On August 2, 1997, creditor D can still demand payment of the
balance from C who can legally pay only P5,000 representing A’s
share considering that B’s liability has not yet matured.
Class Discussion
Q: When can a solidary obligation be implemented as if it were joint?
A: When each one of the solidary debtors have different periods of payment. Hence,
solidary debt can be enforced as JOINT in relation to obligations with a period (Art.
1211 & 1212). This just means that the creditor can collect from any of the solidary
debtors – however, the creditor can collect only the share that is due.
Article 1212. Each one of the solidary creditors may do whatever may be useful to
the others, but not anything which may be prejudicial to the latter.
All for One, One for All
• Even just one of the solidary creditors can file a suit for recovery of the entire
indebtedness from the solidary debtors.
o But when he does something prejudicial to the other creditors, the
action of said creditor is not necessarily void.
• CASE: Quiombong v. CA
o Facts: Only one of the solidary creditors filed suit for collection against
the solidary debtors. The debtors moved for the dismissal of the suit
on the ground that the other solidary creditor should have been
included in the case. Is the argument of the debtors tenable?
o Held: No. Recovery of the contract price was surely a useful act & can
be done even by one solidary creditor.
§ The question as to who should sue on a solidary obligation for
the collection of the price was a personal issue between the
solidary creditors, & it did not matter who as between them filed
the complaint, since the debtors were liable to either of them for
the whole obligation.
• If one of the solidary creditors makes an extrajudicial demand for the debtor
to pay, this will benefit also the other creditors.
o The demand will make the prescriptive period for the fulfillment of the
obligation run anew.
61 | Katrina C. Gaw | Block C 2018
• BUT: A solidary creditor should NOT do anything which may be prejudicial to
the other solidary creditors.
o Ex. If the solidary obligation has become due & the debtor decides to
make complete payment to one of the solidary creditors, such solidary
creditor must accept payment.
§ Non-acceptance is prejudicial to the other solidary creditors, as
it would lead to a delay on the part of the creditors for which
they all may be liable.
o Ex. If one of the solidary creditors remits the obligation in favor of one
of the solidary debtors, the whole obligation is extinguished.
§ The extinguishment can no longer be invalidated.
§ Their remedy is to collect their share of the indebtedness from
the solidary creditor who made the remission.
§ They can likewise ask for damages for what ever they may have
lost as a result of the remission, such as interest which should
have been earned had it not for the remission.
Article 1213. A solidary creditor cannot assign his rights without the consent of the
others.
Mutual Trust
• Ideally, the relationship between & among solidary creditors is one of mutual
trust.
• Thus, a solidary creditor cannot assign his rights without the consent of the
others.
Class Discussion
Remember that a creditor owns the credit, while the debtor owes the debt, and a
credit is a property that you can actually sell. You can also inherit credits or
collectibles. However, Art. 1213 serves to restrict the power of a creditor to sell or
assign his rights to the debt of a debtor to another.
Article 1214. The debtors may pay any one of the solidary creditors; but if any
demand, judicial or extrajudicial, has been made by one of them, payment should be
made to him.
Payment to the Creditor Who Makes the Demand
• GR: A debtor may pay any of the solidary creditors.
• BUT: If one of them makes an extrajudicial or judicial demand, payment must
be made to such creditor.
Two Views
• Once a court case has been filed by one solidary creditor, the debtor cannot
pay the other solidary creditor who is not included in the case.
• The effect of paying a different creditor has led to 2 views:
1) If payment is made to a creditor who is not a party to the suit or did
not make the demand, the payment is INVALID.
 o Based on the view that, as soon as one of the creditors
make the demand, the mutual representation of the
creditors with respect to each other momentarily ceases
o When the case terminates & demanding-creditor accepts
partial payment with a reservation as to the balance or, if
after extrajudicial demand, the demanding-creditor accepts
partial payment with reservation as to the balance, the other
creditors can now again seek payment from the debtor.
2) The payment made to the other creditors is VALID (the Sta. Maria
opinion).
o Art. 1214 does not provide for invalidity, so the answer
should be what is most beneficial to the creditors.
o Payment to the demanding creditor must be seen as a
preference only.
o If the non-demanding creditors accept the payment, the
demanding creditor will not be prejudiced because the case
for collection pending in court will not necessarily be
dismissed. There will still be interest, damages, or attorney’s
fees to talk of, unless the creditor waives them.
o The same should apply in extrajudicial demand.
o Consistent with Art. 1222 – where a solidarity debtor may
avail himself of all the defenses which are derived from the
nature of the obligation & those personal to him, or pertain
to his own share.
Class Discussion
Q: What are the powers of a solidary creditor?
A: They are –
1. The power to select which among his solidary debtors he will file a case against
2. The power to decide how much he wants to collect from a particular debtor
Article 1215. Novation, compensation, confusion, or remission of the debt, made by
any of the solidary creditors or with any of the solidary debtors, shall extinguish the
obligation, without prejudice to the provisions of Article 1219.
The creditor who may have executed any of these acts, as well as he who collects
the debt, shall be liable to the others for the share in the obligation corresponding to
them.
Modes of Extinguishing an Obligation
1) Novation – the change of creditors, debtors, or the principal condition of the
contract
o MUST clearly release the solidary obligation of debtors
2) Compensation – when 2 persons, in their own right, are creditors & debtors
of each other
3) Confusion – the merger of the characters of the creditor & debtor in the same
person
4) Remission – the condonation of an obligation
62 | Katrina C. Gaw | Block C 2018
Illustrative Example
• NOTE: The entire obligation is extinguished, not just the debt of the debtor
whose debt was expressly extinguished.
• A, B, & C are solidary debtors of D, E, & F in the amount of P1,500.
• Novation: If A informs D that X is paying the debt provided that A is released
from the obligation, & X & D agree to the change, there is a novation in the
person of A, one of the debtors.
o Because of this novation, not only A’s obligation, but also B’s & C’s are
extinguished.
• Compensation: If A becomes the creditor of D, also for P1,500, & said
amount is also due, there is compensation between A & D.
o The compensation extinguishes not only the obligation of A but also
B’s & C’s.
• Confusion: If D issues a promissory note to X in the amount of P1,500 & X
endorses it to A who endorses it to D, there is a merger.
o The debt has been extinguished because of creditor D without
creditors E & F being benefited.
• So as not to prejudice the other solidary creditors, D must pay each of them
P500.
o The creditor who may have executed any of these acts of novation,
compensation, merger, or confusion, as well as he who collects the
debt, shall be liable to the others for the share in the obligation
corresponding to them.
Class Discussion
• In Art. 1215, despite the prejudice to the unknowing creditor, the obligation is
nevertheless extinguished.
• All other modes of extinguishment by one creditor will have the same effect
as those mentioned in Art. 1215, which will also still apply.
Article 1216. The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of them shall not
be an obstacle to those which may subsequently be directed against the others, so
long as the debt has not been fully collected.
CASE: Imperial Insurance, Inc. v. David
Lesson: A solidary debtor of a deceased co-debtor can be proceeded against by the
creditor for the enforcement of the debt, even if the creditor did not participate in
the intestate proceedings.
Facts: A husband & wife bound themselves jointly & severally in favor of the obligee
for a sum of money.
When the husband died, the obligee demanded payment from the wife who resisted
payment, claiming that the obligee’s claim is barred by its failure to file a claim in the
intestate proceeding of the deceased husband. Is the claim barred?
Held: No. The obligee can properly claim from the wife, as the obligation is solidary. If
husband & wife bound themselves jointly & severally, then in case of his death, her
liability is independent of & separate from her husband’s; she may be sued for the
whole debt. It is wrong to hold that the claim against her & her husband should be
made in the decedent’s estate.
CASE: Guererro v. CA
Lesson: Compromise is not the same as novation; thus when a compromise
agreement between the creditor & one solidary debtor fails, the creditor can still
seek payment from the other debtor.
Facts: The creditor filed a suit against one of the solidary debtors. The suit was
compromised without novating the solidary debt.
• The said solidary debtor defaulted in making payment, resulting in the
creditor demanding payment from the other solidary debtor.
• The other solidary debtor claimed that there was already a waiver by the
creditor to go against him considering that he already compromised the case
with his other solidary debtor.
Was there a waiver?
Held: No. The fact that in the compromise agreement the creditor chose to go after
the 1st debtor did not imply waiver of its right to proceed against any of the solidary
debtors or some or all of them simultaneously.
Demand made against one of them is not an obstacle to demands which may
subsequently be directed against the others so long as the debt or any part of it
remains outstanding & unpaid.
Partial Payment
• The solidary creditor has a right not to accept partial payment from the
solidary debtors.
o AND if he accepts partial payment from some, he is not prevented
from claiming from those who have not yet paid
• If a claim from one of the solidary debtors has been dismissed by a court on
grounds other than the extinguishment of the whole obligation or
prescription, it does not necessarily mean that the solidary indebtedness
cannot be claimed against the other solidary debtors who were (1) not
impleaded in the case or against those who were (2) impleaded but whose
liability was found by the court as proper.
*CASE: Republic Glass Co. v. Qua
Lesson: (1) A creditor may choose to proceed only against some & not all of the
solidary debtors. (2) The creditor can also choose to collect part of the debt from
some of the solidary debtors, & the remaining debt from the others.
Article 1217. Payment made by one of the solidary debtors extinguishes the
obligation. If two or more solidary debtors offer to pay, the creditor may choose
which offer to accept.
He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the payment
is made before the debt is due, no interest for the intervening period may be
demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his
share to the debtor paying the obligation, such share shall be borne by all his co-
63 | Katrina C. Gaw | Block C 2018
debtors, in proportion to the debt of each.
Creditor’s Choice
• Creditor can choose whom he will enforce payment
• Creditor may also choose which offer to accept when 2 or more solidary
debtors offer him payment
• Ex. A, B, & C are solidarily indebted to D for P1,500 on May 1.
o A, B & C offered to pay D on the due date.
§ D can choose whose payment to accept.
o If D accepts payment from A, the obligation is totally extinguished.
§ A then has the right to claim P500 each from B & C (their
respective shares in the indebtedness).
o If A paid interest on the indebtedness, B & C must also share in the
payment of the interest.
§ NOTE: If payment is made before the debt is due, no interest
for the intervening period may be demanded.
o If A pays the indebtedness on Feb. 1, no interest can be claimed by A
for the period beginning Feb. 1 up to May 1, the due date of the
obligation.
o If C cannot pay because he is insolvent, his share shall be borne by A
& B in proportion to the debt of each.
§ A is liable for P250 & so is B. Since A paid the entire obligation,
A can ask reimbursement of said P250 (C’s share) from B.
*CASE: Republic Glass Co. v. Qua
Lesson: Payment of any amount will not automatically result in reimbursement from
the other co-debtors. 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 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.
Q (based on case): A & B are solidarily indebted to X in the amount of P1,000. A, with
X’s consent, made a partial payment of P500, which represents A’s proportionate
share in the debt. Can A demand a reimbursement of P250 from B, representing half
of P500?
A: No. However, if A pays P800, an amount exceeding his proportionate share, he
can ask for reimbursement of P300, again because A’s share of the debt is P500. A
solidary debtor can only collect from his co-solidary debtor if what he paid is beyond
his share.
Class Discussion
When a solidary debtor pays for the entire debt of his co-debtors & his own & has a
right to reimbursement from his fellow debtors, the debt of the debtors becomes
JOINT, not solidary.
Class Discussion
Q: A, B, & C are solidarily indebted to X for P200. A told X that he would pay X
partially, P110, with reservation that the balance was still due. What happens next?
A: A has paid more than his share & now has the right to collect from B & C.
Article 1218. Payment by a solidary debtor shall not entitle him to reimbursement
from his co-debtors if such payment is made after the obligation has prescribed or
become illegal.
No Reimbursement for Payment Made by a Co-Debtor When –
(1) Payment is made after the obligation has prescribed
(2) Payment is made after the obligation has become illegal
Illustrative Example: Prescription
• An action based on a written agreement must be brought within 10 years
from the time the cause of action accrues.
• Ex. A & B, solidary debtors pursuant to a written loan agreement, are bound
to pay C on May 2, 2010. On the said date, the creditor makes a demand on
them, but does not collect until after 12 years from the demand.
o The claim clearly has prescribed.
• BUT: If A pays the creditor despite prescription, B can refuse to pay A his
share because technically the debt has prescribed.
Article 1219. The remission made by the creditor of the share which affects one of
the solidary debtors does not release the latter from his responsibility towards the
co-debtors, in case the debt had been totally paid by anyone of them before the
remission was effected.
Article 1220. The remission of the whole obligation, obtained by one of the solidary
debtors, does not entitle him to reimbursement from his co-debtors.
Effects of Remission
• Depends when the remission was in fact given by the creditor
• Ex. A, B, & C are solidary debtors of D in the amount of P1,500. A persuades
D to condone the debt.
o A cannot collect reimbursement from B or C because the remission by
D of A’s debt extinguishes the entire obligation.
o BUT: If C, after the debt becomes due, pays the whole indebtedness &
A only convinces D to condone the debt after C’s payment, remission
has no effect.
§ By the time the remission was made, D’s credit has already
been extinguished. C can still claim from A, the latter’s share of
the indebtedness.
Only ONE Creditor in Art. 1219
• Art. 1219 is applicable only when there is one creditor.
• If there are many solidary creditors involved, remission of the debt by one of
them without the consent of the others will be prejudicial to the other solidary
creditors & is now allowed.
64 | Katrina C. Gaw | Block C 2018
o If the remission is done, the solidary creditor who made the remission
shall be liable for the share which the other creditors should answer
for damages which the other solidary creditors may suffer as a result
of the remission.
• Ex. A, B, & C are solidary creditors of X, who owes them P1,500 payable on
Dec. 30, 2001 with interest of 15% per annum. B condoned the debt on Apr.
1, 2001, just 1 day after it was incurred.
o B shall be liable to A for P500 & C for P500, plus damages equivalent
to the interest which A & C would have gotten had the obligation not
been condoned & had it been paid on Dec. 30; thus, interest from Apr.
1-Dec. 30, 2001.
Article 1221. If the thing has been lost or if the prestation has become impossible
without the fault of the solidary debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all shall be responsible to the
creditor, for the price & the payment of damages & interest, without prejudice to
their action against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the performance has become
impossible after one of the solidary debtors has incurred in delay through the judicial
or extrajudicial demand upon him by the creditor, the provisions of the preceding
paragraph shall apply.
When Thing is Lost
• Obligation is extinguished & debtors are not liable when lost or when the
prestation becomes impossible without their fault
• When there is fault or delay on the part of any of the solidary debtors before it
is lost or becomes impossible, all the solidary debtors will still be held liable.
Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of
all defenses which are derived from the nature of the obligation and of those which
are personal to him, or pertain to his own share. With respect to those which
personally belong to the others, he may avail himself thereof only as regards that
part of the debt for which the latter are responsible.
Scenario
• Ex. A, B & C are indebted to G in the amount of P1,500, but B shall only pay if
he passes the bar exam for lawyers in 1996 & C shall pay only on Jan. 2,
1997, & A when he reaches the age of 18.
o If G sues B in 1996 after he passes the bar, B can set up the
defense that C’s obligation is subject to a period which has not
yet arrived, & also the defense that A’s contract is voidable since
he was a minor at the time he (A) contracted the solidary
obligation.
o If B is successful in claiming said defenses, he will nevertheless
pay the amount of P500 which pertains to his share because
there is no impediment in collecting the same from him.
Class Discussion
Remember there is always a choice in delay & other faults of debtors: either (1)
specific performance, or (2) damages.
SECTION 5. – DIVISIBLE & INDIVISIBLE OBLIGATIONS.
Article 1223. The divisibility or indivisibility of the things that are the object of
obligations in which there is only one debtor & only one creditor does not alter or
modify the provisions of Ch. 2 of this Title.
Divisibility or Indivisibility
• The nature & effect of obligations do not affect the divisibility or indivisibility
of the things that are the objects of the obligations in which there is only 1
debtor & 1 creditor.
Article 1224. A joint indivisible obligation gives rise to indemnity for damages from
the time anyone of the debtors does not comply with his undertaking. The debtors
who may have been ready to fulfill their promises shall not contribute to the
indemnity beyond the corresponding portion of the price of the thing or of the value
of the service in which the obligation consists.
Joint Debtors
• Bound only to perform their respective portion in a particular indebtedness.
• Divisible obligation – easy to demand from each joint obligor payment of his
respective share
• Indivisible – each debtor must coordinate with the rest of the debtors for the
fulfillment of the obligation
• Ex. If A, B & C are jointly bound to deliver a computer worth P30,000 to D &
the latter, on due date, demands payment from them, all of them must fulfill
the obligation.
o If A & B are ready to deliver but C, for no justifiable reason, refuses to
deliver, said debtors’ joint obligation is converted into a claim for
damages on the part of D, who can file a case against all them for the
amount of the computer. D can also demand for damages he suffered
due to the non-delivery of the computer, such as exemplary damages,
moral damages, or attorney’s fees.
o BUT: A & B should not be held liable for these other damages as they
were willing to deliver the computer. It will only be C who should
shoulder these other damages.
Article 1225. For the purposes of the preceding articles, obligations to give definite
things & those which are not susceptible of partial performance shall be deemed to
be indivisible.
When the obligation has for its object the execution of a certain number of days of
work, the accomplishment of work by metrical units, or analogous things which by
their nature are susceptible of partial performance, it shall be divisible.
However, even though the object or service may be physically divisible, an obligation
is indivisible if so provided by law or intended by the parties.
In obligations not to do, divisibility or indivisibility shall be determined by the
65 | Katrina C. Gaw | Block C 2018
character of the prestation in each particular case.
Indivisible Obligations
• An obligation which is not susceptible of partial performance
o Ex. A contract stipulating that an actor has to sing & dance
simultaneously, is indivisible
• An obligation to give definite things
o Ex. An obligation to give a particular house.
Divisible Obligations
• When the obligation has for its object the execution of a certain number of
days of work
• When the object is the accomplishment of work by metrical units, or
analogous things, which by their nature are susceptible of partial
performance
Express Stipulation
• Despite the nature of the obligation, the parties themselves may stipulate
whether or not the object or service shall, for purposes of their contract, be
divisible or indivisible.
• The wording of the contract therefore will be material to show the
characterization of the obligation
• CASE: Government v. CFI
o Lesson: Words like “in proportion” & “stages” are indicative of the
divisible nature of the obligation.
o Facts: The compromise agreement stated, among others, that the
work was to be done in stages to be determined by the City Engineer;
that the contractor was to advance the necessary amount needed for
each stage of the work to be reimbursed by the City Government; &
that the contractor was to furnish the City Government a new
performance bond in the amount required by law in proportion to the
remaining value or cost of the unfinished work of the construction per
approved plans. What kind of obligation is in this agreement?
o Held: The provisions in the compromise agreement read together
clearly show a divisible obligation.
§ If the parties really intended the legal rate of 20% performance
bond to refer to the whole unfinished work, then the provisions
should have required the contractor to submit & file a new
performance bond to cover the remaining value/cost of the
unfinished work of the construction. Using the words “in
proportion” significantly changed the meaning of the paragraph
to ultimately mean a performance bond equal to 20% of the
next stage of the work to be done.
Obligations “To Do” or “Not To Do”
• Divisibility or indivisibility shall be determined by the character of the
prestation in each particular case
Class Discussion
An example of a divisible obligation – projects with phases (like subdivisions or
buildings of real estate developers)
SECTION 6. OBLIGATIONS WITH A PENAL CLAUSE.
*Article 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages & the payment of interests in case of non-compliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.
The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.
Penal Clause
• An accessory obligation the parties attach to a principal obligation to insure
the performance thereof, by imposing on the debtor a special prestation
(generally consisting in the payment of a sum of money) in case the
obligation (1) is not fulfilled or (2) is irregularly or inadequately fulfilled
• If the principal obligation has been complied with, the penal clause has lost
its efficacy or enforceability
• Application may be governed by the parties
o If there is nothing stipulated as to how it shall be applied, then the law
applies: the penalty substitutes the indemnity for damages & interest
in case of non-compliance
Penalty v. Liquidated Damages
• CASE: Lambert v. Fox – there is no difference between them legally, though
they may differ as a matter of language. In either case, the creditor is entitled
to recover the sum stipulated without the necessity of proving damages.
o Later, SC would say that this is only true if there is no partial or
irregular compliance with the terms of the contract
• CASE: Laureano v. Kilayco – gave the differences between the two –
Penalty Liquidated Damages
It is a penalty that does not regard Pre-determined amount of actual
the probably actual damages damages that might result from a
resulting from the breach of contract breach, as calculated by the parties
Objective: To deter the obligor from Objective: To provide for the
not complying with the agreement or, payment of actual anticipated &
if the violation has already occurred, liquidated damages, rather than
to penalize the obligor just to penalize breaches of a
contract
Supposed to be punitive Supposed to be compensatory
Class Discussion
Penalty & liquidated damages are the same in effect but they are not the same.
Penalties are punitive. Liquidated damages are compensatory, making you whole
because of the damages you have suffered. This is important because if there is
66 | Katrina C. Gaw | Block C 2018
fraud & there is liquidated damages, and fraud is proven, the injuring party will be
liable under the general law on damages for FRAUD, which will supersede the
liquidated damages. BUT if it is a penalty & there is fraud, then ASIDE from the
penalty, in case of fraud, you will be entitled to damages. (Laureano v. Kilayco)
Effect of Imposition of Liquidated Damages
• GR: Imposition of the liquidated for breach of contract, such as in a building
contract, bars any award for additional damages at large for the same
breach.
• EXC: If the owner contracts the services of another to finish the construction,
the owner is entitled to reimbursement of the cost for contracting the other
contractor, in addition to liquidated damages.
CASE: Baylen Co. v. CA
Lesson: Regardless of whether a clause is for liquidated damages or a penalty, said
provision cannot go beyond the import of the stipulation providing it.
• Hence: If the clause was made to apply only to a situation where the project
was completed & delivered beyond the date specified for completion &
delivery, the clause cannot be applied to an incomplete abandoned project
prior to the completion & delivery date.
CASE: Continental Cement Co. v. Asea Brown Boveri Inc.
Facts: X Co. wanted to claim damages against Y Co. for production loss, labor cost, &
rental of crane. However, X Co. & Y Co. already executed a contract with a penalty
clause providing for the amount of P987.25 for every day of delay. May X Co.’s
claims for the production loss, etc. still prosper?
Held: No. The penalty clause in the contract the two companies executed covered all
other damages. Other damages may only be obtained if the obligor refuses to pay
the penalty or is guilty of fraud; however, these must still be proven through
evidence.
CASE: Pamintuan v. CA
Facts: The parties agreed that any violation of the provisions of the contract between
them would entitle the aggrieved party to collect liquidated damages in the sum of
P10,000. Fraud was committed in the performance of the contract on the part of the
seller. Does the provision in their contract bar recovery by the buyer of damages
other than the P10,000?
Held: No. SC held that the damages as a result of fraud may be proven & such
proven damages supersede liquidated damages. Citing Manresa, SC opined that in
case of fraud, the difference between the proven damages & the stipulated penalty
may be recovered.
When Creditors in Obligations With a Penal Clause are Entitled to Damages
• The creditor in an obligation with a penal clause shall still be entitled to
damages when:
1. The debtor is guilty of fraud;
2. The debtor refuses to pay the penalty;
3. When stipulated by the parties

When Penalty is Enforceable
• The penalty may be enforced only when it is demandable.
o An obligor is in delay only upon judicial or extra-judicial demand unless
legally excused as provided by law.
o Hence, the penalty may be claimed only when there is demand,
whether judicial or extrajudicial, unless the law, the stipulation of the
parties, or the nature of the contract (e.g., time is of the essence)
otherwise demands.
CASE: Spouses Poon v. Price Savings Bank
Lesson: The penalty clause may be in any form which is determined or liquidated.
Facts: There was a stipulation in the lease contract which said: “Should the leased
premises be closed, deserted, or vacated by the LESSEE, the LESSOR shall have the
right to terminate the lease without the necessity of serving a court order and to
immediately repossess the leased premises. […] The LESSOR shall thereupon have
the right to enter into a new contract with another party. All advanced rentals shall
be forfeited in favor of the LESSOR.” Is the stipulation a penal clause?
Held: Yes. A provision is a penal clause if it calls for the forfeiture of any remaining
deposit still in the possession of the lessor, without prejudice to any other obligation
still owing, in the event of the termination or cancellation of the agreement by
reason of the lessee’s violation of any of the terms and conditions thereof. This is a
valid agreement. The clause is an accessory obligation meant to ensure the
performance of the principal obligation by imposing on the debtor a special
prestation in case of nonperformance or inadequate performance of the principal
obligation. Hence, the clause is a penal clause, even if it is note expressly referred to
as one.
Class Discussion
A penalty may or may not extinguish the obligation, especially when the contract
says: “penalty for each & every day of delay”
Class Discussion
Q1: Is penalty a substitute for non-compliance?
A1: Yes, as a general rule. And since the penalty clause substitutes for the general
law on damages, the latter will be inoperative (as a general rule).
Q2: Can creditors/debtors manipulate the penalty clause to their liking?
A2: Yes.
Q3: Can a creditor manipulate the penalty clause in such a way as to make the
debtor liable for both the penalty and the general law on damages?
A3: Yes.
3 Exceptions to the General Rule on Penalties Replacing Damages
1) When parties stipulate in the contract that both are still demandable;
2) When there is fraud on the part of the person who must pay; &
3) When the debtor refuses to pay the penalty.
*Article 1227. The debtor cannot exempt himself from the performance of the
67 | Katrina C. Gaw | Block C 2018
obligation by paying the penalty, save in the case where this right has been expressly
reserved for him. Neither can the creditor demand the fulfillment of the obligation &
the satisfaction of the penalty at the same time, unless this right has been clearly
granted him. However, if after the creditor has decided to require the fulfillment of
the obligation, the performance thereof should become impossible without his fault,
the penalty may be enforced.
Performance of the Principal Obligation
• Penalty is merely an accessory obligation. It is not the principal obligation.
o The debtor CANNOT substitute the performance of the principal
obligation by the mere payment of the penalty.
o HOWEVER, the parties can stipulate otherwise.
• Likewise the creditor CANNOT demand fulfillment of the obligation & payment
of the penalty at the same time.
o Once the obligation has been complied with & extinguished, the penal
clause has lost its raison d’etre.
• GR: When the penalty is paid, the obligation is extinguished.
o EXC: the parties CAN stipulate that payment of the penalty &
satisfaction of the obligation can be demanded at the same time.
• In the event that (1) the creditor demands fulfillment of the obligation & (2) it
has become impossible without his fault, the penalty may be enforced.
o Ex. A is to deliver a particular computer to B on May 7, 1997. It was
stipulated that in the event he fails to deliver on time, he shall be
liable for liquidated damages in the amount of P200,000. B demands
delivery of the particular computer on the due date but A fails to
deliver. Thereafter, the computer is hit by lightning after his default. B
can demand payment of the P200,000 penalty.
CASE: Heirs of Liong v. Castillo
Lesson: The payment of the penalty cannot substitute the performance of the
obligation unless there is a stipulation to the contrary.
Facts: The agreement between X & Y to transfer some property had a penal clause,
which stated that a party who violated any of the provisions therein would be liable
to pay a penalty of P50,000 with attorney’s fees incurred by the aggrieved party. Y
violated the contract, & the RTC ordered Y to execute & deliver their share of the
property to X. The RTC also made Y pay P50,000 as liquidated damages, plus
attorney’s fees. Was the RTC correct in its imposition of liability to Y?
Held: Yes. The P50,000 was validly required, & substitutes for moral & exemplary
damages in this case. In obligations with a penal clause, the penalty generally
substitutes the indemnity for damages & 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 &
compensatory damages.
The RTC’s award of attorney’s fees in the sum of P50,000 is, however, proper. Aside
from the fact that the penal clause included a liability for said award in the event of
litigation over a breach, X was able to prove that he incurred said sum in engaging
the services of a lawyer.

Class Discussion
DAMAGES are paid when the breach relates to an object; INTEREST is paid when the
breach relates to a contract where the main object is money (e.g., loan).
*Article 1228. Proof of actual damages suffered by the creditor is not necessary in
order that the penalty may be demanded.
*Proof of Damages Not Necessary
• Because the particular penalty in the penalty clause is already specified &
hence liquidated
• The person will perform the penalty in the agreement for as long as there is
irregular or no compliance with the principal obligation regardless of whether
or not the person seeking it suffers damages
• CASE: Allen v. Province of Albay
o Lesson: If through the act of the owner in a contract, the contractor
will be prevented from finishing the works on the contractual
completion date:
1) The owner shall be deemed to have waived the time limit or the
time period
2) The contractor is bound only to finish the construction within a
reasonable time
3) If there are liquidated damages provided for in case of delay, a
claim for such damages cannot be sustained.
4) Neither could the liquidated damages be restored to be made
applicable to an unreasonable length of time.
Class Discussion
• GR: The principal obligation is extinguished when you pay the penalty.
• This rule on actual damages applies because the amount for the penalty has
already been pre-determined
• General Damages:
o Compensatory/actual damage – cost of object
o Moral damages – sleepless nights, anguish
o Exemplary damages – extreme breach in bad faith
§ Moral & exemplary – bigger than actual damage
§ Bad faith – further damages
• There CAN be breach of contract in good faith. In such a case, only actual
damages will be paid.
Class Discussion
Q: X wants to buy from Y for P500,000. The penalty clause in the contract says P1M.
Y fails to deliver. Y argues that he is only liable for P1M. Is this true?
A: No. Because of the penal clause, Y is liable to pay the full P1M, though the actual
loss is only P500,000.
Article 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there
68 | Katrina C. Gaw | Block C 2018
has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.
Equitable Reduction
• A contract is a source of obligation.
o Law between the parties
• GR: Neither the law nor the courts will extricate a party from an undesirable
contract he entered into with all the required formalities & with full
awareness of its consequences
• EXC: PENALTIES
o If a penalty is unconscionable, the court may (1) temper, (2) reduce or,
in some cases, (3) delete it.
• Situations when court modified the penalty:
o The court reduced the 25% penalty charge to cover the attorney’s fees
& collection fees, which was in addition to the 12% annual interest, to
10% for being manifestly exorbitant
o The court reduced a subdivision lot buyer’s liability from the stipulated
P12K to P1.5K after finding that he had partially performed his
obligation to complete at least 50% his house within 2 years, having
done so a month after deadline.
CASE: Palmares v. CA
Facts: There was a penalty interest of 3% per month on the total amount due but
unpaid in a contract. The total amount owed was P5,000 & there was partial
payment of P8,600 on due date. There was also a heavy compensatory interest
separate from the penalty interest.
Held: The Court eliminated the penalty charge for being excessive & unwarranted
under the circumstances.
CASE: Ligutan v. CA
Lesson: The question of whether a penalty is reasonable or iniquitous can be partly
subjective and partly objective. Its resolution would depend on such factors as, but
not necessarily confined to, (1) the type, extent, & purpose of the penalty, (2) the
nature of the obligation, (3) the mode of breach & its consequences, (4) the
supervening realities, (5) the standing & relationship of the parties, (6) & the like,
the application of which is addressed to the sound discretion of the court. In RCBC v.
CA, SC tempered the penalty charges after taking into account the debtor’s pitiful
situation and its offer to settle the entire obligation with the creditor. The stipulated
penalty might likewise be reduced when a partial or irregular performance is made
by the debtor. The stipulated penalty might even be deleted such as when there has
been substantial performance in good faith by the obligor, when the penalty clause
itself suffers from fatal infirmity, or when exceptional circumstances so exist as to
warrant it.
Facts: The stipulated interest in the contract was 15.189% per annum. Following a
breach, the injured party sued. Was the 15.189% per annum excessive?
Held: No. The 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 Held: No, this is unconscionable. SC reduced the annual interest to 12% penalty &
may justify a court in not allowing the creditor to impose full surcharges and collection charges to 6%, & attorney’s fees to 5%. It held that attorney’s fees are in
penalties, despite an express stipulation therefor in a valid agreement, may not the nature of liquidated damages, which under Art. 2227 of the Civil Code, shall be
equally justify the non-payment or reduction of interest. Indeed, the interest equitably reduced if they are unconscionable.
prescribed in loan financing arrangements is a fundamental part of the banking
business and the core of a bank’s existence. Class Discussion
Q: The car is valued at P1,000 & the penalty for failure to deliver is P1M. Can the
Class Discussion debtor complain when he is in delay & made to pay the penalty?
Normally an interest rate of 30% per annum is void for being immoral. But there are A: NO. The amount is pre-determined damage. This would be the same if the car
cases when 3% per month is valid, as in the credit card case. value is P1M & the penalty is P1,000. BUT the debtor has a remedy – he can go to
the courts.
CASE: Jison v. CA
Lesson: When there has been partial or irregular compliance with a contract for Article 1230. The nullity of the penal clause does not carry with it that of the
special indemnification in the event of failure to comply with its terms, the courts will principal obligation.
rigidly apply the doctrine of strict construction & against the enforcement in its The nullity of the principal obligation carries with it that of the penal clause.
entirety of the indemnification where said indemnity is essentially a mere penalty
having for its principal object the enforcement of compliance with the contract Principal Obligation & Penal Clause
Facts: The contract price was originally P55K. • The penal clause, being merely an accessory obligation, does not invalidate
• The contract states that, in case the contract is cancelled, the amounts the principal obligation in the event that such penal clause is void or without
already paid shall be forfeited in favor of the vendor as liquidated damages. effect.
• The amount already paid, P47K, was forfeited as per the contract stipulation • The nullity of the principal obligation carries with it that of the penal clause.
when said contract was cancelled.
Held: While the resolution of the contract & the forfeiture of the amounts already CHAPTER 4 – EXTINGUISHMENT OF OBLIGATION
seen were seen as valid & binding, the Court reduced the penalty from P47K to
P23K. Furthermore, since the contract was cancelled, the lot reverts back to the GENERAL PROVISIONS
owner.
Article 1231. Obligations are extinguished:
Invalid Penalty Clause (1) By payment or performance;
• If the penalty clause, construed against the one enforcing it, is so (2) By the loss of the thing due;
unconscionable that its enforcement constitutes an undue deprivation or (3) By the condonation or remission of the debt;
confiscation of the property of the obligor, the courts can strike it down. (4) By the confusion or merger of the rights of creditor & debtor;
• CASE: Spouses Poon v. Prime Savings Bank – While SC held that the (5) By compensation;
forfeiture provision of a lease contract was a valid penalty clause & all (6) By novation.
unused rentals were forfeitable, SC reduced the amount of penalty, in Other causes of extinguishment of obligations, such as annulment, rescission,
consideration of public interest. fulfillment of a resolutory condition, & prescription, are governed elsewhere in this
o The forfeiture would heavily affect a delinquent bank, which in turn, Code.
would affect the right to recover of many innocent creditors & debtors
of said bank. Ways of Extinguishing an Obligation
(1) Payment or performance
CASE: Louh, Jr. v. BPI (2) Loss of the thing due
Lesson: 3.5% finance charge & 6% late payment charge monthly is unconscionable. (3) Condonation or remission of the debt
Furthermore, stipulated interest rates of 3% or higher per month are excessive, (4) Confusion or merger of the right of the creditor & debtor
iniquitous, & unconscionable. (5) Compensation
(6) Novation
CASE: MCMP Construction Co v. Monark (7) Annulment
Facts: Creditor charged the debtor a cumulative of 60% annually as interest, penalty, (8) Rescission – cancellation of the creditor due to substantial non-compliance
& collection fees, & 25% for attorney’s fees. Is this allowed? (breach of trust)
(9) Fulfillment of a Resolutory Condition

69 | Katrina C. Gaw | Block C 2018

 (10) Prescription
Effect of Death of a Party
• Does not extinguish an obligation unless said obligation is:
o Personal in nature
o Intransmissible
• Heirs – The lessor’s heirs who inherit the leased property from the deceased
lessor cannot set up the claim that the obligation to allow the property under
the lease contract in the possession of the lessee has been extinguished &
eject the lessee under the deceased lessor’s contract
o Death of a party does not excuse non-performance of a contract which
involves a property right
o Rights thereunder pass to the personal representatives of the
deceased
o Nonperformance is also not excused by death
• Crime – When there is civil liability for the commission of a crime, the death
of the offender generally extinguishes the crime & the civil liability.
o CASE: People v. Jose
§ Facts: The accused forcibly abducted & raped the victim & was
convicted, with obligation to pay moral & exemplary damages.
He appealed the decision, but before the judgment of
conviction could become final, he died. What happens?
§ Held: The case is dismissed & he & his heirs are relieved from
all penalties.
o BUT: If the civil liability neither solely nor originally springs from the
crime, the liability shall persist despite the extinction of the criminal
liability.
§ CASE: Torrijos v. CA
• Facts: A person bought a property from the accused, &
thereafter the accused again sold the property to
another person. The accused was charged & convicted
of the crime of estafa & was made to pay damages. The
accused died while the appeal was pending. Is the
obligation to pay the damages extinguished?
• Held: No. While his criminal liability was extinguished,
his civil liability was not. His civil liability did not arise
solely or originally from the crime itself, but from a
contract of sale of property not implemented due to his
deceitful acts.
CASE: Ruben Reyna v. Soria
Lesson: The practice of companies making a “write-off” of certain uncollectible
accounts does not mean extinguishment of such written off obligations.
• A write-off is an accounting strategy used when an amount is uncollectible &
it is hence recorded as an uncollectible expense in the books of account of
the company. If later, the debt is recovered, the books will be adjusted to
reflect the amount to be collected as an asset. In turn, income will be
credited by the same amount of increase in the accounts receivable.
70 | Katrina C. Gaw | Block C 2018
• Write-offs are not one of the modes to extinguish obligations. In making a
write-off, only the creditor takes action by removing the uncollectible amount
from its books even without the approval or participation of the debtor.
• When there is a write-off, the legal relationship between debtor & creditor
remains the same – the debtor continues to remain liable to the creditor to
the full extent of the unpaid debt.
SECTION 1. PAYMENT OR PERFORMANCE.
Article 1232. Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation.
Obligation to Pay
• Not limited to the delivery of money
• Any manner of performing the obligation with the end in view of extinguishing
it.
o Ex. A buys a car from seller B. A can pay not only in money, but also In
services, provided that B agrees.
• There are presumptions made by law in favor of payment.
o The receipt of the principal by the creditor, without reservation with
respect to the interest, gives rise to the presumption that said interest
has been paid.
o The receipt of a later installment of a debt, without reservation as to
prior installments, gives rise to the presumption that such installments
have been paid.
o These presumptions can be rebutted by evidence.
§ If presumptions are overturned, the burden of proving there
has been payment rests on the obligor.
o The burden of proof to show payment once the debt has been fully
established by evidence is on the debtor
§ CASE: Biala v. CA
• Lesson: Promissory notes in the hands of the creditor
are proofs of debt rather than proofs of payment.
• Facts: X presented promissory notes showing Y’s debts.
But there were no receipts or other satisfactory
evidence to prove Y’s alleged payment to X. Y argued he
was no longer indebted to X. Will Y’s argument be
sustained?
• Held: No. The Court upheld Y’s indebtedness. The
burden of proof to show the obligation has been
extinguished due to payment is on the debtor Y.
*CASE: Royal Cargo Co. v. DFS Sports Unlimited
Lesson: The debtor has the burden of proving payment; it is not the creditor’s burden
to prove non-payment. An invoice, being merely an itemized list of goods or services
furnished by a seller to a buyer, specifying the price & terms of the sale (i.e., a bill of
costs) is not considered evidence of payment, even if the word “PAID” is stamped on
top of said invoice; only a receipt is considered evidence of payment.
Facts: To prove payment, the buyer presented original copies of invoices, which were
stamped with the word “PAID.” Is this sufficient evidence of payment, or does it raise
a disputable presumption that the buyer has indeed discharged its obligations to the
seller?
Held: No. An “sales or commercial invoice” is defined as a written account of goods
sold or services rendered indicating the prices charged therefor or a list by whatever
name it is known which is used in the ordinary course of business evidencing sale
and transfer or agreement to sell or transfer goods and services. On the other hand,
a “receipt” is a written acknowledgment of the fact of payment in money or other
settlement between seller and buyer of goods, debtor or creditor, or person
rendering services, and client or customer.
From the above, an invoice, versus a receipt, may not be considered evidence of
payment. Also, it does not mean that possession by a debtor of an invoice raises the
presumption that it has already paid its obligation. An invoice is simply a list sent to
a purchaser, factor, consignee, etc., containing the items, together with the prices
and charges, of merchandise sent or to be sent to him; a mere detailed statement of
the nature, quantity and cost or price of the things invoiced.
CASE: Go Tong Electric Supply v. BPI Family Savings Bank
Lesson: (1) One who pleads payment has the burden of proving it; the burden thus
rests on the defendant.
(2) When the creditor is in possession of the document of credit, proof of non-
payment is not needed, for it is presumed.
Facts: The plaintiff (the creditor in the case) was in possession of the Credit
Agreement promissory note, & comprehensive surety agreement. If such is the case,
what presumption is raised?
Held: There is a presumption that the obligation of the debtor has not been
extinguished.
CASE: Multi-International Business Data System v. Martinez
Lesson: (1) Although not exclusive, a receipt of payment is the best evidence of the
fact of payment.
(2) BUT: The fact of payment may be established not only by documentary evidence,
but also by parol evidence (i.e., oral testimony that payment was made).
CASE: Alonzo v. San Juan
Lesson: A receipt is different from a voucher. A receipt is a written & signed
acknowledgment that honey has or goods have been delivered. A voucher is a
documentary record of a business transaction. The references to alleged check
payments in the vouchers presented do not vest them with the character of receipts.
Class Discussion
• Payment is an active mode of extinguishing an obligation. Some of the modes
are passive.
• In reciprocal obligations, both parties always pay. For example, both the buyer
and seller are obligated to pay, since payment is defined as “delivery of sum
of money,” OR “performance as agreed upon by the parties. For further
examples –
71 | Katrina C. Gaw | Block C 2018
o If X pays Y to sing.
§ X pays Y with money.
§ Y’s singing is payment.
o If X gives Y a piano, Y will give him P10,000.
§ Both parties are PAYING.
§ X pays through the piano.
§ Y pays by giving P10,000.
• NOTE: Technically speaking, when X pays Y with a check, that is NOT
payment. When paying through a check, the MONEY is not yet delivered.
Article 1233. A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or rendered,
as the case may be.
*Complete Delivery
• FULL satisfaction of the debt or obligation
• Must comprise everything that is necessary to satisfy the obligation
consistent with the object of the same
o Ex. Determinate things must include the delivery of all accessories &
accessions, even if not mentioned; payment of loan with stipulated
interest is only complete when money is given with interest
• Anything less may be considered a breach of the obligation
• CASE: PNB v. CA
o Lesson: Debtor must also be able to prove that payment was made to
the correct person or representative.
o Facts: PNB paid an alleged attorney-in-fact of the creditor, but there
was no proof that the alleged attorney-in-fact was the representative
of the creditor. Is the payment effective?
o Held: Payment was not effective. A check was never delivered to the
creditor.
CASE: Soliva v. Estate of Villalba
Lesson: Non-payment is a resolutory condition that extinguishes the transaction
existing for a time & discharges the obligations created thereunder.
• Under Art. 1191, the remedy of the unpaid seller is to sue for collection or, in
case of substantial breach, to rescind the contract.
• Art. 1592 governs rescission in relation to the sale of immovables.
o Even if it was stipulated that upon failure to pay the price at the time
agreed upon the rescission of the contract shall of right take place,
the vendee may pay, even after the expiration of the period, as long as
no demand for rescission of the contract has been made upon him
either judicially or by a notarial act.
o BUT: After the demand, the court may not grant him a new term.
Class Discussion
GR: Payment must always be complete.
Exception:
1. By stipulation of the parties
2. Partially liquidated or partially unliquidated – the liquidated part can be paid
ahead of the unliquidated part.
*Article 1234. [Doctrine of Substantial Performance.] If the obligation has been
substantially performed in good faith, the obligor may recover as though there had
been a strict & complete fulfillment, less damages suffered by the obligee.
Obligor May “Recover”
• Obligor may be paid, minus damages
• The part that was not performed must not destroy the value or the purpose of
the contract & there must be good faith
Doctrine of Substantial Performance
• NOT complete performance
• Constitutes a breach of the obligation if not for the legal treatment that when
such occurs, the obligor may recover as though there had been strict &
complete fulfillment, less damages suffered by the obligee
o BUT: Breach should NOT be material enough to compel the obligee to
rescind the whole obligation
o The part unperformed must NOT destroy the value or purpose of the
contract
o It must also be done in good faith
§ Conscious departure from the contract will not necessarily
defeat recovery. The pertinent inquiry is not WON the breach
was willful but WON the behavior of the party in default
comports with the standards of good faith & fair dealing.
§ Even an adverse conclusion on this point is not decisive but is
to be weighed by other factors, such as the extent to which the
owner will be deprived of a reasonably expected benefit & the
extent to which the builder may suffer forfeiture, in deciding
whether there has been substantial performance.
CASE: Pagsibigan v. CA
Lesson: There is substantial compliance when the debtor, due to the interest
charged, technically already paid much more than the actual debt. This can merit the
release of a mortgage, or prevent a creditor from rescinding the contract.
Facts: The debtor had already paid the creditor more than the original amount of
loan, which had a security of mortgage, due to the imposition of a high interest rate
plus penalty charges. The debtor, as payment of the remaining balance of
P3,558.20, had in effect paid P8,650.00 in addition to the P1,000 it also paid. Can
the mortgage securing the loan already be cancelled?
Held: Yes. The mortgage could be released because there was already substantial
compliance. However, the debtor was still required to pay some penalties.
Damages
• The obligor may recover as though there had been a strict & complete
fulfillment, less damages suffered by the obligee.
o Obligor may be compensated for the work performed.
72 | Katrina C. Gaw | Block C 2018
• Examples:
o The difference between the value of the house as built & the value it
would have had had it been constructed strictly according to the
contract is the measure of damages in such a contract.
o The defaulting party will be allowed to recover the contract price less
the cost of correction of the defects of the unfinished work.
CASE: JM Tuason & Co. Inc. v. Javier
Lesson: The obligor may ask for a reasonable extension to pay all his obligations to
the obligee.
Facts: The obligor had been religiously satisfying the monthly installments after the
execution of the contract for a period of almost 8 years. The total aggregate amount
the obligor has paid to the obligee, when including interests, already exceeds the
original loan. Can the obligor pray for an extension of the term to pay the loan?
Held: Yes. The obligor was allowed time to pay his debts, taking into account the
circumstances of his case.
Class Discussion
GR: COMPLETE compliance is required.
EXC: Doctrine of Substantial Compliance (where there is a breach, but it is
substantially complete)
• If under Art. 1234 – Good faith – no waiver of damages
• If under Art. 1235 – Irregularity is accepted – waiver of damages
Art. 1234 Art. 1235
1. Both apply when payment is incomplete.
2. In both cases, the law will treat the payment as complete, although it is not.
There is no waiver of damages (because There is a waiver of damages.
of the phrase in the provision which
states that obligor may recover, “less the
damages suffered by the obligee”)
Technical breach which will not greatly This is “honest-to-goodness” substantial
affect the object; there has been good compliance, because the breach is so
faith performance of the obligation (e.g., irregular & manifest, & yet there is no
a slight chip on a plate). protest or objection (e.g., a plate that is
half-broken but still accepted).
*Article 1235. When the obligee accepts the performance knowing its
incompleteness or irregularity, & without expressing any protest or objection, the
obligation is deemed fully complied with.
Waiver
• The substantial compliance in Art. 1235 connotes the waiver of the obligee of
damages arising from the breach of the contract which resulted in the
incompleteness or irregularity
• By not expressing any protest or objection, the obligee accepts the
performance as fully complied with despite his knowledge of such irregularity.
CASE: De Castro v. CA
Facts: An agent received only partial payment of his commission. Is this enough for
Art. 1235 to apply?
Held: No. Art. 1235 does not apply to instances of mere “receipt.” There must be a
showing that there was an “acceptance” of that payment to extinguish the
obligation.
CASE: Esguerra v. Villanueva
Lesson: The law does not require the protest of the creditor to be made in a
particular manner or at a particular time. So long as the acts of the creditor, at the
time of the incomplete payment by the debtor, or within a reasonable time
thereafter, evince that the former is not satisfied with said payment, the obligation is
still not fully extinguished.
Facts: The debtor claimed that, because the creditor received his partial payments
of P800 & P1,400, the creditor was to be considered to have accepted the
incompleteness of the performance.
The day immediately following the first payment of P800, the creditor asked the
judge to issue the corresponding writs of execution in the case.
Held: The debtor is wrong. The creditor patently manifested his dissatisfaction in
relation to the 1st payment of the P800 when he filed the case the next day. Even
the debtor impliedly acknowledged the dissatisfaction when, after the suit was filed
against them already, they paid the creditor P1,400. Receipt is NOT the same as
acceptance.
• Accepting – agreeing or acceding to an incomplete or irregular performance
*CASE: Selegna v. UCPB
Lesson: The objection or the protest need not be concurrent to the receipt of the
irregular payment.
Facts: The debtor did not pay on maturity date, but later, the debtor made a partial
payment. After receiving this partial payment, the creditor foreclosed. Was the
receipt of the partial payment a waiver of the right to extrajudicially foreclose on the
part of the creditor?
Held: No. To imply that creditors accept partial payment as complete performance of
their obligation, their acceptance must be made under circumstances that indicate
their intention to consider the performance complete & to renounce their claim
arising from the defect. There are no circumstances here that indicate the creditor
renounced his right to foreclose the properties extrajudicially. The fact that it had
filed an application for extrajudicial foreclosure after receiving the partial payment
shows that the creditor did not intend to give the debtor more time to pay the
obligation.
CASE: Tayag v. CA
Facts: The sellers accepted from the purchaser numerous payments in installment
of the purchase price of a particular piece of land after due date & posterior the
grace periods provided in the contract without any protest as to the delayed
payments. The purchaser filed a case for specific performance relative to the sale, &
consigned at the same time the balance of the purchase price. Can the seller be
73 | Katrina C. Gaw | Block C 2018
deemed to have waived his right to object to the irregular payments of the
purchaser?
Held: Yes. The actuation of the sellers was clearly a waiver of his right to rescind the
contract. Also, on the basis of Article 1235, he was likewise estopped from reneging
their commitment on account of acceptance of benefits arising from overdue
accounts of the purchaser.
CASE: MIAA v. Avia Filipinas International
Facts: The lease contract between X & Y (Y being the lessee) provided that Y could
rent the premises until Aug. 31, 1991 for P6,580 per month; the contract also said
that X could increase the rent based on government executive orders. After Aug. 31,
1991, Y continued to stay in the premises on an implied lease, paying the same
amount. Later, X demanded that Y pay P15,996.50 instead of the initial rent,
attempting to require Y to pay the said amount beginning Sep. 1, 1991 until Sep. 1,
1994. Can X demand that Y pay that increased amount starting Sep. 1, 1991?
Held: No. During the abovementioned period, Y continued to pay & X kept on
receiving the original rental fee of P6,580 without any reservations or protests from
the latter. Neither did X indicate in the official receipts it issued that the payments
made by Y constitute only partial fulfillment of the latter's obligations. Art. 1235
clearly states that when the obligee accepts the performance knowing its
incompleteness, & without expressing any protest, the obligation is deemed fully
complied with. For failing to make any protest, X is estopped from seeking recovery
of the amount claimed.
CASE: MIAA v. Ding Velayo Sports Center
Facts: The lessor refused to comply with the option of the lessee in the lease
contract to renew the lease, on the ground that the lessee breached certain
provisions in the contract pertaining to building certain improvements, such as
parking, shopping mall, and sports facilities. Is the lessor correct in its assertions?
Held: No. While the lease expressly obligated the lessee to build certain
improvements, the belated insistence by the lessor on compliance with the same
appears to be a mere afterthought. Pars. 9 & 10 of the Contract of Lease likewise
expressly require the lessee to submit, for prior approval by the lessor, all
construction plans on the subject property; and to complete the contemplated
improvements thereon within a year. The Contract of Lease was executed on May
14, 1976, & the 1-year period expired on May 14, 1977. Yet, the lessor did not
register any protest to the alleged incompleteness of in the performance by the
lessee of its obligation to build & develop improvements on the subject property. In
fact, upon the expiration of the original 25-year lease period in Feb. 1992, the lessor
was willing to accept as its own the improvements built on the subject property in
1992. The lessor only raised the issue of the purported irregularity of the said
improvements when it was brought to court for refusing to renew the lease.
No Objection to Invoice
• If a party fails to interpose any objection to the entries in an invoice furnished
to him by the other party, such failure can be considered as implied
acceptance & he will be liable to pay the amount stated
Class Discussion
Under Art. 1235, the creditor is deemed to have accepted the thing despite its
irregularity. Hence, to determine if the provision applies, the key question is, did you
accept, or did you merely receive?
If obligee says nothing about a defect upon acceptance, the obligation is deemed
fulfilled. BUT acceptance (agreeing with the payment) is not the same as receipt
(receiving the object). Objection can be done reasonably after the receipt; the
concurrence of the receipt & the objection is not necessary.
• Q: X owes Y P1M. X offers to pay P900K. Y can legally refuse it, but should
he?
• A: No. Y should just take it. But he MUST protest & say, “Give me the 900K,
but you still owe me for the rest.” Y should give a receipt for the amount
received & the balance that is still due.
• Q: X owes Y P100K. X pays only P90K. Y did not protest during receipt, but
after seeing the missing money, Y went immediately to the sheriff to enforce
the mortgage. Was Y’s action proper despite Y not making any explicit
protest?
• A: Yes. This objection, evidenced by the enforcement of the mortgage, is valid
even if it occurred after receipt of P90K.
Remember that a failure to interpose objection means estoppel within reasonable
time.
Article 1236. The creditor is not bound to accept payment or performance by a 3rd
person who has no interest in the fulfillment of the obligation, unless there is a
stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except
that if he paid without the knowledge or against the will of the debtor, he can recover
only insofar as the payment has been beneficial to the debtor.
Article 1237. Whoever pays on behalf of the debtor without the knowledge or against
the will of the latter, cannot compel the creditor to subrogate him in his rights, such
as those arising from a mortgage, guaranty, or penalty.
Article 1238. Payment made by a 3rd person who does not intend to be reimbursed
by the debtor is deemed to be a donation, which requires the debtor’s consent. But
the payment is in any case valid as to the creditor who has accepted it.
Payment Made by a 3rd Person
• Payment made by a third person & accepted by the creditor extinguishes the
obligation in ALL CASES as to the original creditor.
o The difference lies in the rights of the new creditor, depending on the
knowledge of the debtor. With regard to the old creditor, the obligation
is extinguished either way.
• The good faith or bad faith of 3rd person is immaterial.
• WON the one who paid completely acquires the rights of the creditor as
against the debtor depends on WON the payment has been made without
knowledge or against the will of the debtor.
74 | Katrina C. Gaw | Block C 2018
1) 3rd Person Pays without Knowledge or Against the Will of the Debtor
• 3rd person can only recover from the debtor to the extent that the debtor has
been benefited.
• As to what is beneficial to the debtor can be invoked only by such debtor &
not the creditor.
o WON it is beneficial to the debtor is determined by the law & not the
will of the debtor.
o The beneficial effects must be determined at the time the payment
was made.
• The 3rd person cannot compel the creditor to subrogate him in his rights,
such as those arising from a mortgage, guaranty or penalty.
o Ex. A is indebted to B for P500,000 secured by a real estate mortgage
on the house of A, & X pays B the said indebtedness in the amount of
P500,000 without the knowledge or against the will of A.
§ X can only recover the amount of P500,000 but he cannot
compel the creditor to transfer the mortgage to him.
§ In case A does not pay X, X cannot foreclose on the mortgage
to satisfy his claim.
• BUT: If the third party who paid is interested in the obligation, such as a
guarantor, surety, or co-debtor, legal subrogation is presumed.
o Such interested third party-payor can have the right even as to the
accessory obligations such as a mortgage.
o HOWEVER, the presumption is rebuttable.
• Legal subrogation – transfers to the person subrogated the credit with all the
rights thereto appertaining, either against the debtor or against 3rd persons,
be they guarantors, or possessors of mortgages.
2) 3rd Person Pays the Creditor with the Knowledge of the Debtor, but Debtor Objects
• Effect is the same as in #1
3) When 3rd Person Pays the Creditor with Knowledge & Consent of Debtor
• 3rd person can recover from the debtor the amount paid to the creditor
• 3rd person can also compel the creditor to transfer to him any mortgage,
guaranty or penalty – there is legal subrogation
• Ex. from No. 1: X can recover P500,000.
o X can compel the creditor to transfer to him the real estate mortgage
of A so that if A does not pay, X can foreclose on the mortgage to
satisfy his claim.
4) When the Creditor Accepts Payment Due to Contract
• When the contract between the debtor & creditor states that a 3rd person can
make the payment, the effect is the same as #3.
5) When 3rd Person Pays the Creditor without Intending to be Reimbursed
• Obligation is extinguished WON the consent of the debtor is obtained.
• However, payment will be treated as a donation, which requires the consent
of the debtor.
 • Ex. A is indebted to B. X pays B the said indebtedness without intending to be
paid back by A. This will be treated as a donation & hence A should accept
the payment made by X.
o If A does not consent, the obligation nevertheless will be extinguished
in so far as B is concerned.
CASE: Osmena-Jalandoni v. Encomienda
Lesson: The debtor who knows that another has paid his obligation for him and who
does not repudiate it at any time, must corollarily pay the amount advanced by such
third person.
Facts: The utilities & other expenses of J were paid by E, amounting to about P3M, &
J refused to reimburse E; J argued that that she had no loan from E. J also
contended that the amounts she received from E were mostly provided & paid
without her prior knowledge & thus she could not have consented to any loan
agreement. She relied on the fact that E’s claims were not supported by any
documentary evidence. Can J completely not pay E for the expenses E paid?
Held: No. J must pay E for the amounts paid by E on J’s behalf. As to the lack of
evidence, the trial court merely found by no documentary evidence was offered
showing J’s authorization or undertaking to pay the expenses. But the 2nd par. of Art.
1236 provides: “Whoever pays for another may demand from the debtor what he
has paid, except that if he paid without the knowledge or against the will of the
debtor, he can recover only insofar as the payment has been beneficial to the
debtor.”
Clearly, J benefited from the purportedly unauthorized payments. Thus, even if she
asseverates that E’s payment of her bills was without her knowledge or against her
will, she cannot deny the fact that the same still inured to her benefit and E must
therefore be consequently reimbursed for it. Also, when J learned about the
payments, she did nothing to express her repudiation of the same, within a
reasonable time. Even when she claimed that she was prepared with her own
money, she still accepted the financial assistance & actually made use of it. While
she asserts to have been upset because of E’s supposedly intrusive actions, she
failed to protest and, in fact, repeatedly accepted money from her and further
allowed her to pay her utilities. She cannot, therefore, deny the benefits she reaped
from said acts now that the time for restitution has come.
CASE: Tanguilig v. CA
Facts: X was supposed to pay Y because Y built a windmill for X. X claimed he made
payment to another contractor who built the well to which the windmill system was
connected & such payment must be credited as payment to Y. Is X correct?
Held: X is incorrect. The only contract that existed between X & Y was the
construction of a windmill & therefore any payment to the contractor of the deep well
was ineffective payment to Y.
X cannot claim the benefit of the law concerning “payments made by a 3rd person.”
The provisions do not apply because no creditor-debtor relationship between Y (the
creditor) & the 3rd party has been established regarding the construction of the deep
well. Specifically, the 3rd party did not testify that he entered into a contract with Y
for the construction of X’s deep well. If the 3rd party was really commissioned by Y to
75 | Katrina C. Gaw | Block C 2018
construct the deep well, an agreement particularly to this effect should have been
entered into.
CASE: Moreo-Lentfer v. Wolf
Lesson: Donations under Art. 1238 must comply with formal requisites for donation
provided under the Civil Code.
Facts: A beach house was fraudulently transferred to P; the house was really
supposed to be sold to R, who actually paid the price. P invoked Art. 1238 in
claiming that payment made by R was actually intended to be a donation. Is P’s
assertion correct?
Held: No. Trying to apply Art. 1238 to this case is like forcing a square peg into a
round hole. The absence of intention to be reimbursed, the qualifying circumstance
in Art. 1238, is negated by the facts of this case. R’s acts contradict any intention to
donate the properties to P. When R learned that the sale of the beach house was in
favor of P, he immediately filed a complaint for annulment of the sale and
reconveyance of the property. P at that time claimed the beach house, together with
the lease right, was donated to her. But R actually stayed in the beach house in the
concept of an owner and shouldered the expenses for its maintenance amounting to
P200,000. Moreover, R is not related or even close to P. Obviously, R had trusted P
to keep a time deposit account for him with Solid Bank for the purpose of making
the purchase of the cited properties.
P’s claim of donation rings hollow. A donation is a simple act of liberality where a
person gives freely of a thing or right in favor of another, who accepts it. But when a
large amount of money is involved, equivalent to P3,297,800, then P’s claim of
liberality of the donor with more than a grain of salt. Furthermore, a donation must
comply with the mandatory formal requirements set forth by law for its validity. Since
the subject of donation is the purchase money, Art. 7489 is applicable. Accordingly,
the donation of money equivalent to P3,297,800 as well as its acceptance should
have been in writing. It was not. Hence, the donation is invalid for non-compliance
with the formal requisites prescribed by law.
Class Discussion
Q: A is the creditor, B is the debtor. X told A, the creditor, “I will pay for the
indebtedness of B.” Is there subrogation? What are the rights of the parties?
A: If B consented & has knowledge that X will pay A, then there is complete
subrogation. This means that if B does not pay and X pays A, X will be entitled to all
the securities, accessory obligations, etc. that was originally owed by B.
If B does not consent and has no knowledge, or if B has knowledge but did not
consent, X will be entitled to pay from B. However, X will only be allowed to collect to
the extent of the cost of the payment made by X.
*Article 1239. In obligations to give, payment made by one who does not have the
9 Art. 748. The donation of a movable may be made orally or in writing. An oral donation requires the
simultaneous delivery of the thing or of the document representing the right donated.
If the value of the personal property donated exceeds P5,000, the donation and the acceptance shall be
made in writing. Otherwise, the donation shall be void.
free disposal of the thing due & capacity to alienate it shall not be valid, without
prejudice to the provisions of Article 1427 under the Title on Natural Obligations.
Incapacity
• GR: One has the free disposal of the thing due & capacity to alienate it only if
he is the owner of the thing or at least he was given authority by the owner to
use the property as payment for the obligation “to give.”
• “Without prejudice to the provisions of Art. 1427”
o *When a minor below 18, who has entered into a contract without the
consent of the parent or guardian, voluntarily pays a sum of money or
delivers a fungible thing in fulfillment of the obligation, there shall be
no right to recover the same from the obligee who has spent or
consumed it in good faith.
• Minors do not have free disposal; contracts entered into by them are
annullable.
o Even if a minor owns something, especially one with significant value,
he does not, on his own, have the free disposal of it without the
consent of his parents & the courts.
Class Discussion
Payment BY incapacitated person – NOT valid
- Effect is that the payment can be returned to the incapacitated person
- EXCEPT: Art. 1427 (natural obligations)
Article 1240. Payment shall be made to the person in whose favor the obligation has
been constituted, or his successors-in-interest, or any person authorized to receive
it.
Payment should only be made to –
1) The creditor or the obligee
2) His successors-in-interest
3) Any person authorized to receive it – not only a person authorized by the
same creditor, but also a person authorized by law, such as a guardian,
executor or administrator of estate of a deceased, & assignee or liquidator of
a partnership or corporation, as well as any other who may be authorized to
do so by law
CASE: Spouses De La Cruz v. Concepcion
Lesson: 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.
Facts: X reminded Y of payments that had to be made by the latter. In the letter
addressed to Y, X told Y to leave payment with a certain “Dori.” Y gave the payment
76 | Katrina C. Gaw | Block C 2018
to Dori, who turned out to be the household help of X. Is Dori considered an agent of
X?
Held: Yes. To extinguish said obligation, payment should be made to the proper
person. Taking into consideration the busy schedule of Y, X advised the latter to
leave the payment to a certain Dori, or to her trusted helper. This is an express
authority given to Dori to receive payment. Thus, as shown in the receipt signed by
Dori and pursuant to the authority granted to Dori, payment made to the latter is
deemed payment to X.
Rules on Payment
• No consideration for good faith or bad faith
o Payment to a stranger would be generally invalid even with good faith
• CASE: Panganiban v. Cuevas - Payment made to a 3rd person, even through
error & in good faith, shall not release the debtor of the obligation to pay &
will not deprive the creditor of his right to demand payment.
o If it becomes impossible to recover what was unduly paid, any loss
resulting is borne by the deceived debtor, who is the only one
responsible for his own acts unless there is a stipulation for the
wrongful payment.
• CASE: PNB v. CA - Where payment was made to one claiming to be the
attorney-in-fact of the creditor but no evidence of his authority was presented,
payment was not effected.
*CASE: BPI v. CA
Lesson: The relationship between a bank & its depositor, was one of creditor &
debtor (the depositor being the creditor & the bank being the debtor), & any
withdrawal by the depositor was in effect payment of a debt by a bank.
§ Payment made by the creditor to the wrong party does not extinguish the
obligation as to the creditor who is without fault or negligence, even if the
debtor acted in utmost good faith & by mistake as to the person of the
creditor, or through error induced by fraud of a 3rd person.
Facts: BPI was aware of the dispute involving the ownership of a certain deposit;
despite this, it allowed the withdrawal of the said deposit by the heirs of the
deceased.
• They claimed the deposit was that of their deceased father.
• They also successfully obtained a judicial resolution from the probate court
allowing the withdrawal of the said money, although said resolution did not
specifically order the bank to release the money.
• BPI, relying on the judicial resolution, released in good faith the money which
turned out as belonging to another.
Is BPI liable if later it is found out that the funds were released to the wrong people?
Held: Yes. The debt herein was paid to persons who were not the creditors or at least
successors-in-interest of the same, therefore no payment extinguished the obligation
as the withdrawal was not proper.
Because the ownership of the deposit remained undetermined, BPI had no right to
pay persons other than those in whose favor the obligation was constituted or whose
right is indisputable. The payment of the money deposited with BPI that will
extinguish its obligation to the creditor-depositor is payment to the person of the
creditor or to one authorized by him or by law to receive it.
Class Discussion
To accept payment, & for said payment to be valid, it must be made under Special
Power of Attorney (SPA). And the SPA must be very specific. A provision in the SPA
allowing the agent “to mortgage” a lot would not be the same as allowing the agent
“to buy” the same.
*Article 1241. Payment to a person who is incapacitated to administer his property
shall be valid if he has kept the thing delivered, or insofar as the payment has been
beneficial to him.
Payment made to a 3rd person shall also be valid insofar as it has redounded to the
benefit of the creditor. Such benefit to the creditor need not be proved in the ff.
cases:
(1) If after the payment, the 3rd person acquires the creditor’s rights;
(2) If the creditor ratifies the payment to the 3rd person;
(3) If by the creditor’s conduct, the debtor has been led to believe that the 3rd
person had authority to receive payment.
Rules for Payment to an Incapacitated Person
• Incapacitated person – minor, insane
• GR: For an incapacitated person to be able to administer his property &
transact business, he must have a court-appointed guardian handle his
affairs.
o BUT: The father & mother shall be the legal guardian of the property of
the unemancipated common child without the necessity of a court
appointment.
• Payment should be made to the guardians of the incapacitated person. If it is
made directly to the incapacitated person, said payment is voidable.
• Payment made to a 3rd person is also valid if it redounds to the benefit of the
incapacitated person/creditor
o BUT the benefit must be proven
• HOWEVER, if payment is made to an incapacitated person, it is effective in
two situations:
1) When he has kept the thing delivered
o If payment is made to a minor, he must keep it in his
possession until he reaches the age of majority for such
payment to be valid.
o This act of still holding on to the thing delivered as payment at
the time when the person is already capacitated can be
considered as ratification of the payment, curing the irregularity
of the same
2) In so far as the payment is beneficial to him
o If the minor uses the payment for activities beneficial to him
(e.g. to pay school tuition fees), then the payment is valid to the
extent that he has been benefited
77 | Katrina C. Gaw | Block C 2018
• In paying an incapacitated person under a voidable contract, the capacitated
person, who may have even acted in good faith, is at a disadvantage.
o Generally, the capacitated person CANNOT ask for the annulment of
the contract on the basis of the incapacity of the other party
o In the event that the contract is annulled, the incapacitated person is
not obliged to make restitution except in so far as he has been
benefited by the thing or price received by him.
Class Discussion
Q: X pays Y, a 13-year-old, P100,O00. Y heads to PAGCOR & spends all the money.
When Y hits 18, is the payment valid?
A: NO. Payment is only valid when it benefited the minor, or he has kept it.
Class Discussion
Payment TO a minor is VOIDABLE. It is VALID ONLY IF it is kept by him after the age
of majority (in which case it is ratified) OR if he has benefited from it. The law may
say “valid,” but it is actually annullable (BUT when you answer questions as to this in
the bar, you must answer what the law provides).
Class Discussion
Q: If the minor is not obliged to restitute, can the minor file a case?
A: Yes. This is because the minor has no obligation to restitute.
*NOTE: The minor is obliged to restitute to the extent of his benefit.
Payment to Someone Who Is Not Creditor
• Payment made to a stranger, (i.e., person who is not the creditor, his
successor-in-interest, or a person authorized to receive payment) is not
effective payment which will bind the creditor.
o HOWEVER, if such payment nevertheless benefits the creditor, it shall
be effective in so far as it has redounded to the benefit of the creditor.
• Ex. A is the debtor of B. A, instead of paying B directly, pays ½ of the
indebtedness to B’s brother, whom B never authorized to receive payment.
This payment is NOT valid.
o HOWEVER, if the brother of B uses the money to pay B’s indebtedness
to somebody, then the payment will become valid. It will extinguish A’s
indebtedness insofar as the payment has redounded to the benefit of
B which, in this case, is ½ of the indebtedness.
Exception to Proving Benefit of Creditor
• The benefit to the creditor for payment made by the debtor to a 3rd person
must always be proven except in 3 cases:
1) If after payment, the 3rd person acquires the creditor’s rights.
o Ex. A is indebted to B for P1,000. A does not pay B on due date
despite proper demand, such that the stipulated interest on
the indebtedness accrues in the amount of P100.
§ If A (the debtor) pays X (3rd person) the principal
amount, such payment is not effective.
 § BUT: If there is concrete proof that interest has not yet
been paid, & later B (the real creditor) empowers X to
also collect the interest of P100 for himself (X) & not for
B, then the benefit to the creditor need not be proven.
o The fact that X acquires the creditor’s right to collect the
interest is enough to show that payment to the 3rd person X
benefited the creditor B. The P1,000 principal indebtedness
therefore must be considered extinguished. If A pays the
interest to X, the totality of the obligation is extinguished.
2) When the creditor ratifies the payment to the originally unauthorized
3rd person (ratification).
o Creditor need not be benefited.
o In the same example, if B, after learning that payment was
made to X approves of the payment to the latter, the debt is
extinguished.
3) When, by the creditor’s conduct, the debtor has been led to
believe that the 3rd person has authority to receive the payment
(estoppel).
o In the same example, if B tells A that he can transact any
business or any of his concerns with X, including the P1,000
indebtedness,& later A pays X the indebtedness, the obligation
is extinguished, as B cannot disclaim the payment to X. By his
representation to A, B is estopped from claiming that X had no
authority to accept payment.
Class Discussion
Q: A is the creditor, B is the debtor. B paid X. What are the rights of the parties?
A: There is no extinguishment of the obligation of B to A, even if this is made in good
faith. BUT there are exceptions to the rule:
• The obligation of B to A will be extinguished if it benefited A.
• Article 1241 – If after payment, the third person acquires the creditor’s right
• Article 1241 – If the creditor ratifies the payment made to the third person
• Article 1241 – If by the conduct of the creditor, the debtor was made to
believe that the third person had authority to receive payment
• See also the case of BPI v. CA – payment in this case made to a third person
is not valid because the court only made a provisional determination of
ownership which did not fully determine the rights of the parties
• Holder of the evidence of indebtedness – if you pay the person who holds the
evidence of indebtedness (e.g., a bearer instrument), this will also extinguish
the obligation.
Article 1242. Payment made in good faith to any person in possession of the credit
shall release the debtor.
Possession of Credit
• A person in possession of the credit is presumed to own the credit.
o A debtor who pays the possessor in good faith is released from the
debt.
78 | Katrina C. Gaw | Block C 2018
o Whether the creditor willfully, unintentionally or negligently allowed a
3rd person to possess the credit does not matter in so far as the
debtor who paid in good faith is concerned.
• The risk is always on the creditor provided payment is made by the debtor in
good faith.
o If payment is made to a person who is not in possession of the credit,
the debtor will not be released from his obligation regardless of
whether or not payment was made in good faith.
CASE: National Power Co. (NPC) v. Ibrahim
Facts: On the basis of a final judgment, NPC paid the winner (Mangondato) of said
final judgment rental fees & expropriation indemnity & not the alleged true owner,
Ibrahim & Maruhom. Is the payment valid?
Held: Yes, the payment to Mangondato extinguished the obligation of NTC,
regardless of who turns out to be the true owner who is entitled to payment for the
subject land. This is true regardless of who among Mangondato & Ibrahim &
Maruhom are the true owners of the property. If it turns out that Mangondato &
Ibrahim own the property, it can be said that payment to Mangondato would be akin
to a payment made in “good faith” to a person in “possession of credit” per Art.
1242 that, just the same, extinguishes NPC’s obligation to pay for the rental fees
and expropriation indemnity due for the subject land.
Art. 1242 contemplates a situation where a debtor pays a “possessor of credit” i.e.,
someone who is not the real creditor but appears, under the circumstances, to be
the real creditor. In such scenario, the law considers the payment to the “possessor
of credit” as valid even as against the real creditor taking into account the good faith
of the debtor.
Borrowing the principles behind Art. 1242, SC held that Mangondato — being the
winner of the first judgment as well as the registered owner of the subject land at
the time — may be considered as a “possessor of credit” with respect to the rental
fees and expropriation indemnity adjudged due for the subject land, if the Ibrahims
and Maruhoms turn out to be the real owners. Hence, NPC’s payment to
Mangondato of the fees and indemnity due still validly extinguished its obligation to
pay for the same even as against the Ibrahims and Maruhoms.
Article 1243. Payment made to the creditor by the debtor after the latter has been
judicially ordered to retain the debt shall not be valid.
Payment After Judicial Order to the Contrary
• To prevent any transaction which might be intended to defraud said creditors,
the debtor is prohibited from paying a particular creditor during the
effectivity of a court order prohibiting him to make such payment to that
particular creditor.
• In the event that the debtor makes such payment, it shall not extinguish
the obligation as the law considers such payment as invalid.
Article 1244. The debtor of a thing cannot compel the creditor to receive a different
one, although the latter may be of the same value as, or more valuable than that
which is due.
In obligations to do or not to do, as act or forbearance cannot be substituted by
another act or forbearance against the obligee’s will.
No Substitution
• A debtor cannot pay by giving a particular car if the agreement is to give a
particular jeep even if the car is more expensive than the jeep.
• Likewise, if one has been engaged to sing for one night in exchange for an
airplane ticket, the obligor cannot fulfill the obligation by dancing for one
week even if such dancing is worth more than the singing.
*Article 1245. Dation in payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the law on sales.
Dation in Payment (Dacion en Pago)
• It is a contract where the debtor offers another thing to the creditor, who
accepts it as the equivalent of payment for the outstanding debt
o PURPOSE – to transfer ownership of the thing
o This is a form of objective novation
• As a mode of extinguishing obligation, dacion en pago requires the common
consent of the parties
o This is because dation in payment is akin to a contract of sale, where
the creditor is buying a property from the debtor, the payment of which
is charged against the debtor’s debt
o Hence, the elements of a valid contract of sale, namely, consent,
object certain, & cause or consideration, must be present
• NOT mortgage or security - mere repossession of certain machinery &
equipment for purposes of securing payment of an obligation & not for the
purpose of transferring ownership is NOT dation in payment
Requisites for Valid Dation in Payment (Caltex v. IAC)
(1) There must be performance of the prestation in lieu of payment (animo
solvendi)
o May consist in the delivery of a corporeal thing, a real right, or a credit
against the 3rd person
(2) There must be some difference between the prestation due & that which is
given in substitution (aliud pro alio)
(3) There must be an agreement between the creditor & debtor that the
obligation is immediately extinguished by reason of the performance of a
prestation different from that due.
CASE: Caltex v. IAC
Lesson: Dation in payment is not necessarily the total extinguishment of an
obligation — it extinguishes the obligation only up to the value of the thing delivered.
The obligation is totally extinguished only when the parties, by agreement, express or
implied, or by their silence, consider the thing as equivalent to the obligation, in
which case the obligation is totally extinguished.
79 | Katrina C. Gaw | Block C 2018
Facts: The debtor assigned to the creditor its receivables from the Special Fund
Import Payments due from the National Treasury of the Philippines to be applied as
payment of the amount of P4,072,683.13 it owed to the creditor.
• The amount actually received from the Special Fund by the debtor was more
than P4,072,683.13.
• Their Deed of Assignment said:
o Debtor has outstanding obligation of P4,072,683.13, plus any
applicable interest on overdue account.
o Debtor hereby irrevocably assigns & transfers to the creditor any & all
funds paid by the Special Fund Import Payments, including all rights &
benefits accruing to the same, plus any applicable interest charges, &
other avturbo fuel lifting & deliveries that the debtor may from time to
time receive from creditor.
• After the creditor sought the excess of the amount obtained, the debtor
released some of the excess minus P510,550.63, which the debtor claimed
as interest on the indebtedness.
• CA ruled that this was a dacion en pago case which completely extinguished
the obligation of the debtor & that the P510,550.63 should be returned.
Was the CA correct?
Held: No. SC reversed the CA. The obligation was not totally extinguished, as the
contract between the parties contemplated other obligations.
• There are 3 obligations in this case based on the contract:
o The outstanding obligation of P4,072,683.13
o The applicable interest charges on overdue accounts
o The other avturbo fuel lifting & deliveries that the debtor may from
time to time receive from creditor
• Had the parties intended to limit the debtor’s obligation to P4,072,682.13,
they should have said so, & there would have been no need for them to
qualify the statement of the amount with clauses.
o The literal meaning of the Deed of Assignment should control.
• Furthermore, even after the payment of money, the creditor continued to
charge the debtor for interest & the debtor made requests to lower the
interest, which shows that to the minds of both parties, the debt subsisted.
CASE: Spouses Estanislao v. East West Bank
Facts: In a deed of assignment, the debtors transferred certain movables (units of
heavy equipment) to the creditor-bank; the creditor-bank expressly acknowledged
the transfer of the heavy equipment as “full payment” of the indebtedness. The bank
now asserts that it may still enforce the original obligation because signatures of its
representatives do not appear on the deed of assignment. Can the bank still make
further claims?
Held: No, the deed of assignment is “full payment” of the obligation of the debtors,
as expressly stipulated in the deed itself. The deed of assignment was a perfected
agreement which extinguished the debtor’s total outstanding obligation to the bank.
The nature of the assignment was a dacion en pago whereby property is alienated to
the creditor in the satisfaction of a debt in money. Since the agreement was
consummated by the delivery of the last unit of heavy equipment under the deed,
the debtors are deemed to have been released from all their obligations to the bank.
 Held: This stipulation is void. The intent of the creditor appears to be evident, for the
CASE: Tan Shuy v. Spouses Maulawin debtor is obliged to dispose of the collateral at the pre-agreed consideration
Facts: A debtor, instead of collecting payment of copra deliveries due from his amounting to practically the same amount as the loan. In effect, the creditor
creditor, applied such collectibles to his loan in favor of his creditor. Does the loan acquires the collateral in the event of non-payment of the loan. This is within the
subsist in this case? concept of pactum commissorium. Such stipulation is void.
Held: No. The arrangement is in the nature of dacion en pago & thus extinguished
the obligation to the extent that payment was made. CASE: DBP v. CA
Facts: The debtor executed a deed of assignment of leasehold rights of certain
*Dacion en Pago v. Pactum Commissorium properties.
Dacion en Pago Pactum Commisorium Held: These are simply mortgages.
Transfer of Before the creditor becomes The parties agree, generally in • NOT dacion en pago because the leasehold rights were not designed to
Ownership the owner of the collateralized one single contract, that, in the extinguish the obligation, but merely to constitute a security;
of Property property, an intervening event that the debtor fails to • NOT pactum commissorium, as they did not provide for the automatic
After Default agreement subsequent & pay the debt, the mortgaged or ownership of the properties in case of non-payment;
independent from the original pledged property of the debtor • NOT payment by cession because there was only one creditor.
contract of the parties is shall automatically be
executed to have the property appropriated or owned by the Class Discussion
collateralized in the original creditor. The triumvirate:
agreement as payment of the 1. Dacion en pago – novation of the object of the contract
debt, thereby extinguishing the • Here, there is novation – an intervening agreement between the object to be
obligation. changed
• Ex. A is the borrower, B is the creditor. The collateral of the loan is the house
Validity Valid & provided for by law Void (Art. 2088 of the Civil and lot. If A says, “Can I negotiate and enter into an agreement where a
Code): “The creditor cannot different collateral will be foreclosed instead?” This is dacion.
appropriate the things given by 2. Pactum commissorium (automatic ownership of collateral) – void
way of pledge or mortgage, or 3. Extrajudicial or judicial foreclosure
dispose of them. Any stipulation
to the contrary is void.” Any Article 1246. When the obligation consists in the delivery of an indeterminate or
property made as a security to generic thing, whose quality & circumstances have not been stated, the creditor
a loan must 1st undergo public cannot demand a thing of superior quality. Neither can the debtor deliver a thing of
bidding. inferior quality. The purpose of the obligation & other circumstances shall be taken
in consideration.
Elements of Pactum Commisorium
1) There must be a debtor-creditor relationship between the parties; Delivery with Generic Objects
2) The property of the debtor was used as security for the loan, either as a • If an obligor, who is not rich, is bound to deliver any rented car to be used at a
mortgage or pledge; & very simple wedding ceremony & the obligee knows his financial capacity,
3) There was automatic appropriation of the property upon failure of the debtor such obligee cannot demand that the obligor deliver a multi-million Rolls
to pay the obligation as provided in their agreement. Royce which could only be rented at such amount which the obligor cannot
afford.
CASE: Bustamante v. Rosel
• On the other hand, the obligor cannot deliver a car which is so old that it
Lesson: One example of pactum commisorium is when the debtor & creditor agree to
would not start unless it is pushed.
sell the mortgage to the creditor himself & such is as stipulation in their original loan
agreement.
Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by
Facts: A debtor & creditor entered into a loan agreement where it was stipulated
the payment shall be for the account of the debtor. With regard to judicial costs, the
that, in case of the default of the debtor, the creditor has the option to buy the
Rules of Court shall govern.
collateral for a total consideration of P200,000 inclusive of the borrowed amount &
interest thereon.
Extrajudicial & Judicial Costs

80 | Katrina C. Gaw | Block C 2018

 • The creditor usually benefits from the obligation. It is always in his favor that
the debtor gives, does some service or not do some service.
• Debtor pays for the extrajudicial expenses for the payment or performance of
the obligation, unless the parties otherwise stipulate.
• With respect to judicial cost, the Rules of Court shall apply.
Article 1248. Unless there is an express stipulation to that effect, the creditor cannot
be compelled partially to receive the prestation in which the obligation consists.
Neither may the debtor be required to make partial payments.
However, when the debt is in part liquidated & in part unliquidated, the creditor may
demand & the debtor may effect the payment of the former without waiting for the
liquidation of the latter.
CASE: Nasser v. Cuevas
Lesson: A creditor cannot be compelled partially to receive the prestations in which
the obligation consists unless there is an express stipulation to that effect.
Facts: On the basis of a compromise agreement, a number of obligors agreed to pay
a lawyer his legal fees by way of real property & cash.
For this purpose, it was expressly stipulated that a charging lien for attorney’s fees
would be established on the properties to secure payment of the legal fees
“provided that upon full payment of the corresponding liability of a party, the lien on
his/her share is extinguished.”
Upon demand of the lawyer for payment, the obligors contended that the
aforequoted clause gave them the right to pay in installment.
Held: This interpretation is wrong. The clause simple means that the lien will be
extinguished when the heirs pay, & do not expressly grant the right to pay in partial
installments.
Partial Payment – When Allowed
1) If there is an express stipulation by the parties allowing the same or
2) If the debt is partially liquidated and partially unliquidated.
o Ex. A debtor is bound to perform an obligation by paying the amount of
P1,000 & by also delivering whatever money he will get from the
estate of his already deceased father.
§ The creditor may demand & the debtor may pay the P1,000
without waiting for the determination of the amount of
money the debtor will get from the deceased father’s estate.
No Express Stipulation – Still Allowed
• Even if there is no express stipulation, partial payment can likewise be
effective if the creditor accepts it & benefits from it.
• A creditor cannot be considered in delay if he refuses to accept partial
performance because, unless otherwise provided by law or stipulated by the
parties, a creditor cannot be compelled to accept partial performance.
o BUT: The creditor will incur in delay if he does not accept such partial
performance if:
(1) Good faith necessitates acceptance or
(2) The creditor abuses his right in not accepting.
81 | Katrina C. Gaw | Block C 2018
*Article 1249. The payment of debts in money shall be made in the currency
stipulated, & if it is not possible to deliver such currency, then in the currency which
is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have
been cashed, or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in
abeyance.
Currency
• Uniform Currency Act (RA 529) – It was prohibited to use foreign currency in
connection with certain contracts in PH. Though the stipulation for the use of
foreign currency is void, the contract is nevertheless valid.
o Has been repealed by RA 8183
• RA 8183 – effective on July 6, 1996
o All monetary obligations shall be settled in PH currency, which is legal
tender in the Philippines.
o BUT: Parties may agree that the transaction shall be settled in any
other currency at the time of payment.
Negotiable Instruments: Promissory Notes
• Promissory note - a document where a promise to pay is made by the debtor
to the creditor
o An unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand or at a fixed or
determinable future time, a sum certain in money to order or to bearer
Class Discussion
Promissory Notes – a negotiable instrument; if a completely random stranger picks
this up, he can have the amount already
• There are always at least 2 parties in a promissory note
• Can be endorsed at the back to other persons, making the debtor liable to
pay said 3rd person
• FRONT
o “I promise to pay X P1,000 on May 1, 2015.”
o Signature of debtor (maker of the note)
o “To order” or “To bearer”
• BACK: “Endorsed to M”
Negotiable Instruments: Bills of Exchange
• Bills of exchange - an unconditional order in writing addressed by one person
to another signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time a sum
certain in money to order to bearer
o Check – a bill of exchange drawn on a bank payable on demand
§ Not considered legal tender or valid tender of payment
 § An offer to pay in check may be refused by the obligee or
creditor
§ BUT: If payment by way of a fully-funded check was offered &
the obligee accepts the check as payment after the obligor
manifests that it was given to settle an obligation, he shall be
estopped from later on denouncing the efficacy of such
payment. (*Far East Bank & Trust Co. v. Diaz Realty)
Class Discussion
Far East Bank case – For checks to constitute as payment –
1. Parties must so stipulate
2. The check must be funded
Negotiable Instruments & Substitution for Money
• Specific rule of law - in fulfillment of an obligation by payment of money, only
payment in cash will extinguish the obligation
o Thus, if promissory notes, bills of exchange or checks are given to pay
a debt, such debt will NOT be extinguished unless these mercantile
documents are encashed.
• Negotiable instruments – only a substitute for money, & not money itself
Class Discussion
Checks are another form of negotiable instruments
• Type of bill of exchange
• Debtor – drawer
• Creditor – payee
• Bank – drawee
Cashier’s/Manager’s Check
• Drawer is the drawee
• Not legal tender
• Considered as good as cash, though it is not cash
• Checks take 3 days to process (before it turns into actual cash, or payment)
• Usually stale in 6 months
GR: Payment must be in cash to be considered as legal payment
EXC: Check can be considered payment if parties so stipulate, but the check must be
fully funded.
*Impairment by the Creditor
• “When through the fault of the creditor they have been impaired”
o Applicable only to instruments executed by 3rd persons & delivered by
the debtor to the creditor
§ Ex. Someone else’s account suddenly runs out; process of
endorsement
o DOES NOT apply to instruments executed by the debtor (as drawer)
himself & delivered to the creditor.
82 | Katrina C. Gaw | Block C 2018
• Checks – must be presented within a reasonable time after its issue;
otherwise, the drawer will be discharged from liability thereon to the extent of
the loss caused by the delay.
o Normal banking practice - a check becomes stale if it has not been
presented to the bank for a period of 6 months from the date of the
said check.
o HOWEVER, if a creditor allows his checks to become stale, it does not
mean that the debtor who drew the check will necessarily be
discharged from his debt, or that his obligation will be extinguished.
§ It is only when the creditor does not present the check for
payment & thereafter the bank upon which the check has been
drawn collapses or fails to the point that it cannot meet
demands for payment, will the debtor be discharged.
§ If the bank is still in good credit & is able to pay the check, if
the drawer, at the date of the check or at the time of the
presentment of it for payment & dishonor, has withdrawn his
funds, the drawer would remain liable to pay the check,
notwithstanding the lapse of time.
Class Discussion
Q: X gave Y a check. Y kept it in his drawer for a year & forgot about it. The bank
dishonored the check when Y tried to deposit it. What are Y’s remedies?
A: Y can still ask X for money, following prescriptive period requirements (within 10
years for written, 6 years for oral)
Q: So what does the law mean about the creditor impairing the check?
A: The phrase only applies if check was issued by a 3rd person.
*CASE: National Federation Marketing v. NAMARCO
Lesson: The clause of Art. 1249 relative to the impairment of the negotiable
character of the commercial paper by the fault of the creditor, is applicable ONLY to
instruments executed by third persons and delivered by the debtor to the creditor,
and does NOT apply to instruments executed by the debtor himself and paid to the
creditor.
Class Discussion
• Staleness of a check is not the impairment contemplated by the law. The
impairment contemplated by the law will EXTINGUISH the obligation. A mere
stale check will not extinguish the obligation. Hence, if the creditor makes the
deposit after the 6-month period and as a result the check bounces, the
check is not considered impaired by the creditor.
• The impairment contemplated by law is actually indorsement. Hence, there is
impairment when A issues a check to pay X, & X, instead of encashing the
check, uses this check to pay C.
• If C holds on to the check for 2 years after the check was given by X, & only
then does C attempt to encash the check, when A already withdrew all the
money in the count, the obligation is extinguished due to impairment by the
creditor. (National Federation Marketing v. NAMARCO case)
Article 1250. In case an extraordinary inflation or deflation of the currency stipulated
should supervene, the value of the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is an agreement to the
contrary.
Extraordinary Inflation
• Applies only in contractual obligations
o Q: A & B entered into a contract in 1916. B did not pay. Case took a
long time to be resolved. After 25 years, the decision of the SC
became final. A would like to collect, and argues that the P10,000
owed from 1916 is now P1B due to extraordinary inflation. Should A
be paid 1B?
o A: NO. The extraordinary inflation will not be considered UNLESS
agreed upon by the parties.
• *Exists when there is a decrease or increase in the purchasing power of the
PH currency which is unusual or beyond the common fluctuation in the value
of said currency & such decrease or increase could not have been reasonably
foreseen or was manifestly beyond the contemplation of the parties at the
time of the establishment of the obligation.
o Ex. Hyperinflation of the German mark, from 4.2 to 62 to the USD
within a year
• Mere decline in purchasing power is not inflation
• *There MUST be an official declaration by competent authorities, such as the
Central Bank, Dept. of Finance of BSP
• NOT applicable to Art. 1250: cases involving (1) tort & (2) expropriations by
the government of property in the exercise of eminent domain powers
o In eminent domain, the value at establishment of the obligation is the
value of the peso at the time of the taking of the property, as this is
when the obligation of the Government to pay arises
• Value of the currency – purchasing power of money
o Also know as “par value,” “legal exchange rate,” or “par of exchange”
• Par value - the amount it takes one currency (for example, based on gold) to
buy a unit in another currency (also based on gold) that is, how pieces of the
one unit (or their gold content) are necessary to equal the gold content of the
other unit
o Value as officially defined in terms of gold or, under the silver
standard, where there was such a standard, in terms of silver.
o The ‘par of exchange’ therefore applies only between countries having
a fixed metallic content for their currency unit. It would be possible to
define a currency’s par value in terms of another currency such as the
dollar or pound sterling, but usage confines the meaning of par to the
official value in terms of gold.
Article 1251. Payment shall be made in the place designated in the obligation.
There being no express stipulation & if the undertaking is to deliver a determinate
thing, the payment shall be made wherever the thing might be at the moment the
obligation was constituted.
In any other case the place of payment shall be the domicile of the debtor.
83 | Katrina C. Gaw | Block C 2018
If the debtor changes his domicile in bad faith or after he has incurred in delay, the
additional expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.
Place of Payment
• The parties can agree as to where the payment shall be made.
• If there is no stipulation & the obligation is to give a determinate thing,
payment shall be made in the place where the thing is located at the time of
the constitution of the obligation.
• In any other case, the place of payment is the domicile of the debtor.
o Domicile - For the exercise of civil rights & the fulfillment of civil
obligations, the domicile of natural persons is the place of their
habitual residence.
• The additional expenses attendant in making payment shall be borne by the
debtor if:
o He changes his domicile in bad faith, such as if the change was made
precisely for the creditor not to locate him, or
o After he has incurred in delay.
Class Discussion
Place of Payment:
1) Agreement, or if none;
2) If the property is determinate – place where thing is found at obligation’s
constitution
3) If the property is generic – house of debtor
SUBSECTION 1. - APPLICATION OF PAYMENTS.
*Article 1252. He who has various debts of the same kind in favor of one & the
same creditor, may declare at the time of making the payment, to which of them the
same must be applied. Unless the parties so stipulate, or when the application of
payment is made by the party for whose benefit the term has been constituted,
application shall not be made as to debts which are not yet due.
If the debtor accepts from the creditor a receipt in which an application of payment
is made, the former cannot complain of the same, unless there is a cause for
invalidating the contract.
Arts. 1252-1254
• Apply to a person owing several debts of the same kind to a single creditor
• Like in alternative obligations, the choice as to which debt the payment is to
be applied is given to the debtor.
o The debtor must make a declaration as to which debt should the
payment be applied.
• Must conform to the general rules of payment from Arts. 1232-1251
o Art. 1233 – Payment must be completely delivered
o Art. 1248 – The creditor cannot be compelled partially to receive the
prestation in which the obligation consists
 § If the debtor makes a declaration as to the particular debt
(from among a number of debts) to which his payment is to be
applied, the creditor can validly refuse such application if the
payment is to be applied to a debt which will only partially pay a
particular indebtedness.
Class Discussion
Q: X has 3 debts, P1,000, P5,000 & P10,000. X gives Y P1,000 & asks Y to apply
this to the P5,000. Can Y say no?
A: Yes, because applying the P1,000 to P5,000 would only be partial performance,
which the creditor can validly object to.
Debts Not Yet Due
• Application of payment cannot be made on debts not yet due
o Unless the parties agree or
o When the application of payment is made by the party, which may
either be the debtor or the creditor, for whose benefit the term has
been constituted.
• Ex. A is indebted to B in the amount of P1,000, P2,000, & P900 which will
not earn interest if paid on Jan. 2, 1997 but will earn interest from Feb. 2,
1997, the latter date being the 2nd due date if the debtor chooses not to pay
on Jan. 2, 1997.
o Clearly the period prior to Jan. 2, 1997 is for the benefit of the debtor.
Thus, if he decides to give B P500 before Jan. 2, 1997, the choice of
application belongs to him.
o If the creditor is agreeable to being partially paid, the debtor can apply
the P500 to the P1,000, P2,000, or P900 depending on his choice
even if the indebtedness is not yet due.
o It is clear that in such a case, whether he pays it on or before Jan. 2,
1997 will not make any difference in so far as the debtor or creditor is
concerned because no interest is imposed.
*CASE: Spouses Chuy Tan v. China Banking Co.
Lesson: The right of a debtor to apply payment is merely directory in nature & must
be promptly exercised, lest such right pass on to the creditor. That is why the
provision says the debtor “may” declare at the time of making payment which debt
his payment is to be applied to, & also why the same provision allows the creditor to
apply the payment where the debtor fails to elect to do so. The debtor’s right in this
case is hence waivable.
If neither the creditor nor debtor exercises the option, the court will apply the
payment in accordance with justice & equity in a specific case, taking into
consideration all circumstances.
Facts: The debtor in this case defaulted on one of its many loans; as a result, the
property mortgaged under the debtor’s loan was foreclosed & sold in a public sale.
The debtor failed to specify which loan the proceeds of the sale should be applied to.
The creditor-bank thus chose to apply the proceeds of the sale to the interest &
penalties first, & not the principal loan just yet. Is the action of the creditor-bank
valid?
84 | Katrina C. Gaw | Block C 2018
Held: Yes. If the debtor fails to exercise his right to choose to which of his several
debts a payment is to be applied, the right passes to the creditor, who may make
such application as he chooses.
The bank’s choice also coincides with Art. 1253, which states that if a debt produces
interest, payment of the principal shall not be deemed to have been made until the
interests are covered.
CASE: Sinamban v. China Banking Co.
Lesson: (1) Where there are 2 sets of debtors who signed promissory notes as
solidary co-maker, the rule on application of payments will not apply, considering
that the choice as to who will pay belongs to the creditor & not to the debtor.
(2) Art. 1252 also contemplates a situation of a debtor with several debts due & not
to a situation where each solidary debt is imputable to several debtors.
Class Discussion
Q: A is the creditor, B is the debtor. B has three debts to A – Debt 1, 2, and 3. Who is
given by law the option to choose which account will be first paid?
A: Debtor. But the choice of the debtor is directory. You cannot make the creditor
wait.
Q: Is that mandatory? What if the debtor takes too long to choose which debt? What
if creditor, due to waiting too long, decides to apply the debt to Debt 3?
A: Yes, the creditor can choose. (Spouses Juan Chuy-Tan v. China Banking Co.) So
while the debtor has the choice under the law, if the debtor dilly-dallies, the creditor
can choose. This is based on the second paragraph of the law.
*Note that the creditor is allowed to reject the debtor’s choice.
**Mel’s advice: If you are the creditor, just accept all money and just work out the
balance later.
Receipt
• Gives rise to doctrine of substantial compliance – presumption that payment
has been made
o To avoid this, creditors should also state in the receipt on what
account the payment is considered applied & also state, “balance is
still existing & demandable”
• Estoppel - If the debtor accepts from the creditor a receipt in which an
application of payment is made, the debtor cannot complain of the same,
unless there is a cause for invalidating the contract.
o The debtor must not only merely receive the receipt but he must
accept the receipt.
• Ex. A is indebted to B for P1,000, P2,000, & P900. A pays B P500 without
mentioning as to which debt the P500 will be applied. B, the creditor, is
agreeable to any partial payment, & issues a receipt indicating therein that
the P500 shall be applied to the P1,000 debt, & A readily accepts the said
receipt.
o A cannot later complain that the P500 should have been applied to
the P2,000 debt unless there exists a cause to invalidate the contract
in connection with the indebtedness in the amount of P1,000.
 • However, if the indebtedness has been obtained through fraud or
intimidation which is a cause to annul the contract, the debtor is not
estopped from questioning the application.
Class Discussion
Q: B gives A P500 as partial payment, without declaring the application of the P500.
B has debts of P1,000, P2,000, and P3,000. Where will the P500 be applied?
A: It will first be applied to the most onerous one. Since none of them are more
onerous, the P500 will be applied to all debts, pro rata. Value of money alone, for
purposes of application of payment, will NOT define which one is more onerous.
Examples of more onerous: those with a higher interest, the one with collaterals, the
one with acceleration clause.
Article 1253. If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered.
Interest to be Paid First
• Art. 1253 is merely directory & not mandatory.
• Although interest only attaches to the principal, the payment of both principal
& interest, in effect, constitutes two payments by the debtor.
• Art. 1176: The receipt of the principal by the creditor without reservation with
respect to the interest, shall give rise to the presumption that the interest has
been paid
o This presumption is rebuttable
CASE: Marquez v. Elisan Credit Co.
Lesson: The presumption under Art. 1176 does not resolve the question of WON the
amount received by the creditor is a payment for the principal or interest. Under this
Art., the amount received by the creditor is the payment for the principal, but a doubt
arises on WON the interest is waived because the creditor accepts the payment for
the principal without reservation with respect to the interest. Art. 1176 resolves this
doubt by presuming that the creditor waives the payment of interest because he
accepts payment for the principal without any reservation.
On the other hand, the presumption under Art. 1253 resolves doubts involving
payment of interest-bearing debts. It is a given under this Art. that the debt produces
interest. The doubt pertains to the application of payment; the uncertainty is on
whether the amount received by the creditor is payment for the principal or the
interest. Art. 1253 resolves this doubt by providing a hierarchy: payments shall first
be applied to the interest; payment shall then be applied to the principal only after
the interest has been fully paid.
Correlating the two provisions, the rule under Art. 1253 that payments shall first be
applied to the interest and & to the principal shall govern if two facts exist: (1) the
debt produces interest (e.g., the payment of interest is expressly stipulated) and (2)
the principal remains unpaid.
The exception is a situation covered under Art. 1176, i.e., when the creditor waives
payment of the interest despite the presence of (1) & (2) above. In such case, the
payments shall obviously be credited to the principal.
85 | Katrina C. Gaw | Block C 2018
Facts: M obtained from ECC a loan payable in weekly installments & subject to
annual interest with monthly penalties & attorney’s fees in case of non-payment. A
chattel mortgage was also executed stipulating that “the motor vehicle shall stand
as a security for all other obligations of every kind already incurred or
which hereafter may be incurred. The payment of this first loan was acknowledged
by both parties. Subsequently, M obtained a second loan with the same terms and
conditions as the first loan.
• When the second loan matured, there still remained an unpaid balance.
Because of liquidity issues, M asked ECC if he could pay the unpaid balance
by daily installments until the loan is paid; the ECC agreed. Months after the
maturity of the loan, M had already paid a total amount greater than that of
the principal.
• Despite this, ECC filed a complaint for foreclosure of the chattel mortgage on
the ground that M failed to pay the principal of the second loan despite
demand. It was also prayed that the unpaid balance plus
accrued penalties and interests be paid because, allegedly, M’s failure to pay
upon maturity triggered the imposition of monthly penalties & attorney’s fees.
Issue #1: M, citing Arts. 1176 & 1235, argued that ECC was mistaken when it
credited his daily payments against the interest instead of the principal. Is M’s
contention correct?
Held #1: No. ECC acted according to the law when it credited the daily payments
against the interest instead of the principal. Since the doubt in the present case
pertains to the application of the daily payments in an interest-bearing loan, Art.
1253 shall apply. Only when there is a waiver of interest shall Art. 1176 become
relevant.
Under this analysis, ECC properly credited the daily payments to the interest & not to
the principal because: (1) the debt produces interest, i.e., the promissory note
securing the second loan provided for payment of interest; (2) a portion of the
second loan remained unpaid upon maturity; & (3) ECC did not waive the payment of
interest.
Issue #2: M also alleges that ECC waived the interest on the loan. Is M correct?
Held #2: No. The fact that the official receipts did not indicate whether the payments
were made for the principal or the interest does not prove that the ECC waived the
interest.
There were actually two forms of interest involved in this case – one was the
stipulated interest for default (or monthly penalty) which was at 10% per month, &
one was the stipulated monetary interest of 26% p.a. Art. 1253 covers both types of
interests. As Tolentino opines: “the interest for default arises because of non-
performance by the debtor, & to allow him to apply payment to the capital without
first satisfying such interest, would be to place him in a better position than a debtor
who has not incurred in delay.”
In Swagman Hotels and Travel v. CA, SC applied Art. 1253 in resolving WON the
debtor has waived the payments of interest when he issued receipts describing the
payments as “capital repayment.” In that case, it held that the creditor would not
have signed the receipts describing the payments made by the debtor as “capital
repayment” if the obligation to pay the interest was still subsisting. There was
therefore a novation of the terms of the three promissory notes in that the interest
was waived.
In Swagman, it was clearly established that the creditors accepted the payment of
the principal. The creditors were deemed to have waived the payment of interest
because they issued receipts expressly referring to the payment of the principal
without any reservation with respect to the interest. As a result, the interests due
were deemed waived. It was immaterial whether the creditors intended to waive the
interest or not. The law presumed such waiver because the creditors accepted the
payment of the principal without reservation with respect to the interest.
Swagman is to be distinguished from the case at bar. In the present case, it was not
proven that ECC accepted the payment of the principal. The silence of the receipts
on whether the daily payments were credited against the unpaid balance of the
principal or the accrued interest does not mean that the respondent waived the
payment of interest. There is no presumption of waiver of interest without any
evidence showing that the ECC accepted the daily installments as payments for the
principal.
Ideally, ECC could have been more specific by indicating on the receipts that the
daily payments were being credited against the interest. Its failure to do so, however,
should not be taken against it. ECC had the right to credit the daily payments against
the interest applying Art. 1253.
It bears stressing also that M was already in default. Under the promissory note, the
petitioner waived demand in case of non-payment upon due date. The stipulated
interest and interest for default have both accrued. The only logical result, following
Art. 1253, is that the daily payments were first applied against either or both the
stipulated interest & interest for default.10
Contracts Involving Installment Payments
• In a contract involving installment payments with interest chargeable against
the remaining balance of the obligation, it is the duty of the creditor to inform
the debtor of:
o The amount of interest that falls due &
o That he is applying the installment payments to cover said interest.
• Otherwise, the creditor cannot apply the payments to the interest & then hold
the debtor in default for non-payment of installments on the principal.
CASE: Pagsibigan v. CA
Lesson: The right to apply payment to the interest first can be waived.
Facts: The creditor, in receiving numerous partial payments from the debtor, applied
the said payments to the principal, interest & penalties with the principal getting the
bulk of the application. Even in some of the recent partial payments, the said
payments were applied to the principal despite the fact that the creditor knew that
interest was still due. Was there a waiver of Art. 1253?
Held: Yes. The creditor waived his rights under Art. 1253.
*CASE: Magdalena Estates, Inc. v. Rodriguez
10 Direct quote from case (which was also in the book): “Moreover, Art. 1253 is viewed as having an
obligatory character & not merely suppletory. It cannot be dispensed with except by mutual agreement. The
creditor may oppose an application of payment made by the debtor contrary to this rule.” Note that earlier in
the book, a case is cited which states that Art. 1253 is directory, & not mandatory; hence, the relegation of
this statement of the SC in the footnotes.
86 | Katrina C. Gaw | Block C 2018
Lesson: When a surety makes the payment, it cannot claim the applicability of Art.
1253 & thereby raise the presumption in said provision.
Facts: A surety bound himself solidarily liable to the extent of P5,000 only & paid
such an amount to the creditor when the debtor defaulted.
The creditor still claimed interest from the debtor who resisted paying such interest
on the ground that, in accepting payment of the principal from the surety in the
amount only of P5,000, the creditor waived his right to Art. 1253. Is this argument
tenable?
Held: No. The creditor is still entitled to the interest. Art. 1253 is not applicable here,
as the liability of the surety does not extend beyond the terms of the agreement. The
provision on application of payment cannot be made applicable to a person whose
obligation as a mere surety is both contingent & singular. The surety’s liability is
confined to such obligation, & he is entitled to have all payments made applied
exclusively to said application and to no other.
Article 1254. When the payment cannot be applied in accordance with the preceding
rules, or if application cannot be inferred from other circumstances, the debt which
is most onerous to the debtor, among those due, shall be deemed to have been
satisfied.
If the debts due are of the same nature & burden, the payment shall be applied to
all of them proportionately.
Application of the Debt in Other Cases
• If there is no indication which debt is to to be paid first, it will be applied to
the most onerous debt.
o Most onerous - the indebtedness which exacts the heavier burden
from among many.
§ NOT based on the amount of the debts
§ Ex. A debt with interest as opposed to simple debt
§ Ex. A debt with an acceleration clause enabling the creditor to
demand payment of the whole obligation if the debtor defaults
in even one amortization or installment is more onerous than a
debt payable in installment but without an acceleration clause.
• Acceleration clause – payment made in installments; if
there’s a failure to pay 1, then the entire amount can be
demanded
§ A debt secured by a mortgage is more onerous than one
without security.
• Examples:
o A owes G a due debt of P30,000 with an interest rate of 12% per
annum, another due debt of P22,000 without interest but secured by
his silver watch, & lastly P24,000 collateralized by A’s house &
payable in equal installment with the first installment already due &
with an acceleration clause.
§ If A makes a payment of P600 without any indication where the
latter amount should be applied & the creditor agrees to any
partial payment, it will be applied to the most onerous debt
which in this case is the P24,000 because, aside from the
 imposition of an interest rate it has an acceleration clause
which will make the whole amount due.
o CASE: Espina v. CA – Between indebtedness resulting from unpaid
back rentals for the condominium unit a debtor was occupying, or to
his obligation arising from his contract to pay the purchase price of
such condominium unit which he decided to buy, the unpaid back
rentals are more onerous.
• If the debts due are of the same nature & burden, the payment shall be
applied to all of them proportionately.
o Ex. A owes B 3 due debts each of which amounts to P30,000, a
payment of P9,000.00 by A, without any indication as to where it is to
be applied & where the creditor agrees to partial payment, shall be
equally applied to each of the debts. Hence, each debt will be reduced
by P3,000 each.
o But if A owes B 3 due debts of P10,000.00, P20,000.00 & P30,000 &
the creditor agrees to partial payment, a payment of P6,000 will be
applied in the proportion of 1:2:3. Thus, P1,000 will be applied to the
P10,000 debt; P2,000 to the P20,000 debt; and P3,000 to the
P30,000 debt.
SUBSECTION 2. – PAYMENT BY CESSION.
Article 1255. The debtor may cede or assign his property to his creditors in payment
of his debts. This cession, unless there is stipulation to the contrary, shall only
release the debtor from responsibility for the net proceeds of the thing assigned. The
agreements which, on the effect of the cession, are made between the debtor & his
creditors shall be governed by special laws.
Cession
• Refers to a situation where the debtor owes 2 or more creditors
o At least, there must be as many debts as there are creditors
o There can be more debts than the number of creditors when, from
among the many creditors, the debtor may owe any of them 2 or more
debts.
• Also extinguishes debt in an extrajudicial way
• Presupposes financial difficulties on the part of the debtor
o Ceding or assigning property – refers to ALL of the properties of the
debtor which are susceptible of & not exempted by law from being
alienated
o NOT only the cession of one or a number of properties
• Family home - generally exempted by law from being executed or sold
o HOWEVER, it may be sold provided that it strictly follows the
requirements of law, such as the procurement of the written consent
to the sale of the person who constituted the home as a family home
& the latter’s spouse & a majority of the beneficiaries of legal age of
the family home.
CASE: Yulim International Co. v. International Exchange Bank
87 | Katrina C. Gaw | Block C 2018
Facts: The debtor & creditor signed a deed of assignment providing that as soon as
the condominium unit was named in the name of the debtor, a deed of real estate
mortgage would be executed to secure the debt. Is this cession in payment?
Held: No. The deed of assignment here did not involve two or more creditors nor did
it involve all the properties of the debtor. It was essentially just a mortgage.
Creditors’ Agreement
• Creditors MUST agree to the cession.
o Among the creditors, they must likewise agree as to which debt will be
paid 1st or as to the proportioning of the payment of the money
obtained through cession for the payment of debt.
• If there is no agreement, the applicable law on preference of credit will apply.
• The creditors will administer the totality of the ceded property without the
ownership being transferred to them.
o Authorized to sell or alienate the property for purpose of obtaining
enough money to pay off their respective debts.
o Cession thus deals only with possession, & not ownership
Extinguishment
• Once cession is made, the obligation of the debtor shall only be extinguished
up to the extent that the proceeds are able to satisfy the claims of the
creditors.
o It is possible that the money obtained from the alienation of the
property is not enough to satisfy the claims of the creditors.
• If so, the creditors can still demand payment for the deficiency. The
agreements on the effect of the cession made between the debtor & his
creditors shall be governed by special laws.
o Ex. Insolvency Law - if applicable, shall place the assets of the debtor
for judicial liquidation for the purpose of paying off his obligations.
Class Discussion
Cession presupposes the ff.:
• Debtor is under financial difficulties
• There are 2 or more creditors
• There are as many debts due as there are creditors (the minimum rule)
Insolvency & Cession are not the same
• Insolvency – requires a court proceeding; whatever the court decides, that’s
it. The creditors can no longer get the remaining amounts.
• Cession – no proceeding; creditors pay among themselves
o Transfer is only of possession, not of title
o ALL properties are transferred
o The creditors can still get the remaining amount of debt from debtor
SUBSECTION 3. – TENDER OF PAYMENT.11
11 This Subsection applies in all instances when there is tender of payment.
*Article 1256. If the creditor to whom tender of payment has been made refuses
without just cause to accept it, the debtor shall be released from responsibility by
the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the ff. cases:
(1) When the creditor is absent or unknown, or does not appear at the place of
payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When 2 or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.
Article 1257. In order that the consignation of the thing due may release the obligor,
it must first be announced to the persons interested in the fulfillment of the
obligation.
The consignation shall be ineffectual if it is not made strictly in consonance with the
provisions which regulate payment.
Article 1258. Consignation shall be made by depositing the things due at the
disposal of judicial authority, before whom the tender of payment shall be proved, in
a proper case, & the announcement of the consignation in other cases.
The consignation having been made, the interested parties shall also be notified
thereof.
Tender of Payment & Consignation
• Applies in all contracts where there is an obligation to pay
• CASE: Adelfa Properties v. CA – In a contract to sell, the requisites of a valid
tender must be complied with. The mere sending of letter by the buyer
expressing the intention to pay, without the accompanying payment, does not
extinguish the obligation to pay the balance of the purchase price.
o A mere tender of payment is not sufficient to compel the seller to
deliver the property & execute the deed of sale; it is consignation
which will extinguish the buyer’s obligation to pay the balance of the
purchase price
o Consequently, for a contract to sell, performance may be effected not
by tender of payment alone but by both tender & consignation.
Consignation
• Act of depositing the thing due with the court or judicial authorities whenever
the creditor cannot accept or refuses to accept payment
• *NOTE: Before there can be consignation, the debtor must first offer to pay
(i.e., there must be prior tender of payment)
• An ordinary court case
Class Discussion
Consignment – an ordinary court case
• 2nd notice – case has been filed against you
• One of the instances when extrajudicial demand is a requisite
88 | Katrina C. Gaw | Block C 2018
• There must be notice before consignment--“I demand that you accept my
payment, & if you do not, I will take this to court.
o BUT: If you staple a check as payment, this is not counted, as
payment is the delivery of money.
Cases When Consignation is Not Necessary
(1) Option contract
(2) Legal redemption
(3) Sale with right to repurchase
• Explanation for Exemptions:
o Consignation is not necessary because these cases involve an
exercise of a right or privilege (to buy, redeem, or repurchase) rather
than the discharge of an obligation
o Tender of payment would be sufficient to preserve the right or
privilege.
o Provisions on consignment are NOT applicable when there is no
obligation to pay.
CASE: Vda. De Quirino v. Palarca
Lesson: An option contract is not a consignment contract.
Facts: The lessee was given “the right & option to buy the leased premises for
P12,000.” Must there be consignment as provided under Art. 1256?
Held: No. The consignation in Art. 1256 is inapplicable. Said provision refers to
consignation as one of the means for the payment or discharge of a “debt,” whereas
the lessee was not indebted to the lessor for the price of the leased premises. The
lessee merely exercised a right of option and had no obligation to pay said price
CASE: Badayos v. CA
Lesson: Redemption contracts also cannot involve consignation.
Facts: X was trying to exercise his right of redemption. Does this involve
consignment?
Held: No. In the exercise of the right of redemption, consignation is not necessary.
the relationship that existed between vendor & vendee a retro was not one of
debtor-creditor. The vendor a retro is exercising a right, not discharging an
obligation, hence a mere tender of payment is sufficient to preserve the right of a
vendor.
Class Discussion
• NOTE: Payment must be in cash; so checks, negotiable instruments are not
considered payment.
• This is different from the rule on the right to repurchase – here, tender of a
check is enough to demonstrate the exercise of a right.
o BUT the repurchase is NOT YET CONSIDERED PAID (so watch out for
what the question really is).
o Ex. In an execution sale where there is a right of redemption, the
tender of a check is enough to demonstrate the exercise of the right to
redeem within the reglementary period, but the amount will not yet be
considered paid.

*CASE: Far East Bank & Trust Co. v. Diaz Realty
Lesson: A check is not tender, but creditor may nonetheless be estopped from
claiming that there was no payment if he accepts it.
Facts: The court was asked to rule on whether or not a check can be considered
valid tender of payment.
Held: For a valid tender of payment, it is necessary that there be (1) a fusion of
intent, ability, & capability to make good such offer, which must be (2) absolute &
must (3) cover the amount due.
Though a check is not legal tender, & a creditor may validly refuse to accept it if
tendered as payment, one who accepts a fully funded check after the debtor’s
manifestation that it had been given to settle an obligation is estopped from later on
denouncing the efficacy of such tender of payment.
Requisites of Law for Effective Tender of Payment & Consignation
• If one is missing, consignation will not be effective.
• The debtor must show that:
1) That there was a debt due.
2) That the consignation of the obligation was made because the creditor
to whom tender of payment was made –
a. Refused to accept it;
b. He was absent;
c. He was incapacitated; or
d. Because several persons claimed to be entitled to receive the
amount due
3) That previous notice of the consignation had been given to the person
interested in the performance of the obligation (1st notice).
o Without this 1st notice, the consignation as payment is void
o Gives the creditor the opportunity to reconsider his unjustified
refusal & to accept payment thereby avoiding consignation &
subsequent litigation
o Essential to the validity of the consignation
4) That the amount due was placed at the disposal of the court.
5) That after the consignation had been made the person interested was
notified thereof (2nd notice).
o Enables the creditor to withdraw the goods or money
deposited.
o Unjust for him to suffer the deterioration, depreciation or loss
of such goods or money due to lack of knowledge of the
consignation
Tender of Payment
• Tender of payment must be distinguished from consignation.
o Tender is the antecedent of consignation; an act preparatory to the
consignation, which is the principal
o That from which are derived the immediate consequences which the
debtor desires or seeks to obtain.
89 | Katrina C. Gaw | Block C 2018
o An extrajudicial, private settlement before proceeding to the
solemnities of consignation (which is judicial)
• Must be made in lawful currency.
• Tender of a check is NOT valid tender of payment
o Payment in check may be acceptable as valid if no prompt objection to
said payment is made, BUT the fact that in previous years payment in
check was accepted does not place its creditor in estoppel from
requiring the debtor to pay his obligation in cash.
Tender of Payment v. Consignation
Tender of Payment Consignation
Act precedent to consignment, an The principal act which extinguishes the
attempt to make a private settlement obligation
Extrajudicial Judicial
Not yet considered delivery of property Sufficient equivalent to delivery of property
CASE: PNB v. Chan
Facts: Instead of depositing the money representing rental payments with the court
for consignation, PNB, the debtor, merely opened a non-drawing savings account at
its Paco Branch. There, it deposited monthly rentals. Was this proper?
Held: No. Consignation is necessarily judicial. It is not allowed in venues other than
the court. Consequently, PNB’s obligation to pay rent remained subsisting, as the
deposit of the rentals cannot be considered to have the effect of consignation.
CASE: De Mesa v. CA
Lesson: It is valid notice when the court allows the debtor to consign multiple
installments & send one notice informing the creditor of all the installments in the
court.
Facts: The debtor in the trial court filed a motion to allow it to just consign all future
quarterly installments (12th to 20th) without need of formal tender of payment and
service of notices to the creditor who was duly notified of such motion.
The creditor now argues that there was no notice to her of debtor’s consignation of
the amounts for the 12th to 20th quarterly installments. Was there proper notice?
Held: Yes. SC ruled that the circumstances of the case & the order of the court
granting the motion can be considered substantial compliance with the requirement
of notice to the creditor.
When Consignation without Tender of Payment Produces the Same Effect:
1) When the creditor is absent or unknown, or does not appear at the place of
payment
o Ex. If A is indebted to B for P1,000 payable on Apr. 11, 1997 at Manila
Hotel, & on said date, A is ready to pay, but B is not at the Manila
Hotel, then consignation can immediately be made in court without
need of looking for B & tendering payment.
2) When the creditor is incapacitated to receive the payment at the time it is
due
3) When, without just cause, the creditor refuses to give a receipt
o A receipt is proof of payment.
 Debtor must protect himself with the receipt, which he can
§ §
demand from the creditor upon payment as evidence of the
fact of payment.
o BUT: If there is just cause for the creditor not to issue the receipt,
tender of payment must still be made.
§ Ex. If the debtor insists that the creditor issue a receipt for the
full amount of indebtedness & the creditor refuses to issue one
because there was no full payment, there is justifiable ground
on the creditor’s part. Tender of payment is still necessary.
4) When two or more persons claim the same right to collect
o There is no use tendering payment to any of the 2 or more persons
who claim the right to collect because it may turn out that the person
to whom payment is given might not be lawfully entitled to the
payment
5) When the title of the obligation has been lost
o To protect the debtor, he may immediately go to court if title is lost
o It is better for the court to declare that the obligation has been
extinguished than just pay the creditor without recovering the title to
the debt or at least without declaring or annotating in the said title
that the debt is already ineffective because of the payment
Article 1259. The expenses of consignation, when properly made, shall be charged
against the creditor.
Creditor Pays for Consignation
• The creditor pays expenses of consignation because it was his failure to
accept payment that led to the consignation
• CASE: Miranda v. Reyes
o Facts: X (the debtor) tendered payment of the price for redeeming the
property to Y a few days before the period of redemption was to
expire.
§ Y immediately accepted the tender & sent his letter of
acceptance by mail.
§ X, still waiting for the reply, filed a case for consignation
§ Y, instead of just withdrawing the money deposited in court, filed
an answer claiming that there was no need of consignation as X
accepted the tender & consequently litigated the case.
Was there a valid consignation?
o Held: Yes. Consignation was valid.12
§ It is true that Y sent his letter of acceptance on Sep. 24, but
it was not received by X until Sep. 29. In the meantime, the
redemption period was about to expire. X did the most
prudent thing under the circumstances by filing the action &
depositing the redemption money in court.
12 The law must be reasonably interpreted & the realities of the situation in each case taken into account so
that the purpose of the law may not be defeated.
90 | Katrina C. Gaw | Block C 2018
Y has nobody to blame but himself for the litigation
expenses, because all Y had to do the 1st time was to
withdraw the amount deposited, without going through the
contesting the validity of the deposit just because there had
been no unjustified refusal to accept the said tender.
Article 1260. Once the consignation has been duly made, the debtor may ask the
judge to order the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial declaration
that the consignation has been properly made, the debtor may withdraw the thing or
the sum deposited, allowing the obligation to remain in force.
Court Ruling
• Once there is already a finding that the consignation is proper, the debtor is
released from the obligation.
o He can ask the court to order the cancellation of the obligation.
• The court will order that the creditor accepts the money or thing consigned as
payment.
• The consignation has a retroactive effect.
o The payment is deemed to have been made at the time of the deposit
of the money in court or when it was placed at the disposal of the
judicial authority.
CASE: Gambas v. Tan
Lesson: Partial acceptance is considered as rejection by the creditor in a
consignment case; the debtor can withdraw his payment before the creditor accepts.
Facts: The debtor filed a case for consignation & deposited the amount of money
offered as payment to the creditor who previously refused to accept.
• The court granted the withdrawal of the amount deposited upon motion of
the debtor.
• The creditor, aware of the said withdrawal, filed an answer stating that the
money was not enough, & that he was willing to accept the money as partial
payment. He also sought the nullification of the withdrawal as he was not
given notice of the same.
Was the withdrawal proper?
Held: Yes. Art. 1260, par. 2 gives the depositor the right to withdraw the amount
deposited at any time before the creditor accepts it.
Such right is clear in this case, because the statement of the creditor came late, &,
what is more, the acceptance was partial. This last consideration renders
unnecessary to discuss the effect of failure to give the creditor any notice of
withdrawal, since the statement was practically a rejection of the offer of payment.
With Reservation
• An acceptance with reservation is valid, as long as it is done prior to the
withdrawal of the amount by the debtor.
o CASE: Riesenback v. CA – The creditor’s acceptance of the consigned
amount but with an express reservation that he is not admitting the
correctness of the obligation & therefore he is also reserving his right
 to claim the balance in accordance with what is prayed for in his
answer & counterclaims is valid.
• The reservation did NOT completely extinguish the obligation.
o If there is no reservation made, it means that the creditor waives
his other claims under the contract.
Effect of Declaration of Court
• Upon the declaration of the court that the consignation is valid, the debtor
cannot anymore claim that he is the owner of the said amount. He cannot
withdraw it anymore.
Class Discussion
Q: When is payment considered made in consignation?
A: It is considered made as of the time of the filing of the consignation case in court
with the deposit of the money, based on jurisprudence. It is NOT considered to have
been consigned upon finality of the decision of the consignation case, but before
that, with a filing.
Q: Can the debtor make a withdrawal of the consigned money in court without notice
to the defendant-creditor, in accordance with the 3-day notice rule for hearings?
A: YES. The 3-day notice rule is not applicable in a withdrawal of money in a
consignation case.
Q: Now, a decision is made, can the debtor still withdraw?
A: NO, unless the creditor agrees to the withdrawal. When the creditor allows the
withdrawal, the debt is resurrected. The money again becomes generic.
Article 1261. If, the consignation having been made, the creditor should authorize
the debtor to withdraw the same, he shall lose every preference which he may have
over the thing. The co-debtors, guarantors and sureties shall be released.
Finding of Court & Creditor’s Actions
• When the court has found proper consignation & the obligation has been
cancelled, creditor MUST obtain from the court the payment.
• However, if the obligation having been extinguished, the debtor decides to
withdraw the thing deposited with the creditor’s consent, there is thus
nothing which the creditor can obtain from the court.
o In this case, both debtor & creditor, in effect, agreed to revive the
indebtedness.
• The creditor, due to his consent, will lose preference to the thing previously
deposited to specifically pay-off his debt.
o Anybody who has an interest in it can also go after it & the creditor
cannot anymore say that it has been precisely consigned to answer for
the credit in his favor.
• Moreover, the solidary debtors, guarantors, & sureties of the debtor shall be
released as they likewise benefit from the extinguishment of the obligation &
the debtor cannot unilaterally revive the obligation without their consent.
o DOES NOT APPLY to joint obligations
Class Discussion
91 | Katrina C. Gaw | Block C 2018
When one of many solidary co-debtors are released, said release will necessarily
apply to the other solidary co-debtors.
SECTION 2. – LOSS OF THE THING DUE.
Article 1262. An obligation which consists in the delivery of a determinate thing shall
be extinguished if it should be lost or destroyed without the fault of the debtor, and
before he has incurred in delay.
When by law or stipulation, the obligor is liable even for fortuitous events, the loss of
the thing does not extinguish the obligation, & he shall be responsible for damages.
The same rule applies when the nature of the obligation requires the assumption of
risk.
Effect of Loss
• Determinate object - the debtor shall be excused from performing his
obligation if such thing is lost without his fault.
• BUT: if it is (1) his fault or if it has been (2) lost after the debtor has incurred
in delay, the debtor shall answer for the resulting damages.
CASE: Fed. of United Namarco Distributors Inc. v. NAMARCO
Lesson: Do not delay, because if you do, you pay for any loss, damage or
deterioration of the object of the prestation.
Facts: X (the debtor) promised to deliver 2,000 boxes of oranges to Y. Y demanded
the boxes from X when they were due in May 1, 1995, but X refused for no valid
reason.
Y filed a case ordering X not to dispose of the boxes & kept asking for the boxes to
be delivered to him. When at last X decided to deliver, after already being in delay,
the oranges in 1,500 boxes began to spoil. Y refused to accept these boxes.
X claims that under their contract, Y was supposed to bear the expenses for handling
& storage. Thus, Y should shoulder the burden of the 1,500 boxes. Is X’s contention
correct?
Held: No. X bears the risk of the loss, because he was in delay.
Fortuitous Event & Assumption of Risk
• As discussed in Article 1174.
• Because the thing is lost already, damages can be obtained from the debtor.
o Ex. If the specific & particular car to be delivered by the debtor is
worth P500,000, & it is lost through a fortuitous event, but the parties
stipulate that the debtor, even under such circumstances, will still be
liable, the creditor cannot insist on the delivery of the specific car
because it has already been lost, but he can seek damages in the
amount of P500,000, the value of the car.
Article 1263. In an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation.
Generic Thing
 • Cannot really be lost or destroyed unless the whole class of said thing is
destroyed; the obligation subsists despite the loss or destruction of one thing
in the said class.
o Ex. If the debtor is bound to deliver a ball without any specification, he
may deliver any kind of ball. If he buys one & subsequently loses it
through a fortuitous event, his obligation is not extinguished. The
debtor simply has to buy another ball.
Article 1264. The courts shall determine whether, under the circumstances, the
partial loss of the object of the obligation is so important as to extinguish the
obligation.
Partial Loss
• If the loss is complete, Arts. 1262 & 1263 will apply.
• If the loss is partial & the circumstances so warrant, the court may consider it
as a complete loss which extinguishes the obligation.
o Only happens if the partial loss is so important so as to totally affect
the whole object of the obligation.
• BUT: If it is considered as a complete loss, then the rules under Arts. 1262 &
1263 must apply.
o Ex. If the debtor’s obligation is to deliver a specific computer,
consisting of the CPU with specific drives & particular hard disks
together with a very specialized screen peculiarly made for the said
computer, with a special keyboard made to respond only to said
screen, & the said screen is lost through a fortuitous event before the
debtor has incurred in delay, there is clearly a partial loss which
renders the computer system totally useless. In this case, the debtor
can go to court and declare that the partial loss has extinguished his
obligation to deliver the computer.
Article 1265. Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, unless there is proof to the contrary, &
without prejudice to the provisions of Article 1165. This presumption does not apply
in case of earthquake, flood, storm, or other natural calamity.
Loss during Possession of Debtor
• GR: Presumption that the loss of the thing is due to the fault of the debtor
who possesses it.
o The presumption arises from the fact that it was lost while it is in the
possession of the debtor.
o If the debtor is NOT in the possession of the thing when it is lost, the
presumption does not arise.
• If the presumption applies, the debtor MUST prove that the loss is not
through his fault or it has been caused by a fortuitous event.
o HOWEVER, he is still liable for a fortuitous event if:
§ It has been so stipulated by the parties
§ The law so states
§ The nature of the obligation involves an assumption of risk
92 | Katrina C. Gaw | Block C 2018
§ The obligor delays
§ The obligor has promised the same thing to 2 or more persons
who do not have the same interest.
• The presumption does NOT apply even if the loss happens at the time the
thing is in the possession of the debtor if, at the time of the loss, an
earthquake, storm, or other natural calamity exists.
Article 1266. The debtor in obligations to do shall also be released when the
prestation becomes legally or physically impossible without the fault of the obligor.
CASE: PNCC v. CA
Lesson: Art. 1266 applies only to obligations “to do.” It has no application to
prestations “to give” such as a certificate of title to a real property free from liens &
encumbrances.
Facts: The lessee in a lease contract sought its release from paying the rentals &
from the said contract itself invoking Art. 1266. The lessee claimed that, due to the
change in political climate after the EDSA revolution & change in financial condition,
it was not able to use the property for the purpose for which it intended to utilize it,
i.e., to use the leased premises as a site of a rock crushing plant. Can lessee rely on
Art. 1266 for release from its liabilities?
Held: No. Lessee cannot rely on Art. 1266, because it applies only in obligations “to
do” & not “to give.” Additionally, the unforeseen event & causes mentioned by the
lessee are not the impossibilities contemplated by the law.
Obligations “To Do”
• When the prestation becomes legally or physically impossible without the
fault of the obligor, it shall be considered a loss which extinguishes the
obligation.
o Legal impossibility - If the obligor is bound to build a fence along the
property of the obligor & the said property is expropriated by the
government which bars everybody from entering the same,
o Physical impossibility - a debtor was bound to do a concert & to
provide musical bands exclusively in a particular Music Hall & the
parties contracted on the basis of the continued existence of the said
Music Hall, which burned down, without the fault of either the debtor
or the creditor, before the concert could begin. The obligation of the
debtor to render a concert has become physically impossible to
perform & therefore the same was extinguished.
Article 1267. When the service has become so difficult as to be manifestly beyond
the contemplation of the parties, the obligor may also be released therefrom, in
whole or in part.
Difficulty Beyond Contemplation of Parties
• *Art. applies to obligations “to do” & NOT obligations to give
• Difficulty alone does not excuse the debtor from fulfilling his prestation.
o Subjective impossibility - a promissor’s duty is never discharged by the
mere fact that the supervening events deprive him of the ability to
 perform, if they do not also deprive other persons of the ability to
render such a performance.
• Art. 1267 - a new norm providing that when the service has become so
difficult as to be manifestly beyond the contemplation of the parties, the
obligor may be released therefrom, in whole or in part
o Still within the rule on impossibility of performance, although it may
not be necessarily be impossible.
• Enunciates doctrine of unforeseen events
*Requisites for Application of Art. 1267 (Rebus Sic Stantibus) (Tagaytay Realty Co.
v. Gacutan)
1) The event or change in circumstance could not have been foreseen at the
time of the execution of the contract.
2) The prestation has become extremely difficult to render (implying that it could
still be done, but it would be extremely difficult & almost impossible).
3) It must not be due to the acts of any of the parties.
4) The contract is for a future prestation.13
*These requirements must exist together.
Illustrative Example
• An obligor is bound to deliver 40 cases of mangoes from the Philippines to
South Africa by ship at the cost of $30,000 on or before Apr. 11, 1997.
• The usual route in going to South Africa has been suddenly closed prompting
the obligor to look & eventually pass through another route, which is likewise
closed, again leaving the obligor with no other choice but to attempt passing
through another alternative route 4 times longer than the usual route, &
which route could be traversed by its vessel without damaging itself & without
entailing enormous additional and unreasonable cost (i.e., the obligor would
have to charter other vessels for the continuing voyage), & also without
subjecting the fruits to possible harm as they would most likely spoil along
such a long trip.
• The obligation in this case has clearly become so difficult to do & is
manifestly beyond their contemplation. The obligation should be deemed
extinguished.
*Rebus Sic Stantibus
• The basis of Art. 1267
o Under this theory, the parties stipulate in the light of certain prevailing
conditions
o Once these conditions cease to exist, the contract also ceases to exist
• Change in conditions which can extinguish obligations
• HOWEVER, Art. 1267 is NOT an absolute application of this theory, because
such would endanger the security of contractual relations
o The parties to the contract must be presumed to have assumed the
risks of unfavorable developments.
13 But see: Naga Telephone Co. v. CA (discussed below).
93 | Katrina C. Gaw | Block C 2018
• It is therefore only in absolutely exceptional changes of circumstances that
equity demands assistance for the debtor.
CASE: PNCC v. CA
Lesson: Rebus sic stantibus does not apply to turmoil in Marcos era & EDSA
Revolution; only in absolutely exceptional circumstances.
Facts: The lessee in a lease contract sought its release from paying the rentals &
from the said contract itself invoking Article 1266 & rebus sic stantibus, claiming
that, due to the change in political climate after the EDSA revolution & change in
financial condition, it was not able to use the property for the purpose for which it
intended to utilize it, i.e., to use the leased premises as a site of a rock crushing
plant. Does rebus sic stantibus apply here?
Held: No. Rebus sic stantibus does not apply here; the petitioner was aware of all
the political turmoil when they entered into the contract in Nov. 18, 1985, days after
Marcos declared Martial Law.
Also, anent petitioner’s alleged poor financial condition, mere pecuniary inability to
fulfill an engagement does not discharge a contractual obligation, nor does it
constitute a defense to an action for specific performance.
*CASE: Spouses Poon v. Prime Savings Bank
Facts: The lessee (a bank) & lessor entered into a contract of lease for 10 years. The
lessee was engaged in various unsound business practices for which it was already
issued several warnings by the BSP. Furthermore, the closure of the business was
already something the lessors previously raised as a concern. Eventually, the lessee
had to close business, 3.5 years into the 10-year life of the contract of lease. Can
the lessee now invoke rebus sic stantibus as a defense for its premature termination
of the contract of lease?
Held: No. The 1st & 3rd requisites for the application of the principle – i.e., that the
event could not have been foreseen, & it must not be due to any act of the parties in
the case – are not present here. The closure of the lessee’s business was not an
unforeseen event. As the lease was long-term, it was not lost on the parties that
such an eventuality might occur, as it was in fact covered by the terms of their
Contract. Also, the closure was not independent of the lessee’s will.
CASE: Tagaytay Realty Co. v. Gacutan
Facts: Petitioner did not comply with its obligation to complete the construction of
the subdivision project, including amenities, within 1 year from the issuance of the
license. It argued it did so because of the worsening economic conditions at the
time, & invoked rebus sic stantibus. Is the principle applicable?
Held: No. The requisites did not concur herein because the difficulty of performance
under Art. 1267 should be such that one party would be placed at a disadvantage by
the unforeseen event. Mere inconvenience, or unexpected impediments, or
increased expenses did not suffice to relieve the debtor from a bad bargain. And,
secondly, the unilateral suspension of the construction had preceded the worsening
of economic conditions in 1983; hence, the latter could not reasonably justify the
petitioner's plea for release from its statutory and contractual obligations to its lot
buyers, particularly the respondent. Besides, the petitioner had the legal obligation
to complete the amenities within one year from the issuance of the license (under
Sec. 20 of PD No. 957), or within 2 years from July 15, 1976 (under the express
undertaking of the petitioner). Hence, it should have complied with its obligation by
July 15, 1978 at the latest, long before the worsening of the economy in 1983.
CASE: Naga Telephone City, Inc. v. CA
Lesson: (1) To fall under Art. 1267, it is not a requirement that the contract be for
future service with future unusual change. Considering the practical needs & the
demands of equity & good faith, the disappearance of the basis of a contract gives
rise to a right to relief in favor of the party prejudiced.
(2) Art. 1267 cannot be used to modify contracts, only to extinguish them.
Facts: Petitioner X & respondent Y entered into a contract where they agreed that X
shall use the electrical posts of Y in Naga City free of charge, but the contract can be
terminated if Y is forced to stop its business. As consideration, X agreed to install
free of charge 10 telephone connections to Y.
• At the time of the execution of the contract, it was the contemplation of the
parties that the posts were only to be used in Naga City because, at that time
the capability of Y was very limited. This was so even if at that time there
were many subscribers in Naga City for telephone lines, who cannot be
served because of this contemplated limited capability.
• After 11 years of the effectivity of the contract, the contract became so
burdensome to Y. This fact was shown by the following: the telephone cables
strung by X had become heavier with the increase in the volume of their
subscribers, worsened by the fact that their linemen bore holes through the
posts at which points those posts were broken during typhoons, & that a post
costs as much as P2,630. While there was an increased use of the posts,
there was no corresponding increase in the telephone connections to Y. X
also began using Y’s telephone posts outside Naga City. The contract became
so one-sided to the prejudice of Y.
• X contends that, because the contract did not involve the rendition of service
or a personal prestation & it was not for future service with future unusual
change, Article 1267 should not apply & therefore the ruling in the Occena
vs. Jabson should be followed.
Does Art. 1267 apply?
Held: Yes. Art. 1267 was applicable & the obligation was extinguished. The
continued enforcement of the contract had manifestly gone beyond the
contemplation of the parties so much so that the Y should be released from the
contract to avoid X’s unjust enrichment at Y’s expense.
• A reading of Art. 1267 will show that the term “service” should be understood
as referring to the “performance” of the obligation
• The use of the telephone lines is the “service” contemplated in Article 1267
• In Occena, the Court did not allow Article 1267 to apply to a petition praying
for modification of terms in a contract by fixing the proper shares that should
pertain to them out of the gross proceeds from the sales of subdivided lots.
Here, the parties did not want to be released from the obligation, but for the
contract to be modified. The case was dismissed for lack of cause of action,
as Article 1267 is for extinguishment, & not modifications of contracts.
CASE: Magat, Jr. v. CA
94 | Katrina C. Gaw | Block C 2018
Lesson: When one cannot perform a particular obligation because of government
prohibition or non-issuance by the government of the permit due to supervening
events, the obligation can also be deemed extinguished under Art. 1267.
Facts: X won a bidding to operate taxis with radio transceivers. For this purpose, X
ordered certain transceivers through Y. Y ordered from Japan.
• It was agreed that the radio transceivers will be delivered within 60-90 days
notice from X of the assigned radio frequency taking note of government
regulations.
• The radio frequency was assigned but later the government, because of the
imposition of martial law, denied the application for a permit to import the
radio transceivers. Due to this denial, X was likewise unable to obtain the
necessary letter of credit. X did not continue with the contract.
Can Y sue X for breach of contract?
Held: No. X testified that a permit to import the transceivers from Japan was denied
by the Radio Control Board. He stated that he & Y personally went to the Radio
Control Office, & were denied a permit to import. They also went to the Office of the
President, where Secretary Zamora explained that radios were “banned like guns
because of martial law.” X testified that this prevented him from securing a letter of
credit from the Central Bank.
X’s inability to secure a letter of credit & to comply with his obligation was a direct
consequence of the denial of the permit to import. For this X cannot be faulted.
Article 1268. When the debt of a thing certain & determinate proceeds from a
criminal offense, the debtor shall not be exempted from the payment of its price,
whatever may be the cause for the loss, unless the thing having been offered by him
to the person who should receive it, the latter refused without justification to accept
it.
Criminal Offense
• If A stole a watch from B & was criminally charged for said offense, & the
watch was lost through a fortuitous event, A must still pay the price of the
watch.
o The loss will not excuse him from being responsible; he did not have
the right to possess the same in the first place.
• If A however offered back the watch to B, & the latter refused to accept, the
risk of loss of the watch would be on B except if there was justifiable reason
not to accept it as, for example, it had already been severely damaged.
Article 1269. The obligation having been extinguished by the loss of the thing, the
creditor shall have all the rights of action which the debtor may have against 3rd
persons by reason of the loss.
Rights of Action Open to Creditor
• If A buys a house from G, & the house, which is insured, is accidentally
burned by a fortuitous event prior to the demand for its delivery by A, the
obligation of G to deliver the house is extinguished.
 o BUT: If A has already paid the price of the house, he can seek
reimbursement of the insurance proceeds due from the insurance
company.
SECTION 3. – CONDONATION OR REMISSION OF THE DEBT.
*Article 1270. Condonation or remission is essentially gratuitous, and requires the
acceptance by the obligor. It may be made expressly or impliedly.
One & the other kind shall be subject to the rules which govern inofficious donations.
Express condonation shall, furthermore, comply with the forms of donation.
Condonation or Remission of a Debt
• An act of liberality; a donation of the obligee’s credit in favor of the debtor
• Connotes that there is a previous demandable obligation but the creditor
decides not to enforce the debtor’s prestation anymore.
o Requires the implied or express consent of the obligor.
• Governed by the rules on inofficious donation
Rules on Inofficious Donation
• A donation is inofficious if it turns out that the thing or amount donated
(remitted or condoned) encroaches or infringes on the legitime or
successional rights of the heirs of the condoning creditor.
• To “combat” inofficious donation, one must prove payment & not
condonation, because payment is not revocable as inofficious donation
• Ex. A creditor condones the debt of a debtor in the amount of P50K.
o Later on, the creditor gives birth to a child at a time when her
properties are worth only P10,000.
o Her over-all estate (including the remitted P50,000) at the time of the
birth of the child is therefore P60,000.
§ The legitime of the child is 1/2 of the estate which, in this case,
is P30,000.
§ The free portion which can be given to any person not
necessarily an heir is also P30,000.
o Thus, since the child will only get P10,000 because this is the only
existing property out of an estate of P60,000, the remission in favor of
the debtor is inofficious to the extent of P20,000. The remission
clearly infringes on the legitime of the child.
o The debtor must therefore be made to pay P20,000 out of the
P50,000 remitted debt. Hence, the child shall get P20,000 +
P10,000, completing his legitime.
Related Provisions – Inofficious Donations
• Art. 750 – The donation may include all the present property of the donor, or
part thereof, provided he reserves, in full ownership or in usufruct, sufficient
means to support himself & all relatives who, at the time of the acceptance of
the donation, are by law entitled to be supported by the donor.
o Without such reservation, the donation shall be reduced on petition of
any person affected.
95 | Katrina C. Gaw | Block C 2018
• Art. 771 - Donations which in accordance with Article 752, are inofficious,
bearing in mind the estimated net value of the donor’s property at the time of
his death, shall be reduced with regard to the excess
o BUT the reduction shall not prevent the donations from taking effect
during the life of the donor
o NOR shall it bar the donee from appropriating the fruits.
• Art. 772 – Only those who at the time of the donor’s death have a right to the
legitime & their heirs & successors in interest may ask for the reduction of
inofficious donations.
o Said persons cannot renounce their right during the lifetime of the
donor, either by express declaration, or by consenting to the donation.
o The donees, devisees & legatees, who are not entitled to the legitime
& the creditors of the deceased can neither ask for the reduction nor
avail themselves thereof.
• Art. 773 – If, there being 2 or more donations, the disposable portion is not
sufficient to cover all of them, those of the more recent date shall be reduced
with regard to the excess.
• Art. 760 – Every donation inter vivos, made by a person having no children or
descendants, legitimate or legitimated by subsequent marriage, or
illegitimate, may be revoked or reduced as provided in the next article, by the
happening of any of these events:
(1) If the donor, after the donation, should have legitimate or legitimated
or illegitimate children, even though they be posthumous;
(2) If the child of the donor, whom the latter believed to be dead when he
made the donation, should turn out to be living;
(3) If the donor should subsequently adopt a minor child.
• Art. 761 – In cases referred to in the preceding article, the donation shall be
revoked or reduced insofar as it exceeds the portion that may be freely
disposed of by will, taking into account the whole estate of the donor at the
time of the birth, appearance or adoption of a child.
• Art. 762 – Upon the revocation or reduction of the donation by the birth,
appearance or adoption of a child, the property affected shall be returned, or
its value if the donee has sold the same.
o If the property is mortgaged, the donor may redeem the mortgage, by
paying the amount guaranteed, with a right to recover the same from
the donee.
o When the property cannot be returned, it shall be estimated at what it
was worth at the time of the donation.
• Art. 763 – The action for revocation or reduction on the grounds set forth in
Art. 760 shall prescribe after 4 years from:
o The birth of the 1st child, or from his legitimation, recognition or
adoption or
o From the judicial declaration of filiation, or
o From the time information was received regarding the existence of the
child believed dead.
o This action cannot be renounced, & is transmitted, upon the death of
the donor, to his legitimate & illegitimate children & descendants.
Rules on Forms of Donations
• Art. 748 – The donation of a movable may be oral or in writing.
o Oral donation - requires simultaneous delivery of the thing or of the
document representing the right donated.
o If the value of the personal property donated exceeds P5,000, the
donation & the acceptance shall be made in writing. Otherwise, the
donation shall be void.
• Art. 749 – In order that the donation of an immovable may be valid, it must
be made in a public document, specifying
o The property donated &
o The value of the charges which the donee must satisfy.
o The acceptance may be made in the same deed of donation or in a
separate public document, but it shall not take effect unless it is done
during the lifetime of the donor.
o If the acceptance is made in a separate instrument, the donor shall be
notified thereof in an authentic form, & this step shall be noted in both
instruments.
*Article 1271. The delivery of a private document evidencing a credit, made
voluntarily by the creditor to the debtor, implies the renunciation of the action which
the former had against the latter.
If in order to nullify this waiver it should be claimed to be inofficious, the debtor & his
heirs may uphold it by proving that the delivery of the document was made in virtue
of payment of the debt.
Private Document Evidencing a Credit
• Promissory note – the most common private document evidencing a credit
o A promissory note in the hands of the creditor is proof of indebtedness
rather than proof of payment.
• If a creditor delivers a promissory note to the debtor, the creditor, in effect,
furnishes the debtor the evidence which could prove the indebtedness of
such debtor in his favor.
o Implies that the creditor is no longer interested in the debt.
o The law provides that such act will be considered a renunciation.
o The presumption created is that the debt was condoned, NOT that
there was payment
• Ex. A owes B P1,000, evidenced by a promissory note executed by A, which is
in the possession of B.
o If B later voluntarily gives it to A, such delivery implies a renunciation
of the debt.
o BUT: In the event that the remission of the P1,000 is claimed to be
void because it is inofficious, the heirs of A can show that A’s
possession of the promissory note is NOT a result of a remission made
by A but a result of A’s payment of the obligation.
• In case of PAYMENT, the promissory note is always taken by the debtor.
Class Discussion
96 | Katrina C. Gaw | Block C 2018
Donations take effect during the lifetime of the donor & the donee gets the fruits
during the period in which he holds the property.
Class Discussion
If the debtor is in possession of the evidence of indebtedness without there being a
reason for it, what are the presumptions?
1. That the creditor voluntarily delivered it to him
2. There is NO PRESUMPTION that the obligation has been paid; there is instead a
presumption that the obligation has been CONDONED
• The difference: In condonation, the rule on inofficiousness will apply
Article 1272. Whenever the private document in which the debt appears is found in
the possession of the debtor, it shall be presumed that the creditor delivered it
voluntarily, unless the contrary is proved.
Presumption in Article 1272
• Document evidencing the debt in the possession of the debtor gives rise to
the refutable presumption that such document has been delivered by the
creditor voluntarily.
• However, this presumption can be overturned by clear evidence to the
contrary.
Article 1273. The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force.
Principal & Accessory Obligations
• Existence of the accessory obligation depends on the existence of the
principal obligation.
o BUT the existence of the principal obligation does NOT depend on the
accessory obligation.
§ If the principal obligation is extinguished, it carries with it the
extinguishment of the accessory obligation but not vice-versa.
• Ex. If A is indebted to B, & the indebtedness is guaranteed by X, & B told X
that he will not anymore claim on X’s guarantee as the said creditor is
renouncing the same, X is released but the principal obligation of A still
subsists.
o B can still collect from A.
o BUT: If B renounces the indebtedness of A, B cannot go against X
because the latter’s guarantee, being an accessory obligation, is
extinguished with that of the principal obligation.
*Article 1274. It is presumed that the necessary obligation of pledge has been
remitted when the thing pledged, after its delivery to the creditor, is found in the
possession of the debtor, or of a 3rd person who owns the thing.
Pledge
• Involves a movable property constituted by the owner of such property who
has free disposal of it, to secure the fulfillment of a principal obligation
 • Such contract is perfected only upon the delivery of the thing pledged to the
creditor.
o A pledge is an accessory contract.
o A person may even pledge his property not for his own indebtedness
but for the indebtedness of another person.
• In a contract of pledge, the creditor must be in possession of the thing
pledged.
o If it is in possession of the debtor or of the 3rd person who owns it,
there is a presumption that the accessory obligation has been
condoned or remitted. However, this is a refutable presumption.
Class Discussion
• Movable security – pledge
• Real estate security – mortgage
• With securities, if D cannot pay his debt to C, the pledge/mortgage will be
sold at public auction & proceeds given to C
Class Discussion (M: This is my favorite question)
If a promissory note is in the possession of the debtor, the presumption is that it has
been delivered to him & the obligation is condoned & therefore, extinguished.
If the thing pledged is in the possession of the debtor, then the OBLIGATION OF
PLEDGE (accessory obligation) is deemed remitted, NOT the principal debt.
SECTION 4. – CONFUSION OR MERGER OF RIGHTS
Article 1275. The obligation is extinguished from the time the characters of creditor
& debtor are merged in the same person.
Confusion or Merger
• The obligation is extinguished from the time the characters of creditor &
debtor are merged in the same person.
o Ex. A son owes his father P10,000. His father dies leaving as part of
his estate, inherited by the son, the amount of P10,000 owed by the
son to his father.
• CASE: Chittick v. CA
o Facts: A woman filed a complaint against her father for support in
arrears & for her share in the conjugal partnership. After the she was
substituted in the case by her children upon her death, the father
likewise died. What happens to the obligation?
o Held: Chittick’s children, as heirs of the creditor (their mother), are
also the heirs of the debtor (their grandfather), the obligation sued
upon had been extinguished by the merger in their persons of the
character of creditor & debtor of the same obligation.
Article 1276. Merger which takes place in the person of the principal debtor or
creditor benefits the guarantors. Confusion which takes place in the person of any of
the latter does not extinguish the obligation.
97 | Katrina C. Gaw | Block C 2018
Guarantee
• An indebtedness by a debtor & guaranteed by a 3rd person is extinguished if
there is a merger of the characters of debtor & creditor.
o The extinguishment of the principal obligation extinguishes the
accessory obligation of guarantee.
o Guarantee – when a guarantor binds himself to pay the remaining
indebtedness of a debtor after the creditor has exhausted all other
available remedies.
• The ff. merely extinguishes the accessory obligation:
o Merger of the persons of guarantor & creditor
o Merger of the characters of debtor & guarantor
Article 1277. Confusion does not extinguish a joint obligation except as regards the
share corresponding to the creditor or debtor in whom the two characters concur.
Joint Obligations
• Joint debtors owe the creditor only their share in the whole indebtedness &
the creditor can only collect from each debtor his share in the total
indebtedness.
• If A, B, & C jointly owe X P3,000 & there is a merger of the characters of X &
C, the obligation is extinguished in so far as the P1,000 share of C in the
indebtedness is concerned but not as to the rest.
o X can still collect P1,000 each from A & B.
Solidary Obligations (same example as above)
• If the obligation is solidary & there is merger of the characters of C & X, the
obligation is extinguished.
o HOWEVER, if A pays the whole indebtedness to X prior to the merger of
the characters of C & X, A can still collect from X & likewise from B
their respective shares in the indebtedness which is P1,000 each
SECTION 5. – COMPENSATION.
Article 1278. Compensation shall take place when 2 persons, in their own right, are
creditors & debtors of each other.
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, & that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, & also of the same quality if the latter
has been stated;
(3) That the two debts be due;
(4) That they be liquidated & demandable;
(5) That over neither of them there be any retention or controversy, commenced
by 3rd persons & communicated in due time to the debtor.
Compensation
 • At least 2 contracts are involved
• Can be total or partial
o Unlike with payment, which generally must be complete
• Compensation – by operation of law
• Mode of extinguishing an obligation whereby the parties are mutually debtors
& creditors of each other.
o If they owe each other exactly the same amount & the requisites
under Art. 1279 are present, they do not have to make actual
payment to each other, i.e., they do not have to hand money or the
things due to each other, as payment is made by operation of law.
o Hence, if A owes B P2,000, & B, in turn, owes A P2,000, & both
indebtedness are due without any 3rd person claiming the same, the
obligation is extinguished.
o If they mutually owe each other the unequal amounts, then there is
compensation up to the extent that the amounts are covered by their
mutual outstanding obligations.
Class Discussion
Q: X only paid 100,000 of the 200,000 subscribed stocks to a bank, callable at any
time. X, as a depositor of the bank, is also a creditor of the bank. X has a deposit of
100,000 in the bank. The bank called the callable shares. X argued that the deposit
is a legal compensation. Is this correct?
A: No, the investment made in the bank will not compensate with deposits made in
the bank. (Jurisprudence)
Aside from this, taxes also cannot be compensated.
Class Discussion
Loans that can be compensated = mutuum
• There is NO COMPENSATION in deposits
• Support cannot be compensated
• Crime cannot be compensated
Requisites for Legal Compensation
1) Each one of the obligors is bound principally & each of them is at the same
time a principal creditor of the other
o The obligors must be mutual creditors & debtors of each other
o CASE: Soriano v. General de Tabacos de Filipina
§ Facts: X extended a crop loan to Y who secured payment of the
loan by, among others, the sugarcane crops that would be
planted & harvested.
• X, after receipt of some export sugar from Y, shipped the
same to the US for X’s own account & benefit.
o Later on, X resisted the claim of Y to be credited an
amount of P51,528.01, representing the amount
of the sugar it delivered to X.
• X invoked automatic compensation because Y was X’s
debtor due to his crop loan account, & at the same time
a creditor of X for the proceeds of the sale of Y’s sugar.
98 | Katrina C. Gaw | Block C 2018
Is compensation proper?
§ Held: No. The parties were NOT mutual debtors & creditors of
each other considering the fact that, by X’s own admission, the
sugar was sold not for the account of Y but for the account of X
& therefore X could not have been a debtor of Y.
o CASE: Republic v. Mambulao Lumber Co.
§ Lesson: No set-off is admissible against demands for taxes
levied for general or local governmental purposes.
§ Facts: A company contended that the reforestation charges
collected under RA 115 & not used in the area subject of its
timber license, could be applied in compensation of the sum
due from it as forest charges. Is compensation proper?
§ Held: No. The reforestation charges were in the nature of taxes
& can never be refunded even if the they were not actually
used in the area subject of its timber license, &, because they
were taxes, the reforestation charges were not debts for
purposes of legal compensation to make the parties therein
mutual creditors & debtors of each other.
2) Both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, & also of the same quality if the latter has been
stated
o There can be no compensation if one debt involves the payment of
money & the other the delivery of a particular thing.
o HOWEVER, there can be compensation involving things that are
determined such as any computer, but not a specific determinate
thing such as a computer with serial number 10325.
§ “Consumable” means “fungible” (generic)
o CASE: Ong v. CA
§ Facts: Compensation is sought for an obligation of a debtor to
deliver a sum of money to a creditor & another obligation of
creditor to deliver zippers to the debtor. Can there be
compensation?
§ Held: No. The debts, even admitting that the delivery of the
zippers to the debtor is a debt, do not both consist in a sum of
money nor are they of the same quality & kind.
3) The 2 debts are due
o The debts need not be incurred at the same time.
o A debt cannot be demanded if it is not yet due.
§ BUT: The parties can agree that compensation can be made
even as to the debts which are not yet due.
o CASE: Perez v. CA
§ Facts: A finance company was indebted to an investor with
respect to 2 debts due originally on Aug. 6, 1974 & Aug. 13,
1974 respectively.
 • The debts were rolled-over so that their maturity dates
were extended to Oct. 4, 1974 & Oct. 11, 1974,
respectively.
• The finance company was the creditor with respect to a
certain obligation to mature on Aug. 5, 1994 as against
company X to whom the 2 credits of the investor, which
were to mature on Oct. 4 & 11, 1974 respectively, were
assigned on Sep. 9, 1974.
Is there legal compensation in this case?
§ Held: No. Both debts have to be due & demandable for
compensation to take place.
• On the respective dates of maturity, specifically, Aug. 6 &
Aug. 13, 1974, respectively, the investor was still the
holder of those bills, it can be safely assumed that it was
he who had asked for the roll-overs on the said dates.
Company X was bound by the roll-overs since the
assignment to it was made only on Sept. 9, 1974. The
inevitable result of the roll-overs of the principals was
that the debts were not yet due & demandable as of the
date of their assignment by the investor to Company X on
Sept. 9, 1974, nor as of Oct. 3, 1974 when Company X
surrendered the Bills to the finance company.
o CASE: PNB Madecor v. Uy
§ Facts: One of the debts was payable only upon demand & there
was no demand made. Can there be legal compensation?
§ Held: No. There can be no legal compensation because the
debt is not yet due.
o CASE: Union Bank v. DBP
§ Lesson: Even if both parties in a contract of lease are mutual
creditor & debtors of one another, compensation cannot take
place between the lessor & lessee if the lessee’s obligation to
pay the lessor rent is contingent on a prior payment by a third
party to the lessee.
Class DIscussion
Q: A owes B P1K. B owes A P1K. Both are payable on March 1. Can compensation
arrive at March 5?
A: No. There must be a demand for payment for them to be considered due &
demandable.
4) The debts are liquidated & demandable.
o The debt must be determined & certain.
§ Compensation cannot take place where one of the debts is not
liquidated, as when there is a running interest still to be paid
thereon.
o CASE: Compania Maritima v. CA
§ Facts: X owed Y the sum of P40,797.54. There was legal
interest payable from Feb. 3, 1951 on said debt, representing
99 | Katrina C. Gaw | Block C 2018
useful expenses. It was stipulated that the interest would not
stop accruing “until the expenses are fully paid.”
• Meanwhile, Y also owed X P59,500, for rentals payable.
• X now claims there should be legal compensation for
the P40,797.54 debt, so that they would owe only
P18,702.46.
Can there be compensation?
§ Held: No. There can be no compensation, because the amount
is not liquidated. Since there was still legal interest to be paid
“until the expenses are fully paid,” there is still some debt
which is not liquidated.
o CASE: Miailhe v. Halili
§ Facts: SC reduced the liability in favor of the X resulting, among
others, in an excess amount of P2,004.28, which consequently
became payable to Y.
o X did not want to return the said amount on the ground
that he had the right to retain the same considering
that, in another case, which was on appeal, the lower
court had rendered judgment against Y & in favor of X
for the sum of P2,004.28.
Can there be compensation?
§ Held: No. There can be no compensation because the amount
of P2,004.28 awarded to X in another case was still under
litigation & therefore still being disputed. It was a requirement
for compensation to take place that the amount involved be
certain & liquidated.
o CASE: Phil. Trust Co. v. Roxas
§ Lesson: Where the loan obligation & amount are still being
disputed before the CA, there can be no legal compensation for
lack of compliance with the 4th requisite.
5) Over neither of them there be any retention or controversy, commenced by
3rd persons & communicated in due time to the debtor.
o Due time – the period before legal compensation was supposed to
take place, considering that legal compensation operates so long as
the requisites concur, even without any conscious intent on the part of
the parties.
§ A controversy communicated to the parties after that time
CANNOT undo the compensation that had taken place by force
of law, lest the law concerning legal compensation be for
naught.
o Ex. A owes B P1,000, due on May 3, 1999. B is likewise indebted to A
in the same amount due on May 23, 1999. Legal compensation
therefore could set in on May 23, 1999.
§ D filed suit against A & obtained a favorable resolution from the
court garnishing all money & credits of A, including the
indebtedness of B in A’s favor. If it were only on June 1, 1999
that B was able to know of the garnishment, legal compensation
 has already set in. D cannot anymore make use of the credits of
A against B to satisfy A’s obligation in his (D’s) favor.
§ BUT: If B were notified on May 20, 1999, there can be no
compensation of the mutual debts of A & B against each other
as the controversy commenced by D, a 3rd person, was duly
communicated at a time before legal compensation could set in.
Class Scenario
Q: Company X owes Y P10,000 which Company X borrowed from Y. Y, on the other
hand, owes X for a share of stocks from Y that he hasn’t paid fully yet. Can there be
compensation?
A: NO. A person buying stocks from a company is not indebtedness on the part of the
buyer of the stocks. Thus, there can be no legal compensation, because the law
defines it as a situation where 2 persons “are mutually creditors & debtors of each
other.”
Class Discussion
The contract should at least be voidable for compensation to take place.
Article 1280. Notwithstanding the provisions of the preceding article, the guarantor
may set up compensation as regards what the creditor may owe the principal debtor.
Guarantor
• A person who promises to pay the creditor in the event that the principal
debtor fails to pay the indebtedness.
o Before the creditor can go against a guarantor, the creditor must first
exhaust all possible ways to collect the debt from the principal debtor
§ UNLESS the guarantor binds himself solidarily with the
principal debtor.
o If the creditor goes against the guarantor, the latter can resist
payment by invoking compensation between the creditor & the
principal debtor.
• “Notwithstanding the provisions of the preceding article”
o Even if the guarantor & the principal creditor are not mutual debtors &
creditors of each other, the obligation of the guarantor can be
extinguished by invoking compensation in so far as the principal
debtor is concerned.
o EXC to GR: Here, the 1st element is missing
Article 1281. Compensation may be total or partial. When the two debts are of the
same amount, there is a total compensation.
Total & Partial Compensation
• Total compensation - when the mutual debts of the parties to each other are
equal.
• Partial compensation - when the debts are not equal, in which case, the
debts are extinguished to the concurrent amount.
100 | Katrina C. Gaw | Block C 2018
• Hence, if A owes Z P2,000 & Z owes A P500, compensation can occur but
only on a partial basis. Z’s indebtedness will be extinguished, but A’s
indebtedness will subsist but partially extinguished to the extent of P500,
reducing liability to of P1,500.
CASE: Mondragon Personal Sales v. Sola
Lesson: Legal compensation may be partial.
Facts: X owed Y P125K based on a contract of services where Y provided X with
bodega facilities. On the other hand, Y owed X P1.9M based on a franchise
distributorship agreement. When X stopped paying for the bodega services, Y locked
up the bodega. Later, Y asked for rescission of the contract. Can the contract for
bodega services be rescinded?
Held: No. There has already been partial legal compensation in this case. Hence,
there is no basis for Y to ask for rescission especially since Y was the one to first
breach the contract when he padlocked the bodega. In a previous letter, Y
acknowledged that he was indebted to X.
Hence, in this case, compensation is proper to the extent of the 125K X owes Y,
since Y owes P1.9M to X.
Article 1282. The parties may agree upon the compensation of debts which are not
yet due.
When Not Yet Due
• GR: Compensation can only occur when the debts are due & demandable
(legal compensation)
• BUT: The parties may agree upon the compensation of debts which are not
yet due. (Contractual compensation)
• Hence, if A owes Z P1,000 due on Apr. 11 & Z is indebted to A in the same
amount but due on May 7, there can be no compensation on Apr. 11.
o BUT: Z & A can agree that, even if May 7 has not yet arrived, their
mutual indebtedness compensate each other so that their respective
obligations are extinguished.
Article 1283. If one of the parties to a suit over an obligation has a claim for
damages against the other, the former may set it off by proving his right to said
damages and the amount thereof.
Judicial Set-Off
• Happens when one of the parties to a suit over an obligation has a claim for
damages against the other
• A files a collection case against B for P1,000.
o B can file a counterclaim in the same amount claiming damages
arising from the same or different transaction & requesting the court
to just set-off the damages.
o If the court agrees, then there can be compensation.
CASE: Ong v. CA
Lesson: For judicial set-off to apply, the amount of damages or the claim sought to
be compensated must be duly proven.
Facts: X owed Y money, & X deposited zippers with Y, though it was not shown that Y
had asked for the zippers or even needed it for business. Can there be judicial set-
off?
Held: No. X has not proved the right to any damage as a result of the claimed
retention of the zippers by Y. There was also no proof of the amount of such
damages as X could not even say how many of the zippers had been earlier
withdrawn by him.
Article 1284. When one or both debts are rescissible or voidable, they may be
compensated against each other before they are judicially rescinded or avoided.
Rescissible Debt
• Valid up to the time it is rescinded or annulled
• If all the requisites for a valid compensation are present before a contract is
rescinded, the compensation can occur by operation of law
• Ex. If A is indebted to B for P1,000 & the latter is likewise indebted to A for
the same amount which are both due & demandable, compensation will
occur even if the loan obtained by B from A was procured through force &
intimidation, therefore making the same voidable, for as long as such debt
has not yet been annulled.
*Article 1285. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the assignor
was notified by the debtor at the time he gave his consent, that he reserved his right
to the compensation.
If the creditor communicated the cession to him but the debtor did not consent
thereto, the latter may set up the compensation of debts previous to the cession, but
not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same & also later ones until he had
knowledge of the assignment.
Cession
• In this Article, this involves transfer of title, like a sale or donation
• Valid even without consent of debtor
• Another exception to the rule that only the principal creditors & debtors can
claim from each other
• There is a novation — a change in the person of the creditor
3 Cases When the Debtor Assigns His Credit to a 3rd Person
1) When the debtor has consented to the assignment of rights made by a
creditor in favor of a 3rd person, the debtor cannot set up against the
assignee the compensation which would pertain to him against the assignor,
unless the assignor was notified by the debtor at the time he gave his
consent, that he reserved his right to the compensation
101 | Katrina C. Gaw | Block C 2018
o Ex. X owes Z P1,000 due on Apr. 12. Z is likewise indebted to X in the
same amount due on May 6. On Apr. 14, Z assigned his credit to O
with the consent of X who does not make any reservation as to his
right of compensation which could occur on May 6.
§ On May 7, O demands payment from X the amount of P1,000
which has been assigned to him by Z. X CANNOT resist
payment by claiming that the amount of indebtedness of Z in
his favor may be applied in compensation of the said amount
of P1,000 assigned by Z to O.
§ BUT: If at the time X gives his consent to the assignment, he
reserves his right to the compensation, he can validly invoke
that the obligation has been extinguished through
compensation.
o CASE: Perez v. CA
§ Facts: A finance company issued to an investor 2 promissory
notes to mature originally on Aug. 6 & Aug. 13, 1974,
respectively. The commercial papers were rolled-over so that
their maturity dates were extended to Oct. 4 & Oct. 11, 1974
respectively.
• The same finance corporation was the creditor with
respect to a certain obligation to mature on Aug. 5, 1994
as against Company X to whom the 2 credits of the
investor, which were to mature on Oct. 4 & 11, 1974,
respectively, were assigned on Sept. 9, 1974.
Compensation was being claimed on the basis of the Art.
1285, par. 3. Can there be compensation?
§ Held: No, applying Art. 1285, par. 1. The debtor cannot claim
that he had no knowledge of the assignment in view of the
special nature of money market transactions
• The impersonal character of the money market device
overlooks the individuals or entities concerned.
o “Implied” knowledge of free assignment (& consent)
• The issuer of a commercial paper in the money market
necessarily knows in advance that it would be
expeditiously transacted & transferred to any
investor/lender without need of notice to said issuer.
• In practice, non-notification is given to the borrower or
issuer of commercial paper of the sale or transfer to the
investor.
2) When the creditor communicated the cession to the debtor but the debtor did
not consent thereto, the latter may set up the compensation of debts
previous to the cession, but not of subsequent ones
o X owes Y P1,000 due on Apr. 12 & P2,000 due on May 10. Y also
owes X P1,000 due on May 6 & P2,000 due on May 9.
§ On May 7, Y assigns all his credits to O but X does not consent
to the assignment.
§ On June 1, O demands payment from X of the 1st P1,000 & the
2nd P2,000 assigned to him by Y. X can resist payment of the
 P1,000 on the ground that compensation has taken place
because the 1st debts became due before the cession, but he
cannot set up compensation as to the P2,000 which has
become due after the cession.
3) When the assignment is made without the knowledge of the debtor, he may
set up the compensation of all credits prior to the same & also later ones
until he has knowledge of the assignment.
o Ex. from 2nd case: If X is informed by Y only on May 15 that he has
assigned all his credits to O, & the latter demands payment of the 1st
P1,000 & the 2nd P2,000 on June 1, X can invoke that all the
indebtedness was extinguished because compensation has set in.
o CASE: Sesbreño v. CA
§ Lesson: It is the time that the debtor learns of the assignment
that is determinative, rather than the time it is actually
assigned.
o Art. 1626 – “The debtor who, before having knowledge
of the assignment, pays his creditor shall be released
from the obligation.”
o If a man pays his debt before notice of the assignment,
the law exonerates him. It is the duty of the person who
has acquired a title by transfer to give his debtor notice
to demand payment of debt.
§ Facts: Philfinance was indebted to Delta, evidenced by
promissory note 1. The latter was likewise indebted to the
former evidenced by promissory note 2. Philfinance assigned
promissory note 1 to Sesbreño, one of Philfinance’s creditors,
who only notified Delta of such assignment after the
indebtedness of Delta in favor of Philfinance & the
indebtedness of Philfinance in favor of Delta both became
mutually due. Despite the said maturities of said debts,
Sesbreño decided to claim from Delta on the basis of the
assigned credit made to him by Philfinance. Can Sesbreño still
make the claim?
§ Held: No. Sesbreño could no longer claim from Delta because
he notified Delta of his rights as assignee after compensation
had taken place by operation of law, even if he received the
promissory note 1 prior to the co-terminal maturity date.
o “Co-terminal maturity” means maturity on the same
date, giving way to compensation
o No man is bound to remain a debtor: he may pay to him
with whom he contracted to pay; & if he pays before
notice that his debt has been assigned, the law holds
him exonerated, for the reason that it is the duty of the
person who has acquired a title by transfer to demand
payment of the debt, to give his debtor notice.
Class Discussion
102 | Katrina C. Gaw | Block C 2018
Q: A is the creditor, B is the debtor. A, as assignor, assigns his credit to X (the
assignee). Is B’s consent needed for A’s assignment to X?
A: No.
Q: If this is conventional subrogation and not assignment of credit, is B’s consent
needed?
A: Yes. Conventional subrogation and assignment of credit are NOT the same. In
conventional subrogation, the consent of all parties must be obtained for the validity
of the arrangement.
Q: Given the scenario of assignment, where A and B are mutual creditors and
debtors of one another, can B assert compensation as against X in relation to his
credit as against A?
A: If there is consent by B, there will be no compensation. B cannot invoke
compensation as against X, unless B, at the time of assignment, reserves his right to
the compensation.
Q: When there is knowledge but no consent on the part of B, will compensation lie?
A: Compensation will lie only as to those PRIOR to the cession.
Q: What if there is no knowledge?
A: Compensation will happen as to transactions BEFORE and AFTER the cession,
BUT before knowledge. In short, compensation will happen as to anything before
knowledge.
Article 1286. Compensation takes place by operation of law, even though the debts
may be payable at different places, but there shall be an indemnity for expenses of
exchange or transportation to the place of payment.
Operation of Law
• If all the requisites under Art. 1279 are present, compensation takes place by
operation of law.
o The parties need not notify each other that they intend to have their
debts compensated.
• Indemnity for expenses of exchange or transportation to the place of payment
can arise only if there is partial compensation.
o Ex. If A owes B P1,000 payable in Davao but B owes A P500 in
Marikina, then there is only partial compensation. A has to go to
Marikina for him to receive the payment of B for the balance of P500.
A, the creditor, should be reimbursed by the debtor the amount of
transportation expenses A has incurred in going to Marikina because,
under Art. 1247, the extrajudicial expenses required for payment shall
be for the account of the debtor, unless it is otherwise stipulated.
• BUT: If there is complete compensation, the parties need not do anything as
the obligations are completely extinguished.
o Ex. If A owes B P1,000 payable in Davao & B owes A the same amount
payable in Marikina & both are due, A and B do not have to go to the
places of payment as the compensation here is complete and
therefore both obligations are totally extinguished.
Article 1287. Compensation shall not be proper when one of the debts arises from a
depositum or from the obligations of a depository or of a bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim for support
due by gratuitous title, without prejudice to the provisions of par. 2 of Article 301.
Article 1288. Neither shall there be compensation if one of the debts consists in civil
liability arising from a penal offense.
No Compensation in the ff. cases even if there is Technically a Loan
1) Debts arising from a depositum or from the obligations of a depository
o A deposit is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it & of
returning the same
o Ex. If A owes B P1,000 due on Apr. 11, & A deposited with B P1,000
only for safekeeping to be returned on Apr.11, 1977, there can be no
compensation come Apr. 11, 1997 as the obligation of B to return the
P1,000 arises from the obligations of a depository
2) Debts arising from the obligations of a bailee in commodatum.
o The bailee in commodatum acquires the use of the thing loaned but
not its fruits
o Bailee is obliged to pay the ordinary expenses for the use &
preservation of the thing loaned
o Bailee cannot retain the thing loaned on the ground that the bailor
owes him something, even though it may be by reason of expenses.
o BUT: The bailee has the right of retention for damages mentioned in
Art. 1951
3) Debts arising from duty to support.
o Compensation cannot likewise apply if the other obligation is one of
support to the other party
§ Ex. A father, who is required to give support to his son, cannot
claim that he need not give the support considering that his
son owes him the same amount of money.
o BUT: Support in arrears can be compensated or renounced (Art. 301,
par. 1 of the Civil Code)
§ Ex. If the father has not given his son P4,000 which is
equivalent to the previous 4 months of unremitted financial
support, but the same son owes the father P4,000, there can
be compensation
§ NOTE: The application of Art. 301, par. 2 is doubtful because it
has already been deleted by the New Family Code
4) Debts consisting of a civil liability arising from a penal offense
o Ex. If A is indebted to B by virtue of a contract of loan & B is indebted
to A by virtue of an award of civil damages in favor of A as a result of
B’s conviction in inflicting physical injuries on A, there can be no
compensation.
o A criminal violation of the Trust Receipt Law which makes the obligor
financially & civilly liable to the contracting bank to the extent
indicated in the Trust Receipt contract cannot be extinguished by a
claim of compensation of the amount of deposit which the obligor has
103 | Katrina C. Gaw | Block C 2018
with the bank even if, under the law, a person who opens a deposit
account in a bank is technically a creditor of that bank
Article 1289. If a person should have against him several debts which are
susceptible of compensation, the rules on the application of payments shall apply to
the order of the compensation.
Rules on Application of Payment
• If A owes X P3,000 due on April 11, 1997, & X owes A P3,000 without
interest, & another P3,000 with interest at 12% per annum in case of non-
payment, all due on April 11, 1997, there can be compensation.
o If X does not designate the indebtedness to which compensation will
apply, it will be applied to the most onerous debt which is the interest-
bearing P3,000 debt. This is the most onerous because the payment
of the interest is necessarily most burdensome.
Article 1290. When all the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, & extinguishes both to the
concurrent amount, even though the creditors and debtors are not aware of the
compensation.
Compensation: Automatic Extinguishment
• Most expedient way of extinguishing an obligation
• Automatic & occurs even though the creditors & debtors are not aware of the
compensation
CASE: Mindanao Portland Cement v. CA
Lesson: Civil liabilities arising from civil obligations in 2 different suits featuring the
same persons can compensate one another.
Facts: A creditor was able to obtain in a civil case an award of attorney’s fees in the
amount of P10,000 from the debtor, & the latter was also able to obtain a judgment
in another civil case for attorney’s fees in the same amount from the former. Is there
compensation?
Held: Yes. Compensation has taken place.
CASE: Pioneer Insurance & Surety Co. v. CA
Lesson: The stipulation in the indemnity agreement allowing the surety to recover
even before it paid the creditor is enforceable. In accordance therewith, the surety
may demand from the indemnitors even before paying the creditors.
Facts: In Sept. 8, 1987, X, a surety company, issued general warehousing bonds in
favor of the Bureau of Customs for importation of raw materials in the total amount
of P6,500. The bonds were issued on behalf of Company Y & its president, Z.
• To secure X against any & all damages & losses of whatever kind which X
may incur as a consequence of its becoming a surety upon the bonds, Z & Y
executed jointly & severally in favor of X indemnity agreements for said
bonds, promising to pay their debts to the Bureau.
• The indemnities was to be paid to X as soon as demand is received from the
Bureau or as soon as it becomes liable to make payment of any sum under
 the terms of the bond, its renewal, extensions or substitutions whether the
said sum has actually been paid or not
• Y & Z failed to pay for their debt; thus the Bureau demanded payment from X
the amount of P6,390,259. This amount eventually reached P9,031,000 in
1983.
• In response to X’s demand letter, Y & Z promised to pay. The Bureau agreed
with Y & Z for monthly installment payments of their obligation on condition
that Y & Z will make an initial payment of P500,000 & thereafter P400,000
monthly until fully paid pursuant to the 1st endorsement by the Bureau, dated
Sept. 22, 1976. However, other than the initial payment of P500,000 did not
pay.
• In 1979, a fire gutted the Y’s factory destroying materials insured with X in
the amount of P1,144,744. Y demanded from X payment of the proceeds of
the insurance policy but X refused to pay claiming that said proceeds must be
applied by way of partial compensation against its liability with the Bureau
arising from the warehousing bonds.
• Y argued that they were not the creditors of X & the demands to pay made by
the Bureau did not create any liability & even if they did, the liability under the
warehousing bonds in favor of the Bureau of Customs was the liability of X,
that petitioner did not pay the Bureau & Y has nothing to reimburse.
Is there legal compensation here?
Held: Yes. There is legal compensation.
• X owes Y the amount representing the proceeds of the insurance policy. Y &
Z, however, try to negate their liability by claiming that they have no more
liability because of the fortuitous event. At the same time however, Y & Z
admit liability when they argued that X was released from the same upon
their agreement with the Bureau of Customs to make staggered payments.
Finally, Y & Z argue that since X has not made any payment yet regarding the
amount demanded by the Bureau of Customs, there is nothing for which the
X should be reimbursed.
o It is needless to emphasize that at the time the fire occurred, Y & Z
with X had already incurred liability on the warehousing bonds with the
Bureau of Customs, as Y & Z failed to comply with the provisions of
their undertaking. It is therefore, clear that as far as the P9,031,000
is concerned, X, Y & Z were already liable to the Bureau when the fire
happened.
o Neither can Y & Z claim that X was released from liability when they
made arrangements with the Bureau of Customs for staggered
payments since the facts will bear out that other than the P500,000
payment, no further payment was made by Y & Z, leading the Bureau
of Customs to go after X again.
• Clearly, X can demand reimbursement from the respondents even before it
has actually paid its obligation to the Bureau of Customs.
o It can, in principle, be held liable under the warehouse bonds even
before actual payment to the Bureau of Customs. The liability has
been fixed. What remains is simply its liquidation. The respondents
who defaulted on the agreement to make staggered payments thereby
104 | Katrina C. Gaw | Block C 2018
causing X’s liability to the Bureau of Customs cannot refuse the set-
off.
o Consequently, legal compensation can take place between X, Y & Z,
that is, X can partially set-off the insurance proceeds in the amount of
P1,144,744.49 against its liability under the warehousing bonds
which has been computed in the amount of P9,031,000.00 as of
1983.
• From the records, it is seen that the last demand letter of the Bureau of
Customs asking the petitioner to pay the value of the bonds was on 1981.
The records are silent on whether or not the Bureau of Customs sued either
of the parties to enforce liability under the warehousing bonds. It may be
noted that the petitioner admits its liability under the warehousing bonds.
Since the issue is legal compensation & in order to avoid any miscarriage of
justice, the Court refers the issue on the enforcement of liability under the
bonds to the Bureau of Customs.
SECTION 6. – NOVATION.
LECTURE FROM DEAN MEL
2 Kinds of Novation
1. Objective novation – deals with change in the object or change in the principal
condition
• Express – by stipulation, it can be effected at present or in the future
• Implied – the test is the incompatibility, in every point (this relates to the
object, consent, and cause of the contract)
o Ex. If you shorten the period, there is novation
o Ex. If there is extension of period, there is no novation
o Ex. If there is a change in the accessory obligation (i.e, from mortgage
to pledge), there is no novation because the principal obligation does
not change
o Ex. The court renders a decision that there must be right of
redemption. But after the decision, the parties enter into a
compromise that there will just be payment of P300,000. This is
considered novation.
o Ex. If the change is to make a debt that was to be paid in lump sum to
one by installment, there is no novation.
2. Subjective novation – change in debtor or change in the creditor (subrogation)
• Expromission – there is a change of the debtor without the knowledge or
against the consent of the old debtor, but with the agreement that the old
debtor’s obligation will be extinguished
• Delegacion – the old debtor recommends a new debtor to replace him, and
the creditor agrees
• What happens when there is insolvency? What if the new debtor becomes
insolvent? Will it resurrect the obligation of the old debtor?
o GR: There will be no revival of the old debtor’s obligation.
o EXC: Delegacion, when the new debtor’s insolvency is known to the

old debtor, who recommended the new debtor
Q: A is the creditor. B is the debtor. X tells A, “When the debt of B becomes due, I will
pay.” A says to B, “If your debt becomes due, X will pay.” The debt became due. A
collected from B. Is that collection proper?
A: Yes. In that scenario, there is no categorical, clear, and unmistakable agreement
that B’s obligation has been extinguished. X became only an ADDITIONAL DEBTOR,
and, at the most, a solidary debtor.
Q: Is novation presumed?
A: NO, except in legal subrogation.
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a 3rd person in the rights of the creditor.
Novation
• *Civil Code refers to extinctive (not modificatory) novation
o Extinguishes the totality of the contract
• NEVER presumed; parties must be expressly agreed that the previous
obligation is extinguished & the new one replaces it
o EXC: It may be implied where there is total incompatibility in all
aspects, on every point
• Unlike the other forms of extinguishment, it is a juridical act with a dual
function:
o It extinguishes the obligation
o It creates a new one in lieu of the old
*CASE: Ajax Marketing & Development Co. v. CA
Lessons: (1) To effect an objective novation it is imperative that the new obligation
expressly declare that the old obligation is thereby extinguished, or that the new
obligation be on every point incompatible with the new one.
(2) To effect a subjective novation by a change in the person of the debtor it is
necessary that the old debtor be released expressly from the obligation, & the 3rd
person or new debtor assumes his place in the relation.
(3) There is no novation without such release as the 3rd person who has assumed
the debtor’s obligation becomes merely a co-debtor or surety.
Facts: Petitioners’ 3 debts (secured by continuing real estate mortgages also
intended to secure future indebtedness, including renewals & extensions) were
consolidated into 1 debt with the original debtors incorporating themselves into a
corporation for purposes of the consolidated debt.
The original debtors claimed that there was novation considering the resulting
consolidation, & the change in the person of the debtor; they also claimed the
mortgaged property had been discharged. Was there novation?
Held: No. There was no subjective or objective novation.
• No Objective Novation:
105 | Katrina C. Gaw | Block C 2018
o There was nothing to show the unequivocal intent of the parties to
novate the 3 loan agreements when they consolidated
o The new promissory note still states “secured by REM (real estate
mortgage)”
o The new agreement merely restructured the previous 3 loans
• No Subjective Novation:
o The bare fact of the from a partnership to a corporation, without
sufficient evidence, either testimonial or documentary, that the
debtors were expressly released from their obligations, did not make
the new corporate personality, a 3rd person or new debtor within the
context of a subjective novation.
o If at all, the new company only became a co-debtor or surety. Without
express release of the debtor from the obligation, any third party who
may thereafter assume the obligation shall be considered merely as
co-debtor or surety.
Kinds of Novation
1) Subject – occurs when there is a change of either the person of the debtor,
or of the creditor in an existing obligation
o The old debtor MUST be released expressly from the obligation, &
3rd person or new debtor assumes his place in the relation
§ No novation without such release as the 3rd person who
has assumed the debtor’s obligation becomes merely a
co-debtor or surety
2) Objective – occurs when there is a change of the object or principal
conditions of an existing obligation
o The new obligation MUST expressly declare that the old obligation
is thereby extinguished, or that the new obligation be on every
point incompatible with the new one
3) Mixed – when the change of the object or principal conditions of an
obligation occurs at the same time with the change of either the person of
the debtor or creditor
No Form Necessary
• GR: No form of words or writing is necessary to give effect to a novation
• Ex. An oral lease agreement can validly novate a contract to sell provided that
it can be shown that:
o The intent to novate was present &
o The terms are truly incompatible in every respect
*CASE: SM Systems Co. v. Camerino
Lesson: Judgments can be novated by subsequent compromise agreements.
Facts: Farmers, in a compromise agreement executed subsequent to a final
judgment, waived their right to redemption & agreed to be paid P300,000. This was
not the tenor of the final judgment. Is the agreement valid?
Held: Yes. This simply constitutes a novation of the said judgment.
Article 1292. In order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal terms, or
that the old & the new obligations be on every point incompatible with each other.
2 Distinct, Successive Contracts
• ALL parties must consent
• No novation unless 2 distinct & successive binding contracts take place, with
the later one designed to replace the preceding convention.
• There is NO novation when:
o A subsequent contract is designed to novate a previous contract, but
not all parties to the original contract consented to or are made
parties in the subsequent contract
o Modifications are introduced before a bargain becomes obligatory.
• Ex. Dacion en pago is a form of novation in which a change takes place in the
object (originally a payment in money, substituted for something else)
involved in the original contract.
Kinds of Novation
• Express - It so expressly declares in certain terms
o “Expressly” - the contracting parties incontrovertibly disclose that their
object in executing the new contract is to extinguish the old one
o Ex. If an old promissory note is replaced by a new promissory note
which expressly states that the new note is meant “to cancel” the old
one
o Ex. If a contract to sell of a condominium unit was executed after the
lessor & the lessee executed their lease contract, the former does
NOT necessarily novate the latter absent any clear expression of the
intention to novate
• Implied - When the old obligation is completely incompatible with the new
obligation in every aspect
o No specific form required
o Irreconcilabe incompatibility between the old & new obligation
o Acts which are too clear & unequivocal to be mistaken
o Test of incompatibility – WON the 2 obligations can stand together,
each one having its independent existence
o Changes must be essential in nature & not merely accidental
§ Must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions
thereof
• OTHERWISE, the change would be merely modificatory
& insufficient to extinguish the original obligation
4 Essential Elements of Novation
1) A previous valid obligation
2) The agreement of all the parties to the new contract (consent)
3) The extinguishment of the old contract
4) Validity of the new one
*CASE: Garcia, Jr. v. CA
106 | Katrina C. Gaw | Block C 2018
Lesson: An extension of deadline for a loan is not novation.
Facts: The creditor granted an extension of the deadline for the loan, among other
new conditions, in a newly executed contract. The debtor now claims there has been
novation. Is there novation?
Held: No. An obligation to pay a sum of money is NOT novated in a new instrument
by changing the term of payment & adding other obligations not incompatible with
the old one. The new terms must be completely irreconcilable to be called novation.
*CASE: Guerrero v. CA
Lesson: There is no novation when a new agreement is executed between the
creditor & 1 of the solidary debtors regarding the payment of a solidary debt. The
creditor can definitely still go after the other solidary debtors.
Facts: X, Y & Z executed an agreement of counter-guaranty in favor of a surety
corporation binding themselves solidarily for any claim the surety may have against
them.
• Upon default in the payment of the obligation, the surety corporation sued X
& consequently obtained a favorable judgment on the basis of a compromise
agreement directing X to pay the whole obligation
• Upon failure to satisfy the judgment, the surety corporation filed a case
against Y for the collection of the same amount of money
• Y resisted on the ground that the previous judgment in the civil case against
X novated the contract of indemnity & released Y from its obligation.
Was there novation?
Held: There was no novation. The agreement of “counter-guaranty” is not irrevocably
irreconcilable with the compromise agreement.
The choice of the creditor to first attempt to get payment from just X does not mean
that the debt of Y & Z had been novated.
*CASE: Magdalana Estates, Inc. v. Rodriguez
Lesson: An obligation to pay a sum of money is not novated, in a new instrument
wherein the old is ratified by:
• Changing only the terms of payment & adding other obligations not
incompatible with the old one, or
• Wherein the old contract is merely supplemented by the new one
Facts: X bought a property from Y, & issued a promissory note with interest. X also
procured a bond from a surety company for the payment of the principal.
• Y accepted without reservation the agreement set forth in the surety bond
which however did not make provisions on the interest.
• X contended that the surety bond novated his obligation with respect to the
interest.
Was there novation?
Held: No. The mere fact that the creditor receives a guaranty or accepts the
payments from a 3rd person who has agreed to assume the obligation, when there is
no agreement that the 1st debtor shall be released form responsibility, does not
constitute a novation, & the creditor can still enforce the obligation against the
original debtor.
The surety is just an accessory obligation of the promissory note.
*CASE: Cochingyan v. R&B Surety & Insurance Co.
Lesson: Where the parties to the new obligation expressly recognize the continuing
existence & validity of the old one, & where, in other words, the parties expressly
negated the lapsing of the old obligation, there can be no novation. The issue of
implied novation is not reached at all.
Facts: In a trust agreement, the trustor bound itself to pay to the creditor-beneficiary
whatever amount the debtors have to pay to the creditor-beneficiary.
The principal loan involved in the trust agreement was previously secured by a bond
issued by a surety company. Did the trust agreement novate the surety agreement?
Held: No, because since it did not expressly terminate the obligation under the
surety.
The trust merely brought in other persons to assume the same obligation directly,
since the trustor in this case was already previously bound subsidiarily when it
secured the bond issued by the surety.
It is not unusual in business for a stranger to a contract to assume obligations
thereunder (e.g., a contract of suretyship or guarantee). The legal effect is the
increase of the number of persons liable to the obligee, & not the extinguishment of
the liability of the 1st debtor.
CASE: Fortune Motors Inc. v. CA
Lesson: A surety & financing agreement, where the financing agreement merely
details the nuances of the surety, cannot novate one another.
Facts: A surety agreement was executed between petitioners & respondents, with
the respondent-surety absolutely, unconditionally & solidarily guaranteeing the full,
faithful and prompt performance, payment & discharge of all obligations of
petitioners; there were no qualifications or conditions therein.
A new financing agreement was executed, & now the petitioners claim that the new
financing agreement contain onerous obligations not contemplated in the surety
undertakings, thus changing the principal term thereof & effecting a novation. Was
there novation?
Held: No. The financing agreement merely detailed the obligations of one of the
parties without changing the nature of the previous agreement. The agreements can
stand together without conflict because one is accessory to the other.
CASE: Security Bank & Trust v. Cuerva
Facts: There was a 1980 credit accommodation, followed by a 1989 loan
agreement. In the terms of the 1989 agreement, it was stated that it would be
applied “to liquidate the principal portion of the Borrower’s present total outstanding
indebtedness in the Lender (the “Indebtedness”) while the 2nd Loan shall be applied
to liquidate the past due interest & penalty portion of the indebtedness.”
• There was also testimony of an officer of the bank that the proceeds of the
1989 Loan Agreement were used “to pay-off” the original indebtedness.
• Several incompatibilities between the 1989 Agreement & the 1980 original
obligation:
o While the 1980 credit accommodation stipulated that the amount of
loan was not to exceed P8 million, the 1989 Agreement provided that
the loan was P12.2 million. The periods for payment were also
different.
107 | Katrina C. Gaw | Block C 2018
o The later contract contained conditions, “positive covenants” &
“negative covenants” not found in the earlier obligation. As an
example of a positive covenant, the Borrower undertook “from time to
time & upon request by the Lender, (to) perform such further acts
&/or execute & deliver such additional documents as may be
necessary or proper to effectively carry out the provisions & purposes
of this Loan Agreement.”
o Likewise, SIMC agreed that it would not create any mortgage or
encumbrance on any asset owned or hereafter acquired, nor would it
participate in any merger or consolidation.
Was there novation?
Held: Yes. The original loan agreement was novated by a new one, as evidenced by
the acts of the parties & the terms of the new agreement.
Article 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the
latter, but not without the consent of the creditor. Payment by the new debtor gives
him the rights mentioned in Article 1236 & 1237.
Article 1294. If the substitution is without the knowledge or against the will of the
debtor, the new debtor’s insolvency or non-fulfillment of the obligation shall not give
rise to any liability on the part of the original debtor.
Subjective Novation
• The creditor MUST always be aware of the novation.
o Ex. An assignment of a lease contract by the lessee to a 3rd party must
get the consent of the lessor because such assignment would involve
the transfer, not only of rights but also of obligations. It constitutes
novation by substitution of the person of one of the parties, namely
the lessee-debtor.
• The old debtor need not know, though this carries certain effects.
CASE: Bangayan v. CA
Lesson: An assignment of a lease contract by the lessee must have the lessor’s
consent, because such assignment involves the transfer not only of rights but also of
obligations. It constitutes novation by the substitution of the person of one of the
parties – the lessee-debtor.
CASE: Gaw v. IAC
Lesson: The change in the principal object or conditions, the substitution of the
person of the debtor, the subrogation of a 3rd person in the rights of the creditor
must all involve a clear & manifest intent to extinguish the old obligation & to
release the debtor from such old obligation.
Facts: X entered into an exclusive dealership agreement with a Company Y to sell the
Y’s product.
• X entered into a co-terminous marketing agreement with Z for the latter to
market the products & to obtain funds to fulfill the deposit required by
company Y. Such deposit, upon being tendered by Z, was refused by Y for fear
 that it might violate the exclusive dealership agreement with X. Y said that it
would accept provided it be made under the name of X.
• X argued that the new agreement between X & Z was Z’s attempt “to step
into the shoes” of X, & novation exists.
Is there novation?
Held: No. The co-terminous marketing agreement did not novate the dealership
agreement.
Though the agreement between X & Z is related to the agreement between X & Y, as
the term of the former is co-terminous with the latter, the new agreement was
merely an “attempted novation.”
Not only was X not released from complying with the terms and conditions of the
dealership agreement but he was, in a sense, already implementing the latter.
Novation SHOULD create a new obligation.
CASE: Odiamar v. Odiamar Valencia
Lesson: (1) For a change in the debtor, the change must also clearly release the old
debtor from the obligation.
(2) Novation is never presumed, & the animus novandi (intent to novate), whether
wholly or partially, must appear by express agreement of the parties, or by their acts
that are too clear to be mistaken.
Facts: Spouses X & Y were indebted to Z. When the Spouses were already dead, B,
child of X & Y, manifested a desire to shoulder the debt of P2.1M that her parents
owed to Z. Later, in a dispute regarding this debt, Z argued that novation applied
against B & that B should now be solely liable to shoulder the P2.1M debt of her
parents; thus, it would be correct on Z’s part to run after B instead of going to the
estate. Is Z correct?
Held: No. To constitute novation by substitution of debtor, the former debtor must be
expressly released from the obligation & the new debtor must assume the former’s
place in the contractual relations.
The fact that the creditor accepts payments from a third person, who has assumed
the obligation, will result merely in the addition of debtors & not novation.
Here, the intent to novate was not satisfactorily shown. At best, B only manifested a
desire to shoulder the debt of her parents, which does not amount to novation. It is
wrong to hold B liable for the debts of Spouses X & Y on account of novation.
Novation through Debtor
• Novation through the replacement of the old debtor by a new debtor may be
with or without the initiative of the old debtor.
• Delegacion - If the old debtor, to extinguish his obligation, suggests to the
creditor that he be substituted by a new debtor of his choice & the creditor
agrees
• Expromission - If the old debtor is substituted without the knowledge or
consent of the old debtor & the obligation is extinguished
• In both delegacion & expromission, the consent of the creditor is
indispensable.
Illustrative Example
• X is indebted to Y in the amount of P1,000.
108 | Katrina C. Gaw | Block C 2018
o Without knowledge or consent of X, O commits to pay the
indebtedness of X.
§ Should it become due, Y can still claim from X the said
indebtedness on due date, despite O’s commitment, because
there is no novation.
§ There is nothing in the commitment of O that clearly shows the
intention of O to release X from his obligation. O only became
an additional debtor.
o BUT: If Y agrees that the obligation of X is to be extinguished upon
O’s making the commitment to pay the indebtedness of X, there is a
novation.
§ If O later on makes a partial payment of P500, Y cannot go
against X for the balance, as his obligation has already been
extinguished in so far as Y is concerned.
• O can demand reimbursement from X, not of the
whole P1,000, but only P500, the amount which
benefited X, pursuant to Art. 1236 par. 2.14
§ If O pays the whole amount, then he can recover the full
amount from X.
o BUT: In all these cases, if the original indebtedness of X to Y is
secured by a mortgage on the house of X & the payment of the
indebtedness of X is made by O, he CANNOT compel X to subrogate
him in his rights, such as those arising from mortgage, guaranty or
penalty.
§ Hence, if X fails to reimburse O, the latter cannot make use
of the mortgage which has been constituted on the
indebtedness, pursuant to Art. 1237 of the Civil Code.15
o In the event that after O commits to pay the indebtedness of X which,
upon agreement with Y releases X from his obligation with Y, O
becomes insolvent or does not pay Y the indebtedness upon demand
by Y on due date, Y can no longer go against the original debtor, X, to
claim the debt, as the latter’s obligation has already been
extinguished through novation.
*CASE: Ever Electrical Manufacturing Inc. v. PBCOM
Facts: V committed to pay the indebtedness of E in favor of PBCOM, anchored on the
contractual stipulation that V “has offered to assume full liability to undertake
payment of all past due accounts of E.” Is there novation?
Held: No, considering that in the same contract, there was a phrase that “there is
nothing to be construed from the above-stated stipulation that E is released from its
obligation.” V is merely an additional person who would ensure that the loan of E to
PBCOM would be paid.
14 “Whoever pays for another may demand from the debtor what he has paid, except that if he paid without
the knowledge of the debtor or against his will, he can recover only insofar as the payment has been
beneficial to the debtor.”
15 “Whoever pays on behalf of the debtor without the knowledge or against the will of the debtor, cannot
compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty or
penalty.”

Article 1295. The insolvency of the new debtor, who has been proposed by the
original debtor & accepted by the creditor, shall not revive the action of the latter
against the original obligor, except when said insolvency was already existing & of
public knowledge, or known to the debtor, when he delegated his debt.
Insolvency of New Debtor
• When there is delegacion, the obligation of the old debtor to make payment is
completely extinguished.
o In the event that the new debtor is insolvent, the creditor cannot go
against the old debtor to collect the debt.
2 Cases When the Creditor Can Still Go Against the Old Debtor
1) When the insolvency of the new debtor has already been existing & of public
knowledge at the time of the delegation by the old debtor
2) When the insolvency of the new debtor is known to the old debtor when he
delegates his debt
*NOTE: In both cases –
1) The creditor must NOT know that the new debtor is insolvent; otherwise, he
would be considered in estoppel
2) The insolvency must have existed at the time the old debtor delegated his
debt.
Class Discussion
Q: A is the original creditor; B is the original debtor. X tells A that he will pay B’s
debts. B agrees. However, A nevertheless collects from B. Is there novation?
A: NO. X becomes merely a co-debtor of B. There is no categorical extinguishment of
the liability of B. Thus, there is no novation.
Article 1296. When the principal obligation is extinguished in consequence of a
novation, accessory obligations may subsist only insofar as they may benefit 3rd
persons who did not give their consent.
Effect on Accessory Obligations
• The accessory always follows the principal. If the principal is extinguished, the
accessory goes with it.
o All accessory obligations such as those arising from a contract of
mortgage, guarantee, and pledge are likewise extinguished.
• BUT: The law likewise says that the accessory obligation may subsist only
insofar as they may benefit third persons who do not give their consent.
o Ex. X borrows P100,000 from Y to be paid after 12 months. The loan
is secured by a real estate mortgage of Z’s house. The mortgage is to
be effective only for 12 months. In constituting his house as security
for the loan of X, Z agrees to be paid by X the amount of P1,000 for as
long as the loan secured by the mortgage exists. However, instead of
paying Z the said amount, X will just apply the P1,000 to the P12,000
indebtedness of Z in X’s favor such that by the time the 12-month loan
109 | Katrina C. Gaw | Block C 2018
matures, the indebtedness of Z would have already been paid. This is
made because Z has no cash to pay the P12,000 obligation to X.
§ On the 11th month, X & Y decide to consolidate the P100,000
loan with the other P700,000 loan which X owes in favor of Y
&, in so doing, they expressly agreed in the consolidation-
document that the loan of P100,000 shall in effect cease & be
integrated in the P700,000 with a lower interest rate & payable
for a longer period of time without any collateral.
§ Z did not consent to this arrangement as it would clearly
prejudice him. Z’s mortgage therefore may subsist for the
remaining month attached to the principal new obligation. X
will still accept the mortgage of Z as payment of P1,000 for the
last month, thereby extinguishing Z’s obligation
Article 1297. If the new obligation is void, the original one shall subsist, unless the
parties intended that the former relation should be extinguished in any event.
Subsequent Void Obligation
• A subsequent void obligation intended to novate an old one has no legal
effect & will be considered as not having been agreed upon in the first place.
The original obligation shall subsist.
o BUT: If in coming up with the new but void obligation, the parties agree
that it shall in any event extinguish the old obligation, then such old
obligation will not be revived.
• Ex. If X is bound to give Y a car & this is novated by binding X to give instead
his future inheritance from his father’s death to Y, the latter new obligation is
void because, according to the law, future inheritance cannot be the object of
a contract. This new void obligation will not be deemed to have been entered
into & the old obligation will be revived.
o BUT: If the parties agree that the act of entering into the new but void
obligation will in any event extinguish the old one, then it will not be
revived.
Article 1298. The novation is void if the original obligation was void, except when
annulment may be claimed only by the debtor, or when ratification validates acts
which are voidable.
Void or Voidable Novation
• Novation of a principal obligation definitely presupposes a previously existing
obligation which is valid.
• If the previously existing obligation is void, a subsequent obligation intending
to novate it shall likewise be void
o UNLESS it is clear that such subsequent one can stand on itself &
without any reference to the old one.
• If the original obligation is merely voidable, it means that it is valid up to the
time it is annulled. Hence, it CAN be novated before it is annulled.
o Ex. If, through force & intimidation, X was obliged to give Y a car &
later the prestation was novated, again through force & intimidation,
 in such a way that X is now obliged to give Y not a car but a house, it is
only X who can file a case for annulment of the obligation.
§ If X does not do so, the new obligation may be given effect.
§ Also, if, after the obligation was novated, X asks for an increase
in the price of the house & Y agrees, then the obligation is
ratified because of the act of X.
Article 1299. If the original obligation was subject to a suspensive or resolutory
condition, the new obligation shall be under the same condition, unless it is
otherwise stipulated.
Illustrative Example
• If X is bound to give Y a house only if he passes his law course & thereafter
the obligation is novated such that X instead is bound to give Y a car without
any statement as to the suspensive condition, it shall be deemed that the
giving of the car is likewise subject to Y passing his law course.
o In order not to subject the obligation to the previous suspensive
condition, there must be an express statement to that effect in the
new obligation as novated.
Class Discussion
Q: X will give Y a ballpen if it rains next month. However, the 2 decide to novate the
contract so it says, “X will give Y the ballpen” without mentioning the condition. Will
the condition still apply?
A: Yes. Thus, the parties must agree & always read the 1st & 2nd contract.
Article 1300. Subrogation of a 3rd person in the rights of the creditor is either legal or
conventional. The former is not presumed, except in cases expressly mentioned in
this Code; the latter must be clearly established in order that it may take effect.
Subrogation
• The transfer of all the rights of the creditor to a 3rd person, who substitutes
him in all his rights
• Types of subrogation:
o Legal subrogation - that which takes effect by mandate of law & does
not proceed from an agreement of the parties
§ The law that is the basis of the subrogation must be clearly
identified & invoked to enforce the rights pertinent thereto.
o Conventional subrogation - must be clearly established by the
unequivocal terms of the substituting obligation or by the evident
incompatibility of the new and old obligations on every point.
• Both kinds principally involve the change in the person of the creditor
o Ex. X is indebted to B for P10,000 secured by a mortgage on X’s
house. For consideration paid to B, Y, with the consent of X, assumes
the credit with the stipulation that X’s obligation against B is
extinguished such that B can no longer collect from X. Y becomes the
new creditor who can enforce the claim, & if X cannot pay, Y can
foreclose on the mortgage.
110 | Katrina C. Gaw | Block C 2018
Article 1301. Conventional subrogation of a third person requires the consent of the
original parties & of the third person.
Conventional Subrogation & Consent
• Conventional subrogation must be agreed upon by the debtor, new creditor &
the old creditor. It is therefore contractual.
o For the substitution of the creditor to be legally complete in all
aspects, all parties must agree to the same.
• If the debtor does not agree & the 3rd party makes payment to the creditor,
such third party can demand payment from the debtor up to the extent the
latter has been benefited, but cannot compel the creditor to subrogate him
(3rd party) in his rights, such as those arising from mortgage, guaranty, or
penalty
Article 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without the
debtor’s knowledge;
(2) When a 3rd person, not interested in the obligation, pays with the express or
tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion
as to the latter’s share.
GR: Novation is NOT Presumed
EXC: Art. 1302
3 Cases When Legal Subrogation is Presumed
1) When a creditor pays another creditor who is preferred, even without the
debtor’s knowledge
o Under our law, claims for the unpaid price of movables sold, on said
movables, so long as they are in the possession of the debtor, up to
the value of the same is a preferred credit.
§ Any creditor who owns such credit is a preferred creditor & if
another creditor pays off the unpaid purchase price of the
movable, such paying creditor will be presumed to have been
subrogated to the rights of the creditor who originally owned
the credit
2) When a 3rd person, not interested in the obligation, pays with the express or
tacit approval of the debtor
o The debtor, in effect, agrees to the payment & hence there exists
something similar to a conventional subrogation
o CASE: Chempil v. CA
§ Facts: The petitioner bought some shares from the debtor in
exchange for money; the shares, however, which were owned
by the debtor, were being kept by a bank to satisfy the debtor’s
debt. The petitioner claimed that he was subrogated to the
rights of the creditor when he paid the indebtedness of the
 debtor to the bank. The money used for payment belonged to
the debtor. Was there subrogation?
§ Held: No. There is no subrogation. The exact wording of the
contract between the petitioner & the debtor stated that there
was to be an order of preference for the money the debtor
would give petitioner, & 1st on the list was the use of the money
to pay the creditor, as soon as the SC ruled on just how much
the debtor owed the creditor. The debtor merely paid his debt
to the bank via the petitioner, as if the petitioner were a 3rd
party agent. Thus, the bank remained the creditor & no
subrogation took place.
• Furthermore, the petitioner claimed to be the
subrogated new debtor under Art. 1302 (2), but SC said
it was not actually a disinterested party, because the
extinguishment of the debtor’s debt served as the
petitioner’s payment for the shares.
3) When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion
as to the latter’s share.
o A person interested in the fulfillment of the obligation is one who will
be affected by payment of the debtor.
§ Ex. A guarantor, surety or solidary debtor will be
released if the principal obligation of the debtor is paid.
o Ex. A is indebted to M. The loan was secured by a real estate mortgage
constituted by X on his own property for the benefit of A’s debt. In the
event X pays M, the presumption of legal subrogation will arise in favor
of X even if such payment was made without the consent of A. Since
there is merger of the characters of the creditor & the mortgagor, the
real estate mortgage is extinguished.
o CASE: Figuera v. Ang
§ Facts: An assignee of a business paid the necessary utility bills
incurred by the business. Not doing so would have resulted in
the utilities being cut off and the business coming to a halt.
The assignee contended that the amount she paid should be
deducted from the amount payable to the assignor for the
business bought by the assignee from the assignor. The
assignor objected on the ground that the payment of the utility
bill was made without her consent & thus, was separable from
the obligation of the assignee with respect to the business. Is
the assignor correct?
§ Held: No. Art. 1302 (3) applies. The assignee is a person
interested in the fulfillment of the obligation to pay the utility
bill & thus, even without the assignor’s consent, her payment
subrogated her to the rights of the utility company to collect
from the assignor. And since the assignee still had a balance to
pay the assignor with respect to the business, SC allowed legal
compensation of the mutual obligations.
111 | Katrina C. Gaw | Block C 2018
Article 1303. Subrogation transfers to the person subrogated the credit with all the
rights thereto appertaining, either against the debtor or against 3rd persons, be they
guarantors or possessors of mortgages, subject to stipulation in a conventional
subrogation.
Effects of Subrogation
• Generally, 3rd person “steps into the shoes” of the creditor & becomes the
new creditor.
• BUT: In conventional subrogation, the parties may stipulate the nature, limits,
extent & scope of the subrogation provided these are not contrary to law,
morals, good customs, public order, or public policy.
CASE: Liam v. UCPB
Lesson: An assignment of credit must be distinguished from subrogation –
Assignment of Credit Subrogation
1. The process of transferring the right of 1. The process by which the third party
the assignor to the assignee who would pays the obligation of the debtor to the
then have the right to proceed against creditor with the latter's consent.
the debtor. 2. The paying third party steps into the
2. It may be done either gratuitously or shoes of the original creditor as
onerously; in the latter case, it has an subrogee of the latter. It results in a
effect similar to a sale. subjective novation of the contract in
that a third person is subrogated to the
rights of the creditor.
The consent of the debtor is not Requires an agreement among the three
necessary in order that it may fully parties concerned – the original creditor,
produce legal effects. the debtor, & the new creditor. It is a
Instead, notice must be sent to the new contractual relation based on the
debtor, as the assignment takes effect mutual agreement among all the
only from the time he has knowledge necessary parties
thereof. A creditor may, therefore, validly
assign his credit and its accessories
without the debtor's consent.
Facts: A developer transferred to a bank its receivables due from a condominium-
buyer, to pay off the developer’s indebtedness to the bank. The condominium-buyer
later sued both the bank & the developer for them to honor the “contract to sell” she
entered into, by giving her the right of preference in relation to the units sold. The
developer, however, argued that the buyer had no cause of action because the buyer
agreed to the substitution of the developer by the bank. Is the developer correct?
Held: No. The bank should not be part of the dispute. What happened was not
subrogation where the bank assumed all the rights & obligations of the developer,
but an assignment of credit which merely transferred the collectibles of the
developer to the bank & nothing more.
The absence of the buyer’s consent to the transaction between the developer & the
bank is another indicator that this was an assignment of credit, since there, the
consent of the debtor is not essential. What the law requires is merely notice to him.
The purpose of said notice is only to inform the debtor that from the date of
assignment, payment should be made to the assignee & not the original creditor.
It must also be noted that in the assignment, there were no changes made to the
“contract to sell” between the developer & the buyer. Hence, there was no novation
by subrogation in this case.
Article 1304. A creditor, to whom partial payment has been made, may exercise his
right for the remainder, & he shall be preferred to the person who has subrogated in
his place in virtue of the partial payment of the same credit.
Preferred Creditor
• The provision contemplates a situation where a debt has been partially paid
by a 3rd person, with the consent of the debtor.
• If there is no consent of the debtor, the only right of the third party who made
the payment is to be reimbursed of the amount he has partially paid pursuant
to Art. 1236.
o Art. 1237 - Whoever pays on behalf of the debtor without the
knowledge or against the will of the latter, cannot compel the creditor
to subrogate him his rights, such as those arising from mortgage,
guaranty, or penalty.
• In the event partial payment is made by a 3rd person which extinguishes the
debtor’s obligation to pay the creditor up to the extent of said partial
payment, the creditor can still demand from the debtor the balance of the
obligation.
o In the meantime, the 3rd party who made the partial payment can
likewise demand from the debtor what he has paid to the creditor.
o In the event that the creditor & the 3rd party demands from the debtor
at the same time the payment of what is due them, the creditor will be
preferred. He will be paid first as the law states that he is preferred.
TITLE II. – CONTRACTS.
CHAPTER ONE: GENERAL PROVISIONS
Article 1305. A contract is a meeting of minds between 2 persons whereby one
binds himself, with respect to the other, to give something or to render some service.
Contract
• A juridical convention manifested in legal form, by virtue of which 1 or more
persons bind themselves in favor of another or others, or reciprocally, to the
fulfillment of a prestation to give, to do or not to do.
o BUT: There are cases where, although there is a meeting of the minds,
the contract still cannot be legally enforced because it lacks some of
the required formalities mandated by law for enforceability (e.g.,
Statute of Frauds)
• Also defined as an agreement whereby at least 1 of the parties acquires a
right, either in rem (real right) or in personam (personal right), in relation to
some person, thing, act or forbearance
Stages of Contracts
112 | Katrina C. Gaw | Block C 2018
1) Negotiation - covers the period from the time the prospective contracting
parties indicate interest in the contract to the time the contract is concluded
2) Perfection - takes place upon the concurrence of the essential elements
thereof
o A contract which is consensual as to perfection is established upon a
mere meeting of the minds, i.e., the concurrence of offer &
acceptance, on the object & on the cause thereof
o Real contract – a contract which requires for its perfection, in addition
to consent, the delivery of the object of the agreement, as in a pledge
or commodatum
o Solemn contract - compliance with certain formalities prescribed by
law, e.g. donation of real property, is essential in order to make the act
valid, the prescribed form being thereby an essential element thereof
3) Consummation - begins when the parties perform their respective
undertakings under the contract
4) Extinguishment
*Article 1306. The contracting parties may establish such stipulations, clauses,
terms & conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy.
*Autonomy in Contracts
• Freedom to stipulate terms & conditions is the essence of the contractual
system, provided such stipulations are not contrary to law, morals, good
customs, public order, or public policy
o This freedom prohibits a party from coercing or intimidating or unduly
influencing another to enter into a contract
• In order for the court to declare a contract void for being against public policy,
it must be shown that the contract, as to the consideration or thing to be
done, has a tendency to injure the public, is against the public good, or
contravenes some established interest of society, or is inconsistent with
sound policy & good morals which tends to undermine the security of
individual rights, whether of personal liability or of private property
Class Discussion
Q: If you violate a law is it necessary void?
A: No. This is only when the law violated is mandatory or prohibitive.
Q: What if it is against morals?
A: Surely, it will be void. An example would be unconscionable interest rates.
CASE: Azcuna, Jr. v. CA
Lesson: Even contracts that seem unfair, though are freely entered into, are
protected by the law.
Facts: A lease contract provided that, if the lessee does not vacate the premises on
due date, the lessee shall be charged P1,000 per day as damages without prejudice
to other remedies which the lessor is entitled to. There is no evidence of undue
influence or force. Is the contract valid?
Held: Yes. After entering into such an agreement, petitioner cannot thereafter turn
his back on his word with a plea that on him was indicted a penalty shocking to the
conscience & impressed with inequity as to call for the relief sought on the part of a
judicial tribunal.
CASE: Pakistan Int’l Airlines (PIA) v. Ople
Lesson: The principle of autonomy in contracts is not absolute. Laws are always
deemed written into contracts; therefore, contracts cannot circumvent the force &
effect of the law.
Facts: PIA invokes par. 5 & 6 of its contract of employment with ex-employees X & Y,
arguing that its relationship with them was governed by the provisions of its contract
rather than by the Labor Code.
• Par. 5 of that contract set a term of 3 years for that relationship, extendible
by agreement between the parties
• Par. 6 - notwithstanding any other provision in the contract, PIA had the right
to terminate the employment agreement at any time by giving one-month’s
notice to the employee or, in lieu of such notices, one-month’s salary.
Is the contract valid?
Held: No. Parties may not contract away applicable provisions of law especially those
which are mandatory & prohibitory16 & dealing with matters heavily impressed with
public interest. The law relating to labor & employment is clearly such an area.
The contract is in direct contravention with laws on security of tenure found in the
Labor Code, & leaves the employment of X & Y at the option of PIA.
*CASE: Industrial Personnel & Management Services v. De Vera
Lesson: GR: Philippine law applies even to overseas employment contracts. Even if
an OFW is employed abroad, he still has his rights to security of tenure, human
conditions of work, & a living wage under the Philippine Constitution.
EXC: In the following cases, when foreign law can govern an overseas contract –
(1) It is expressly stipulated that the foreign law will apply in the contract;
(2) Foreign law must be proven before the courts pursuant to Philippine rules on
evidence;
(3) Foreign law stipulated is not contrary to law, morals, good customs, public
order, or public policy; &
(4) Processed through the POEA
Before an employer may invoke applicability of a foreign law to an overseas
employment contract, the 4 requisites must be shown.
• For (1), if no stipulation exists, then Philippine labor law will apply in
accordance with the principle of lex loci contractus (i.e., the law to be applied
is the one in the place where the contract was made).
• For (2), if this is lacking, then the doctrine of processual presumption
operates. This doctrine means that when a foreign law is not pleaded, or even
if pleaded, is not proved, the presumption is that the foreign law is the same
as that of our own
16 Art. 5, Civil Code: Acts executed against mandatory or prohibitory laws shall be void, except when the law
itself authorizes its validity.
113 | Katrina C. Gaw | Block C 2018
CASE: Manila Bay Club Assoc. v. CA
Lesson: Contracts are respected as the law between the contracting parties, & they
may establish such stipulations as they may want to include.
Facts: Because of the failure of the petitioner to comply with the insurance clause of
the lease contract, the lessor terminated the lease pursuant to a provision in the
same lease contract stipulating that failure to comply with any provision of the
contract shall allow the lessor to rescind the same. Is the stipulation valid?
Held: Yes. It was meant to ensure strict compliance with the mandatory provisions of
the contract, as expressed by the language used in its drafting, such as “the building
must be insured and the insurance premium must be for the account of the
LESSEE.”
CASE: Phil. Am. General Insurance Co. v. Mutuc
Lesson: When a party is free to choose whether to accept the stipulation of a
contract, even if there may seem to be some adhesion, & chooses to sign it, he is
bound by his consent.
Facts: X, after agreeing that his bond may be renewed or extended without
notification, which was stipulated by the company that hired him to ensure his
faithful performance, claimed that such provision was void because it is a contract
of adhesion; the lower court held him liable for the bond. Is the contract valid?
Held: Yes. X was not at all compelled to agree to it. X was free to act either way.
CASE: Teves v. People’s Homesite & Housing Co.
Lesson: In the absence of express legislation or constitutional prohibited, a court, in
order to declare a contract void for being against public policy, must find that the
contract, as to the consideration or the thing to be done –
• Has a tendency to injure the public,
• Is against the public good,
• Contravenes some established interest in society, or
• Is inconsistent with sound policy or good morals which tends to undermine
the security of individual rights, whether of personal liability or of private
property
CASE: De Leon v. CA
Lesson: The continued existence of a marriage cannot be made the basis of a
contract.
Facts: The parties, who were husband & wife, stipulated that “in consideration for a
peaceful & amicable termination of relations between the undersigned & her lawful
husband,” the husband would give some properties to the wife & monthly support
for the children, & the wife would agree to a judicial separation of property plus the
amendment to the divorce proceedings initiated by the wife in the US to conform to
the agreement. Is the agreement valid?
Held: No. The agreement is contrary to law, Filipino morals & public policy because
the consideration of the agreement is the termination of the marriage by the parties
which they cannot do on their own & without any legal basis.
Laws Affecting Contracts
 • Only laws existing at the time of the execution of a contract are applicable
thereto
o Later statutes do not govern said contract unless the latter is
specifically intended to have a retroactive effect.
• A later law which enlarges, abridges or in any manner changes the intent of
the parties to the contract impairs the contract itself & cannot be given
retroactive effect without violating the constitutional prohibition against
impairment of contracts
o However, while a contract is deemed to be the law between the
contracting parties, non-impairment of contracts or vested rights
clauses will have to yield to the State’s police power, which is deemed
written into every contract
CASE: Ortigas v. CA
Lesson: Some laws, especially involving State police power, have a retroactive effect
& can extinguish contractual stipulations.
Facts: The contract of sale provided that the property shall only be used for
residential purposes. But the buyer subsequently built a commercial edifice in
consonance with a later zoning ordinance classifying the area as a commercial zone.
Was there violation of the contract on the part of the buyer?
Held: No. The restrictions of the contract of sale were deemed extinguished by the
retroactive effect of the zoning ordinance.
Class Discussion
1. Violation of a law generally does NOT make a contract void
2. The law violated must be mandatory or prohibitory to make the contract void
Article 1307. Innominate contracts shall be regulated by the stipulations of the
parties, by the provisions of Titles I & II of this Book, by the rules governing the most
analogous nominate contracts, & by the customs of the place.
Innominate Contracts
• Those which are not specifically governed by any Civil Code provision or
special law, but which likewise involve the fulfillment or accomplishment of
some prestations
Innominate contracts are governed by the ff.:
1) Stipulation of the parties
o The parties may have some arrangements which they feel should bind
them but which do not have any exact legal provisions in the Civil
Code to govern the nature of the obligation appertaining to it
2) Provisions on obligations & contracts in Title I & II of the Civil Code
o Parties can stipulate any provision, term & condition that will govern
the enforceability of their agreement provided they are not contrary to
law, morals, good customs, public order, or public policy
3) Rules governing the most analogous nominate contracts.
114 | Katrina C. Gaw | Block C 2018
o Civil Code’s nominate contracts: sale, barter or exchange, lease,
partnership, agency, loan, deposit, aleatory contracts, compromises,
guaranty, pledge, mortgage & antichresis.
o Special laws - insurance, real estate mortgage, & charter party
4) Customs of the place – rules of conduct by repetition of acts uniformly
observed as a social rule, legally binding & obligatory
o Must be proved as a fact according to the rules of evidence
Kinds of Innominate Contracts
1) Do ut des –the parties mutually give each other a certain thing
2) Facio ut facias – the parties mutually render a service
3) Do ut facias; facias ut des - a mixed prestation such that one party gives
something & the other party does something
o CASE: Dizon v. Gaborro
§ Facts: A contract was entered into whereby the respondent
assumed to pay the indebtedness of petitioner to certain
banks, and in consideration therefor, respondent was given the
possession, enjoyment & use of certain lands until petitioner
can reimburse fully the respondents the amounts paid by the
latter to the banks, to accomplish the following ends: (a)
payment of the bank obligations; (b) make the lands productive
for the benefit of the possessor; (c) assure the return of the
land to the petitioner thus rendering equity & fairness to all
parties concerned. What kind of contract is this?
§ Held: This was an innominate contract “to give & to do”, which
mixed the obligations & principally uses antichresis17 between
the parties
o *CASE: Corpus v. CA
§ Facts: An agreement as to legal fees between a lawyer & his
client were not reduced into writing, but there were indicators
that payment was contemplated by the parties. Was payment
justified?
§ Held: Yes. Payment was justified by virtue of the innominate
contract of facio ut des (I do & you give) which is based on the
principle that “no one shall unjustly enrich himself at the
expense of another.”
Class Discusssion
Contract of a piece of work, mutuum, commodatum, depositum – there are
nominate contracts
*Article 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
Mutuality of Contracts
17 A contract whereby a debtor pledges (i.e., conveys possession but not title) real property to a creditor,
allowing the use and occupation of the pledged property, in lieu of interest on the loan; pay your
indebtedness first before the interest of your collateral.
 • A contract violates mutuality when it leaves the validity or compliance of the
contract entirely to the will of one of the contracting parties
• Violate this & the contract is void
*CASE: GF Equity v. Valenzona
Lesson: The ultimate purpose of the mutuality principle is to nullify a contract
containing a condition which makes its fulfillment or pre-termination dependent
exclusively upon the uncontrolled will of one of the contracting parties.
Facts: The contract says,
“If at any time during the contract, the COACH, in the sole opinion of the
CORPORATION, fails to exhibit sufficient skill or competitive ability to coach the
team, the CORPORATION may terminate this contract.”
On the basis of this provision, the coach was terminated. Was the termination of
the coach proper?
Held: No. The termination of the coach on the basis of that provision was not proper
since the same is against the attribute of mutuality of contracts.
Art. 1308 was phrased to emphasize the principle that the contract must bind both
parties. This is based on the principle that obligations arising from contracts have
the force of law between the contracting parties and secondly, that there must be
mutuality between the parties based on their essential equality to which is
repugnant to have one party bound by the contract leaving the other free therefrom.
Its ultimate purpose is to render void a contract containing a condition which makes
its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties.
In the case at bar, the contract incorporates the right of GF Equity to pre-terminate
the contract that if the coach, in the sole opinion of the corporation, fails to exhibit
sufficient skill or competitive ability to coach the team, the corporation may
terminate the contract. The assailed condition transgresses the principle of
mutuality of contracts. It leaves the determination of whether Valenzona failed to
exhibit sufficient skill or competitive ability to coach Alaska team solely to the
opinion of GF Equity. Whether Valenzona indeed failed to exhibit the required skill or
competitive ability depended exclusively on the judgment of GF Equity. In other
words, GF Equity was given an unbridled prerogative to pre-terminate the contract
irrespective of the soundness, fairness or reasonableness, or even lack of basis of
its opinion.
To sustain the validity of the assailed paragraph would open the gate for arbitrary
and illegal dismissals. The stipulation being violative of the mutuality principle
underlying Art. 1308, it is void.
The nullity of the stipulation notwithstanding, GF Equity was not precluded from the
right to pre-terminate the contract. The pre-termination must have legal basis,
however, if it is to be declared justified. GF Equity failed, however, to advance any
ground to justify the pre-termination. It simply invoked the assailed provision which
is void. While GF Equity’s act of pre-terminating Valenzona’s services cannot be
considered willful as it was based on a stipulation, albeit declared void, it, in doing
so, failed to consider the abuse of rights principle enshrined in Art. 19.
*Instances cited by the SC where Art. 1308 was not violated –
• Jespajo Realty v. CA: The express provision in the lease agreement of the
parties that violation of any of the terms of the contract shall be sufficient
115 | Katrina C. Gaw | Block C 2018
ground for termination thereof by the lessor, removes the contract from the
application of Art. 1308.
• Taylor v. Uy Tieng Piao: this Court ruled that now Art. 1308 creates no
impediment to the insertion in a contract for personal service of a resolutory
condition permitting the cancellation of the contract by one of the parties.
Such a stipulation does not make either the validity of the fulfillment of the
contract dependent upon the will of the party to whom is conceded the
privilege of cancellation; for where the contracting parties have agreed that
such option shall exist, the exercise of the option is as much in the fulfillment
of the contract as any other act which may have been the subject of
agreement.
Class Discussion
Q: Contract says: “If in the opinion of the corporation, you are no longer fit to be a
coach…” Is this violative of Art. 1308?
A: Yes. It is so subjective on the part of one party.
Q: Contract says: “If out of 10 games, you lost 7 games, the corporation shall
termination you.” Is this allowed?
A: Yes, because there is an objective standard (unlike the one in GF Equity).
CASE: Garcia v. Rita Legarda, Inc.
Lesson: A contract expressly giving to one party the right to cancel the same if a
resolutory condition therefor agreed upon — similar to the one under consideration —
is not fulfilled, is valid, the reason being that when the contract is thus cancelled, the
agreement of the parties is in reality being fulfilled.
Facts: A contract to sell a real property stipulated that the vendor was given the right
to unilaterally rescind or terminate the contract in the event the other party failed to
pay any of the required installments of the purchase price. In particular, the contract
reads:
“In case of default in the payment of installments by the vendee, he shall have
(1) “a month of grace”, & (2) should said month of grace expire without the
vendee paying his arrears, he shall have another “period of 90 days” to pay “all
the amounts he should have paid,” etc., then the vendor “has the right to
declare this contract cancelled & of no effect.”
Is the stipulation valid?
Held: Yes. The above stipulation merely gives the vendor “the right to declare this
contract cancelled & of no effect” upon fulfillment of the conditions therein set forth.
It does not leave the validity or compliance of the contract entirely to the will of one
of the contracting parties.
CASE: Allied Banking Co. v. CA
Facts: A stipulation in a lease contract stated the contract “may be renewed for a
like term at the option of the lessee.” Is this allowed?
Held: Yes. It does not go against the attribute of mutuality of contracts. Such right on
the part of the lessee is part of the consideration in the contract; the lessor is free to
give or not to give the option to the lessee. The clause likewise means that, once the
lessee exercises the option to renew, all the terms & conditions of the old contract
are renewed and not only the period.
Contract of Adhesion
• One wherein a party, usually a corporation, prepares the stipulations in the
contract, while the other party merely affixes his signature or his “adhesion”
thereto.
• These types of contracts are as binding as ordinary contracts.
o The party who adheres to the contract is free to reject it entirely.
• BUT: Courts will not hesitate to rule out blind adherence to terms where facts
& circumstances will show that it is basically one-sided.
o Generally, contracts of adhesion are valid, except when they are highly
inequitable
*CASE: PNB v. CA
Lesson: (1) Contracts dependent on the sole will of one of the parties are generally
void, especially contracts of adhesion where the parties are not in equal footing.
(2) Constant increases of interest at the will of the creditor are contrary to law (they
make potestative contracts).
Facts: PNB & the debtor entered into a loan agreement stipulating, among others,
that PNB was authorized to increase the stipulated 18% interest per annum within
the limits prescribed by law at any time depending on whatever policy PNB may
adopt in the future provided that the interest rate on the note shall be
correspondingly decreased in the event that the applicable maximum interest rate is
reduced by law or by the Monetary Board. PNB indeed increased the rates to 32%,
then subsequently to 41% & then finally to 48% within the year over the objection of
the debtor
Held: The stipulation is void. P.D. 116 specifically provides that increases in interest
rates shall be made “once every twelve months” & furthermore such increases
violated the mutuality of contracts. It would have invested the loan agreement with
the character of a contract of adhesion, where the parties do not bargain on equal
footing, the weaker party’s (the debtor) participation being reduced to the alternative
“take it or leave it”. Such contract is a veritable trap for the weaker party whom the
courts of justice must protect against abuse and imposition.
Q: Contract says: “Interest rate shall be increased when commercial rate increases.”
Does this violate Art. 1308?
A: Yes. It is unfair because it does not take into consideration future decreases; this
is potestative and hence void. There is no essential equality in the transaction; there
is no estoppel because the contract is essentially void and violates Art. 1308.
CASE: Philippine Savings Bank v. Spouses Castillo
Facts: The promissory note here had an escalation & a corresponding de-escalation
clause in relation to interest. Is the clause in the note void?
Held: No. But nevertheless, the validity of the escalation close does not give the
bank the unbridled right to unilaterally adjust interest rates. The adjustments should
still be subject to the mutual agreement of the parties. In light of the absence of
consent on the part of the debtors to the modification of the interest rates, the
adjusted rates cannot bind them notwithstanding the inclusion of a de-escalation
clause in the loan agreement.
116 | Katrina C. Gaw | Block C 2018
CASE: Serra v. CA
Lesson: Not all contracts of adhesion are void. There must be a showing that it is
highly inequitable for such contract to be invalidated.
Facts: A CPA-Lawyer assails the validity of the contract he entered into. Is the
stipulation valid?
Held: Yes. Since the petitioner was already a CPA-Lawyer, he should have been more
cautious in his transactions, particularly where it concerns valuable properties.
*4 Cases When the Court Can Intervene into Contract of 2 Persons
GR: Courts cannot intrude into or change the stipulations of parties; the court can
only resolve conflicts arising from the contract.
EXC: The courts can intervene in the ff. situations –
1) If the contract is inequitable, when the determination of the performance was
left to the will of a 3rd person, the court can adjust it.
2) If there is a penal clause that is iniquitous, the court can remove it or reduce
the penalty.
3) Rebus sic stantibus – when there is an absolute, exceptional change of
circumstances
4) If there is reason for the court to fix a period
a. When a suspensive potestative condition is void, but the obligation on
which it hinges is still valid
b. When the debtor binds himself to pay “when his means permit him to
do so”
c. When one party seeks rescission, but the court finds just cause to fix a
period
d. When from the nature & circumstances of the obligation, it is obvious
that a period was intended by the parties
e. When the period is dependent on the sole will of the debtor
Article 1309. The determination of the performance may be left to a 3rd person,
whose decision shall not be binding until it has been made known to both
contracting parties.
Article 1310. The determination shall not be obligatory if it is evidently inequitable.
In such case, the courts shall decide what is equitable under the circumstances.
3rd Party Intervention
• The parties may constitute a 3rd party to determine the performance of the
contract. The decision becomes effective when both contracting parties
already have knowledge of the decision.
o It will not be binding if only one of the parties knows of the decision.
• When one agrees to let a 3rd person decide, there is already a contract.
However, what remains is to figure out how something is to be done.
o Cause, object, & consent are already present; just the MANNER is not
yet settled.
• This determination MUST not destroy the nature of mutuality of the contract
between the principal parties based on their essential equality.
 o The court shall decide what is equitable under the circumstances.
o The court cannot decide to invalidate, but can fix the manner
• Ex. A & B enter into a contract whereby A will sing in the nightclub of B for 2
days. The contract stipulates that, for 2 days, A is to be paid P5,000 for such
number of songs to be determined by X 2 days before the performance, &
any violation renders the contract ineffectual entitling B not to pay A any
consideration as a penalty. They sign the contract. Later, X makes a
determination that A is to sing 20 songs, selected by X continually without a
break starting from 6PM-2AM; &, if the nightclub is filled with people, A will
give an encore 3 times divided into 30 minutes each time. A shall only sing
those specifically requested by the audience, & in case he does not know the
song, his fee is to be reduced. X notified A two days before the performance
that the latter will sing 15 English rock songs & 5 Norwegian songs which
obviously A does not know.
o This is clearly a situation where the performance is so inequitable. In
fact the contract itself & not merely the determination of its
performance is almost left to the will of the third party & it greatly
favors the nightclub owner.
o A can go to court which will decide what is equitable under the
circumstances. Court intervention is necessary in order that the intent
of the parties will not be rendered nugatory by the inequitable terms
and conditions of a third party.
*Article 1311. Contracts take effect only between the parties, their assigns & heirs,
except in case where the rights & obligations arising from the contract are not
transmissible by their nature, or by stipulation, or by provision of law. The heir is not
liable beyond the value of the property he received from the decedent.
If a contract should contain some stipulation in favor of a 3rd person, he may
demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly & deliberately conferred a favor
upon a 3rd person.
DEAN MEL’S LECTURES
Relativity of contracts – binds the contract between the parties.
In contracts, there are invisible and visible parties. The visible parties are the
principal parties themselves, but the invisible parties are the assigns and heirs.
Hence, if the principal party (lessee) dies, can the lessor eject the heirs? No,
because they are the invisible parties (DKH v. CA)
The general rule is that rights are transmissible.
The exceptions are:
1. Those provided by law to be intransmissible
• Q: Can you sublease without consent of the lessor?
• A: Yes.
• Q: Can you assign to another party a property leased?
• A: NO, by express provision of the law.
117 | Katrina C. Gaw | Block C 2018
• Q: Can a solidary creditor assign his credit to another person?
• A: Yes, but only with the consent fo the others.
2. By the stipulation of the parties
3. By nature
Exceptions to Relativity: (The people in this list are not the listed parties, visible or
invisible, but they are affected negatively or positively)
1. Tort interference
• Q: A & B have a contract where A sings in the nightclub. C asks A, hey how
much do you earn a day in B’s nightclub? A says P50. C says that’s too
cheap! Is that enough to put C in bad faith?
• A: No. C will only be liable (1) if he is in bad faith & (2) he gains from it & (2)
C’s intention is to gain from it. Hence, there must be malice or C cannot be
made liable.
2. Contracts pour autrui (Art. 1311) - e.g. credit card & insurance contracts
3. Contracts creating real rights (Art. 1312), 3rd persons who come into possession
of the object of the contract are bound thereby – e.g., real rights and mortgages,
because the latter will attach to real property
• Q: Can a contract stipulate that the mortgagor cannot sell the property
while the contract is effective?
• A: No. By express stipulation of the law, that is a void contract.
4. Contracts intended to defraud creditors (Art. 1318) – a rescission case can be
filed (accion pauliana)
Relativity of Contracts
• Generally, contracts take effect only between the immediate parties to the
same.
• General rules:
o Contracts are transmissible to heirs & assignees; they are the
“invisible parties”
o A stranger cannot invoke the contract of another for his own interest
or for a source of an alleged prejudice.
o A party cannot impose an obligation or liability to one who, under its
terms, is a stranger to the said contract.
o Real rights are transmissible, personal rights are not.
CASE: Integrated Packaging Corp. v. CA
Lesson: Contracts can only bind the parties who entered into it, & it cannot favor or
prejudice a 3rd person, even if he is aware of such contract & has acted with
knowledge thereof.
Facts: A company was in default in paying its supplier, & sued the same supplier
allegedly for causing damage to it in that it was not able to comply with its contract
with Philacor because the supplier failed to deliver the materials which were
supposed to be used by the company for the orders of Philacor. Can the company
get damages?
Held: No. SC did not award damages to the company. Not only because the non-
delivery of the materials by the supplier was justified due to the non-payment by the
company of the deliveries, but also because the supplier has absolutely nothing to
do with the contract between the company & Philacor.
• The contract between the company & the supplier did not have a direct
bearing in the contract between the company & Philacor.
o The papers in the 2 contracts are different.
o The demand by Philacor was made after the supplier filed its
complaint in court.
CASE: Games & Garments Developers v. Allied Banking
Lesson: 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 of.
Facts: The bank merely facilitated the sale of the property & provided financing for
the deed of sale. Can the bank be made liable later on when the balance of the
purchase price is sought?
Held: No. The bank in this case was neither a party to the deed of sale nor an
assignee thereof. Even if the bank employees assisted in the execution of the deed
of sale of the property between the buyer & seller, this did not make the bank a party
to the deed & liable therefor.
CASE: Spouses Pontigon v. Heirs of Sanchez
Lesson: The principle of relativity of contracts extends to the principal parties’
assigns & heirs. Hence, heirs are bound by extrajudicial settlements signed by their
deceased parent while the parent was still alive. Assigns & heirs are not deemed
third parties to the contract within the contemplation of the law. There is furthermore
no distinction on whether the contract is oral or written, or in a public or private
instrument (& hence, whether notarized or not notarized).
Relativity & Real Property
• Principal parties include heirs & assigns
• Under certain conditions, the law operates to effect the transfer of an action
from one person to another without any concurring act on the part of the
parties or indeed without their assent.
• Usual ways interests in land are transferred:
o Marriage
o Death
• Through the principle of relativity, real property rights are transferred.
o With real property, upon its transfer, covenants may be annexed to the
contract which run with the land & one who subsequently acquires an
interest therein takes it subject to the benefits and obligations of such
covenants.
§ The period of a contract of lease is binding upon the heirs of
the lessor
§ Likewise, a sublessee is bound by the terms of the principal
contract of the lessor & the lessee
§ If the predecessor was duty-bound to reconvey land to another,
& at his death the reconveyance had not been made, the heirs
can be compelled to execute the proper deed for reconveyance
118 | Katrina C. Gaw | Block C 2018
*CASE: DKH Holdings Corp. v. CA
Lesson: The death of a party does not excuse non-performance of a contract which
involves a property right, & the rights & obligations thereunder pass to the personal
representatives of the deceased. Similarly, non-performance is not excused by the
death of the party when the other party has a property interest in the subject matter
of the contract.
Facts: The heir of the lessor refused to honor the lease contract entered into by the
deceased lessor contending that, though he inherited the property from the
deceased lessor, he was not a party to the lease contract. Was the heir’s action
correct?
Held: No. The heir must honor the contract because in inheriting the property, he
acquired all the rights & obligations of the deceased lessor with respect to the
property.
As the successor of his deceased mother, the heir only succeeds to whatever rights
his mother had & what is valid & binding against her is valid & binding against him.
Transmission of Rights & Obligations
• May likewise be agreed upon by the parties.
o Ex. A contract may provide that, in the event a contractor fails to finish
the house on time, another contractor may assume his place in the
contract subject to the same terms & conditions.
• If the transferee is the heir, he shall not be held liable beyond the value of the
property he received from the decedent.
o Ex. if the deceased left the heir a property which, however, was a
collateral for a debt which the deceased incurred during his lifetime,
the creditor can go against the property to pay off the indebtedness of
the deceased. If the property is not sufficient to satisfy the debt, the
creditor cannot personally go against the heir to collect the deficiency.
Contracts cannot take effect with respect to theirs or assigns when:
(1) The nature of the contract does not allow transmission.
o Ex. A contract which binds a person to sing in a particular nightclub
because of the special way he sings his songs is not transmissible
because his hiring was personal & his abilities cannot be exactly
duplicated by any person. Plus, the audience may have bought the
tickets to the show precisely because that particular singer will sing.
o Where acts stipulated in a contract require the exercise of special
knowledge, genius, skill, taste, ability, experience, judgment,
discretion, integrity, or other personal qualification of one or both
parties, the agreement is of a personal nature, & terminates on the
death of the party who is required to render such service
§ A good measure of determining whether a contract terminates
upon the death of one of the parties is whether it is of such a
character that it may be performed by the promissor’s personal
representative.
§ Contracts to perform personal acts which cannot be as well
performed by others are discharged by the death of the
promissory.
 o Conversely, where the service or act is of such a character that it may
as well be performed by another, or where the contract, by its terms,
shows that performance by others was contemplated, death does not
terminate the contract or excuse non-performance
(2) The parties stipulate that no transmission of rights is allowed
o Ex. Parties to a contract of lease can stipulate that the lease contract
cannot be subleased & a sublease without the consent of the lessor
shall allow the lessor to terminate the lease
(3) The law provides non-transmission
o In a contract of voluntary deposit, the depositary cannot deposit the
thing with a 3rd person, unless there is a stipulation to the contrary
o Art. 1649: In lease, the lessee cannot assign the lease without the
consent of the lessor, unless there is a stipulation to the contrary
Contracts Pour Autrui
• Relates to Art. 1312, 2nd par. - If a contract should contain some stipulation
in favor of a 3rd person, although he is not a party to the contract, he may
demand its fulfillment provided he communicate his acceptance to the
obligor before its revocation.
o A mere incidental benefit or interest of a person is not sufficient.
o There must be a clear intent to benefit the 3rd person.
Requisites of a Contract Pour Autrui
1) There must be a stipulation in favor of a 3rd person.
o It is unnecessary that the 3rd person be always named in the contract.
2) The stipulation must be a part, not the whole of the obligation.
o The benefit must only be a part of the contract contained in one of its
stipulations & should not constitute the whole contract.
§ Ex. Letter of credit in commercial transactions in favor of the
exporter is the result of a stipulation pour autrui.
• In a letter of credit transaction, the importer & a bank
enters into an agreement where the bank pays an
exporter in another country for goods ordered &
delivered to the importer. The exporter-beneficiary
therefore benefits from the stipulation in a contract
between the importer & the bank.
3) The contracting parties must have clearly & decidedly conferred a favor upon
a 3rd person, NOT a mere incidental benefit or interest.
4) Neither of the contracting parties bears the legal representation or
authorization of the 3rd party.
5) The favored party must have communicated his acceptance of said
stipulation to the obligor before its revocation.
o GR: It is not necessary for the 3rd party to make a formal acceptance
prior to bringing of the suit. The assent of the beneficiary will be
presumed.
§ The commencement of an action to enforce a promise is
sufficient as an acceptance.
119 | Katrina C. Gaw | Block C 2018
CASE: Marmont Resort Hotel v. Guiang
Lesson: In a contract pour autrui, the parties must give way to the benefit that will be
granted to the 3rd party.
Facts: A memorandum of agreement (MOA) was entered into between Marmont
Hotel & Maris Trading for the installation of a complete water supply facility.
• The installation encroached on the property of X with the X’s permission.
• The encroachment eventually prompted Maris Trading & X to enter into a 2nd
MOA stipulating that, for valuable monetary consideration & the fact that the
installation & the drilling of the water facility for the benefit of Marmont Hotel
were made in the property of X with his consent, X shall cede their possessory
rights over the property to Maris Trading.
• X, however, refused to let Marmont Hotel use the water facility in his property.
Can X be held liable?
Held: Yes. X can be held liable for refusing Marmont Hotel, because it is clear that
Marmont was to benefit from the 2nd MOA. In fact, said stipulations appear to have
been designed precisely to benefit Marmont &, thus, partake of the nature of
stipulations pour autrui.
Marmont was not a party to that 2nd MOA, but X could not have prevented Maris
Trading from entering the property possessory rights it already acquired. That X
remained in physical possession of that particular bit of lane, is of no moment: they
did so simply upon the sufferance of Maris Trading.
CASE: Coquia v. Fieldman’s Insurance Co.
Lesson: Certain types of insurance contracts are also contracts pour autrui.
Facts: On Dec. 1, 1961, Fieldman’s issued, in favor of the insured, a common carrier
accident insurance policy, covering the period from Dec.1, 1961-Dec. 1, 1962. It
was stipulated in said policy that Fieldman’s would indemnify the insured in the
event of accident caused by car accidents against all sums which the insured will
become legally liable, including death of any person in the vehicle.
• While the policy was in force, a taxicab of the insured, driven by Coquia, met
a vehicular accident at Pangasinan & died.
o The insured filed therefore a claim for P5,000 to which Fieldman’s
replied with an offer to pay P2,000, by way of compromise. The
insured rejected the same & made a counter-offer for P4,000, but
Fieldman’s did not accept it.
• On Sept.18, 1962 the insured & Coquia’s parents filed a complaint against
the Fieldman’s to collect the proceeds of the afore-mentioned policy.
• In its answer, Fieldman’s admitted the existence thereof, but pleaded lack of
cause of action because the Coquias have no contractual relations with
Fieldman’s.
Can Fieldman’s be held to the Conquias?
Held: Yes. This is a contract pour autrui, because it was executed by Fieldman’s &
the insured to favor 3rd persons—the drivers of insured. The stipulations of the
contract reveal such intent:
• It promised to indemnify the insured in the event of an accident which the
insured will become legally liable to pay in respect to death, bodily injury of its
drivers.
 • Fieldman’s also stated that it would indemnify the personal representatives
of the driver if he dies.
• Fieldman’s may, at its option, make the payable directly to the heirs or
claimants.
This character being is manifest by the fact that the deceased driver paid 50% of the
corresponding premiums, which were deducted from his weekly commissions. Under
these conditions, it is clear that the Coquias, as the sole heirs of the deceased, have
a direct cause of action against Fieldman’s &, since they could have maintained this
action by themselves, without the assistance of the insured, it goes without saying
that they could & did properly join the latter in filing the complaint.
CASE: Mandarin Villa Inc. v. CA
Lesson: A credit card holder’s use of a credit card is a sign of acceptance of the
stipulation, communicated to the obligor — the establishment that should process &
accept the payment through credit card.
Facts: The owner of a restaurant refused to honor a credit card for the purpose of
payment from a customer on the ground that its machine validating such credit card
indicated that the latter had expired, when in fact it had not expired as clearly
indicated in the card itself.
The owner would have known such fact had it merely followed the rules it agreed
upon with the credit card company providing that, in cases of expiration of the credit
card as indicated in the machine, the restaurant owner should examine the card
itself & follow certain other procedures. Can the restaurant owner be held liable?
Held: Yes. The restaurant owner is liable for damages due to his negligence, as this
is a contract pour autrui. The restaurant is affiliated with the credit card company &
they signed an agreement so that the card’s holders could use their cards to pay in
establishments.
The holder’s offer to pay by means of his credit card constitutes not only an
acceptance of the said stipulation but also an explicit communication of his
acceptance to the obligor.
CASE: Young v. CA
Lesson: The favored party must also communicated acceptance of the right of first
refusal to the obligor, lest the right be revoked by operation of law.
Facts: X owns a piece of land & a building. It rents out several rooms in the building,
including one room to Y. X received an order from the City Engineer to demolish the
building. Y filed an action to annul the demolition order.
• As an incident to this case, the parties executed a compromise agreement
provides that Y & all persons claiming rights under him bind themselves to
voluntarily & peacefully vacate the premises which they are occupying as
lessees which are the subject of the demolition order & to surrender
possession thereof to X within 60 days from written notice, subject to the
proviso that should X decide to sell the subject property, “Y would have the
right of first refusal.”
2 years later, X sold the property by way of dacion to Z. The land was subdivided into
2 parcels, both in the name of Z. Z sold half the property to B & half to C.
• X filed a case for the annulment of the sale to C & for specific performance &
damages against Y & Z.
120 | Katrina C. Gaw | Block C 2018
o X said he was not given the right of first refusal promised to him.
• The lower courts ruled that X failed to show that he demanded his right of
first refusal from Y before Y sold the property to Z, & that, anyway, if the
stipulation was indeed a contract pour autrui, X failed to inform the obligor of
his acceptance.
Should X’s case prosper?
Held: No. The petition is devoid of merit. Assuming that X is correct in claiming that
this is a stipulation pour autrui, it is unrebutted that he did not communicate his
acceptance whether expressly or impliedly. He insists however, that the stipulation
has not yet been revoked, so that his present claim is still timely.
BUT the sale of subject property to some other person or entity constitutes in effect
a revocation of the grant of the right of first refusal to X.
*Exceptions to Relativity
1) Tort interference
2) Contracts pour autrui
3) Contracts creating real rights, 3rd persons who come into possession of the
object of the contract are bound thereby
4) Contracts intended to defraud creditors
Article 1312. In contracts creating real rights, 3rd persons who come into possession
of the object of the contract are bound thereby, subject to the provisions of the
Mortgage Law & the Land Registration Law.
Real Rights & 3rd Persons
• Another example of when a 3rd person not a party to a contract is affected or
may be subject to its provisions.
o Ex. A lease of real estate recorded in the Registry of Property between
a lessor & lessee shall bind a subsequent buyer who purchases &
comes into the possession of the contract’s object which is the
property leased. The latter is bound to honor the contract entered into
by the former lessor.
§ A sublessee is also bound by the contract of the lessor and the
lessee. If the lessor terminates the lease contract for a valid
cause, the sublessee can be ejected from the leased premises
even if he is not a party to the lease contract.
§ If the lessor was successful in judicially ejecting the lessee, the
following can likewise be ejected despite the fact that they
were not made parties to the ejectment suit:
1. Trespassers, squatters, or agents of the defendant-
lessee fraudulently occupying the property to frustrate
the judgment;
2. Guest or other occupants of the premises with the
permission of the defendant-lessee;
3. Transferees pendente lite;
4. Sub-lessees;
5. Co-lessees;
 6. Members of the family, relatives & other privies of the
defendant-lessee.
o Ex. A property mortgaged as a collateral of a debt & recorded in the
Registry of Property shall bind any subsequent possessor-owner of the
same.
CASE: Estate of Llenado v. Llenado
Lesson: (1) The rights & obligations pass to the heirs of the deceased and the heir of
the deceased lessor is bound to respect the period of the lease. The same principle
applies to the option to renew the lease. As a general rule, covenants to renew a
lease are not personal but will run with the land. Consequently, the successors-in-
interest of the lessee are entitled to the benefits, while that of the lessor are
burdened with the duties and obligations, which said covenants conferred and
imposed on the original parties.
(2) The provisions of a lease contract which was transmitted to the heirs must be
exercised; otherwise, it can be lost.
Facts: In a 1978 Agreement, Romeo, as lessee, agreed to transfer his rights &
interests under the lease with option to renew in favor of Orlando, the latter’s heirs,
successors, & assigns. When Orlando died in 1983, the right was transmitted to his
heirs. The lot, however, was subsequently sold in 1987. Do the heirs have a right at
this present stage to argue that they should still be entitled to lease the property?
Held: No. When Orlando died on Nov. 7, 1983, the lease contract was set to expire
26 days later or on Dec. 3, 1983, unless renewed by Orlando’s heirs for another 4
years. While the option to renew is an enforceable right, it must necessarily be first
exercised to be given effect.
A clause relative to the renewal of the lease agreement at the option of the lessee
gives the latter an enforceable right to renew the contract in which the clause is
found for such time as provided for. The agreement is understood as being in favor
of the lessee, & the latter is authorized to renew the contract and to continue to
occupy the leased property after notifying the lessor to that effect. A lessor’s
agreement to renew gives a privilege to the tenant, but is nevertheless an executory
contract, & until the tenant has exercised the privilege by way of some affirmative
act, he cannot be held for the additional term. In the absence of a stipulation in the
lease requiring notice of the exercise of an option or an election to renew to be given
within a certain time before the expiration of the lease, which of course, the lessee
must comply with, the general rule is that a lessee must exercise an option or
election to renew his lease and notify the lessor thereof before, or at least at the
time of the expiration of his original term, unless there is a waiver or special
circumstances warranting equitable relief.
The election of the option to renew in this case cannot be inferred from Orlando’s
heirs continued occupation of the lot even after his death. Since the lessor is
contesting the right of the heirs to stay on the land, the latter had the burden to
prove that Orlando or any of the heirs exercised their right to renew the lease. Since
there is no evidence of this overt act, then the lease had already expired.
Article 1313. Creditors are protected in cases of contracts intended to defraud them.
Creditors
121 | Katrina C. Gaw | Block C 2018
• Another example of when a 3rd person not a party to a contract is affected.
• Art. 1381 (3) - a contract shall be rescissible if it is undertaken in fraud of
creditors when the latter cannot in any other manner collect the claim due
them.
o In such a case, even if the creditor is not a party to the contract
intended to defraud him, he is given legal personality by law to
terminate the contract.
Article 1314. Any 3rd person who induces another to violate his contract shall be
liable for damages to the other contracting party.
Inducing Others to Violate Contracts
• Could be referred to as “tort interference”
o Malice on part of the 3rd party
o Legal rights of the plaintiff are interfered with
• While a contract between 2 parties cannot impose on a stranger a liability in
accordance with the terms of the contract without said stranger’s consent, a
stranger does owe to the parties to the agreement a duty not to interfere with
its performance
o A contract confers certain rights on the person with whom it is made,
& not only binds the parties, but also imposes on all the world, in a
sense, the duty of respecting the contractual obligation.
• Not only to contract of services; applies to any case where a person
maliciously persuades another to break a contract with a 3rd person
• Measure - If the persuasion be used for the indirect purpose of injuring the
plaintiff, or benefiting the defendant, at the expense of the plaintiff, it is a
malicious act, which, in law & in fact, is a wrongful act & thus an actionable
act of injury issued from it.
o BUT no liability ordinarily attaches where the party sought to be
charged in damages was acting in the lawful exercise of some distinct
right.
o MOREOVER, if none of the legal rights of the plaintiff are interfered
with, an action for damages cannot be maintained.
• An action for damages is NOT the sole remedy.
o In a proper case one may properly be enjoined from in any way
procuring the violation of lawful & valid contract.
o While the one who violates his contract may be personally liable to the
other party thereto for its breach, the party guilty of such breach may,
nevertheless, recover against the one who induces him to violate his
contract when the latter, by such acts & persuasion, intended to injure
the other contracting party or to coerce him into adopting a line of
business against his will & judgment.
• Ex. If A was contracted by B to be the resident painter in his studio for 1 year
& C maliciously induces B to dishonor the contract so that he can go to C’s
studio, C can be liable for damages under Article 1314.
Damages
• The compensation awarded for the damage suffered.
 o Damage – the loss, hurt or harm which results from injury
• One is liable in an action for damages for a non-trespassory invasion of
another’s interest in the private use & enjoyment of assets if:
(1) The other has property rights & privileges with respect to the use or
enjoyment interfered with
(2) The invasion is substantial
(3) The defendant’s conduct is a legal cause of the invasion, &
(4) The invasion is either intentional & unreasonable or unintentional &
actionable under general negligence rules.
• Law of torts is concerned with the duty to respect the property of others, & a
cause of action ex delicto may be predicated upon an unlawful interference
by one person of the enjoyment by the other of his private property.
o This may pertain to a situation where a 3rd person induces a party to
violate his undertaking under a contract.
• In PH tort law, there must always be MALICE, with intent to cause harm or
injury to a party.
o Where there was no malice in the interference of a contract, & the
impulse behind one’s conduct lies in a proper business interest rather
than in wrongful motives, a party cannot be a malicious interferer.
o Where the alleged interferer is financially interested, & such interest
motivates his conduct, it cannot be said that he is an officious or
malicious intermeddler.
Elements of Tort Interference
(1) Existence of a valid contract
(2) Knowledge on the part of the 3rd person of the existence of contract; &
(3) Interference of the 3rd person is without legal justification or excuse
(4) Malice (in PH)
CASE: Song Pin Bun v. CA
Lesson: Intervening in another’s contract for business interests does not lead to
damages if it lacks malice or a desire to cause injury to another; it can, however,
lead to permanent injunction.
Facts: Company X leased property from the lessor Y. After the lease expired, the
company still occupied the premises. When the managing partner of Company X
died, the son, Z, of the said managing partner took possession of the premises for
his own company, Trendsetter Marketing, using the leased premises as warehouse
for his textile business.
• X asked Z & Trendsetter Marketing to vacate the premises. They refused &
instead asked the lessor for the execution of formal contracts of lease with
his own corporation. The lessor agreed. The lease contracts were executed.
• X sued for the nullification of the lease contracts on the ground of contractual
interference under Article 1314. X won but did not order Y & Z to pay
damages. They were only ordered to pay attorney’s fees.
Trendsetter & Z contend that since no award of damages were imposed & the lower
court did not rule that Trendsetter caused damage, the contract between
Trendsetter & the lessor should not be annulled & there should be no permanent
injunction. Is their contention correct?
122 | Katrina C. Gaw | Block C 2018
Held: No. SC rejected this contention, but also did not award damages.
In this case, Trendsetter Marketing asked the lessor to execute lease contracts in its
favor, & as a result Trendsetter deprived Company X of the latter’s property right.
Clearly, the 3 elements of tort interference are present in this case. However,
nothing on record imputes deliberate wrongful motives or malice on Z, thus there
can be no award of damages, absent clear evidence of malice.
The contracts were nullified & there was a permanent injunction against the
implementation of the contract between Z & Y.
Article 1315. Contracts are perfected by mere consent, & from that moment the
parties are bound not only to the fulfillment of what has been expressly stipulated
but also to all the consequences which, according to their nature, may be in keeping
with good faith, usage and law.
Article 1316. Real contracts, such as deposit, pledge & commodatum, are not
perfected until the delivery of the object of the obligation.
Perfected Contracts
• A contract is the law between the parties. Any non-fulfillment of the contract
will make the violator liable.
• The law likewise states that the parties are bound to fulfill all the
consequences which, according to their nature, may be in keeping with good
faith, usage, & the law.
o The parties are bound to exercise the diligence of a good father of a
family with respect to the thing sought to be delivered unless there is
another standard of care stipulated by the parties or required by a law.
o There is an implied obligation to do the act contracted with reasonable
care in order that the person or property of others may not be injured
by any force which he sets in motion or by any agent or agency for
which he is responsible.
o They are likewise obliged to deliver with the determinate thing which is
the object of the contract all its accessions & accessories even though
they may not have been mentioned.
o They shall be liable for fortuitous event in case of delay.
Delivery & Perfection
• GR: A contract is perfected by mere consent of the parties.
o Ex. A contract of sale is consensual & is perfected once agreement is
reached between the parties on the subject matter & the
consideration.
o However, ownership over the object of the contract of sale is
transferred only upon actual or constructive delivery.
• EXC: There are contracts which are perfected, not by mere consent alone, but
by the delivery of the object of the contract. These are real contracts such as
deposit, pledge & commodatum.
o An accepted promise to deliver something by way of commodatum is
binding upon the parties, but the commodatum itself shall be
perfected upon the delivery of the object of the contract (Art. 1934).
 § The bailee in commodatum acquires the use of the thing
loaned but not its fruits. Hence, if he does not have the object
which he is entitled to make use, there can never be
perfection. The contract can not be implemented.
o A contract of pledge is constituted by the owner of the object to be
pledged to secure a loan.
§ In a pledge, it is indispensable that the thing pledged be placed
in the possession of the creditor, or of a 3rd person by common
agreement. This transfer of possession is a requirement of law
under Art. 2093. Hence, before a contract of pledge can be
perfected, the object pledged must first be delivered.
o Delivery is also required before a contract of deposit is perfected
because, under Art. 1962, a deposit is constituted from the moment a
person receives a thing belonging to another, with the obligation &
principal purpose of safely keeping it & of returning the same.
Article 1317. No one may contract in the name of another without being authorized
by the latter, or unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless
it is ratified, expressly or impliedly, by the person on whose behalf it has been
executed, before it is revoked by the other contracting party.
Agency
• A contract where a person binds himself to render some service or to do
something in representation or on behalf of another, with the consent or
authority of the latter
o The principal of the agent must comply with all the obligations which
the agent may have contracted within the scope of his authority.
• When the agent has exceeded his power (ultra vires), the principal is not
bound except when he ratifies it expressly or tacitly.
o Such would make the contract unenforceable
o Even when the agent exceeded his authority, the principal is solidarily
liable with the agent if the former allowed the latter to act as though
he had full powers.
• In the execution of the agency, the agent shall act in accordance with the
instructions of the principal.
o In default thereof, he shall do all that a good father of a family would
do, as required by the nature of the business.
• When a sale of a piece of land or any interest therein is through an agent,
the authority of the latter shall be in writing; otherwise, the sale shall be
void.
• Examples in the Family Code:
o Parents & those exercising parental authority have the right and duty
to represent their unemancipated children in all matters affecting their
interests.
123 | Katrina C. Gaw | Block C 2018
o The father & the mother shall be the legal guardian of the property of
the unemancipated common child without the necessity of a court
appointment.
§ In case of disagreement, the father’s decision shall prevail
unless there is a judicial order to the contrary.
o Parents can enter into contract with respect to properties of their
children even without court approval if this will involve only simple
acts of administration like repairs of properties owned by the children.
§ BUT: With respect to acts of dominion like selling, encumbering
or alienating the properties of their children, court authority is
needed; otherwise the contract shall be considered void.
o Where the value of the property or the annual income of the child
exceeds P50,000, the parent concerned is required to furnish a bond
in such amount as the court may determine, but not less than 10% of
the value of the property or annual income, to guarantee the
performance of the obligations prescribed for general guardians.
• BUT: A contract entered into in the name of another would be unenforceable
unless it is ratified by the person on whose behalf it was executed, before it is
revoked by the contracting party, when it is executed by:
o One who ostensibly might have but who, in reality, had no real
authority or legal representation, or
o One who, having such authority, acted beyond his powers
CASE: Yao Kai Sin v. CA
Lesson: A corporate officer or agent may represent & bind the corporation in
transactions with 3rd persons to the extent that authority to do so has been
conferred upon him, & this includes powers which have been intentionally conferred,
& also such powers as, in the usual course of the particular business, are incidental
to, or may be implied from, the powers intentionally conferred, powers added by
custom & usage, as usually pertaining to the particular officer or agent, & such
apparent powers as the corporation has caused persons dealing with the officer or
agent to believe that it has conferred.
Facts: The president & chairman of Corporation X entered into a contract with
Corporation Y, but such president & chairman had no authority under the law or the
corporate by-laws to enter into such agreement.
• The by-laws of Corporation X state that it is the Board of Directors that
“enters into” agreements, & the president & chairman “executes & signs,” for
& in behalf of the corporation, all agreements the corporation may enter into
Corporation Y, in making its claims, said that the president & chairman had been
vested with “apparent authority.” Is the contract enforceable?
Held: No. The contract is unenforceable. The president & chairman was not
empowered by the by-laws of Corporation X to enter the agreement between
Corporation X & Y. The president merely signs the agreement after the Board has
approved it.
A corporation can act only through its officers & agents, “all acts within the powers of
said corporation may be performed by agents of its selection; &, except so far as
limitations or restrictions may be imposed by special charter, by-laws, or statutory
provisions, the same general principles of law which govern the relation of agency
for a natural person govern the officer or agent of a corporation, of whatever status
or rank, in respect to his power to act for the corporation.
Agents when once appointed, or members acting in their stead, are subject to the
same rules, liabilities & incapacities as are agents of individuals & private persons.
Corporation Y did not provide enough evidence that Corporation X had clothed its
president & chairman with apparent authority as evidenced by similar acts executed
in its favor or in favor of other parties.
Supplement to Corporate Agency Cases
• Although an officer or agent acts without, or in excess of, his actual authority
if he acts within the scope of an apparent authority with which the
corporation has clothed him by holding him out or permitting him to appear
as having such authority, the corporation is bound thereby in favor of a
person who deals with him in good faith in reliance on such apparent
authority, as where an officer is allowed to exercise a particular authority with
respect to the business, or a particular branch of it, continuously & publicly,
for a considerable time.
• If a private corporation intentionally or negligently clothes its officers or
agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority is real, as to innocent 3rd
persons dealing in good faith with such officers or agents.
o This apparent authority may result from:
(1) The general manner by which the corporation holds out an
officer or agent as having power to act or, in other words, the
apparent authority with which it clothes him to act in general,
or
(2) The acquiescence in his acts of a particular nature, with actual
or constructive knowledge thereof, whether within or without
the scope of his ordinary powers.
• Examples where apparent authority led to corporate liability:
o CASE: Francisco v. GSIS – GSIS validly accepted the offer of
compromise made by the plaintiff. The terms of the compromise
telegram the plaintiff sent were clear, & the General Manager of GSIS
signed it with his name & the GSIS Board Secretary informed the
plaintiff that the compromise had been accepted.
o CASE: Board of Liquidators v. Kalaw – The practice of the corporation
has been to allow its general manager to negotiate & execute
contracts in its copra trading activities for & in NACOCO’s behalf
without prior board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior approval on all
corporate contacts, but that board itself, by its acts & through
acquiescence, practically laid aside the by-law requirement of prior
approval.
Ratification of Unenforceable Contract
• Can be ratified expressly or impliedly by the person on whose behalf it has
been executed, before it is revoked by the other contracting party
• Ratification must always come BEFORE revocation.
124 | Katrina C. Gaw | Block C 2018
*CASE: Regal Films v. Concepcion
Lesson: Ratification of the acts of an agent who had no authority to act should
always be made before the revocation of the other party.
Facts: The agent of a certain movie actor entered into an agreement with Regal
Films designed to constitute as an addendum to the original agreements between
the movie actor & Regal Films so that the lawsuit between the movie actor & Regal
Films will finally be settled.
• The movie actor disavowed the addendum, contending that, by the time the
agent transacted the addendum, she was not anymore his agent.
• In the preliminary conference in court, Regal Films intimated to the movie
actor that it was willing to release him from the original contracts instead of
pursuing the addendum. Thereupon, the movie actor surprisingly manifested
to the court that he was accepting the addendum. On the basis of this
acceptance, a decision by way of a compromise agreement was entered by
the court. Regal Films filed a counterclaim against the movie actor.
Can the compromise agreement be enforced?
Held: No. The compromise agreement cannot be enforced. There was no ratification.
• Consent is manifested by the meeting of the offer & the acceptance upon the
thing & the cause which are to constitute the agreement.
o The offer, however, must be certain & the acceptance seasonable &
absolute; if qualified, the acceptance would merely constitute a
counter-offer.
• At the first instance, the addendum was flatly rejected by the movie actor on
the theses (a) that he did not give his consent thereto nor authorized anyone
to enter into the agreement, and (b) that it contained provisions grossly
disadvantageous to him. The outright rejection of the addendum made
known to the other ended the offer. When respondent later filed his
Manifestation, stating that he was, after all, willing to honor the addendum,
there was nothing to accept.
• Verily, consent could be given not only by the party himself but by anyone duly
authorized and acting for & in his behalf. But by respondent’s own admission,
the addendum was entered into without his knowledge & consent.
• There was no ratification because the actor did not ratify the contract before
the revocation of Regal Films
Class Discussion
Ratification must come before the other party rejects the offer.
Supplement to Compromise Case
• Compromise – an agreement between 2 or more persons who, for preventing
or putting an end to a lawsuit, adjust their respective positions by mutual
consent in the way they feel they can live with.
o Reciprocal concessions are the very heart & life of every compromise
agreement, where each party approximates and concedes in the hope
of gaining balanced by the danger of losing.
• It is, in essence, a new contract.
 CHAPTER II. – ESSENTIAL REQUISITES OF A CONTRACT.
GENERAL PROVISIONS.
Article 1318. There is no contract unless the ff. requisites concur:
1. Consent of the contracting parties;
2. Object certain which is the subject matter of the contract;
3. Cause of the obligation which is established.
Requisites of a Contract
• All 3 requisites must be present.
• Absence of any one of the requisites creates an inexistent contract. It
produces no effect.
o *CASE: Modina v. CA – Inexistent contracts can be invoked by any
person whenever juridical effects founded thereon are asserted
against him.
§ Ex. A transferor can recover the object of such contract by
accion reinvidicatoria18 & any possessor may refuse to deliver it
to the transferee, who cannot enforce the transfer.
o The rule on pari delicto as between the parties does not apply in cases
of inexistent contracts.
§ If there is an ostensible contract with all the elements present
ostensibly, there is pari delicto.
Class Discussion
A “no contract” situation is significant, as explained by the SC in Modina v. CA. The
relevance is in the doctrine of in pari delicto. The doctrine of pari delicto states that if
both parties are equally guilty, they have no remedy against each other. In Modina,
SC distinguished two kinds of void contract –
1. Void and inexistent contract – one element is missing
2. Ostensible contract, but void – all elements are present, but because of some
provision of law, it is void
To which kind of contract does pari delicto apply? Only in ostensible contracts that
are void (hence, only in the second type).
Class Discussion
Q: X wants to get a visa in the U.S. X has no proof of ownership of real property. X
goes to friend Y and says, “Can you pretend the property you own in Forbes belongs
to me? Just sign the notarized deed of sale.” Y says OK. After X gets his visa, Y goes
to him and says, “Can I get my property back?” X says “No, since you already gave
me the property!” Can Y get the contract declared void?
A: Yes, because the contract is absolutely simulated and false under the first type of
contract (void & inexistent).
Q: X buys shabu from Y. Shabu is prohibited under the law, of course. X never paid Y
back for the shabu. Can Y run after X in court?
18 Action to recover ownership over real property.
125 | Katrina C. Gaw | Block C 2018
A: No, Y is in pari delicto since this is the second type of void contract (ostensible,
but void because of the law). Hence, the pari delicto doctrine applies.
SECTION 1. – CONSENT.
Article 1319. Consent is manifested by the meeting of the offer & the acceptance
upon the thing & the cause which are to constitute the contract. The offer must be
certain & the acceptance absolute. A qualified acceptance constitutes a counter-
offer.
Acceptance made by letter or telegram does not bind the offerer except from the
time it came to his knowledge. The contract, in such a case, is presumed to have
been entered into in the place where the offer was made.
Article 1320. An acceptance may be express or implied.
Consent & Offer
• Consent –The concurrence of the wills of the offerer & the acceptor as to the
thing & the cause which constitute a contract.
• Offer – a manifestation of a willingness to enter into a bargain so made as to
justify another person in understanding that his assent to that bargain is
invited & will conclude it
o Must be so complete that its absolute acceptance forms an
agreement with all the terms necessary & intended by the parties
o There can be no agreement until its terms are settled; an offer which
is not complete is merely a step in the negotiations.
• Making an offer – means inviting an acceptance which, if given, will finally
create the contract
o The offer empowers the person offered to create a contract
• Negotiation – formally initiated by an offer
o Policitacion – an imperfect promise; merely an offer
o *CASE: Laudico v. Arias – Public advertisements or solicitations are
ordinarily just invitations or proposals; these relations, until a contract
is perfected, are not considered binding commitments. The offer, at
this stage, may be withdrawn; the withdrawal is effective immediately
after its manifestation, & not necessarily when the offeree learns of
the withdrawal.
• Until a contract is perfected, there are no binding agreements
o Any time before perfection, the parties may stop
o Withdrawal is effective immediately after manifestation, & not when
the offeree learns of the withdrawal
Class Discussion’’
Q: Can the offeree publish the acceptance on the newspaper & assume constructive
knowledge?
A: NO. There must be actual knowledge.
Acceptance
• No acceptance – no concurrence of will & no consent
 • CASE: Salonga v. Farrales
o Lesson: The essence of consent is the conformity of the parties on the
terms of the contract, the acceptance by one, of the offers made by
the other. In a bilateral contract (e.g. contract to sell), where there is
merely an offer by one party, without the acceptance of the other,
there is no consent.
o Facts: By way of compromise, X attempted to sell land to Y, which Y
rejected.
o Held: There is no contract. Consent is an essential element of the
existence of a contract, & when it is wanting, the contract is non-
existent.
• Acceptance must be absolute.
o May be express or implied
o Except where a formal acceptance is so required, although the
acceptance must be affirmatively & clearly made & must be evidenced
by some acts or conduct communicated to the offeror, it may be made
either in a formal or an informal manner
o May be shown by acts, conduct, or words of the accepting party that
clearly manifest a present intention or determination to accept the
offer to buy or sell
o Acceptance may be shown by the acts, conduct or words of a party
recognizing the existence of the contract of sale.
• Acceptance must be unconditional.
o Must be identical to the terms of the offer
o Qualified acceptance - variation from the proposal either by way of
omission, addition or alteration
§ Considered as a counter-offer
§ NOT acceptance; neither party is bound
§ BUT an acceptance is not conditional if the acceptor expresses
dissatisfaction with the offer, yet gives his unqualified assent,
or if he adds immaterial words.
o Both the modified acceptance & an unconditional assent after such
modified acceptance are in effect nothing more than counter
propositions that must be assented to by the original offerer before
any binding obligation is fastened on the parties.
§ In case the original proponent accedes to the modification
imposed & gives notice to that effect, the contract is
concluded.
• It is not necessary in every instance that an express
assent to the modified acceptance be shown.
o If the parties proceed with their contract as if the condition of the
acceptance were a part of it, this is as effectual as an acceptance as if
the changes had been formally assented to.
CASE: Jardine Davies v. CA
Lesson: (1) Distinguishing between a condition imposed on the perfection of a
contract & a condition imposed merely on the performance of an obligation –
126 | Katrina C. Gaw | Block C 2018
• Failure to comply with the 1st condition (imposed on the perfection of a
contract) results in the failure of a contract
• Failure to comply with the 2nd (imposed on the performance of an obligation)
merely gives the other party options &/or remedies to protect interests.
(2) An acceptance may be express or implied, & this can be inferred from the
contemporaneous & subsequent acts of the contracting parties.
Facts: The company accepted the bid of a particular supplier based on the latter’s
proposals & stated in its letter of acceptance that the awarding of the project to the
said supplier was subject to certain basic terms and conditions such as: 1) payment
shall be on a progress billing basis with a guarantee bond; 2) the project shall be
undertaken pursuant to the attached specifications; 3) all materials that will be used
in the project shall be brand new; 4) the project must commence immediately and
completed within 20 working days; 5) the supplier must submit a performance bond
& a contractor’s all-risk insurance; 6) there is a warranty of 1 year against defective
material and/or workmanship. Was there an acceptance despite the conditions?
Held: Yes. The “terms & conditions” in the letter of acceptance were not tantamount
to a qualified acceptance. The terms are imposed on the performance of the
obligation, rather than the perfection of the contract.
Even assuming that the company’s acceptance was conditional, there was also
implied acceptance on the supplier’s part when they submitted (1) the performance
bond & (2) the contractor’s all-risk insurance.
Time of Knowledge if Acceptance is by Letter or Telegram
• Acceptance by letter or telegram does not bind the offerer except from the
time it came to his knowledge
o Ex. If A offered to B his property & B, through telegram, sent his
acceptance but, before A actually received the telegram, he informs B
of the revocation of his offer, no contract can be perfected.
CASE: Tan v. Planters Product
Lesson: The essence of consent is the agreement of the parties on the terms of the
contract. It is the concurrence of the minds of the parties on the object & cause
which constitutes the contract. The area of agreement must extend to all points that
the parties deem material; otherwise, there is no consent at all.
Facts: One of the parties asserted that the non-commercial provisions of a lease
contract were not material to its execution, & therefore their non-consideration
should not negate the creation of the contract. Is this correct?
Held: No. If the parties consider material other provisions, though ordinarily not
significant, to arrive at the perfection of the contract, those other stipulations must
likewise be agreed upon by the parties.
Class Discussion
Q: Is there such a thing as constructive acceptance, i.e., an acceptance not
personally known to the offeror, as when it was just published in a newspaper of
general circulation?
A: NO. Acceptance must be personally and actually known to the offeror.
Q: Is there such a thing as constructive withdrawal of offer? For example, A offered B
his car for P10,000 by snail mail. B accepted the sale.
A: GR: A must read the acceptance before it is considered accepted (it is actual
knowledge that counts).
EXC:
1. When the offeror made a clear manifestation that he is withdrawing his offer
(Laudico v. Arias – like mailing the withdrawal in the post office; that is constructive
knowledge on the part of the acceptor). Thus, if the acceptee sends by mail the offer
accepting, while the offeror sends out the withdrawal. If the offeror reads the
acceptance first, there is no contract, because withdrawal of offer can be
CONSTRUCTIVE.
Withdrawals are effective immediately after manifestation and not necessarily when
the offeree learns of the withdrawal. But as the GR, the offeror must have
knowledge.
2. Malbarosa v. CA
Q: X gave Y an offer with details. X said, “If you consent to the terms above, you must
sign the conforme below.” X and Y saw each other in the supermarket. Y said, “You
know what? I accept everything in the offer sheet!” Is there a contract?
A: NO, there is no contract. According to Art. 1321, the offeror may state the time,
place, and MANNER OF ACCEPTANCE, all of which must be complied with. BUT it is
different if the offeror already benefited from the contract.
Q: If the contract says, “You must sign the conforme below” without indicating the
time in which to accept, what is the time?
A: The time is immediate.
Q: X tells Y, “Sign the bottom for acceptance.” Y signs & X says, “OK!” Is there
already a contract?
A: Yes.
Q: If there is no signature, but Y is given the item provided in the stipulations of the
contract, is there a contract
A: Yes.
Article 1321. The person making the offer may fix the time, place, & manner of
acceptance, all of which must be complied with.
Offerer’s Options
• The offerer can indicate:
o The manner of acceptance (integrated into price)
o The time when acceptance is to be made
o The place where it should be made
• The offerer will not be bound by an acceptance made by the acceptor in any
other manner than that specified by the offerer, unless the offerer acquiesces
in the change.
*CASE: Malbarosa v. CA
Lesson: An offer made inter praesentes must be accepted immediately. If the parties
intended that there should be an express acceptance, the contract will be perfected
only upon knowledge by the offeror of the express acceptance by the offeree of the
offer. An acceptance which is not made in the manner prescribed by the offeror is
not effective but constitutes a counter-offer which the offeror may accept or reject.
The contract is not perfected if the offeror revokes or withdraws its offer and the
127 | Katrina C. Gaw | Block C 2018
revocation or withdrawal of the offeror is the first to reach the offeree. The
acceptance by the offeree of the offer after knowledge of the revocation or
withdrawal of the offer is inefficacious. The termination of the contract when the
negotiations of the parties terminate and the offer and acceptance concur, is largely
a question of fact to be determined by the trial court.
Facts: On Mar. 16, X handed over a Mar. 14 offer letter to Y, which stated that if Y
accepted the terms, he had to affix his signature at the bottom. Y asked for time to
think about whether or not he wanted the offer. On Apr. 4, however, X withdrew the
letter so he could sell the same property to Z. On Apr. 7, however, Y sent a copy of
the letter with his signature, expressing his acceptance of X’s offer. Can Y still claim
there was a perfected contract between himself & X, & hence, the property should
be given to him & not Z?
Held: No. The contract is perfected only from the time an acceptance of an offer is
made known to the offeror. If an offeror prescribes the exclusive manner in which
acceptance shall be indicated by the offeree, an acceptance of the offer in the
manner prescribed will bind the offeror. On the other hand, an attempt on the part of
the offeree to accept the offer in a different manner does not bind the offeror as the
absence of the meeting of the minds on the altered type of acceptance.
Y’s argument that he was not accorded by X reasonable time to accept or reject his
offer does not persuade. It must be noted that there was not time frame fixed by X
for Y to accept or reject the offer. When the offer has not fixed a period for the
offeree to accept the offer, & the offer is made to a person present, the acceptance
must be made immediately. Because Y did not immediately accept the offer on Mar.
16, X had the right to withdraw the offer, which X did in this case on Apr. 4.
Y claims he actually signed the letter on Mar. 28, & in his mind this constituted his
acceptance, but unless & until X received a copy of the letter, it cannot be argued
that a contract had already been perfected between X & Y.
CASE: Matias v. CA
Lesson: Haggling over exorbitant prices means there is still no acceptance of the
offer; it is the offerer who has the right to make offers which the other party could
accept.
Facts: A subsequent new owner of a leased Hacienda offered to sell to the lessees
the property subject of the lease. The offer was ignored by the lessees who instead
filed a suit to compel the new subsequent owner to sell the property in an amount &
in a manner which the lessee feels reasonable. During the early stages of the
negotiations, the lessees have already been in arrears in the payment of rentals,
which delinquency lasted up to the time of the consummation of the sale of the
Hacienda. Can the lessees insist on their desired price?
Held: No. Instead of discussing with the new owner the terms & conditions they wish
to impose on the projected sale, the lessees insist on their claim that the price of the
lots are exorbitant; & that their right to purchase the lot at a price fixed in the
complaint was disregarded. Lessees’ insistence as to the price of the lot rests on the
false assumption that the fixing of the price of the lot they wanted to purchase is one
of the rights granted to them by law.
Contract of Sale
 • Manner of payment of the purchase price – part of the price; an essential
element before a valid & binding contract of sale can exist
o Parties must also meet on the terms or conditions of the price,
otherwise there is no sale
• An agreement on the manner of payment goes into the price
o A disagreement on the manner of payment is tantamount to a failure
to agree on the price.
• Even if the parties have agreed as to the object of the sale & the purchase
price but still have not agreed on the manner of how & when the
downpayment & the installments are to be paid, the contract is NOT
perfected & there is no contract of sale.
Article 1322. An offer made through an agent is accepted from the time acceptance
is communicated to him.
Contract of Agency
• A person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the
latter.
• The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.
o When the agent has exceeded his power, the principal is not bound
except when he ratifies it expressly or tacitly.
o If the offer is made through an agent, acceptance of the offer can be
made to such an agent.
o HOWEVER, when a sale of a piece of land or any interest therein is
through an agent, the authority of the latter shall be in writing,
otherwise the sale shall be void.
*Article 1323. An offer becomes ineffective upon the death, civil interdiction,
insanity, or insolvency of either party before acceptance is conveyed.
Class Discussion
“Conveyed” in Art. 1323 means “actually read;” recall there is no constructive
acceptance.
Ineffective Offer – When Either Party, Before Conveying Acceptance
1) Dies
2) Suffers civil interdiction
3) Becomes insane
4) Becomes insolvent
Ineffective Offers Explained
• There is no contract not simply because there is no acceptance but, more
importantly, because the offer has become ineffective.
o When an offer is ineffective, nothing can be accepted.
• “Before acceptance is conveyed” – before acceptance has come to the
actual knowledge of the offeror.
128 | Katrina C. Gaw | Block C 2018
o Ex. A letter of acceptance may be sent by mail, but if, before such mail
is received & read by the offeror, either the offeror or the acceptor
died, there is still no contract because the offer has become
ineffective.
Class Discussion
Q: A sent offer sheet to B. B received offer sheet to A. Before A got it, B became
insane. Then A got the acceptance. Is there a contract?
A: No. By legal effect, there is no offer.
CASE: Villanueva v. CA
Lesson: The insolvency of a bank & the consequent appointment of a receiver
restrict the bank’s capacity to act especially in relation to its property.
Facts: A person offered to a particular bank the purchase of a certain foreclosed
property. The offer was accepted by the bank through a board resolution which
however was not relayed to the person making the offer. The person was able to
know of the acceptance only after the bank was placed under receivership by the
Central Bank as said bank became insolvent. Is the offer still effective?
Held: No. The offer became ineffective; no contract was created because the
purported contract of sale never reached the stage of perfection.
Corollarily, the offeror cannot invoke the resolution of the bank approving his bid as
basis for his alleged right to buy the disputed properties.
Article 1324. When the offerer has allowed the offeree a certain period to accept,
the offer may be withdrawn at any time before acceptance by communicating such
withdrawal, except when the option is founded upon a consideration, as something
paid or promised.
Option Contract
• An option is a contract granting a privilege to buy or sell at a determined price
within an agreed time
• Also called the “option period”
An Option Contract Founded on a Separate Consideration
• A privilege existing only in one party — the buyer.
o For a separate consideration paid, he is given the right to decide to
purchase or not, a certain merchandise or property, at any time within
the agreed period, at a fixed price.
• This being his prerogative, the buyer may not be compelled to exercise the
option to buy before the time expires.
• Jurisprudence demonstrating an “option” contract founded on a separate
consideration:
o CASE: Vda. de Quirino v. Palarca – There was a lease contract with the
option to buy where “the consideration for the lessor’s obligation to
sell the leased premises to the lessee, should the lessee choose to
exercise his option to purchase the same, is the obligation of the
lessee to sell to the lessor the building &/or improvements
 constructed &/or made by the former, if he fails to exercise his option
to buy said premises.”
o CASE: Serra v. CA – The lessee is to initiate the transferring of the
building and/or improvements on the property to petitioner, should
respondent bank fail to exercise its option within the period stipulated.
• Consideration in an option contract – anything of value, unlike in sale where
it must be the price certain in money or its equivalent
Class Discussion
An option is a separate contract where the object is the PERIOD; the period may be
with consideration or with no consideration (ex. reservation fees for condominiums).
Rules When There is an Option Period (Ang Yu Asuncion v. CA)
1) If the period is not itself founded upon a consideration
o The offeror is still free & has the right to withdraw the offer
1. Before its acceptance or,
2. If an acceptance has been made, before the offeror’s coming
to know of such fact, by communicating that withdrawal to the
offeree.
o The right to withdraw must not be exercised whimsically or arbitrarily;
otherwise it could give rise to a damage claim under Art. 19, which
ordains that “every person must, in the exercise of his rights & in the
performance of his duties, act with justice, give everyone his due, &
observe honesty & good faith.”
2) If the period has a separate consideration
o A contract of “option” is deemed perfected; it would be a breach of
that contract to withdraw the offer during the agreed period.
§ The option is an independent contract by itself, & must be
distinguished from the projected main agreement (subject
matter of the option)
o If, in fact, the optioner-offeror withdraws the offer before its
acceptance (thus “exercising the option”) by the optionee-offeree, the
latter may NOT sue for specific performance on the proposed contract
(“object” of the option) since it has failed to reach its own stage of
perfection.
§ The optioner-offeror, however, renders himself liable for
damages for breach of the option.
o In these cases, care should be taken of the real nature of the
consideration given
o Ex. If the consideration has been intended as part of the consideration
for the main contract with a right of withdrawal on the part of the
optionee, the main contract could be deemed perfected
o Ex. An earnest money in a contract of sale can evidence its perfection
(Art. 1482, Civil Code).
Class Discussion
Q: X pays reservation fee for a condominium at P15,000 to Y. If X decides not to buy
it anymore, can he get the P15,000 back?
129 | Katrina C. Gaw | Block C 2018
A: NO, unless X explicitly tells Y it should be refundable. Because in an option, you
pay for the PERIOD.
Q: If the offeror violates the option contract, can offeree file case for specific
performance for the contract?
A: No. The only thing that can be had is damages.
*Article 1325. Unless it appears otherwise, business advertisement of things for
sale are not definite offers, but mere invitations to make an offer.
Advertisements of Things for Sale
• Generally, advertisement of things for sale – mere invitations to make an
offer.
• Ex. If a seller advertises that he intends to sell his house to any willing
purchaser, it is an invitation for the purchaser to make an offer as to how he
intends to buy the house. The offer of the purchaser should of course include
all the essential requirements to make a valid contract such as the price of
the house. The phrase “unless it appears otherwise” connotes that the
advertisement may constitute an offer which is certain.
Class Discussion
An invitation for the reader to make an offer.
BUT: If the advertisement is SO DETAILED (with object clearly described, place of
payment and manner of payment indicated, super complete), the advertisement is in
itself the offer.
Earnest Money
• DIFFERENT from an option contract
• Considered as part of the price in a contract of sale
o Can be a proof of the perfection of the contract of sale.
o HOWEVER, it is NOT the giving of the earnest money per se, but the
proof of the concurrence of all the essential elements of the contract
of sale which establishes the existence of a perfected sale.
• Ex. If the buyer & the seller agreed that an “earnest deposit” should be made
by the seller merely to guarantee that the buyer will not back out from the
sale, such earnest deposit is NOT earnest money that can be considered as
proof of the perfection of the contract.
Effect of Non-Purchase in Option Period
• Upon the expiration of the option period & the person given such option does
not manifest his acceptance, the offeror may offer the intended contract to
somebody else.
o Any contract perfected with such other person shall be done in good
faith.
Article 1326. Advertisements for bidders are simply invitations to make proposals, &
the advertiser is not bound to accept the highest or lowest bidder, unless the
contrary appears.
Ads to Bid
• A person who entertains an advertisement to bid does not automatically
become the other party to a contract.
o He is only allowed to make his proposals or his offer.
o If he makes his bid, he thereby makes an offer which is not binding
unless it is accepted.
o Offeror still has the right to set time, place & manner
• Ex. When a company starts the process of a bidding & disseminates the
document denominated the “Terms Conditions of the Bidding” to the bidders,
the dissemination of the said documents constitutes an “advertisement” to
bid in the project.
o The bid proposals or quotations submitted by the prospective
suppliers are the offers.
o The favorable reply of the company to one of the prospective suppliers
is the acceptance.
Article 1327. The ff. cannot give consent to a contract:
(1) Unemancipated minors;
(2) Insane or demented persons, & deaf-mutes who do not know how to write.
Minors
• Emancipation takes place by the attainment of majority age, at the age of 18.
o Leads to termination of parental authority over the person & property
of the child, who shall be qualified & responsible for all acts of civil
life, save the exceptions established by existing laws in special cases
• *Contracts entered into by an unemancipated person are annullable.
o HOWEVER, persons who are capable cannot allege the incapacity of
those with whom they contracted to annul the contract.
o Only the minor can invoke the ground that a contract is annullable
because, at the time it was entered into, he was still a minor.
• *When the defect of the contract consists in the incapacity of one of the
parties, the incapacitated person is NOT obliged to make any restitution
except insofar as he has benefited from the thing or price received by him.
o Ex. If a person of age bought property from a minor & the latter
received the purchase price, the person of age cannot file a case to
annul the contract on the ground that the other party is a minor.
§ If the minor, upon coming of age, timely files a case to annul
the contract, he is not obliged to return that part of the
purchase price which he had spent which did not redound to
his benefit, such as losses from gambling, but he is obliged to
pay or reimburse the other party for amounts which he has
spent for his benefit like payment of tuition fees in school.
*CASE: Braganza v. De Villa Abrille [M: Distinguish this from Mercado]
Lesson: Minors who misrepresent their age can set up minority as their defense as
long as their misrepresentation is PASSIVE, & not active.
Facts: 2 minors signed a promissory note, without telling the creditor their ages. The
debtor sought to enforce the promissory note against them, stating that:
130 | Katrina C. Gaw | Block C 2018
• The minors misrepresented themselves.
• The minors only interposed their objection in 1951, when one of them turned
18 in 1947, thus the 4-year prescription period in the Civil Code should
apply.19
Can the minors set up the defense of minority to block the claim of the creditor?
Held: Yes. SC ruled that the minors can set up the defense of minority to resist the
claim, distinguishing this case from Mercado v. Espiritu, which held that minors who
misrepresent their ages cannot be absolved from the contract they entered into.
• Despite the failure of the minors disclose their minority in the same
promissory note they signed, it does not follow as a legal proposition, that
they will not be permitted thereafter to assert it. They had no juridical duty to
disclose their inability.
• In Mercado v. Espiritu, there was ACTIVE misrepresentation, because the
minor was required to give his age in a form & he lied about it; in this case,
the minors were not asked about their age, & thus they did not outright
misrepresent themselves.
• As for the prescription, there is reason to doubt the pertinency of the 4-year
period fixed by Art. 1301 where minority is set up only as a defense to an
action, without the minors asking for any positive relief from the contract.
They have not filed in this case an action for annulment. They interposed an
excuse from liability.
• However, the minors here were paid for the loan to the extent they were
benefited during WW2.
Class Discussion
• Active misrepresentation: Writing that you are 26 when you are actually 15;
you would not have standing to annul the contract.
• “Unemancipated minor” in Art. 1327 applies only to PASSIVE
MISREPRESENTATION.
Insane or Demented Persons
• Likewise annullable & valid up to the time they are rendered ineffective by
the courts.
o The law presumes that the contract has been entered into by
competent persons. To annul a contract, one must prove the insanity
of the other party at the time of the perfection of the contract.
• 3 Classes of Mental Incapacity:
o Idiots – insane from birth
o Lunatics – someone sane at one time, but who from some cause or
another has lost use of his reason
o Those who are not legally totally incapacitated, but are mentally weak
– all forms of mental weakness which do not render the person
affected totally incapable of transacting business or managing his
affairs.
• The insanity must have a direct bearing on the agreement.
19The provisions of Art. 1301 of the Civil Code are quoted to the effect that “an action to annul a contract by
reason of minority must be filed within 4 years” after the minor reached majority age.
 o A monomania or delusion unconnected with the subject matter of the
contract does not destroy its binding force.
o If the person’s ailment is mere mental weakness, but it does NOT
totally destroy the ability to comprehend the nature & effect of the
transaction, such is NOT a ground for the avoidance of a contract
entered into by such persons in the absence of evidence showing
fraud, duress, or undue influence.
o BUT: If the insane delusion is so connected with the subject matter of
the agreement as to render one of the parties thereto incapable of
understanding the nature or effect of the contract, it is thereby
rendered voidable at the option of the party so afflicted.
• The agreement cannot be avoided by the other party or a 3rd person; the
privilege is personal.
o BUT it is generally true that when the insane person is not under a
guardian & the other contracting party has no reasonable cause to
believe him otherwise insane, the agreement is valid if equitable &
beneficial to such insane person, & it has been so far executed that
the other party cannot be placed in status quo.
• A person of unsound mind is liable on his contract for necessities.
Deaf-Mutes and Inability to Write
• Contracts entered into by deaf-mutes who do not know how to write are also
annullable.
o The law is clear that being a deaf-mute alone is not enough to make
the contract voidable.
• For the contract to be annullable, the deaf-mute must likewise not know
how to write.
Class Discussion
For deaf-mutes, it’s NOT read and write. It’s WRITE ONLY. Don’t get confused by this!
I’ll mark you as wrong if you do.
Article 1328. Contracts entered into during a lucid interval are valid. Contracts
agreed to in a state of drunkenness or during a hypnotic spell are voidable.
Lucid Interval
• That period of time when an insane person acts with reasonable
understanding, comprehension, & discernment with respect to what he is
doing
o Contract is VALID when entered into during a lucid interval
• However, where one is shown to have been mentally deranged at a recent
period anterior to the execution of the contract, that condition is presumed
to continue
o Burden of proof is on the other party to show that the agreement was
entered into during a lucid interval or after recovery
o PROVIDED that the derangement is not caused by a temporary
ailment, such as fever, fits, or the like
131 | Katrina C. Gaw | Block C 2018
State of Drunkenness
• The intoxication is of such a character as to perpetuate an undue advantage
over the drunken person.
• An agreement other than for necessities, made by a person when so drunk as
to be incapable of understanding its nature & effect, is voidable at the
intoxicated person’s option
• One or more of the influences mentioned below should have been operative
at the time the minds of the parties met on the terms of the contract
Situations When Contract during Drunkenness is Voidable
1) When it appears that the drunkenness was brought about by the opposite
party
o If one party to a transaction procures the intoxication of the other &
then takes advantage of his condition to obtain the contract or
conveyance it will be voidable at the intoxicated person’s option,
notwithstanding the degree of drunkenness may not have been
excessive
2) That a fraudulent advantage was taken of it
o Mere intoxication unmixed with any inequitable conduct on the part of
the other party to the agreement is insufficient to invalidate a contract
entered into, unless it is complete drunkenness
3) That the drunkenness was so complete as to deprive the party of his reason
of an agreeing mind
o Intoxication which merely prevents the party from giving proper
attention to what he is doing or from fully realizing the nature of his
acts is insufficient to invalidate a contract.
Hypnotic Spell
• A contract entered into during a hypnotic spell is likewise voidable.
• Hypnosis – an artificially induced state, resembling sleep, but characterized
by exaggerated suggestibility & continued responsiveness to the voice of the
hypnotist
*Article 1329. The incapacity declared in Article 1327 is subject to the modifications
determined by law, & is understood to be without prejudice to special
disqualification established in the laws.
Article 1330. A contract where consent is given through mistake, violence,
intimidation, undue influence, or fraud is voidable.
Freedom of Will
• To create a contract, the meeting of the mind must be free, voluntary, willful
& with a reasonable understanding of the various obligations the parties
intend to be bound.
• A contract obtained through duress or mistake is annullable.
• Where duress is exerted on one of the parties of such a kind as to overcome
his will & compel a formal assent to an undertaking when he does not really
agree to it, the agreement is not binding.
 o UNLESS the other deals with him in good faith, in ignorance of the
improper influence, & in the belief that the party is acting voluntarily.
Class Discussion
Payment by a minor is VOID & therefore recoverable by that minor unless natural
obligations kick in (where it is consumed or spent by the other party in good faith,
under Art. 1239; Art. 1427).
• Ex. Minor gives old guy payment for money that old guy gave him. Old guy, in
good faith, uses the money to buy a mango & consumes it. This is already
non-recoverable by the minor because of natural obligations.
Payment to a minor is VOIDABLE, and therefore is valid until made void. That is Art.
1241; & that is unless (1) he has kept the thing delivered until he hits 18 or (2) it
has benefited him. It is ratifiable & hence voidable.
These provisions are the “subject to the modifications determined by law.”
*Article 1331. In order that mistake may invalidate consent, it should refer to the
substance of the thing which is the object of the contract, or to those conditions
which have principally moved one or both parties to enter into the contract.
Mistakes as to the identity or qualifications of one of the parties will vitiate consent
only when such identity or qualifications have been the principal cause of the
contract.
A simple mistake of account shall give rise to its correction.
Mistake
• General rule: BOTH must be mistaken; but there are exceptions
• For mistake to make a contract voidable, it must either refer to:
1) The substance of the thing which is the object of the contract
o Affects SUBSTANCE, not object — if there’s no object, there’s
no consent
o Ex. Where the contract for the sale of a cow was entered into,
both parties believing her to be barren, which turned out to be
untrue, it was held that mistake was not as to the mere quality
of the animal sold, but went to the very nature of the thing &
that the vendor had a right to rescind the agreement.
2) Those conditions which principally induced the parties to enter into a
contract.
o The conditions must not be mere incidents to the consideration
o Ex. If A lent money to X only because he was informed that it
was the special request of Z to A, who owed Z a favor which A
wanted to reciprocate, & only because there was an apparent
assurance from Z that he will be a solidary debtor; & X knew
that, had it not been for the request of Z & his engagement as
a solidary debtor, the loan would not have been consummated;
& it eventually turned out that there was no request & no
assurance coming from Z who, in reality merely vouched for the
credit worthiness of X, the said loan agreement can be
annulled by A on the ground that there was an invalid consent
132 | Katrina C. Gaw | Block C 2018
as the conditions which principally moved both parties to enter
into the contract was a mistake.
• A unilateral mistake in the making of an agreement, of which the other party
is entirely ignorant & to which he in no way contributes, will not afford ground
for its avoidance or rescission
o UNLESS it is such a mistake as goes to the substance of the
agreement itself
CASE: Spouses Heizrich & Betty Theis v. CA
Lesson: Mistake in Art. 1331 involves either (1) ignorance, which is the absence of
knowledge with respect to a thing & (2) mistake properly speaking, which is a wrong
conception about said thing, or a belief in the existence of some circumstance, fact,
or event, which in reality does not exist.
Facts: The seller, via a deed of sale, sold to the buyer a property which was not the
one appearing in the deed of sale. The mistake was not the fault of the parties but
was due to mistake in the survey made on the property.
The seller, upon learning of this, immediately offered the buyer another property
instead or a refund of money double the amount paid for the property, but which
offer was unreasonably refused by the buyers prompting the seller to file for
annulment of the contract based on mistake. Can the contract in this case be
invalidated?
Held: Yes. The contract can be invalidated on the basis of Art. 1331 as it involved
mistake as to the substance of the thing & seller was in good faith. He simply made
a misconception about the lot.
*Mistake as to Identity or Qualifications
• Mistake as to the identity or qualifications of one of the parties vitiates
consent only when it is the principal cause of the contract.
o When the identity of one of the parties is a material element of the
contract, a mistake in respect thereto invalidates the agreement.
• Ex. Y contracts with X believing him to be M.
o Y, the offerer, has in contemplation a definite person with whom he
intends to contract.
• One has the right to select the person with whom he wishes to contract,
especially where the nature of the transaction is such that it is important that
performance be had by a particular individual
o Ex. Agreements with a painter, writer, or which call for the
performance of any act requiring skill such as the one sought to be
contracted with is supposed to possess
• In such cases one may contract with whomever he may choose & the
sufficiency of his reasons for so doing is immaterial.
• Thus, where one sends an order for goods or other proposal to another, a 3rd
person cannot without the knowledge of the one sending the order or making
the proposal become a party to the agreement by accepting such proposal.
*CASE: Roman Catholic Church v. Pante
Lesson: For mistake as to the qualification of one of the parties to vitiate consent, 2
requisites must concur:
 1. The mistake must be either with regard to the identity or with regard to the
qualification of one of the contracting parties; &
2. The identity or qualification must have been the principal consideration for
the celebration of the contract.
Facts: The Church agreed to sell a piece of property only to the occupant of the
same. The property is a 32 sqm. strip of rural land used as a passageway from the
house of a certain Pante to the municipal road. Pante wanted to buy 32 sqm. lot.
The Church agreed, believing Pante was the occupant. As it turns out, however,
Pante was not the occupant per se. The Church filed suit to annul the sale on the
ground of mistake & Pante’s fraud & misrepresentation as to his occupancy. Will it
prosper?
Held: No. Contrary to the Church’s contention, the actual occupancy of a buyer over
the land does not appear to be a necessary qualification that the Church requires
before it could sell its land. First of all, nobody could actually reside on or occupy the
lot, for it was only a 2x16-meter strip of rural land used as a passageway.
Given the size of the lot, it could serve no other purpose than as a mere
passageway; it is unthinkable to consider that a 2x16-meter strip of land could be
mistaken as anyone’s residence. Pante also could not have successfully
misrepresented himself as the actual occupant of the lot; this was a fact that the
Church (which has a parish chapel in the same barangay where the lot was located)
could easily verify had it conducted an ocular inspection of its own property. The
surrounding circumstances actually indicate that the Church was aware that Pante
was using the lot merely as a passageway.
The above facts establish that there could not have been a deliberate, willful, or
fraudulent act committed by Pante that misled the Church into giving its consent to
the sale of the subject lot in his favor. That Pante was not an actual occupant of the
lot he purchased was a fact that the Church either ignored or waived as a
requirement. In any case, the Church was by no means led to believe or do so by
Pantes act; there had been no vitiation of the Churchs consent to the sale of the lot
to Pante.
Class Discussion of Roman Catholic Church v. Pante
Q: The Church will only sell property to occupants. The property involved is only a
passageway. The Church and the buyer agreed already to the sale. But the Church
said, “Oh yeah, we have a qualification that we can only sell to occupants.” Is the
contract now annullable?
A: No. Based on the circumstances of the case, the provision is directory only. This is
because the passageway cannot be occupied in the first place, since it is precisely
that, A PASSAGEWAY. While there are qualifications, it is not mandatory for the
creation of that right.
Mistake of Account
• A simple mistake of account shall give rise to its correction. A simple
accounting error does not go into the essentials of a contract.
Article 1332. When one of the parties is unable to read, or if the contract is in a
language not understood by him, & mistake or fraud is alleged, the person enforcing
the contract must show that the terms thereof have been fully explained to the
133 | Katrina C. Gaw | Block C 2018
former.
Presumptions in Contracts
• The parties are presumed to have understood the terms of the contract they
voluntarily signed, especially when there is proof that they are educated.
o Courts are not authorized to extricate parties from the necessary
consequences of their acts, & the fact that the contractual stipulations
may turn out to be financially disadvantageous will not relieve parties
thereto of their obligations.
o They cannot disavow the agreement due to supposed
misunderstanding of its terms.
• BUT: Art. 1332 provides that, when one of the parties is unable to read, or if
the contract is in a language not understood by him, & mistake or fraud is
alleged, the person enforcing the contract must show that the terms thereof
have been fully explained to the former.
• To invoke Art. 1332, one must have the ff. conditions:
o He must be unable to read or
o He must not understand the language of the contract.
• He must first prove such fact or circumstance. Only after sufficiently adducing
evidence proving the fact that he cannot read or that he does not understand
the language of the contract will the burden of proof shift to the one enforcing
the contract to show that the terms thereof have been explained to the
person who is unable to read or who does not understand the language of
the contract.
CASE: Lustan v. CA
Lesson: Where a party to a contract is illiterate or cannot read or cannot understand
the language in which the contract is written, the burden is on the party interested in
enforcing the contract to prove that the terms thereof are fully explained to the
former in a language understood by him.
Facts: The dispute was whether or not the Deed of Sale was in reality an equitable
mortgage wherein the subject property was merely intended to secure an existing
debt by way of mortgage. What is the nature of the document?
Held: The document was an equitable mortgage based on the clear evidence
supporting such contract & based on the finding that the illiterate owner of the same
was made to understand that the deed of sale signed by her merely evidenced an
indebtedness to the creditor.
The contents of the same were not read nor explained to her so that she may
intelligently formulate in her mind the consequences of her conduct & the nature of
the rights she was ceding in favor of the petitioner.
CASE: Lim v. CA
Facts: A deed of confirmation of extrajudicial partition was supposedly executed in
English by an elderly woman, who was illiterate & did not know how to speak English.
The deed was executed by Atty. Tan, lawyer & CPA, but it was not notarized & there
was no proof that the deed was explained to the elderly woman. Is there fraud in this
case?
Held: Yes. Considering the circumstances, the burden was on respondents (the
persons claiming the deed was valid) to prove that the content of the deed was
explained to the illiterate before she signed it. In this regard, evidence that the
respondents submitted failed to discharge that burden.
CASE: Arriola v. Mahilum
Lesson: In case one of the parties to a contract is unable to read & fraud is alleged,
the person enforcing the contract must show that the terms thereof have been fully
explained to the former.
Facts: A sister of an illiterate man was able to have a document signed by the latter
on the misrepresentation that properties other than his property awarded by a
cadastral court to him will be partitioned among the heirs of their parent. It turned
out however that the document included such property. The property was therefore
fraudulently distributed to the other heirs. The illiterate filed suit to recover his
property alleging fraud & misrepresentation. Will the illiterate’s case prosper?
Held: Yes. SC sustained the cause of the illiterate. Since the deed of partition is null,
the reconstituted title & transfer titles arising therefrom are void as well.
The sister knew that there was no other way to obtain the partition of the subject
property than having her brother sign a deed of partition, making the latter believe
that the deed pertained to the three other lots. The scheme was simple enough
considering that the brother was illiterate.
The fact that the brother protested the transfer of the title shows that the brother did
not actually understand the contents of the contract, as the sister claimed.
CASE: Swift Foods v. Spouses Mateo
Lesson: Being a novice in a business is no excuse for negligently performing a
contract.
Facts: X & Y entered into a warehousing agreement, where X would store the goods
of Y. In a stipulation it was said that X could only release the goods with clearance
from Y. But X released goods without Y’s consent. When asked to explain his
actions, X admitted not reading, much less understanding, the warehousing
agreement. He simply followed verbal instructions given to him by sales personnel of
Y. But what the sales personnel asked him to do was a clear breach of the contract
between X & Y. Can X be considered negligent?
Held: Yes. Newness in a particular business cannot be an excuse for violating the
clear terms of an agreement. X admitted to being a successful businessman in other
forms of business, & hence should have known the dangers of deviating from the
clear terms of one’s contract. X should not have deviated from the procedure in the
contract in the absence of any amendment thereon. Ordinary diligence required X to
inquire with the head office whether or not the instructions of the sales personnel
were authorized. His total reliance on their word, contrary to the terms of the
contract, is a clear act of negligence for which he could be made liable to pay
damages.
Worse, X admitted that he totally ignored the terms of the warehousing agreement,
since he never read it. Unless a contracting party cannot read or does not
understand the language in which an agreement is written, he is presumed to know
the import of his contract & is bound thereby. Not alleging any of the following, X has
no excuse for his actions.
134 | Katrina C. Gaw | Block C 2018
CASE: Calicap-Asmeron v. DBP
Lesson: An alleged lack of legal & technical knowledge does not vitiate consent
where it is shown that the party understands English & the deed of sale is simply
worded as it is.
Facts: The petitioner in this case argued that she did not give her full consent to the
deed of conditional sale she signed because she did not have a full grasp of the
legal & technical terms there. Is her argument tenable?
Held: No. First, she did not specify what parts were difficult to understand.
Furthermore, the stipulations of the deed itself were simply worded for even a
person with slight knowledge of English could easily understand. Furthermore, the
petitioner was not illiterate. Her testimonies in court revealed she had no difficulty in
written or spoken English, the language in which the contract was written.
Art. 1332 was made to acknowledge the fact that there are still many illiterates in
the country, & that the documents are usually drawn up in English or Spanish It is
thus part of the state’s policy of promoting social justice.
Article 1333. There is no mistake if the party alleging it knew the doubt, contingency,
or risk affecting the object of the contract.
Contracts with Risk or Doubt
• Involves a mistake of FACT, not a mistake in law
• Where the parties to an agreement indicate an intention to be bound
irrespective of the existence of certain facts & take the risk of their non-
existence, the validity of their agreement is not at all dependent upon the
existence of such facts.
o Where the parties are conscious that the existence of particular facts
is doubtful & make their agreement on this assumption, the non-
existence of such facts does not affect the validity of the agreement,
the risk of their existence being taken by the parties.
• If the parties are conscious of their ignorance as to the existence of some
facts, the non-existence of such facts is of no consequence; this is said to be
predicated upon common experience that if people contract under such
circumstances, they usually intend to abide by the resolution either way of
the known uncertainty, & have insisted on, & received, consideration for
taking that chance.
• Ex. A seller, not knowing the nature of the stone he found, sold it to a
purchaser for only $1 after they discussed their ignorance as to the quality &
nature of the stone which they surmised to be probably a Topaz. It turned out
to be a Diamond worth about $1,000.
o The contract cannot be annulled or rescinded as there was legally no
mistake as to the nature of the stone because when they transacted
the purchase, there was conscious uncertainty & that the parties took
the risk that it could have been some other valuable object capable of
being sold at a higher price.
Article 1334. Mutual error as to the legal effect of an agreement when the real
purpose of the parties is frustrated, may vitiate consent.

Mutual Mistakes
• A unilateral mistake of law as to the legal effect of an agreement is generally
not a ground to annul a contract.
o In such a situation, the document embodying the agreement is drafted
the way the parties have intended it to be such that only its legal
effect is different from what the parties have assumed.
• HOWEVER, a mistake of law may vitiate consent if the ff. requisites are
present:
1) The mistake as to the legal effect of the agreement must be mutual
2) Such mutual mistake frustrates the real purpose of the parties.
• Ex. If A leases to B a property where the latter will construct a four-story
building but it turned out that such building cannot be erected in the said city
because of an ordinance prohibiting the same, the contract can be annulled.
Article 1335. There is violence when in order to wrest consent, serious or irresistible
force is employed.
There is intimidation when one of the contracting parties is compelled by a
reasonable & well-grounded fear of an imminent & grave evil upon his person or
property, or upon the person or property of his spouse, descendants, or ascendants,
to give his consent.
To determine the degree of the intimidation, the age, sex, & condition of the person
shall be borne in mind.
A threat to enforce one’s claim through competent authority, if the claim is just or
legal, does not vitiate consent.
Annullable Contracts & Conditions Defined
1) Violence – serious & irresistible, leading to total absence of free will
o Ex. If A coerces B into a contract by continually beating him until he
signs the contract, A, in effect, imposes his will on B & therefore, no
valid consent is obtained from B.
2) Intimidation – reasonable & well-grounded fear of an imminent & grave evil
upon his person or property, or upon the person or property of his spouse,
descendants or ascendants, to give his consent
o To determine the degree of the intimidation, the age, sex, & condition
of the person shall be borne in mind.
o The threats & circumstances must be of a character as to excite the
reasonable apprehensions of a person of ordinary courage, & that the
agreement be made under the influence of such threats or menace;
the threat must be tangible & direct
o CASE: Vda. de Lacson v. Granada
§ Facts: It was contended that a contract entered into during the
Japanese occupation should be nullified because one of the
parties was constrained to enter the contract & to accept
Japanese currency for fear that, if he would not do so, he might
endanger his life. Can the contract be annulled?
§ Held: No. There was legally no intimidation enough to annul the
contract. The duress must be more than the “general feeling of
135 | Katrina C. Gaw | Block C 2018
fear” on the part of the occupied over the show of might by the
occupant. There must be specific acts or instances of such
nature & magnitude as to have, of themselves, inflicted fear
upon the subject thereof that his execution of the questioned
deed or act can not be considered voluntary.
o CASE: Laperal v. Rogers
§ Facts: A person was directly told by the Japanese military
authorities that he should sell his house & warned him that his
refusal to sell would be considered as a sign of hostility to the
Japanese. Fearing for his life, he sold the house. Is there
ground enough to annul the contract?
§ Held: Yes. The contract can be annulled as the consent was
coerced by direct intimidation & does not fall within the
purview of “collective” or “general” duress.
Threat through Competent Authority
• A threat to enforce one’s claim through competent authority, if the claim is
just or legal, does not vitiate consent
• GR: The institution or threatened institution of a civil suit, or ordinary legal
proceedings to enforce a legal demand does not constitute duress, even
though it may be made in a period of business depression
o Ex.: Threat to commence legal proceedings for the removal of a dam,
or for the collection of a debt contracted during infancy, to foreclose a
chattel, or mortgage, to sue out a writ of attachment or levy
executions, or a threat by an officer to arrest an execution debtor and
take him to jail unless he secures the debt, the officer having in his
possession at the time legal process requiring him to take the debtor
into custody, has in each of the foregoing instances been held not to
have been procured through duress, etc.
• EXC: If a civil proceeding actually begun or threatened is wrongful &
oppressive in its nature & brought or threatened with the intention of
coercing the adverse party & does in fact coerce such party into the payment
of money or the formation of a contract, such payment or contract is made
under duress & may be avoided.
o Ex. A threat to institute receivership proceedings against a certain
company at a time when it would ruin the company’s business &
affect the reputation of the defendant, constitutes such duress as will
avoid the defendant’s contract to pay a specified sum of money in
order to save the business of the company & his own reputation.
o Ex. A bond given, or money paid from being falsely attached to release
property seized in attachment proceedings oppressively instituted or
conducted may be cancelled or recovered.
o Ex. When an invalid and unfounded claim for a lien upon real property
is filed & the necessities of the defendant’s business require that this
lien be immediately discharged, payment under such circumstances
was made under duress & that it might be recovered.
• A threatened civil action may also amount to duress where the parties are not
on an equal footing.
 o Ex. Threats made against a person of inferior intellect, or an aged
weakened in body & mind to the effect that certain civil proceedings
will be instituted, have been held such duress as will avoid a contract
induced thereby. Threatening litigation while the defendant is ill, or to
continue litigation when the circumstances are oppressive has been
held to amount to duress
• CASE: De Leon v. CA
o Facts: The mother claims that she was intimidated into entering an
agreement by the estranged wife of her son because the said wife
threatened to bring her son to court for support, to scandalize their
family by filing baseless suits &, by agreeing to the agreement, the
wife would pardon the said mother’s son for possible crimes of
adultery &/or concubinage subject to the transfer of certain
properties. Is there intimidation?
o Held: No. This did not constitute intimidation. Here, the Court listed
the requisites of legal intimidation.
Requisites for Intimidation as Vitiated Consent
(1) That the intimidation must be the determining cause of the contract, or must
have caused the consent to be given;
(2) That the threatened act must be unjust or unlawful;
(3) That the threat be real & serious, there being an evident disproportion
between the evil & the resistance which all men can offer, leading to the
choice of the contract as the lesser evil;
(4) That it produces a reasonable & well-grounded fear from the fact that the
person from whom it comes has the necessary means or ability to inflict the
threatened injury.
Class Discussion
Q: X pokes a gun at Y to sign a contract. Y is a world champion in running. Is there
force enough to vitiate Y’s consent to the contract?
A: No. There is no “irresistible” force because Y can run away.
Article 1336. Violence or intimidation shall annul the obligation, although it may
have been employed by a 3rd person who did not take part in the contract.
Violence or Intimidation
• May emanate not only from any of the contracting parties but also from 3rd
persons not a party to the contract.
o The contracting party who is not the subject of the violence or the
intimidation may not even know that the other party has been
coerced.
• Ex. If A is coerced to enter into a contract with X because G threatens to kill
all the children of A if he does not do so, such contract may be annulled
whether or not X knew of the intimidation.
Article 1337. There is undue influence when a person takes improper advantage of
his power over the will of another, depriving the latter of a reasonable freedom of
136 | Katrina C. Gaw | Block C 2018
choice. The ff. circumstances shall be considered: the confidential, family, spiritual
and other relations between the parties, or the fact that the person alleged to have
been unduly influenced was suffering from mental weakness, or was ignorant or in
financial distress.
Undue Influence
• When a person takes improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom of choice.
• The ff. circumstances shall be considered: the confidential, family, spiritual, &
other relations between the parties, or the fact that the person alleged to
have been unduly influenced was suffering from mental weakness, or was
ignorant or in financial distress. However, not all influence is prohibited by
law.
o Undue influence - must amount to fraud or coercion.
§ The grantor must be overreached & deceived by some false
representation, stratagem or by coercion, physical or moral.
o GR: Solicitations, entreaties, fair argument & persuasion, or appeals
to the emotions or affections will NOT amount to undue influence
§ EXC: They overcome the will of the person & take away his
ability to act as a free agent
CASE: Banez v. CA
Lesson: Solicitation, importunity, argument & persuasion are not undue influence, &
a contract is not set aside merely because one party used these means to the
consent of the others. Influence obtained by persuasion or argument or by appeals
to the affections is not prohibited either in law or morals & is not obnoxious even in
courts of equity. Such may be termed “due influence.”
Facts: The respondent contended that the letter of a senator unduly influenced
PHHC to approve the transfer of rights of a certain property not to him but to another
person. Was there undue influence enough to annul a contract?
Held: No. Regardless of whether or not the letter by the senator was in fact given to
PHHC, the evidence shows that the PHHC used evaluation, inspections, &
recommended the transfer of the rights to the other person & the letter had little to
no bearing.
CASE: Marubeni Corp. v. Lirag
Lesson: When the undue influence is caused by executive officials performing their
official functions, the contract is not only voidable; it’s void.
Facts: A consultancy agreement was obtained from a government agency because of
the use of influence of executive officials. Is the contract voidable?
Held: This contract is not just voidable; it is void. Any agreement entered
intobecause of the actual or supposed influence which the party has, engaging him
to influence executive officials in the discharge of their duties, which contemplates
the use of personal influence and solicitation rather than an appeal to the judgment
of the official on the merits of the object sought is contrary to public policy.
Consequently, the agreement, assuming that the parties agreed to the consultancy,
is null & void as against public policy.
*Article 1338. There is fraud when, through insidious words or machinations of one
of the contracting parties, the other is induced to enter into a contract which, without
them, he would not have agreed to.
Fraud
• Generally, either at law or in equity, fraud is a false representation of a
material fact made by word or conduct with knowledge of its falsehood or in
reckless disregard of its truth in order to induce & actually inducing another
to act thereon to his injury.
• There must always be damage or injury in cases of fraud.
• Ex. if A, an expert jeweler, to be able to sell his glass figurine, told X that such
figurine is made of diamonds from South Africa &, on such false
representation, X bought the figurine, X can annul the contract of sale.
CASE: Rivero vs. Court of Appeals
Facts: A nephew of an old illiterate sickly woman took advantage of her predicament
by making her believe that the “Kasulatan Sa Ganap na Bilihan” was a contract of
mortgage. Knowing that the old woman merely wanted to borrow money secured by
the mortgage of the property, the nephew again took advantage of the desperate
condition of the illiterate woman by making her sign the Kasulatan where it
appeared thereon that he was the buyer of the property. Is the contract valid?
Held: The contract is annullable. The woman’s consent was obtained thru fraudulent
misrepresentation that the contract she was signing was one of mortgage.
*Article 1339. Failure to disclose facts, when there is a duty to reveal them, as when
the parties are bound by confidential relations, constitutes fraud.
Disclosing Facts
• Each party is not duty-bound to make known to the other any facts both
within their knowledge or within their opportunity to know.
o The mere fact that one of the parties has superior knowledge of the
value of the property subject of the transaction than the other party is
not per se fraud.
• There is only fraud under special & peculiar circumstances, as:
o When a legal or equitable duty is imposed upon the dominant party to
reveal certain facts material to the transaction
§ Ex. An animal breeder has a duty to disclose to an ordinary
buyer that the particular cow the buyer wants to buy is
suffering from a disease not detectable to the naked eye.
o When there is a confidential relationship between the parties.
§ Ex. A lawyer, because of his confidential & trust relationship
with his client, is duty bound to reveal facts important to the
transaction; otherwise, non-disclosure will constitute fraud.
Class Discussion
GR: Does one have duty to disclose facts? NO.
EXC: Unless there is a duty to disclose or reveal them (as in a principal-agency
relationship).
137 | Katrina C. Gaw | Block C 2018
Hence, good faith & knowledge is presumed. The exception to this is when there is a
duty to disclose.
CASE: Talampas v. Moldex Realty
Lesson: Innocent non-disclosure of facts, when no duty to reveal them exists, does
not amount to fraud.
Facts: The contractor & owner entered into a contract for the contractor to develop
the owner’s property. The owner terminated the contract because there was no DAR
conversion clearance that was obtained; hence, the project in general could not
push through. The contractor sued the owner for premature termination, & argued
that fraud was involved. He claimed that the owner deliberately failed to inform him
of the lack of DAR clearance, for he would not have contracted with the owner had
he known beforehand that the project lacked such a clearance. Is his argument
tenable?
Held: No. The owner was not under any legal or contractual obligation to disclose the
project’s conversion clearance status to the contractor; nor was it shown that the
presence of such a clearance was a consideration for the contractor’s entry into the
contract with the owner. Innocent non-disclosure of facts cannot amount to fraud.
Article 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent.
Usual Exaggerations
• The law recognizes the practice in trade that there are usual exaggerations
employed by the parties to consummate a particular transaction.
• If a party is induced by such usual exaggerations, there may be fraud
amounting to active misrepresentation.
o If it is within the means of the other party to investigate the
truthfulness of such exaggeration & he does not do so, there is no
fraud despite the exaggerations.
*Article 1341. A mere expression of an opinion does not signify fraud, unless made
by an expert & the other party has relied on the former’s special knowledge.
Opinions
• Generally not regarded as a representation of the facts
o If the opinion is wrong, it is not seen as deceitful or insidiously
inducing a party to enter into a contract.
• There are times when, without really having any special knowledge as to the
object of the contract, a person expresses an opinion about the same. At the
same time, the other party to whom the opinion was relayed may equally
have his own thoughts & observation that would affect his judgment
o In such cases, the expression of an opinion will not vitiate consent.
Class Discussion
LOQUITOR – i.e., when a thing speaks for itself.
It is therefore NOT fraudulent if one says his car can fly, because people know cars
can’t fly.
 parties. The promissory note between the bank & the elderly woman is
Representation v. Opinion (Example) invalidated on the ground of substantial mistake between the parties.
• An illustration of the difference between opinion & representation is found in
the difference between the vendor of property saying that it is worth so much, *Article 1343. Misrepresentation made in good faith is not fraudulent but may
& his saying that he gave so much for it. constitute error.
o Opinion – “It is worth so much”
§ The buyer may adopt if he will Misrepresentation in Good Faith
o Representation “He gave so much for it” • Misrepresentation is, in the main, inclusive of the term fraud. Practically
§ An assertion of fact which, if false to the knowledge of the every fraud is a misrepresentation, but every misrepresentation is not
seller, is fraudulent fraudulent.
• Thus a misrepresentation as to the subject-matter of or parties to a contract
Opinion v. Representation may be innocently made, &, if so, it does not amount to fraud, but is a
Opinion Representation misrepresentation.
No Fraud Fraud • Misrepresentations may be made without the knowledge of its falsity &
“This is good oil land.” “The oil business is profitable.” therefore completely done in good faith. In such a case it may constitute
“This building is beautiful.” “This building is fireproof.” merely an error (mistake).
“This patent is a valuable “This is the only patent that works in the
improvement.” market.” Class Discussion
• Misrepresentation in bad faith = FRAUD
Expert • Misrepresentation in good faith = Not fraud, but still annullable on the basis
• If the opinion is given by one who is thoroughly knowledgeable or is an expert of mistake
in the field such that he knows for a fact that his opinion will turn out to be
false & still induces the other party to enter into the contract on the basis of *Article 1344. In order that fraud may make a contract voidable, it should be serious
such false opinion, fraud can be invoked to annul the contract. & should not have been employed by both contracting parties.
o In such a case, the opinion will be considered as a fact. Incidental fraud only obliges the person employing it to pay damages.

*Article 1342. Misrepresentation by a 3rd person does not vitiate consent, unless
such misrepresentation has created substantial mistake & the same is mutual.
There must be substantial mistake
The same must be MUTUAL
He joked he would make this a question!
Misrepresentation by a 3rd Person
• Vitiates consent only if it created substantial mistake & the same is mutual
• CASE: Rural Bank of Caloocan v. CA
o Lesson: A contract may be annulled on the ground of vitiated consent
if deceit by a 3rd person, even without connivance or complicity with
one of the contracting parties, resulted in mutual error on the part of
the parties to the contract.
o Facts: A person induced an elderly woman to co-sign a promissory
note as debtor & to mortgage her property, without said woman
knowing the nature of the contract. The same person successfully
misrepresented to the bank the qualification of the elderly woman to
induce the bank to grant the loan. Can the loan agreement be
annulled?
o Held: Yes. The loan agreement signed by the elderly woman can be
annulled on the ground of mistake in the giving of consent by the
Seriousness of Fraud
• There must be an intention to injure & that damage or injury in fact resulted.
• The parties must not be in pari delicto.
o They must not have been mutually guilty of fraud.
• It must not be dolo incidente which is accidental & collateral fraud which
does not necessarily bear on the decision of the party defrauded to enter into
the contract.
• It must be dolo causante which refers to the very cause why the other party
entered into the contract.
o The deceit must be serious or sufficient to impress & lead an
ordinarily prudent person to error. If the allegedly fraudulent actions
do not deceive a prudent person, given the circumstances, the deceit
here cannot be considered sufficient basis to nullify the contract.
o In order for the deceit to be considered serious, it is necessary and
essential to obtain the consent of the party imputing fraud. To
determine whether a person may be sufficiently deceived, the
personal conditions and other factual circumstances need to be
considered.
DEAN MEL’S LECTURE ON TYPES OF FRAUD

138 | Katrina C. Gaw | Block C 2018


1. There can be fraud in the BIRTH of the contract – this is the type of fraud which
makes the contract annullable. There are two types of fraud in the birth of the
contract as found in Art. 1344.
• The first type is one that is serious and substantial misrepresentation. This
would make the contract voidable.
• The second type is incidental fraud in relation to the birth of the contract. This
will only entitle the defrauded party to DAMAGES. This will not make the
contract voidable.
2. There is ANOTHER type of fraud in Art. 1170. The fraud here is in the
IMPLEMENTATION of the contract. The remedy here is Art. 1191, which is rescission
or specific performance, with damages.
So what are the three types of fraud?
1. Fraud at the time of birth that is serious and substantial. (dolo causante)
2. Fraud at the time of birth that is incidental. (dolo incidente)
3. Fraud as a source of liability at implementation stage of the contract. (Art. 1170)
The quantum of evidence needed to prove fraud: clear and convincing evidence
(which is above preponderance of evidence).
*CASE: Tankeh v. DBP
Lesson: Differences between dolo causante & dolo incidente –
Dolo Causante (Causal Fraud) Dolo Incidente (Incidental Fraud)
Makes a contract voidable Entitles the party to damages
Involves misrepresentations or deceptions Involves fraud that is not serious in
of a serious character employed by one character & without which the other
party & without which the other party party would still have entered into the
would not have entered into the contract contract
Must involve the very cause why the other Collateral or incidental to the contract
party entered into the contract
Both must be proved by clear & convincing evidence, i.e., a standard less than proof
beyond reasonable doubt (for criminal cases) & greater than preponderance of
evidence (for civil cases).
Examples of Causal Fraud from Jurisprudence
• When the seller, who had no intention to part with her property, was “tricked
into believing” that what she signed were papers pertinent to her application
for the reconstitution of her burned certificate of title, not a deed of sale;
• When the signature of the authorized corporate officer was forged; or
• When the seller was seriously ill, and died a week after signing the deed of
sale raising doubts on whether the seller could have read, or fully
understood, the contents of the documents he signed or of the
consequences of his act.
*CASE: Woodhouse v. Halili
Lesson: If there is fraud in the performance of the contract, then this fraud will give
rise to damages. If the fraud did not compel the imputing party to give his consent, it
139 | Katrina C. Gaw | Block C 2018
may not serve as the basis to annul the contract, which exhibits dolo causante.
However, the party alleging the existence of fraud may prove the existence of dolo
incidente.
Facts: Woodhouse entered into a contract with Halili to organize a partnership for
the bottling & distribution of soft drinks. The partnership did not push through, &
Halili sued Woodhouse in order to execute the partnership. Woodhouse filed a
counterclaim, in which he argued that Halili had defrauded him because the latter
claimed to be the owner of the franchise of a soft drink bottling corporation, when in
fact he was not. Is the fraud committed against Woodhouse causal fraud?
Held: No. However, incidental fraud was involved. Halili did actually represent to
defendant that he was the holder of the exclusive franchise. Woodhouse was made
to believe, and he actually believed, that plaintiff had the exclusive franchise. The
record abounds with circumstances indicative that the fact that the principal
consideration, the main cause that induced Woodhouse to enter into the partnership
agreement with Halili, was the ability of Halili to get the exclusive franchise to bottle
and distribute for the defendant or for the partnership. Woodhouse was, therefore,
led to the belief that plaintiff had the exclusive franchise, but that the same was to
be secured for or transferred to the partnership. Halili no longer had the exclusive
franchise, or the option thereto, at the time the contract was perfected. But while he
had already lost his option thereto (when the contract was entered into), the
principal obligation that he assumed or undertook was to secure said franchise for
the partnership, as the bottler and distributor for the Mission Dry Corporation. If
Halili was guilty of a false representation, this was not the causal consideration, or
the principal inducement, that led Woodhouse to enter into the partnership
agreement.
But, on the other hand, this supposed ownership of an exclusive franchise was
actually the consideration or price Halili gave in exchange for the share of 30%
granted him in the net profits of the partnership business. Woodhouse agreed to
give Halili 30% share in the net profits because he was transferring his exclusive
franchise to the partnership.
Halili had never been a bottler or a chemist; he never had experience in the
production or distribution of beverages. As a matter of fact, when the bottling plant
being built, all that he suggested was about the toilet facilities for the laborers.
Hence, while the representation that Halili had the exclusive franchise did not vitiate
Woodhouse’s consent to the contract, it was used by Halili to get from Woodhouse a
share of 30% of the net profits; in other words, by pretending that he had the
exclusive franchise and promising to transfer it to Woodhouse, he obtained the
consent of the latter to give him (Halili) a big slice in the net profits. This is the dolo
incidente, because it was used to get the other party's consent to a big share in the
profits, an incidental matter in the agreement. Hence, while the contract remains
valid, Halili is liable to pay damages to Woodhouse for the incidental fraud.
CASE: Spouses Tongson v. Emergency Pawnshop Bula
Facts: The Spouses Tongson owned a lot in Davao which they sold to Napala for
P3M. When Napala gave the Spouses a check to pay for the property, it bounced,
leading to this judicial action. Later, claiming that their consent to the contract of
sale was vitiated, the Spouses pointed out that Napala’s fraudulent representations
of sufficient funds to pay for the property induced them into signing the contract of
sale. Such fraud, according to the Spouses, renders the contract of sale void. On the intend to divest himself of his title & control of the property, hence the
contrary, Napala insisted that the Spouses willingly consented to the sale of the deed of transfer is but a sham.
subject property making the contract of sale valid. Napala maintains that no fraud
attended the execution of the sales contract. Was there causal fraud in this case *Absolute v. Relative Simulation
enough to make the sale void? Absolute Relative
Held: No. There is no causal fraud in this case to justify the annulment of the There is a colorable contract but it has Parties state a false cause in the
contract of sale. It is clear from the records that the Spouses agreed to sell their no substance as the parties have no contract to conceal their real agreement.
property to Napala who offered to pay P3M therefor. Contrary to the Spouses intention to be bound by it.
Tongson’s belief that the fraud employed by Napala was “already operational at the The contract is void (lacks the element The contract is valid, when it does not
time of the perfection of the contract of sale,” the misrepresentation by Napala that of consent); parties are not bound, & prejudice a 3rd person & is not intended
the postdated PNB check would not bounce on its maturity hardly equates to dolo may recover from each other what they for any purpose contrary to law, morals,
causante. Napala’s assurance that the check he issued was fully funded was not the gave under the contract. good customs, public order or public
principal inducement for the Spouses Tongson to sign the Deed of Absolute Sale. policy; parties are still bound by their
Even before Napala issued the check, the parties had already agreed to the sale real agreement.
transaction. The Spouses Tongson were never tricked into selling their property to The apparent contract is not really Parties intend to be bound by their real
Napala. On the contrary, they willingly accepted Napala’s offer to purchase the desired or intended to either produce agreement.
property at P3M. In short, there was a meeting of the minds as to the object of the legal effects or in any way alter the
sale as well as the consideration therefor. juridical situation of the parties.
However, while no causal fraud attended the execution of the sales contract, there is
fraud in its general sense, which involves a false representation of a fact, when CASE: Umali v. CA
Napala inveigled the Spouses to accept the postdated check on the representation Lesson: Absolute or relative simulation can be proved by the acts of the parties that
that the check would be sufficiently funded at its maturity. In other words, the fraud reveal their true intentions.
surfaced when Napala issued the worthless check to the Spouses, which is definitely Facts: There was a Sales Agreement & attached Chattel Mortgage executed
not during the negotiation and perfection stages of the sale. Rather, the fraud between X & Y. It was contended that the failure of Y to pay the consideration proved
existed in the consummation stage of the sale when the parties are in the process of that the contract was absolutely simulated & therefore null & void. Is this argument
performing their respective obligations under the perfected contract of sale. Hence, tenable?
there is no causal fraud in this cause. Held: No. The contract is not absolutely simulated. The subsequent act of Y in
BUT: The Spouses already transferred title of their property to Napala, while Napala receiving & making use of the tractor, subject matter of the Sales Agreement and
failed to fulfill his end of their bargain. While they did not file an action for the Chattel Mortgage, and the simultaneous issuance of a surety bond in favor of X,
rescission of the sales contract, the Spouses specifically prayed in their complaint concomitant with the execution of the Agreement of Counter Guaranty with the
for the annulment of the sales contract, for the immediate execution of a deed of Chattel/Real Estate Mortgage, lead to the conclusion that petitioners had every
reconveyance, and for the return of the subject property to them. The Spouses intention to be bound by these contracts. The occurrence of these series of
likewise prayed “for such other reliefs which may be deemed just and equitable in transactions between X & Y is a strong indication that the parties actually intended,
the premises.” In view of such prayer, and considering Napala’s substantial breach or at least expected, to exact fulfillment of their respective obligations from one
of their obligation under the sales contract, the rescission of the sales contract is but another.
proper and justified. Accordingly, respondents must reconvey the subject property to
the Spouses, who in turn shall refund the initial payment of P200,000 less the costs Article 1346. An absolutely simulated or fictitious contract is void. A relative
of suit. simulation, when it does not prejudice a 3rd person & is not intended for any purpose
contrary to law, morals, good customs, public order or public policy binds the parties
Article 1345. Simulations of a contract may be absolute or relative. The former takes to their real agreement.
place when the parties do not intend to be bound at all; the latter, when the parties
conceal their true agreement. CASE: Javier v. CA
Lesson: A relatively simulated contract binds the parties to their real agreement.
Simulations Facts: A party assigned his timber license to another for a consideration of
• When the apparent contract is not really desired nor intended to produce P120,000, but the Deed of Assignment dated Feb. 15, 1966 stated that, for such
legal effects nor in any way alter the juridical situation of the parties. amount of money, the assignee shall transfer his shares of stock in a corporation to
o Ex. When a person, in order to place his property beyond the reach of be known as Timberwealth Corporation. The assignment was eventually
his creditors, simulated a transfer of it to another, he does not really implemented but the assignee did not fully pay the consideration.

140 | Katrina C. Gaw | Block C 2018

To claim the balance, the assignor sued the assignee who contended that the
contract was void because the corporation was never set up & there was no transfer
to him of the shares of stock. Are the assignee’s contentions correct?
Held: No. The assignee should be held liable considering that the assignment was a
relatively simulated contract which, though containing a false consideration, was not
void.
CASE: JR Blanco v. Quasha
Facts: The owner of the property entered into a contract of sale of her property with a
company payable in equal annual installments of P25,000 per year.
• Simultaneously, the company & the said owner entered into a contract of
lease of the same property whereby the owner would lease the property from
the company for 25 years for a monthly rental of P2,083.34 or P25,000.08
per year.
• The totality of the agreement was called a Sale-Lease-Back Agreement.
It is contended that the sale-lease-back agreement was simulated & therefore void
because no actual consideration passed from the buyer to the seller. Is this claim
correct?
Held: No. Although no actual exchange of money was made, the payment was
effected between vendee & vendor by mutual agreement whereby the monthly rental
which was due the vendor was paid from the annual installment of P25,000 due
from the vendee pursuant to the lease contract executed between them. There is
nothing wrong with this arrangement for the same is not contrary to law, morals,
good customs, or public policy, but rather for the convenience of both parties.
CASE: Pua v. CA
Facts: It was proven that the person who allegedly entered into the contract was not
even conceived at the time the contract was executed. Is this contract valid?
Held: No, it is void. The contract was definitely absolutely simulated.
CASE: Velasquez v. CA
Facts: A debtor was lured by the creditor into making it appear that the debtor sold
to the creditor the collateralized property of the debtor.
• The creditor told the debtor that this scheme was necessary so that the
creditor can borrow money from a certain bank & make use of the property
as collateral.
• After the loan was obtained, the creditor was supposed to execute a
reconveyance of the property to the debtor who would then assume the loan
from the bank and use the proceeds of the loan to pay off his loan to the
creditor.
• In the implementation of the scheme, 3 documents were executed on the
same day: 1) a deed of cancellation of the mortgage made by the debtor to
the creditor; 2) a deed of sale of the property from the debtor to the creditor;
and 3) a document purporting to re-sell the property to the debtor.
It was contended by the creditor that the sale of the property was authentic after the
debtor filed a case to annul all the said documents. Was the sale of the property
authentic?
141 | Katrina C. Gaw | Block C 2018
Held: No. The contract of sale was clearly simulated to facilitate the transaction with
the bank as there was absolutely no consideration at all & the parties clearly did not
intend to be bound by the deed of sale & its accompanying documents.
CASE: Francisco v. Francisco-Alfonso
Facts: The 2 illegitimate daughters claimed that they bought the 2 properties in
1983 from their deceased father via a “Kasulatan sa Ganap na Bilihan” for P25,000
but evidence showed that, even with what they claimed as their respective jobs at
that time, they could not possibly have any income to be able to have such amount
of money at the time of the sale. Is the contract absolutely simulated?
Held: Yes. SC declared the contract as void for being simulated because there was
no consideration for the same. It was impossible for one of the illegitimate daughters
to have money on hand in the amount of P15,000 just selling goto or lugaw at the
time of the sale. Likewise SC said that it was incredible for the other illegitimate
daughter, who was engaged in the buying & selling of RTW, to have money on hand
in the amount of P10,000 at the time of the sale. Aside from the fact that a family
friend testified that the illegitimate daughters had no source of income at the time of
the sale, they also did not present a single witness to prove that the seller received
the purchase price.
CASE: Reyes v. Asuncion
Lesson: The burden of proving the alleged simulation of a contract falls on those
who impugn its regularity & validity. A failure to discharge this duty will result in the
upholding of the contract. The primary consideration in determining whether a
contract is simulated is the intention of the parties as manifested by the express
terms of the agreement itself, as well as the contemporaneous & subsequent
actions of the parties. The most striking index of simulation is not the filial
relationship between the purported seller & buyer, but the complete absence of any
attempt in any manner on buyer’s to assert rights of dominion over the property.
SECTION 2. – OBJECT OF CONTRACTS
Article 1347. All things which are not outside the commerce of men, including future
things, may be the object of a contract. All rights which are not intransmissible may
also be the object of contracts.
No contract may be entered into upon future inheritance except in cases expressly
authorized by law.
All services which are not contrary to law, morals, good customs, public order or
public policy may likewise be the object of a contract.
Object of Contracts
• To qualify as an object for purposes of a contract to exist, the object must at
LEAST be generic – determinate as to its kind
• Any property or service can be the object of a contract provided that it is
within the commerce of man.
o Ex. of those not within commerce of man – lands of the public domain,
like the Luneta Park, a river, or even a fishpond that forms at tributary
 leading to the Agno River (for the latter, its conversion to a fish pond will
not change the fact that it is public property)
o Ex. of within the commerce of man – lands acquired by private
appropriation & acquisitive prescription
• A service to assassinate a particular dignitary cannot be the object of a
contract because it is contrary to law & public order.
• In a contract of sale, things having a potential existence may be the object of
such contract; & the efficacy of the sale of a mere hope or expectancy is
deemed subject to the condition that the thing will come to existence.
o Hence, all future puppies of a particular pregnant dog can be the
object of a contract although the puppies are not yet born.
o HOWEVER, the sale of a vain hope or expectancy is void.
• Rights are also the object of contracts, provided they are transmissible.
o Ex. One can sell leasehold rights over a property provided that there is
no contractual & legal stipulation prohibiting its transmissibility.
• Future things that can be reasonably ascertained can be the object of a
contract.
o BUT: Future inheritance cannot be the object of a contract because its
extent, amount & quantity cannot be determined.
o Future inheritance – any property or right not in existence or capable
of determination at the time of the contract, that a person may in the
future acquire by succession
§ One cannot determine with certainty how much inheritance one
would get from his father, mother, or any person from whom he
is called upon to succeed or to inherit.
§ It may happen that the father, at the time of his death, may
have some debts to pay. Under the rules of succession, these
obligations have to be paid 1st to the creditors before the exact
amount of the inheritance is determined & distributed.
CASE: Blas v. Santos
Lesson: An agreement by a spouse to give his share in the conjugal property is not
considered future inheritance & can be the object of a contract.
Facts: The wife agreed to give whatever her share in the conjugal partnership
property to her heirs once the husband dies. Is this valid?
Held: Yes. The agreement is not upon a future inheritance. It is not an obligation or
promise made by the maker to transmit ½ of her share in the conjugal properties
acquired with her husband, which properties are declared to be conjugal properties
in the will of the husband.
The promise does not refer to any properties that the maker would inherit upon the
death of the husband. The document refers to existing properties which she will
receive by operation of law on the death of her husband, because it is her share in
the conjugal assets.
Class Discussion
Q: A & B are brothers. A says, “I’ll pay you with my inheritance.” Allowed?
142 | Katrina C. Gaw | Block C 2018
A: No. While inheritance can be the object of the contract, future inheritance cannot.
So if your parent dies today, you can waive your right to your share without need of
writing.
Class Discussion
When one speaks of generic property, it need not exist at the time of perfection, but
it should not be a vain hope; there must be a reasonable expectation that it will
exist.
Article 1348. Impossible things or services cannot be the object of contracts.
Impossible Things
• One cannot be bound to do the impossible. Hence, a contract requiring a
person to become a monkey on a particular date is impossible.
Article 1349. The object of every contract must be determinate as to its kind. The
fact that the quantity is not determinate shall not be an obstacle to the existence of
the contract, provided it is possible to determine the same, without the need of a
new contract between the parties.
Determinable as to its Kind (Generic)
• The object must be one that can be ascertained with reasonable certainty as
to its kind.
o A contract engaging a certain person to perform a deed, without
specifying what deed it is, does not make the service determinable &
is thus void.
§ But a contract engaging a person to sing in his nightclub
identifies the kind of deed to be performed & is valid.
o A contract requiring an obligor to deliver a fruit is void.
§ But, if the contract is to deliver a kind of fruit such as a mango
or guava, the contract is valid.
• The fact that the quantity is not determinate shall not be an obstacle to the
existence of the contract, provided it is possible to determine the same,
without the need of a new contract between the parties.
o A contract which engages a person to supply all the ice which a
restaurant needs is valid because the quantity of ice is easily
ascertainable without the need for a new contract.
SECTION 3. – CAUSE OF CONTRACTS.
Article 1350. In onerous contracts the cause is understood to be, for each
contracting party, the prestation or promise of a thing or service by the other; in
remuneratory ones, the service or benefit which is remunerated; & in contracts of
pure beneficence, the mere liberality of the benefactor.
Cause
• Essential or more proximate purpose which the contracting parties have in
view at the time of entering into the contract
 • May or may not be tangible
• It can take different forms, such as a prestation or promise of a thing or
service by another.
• It can be the giving of a sum of money, an object, or even an expectation of
profits from a subdivision project.
CASE: Dihiansan v. CA
Facts: A corporation decided to sell its property along an avenue & gave the persons
living near the said property a preferential right to buy the same.
• One of the persons given such right, X, was approached by Y who requested
that he be allowed to buy the property with a commitment to re-sell the same
to X, who was originally given the preferential right. X agreed and an
agreement was signed embodying this commitment.
• This scheme was done because the corporation will not sell the property to
any other person except those given a preferential right.
• Instead of re-selling to X, however, Y sold the preferential right to another.
It was contended that the contract between X & Y who requested to buy the property
was without consideration & therefore void. Is this contention tenable?
Held: No. There was consideration in this case — the preferential right of X to buy the
property from the owner. The contract stipulated that Y would re-sell the property
back to X.
Kinds of Contracts
1) Onerous Contracts – the cause is understood to be, for each contracting
party, the prestation or promise of a thing or service by the other
2) Reciprocal Contracts – the obligation or promise of each party is the
consideration for that of the other
o CASE: Republic v. Cloribel – where a compromise agreement designed
to terminate the case between litigating parties to a suit was entered
into, the cause of the compromise was the mutual waiver &
abandonment of the parties of their claims against each other
3) Remuneratory Contracts – the cause is the service or benefit which is
remunerated
o Ex. When a doctor agreed to diagnose a patient, the cause for
engaging the doctor is for him to look at the patient & diagnose him.
The fee the doctor receives for his diagnosis is the cause of the
contract as far as the doctor is concerned.
4) Contracts of Pure Beneficence – the mere liberality of the benefactor is the
cause of the contract; it does not involve any material thing but rather it
involves only the generosity of the benefactor
o Ex. A scholarship contract given by a school where an indigent will not
pay anything for his education in the said school has for its cause the
liberality & generosity of the benefactor-school.
Article 1351. The particular motives of the parties in entering into a contract are
different from the cause thereof.
Motive v. Cause
143 | Katrina C. Gaw | Block C 2018
Motive Cause
The particular reason for a contracting The essential reason for the contract
party which does not affect the other party
& which does not preclude the existence of
a different consideration
In a contract of sale of a valuable relic, the In a contract of sale of a valuable
seller was motivated by some expectation relic, cause is the payment of the
of profit while the buyer was motivated to purchase price on the part of the
purchase the relic by the beauty & rarity of seller & the delivery of the thing sold
the relic. on the part of the buyer
Relationship Between Cause & Motive
• GR: The motivation of parties is independent from the cause of the contract &
therefore does NOT form an essential part of it.
• EXC: There are certain situations where the cause is equated to the motive —
when it is clear that the motive predetermines the cause.
CASE: PNCC v. CA
Lesson: As a general rule, the motive of a party in entering into a contract does not
affect the validity nor existence of the contract: an exception is when the realization
of such motive has been made a condition upon which the contract is made to
depend.
Facts: The lessee sought to release itself from paying rentals & from the whole
contract itself; the lessee contended that the purpose for which it entered the
contract, i.e., to use the leased premises as a site of a rock crushing plant, did not
materialize. Is the contention of the lessee tenable?
Held: No. While the particular purpose for why the lessee entered into the contract of
lease did not materialize, the same will not invalidate the contract. The cause in a
contract of lease is the use or enjoyment of a thing. The lessee still got to enjoy the
property. Hence, the general rule, rather than the exception, applies here.
CASE: E. Razon v. PPA
Lesson: A contract entered into in order to obtain something, when such would be in
violation of law, is void for lack of lawful cause.
Facts: The Management Contract under consideration was executed by & between
E. Razon, Inc. represented by its President, Razon, & PPA, represented by E.S. Baclig,
Jr. At the time, E. Razon, Inc. was 60%-controlled by Romualdez, with Razon merely
serving as a “puppet”; Romualdez, as brother-in-law of then-President Marcos, was,
by the Anti-Graft & Corruption Law, prohibited from intervening, directly or indirectly,
in any transaction with the government. PPA cancelled & treated as avoided the
Management of the Contract that was executed, precisely because Razon was
merely a puppet, & hence the contract entered into violated provisions of law which
prohibited Romualdez from intervening in the government transaction. Did the PPA
err in treating as cancelled the Management Contract?
Held: No. Verily, the transfer of the shares of stock of E. Razon, Inc. representing
60% equity to persons fronting for Romualdez was void. The invalidity springs not
from vitiated consent nor absolute want of monetary consideration, but for its having
had an unlawful cause — that of obtaining a government contract in violation of law.
While the general rule is that the causa of the contract must not be confused with
the motives of the parties, this case squarely fits into the exception that the motives
may be regarded as causa when it predetermines the purpose of the contract.
• For Romualdez, the motive was to be able to contract with the government,
which he was then prohibited by law from doing, & on Razon’s part, to be able
to renew his nearly-expired management contract. For it is scarcely
disputable that Razon would not have transferred said shares of stock to
Romualdez without an assurance from the latter that he would be unduly
favored with a renewal of the Management Contract. Thus, it came to pass
that by transferring 60% of the shares in his company to Romualdez, Razon
was able to secure an 8-year contract with respondent PPA & for 6 years
before its cancellation benefit from the proceeds thereof.
• He may be deemed to be a participant in the unlawful purpose if, with
knowledge thereof, he does anything which facilitates the carrying out of such
purpose
• No judicial action is necessary for the annulment of a void contract. Any such
action would be merely declaratory. Thus, it was within the rights of PPA to
unilaterally cancel & treat as avoided the Management Contract & no
arbitrariness may be attached to its exercise of this right.
CASE: Uy v. CA
Lesson: Where the motive stems from an implied condition of the contract, & both
parties knew of such motive & implication, the motive can also become synonymous
with the cause.
Facts: The National Housing Authority (NHA) purchased certain lots & thereafter
cancelled the Deeds of Sale relative thereto considering that the lots turned out to
be unsuitable for its housing project. The seller sued for damages. Should the case
prosper?
Held: No. The case was dismissed. The cancellation was valid as it was based on the
negation of the cause arising from the realization that the lands, which were the
object of the sale, were not suitable for housing. For NHA, the cause was the
acquisition of the land. For the seller, the cause was to obtain the price. But the
motive of the NHA, which was known to the seller, was to use said lands for housing.
It is clear that NHA would not have entered into the contract were the lands not
suitable for housing. In other words, the quality of the land was an implied condition
for the NHA to enter into the contract. On the part of the NHA, therefore, the motive
was the cause for its being a party to the sale.
Article 1352. Contracts without cause, or with unlawful cause, produce no effect
whatsoever. The cause is unlawful if it is contrary to law, morals, good customs,
public order or public policy.
Lack of Cause
• If there is no cause, no contract is perfected, as there can be no meeting of
the minds.
• This is also true if the cause is unlawful.
o A contract engaging a party to steal is unlawful as it is against the law.
144 | Katrina C. Gaw | Block C 2018
o A contract between a husband & wife to have their respective
paramours is contrary to morals.
o A contract to foment riots is contrary to public order.
o A contract waiving the right of an employee to receive what is due him
under the law is contrary to public policy.
Article 1353. The statement of a false cause in contracts shall render them void, if it
should not be proved that they were founded upon another cause which is true and
lawful.
False Cause
• GR: A false cause in a contract makes the contract void.
o Ex. A contract of sale, which states that the price of the object for sale
is P500 when in fact no such price has been paid at all, is void.
• HOWEVER, when a contract, though stating a false consideration, has in fact
a real consideration, the contract is NOT void.
o If a contract is relatively simulated in terms of cause, it is VALID.
o Ex. When a contract stating the consideration of a pen is P1,000 but it
is only sold for P500 which the seller accepted, the contract is valid.
Article 1354. Although the cause is not stated in the contracts, it is presumed that it
exists & is lawful, unless the debtor proves the contrary.
CASE: Liam v. Olympic Sawmill Co.
Lesson: The debtor must produce evidence that a cause is not stated in the contract;
the law presumes that there is a valid cause.
Facts: A loan of P10,000 was entered into &, subsequently, another loan agreement
was executed increasing the original amount of the previous loan by P6,000 “to
answer for attorney’s fees, legal interests & other costs incident thereto to be paid
unto the creditor” upon the termination of the agreement.
• The debtor failed to pay & a case was filed.
• By way of summary judgment, decision was rendered ordering the defendant-
debtor to pay the principal amount of P10,000 & the additional amount of
P6,000. The latter amount was contested as being usurious.
Was the imposition by the court of the additional amount valid?
Held: Yes. The additional P6,000 was valid as liquidated damages suffered by
plaintiff. Under Art. 1354, thought the cause of a contract is not stated, it is
presumed to exist & is presumed lawful. Though the cause of the P6,000 agreement
was not stated, it is presumed to exist under Art. 1354. Furthermore, since there is
no more usury law, then that is no longer an issue here as well. Since defendants
had not proven that the P6,000 obligation was illegal, it is deemed valid.
Article 1355. Except in cases specified by law, lesion or inadequacy of cause shall
not invalidate a contract, unless there has been fraud, mistake, or undue influence.
CASE: Auyong Hian v. CTA
Lesson: Generally, an inadequate cause will not invalidate a contract, absent a
showing that said cause is against the law or obtained through fraud, mistake, or
undue influence.
Facts: The contract involving tobacco was assailed as invalid due to inadequacy of
price. X claimed that the tobacco’s worth was P7M, but the contract between X & Y
stipulated that the tobacco was only worth P1.5M. What is the real value of the
imported tobacco?
Held: The value is P1.5M as provided in the contract. While X makes various
arguments as to inadequate consideration, inadequate consideration will not
invalidate a contract, as provided for under Art. 1355. X has not shown that his
situation falls under the exception in Art. 1355, as no law supports his cause.
CASE: Penaco v. Rueva
Lesson: A valuable consideration, however small or nominal, if given or stipulated in
good faith is, in the absence of fraud, sufficient. A stipulation in consideration of $1
is just as effectual a consideration as a larger sum stipulated for or paid.
Facts: X is the seller of a house & lot. He invoked the inadequacy of the
consideration paid for the properties, amounting to P1,000, to invalidate the
contract of sale. More specifically, X contended that the consideration is for the
house only since the lot on which it is constructed is public land which could not be
sold. He further argued that the building alone had an assessed value of P1,500 &
the land’s value is at P5,000. Should the contract be invalidated?
Held: No. Indeed, the lot on which the building sold a retro is constructed is public
land & X has no right to sell it. What is sought to be transferred, however, is not the
ownership of the land, but the rights, interests, & participation of X “as public land
claimants thereof by virtue of the decision of the Bureau of Lands,” which rights
could be waived, transferred, or alienated.
By its contract, X had undertaken to effect legal transfer of all his rights over the lot
to Y a retro & his assigns upon the consolidation of the title over the building in the
vendee, & whether or not Y is qualified to acquire that land of the public domain
claimed by X depends upon the Director of Lands. For this reason the land issue
should be raised in the administrative proceedings.
The inadequacy of the price is not sufficient proof that the consideration of P1,000
was for the house alone. The vendee a retro could not have possibly bought the
house alone without securing from the seller a specific & fixed arrangement
regarding the lot on which the house is built, otherwise, he could be ejected
therefrom at the will of the vendors a retro.
Class Discussion
Q: A issued a check worth P100,000 to B. According to B, it was a check because A
bought something from him. According to A, it was a donation to B.
A: A (the debtor) must prove his side.
Class Discussion
Q: I will buy this lot for 1 centavo. Is it valid?
A: YES. It is valid, not void. It could be rescinded, but it is still valid.
CHAPTER 3. FORMS OF CONTRACTS.
145 | Katrina C. Gaw | Block C 2018
Article 1356. Contracts shall be obligatory, in whatever form they may have been
entered into, provided all the essential requisites for their validity are present.
However, when the law requires that a contract be in some form in order that it may
be valid or enforceable, or that a contract be proved in a certain way, that
requirement is absolute & indispensable. In such cases, the right of the parties
stated in the following article cannot be exercised.
Forms of Contracts
• GR: Forms is not important for contracts
o EXC: Certain contracts require certain forms to be enforceable
§ In such cases, the form becomes absolute & indispensible
• In the matter of formalities, the PH system still follows “Ordamiento de
Alcala” – upholding the spirit & intent of the parties over formalities
Contracts Which Must Have Some Form
1) Contracts which the law requires to be in some particular form (writing) in
order to make them valid & enforceable (solemn contracts).
o Non-observance renders the contract void & of no effect
o Ex. Donation of immovable property must be in a public instrument so
the donation is binding. (Art. 749)
o Donation of movables worth more than P5,000.00 which must be in
writing, “otherwise the donation shall be void.” (Art. 748)
o Contracts to pay interest on loans (mutuum) that must be “expressly
stipulated in writing” (Art. 1956)
o Agreements in Arts. 1744, 1773, 1847 & 2134, Civil Code.
2) Contracts that the law requires to be proved by some writing (memorandum)
of its terms, as in under Art. 1403 (2) of the Civil Code.
o Non-compliance therewith will not permit, upon the objection of a
party, the contract, although otherwise valid, to be proved or enforced
by action
o Their existence generally not being provable by mere oral testimony
(unless wholly or partly executed), these contracts are exceptional in
requiring a writing embodying the terms thereof for their enforceability
by action in court.
CASE: Dauden-Hernaez v. De Los Angeles
Lesson: A contract for an actress’ services for a movie are valid in any form, as they
are not required to be in a certain way.
Facts: A movie actress filed a suit to recover her compensation for her services as a
leading lady in 2 movies. The producers resisted such claim on the ground that the
contract was void as there was no written agreement to the same. Is the contention
of the producers valid?
Held: No. The contract is not one of the exceptions to the general rule.
CASE: Cenido v. Apacionado
Lesson: Formalities intended for greater efficacy or convenience or to bind 3rd
persons, if not done, would not adversely affect the validity or enforceability of the
contract between the contracting parties themselves.
Facts: There is a written contract of sale of real property, not in a public instrument.
Is the contract still valid despite it not being in a public instrument?
Held: Yes. The requisites of a contract were proven. While a contract of sale of real
property must be in writing for enforceability under the Statute of Frauds, it need not
be in a public instrument for purposes of validity.
CASE: Deloso v. Sandiganbayan
Lesson: Leasing of property generally need not be reduced into writing; it is valid
when an oral contract is later written down.
Facts: The contract was assailed as anomalous on the ground that it was originally
made orally & then later reduced into writing. The Sandiganbayan ruled that certain
tractors were given to lessees in a municipality “without any compensation for their
use.” However, all the witnesses testified that the lessees were aware of the
obligations & agreed to be bound to all the terms & conditions which the
Municipality may impose. Is the contract valid?
Held: Yes. The contract is valid. The fact that the lease agreements were not initially
reduced into writing, this having been done sometime later by the municipal council
through a resolution adopted for the purpose, does not make the transactions
anomalous, nor preclude the generation of the contractual relation between lessor &
lessee. Leasing is not one of those cases required by law to be in writing to be valid.
CASE: Cruz v. Gruspe
Lesson: Courts will not look at the title of the document, but its contents, since the
denomination or title given by the parties to a document is not conclusive of the
nature of its contents.
Facts: A joint affidavit of undertaking was signed by Cruz & Leonardo, which provided
that they promised to pay for the damaged car of Gruspe. In the event that they
could not replace the car within the period stipulated in the contract, they would pay
the cost of fixing Gruspe’s car in the total amount of P350K, with interest at 12% per
month. There is now an issue as to whether or not the document is actually an
“affidavit” or a “contract.” Is it a contract?
Held: Yes. Though it is titled an affidavit, courts will look beyond the title of a
document if the denomination given by the parties is reflective of its contents. What
is really involved here, based on the contents of the “affidavit,” is a contract.
LECTURES FROM DEAN MEL
GR: Forms are not obligatory
EXC: When law requires it for –
• Greater efficacy: the contract is perfectly valid & enforceable, but only
perfected between two persons, & has no greater efficacy to affect third
persons (e.g., the following shall be in a public instrument: real rights in
relation to its transmission, extinguishment, etc.)
o Q: A told B, his sibling, as to real property inherited, “I am waiving my
146 | Katrina C. Gaw | Block C 2018
inheritance to you.” This was only oral. Is the contract valid if not in a
public instrument?
o A: Yes.
o Q: Is it valid if not in writing?
o A: Yes. Just that it has no greater efficacy except as to A & B; however,
the sale will not be registrable in the Register of Deeds. BUT note that
there can be no advance waiver of inheritance, or else it will be void.
• Enforceability: Valid but unenforceable
• Validity: Void
Article 1357. If the law requires a document or other special form, as in the acts &
contracts enumerated in the ff. article, the contracting parties may compel each
other to observe that form, once the contract has been perfected. This right may be
exercised simultaneously with the action upon the contract.
Compelling to Make a Written Contract
• A party, who desires to have his contract reduced in the particular form
required by law, can file an action to compel the other party to comply with
such form.
• If the requirement of law is directory only & has no bearing validity or
enforceability, the parties can enforce the contract &, at the same time,
demand that it be reduced in the form required by law.
CASE: Zaide v. CA
Lesson: An unregistered deed of sale is still valid.
Facts: A deed of sale was so far defective as to render it unregistrable in the Registry
of Property. It did not set forth the name of the vendee’s husband & was for this
reason refused registration by the Register of Deeds. Despite this, is the contract still
valid?
Held: Yes. The defect was unsubstantial & did not invalidate the deed. Though
defective in form, the sale was valid; & the parties could compel each other to do
what was needed to make the document of sale registrable.
The law provides that if an agreement concerns “the sale of land or of an interest
therein,” “the same, or some note or memorandum thereof, be in writing, &
subscribed by the party charged” in order that it may be enforceable by action. Also,
the writing must be in the form of a “public document.” Given this, the parties may
compel one another, under Art. 1357, to observe this proper form. Despite this,
though, the contract is still valid as between the parties.
CASE: Cenido v. Apacianado
Lesson: The private conveyance of real property is valid, but must be registered to
bind 3rd parties.
Facts: The petitioner is assailing the validity of a private conveyance of real property
denominated as “Pagpapatunay” as between the parties. Is the contract valid even if
it is not found in a public instrument?
Held: Yes. However, the question of whether it is sufficient to transfer & convey title
to the land for purposes of original registration or the issuance of a real estate tax
declaration in the new owner’s name is another matter altogether. For greater
efficacy of the contract, convenience of the parties & to bind 3rd persons, the new
owner has the right to compel vendor or his heirs to execute the necessary
document to properly convey the property.
Article 1358. The ff. must appear in a public document:
(1) Acts & contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property; sales
of real property or of an interest therein are governed by Article 1403, No. 2
& 1405;
(2) The cession, repudiation, or renunciation of hereditary rights or of those of
the conjugal partnership of gains;
(3) The power to administer property, or any other power which has for its object
an act appearing or which should appear in a public document, or should
prejudice a 3rd person;
(4) The cession of actions or rights proceeding from an act appearing in a public
document.
All other contracts where the amount involved exceeds P500 must appear in writing,
even a private one. But sales of goods, chattels or things in action are governed by
Article 1403, No. 2 & 1405.
Effect of Non-Compliance
• The failure to put in a public or private document or writing the transactions
or matters in Article 1358 will NOT make the contract unenforceable or void,
but it needs to be in writing to bind 3rd persons.
o Valid between parties even if not in public document
o Writing in a public instrument always gives GREATER EFFICACY to a
contract
• Ex. A contract of sale is a consensual contract, which means that the sale is
perfected by mere consent. No particular form is required for its validity.
o BUT: Under Art. 1498, when the sale is made through a public
instrument, the execution thereof is equivalent to the delivery of the
thing.
§ Delivery may either be actual (real) or constructive.
• Thus, delivery of a parcel of land may be done by
placing the vendee in control & possession of the land
(real) or by embodying the sale in a public instrument
(constructive).
CASE: Pontigon v. Heirs of Sanchez
Lesson: The transfer of the title of the property as inheritance to the heirs via an
extrajudicial settlement, which was not notarized & therefor not in a public
instrument as required by Art. 1358, was not a nullity & was therefor binding among
the heirs.
Cession, Repudiation, Renunciation of Rights in a CPG (Art. 1358 (2))
• The Family Code has amended this provision in the Civil Code
147 | Katrina C. Gaw | Block C 2018
• Under the Family Code, one’s share of the CPG or ACP CANNOT be waived
during one’s marriage, except in case of judicial separation of property
• If the waiver takes place upon a judicial separation of property, or after the
marriage has been dissolved, the same must appear in a public instrument
Power to Administer Property (Art. 1358 (3))
• A general power of attorney is required to grant a person called an agent the
power to administer property of another, called the principal.
• BUT: Even a private document will bind the principal & agent such that the
principal cannot refuse payment of the agent’s fee on the ground that the
power of attorney was not in a public document.
• Effect of it not being in a public document – it will not bind third persons
o Ex. If the power was to administer the apartment of the of the
principal, the lessees are not mandated to honor the private general
power of attorney to pay their rentals to the agent purporting to act for
& on behalf of the principal-lessor.
Class Discussion
Q: A & B are brothers. When their dad died, A told B orally that he waives his
inheritance to B. Is this valid?
A: Yes. It is valid between the parties.
Q: Can it be enforced as against 3rd parties?
A: No, since it’s not in a public instrument. If A puts it in a piece of paper, it is valid,
but still will have no efficacy because it’s a private, not public instrument.
CHAPTER 4. REFORMATION OF INSTRUMENTS.
Article 1359. When, there having been a meeting of the minds of the parties to a
contract, their true intention is not expressed in the instrument purporting to embody
the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of
the parties may ask for the reformation of the instrument to the end that such true
intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the
minds of the parties, the proper remedy is not reformation of the instrument but
annulment of the contract.
Reformation
• Reformation applies only to written contracts contained in an instrument or a
series of instruments
o GR: When the terms of an agreement have been reduced to writing, it
is considered to be containing all the terms agreed upon & there can
be, between the parties & their successors-in-interest, no evidence of
such terms other than the contents of the written agreement
§ EXC: When the instrument fails to express the true intent &
agreement of the parties thereto, one of the parties may bring
an action for the reformation of the instrument to the end that
such true intention may be expressed
• Connotes a valid contract & meeting of the minds
o The embodied contract just does not conform to the contract
 • What is reformed is the instrument, not the contract itself, in order for the
instrument to express their real agreement
o *One can only reform INSTRUMENTS, not contracts
o Rationale: It would be inequitable to allow the enforcement of a
written instrument which does not reflect the real meeting of the
minds. The rigor of legalistic rule that a written instrument should be
the final & inflexible criterion of the rights & obligations of the parties
is thus tempered to forestall the effect of mistake, fraud, inequitable
conduct, or accident
• Prescriptive period - within 10 years from the time the cause of action
accrues, since the suit is based on a written document.
o Cause of action accrues from the knowledge of the ground for
reformation or from the date of the execution of the instrument
embodying the contract if the causes for reformation were already
known at the time of the execution of the said instrument embodying
the contract
o CASE: Rosello-Bentir v. Leanda
§ Facts: It was contended that, at the time of the execution of the
contract on May 5, 1968, there was a verbal agreement
between lessor & lessee that the lessee will be given the right
of first refusal should the lessor decide to sell his property. The
lessee only filed the case for reformation on May 15, 1992 to
reflect such intention of the parties. Will the action prosper?
§ Held: No. The action prescribed already; the period began
running on May 5, 1968.
• *Action may be barred by laches
*2 Requisites for Reformation (Emilio v. Rapal)
1) That the instrument embodying the contract does not reveal the true
intention of the parties
2) The existence of an actual contract entered into by the parties (or, there was
a meeting of the minds of the parties to the contract)
3) The failure of the instrument to express the true intention of the parties is
due to mistake, fraud, inequitable conduct, or accident
Reformation due to Mistake, Fraud, Inequitable Conduct or Accident
• Reformation may be cause by:
o Mistake
o Fraud
o Inequitable Conduct
o Accident
• Burden of proof (onus probandi) is upon the party who insists that the
contract needs to be reformed.
• BUT if these factors prevent the meeting of the minds of the parties, the
remedy is annulment & not reformation
• An action for reformation is a personal right (in personam) even when real
estate is involved
o JDNOM – in rem proceeding
148 | Katrina C. Gaw | Block C 2018
o Legal Separation – in personam proceeding
Class Discussion
Q: What if there was never a meeting of the minds in a contract?
A: There is no reformation where there is no meeting of the minds. The remedy is
declaration of nullity.
Action for Declaratory Relief
• The special civil action for reformation
• The purpose is to secure an authoritative statement of the rights &
obligations of the parties for their guidance in the enforcement thereof, or
compliance therewith.
o NOT to settle issues arising from an alleged breach thereof
• It may be entertained only BEFORE the breach or violation of the law or
contract to which it refers
o Ex. An action for reformation instituted after the lessor allegedly
breached the contract with the lessee giving the lessee a right of first
refusal to buy the leased premises, & which right of first refusal was
the subject of the action for reformation, cannot prosper
Class Discussion
Q: Who can file the action for reformation?
A: The one in good faith (the injured party). The one in bad faith has no remedy.
Article 1360. The principles of the general law on the reformation of instruments are
hereby adopted insofar as they are not in conflict with the provisions of this Code.
Article 1361. When a mutual mistake of the parties causes the failure of the
instrument to disclose their real agreement, said instruments may be reformed.
Mistake as Cause for Reformation
• Mistake must be mutual & must generally involve factual matters.
o There must be a prior meeting of the minds between the parties.
o There must have been a valid existing agreement to which the
erroneous document can be made to match or harmonize.
o The proof of mutual mistake MUST be of the clearest & most
satisfactory character.
§ The amount of evidence necessary to impugn a fact in a
document is always more than a mere preponderance of
evidence
CASE: Gonzalez Mondragon v. Santos
Lesson: Contracts solemnly & deliberately entered into may not be overturned by
inconclusive proof or by reason of mistake of one of the parties to which the other in
no way has contributed.
Facts: One of the parties to a contract contended that there was a mistake relative
to the documentation of the contract because the real intent of the parties was for
the sale by the hectare & not for a sum in gross as stated in the document of sale,
but there was no convincing evidence that the mistake was mutual. Can there be
reformation?
Held: No. An alleged defect in a contract perfectly valid & binding on its face must be
conclusively proved. The validity & fulfillment of contracts cannot be left to the will of
one of the parties.
CASE: Atilano v. Atilano
Lesson: Where a mutual mistake involves a real property, it is possible as in this
case that the parties are in possession of the correct properties, but mistakenly
placed the wrong lots in the contract. BUT if they are both already in possession,
there is no need for reformation.
Facts: There was a mutual mistake in the designation of the particular lands owned
by 2 brothers; Brother 1 was supposed to get Lot A & Brother 2 was getting Lot E,
according to the contract, but Brother 1 lived in Lot E & Brother 2 in Lot A. They have
both lived in said lots for more than 30 years. Can there be reformation?
Held: No. The remedy for correcting property designation is reformation. However, if
the correct properties were already in the possession of the persons to whom they
should rightfully belong, there was no more need for reformation because the parties
actually already implemented the true intention of the contract.
• When one sells or buys real property, i.e., a piece of land, one sells or buys
the property as he sees it, in its actual setting & by its physical metes and
bounds, & not by the mere lot number assigned to it in the certificate of title.
• It must be assumed that the brothers had seen the properties & are each
living where they intended to live.
• The parties have retained possession of their respective properties
conformably to the real intention of the parties to that sale, & all they should
do is to execute mutual deeds of conveyance.
Article 1362. If one party was mistaken & the other acted fraudulently or inequitably
in such a way that the instrument does not show their true intention, the former may
ask for the reformation of the instrument.
Unilateral Mistakes & Reformation
• If the mistake is unilateral, it must be shown that the other party has acted
fraudulently or inequitably resulting in the drafting of a document which does
not correspond to the actual contract agreed upon by the parties.
• Also, a party may have known the facts of the case but is ignorant of or has
been mistaken as to the legal consequences of the same.
• GR: Mistake or ignorance of the law is not a ground for reformation because
parties must, as a rule, submit to the legal ramifications of their written
contracts clearly pursuant to their true intent and meaning.
o EXC: Where, on account of misplaced confidence, & because of some
artifice or deception fraudulently practiced upon him by the other
party, a material part of the contract was omitted from the writing, or
he was otherwise misled, equity will decree a reformation
Article 1363. When one party was mistaken & the other knew or believed that the
instrument did not state their real agreement, but concealed that fact from the
149 | Katrina C. Gaw | Block C 2018
former, the instrument may be reformed.
Knowledge of One Party
• Knowledge by one party of the other’s mistake regarding the expression of
the agreement is equivalent to mutual mistake.
• Reformation of the contract can be sought by the injured party.
Article 1364. When through the ignorance, lack of skill, negligence, or bad faith on
the part of the person drafting the instrument or of the clerk or typist, the instrument
does not express the true intention of the parties, the courts may order that the
instrument be reformed.
Person Drafting the Instrument
• There can be reformation if the person typing the instrument is not able to
come up with a correct written document due to:
o Failure to follow instructions
o Ignorance, lack of skill, negligence or bad faith
• The mistake will be deemed to be mutual
• Hence, if the typist wrongly types the amount of consideration in a written
instrument embodying the contract of sale, the instrument may be reformed
to conform to the real consideration agreed upon.
CASE: Huibonhoa v. CA
Lesson: Where one party is aware of the oversight in the drafting of the contract,
there can be no reformation.
Facts: There was a failure to prove what costly mistake allegedly suppressed the
intention of the parties prompting the petitioner to admit that there was an oversight
in the drafting of the contract by her counsel. Can there be reformation?
Held: No. SC rejected the propriety of reformation because, by such admission of the
petitioner, oversight may not be attributed to all the parties to the contract &
therefore, it cannot be considered a valid reason for the reformation of the same
contract.
Class Discussion
GR: BOTH parties must be mistaken. BOTH parties must be in good faith.
EXC: Even if only 1 party is mistaken (in good faith), reformation is still allowed to
reform, if
• The other party is in fraud with bad faith
• The other party is engaging in inequitable conduct with bad faith
It can also be that everyone was in good faith but there was a typographical error
(accidental, but in good faith).
Summary of When Reformation is Allowed
Person A Person B
Mistake in good faith Mistake in good faith
Fraud, with bad faith
Inequitable conduct, with bad faith
Typographical error but both are in good faith
Article 1365. If 2 parties agree upon the mortgage or pledge of real or personal
property, but the instrument states that the property is sold absolutely or with a right
of repurchase, reformation of the instrument is proper.
CASE: Palileo v. Cosio
Lesson: In reforming instruments, courts do not make another contract for the
parties. They merely inquire into the intention of the parties &, having found it,
reform the written instrument in order that it may express the real intention of the
parties.
Facts: The parties to a contract intended that the house subject of the agreement
was to be a collateral for a particular loan but the agreement apparently states that
the house was the subject of a conditional sale of residential building.
Held: Reformation allowed.
*Article 1366. There shall be no reformation in the ff. cases:
(1) Simple donations inter vivos wherein no condition is imposed;
(2) Wills;
(3) When the real agreement is void.
Wills & Donations
• Any disposition in a will or unconditional donation is an act of liberality. There
is no prior drafting where the parties mutually agree or have a meeting of the
minds.
Void Agreement
• Reformation implies a prior agreement between the parties. If such prior
agreement is void, it cannot be given legal effect.
o An instrument embodying the void agreement cannot be made to
conform to such void agreement which is non-existent as to its legal
effect.
Article 1367. When one of the parties has brought an action to enforce the
instrument, he cannot subsequently ask for its reformation.
Estoppel
• A party seeking to enforce an agreement necessarily acknowledges that the
instrument embodies the contract intended by the parties and therefore, he
is estopped from filing a case for reformation alleging that the contract does
not contain the true intent of the parties.
Article 1368. Reformation may be ordered at the instance of either party or his
successors in interest, if the mistake was mutual; otherwise, upon petition of the
injured party, or his heirs & assigns.
*Persons with Legal Standing to Initiate Reformation
150 | Katrina C. Gaw | Block C 2018
• If the mistake is mutual, either party or his successor-in-interest may file the
action
• If the cause for reformation is on some other grounds, such as fraud or
vitiated consent, the injured party or his heirs & assigns are the only persons
given legal standing to sue
Class Discussion
Q: Who can seek reformation?
A: Both parties & successors-in-interest.
Article 1369. The procedure for the reformation of instruments shall be governed by
rules of court to be promulgated by the Supreme Court.
Procedure for Reformation
• Special civil action for declaratory relief
• Rule 63 of the 1997 New Rules of Civil Procedure – in an action for
declaratory relief, any person interested under a deed, will, contract or other
written instrument, or whose rights are affected by a statute, executive order
or regulation, ordinance, or any other governmental regulation may, before
breach or violation thereof, bring an action in the appropriate RTC to
determine any question of construction or validity arising, & for the
declaration of his rights & duties, thereunder.
o If before the final termination of the case, a breach or violation of an
instrument should take place, the action may thereupon be converted
into an ordinary action, & the parties shall be allowed to file such
pleadings as may be necessary or proper.
Class Discussion
No reformation in –
1. Pure donations
2. Wills
3. Void contracts
4. When the contract has already been violated
5. When one of the parties has brought an action to enforce the instrument, he
cannot subsequently ask for its reformation (estoppel)
CHAPTER 5. INTERPRETATION OF CONTRACTS.
LECTURES FROM DEAN MEL
GR: Literal interpretation
BUT: There are cases where the words are so vague that they clash with the
intention of the parties.
• Intention will always prevail. The problem is, intention is in the mind; how will
you figure out the intent of the parties since it’s inside their heads?
o Look at the text
o Then look at the context

• Tools:
o Prior contemporaneous or subsequent acts
§ Q: The contract is worded, “Payment shall be paid in equal
monthly installments.” When exactly at every month?
§ A: Evidence was presented that in actuality, it was being paid
on every 15th of the month. SC held that that was the date,
even if such date is not so stipulated in the contract. This is the
prior contemporaneous or subsequent acts that the case law
provides.
o Statutory construction (e.g., ejusdem generis)
o For vague words, meaning that will make it most effectual
§ Ex. The first installment shall be made at the time of its initial
execution. Is this execution, meaning, as of the writing of the
contract, or as of the time of the implementation of the
contract? The more common understanding is that execution
pertains to the implementation or enforcement of the contract.
o Nature of the contract
o Do not interpret paragraphs in isolation; you must interpret them
holistically
o Contra proferendem rule – whoever causes the obscurity in the
contract, interpretation shall be against him who wrote it
o Usage and custom in relation to the transaction involved
o Rules of Court – e.g., engage expert testimony
Supposing all of the above are applied, and yet the intent still cannot be ascertained,
the rule of thumb is if the contract is ONEROUS, you interpret it along the lines of the
greater reciprocity of rights; if the contract is GRATUITOUS, the least transmission if
rights
• Q: Lessor & lessee entered into a contract which provides, “All improvements
made by the lessee shall belong to the lessor and shall be owned by him at
the time of the termination of the lease.” The lessee made a swimming pool,
a garage, some landscaping, & a third floor to the house. Then, the lease
terminated. The lessor thanked the lessee for all the improvements. But the
lessee demanded payment from the lessor. The lessor argued that the
contract between them did not provide for payment. The lessee then said
that the opposite was not provided for either. The lessor and lessee tried to
apply all the rules of interpretation but none applied. Given that, should the
lessee be reimbursed?
• A: Yes. The contract is ONEROUS and it should be interpreted along the lines
of greater reciprocity of rights.
Article 1370. If the terms of a contract are clear & leave no doubt upon the intention
of the contracting parties, the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of the parties, the latter
shall prevail over the former.
Purpose of Interpretation
151 | Katrina C. Gaw | Block C 2018
• Figuring out the intent of the parties
• GR: contracts should not be interpreted; the words should be applied as they
are (LITERAL interpretation)
o Interpretation is just for checking the proper way to implement a
contract where the parties have conflicting views
o It is only when the contract is vague or ambiguous that courts can
resort to the interpretation of its terms to determine the intent of the
parties
§ A contract is vague or ambiguous if it is susceptible of two
reasonable alternative interpretations
• Ultimately, it is the agreement of the parties which must be enforced
• Statutory construction can apply as a guide
o CASE: Finnan General Assurance Corporation v. CA
§ Facts: The insurance policy procured by the insured did not
include murder as incidents exempting the insurance company
from liability in case of the death of the inured.
§ Held: SC applied “expresso unius exclusio alterius” —
the mention of one thing implies the exclusion of
another thing — to make the insurance company pay the
beneficiaries arising from the death of the insured.
• GR: The literal meaning of the words in a contract control.
o Look at the text, and then
o Look at the words in context (not in isolation)
o Important task is really ascertaining the intent of the parties
• The title of a contract does not necessarily determine its true nature
o Ex. The fact that a document is entitled “Exclusive Option to Purchase”
does not control where the text thereof shows it is a contract to sell.
• The LITERAL MEANING of the stipulations must prevail.
o Thus, parties must always carefully examine the terms of a contract
thoroughly before signing the same
CASE: International Exchange Bank v. Spouses Briones
Facts: The promissory note with chattel mortgage provided that the creditor was
constituted by the debtors as their “attorney-in-fact with full power & authority to file,
prosecute, compromise, & settle insurance claims, to sign, execute, & deliver the
corresponding papers, receipts, & document to the insurance company, & to collect
from the latter the proceeds of insurance to the extent of its interests.” Can the
appointment of the creditor as the agent of the debtors be contested?
Held: No. The creditor, by the clear terms of the contract, the creditor was made the
agent of the debtors in their insurance claims.
CASE: Tan v. Planters Products, Inc.
Facts: X & Y entered into a lease contract. The contract provided –
The LESSEE has the option to renew his leasehold interest in the leased premises for an
additional 10 years at the expiration of the term of his lease under such terms and
conditions as may be agreed upon by the parties provided that the LESSEE shall give the
LESSOR, prior to the expiration of the term of this Lease, 180 days notice, in writing, of his
desire to procure such new Lease.
In an action in court, Y argued that X should be compelled to renew the contract
based on their original lease agreement; Y said that the parties were able to reach
agreement on all commercial terms of the contract (e.g., rent, variable fee) & were
only in disagreement about non-commercial terms (e.g., the repair of the middle
dock facilities); given this, there should be renewal. X countered that the original
contract’s wording was explicit that the parties must agree to ALL terms before there
would be renewal. Is X correct?
Held: Yes. The renewal of the original lease is subject to "terms and conditions as
may be agreed upon by the parties." The stipulation is couched in general and
mutual terms. It is clear that the renewal of the lease is not automatic. The parties
will still negotiate and bargain on the terms and conditions of the new contract.
These terms and conditions are not specified. Thus, they may include commercial
terms, such as rent and escalation clause, as well as non-commercial terms such as
covenants to fix and repair the leased premises. The only term that cannot be
negotiated or bargained under the new contract is the period of renewal of the lease
which is fixed in the original lease at 10 years. All other terms and conditions are
subject to negotiation.
The evident intention of X & Y is for the new lease contract to be perfected only upon
mutual agreement on all terms and conditions of the new lease, & not just upon
mere notice. This means that there must be an agreement on both the commercial
and non-commercial terms of the new lease contracts. This is clear from the general
language of the renewal clause. If the parties intended differently, they could have
simply deleted the phrase "under such terms and conditions as may be agreed upon
by the parties," which would automatically renew the original contract for another
period of ten years upon mere notice to PPI. Alternatively, they could have included a
stipulation in the original lease contract which would limit the terms and conditions
that the parties may validly negotiate in order for the contract to be renewed.
Reformation v. Interpretation
Interpretation Reformation
The determination of the meaning That remedy in equity by means of which
attached to the words written or spoken a written instrument is made or
which make the contract construed so as to express the real
intention of the parties
CASE: Conde v. CA
Lesson: If the contract is plain & unequivocal in its terms, one is ordinarily bound
thereby, especially if it is in a language he understands. It is the duty of every
contracting party to know a contract’s contents before he signs it.
Facts: The contract was written in the dialect known to X, & the encumbrance of the
property subject of the contract was inscribed in the title. However, X claims that he
only signed the contract to show his non-objection to the repurchase constituting the
lien & that he never received the amount of P165 from Y. Is X’s argument tenable?
Held: No. X must be held bound by the clear terms of the Memorandum of
Repurchase that he signed, where he acknowledged the receipt of P165 & assumed
the obligation to maintain the repurchasers in peaceful possession should they be
“disturbed by other persons.” It was executed in the Visayan language which he
understood.
152 | Katrina C. Gaw | Block C 2018
CASE: Santi v. CA
Lesson: The word “extendable” does not mean automatic extension, but extension
subject to the will of the parties.
Facts: The stipulation reads, regarding the period of a contract of lease, that “said
period of lease being extendable for another period of 20 years.” Does this make the
provision automatically extendable?
Held: No. The words are clear that the lessor’s intention is not to automatically
extend the lease contract but to give her time to think whether to extend the lease. If
the intent of the parties were to provide for an automatic extension of the lease
contract, then they could have easily provided for a straight 40 years contract
instead of 20.
CASE: Fernandez v. CA
Lesson: Where a contract is renewable “at the option of both parties,” both parties
must assent to the renewal.
Facts: X & Y entered into a contract of lease, & agreed that the lease, which was
scheduled to end on 1 July 1983, would be “renewable for another 10 years at the
option of both parties under such terms, conditions & rental reasonable at that time”
& that, upon expiration of the lease, whatever improvements were then existing
thereon should automatically belong to the lessor without having to pay the lessee.
Before the end of the period, X informed Y that he no longer wanted to renew the
lease. Y, on the other hand, wanted the lease renewed. Can there be renewal
without mutual agreement?
Held: No. The parties should mutually agree on a new contract which may not be the
same as the original, under terms, conditions & rental reasonable at that time. It
follows therefore that Y cannot renew the lease by his unilateral act of exercising his
option. Simply stated, the option must be mutually & consensually exercised, & not
unilaterally as was erroneously done by Y.
CASE: Buce v. CA
Lesson: Where a contract does not stipulate who has the option to renew, it is
implied that it will be renewed by mutual agreement of both parties; the phrase
“subject to renewal” means the creation of an entirely new contract.
Facts: A contract of lease stipulated: “This lease shall be for a period of 15 years
effective June 1, 1979, subject to renewal for another 10 years, under the same
terms & conditions.” One party interpreted the provision as allowing automatic
renewal while the other party contended that there was an option to renew. Was the
provision intended to allow for automatic renewal?
Held: No. There was nothing in the contract that showed that the parties intended
automatic renewal. The fact that the lessee was allowed to make improvements on
the property was not indicative of the intention to automatically renew the lease.
Since the contract was also unclear as to who may exercise the option to renew, it
should be interpreted in a way to benefit both parties — thus, by mutual agreement.
• “Renewal of a contract” - the death of the old one and the birth or emergence
of a new one. In such a case, there is an obligation to execute a new lease
contract for the additional term.
 • “Extension of the period of lease” - operates of its own force to create an
additional term.
CASE: Universal Textile Mills, Inc. v. NLRC
Lesson: A court may not make a new contract for the parties or rewrite their contract
under the guise of construction. In other words, the interpretation or construction of
a contract does not include its modification or the creation of a new or different one.
It must be construed and enforced according to the terms employed, and a court
has no right to interpret the agreement as meaning something different from what
the parties intended as expressed by the language they saw fit to employ.
Facts: A quasi-judicial body (NLRC) misread & therefore misapplied the provisions of
a collective bargaining agreement. Is this allowed?
Held: No. The NLRC cannot remake a contract by eviscerating it, by deleting from it
words placed there by the parties. No court, no interpreter and applier of a contract,
has such a prerogative.
CASE: Century Properties Inc. v. Babiano
Facts: Babiano was employed by Century Properties Inc. (CPI). In the employment
contract, the following provision, entitled the “Confidentiality of Documents and Non-
Compete Clause,” was provided:
In order to ensure strict compliance herewith, you shall not work for whatsoever capacity,
either as an employee, agent or consultant with any person whose business is in direct
competition with the company while you are employed and for a period of one year from
date of resignation or termination from the company.
xxx
Finally, if undersigned breaches any terms of this contract, forms of compensation
including commissions and incentives will be forfeited.
Can Babiano’s commissions be forfeited if he violates this clause while still being
employed with CPI?
Held: Yes. The contracting parties indisputably wanted the said clause to be effective
even during the existence of the employer-employee relationship between Babiano
and CPI, thereby indicating their intention to be bound by such clause by affixing
their respective signatures to the employment contract. To allow Babiano to freely
move to direct competitors during and soon after his employment with CPI would
make the latter's trade secrets vulnerable to exposure, especially in a highly
competitive marketing environment. As such, it is only reasonable that CPI and
Babiano agree on such stipulation in the latter's employment contract in order to
afford a fair and reasonable protection to CPI. Indubitably, obligations arising from
contracts, including employment contracts, have the force of law between the
contracting parties and should be complied with in good faith. The lower courts thus
erred in limiting the "Confidentiality of Documents and Non-Compete Clause" only to
acts done after the cessation of the employer-employee relationship or to the "post-
employment" relations of the parties. As clearly stipulated, the parties wanted to
apply said clause during the pendency of Babiano’s employment, and CPI correctly
invoked the same before the labor tribunals to resist the former's claim for unpaid
commissions on account of his breach of the said clause while the employer-
employee relationship between them still subsisted.
Article 1371. In order to judge the intention of the contracting parties, their
153 | Katrina C. Gaw | Block C 2018
contemporaneous & subsequent acts shall be principally considered.
Interpreting Through Acts of Parties
• The reasons & surrounding circumstances behind a contract’s execution are
of paramount importance to place the Interpreter in the same situation as the
parties at the time of the writing of the contract.
Class Discussion
Q: When a contract states that installments shall be paid monthly & the obligation is
P1M, how much should the debtor pay per month?
A: This contract is vague; however, if the debtor pays equally every month & the
creditor makes no objections, then the payments will be made by equal installments,
due to the acts of the parties.
CASE: Pingol v. CA
Lesson: Those contemporaneous & subsequent events are demonstrative acts
which present the true intent of the parties, & control the interpretation of their
contract.
Facts: There was a dispute as to whether the purchase agreement was a contract to
sell or an absolute sale. Pursuant to the deed, the vendor delivered actual &
constructive possession, the vendee constructed a building thereon, there was
submission to the Land Registry of the division done to the lands, & the vendee
continuously possessed the land until his death. Was there a contract to sell or an
absolute sale?
Held: It was an absolute sale. The acts of the parties, contemporaneous &
subsequent to the contract, clearly show that an absolute deed of sale was
intended, by the parties & not a contract to sell. The contract here being one of
absolute sale, the ownership of the subject lot was transferred to the buyer upon the
actual and constructive delivery thereof. There was constructive delivery when the
deed of sale was executed, & actual delivery when the vendee’s possession of the
property began.
CASE: Radiowealth Finance Co. v. Spouses Del Rosario
Facts: The parties in the case did not indicate a date of payment in the space
provided in the promissory note. It was hence contended that, before the obligation
became due & demandable, a period should have been fixed by the court. Is this
correct?
Held: No. First, the act of leaving blank the due date of the first installment did not
necessarily mean that the debtors were allowed to pay when they could. If this were
the intent of the parties, this should have been indicated in the promissory note.
However, it did not reflect such intention.
On the contrary, the Note expressly stipulated that the debt should be amortized
monthly in installments of P11,579 for 12 consecutive months. While the specific
date on which each installment would be due was left blank, the Note clearly
provided that each installment should be payable each month.
Furthermore, it also provided for an acceleration clause and a late payment penalty,
both of which showed the intention of the parties that the installments should be
paid at a definite date. Had they intended that the debtors could pay as and when
they could, there would have been no need for these two clauses.
Verily, the contemporaneous and subsequent acts of the parties manifest their
intention and knowledge that the monthly installments would be due and
demandable each month. In this case, the conclusion that the installments had
already became due and demandable is bolstered by the fact that the debtors
started paying installments on the promissory note, even if the checks were
dishonored by their drawee bank. Their avowals that the obligation had not yet
matured & their claim that a period for payment should be fixed by a court are thus
not persuasive.
CASE: Rapanut v. CA
Facts: The controversial stipulation reads: “The VENDOR/MORTGAGEE (X) is willing
to sell said portion of her lot to the VENDEE/MORTGAGOR (Y) for a total price of
P37,485 payable in monthly installments of P500 with an interest of 10% per
annum on the remaining balance until the full amount is paid.”
X’s view is that the 10% interest must be paid every year & are not included in the
payments already made. Y posits that the P500 monthly installments include the
10% interest. Whose view is correct?
Held: X. The Court looked at the subsequent acts of the parties.
• The Deed of Conditional Sale with Mortgage provides for the date of payment
of the P500 monthly installments, that is, not later than the fifth of every
month, & of the P1,000 semi-annual installment, that is, on June 30 & Dec.
31. The Supplemental Agreement was likewise specific that Y shall pay X
“monthly installments, of P500 with an interest of 10% per annum on the
remaining balance until the full amount is paid.
• A liberal interpretation of the contract in question is that at the end of each
year, all the installment payments made shall be deducted from the principal
obligation. The 10% interest on the balance is then added to whatever
remains of the principal. Thereafter, Y shall pay the monthly installments on
the stipulated dates. In other words, the interests due are added to and paid
like the remaining balance of the principal. Thus, it appears the parties
intended that Y pay the monthly installments at predetermined dates, until
the full amount, consisting of the purchase price & the interests on the
balance, is paid.
• Additionally, the acts of X show the real intent of the contract — though X
could have rescinded the contract based on their stipulations due to failure to
pay, he never made an attempt to do so; X accepted Y’s payments religiously
for 4 years without protest.
CASE: Caltex v. IAC
Facts: X, a party to a deed of assignment, contended that the obligation was limited
only to the particular amount indicated in the deed of assignment notwithstanding
the fact that said deed provided that the assignee (Y) shall be entitled to all funds
which the assignor (X) may be entitled from a certain administrative decision in
payment of X’s outstanding obligation plus any applicable interest charges on
overdue account. X also claimed that the contract meant that the obligation would
be totally extinguished. Is X correct?
154 | Katrina C. Gaw | Block C 2018
Held: No. The subsequent act of the parties showed that they did not intend to
extinguish the obligation based on the contract alone.
• After the execution of the Deed of Assignment on July 31, 1980, Y continued
to charge X with interest on its overdue account up to Jan. 31, 1981,
pursuant to the Deed of Assignment which provides for X’s obligation for
“applicable interest charges on overdue account.” The charges for interest
were made every month and not once did X question or take exception to the
interest.
• X also wrote a letter explicitly asking for a reduction of the interest, thus
proving there was such interest to be paid.
CASE: Javier v. CA
Lesson: Where the parties to a contract have given it a practical construction by their
conduct as by acts in partial performance, such construction may be considered by
the court in construing the contract, determining its meaning, & ascertaining the
mutual intention of the parties at the time of contracting.
Facts: Petitioners contend that the deed of assignment conveyed to them the shares
of stocks of respondent in Timberwealth Corporation, as stated in the deed itself.
Since said corporation never came into existence, no share of stocks was ever
transferred to the petitioners, hence the said deed is null and void for lack of cause
or consideration. Are petitioners correct?
Held: No. SC ruled that the true cause or consideration of said deed was the transfer
of the forest concession of respondent to petitioners for P120,000; this was evident
through their subsequent and contemporaneous acts.
• Both parties knew the stocks did not yet exist.
• Petitioners, after the execution of the deed of assignment, assumed the
operation of the logging concession of respondent.
• The statement of advances to respondent prepared by petitioners stated:
“P55,186 advances to L.A. Tiro be applied to succeeding shipments. Based
on the agreement, we pay P10,000 after every shipment. We had only 2
shipments.”
• Petitioners entered into a Forest Consolidation Agreement with other holders
of forest concessions on the strength of the questioned deed of assignment.
Reasonableness, Not Just Words
• Analysis & construction should not be limited to the words used in the
contract, as they may not accurately reflect the parties’ true intent.
o Carefully consider the reasonableness of the result obtained
• Parties have reasonable leeway in terms of their contractual agreement,
since contracts should not be harsh & iniquitous
• Import of a word depends on context, considering the entire provision
o If a provision demands mandatory application, even the word “may”
can be interpreted as “shall”
o If it demands directory application, “shall” could mean “may” as well
Article 1372. However general the terms of a contract may be, they shall not be
understood to comprehend things that are distinct & cases that are different from
those upon which the parties intended to agree.

Generality of Terms
• Noscitur a sociis - general & unlimited terms are restrained & limited by
particular terms that follow
• Ejusdem generis - a general term joined with a specific one will be deemed to
include only things that are like, of the same genus as, the specific one
• Depending on the intent of the parties & reasonableness, the Court can
broaden or narrow down certain terms — they can even make the plural into
singular.
• Noscitur a sociis & ejusdem generis are opposites of one another
Article 1373. If some stipulation of any contract should admit of several meanings, it
shall be understood as bearing that import which is most adequate to render it
effectual.
CASE: Lao Lim v. CA
Lesson: The compromise agreement should be understood as bearing that import
which is most adequate to render it effectual. Where the instrument is susceptible of
2 interpretations, one which will make it invalid and illegal and another which will
make it valid and legal, the latter interpretation should be interpreted.
Facts: The contract stipulated: “The term of the lease shall be renewed every 3 years
retroacting from Oct. 1979 to Oct. 1982; after which the above-named rental shall
be raised automatically by 20% every 3 years for as long as defendant needed the
premises & can meet and pay the said increases, the defendant to give notice of his
intent to renew 60 days before the expiration of the term.” Should the contract be
declared void?
Held: No. Though the provision can be interpreted as involving a suspensive
potestative condition, said condition is subject to the word “renewed” — which
means mutual agreement of the parties. The contract of lease should be construed
as providing for a definite period of 3 years; the automatic increase of rentals by
20% will take effect only if the parties decide to renew the lease.
Disfavor of Interpretation Leading to Loss of Rights
• Construction of the terms of a contract leading to impairment or loss of right
is not favored
o Conservation & preservation, not waiver, abandonment or forfeiture of
a right, is the rule.
CASE: Caltex v. IAC
Lesson: Provisions in the contract must be given a construction as will give effect to
them.
Facts: The contract states –
• “ASSIGNOR has an outstanding obligation with ASSIGNEE of P4M as of June
30, 1980, plus any applicable interest on overdue account…”
• “In consideration of the foregoing premises, ASSIGNOR by virtue of these
presents does hereby irrevocably assign & transfer unto ASSIGNEE any & all
funds &/or Refund of Special Fund Payments, including all its rights &
benefits accruing out of the same, that ASSIGNOR might be entitled to,
155 | Katrina C. Gaw | Block C 2018
pursuant to the decision in BOE Case No. 80-123, in payment of ASSIGNOR’s
outstanding obligation plus any applicable interest charges on overdue
account & other avturbo fuel lifting & deliveries that ASSIGNOR may from
time to time receive from the ASSIGNEE, & ASSIGNEE does hereby accepts
such assignment in its favor.”
Is the obligation of the Assignor to the Assignee limited to the P4M debt?
Held: No. It can be seen that the Deed of Assignment speaks of 3 obligations — (1)
the outstanding obligation of P4M as of June 30, 1980; (2) the applicable interest
charges on overdue accounts; & (3) the other avturbo fuel lifting & deliveries that the
Assignor may from time to time receive from the Assignee. As aptly argued by
Assignee, if it were the intention of the parties to limit Assignor’s obligation to P4M,
they should have so stated & there would have been no need for them to qualify the
statement of said amount with the clause “as of June 30, 1980 plus any applicable
interest charges on overdue account” & the clause “& other avturbo fuel lifting &
deliveries that ASSIGNOR may from time to time receive from the ASSIGNEE.”
The stipulations of the contract must be interpreted together to give the intention of
the parties full effect.
Article 1374. The various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken
jointly.
CASE: Ruiz v. Sheriff of Manila
Facts: The contract states: “WHEREAS, the parties of the FIRST PART, jointly &
severally, has/have applied for & jointly & severally obtained from the party of the
SECOND PART, a loan in the sum of P15,000 to be amortized at the rate of not less
than P300 including interest on unpaid balance, at the rate of 8% per annum, said
interest & capital amortization to be effected at the end of each month. Failure to
pay 2 successive monthly amortizations will cause this loan to be automatically due
& payable in its entirety. Notwithstanding the foregoing, this loan shall not run for
more than 5 years.”
Appellants claim that despite the acceleration clause, they had 5 years from Jan. 18,
1961 within which to pay their mortgage debt because of the phrase
“notwithstanding the foregoing” in the last sentence. Since the 5-year period had not
yet expired when the mortgage was foreclosed, said foreclosure, they point out, was
premature. Is their contention correct?
Held: No. The entirety of the contract must be taken into account and not just the
last 2 sentences. The acceleration clause & the last sentence must be read
together. It only means that the appellants can pay as little as P300/mo., as long as
they do not fail to pay at least some sum per month — otherwise, after 2 months of
failing to pay, the entire debt will become due & demandable.
CASE: Fernandez v. CA
Facts: The issue involved is the interpretation of the phrase “renewable for another
10 years at the option of both parties under such terms & conditions & rental
reasonable at that time.” Does the word “renewable” mean that the lessee can
unilaterally renew the contract?
Held: No. SC rejected the position that the word “renewable” means that the lessee
can unilaterally renew the contract & that therefore the phrase “at the option of the
parties” was just a superfluity. The use of either “extendible” or “renewable” should
be given NOT sacramental significance. The task of the ascertaining the intention of
the contracting parties is to be discharged by looking to the words they used to
project that intention in their contract, all the words not just a particular word or two,
& words in context not words standing alone.
CASE: China Banking Corp. v. CA
Facts: Petitioners aver that the additional loans extended in favor of private
respondents in excess of P6.5M & P3.5M — amounts respectively stipulated in the
July 1989 & Aug. 10, 1989 mortgage contracts — are also secured by the same
collaterals or real estate properties, citing as bases the introductory paragraph of the
mortgage contracts, as well as the stipulations stated therein under the 1st & 2nd
par. Respondents for their part argue that the additional loans are clean loans
(without mortgages), relying on some isolated parts of the same introductory par. &
1st par. of the contracts, & also of the 3rd par. Are the mortgages to be applied to all
debts?
Held: Yes. The parties’ intent is to constitute the real estate properties as continuing
securities liable for future obligations beyond the amounts of P6.5M & P3.5M.
• While the “whereas” clause provides: “The mortgagee has granted, & may
from time to time hereafter grant to the mortgagors credit facilities not
exceeding P6.5M only” yet in the same clause it provides that “the mortgagee
had required the mortgagor(s) to give collateral security for the payment of
any & all obligations theretofore contracted/incurred & which may thereafter
be contracted/incurred by the mortgagor(s) &/or debtor(s), or any one of
them, in favor of the mortgagee,” qualifying the initial part & showing that the
collaterals or real estate properties serve as securities for future obligations.
The 1st par., which ends with the clause, “the idea being to make this deed a
comprehensive & all embracing security that it is” supports this qualification.
• The 2nd par. provides: “The mortgagee may take further advances & all sums
whatsoever advanced by the mortgagee shall be secured by this mortgagee;”
& although it was stated that “the said credit shall extend to any account
which shall, within the said limit of P6.5M exclusive of interest,” this part of
the 2nd sentence is again qualified by its succeeding portion which provides
that “this mortgage shall stand as security for all indebtedness of the
mortgagor(s) &/or debtor(s), or any one of them, at any & all times
outstanding...”
• The 4th par. states: “All such withdrawals, & payments, whether evidenced by
promissory notes or otherwise, shall be secured by this mortgage” which
manifestly shows that the parties principally intended to constitute the real
estate properties as continuing securities for additional advancements which
the mortgagee may, upon application, extend. It is well settled that mortgages
given to secure future advancements or loans are valid & legal contracts, &
that the amounts named as consideration in said contracts do not limit the
amount for which the mortgage may stand as security if from the instrument
the intent to secure future & other indebtedness can be gathered.
156 | Katrina C. Gaw | Block C 2018
*CASE: Home Development Mutual Fund v. CA
Facts: The consultancy agreement reads – “This agreement takes effect on Jan. 1,
1985 to Dec. 31, 1985: Provided, that either party who desires to terminate the
contract may serve the other party a written notice at least 30 days in advance.”
It was the contention of the petitioner that the 1st clause was independent from the
2nd clause such that after Dec. 31, 1985, the contract is deemed terminated. Hence,
the notice of termination given to the respondent 9 days after Dec. 31, 1985 was
compliance in good faith with above-mentioned agreement. Petitioner likewise
contended that, even before the expiration of the contract, it had served the
respondent notice on Dec. 26, 1985. It was shown however by concrete evidence
that, since 1981, the practice of the petitioner & the respondent was that, without
renegotiation, the consultancy contract was continuously renewed so that the
respondent continued to serve the petitioner even after the expiry date with the
renewal-contract signed in the first few months of the year. Did petitioner comply
with the notice requirement in the contract?
Held: No. The petitioner failed to comply with the 30-day notice requirement for
terminating the contract & therefore, also considering the yearly practice of
petitioner & respondent in the implementation & renewal of their consultancy
agreement, the said agreement must be deemed renewed. The 1st clause relating to
the term of the contract must be construed together with the 2nd clause on the 30-
day notice-requirement. Thus, the 30-day notice should be given prior to the
expiration date of the contract on Dec. 31, 1985.
The requirements of contract as to notice — as to the time of giving, form & manner
of service thereof — must be strictly observed because in an obligation where a
period is designated, it is presumed to be for the benefit of both parties.
The unilateral termination of the contract in question by the herein petitioners is
violative of the principle of mutuality of contracts.
Article 1375. Words which may have different significations shall be understood in
that which is most in keeping with the nature & object of the contract.
CASE: Pasay City Gov’t v. CFI Manila
Lesson: “In proportion” in divisible obligations implies paying a performance bond
that covers only a particular stage of the project, whereas the word “to cover”
implies that the whole amount remaining for the entire project is involved.
Facts: A compromise agreement said that the project was to be done in stages &
that, in acc. with par. 1 (B), the contractor was to submit “a new performance bond
in the amount required by pertinent law, rules & regulations, in proportion to the
remaining value/cost of the unfinished work of the construction as per approved
specifications.”
There was a dispute as to whether the amount of the performance bond covered the
whole unfinished project or only the next stage of work to be done. Does the bond
cover the whole unfinished project?
Held: No. The parties to the compromise contemplated a divisible obligation
necessitating therefore a performance bond “in proportion” to the uncompleted
work. What is crucial in par. 1 (B) are the words, “in proportion.” If the parties really
intended the legal rate of 20% performance bond to refer to the whole unfinished
work, then the provision should have required the contractor to submit & file a new
performance bond to cover the remaining value/cost of the unfinished work of the
construction.
Using the words in proportion then significantly changed the meaning of the
paragraph to ultimately mean a performance bond equal to 20% of the next stage of
work to be done.
CASE: Allied Banking Co. v. Yujuico
Lesson: The use of terms in a contract will be governed primarily by the contents &
intent of the parties. Hence, while a contract uses the word “guarantor,” who is
merely secondarily liable, if the contents of the contract show that his liability is
solidary & direct, such obligor will be liable as such (i.e., as a surety).
Article 1376. The usage or customs of the place shall be borne in mind in the
interpretation of the ambiguities of a contract, & shall fill the omission of stipulations
which are ordinarily established.
*Contracts, Usage, & Custom [M: said he will ask a lot of questions based on cases
from the usage or custom portions]
• An express contract embodying in clear terms the intention of the parties
CANNOT be varied nor contradicted by evidence of usage or custom.
o Custom or usage is used to explain the meaning of words & phrases
used when they do not necessarily exclude the operation of such
custom or usage
§ BUT they may NOT be used to contradict nor vary the plain
meaning of the contract
o It can be used to explain what is doubtful - explains the meaning &
intention of the parties to a written/oral contract, which could not be
done without the aid of this extrinsic evidence
• An express contract is always admissible to supersede, vary or control, a usage
or custom; for the latter may always be waived at the will of the parties
o To do so would be like allowing presumptions & implications to dictate
the content of the formal & deliberate declaration of the parties
CASE: Ligon v. CA
Lesson: Since the true intent of the parties when they executed the compromise
agreement can be ascertained, the same binds them without the need of extraneous
evidence such as accepted banking & financial practices.
CASE: Chua v. CA
Facts: The contract to sell provided for the forfeiture of the “earnest money” upon
failure to pay the balance of the price “provided all papers are in proper order.” The
contract did not specify what was meant by the word “papers.” The lower court held
that the buyer was justified in refusing to pay the balance, since not “all papers”
were in “proper order” because documents pertaining to capital gains tax & the new
certificate of title to the land hat not yet been submitted. The lower court further
ordered the seller to submit first the said documents before the sale could be
considered consummated as prayed for by the buyer. Is this interpretation correct?
157 | Katrina C. Gaw | Block C 2018
Held: No. Customarily, in the absence of a contrary agreement, the submission by an
individual seller to the buyer of the following papers would complete a sale of real
estate: (1) owner’s duplicate copy of the Torrens title; (2) signed deed of absolute
sale; (3) tax declaration; and (3) latest realty tax receipt. The buyer can retain the
amount for the capital gains tax and pay it upon authority of the seller, or the seller
can pay the tax, depending on the agreement of the parties.
The buyer has more interest in having the capital gains tax paid immediately since
this is a pre-requisite to the issuance of a new Torrens title in his name.
Nevertheless, as far as the government is concerned, the capital gains tax remains a
liability of the seller since it is a tax on the seller’s gain from the sale of the real
estate. Payment of the capital gains tax, however, is not a prerequisite to the
transfer of ownership to the buyer. The transfer of ownership takes effect upon the
signing and notarization of the deed of absolute sale.
The recording of the sale with the proper Registry of Deeds and the transfer of the
certificate of title in the name of the buyer are necessary only to bind third parties to
the transfer of ownership. As between the seller and the buyer, the transfer of
ownership takes effect upon the execution of a public instrument conveying the real
estate. Registration of the sale with the Registry of Deeds, or the issuance of a new
certificate of title, does not confer ownership on the buyer. Such registration or
issuance of a new certificate of title is not one of the modes of acquiring ownership.
In this case, the seller was ready, able and willing to submit to the buyer all the
papers that customarily would complete the sale, and to pay as well the capital gains
tax. On the other hand, the buyer’s condition that a new TCT be first issued in his
name before he pays the balance, representing 94.58% of the purchase price, is not
customary in a sale of real estate. Such a condition, not specified in the contract to
sell as evidenced by the Receipt, cannot be considered part of the omissions of
stipulations which are ordinarily established by usage or custom. What is
increasingly becoming customary is to deposit in escrow the balance of the purchase
price pending the issuance of a new certificate of title in the name of the buyer. The
seller suggested this solution but unfortunately, it drew no response from the buyer.
CASE: MWSS v. Hon. Daway
Lesson: Based on previous SC rulings on the nature of letters of credit and the
customs and usage developed over the years in the banking and commercial
practice of letters of credit, SC held that except when a letter of credit specifically
stipulates otherwise, the obligation of the banks issuing letters of credit are solidary
with that of the person or entity requesting for its issuance, the same being a direct,
primary, absolute, & definite undertaking to pay the beneficiary upon the
presentation of the set of documents required therein.
CASE: Bank of America v. CA
Lesson: Letters of credit are documents used in international commerce, & hence it
is often true that there is a lack of national law directly covering letters of credit.
Hence, in interpreting the rules surrounding these instruments, SC often relies on
commercial usage & practice & international commercial credit regulatory rules such
as the Uniform Customs & Practice for Documentary Credits (UCP) issued by the
International Chamber of Commerce.
CASE: Magellan Manufacturing v. CA
Lesson: When it comes to transshipment, SC also makes use of commercial usage &
custom in the industry. Hence, in this case, it was held that it is a well-known
commercial usage that transshipment of freight without legal excuse, however
competent and safe the vessel into which the transfer is made, is a violation of the
contract and an infringement of the right of the shipper, and subjects the carrier to
liability if the freight is lost even by a cause otherwise excepted. It is highly
improbable to suppose that the shipping company in this case, having been engaged
in the shipping business for so long, would be unaware of such a custom of the trade
as to have undertaken such transshipment without the shipper’s consent and
unnecessarily expose themselves to a possible liability.
CASE: Nakpil v. CA
Facts: PBA, the owner, & United, the contractor, were arguing about who was in
charge of providing a supervisor for the constructing project. Which of the two
companies should be in charge of this?
Held: United. Ordinary practice should be that the contractor equips the jobsite with
architects & engineers whose training & expertise make them more qualified to
provide efficient supervision of the construction.
CASE: Lichauco v. Armstrong
Lesson: In determining the rate provided in the contract for mixed goods did not
apply to a contract stipulating for the carrying of rice, rice flour & broken rice, SC
relied on the commercial custom of the Saigon-HK trade where the transaction
happened. SC made reference to commentaries by the Chief Justice of HK & opined:
“It will be remembered that the contracts in question were made with reference to
the Saigon-Hongkong trade. The custom, therefore, of that trade should govern in
the interpretation of the contracts in question. It is the duty of the courts, so far as is
possible in compliance with the express provisions of law, to adopt that
interpretation given to contracts by the merchants themselves by actual practice.”
*CASE: William Golangco Construction Co. v. PCIB
Lesson: With respect to construction contracts, the adoption of a one-year guarantee
period for the contractor to make good any defect in materials & workmanship is
“established usage.”
CASE: H.R. Andreas v. BPI
Lesson: The necessity of pleading a custom depends on the type of custom involved
• If a custom is general in character, and therefore presumed to be known by
the parties, the rule is that such custom may be proved without being
specially pleaded. This is particularly true when a general custom is offered in
evidence to throw light upon a contract, the terms of which are obscure, and
which is dependent upon evidence of such general custom to make it plain.
• If the custom is local in character, the party who proposes to rely upon it
should aver it in his pleadings, and a local custom or usage applying to a
special or particular class of business may not be proven to explain even the
ambiguous terms of a contract, unless the existence of such custom or usage
is pleaded.
158 | Katrina C. Gaw | Block C 2018
CASE: BPI v. De Reny Fabric Industries
Facts: Can a bank be blamed for goods lost, which are represented by a document
of credit it issues?
Held: No. BPI provided that banks, in providing financing in international business
transactions such as those entered into here, do not deal with the property to be
exported or shipped to the importer, but deal only with documents. The Bank
introduced in evidence a provision contained in the UCP which confirms this.
The existence of a custom in international banking and financing circles negating
any duty on the part of a bank to verify whether what has been described in letters of
credits or drafts or shipping documents actually tallies with what was loaded aboard
ship, having been positively proven as a fact, the appellants are bound by this
established usage. They were, after all, the ones who tapped the facilities afforded
by the Bank in order to engage in international business.
CASE: Werr International Co. v. Highlands Prime Inc. (HPI)
Facts: HPI was a developer that hired Werr for a construction project. Under the
contract with Werr, the latter had the obligation to complete the project on Feb. 19,
2006 or pay liquidated damages. The contract itself states –
41.5. Considering the importance of the timely completion of the WORKS on the
OWNER'S commitments to its clients, the CONTRACTOR agrees to pay the OWNER
liquidated damages in the amount of 1/10th of 1% of the amount of the Contract price for
every day of delay (inclusive of Sundays and holidays).
Werr was granted several extensions, the final one being on Oct. 27. At this point,
the work was only 93.18% accomplished. The CIAC, administrative authority for the
construction industry, held that Werr incurred only 9.327 days of delay. It cited Art.
1376 & opined that in the construction industry, the industry practice was that
liquidated damages did not accrue after achieving substantial compliance. It held
that delay should be counted from Oct. 27 until the projected date of substantial
completion. On appeal, the CA reversed this aspect of the CIAC decision & held that
delay should be computed from Oct. 27 until Nov. 28 (33 days) since the contract
should prevail over industry practice. Was the CA correct?
Held: No, but neither was Werr.
• As to CA: It was wrong for the CA to hold that industry practice be rejected
because liquidated damages is provided in the agreement, autonomy of
contracts prevails, and industry practice is completely set aside. Contracting
parties are free to stipulate as to the terms and conditions of the contract for
as long as they are not contrary to law, morals, good customs, public order or
public policy. Corollary to this rule is that laws are deemed written in every
contract. SC has already previously held that substantial compliance exists as
a concept in the construction industry, & has even provided that the
threshold for substantial compliance is 95% in previous jurisprudence.
Considering the foregoing, it is wrong to immediately dismiss the application
of industry practice on the sole ground that there is an existing agreement as
to liquidated damages. As expressly stated under Arts. 1234 & 1376, and in
jurisprudence, the construction industry's prevailing practice may supplement
any ambiguities or omissions in the stipulations of the contract.
o In this case, clause 41.5 is undoubtedly a valid stipulation. However,
while clause 41.5 requires payment of liquidated damages if there is
 delay, it is silent as to the period until when liquidated damages shall
run. The agreement does not state that liquidated damages is due
until termination of the project; neither does it completely reject that it
is only due until substantial completion of the project. This omission in
the agreement may be supplemented by the provisions of the Civil
Code, industry practice, & the CIAP Document No. 102 (the document
on substantial compliance in the construction industry). Hence, the
industry practice that substantial compliance excuses the contractor
from payment of liquidated damages applies to the Agreement.
• As to Werr: Werr, as contractor, urged for the application of the construction
industry practice that liquidated damages do not accrue after the date of
substantial completion of the project. But SC rejected this claim of Werr &
found that while this industry practice may supplement the agreement, Werr
cannot benefit from it. Werr relies on an industry document CIAP Document
No. 102, but the document itself requires that the contractor completes 95%
of the work for there to be substantial completion of the project. Also, in
those cases where SC applied the industry practice to supplement the
contracts and excused payment from liquidated damages under Art. 1234,
the contractors there actually achieved 95% completion of the project.
o Here, there is no dispute that Werr failed to prove that it completed
95% of the project before or at the time of the termination of the
contract. As found by CIAC, it failed to present evidence as to what
accomplishment it achieved from the time of the last billing until the
termination of the contract. What was admitted as accomplishment
at the last billing is 93.18%. For this reason, even if the rule that no
liquidated damages shall run after the date of substantial completion
of the project is adopted, Werr cannot claim benefit for it failed to
meet the condition precedent, i.e., the contractor has successfully
proven that it actually achieved 95% completion rate.
Article 1377. The interpretation of obscure words or stipulations in a contract shall
not favor the party who caused the obscurity.
Ambiguous Words in a Contract
• Words or stipulations that are susceptible to different interpretations causing
ambiguity shall be construed against the person who chose to use such
ambiguous words or phrases.
• This is based on the maxim verba accipiuntur fortius contra proferentem.
• Contra proferentem rule – against the profferer; against the person who
drafted the contract
o If there is an ambiguity which all the other methods of construction
have failed to resolve so that there are two alternative meanings to
certain words, the court may construe the words against the party who
put forward the document & give effect to the meaning more favorable
to the other party.
CASE: Capitol Insurance v. Sadong
159 | Katrina C. Gaw | Block C 2018
Facts: There was an ambiguity as to the scope of the mortgage contract drafted by
the lawyer of the insurance company which led to a corresponding ambiguity in its
application. Can doubts in the contract be interpreted against the insurance
company?
Held: Yes. If the mortgage contract as actually drafted seems to be vague or
ambiguous, the doubt must be resolved against the party whose lawyer prepared the
document.
CASE: Nacu v. CA
Facts: The dispute involved the application of a real estate mortgage to another
loan, as the Bank intended the 1982 real estate mortgage to be applied to the 1983
loan transaction. Can the Bank insist on its intent?
Held: No. If the parties intended the 1982 real estate mortgage to apply to the 1983
loan transaction, the Bank should have required petitioners to execute the proper
loan documents clearly constituting upon the same property a real estate mortgage.
The Bank failed to do this & must therefore suffer the consequences.
Article 1378. When it is absolutely impossible to settle doubts by the rules
established in the preceding articles, & the doubts refer to incidental circumstances
of a gratuitous contract, the least transmission of rights & interests shall prevail. If
the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity
of interests.
If the doubts are cast upon the principal object of the contract in such a way that it
cannot be known what may have been the intention or will of the parties, the
contract shall be null and void.
Rule of Thumb – Greater Reciprocity of Rights for Reciprocal Obligations
• *Ex. Y (lessors) enters into a lease contract with X (lessee), where it states
that all improvements made by X will be owned by Y. X built a swimming pool,
a monument of himself, & a tower. At the end of the lease, Y says, “All this is
mine.” X, however, wants Y to pay for all the improvements. The contract
between them does not talk of payment. Does X have a right to be paid?
o Since the contract does not make a statement, use the rule of thumb
in reciprocal obligations. Thus, X will be paid for the improvements.
CASE: Central Philippine University v. CA
Facts: The deed of donation to the donee required as a condition that the donee
construct a medical school on the property donated.
The donee did not comply with the condition but contended that the donation should
nevertheless be made effective considering the length of time the donor did not
seek the enforcement of the condition. Can the donation be revoked for failure to
comply with the condition?
Held: Yes. SC ruled in favor of the donor & revoked the donation for non-compliance.
Since the deed of donation is basically a gratuitous one, doubts referring to
incidental circumstances of such contract should be resolved in favor of the least
transmission of rights & interests.
CASE: Castelo v. CA
Lesson: If the contract is onerous, the doubt shall be settled in favor of the greatest
reciprocity of interests.
Facts: Under the terms of the stipulation, respondent was bound, & entitled, to pay
the balance of P163,408 on or before 31 Dec. 1982 without incurring any liability
for any interest & penalty charges. During the grace period of 6 months, that is, from
1 Jan. 1983 to 30 June 1983, respondent vendee was given the right to pay the said
balance or any portion that had remained unpaid provided that “interest at the rate
of 12% per annum shall be charged & 1% penalty charge shall be imposed on the
remaining diminishing balance.”
The question is whether, during the period of 1 Jan. 1983 to 30 June 1983, 12%
interest per annum plus 1% penalty charge a month was payable “on the remaining
diminishing balance,” or whether during the period, only 12% per annum interest
was payable while the 1% per month penalty charge would in addition begin to
accrue on any balance remaining unpaid as of 1 July 1983.
Held: The parties likely intended the latter view of their stipulation on interest, as it
was the least onerous; for if the parties had intended that during the grace period,
interest consisting of 12% per annum plus another 12% per annum (equivalent to
1% per month), or a total of 24% per annum, was payable, then they could have
simply said so. Instead, the parties distinguished between interest at the rate of 12%
per annum & the 1% a month penalty charge.
CASE: Gaite v. Fonacier
Lesson: In onerous contracts, the rules of interpretation would incline the scale in
favor of “the greater reciprocity of interest.”
Facts: Gaite transferred to Fonacier all his goodwill, rights & interest on the
improvements he made on the area subject of a mining claim & the 24,000 tons of
iron already extracted, all for a consideration of P75,000, P10,000 of which was
paid upon the signing of the agreement.
• According to par. B of the agreement, the balance of P65,000 will be paid
from & out of the first letter of credit covering the 1st shipment of iron ores &
of the first amount derived from the local sale of iron ore made by the Larap
Mines & Smelting Co., Inc.
• There was a dispute as to whether par. B provides a suspensive period or a
suspensive condition.
Held: Greater reciprocity obtains if the buyer’s obligation is deemed to be actually
existing, with only its maturity (due date) postponed or deferred, than if such
obligation were viewed as non-existent or not binding until the ore was sold.
The sale of the ore to Fonacier was a sale on credit, & not an aleatory contract where
the transferor, Gaite, would assume the risk of not being paid at all; & the previous
sale or shipment of the ore was not a suspensive condition for the payment of the
balance of the agreed price, but was intended merely to fix the future date of the
payment.
Doubts as to Principal Object
• If there are doubts as to the principal object of the contract, in such a way
that it cannot be known what was the will of the parties, the contract shall be
void.
160 | Katrina C. Gaw | Block C 2018
• Ex. If the object of the contract is a particular house of the seller in Q.C., & he
owns 2 houses in the said locality, the contract will be considered void if it
cannot be determined which house is really the object of the contract.
Article 1379. The principles of interpretation stated in Rule 123 [now Rule 130] of
the Rules of Court shall likewise be observed in the construction of contracts.
Rule 130 of the New Rules of Court
• Sec. 10. Interpretation of a writing according to its legal meaning.
o The language of a writing is to be interpreted according to the legal
meaning it bears in the place of its execution, unless the parties
intended otherwise.
• Sec. 11. Instrument construed so as to give effect to all provisions.
o In the construction of an instrument where there are several
provisions or particulars, such a construction is, if possible, to be
adopted as will give effect to all.
• Sec. 12. Interpretation according to intention; general and particular
provisions.
o In the construction of an instrument, the intention of the parties is to
be pursued; and when a general and a particular provision are
inconsistent, the latter is paramount to the former. So a particular
intent will control a general one that is inconsistent with it.
• Sec. 13. Interpretation according to circumstances.
o For the proper construction of an instrument, the circumstances under
which it was made, including the situation of the subject thereof & of
the parties to it, may be shown, so that the judge may be placed in the
position of those whose language he is to interpret.
• Sec. 14. Peculiar signification of terms.
o The terms of a writing are presumed to have been used in their
primary & general acceptation, but evidence is admissible to show
that they have a local, technical, or otherwise peculiar signification, &
were so used & understood in the particular instance, in which the
agreement must be construed accordingly.
• Sec. 15. Written words control printed.
o When an instrument consists partly of written words & partly of a
printed form, & the two are inconsistent, the former controls the latter.
• Sec. 16. Experts and interpreters to be used in explaining certain writings.
o When the characters in which an instrument is written are difficult to
decipher, or the language is not understood by the court, the evidence
of persons skilled in deciphering the characters, or who understand
the language, is admissible to declare the characters or the meaning
of the language.
• Sec. 17. Of two constructions, which preferred.
o When the terms of an agreement have been intended in a different
sense by the different parties to it, that sense is to prevail against
either party in which he supposed the other understood it
 o When different construction of a provision are otherwise equally
proper, that is to be taken which is the most favorable to the party in
whose favor the provision was made.
• Sec. 18. Construction in favor of natural right.
o When an instrument is equally susceptible of 2 interpretations, one in
favor of natural right & the other against it, the former is to be
adopted.
• Sec. 19. Interpretation according to usage.
o An instrument may be construed acc. to usage, in order to determine
its true character.
CASE: Spouses Chin Kong Wong Choi v. UPCB
Facts: The Agreement between Primetown and UCPB provided that Primetown, in
consideration of P748,000,000 given to it by UCPB, “assigned, transferred,
conveyed and set over unto [UCPB] all Accounts Receivables accruing from
[Primetown’s Kiener] x x x together with the assignment of all its rights, titles,
interests and participation over the units covered by or arising from the Contracts to
Sell from which the Accounts Receivables have arisen.”
The Agreement further stipulated that “x x x this sale/assignment is limited to the
Receivables accruing to [Primetown] from the [b]uyers of the condominium units in x
x x [Kiener] and the corresponding Assignment of Rights and Interests arising from
the pertinent Contract to Sell and does not include except for the amount not
exceeding 30,000,000.00, either singly or cumulatively any and all liabilities which
[Primetown] may have assumed under the individual Contract to Sell.” Should the
provision be construed in favor of UCPB or Primetown?
Held: UCPB.
• The Agreement conveys the straightforward intention of Primetown to “sell,
assign, transfer, convey and set over” to UCPB the receivables, rights, titles,
interests and participation over the units covered by the contracts to sell. It
explicitly excluded any and all liabilities and obligations, which Primetown
assumed under the contracts to sell. The intention to exclude Primetown’s
liabilities and obligations is further shown by Primetown’s subsequent letters
to the buyers, which stated that “this payment arrangement shall in no way
cause any amendment of the other terms and conditions, nor the
cancellation of the Contract to Sell you have executed with [Primetown].” It is
a basic rule that if the terms of a contract are clear and leave no doubt upon
the intention of the parties, the literal meaning shall control. The words
should be construed according to their ordinary meaning, unless something
in the assignment indicates that they are being used in a special sense.
Furthermore, in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered.
• It was not clear whether the “amount not exceeding 30,000,000” in the
Agreement referred to receivables or liabilities. Under the Rules of Court,
when different constructions of a provision are otherwise equally proper, that
is to be taken which is the most favorable to the party in whose favor the
provision was made. The Agreement’s whereas clauses provided that
Primetown desired to settle its obligation with UCPB. Therefore, the tenor of
161 | Katrina C. Gaw | Block C 2018
the Agreement is clearly in favor of UCPB. Thus, the excluded amount
referred to receivables.
“Invalid” Contracts
• “Invalid” contract is an imprecise term when used in relation to contracts in
the Civil Code
• Specific names in designating defective contracts, namely:
o Rescissible (Art. 1380, etc.)
o Voidable (Art. 1390, etc.)
o Unenforceable (Art. 1403, etc.)
o Void or inexistent (Art. 1409, etc.)
CHAPTER 6. RESCISSIBLE CONTRACTS
Article 1380. Contracts validly agreed upon may be rescinded in the cases
established by law.
Rescissible Contracts
• Valid, but may be subsequently terminated on legal grounds
• Not principally premised on a breach of trust by the other party, but on some
economic damage as a result of inequitable conduct by one party
• BUT, if the contract is in fraud of creditors, as well as completely simulated
because there is absolutely no consideration, it is void.
CASE: Dilag v. CA
Lesson: A contract in fraud of creditors but completely simulated is considered void
& not merely rescissible.
Facts: A deed of sale was entered into by the Dilag spouses & children in 1974
during the pendency of Civil Case No. 8714 in which Arellano, a creditor, was
seeking for a money judgment against the spouses.
However, the Dilag spouses remained the registered owners of the lot & executed a
real deed of sale only in 1981, when title was actually transferred to the children.
Furthermore, during the entire period covered, the actual possessor of the land was
Diancin, who the spouses leased the property to. Diancin, however, gave way &
handed the property to Arellano when the latter obtained the money judgment in
1979 in his favor. The Dilag children are now asserting their rights over the disputed
lot. Can the Dilag children rightfully claim the lot is theirs through the first deed of
sale?
Held: No. The first deed of sale executed in 1974 was evidently fictitious & was
executed in fraud of creditor Arellano, as the children relied on the 1981 deed of
sale to uphold their claim. The first deed of sale was, therefore, void. The spouses
continued to be the ones who executed acts of ownership, including renting out to
Diancin.
Rescission in Art. 1191 v. Art. 1380
Art. 1191 (Rescinding Reciprocal Art. 1380 (Rescissible Contracts)
Obligations)
Monetary damage is not essential There is damage to a party
Based on breach (sources of liability) Financial, economic, quantifiable
damage
Class Discussion
Article 1380 must involve ECONOMIC DAMAGE (up to the extent of the damage).
This is different from Article 1191 – here, there is a resolution, based on breach of
trust; you end the contract because of the grounds of (1) fraud, (2) delay, etc.
*Article 1381. The ff. contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they
represent suffer lesion by more than ¼ of the value of the things which are
the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors, when the latter cannot in any other
manner collect the claim due them;
(4) Those which refer to things under litigation if they have been entered into by
defendant without knowledge & approval of the litigants or of competent
judicial authority [object is under the custody of the court];
(5) All other contracts specially declared by law to be subject to rescission.
Guardians & the Property of His Ward
• Lesion – implies economic damage
• When there is court approval, any action is VALID
o Any act of ownership or disposition undertaken by the guardian on
behalf of his ward without court approval is void
• Rescissible – when guardian performs acts of administration (e.g., buying
materials for fixing the roof) which were not actually necessary, making such
purchase useless, & the lesion suffered is more than ¼ of the value of the
things which are the object of the contract
Class Discussion
Guardians can only do acts of administration, not acts of dominion. If there is no
order from the court to sell and the guardian sells, then the guardian is in bad faith.
Absentees
• The absence of a person may be declared:
o In 2 years - without any news about the absentee or since the receipt
of the last news
o In 5 years - in case the absentee has left a person in charge of the
administration of his property
• When a person disappears from his domicile, his whereabouts being
unknown, the judge, at the instance of an interested party, relative, or friend,
can appoint a person to represent him when necessary
o Administrator or representative – manages the properties of the
absentee
• Same rules governing guardians govern administrators
162 | Katrina C. Gaw | Block C 2018
Contracts in Fraud of Creditors
• When a contract is entered into in bad faith by the parties, purposely to evade
due obligations in favor of creditors who have no other way to collect their
debts
• CASE: Bobis v. Provincial Sheriff of Camarines Norte
o Facts: It was contested that the sale in this case was fraudulent due to
inadequate price. Is this enough to invalidate the sale?
o Held: No. There was no proof that the parties to the contract entered
into the obligation to defraud the creditor. Fraud is not presumed. It
must be proved by clear preponderance of evidence. There must be a
showing of all these requisites concurring:
1) Both contracting parties acting maliciously & with fraud
2) Their purpose is to prejudice creditors
3) The creditors are deprived by the transaction of all means by
which they may effect collection of their claims.
In this case, there was no showing that the land involved was the only
property the debtors had which the creditor could pursue. The creditor
also did not annotate the title to protect his interests.
CASE: Marsman Investment Ltd. v. Phil. Abaca Development Co. (PADCO)
Facts: The company involved, Marsman, waived the debts of the debtor PADCO &
released PADCO from its obligations. Years later, Marsman filed an action for
rescission, citing the fact that it was a creditor of PADCO. Can there be rescission?
Held: No. There can be no rescission. Until & unless those waivers of the debts are
set aside, the corporation ceased to be a creditor of PADC0, & was thereafter
deprived of any interest in assailing the validity of the transfer of its properties. Only
actual creditors can ask for the rescission of the conveyance made by their debtors
in favor of strangers.
Things Under Litigation
• Rescissible if they have been entered into by the defendant without the
knowledge & approval of the litigants or of competent judicial authority.
o Ex. In a replevin suit where plaintiff seeks to recover personal property
from the defendant, the latter, during the pendency of the suit, cannot
sell in bad faith the property being litigated to any 3rd person. If he
does & the transferee also acts in bad faith, the contract is rescissible
CASE: Ada v. Baylon
Lesson: (1) The rescission of a contract under Art. 1381 (4) requires the
concurrence of the following elements:
1) The defendant, during the pendency of the case, enters into a contract which
refers to the thing subject of litigation;
2) The said contract entered into was without knowledge & approval of the
litigants or of a competent judicial authority.
Where these 2 concur, it is the duty of the court to order the rescission of the
contract.
(2) It should be stressed that the defendant in such a case is not absolutely
proscribed from entering into a contract which refer to things under litigation. If, for
instance, a defendant enters into a contract which conveys the thing under litigation
during the pendency of the case, the conveyance would be valid, there being no
definite disposition yet coming from the court with respect to the thing subject of
litigation. After all, notwithstanding that the subject thereof is a thing under litigation,
such conveyance is but merely an exercise of ownership.
This is true even if the defendant effected the conveyance without the knowledge
and approval of the litigants or of a competent judicial authority. The absence of
such knowledge or approval would not precipitate the invalidity of an otherwise valid
contract. Nevertheless, such contract, though considered valid, may be rescinded at
the instance of the other litigants pursuant to Art. 1381 (4).
Facts: During the pendency of a case, the respondent donated a property to
Florante. The petitioners sought the rescission of this donation, for the same
property donated to Florante was the subject of a pending partition case with the
RTC. Furthermore, the respondent in the partition case did not inform or seek the
approval of petitioners or the RTC before making the donation to Florante. May the
donation be rescinded?
Held: Yes. Although the gratuitous conveyance of the said parcels of land in favor of
Florante was valid, the donation inter vivos of the same being merely an exercise of
ownership, respondent’s failure to inform and seek the approval of the petitioners or
the RTC regarding the conveyance gave the petitioners the right to have the said
donation rescinded pursuant to Article 1381 (4).
Also, the assertion that rescission may only be had after the RTC had finally
determined that the proper partitioning of the properties in the partition case. The
petitioners’ right to institute the action for rescission pursuant to Art. 1381 (4) is not
preconditioned upon the RTC’s determination as to the ownership of the said parcels
of land. The right to ask for the rescission of a contract under Article 1381 (4) is not
contingent upon the final determination of the ownership of the thing subject of
litigation.
Other Contracts Subject to Rescission Under the Law
• *CASE: Litonjua v. LR Corporation
o Lesson: Right of first refusal is an example of a rescissible contract.
o Facts: The creditor lent the money to the debtor who, in turn,
collateralized his property to secure the loan.
o Held: The failure of the debtor to recognize the stipulated right of first
refusal contained in the loan-mortgage agreement in favor of the
creditor makes any sale of the property to a 3rd person rescissible at
the instance of the creditor.
§ Right of first refusal - in the event debtor decides to sell his
property, he must first offer the same to the creditor first
§ The consideration for the loan-mortgage includes the
consideration for the right of first refusal
§ To deprive the creditor of this right of first refusal will prejudice
the creditor in his substantial interests to be able to own the
property.
§ A contract of sale entered into in violation of a right of first
refusal of another person, while valid, is rescissible
163 | Katrina C. Gaw | Block C 2018
Important Pointers for Art. 1381
• All defendants under Art. 1381 must be in bad faith; if one of the persons is
not in bad faith, that person cannot be made liable.
• The action is subsidiary; exhaust all remedies of the person initially in bad
faith before you can do anything else or before you can rescind the contract
Article 1382. Payments made in a state of insolvency for obligations to whose
fulfillment the debtor could not be compelled at the time they were affected, are also
rescissible.
Insolvent Debtor
• A debtor whose liabilities already exceed his assets & who can barely pay off
his debts.
• If such debtor pays off a creditor whose credit has not yet become due, that
payment can be rescinded.
o Prior judicial declaration of insolvency of the debtor is NOT necessary.
• CASE: De La Paz vs. Garcia
o Facts: The transfer of property was made after an insolvency
proceeding was filed with the competent court, and such transfer was
also claimed as in fraud of creditors.
o Held: The transfer was not rescissible under the Civil Code but void
under the Insolvency Law.
Class Discussion
Once a petition for insolvency is filed, any disposition or payment is void. The
demarcation is the filing of the insolvency case. Prior to filing, it is rescissible. After,
it is void.
Article 1383. The action for rescission is subsidiary; it cannot be instituted except
when the party suffering damage has no other legal means to obtain reparation for
the same.
Action for Rescission
• Rescission – a relief the law grants on the premise that the contract is valid,
for the protection of one of the contracting parties & 3rd persons from all
injury & damage the contract may cause, or to protect some incompatible &
preferential right created by the contract
• Action for rescission is also called accion pauliana
• Accion pauliana requires a proper & direct action filed for that purpose & not
on a mere motion incidental in another case (an action for rescission cannot
be collaterally raised in a proceeding which pertains to a separate action)
• Also cannot be raised in a summary proceeding; it must be full-blown trial
o Cannot be done by mere motion of defender
Remedy of Last Resort
• If there are other means to claim reparation, such other means must be
availed of first before resorting to an action for rescission.
 • Accion pauliana (a separate, independent action) is a remedy last of resort;
filing of separate court cases must first be undertaken
o When implementation of decision of court case fails, one can rescind
• The date of the decision of the trial court is immaterial.
o What is important is that the credit of the plaintiff antedates that of
the fraudulent alienation by the debtor of his property.
o After all, the decision of the trial court against the debtor will retroact
to the time when the debtor became indebted to the creditor.
• Requisites for an action for rescission:
1) A judgment;
2) The issuance by the trial court of a writ of execution for the
satisfaction of the judgment; &
3) The failure of the sheriff to enforce & satisfy the judgment of the court.
4) The creditor’s exhaustion of the property of the debtor.
• CASE: Goquilay v. Sycip
o Lesson: An action for rescission is subsidiary & can be instituted only
when the party suffering damage has no other legal means to obtain
reparation for the same. If there is no allegation, or evidence, of
exhaustion of other remedies on the part of a creditor, then said
creditor cannot maintain an action for rescission, EVEN IF fraud
actually did exist.
Situation 1
Q: A, guardian, through acts of fraud, damaged the ward, B, for more than ¼. A is
thus liable to the extent of the excess of that ¼. A bought & paid for roof proofing
materials from a supplier where there was lesion for more than ¼. B reaches the
age of 18. Who should B sue first, the supplier, or A?
A: A first; seek damages from A first. If thereafter A, guardian does not have money,
then only then can there be rescission of the contract with the supplier, since that is
subsidiary.
Situation 2
Q: Judgment creditor wins. Judgment debtor does not pay. Judgment creditor files a
motion for the issuance of writ of execution. First, the sheriff levies on personal
property; in the absence thereof, the sheriff tried real property. After that, however,
there was no more property of the judgment debtor. What is the second to the
endpoint?
A: Sheriff informs the court in his return that no property is leviable.
Q: What is the next step?
A: Accion subrogatoria; the creditor will collect from the debtor of the debtor. If not
available, then rescission is the next step. This is called “accion pauliana.”
Note that the accion pauliana can only be direct; it cannot be collateral. A separate
case will have to be filed.
Q: What is the prescriptive period for accion pauliana?
A: 4 years from the exhaustion of everything because the action is subisidiary.
Q: What if the buyer of the judgment debtor is in good faith; can the judgment
creditor run after the buyer?
A: NO, because buyer is in good faith.
164 | Katrina C. Gaw | Block C 2018
Article 1384. Rescission shall be only to the extent necessary to cover the damages
caused.
Partial Rescission
• Since rescission presupposes a valid contract, it need not be rescinded totally
• Remedy shall be only up to the extent necessary to cover the damages
caused.
o Ex. A is indebted to X for P5,000 &, to defraud X, A transfers his 2
houses, each worth P5,000, to B who is also in bad faith. Rescission
can be had only with respect to 1 house worth P5,000 because it is
only up to this amount that X has been damaged.
Article 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, & the price with its interest;
consequently, it can be carried out only when he who demands rescission can return
whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of 3rd persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the
loss.
*Restitution Following Rescission
• Parties shall be placed in the same position where they were before they
entered into the assailed contract.
o Objective: To restore the parties to their original position
• RETURN: The object subject of the rescissible contract + fruits or interest, if
any
• If the object of the contract cannot be restored because of loss, damages
may be claimed from the person responsible for the loss.
o A party cannot rescind & at the same time retain the consideration, or
a part of the consideration. One cannot have the benefits of rescission
without assuming its burdens.
• HOWEVER, if object is with person in good faith, there can be no restitution,
only damages from the party who caused the controversy
o Ex. If a father, with the intent to defraud his creditors, sold the
property to his son for a valuable consideration but below the fair
market value of the same, such a sale is valid & not even rescissible if
the son was without any knowledge of the ulterior motive of his father
to defraud his creditors.
§ Mere inadequacy of price does not invalidate a contract.
§ For the son therefore the consideration can still be considered
a fair price. In short, the son was clearly in good faith and
therefore the contract of sale cannot be rescinded.
• Good faith is always presumed unless contrary evidence is adduced
o Purchaser in good faith - one who buys the property of another without
notice that someone else has a right or interest in such a property &
 pays a full & fair price at the time of the purchase or before he has
notice of the claim or interest of some other person in the property
Article 1386. Rescission referred to in Nos. 1 & 2 of Article 1381 shall not take place
with respect to contracts approved by the courts.
Approval by the courts implies that the parties were given their day in court to justify
to the court the necessity & reasonableness of the contract to be entered into.
Hence, once judicially approved, such contract cannot anymore be the subject of
rescission.
Court Approval of Contracts
• Implies that the parties were given their day in court to justify to the court the
necessity and reasonableness of the contract to be entered into.
• Once judicially approved, such contract cannot be the subject of rescission.
Article 1387. All contracts by virtue of which the debtor alienates property by
gratuitous title are presumed to have been entered into in fraud of creditors, when
the donor did not reserve sufficient property to pay all debts contracted before the
donation.
Alienations by onerous title are also presumed fraudulent when made by persons
against whom some judgment has been rendered in any instance or some writ of
attachment has been issued. The decision or attachment need not refer to the
property alienated, & need not have been obtained by the party seeking the
rescission.
In addition to these presumptions, the design to defraud creditors may be proved in
any other manner recognized by the law of evidence.
Rebuttable Presumptions of Art. 1387
• Presumptions can only arise from facts or a set of facts.
o *Ex. B is indebted to D for P10,000, E for P7,000, & F for P13,000. All
of the debts are due. B has money in the bank in the amount of
P60,000. B donates P55,000 to X.
§ The donation is presumed to be fraudulent as he has not
reserved sufficient property to pay all debts contracted before
the donation.
§ If the debts are not yet due, it shall be presumed fraudulent
because the only requirements of the law are that the debts
are contracted prior to the donation, & that there is no
reservation of sufficient property to pay all debts contract
before the donation. The maturity of the debts is not a
requirement.
§ The presumption can be controverted by convincing evidence
that the donation was not in fraud of creditors.
• When alienation by onerous title has been made “by persons against whom
some judgment has been rendered in any instance or some writ of
attachment has been issued.”
o The presumption can be rebutted by convincing evidence to the
contrary.
165 | Katrina C. Gaw | Block C 2018
o An alienation made during the pendency of a suit is not enough. There
must already be a decision or a writ of attachment.
o Ex. A is able to obtain a writ of attachment against debtor B. The
attachment effectively places his property in Mandaluyong under the
custody of the court so that, in the event A wins the case, such
property, if necessary, can be sold to pay the judgment debt.
§ Subsequently B sells his property in Laguna to Z. There is a
presumption of a fraudulent alienation even if the Laguna
property is not the subject of the attachment.
• Attachment need not refer to the property alienated.
§ A can seek the rescission of the sale by B to Z of the property in
Laguna.
§ Also, if a decision has been rendered against B in favor of
another creditor X, & B sells the property in Laguna to M, there
is also a presumption of fraudulent transaction, & A can file a
case to rescind the sale even if the decision has not been
obtained by him but by X.
CASE: Provincial Sheriff of Pampanga v. CA
Facts: An action for recovery was filed by X, Y & Z against B & C. At the same time, B
was a furniture dealer under the Modern Furniture Store, which burned down,
together with its contents. As a result, B surrendered his license to operate the store.
• B’s brother, D, put up a new store on the same site, also called Modern
Furniture Store. D secured new license & privilege tax for the store.
• On the same date of payment of tax, B verbally transferred Modern Furniture
Store to his brother D.
• The trial court rendered judgment against B & C, affirmed by CA. A writ of
execution was issued; the Provincial Sheriff levied pieces of furniture found in
Modern Furniture Store.
• D filed a 3rd-party claim with the sheriff, saying the property did not belong to
B, but to himself.
• D filed a case to be declared the owner of the furniture levied & damages
against X, Y & Z plus the sheriff, & a writ of preliminary injunction to stop the
sale.
Will Art. 1387 apply in this case?
Held: No. Art. 1387 applies only when there has in fact been an alienation or
transfer, whether gratuitously or by onerous title. D’s store is entirely new &
different from his brother B’s, as D’s store had completely new content despite the
same name & style, since B’s things were burned down. There was no transfer, as a
matter of fact, thus, there was no actual fraud — D owns the properties in question.
Class Discussion
Q: A is creditor, while B is debtor. A filed a case against B on Mar. 1, 2017. Learning
that a case was filed against him, B sold to X his house (on Mar. 10, 2017), with X
knowing the scheme of B. For a 10M house, X only paid P1M to facilitate the
transfer. On Mar. 6, 2017, a writ of attachment was issued by the court. If the sale
occurred on Mar. 3, instead of Mar. 10, will there be a presumption of fraud?
A: NO, because the sale occurred merely after the filing. The presumption of fraud & the aggrieved party has unsuccessfully
will attach if there is disposition AFTER a writ of attachment is issued or AFTER a exhausted all other legal remedies
decision is issued.
Q: What if it happened on Mar. 10; would there be a presumption of fraud? Ex. For a minor, the period begins from
A: NONE, because under jurisprudence, if in between the sale and writ of attachment the time he reaches 18 years old & has
involving immovable property, there must be a REGISTRATION OF THE WRIT OF unsuccessfully exhausted all legal
ATTACHCMENT. If there is NO REGISTRATION OF THE WRIT OF ATTACHMENT, even if remedies
it occurred after the attachment, there is still no presumption of fraud. There must Absentees From the time the domicile of the
hence be registration before the assumption of fraud can arise. absentee is known, the absentee learns
of the contract & said absentee has
Class Discussion unsuccessfully exhausted all other legal
Note that the presumption of fraud can be rebutted. remedies to be able to recover what
was lost
Article 1388. Whoever acquires in bad faith the things alienated in fraud of creditors,
shall indemnify the latter for damages suffered by them on account of the alienation, Note
whenever, due to any cause, it should be impossible for him to return them. 1. Domicile of natural persons - place of
If there are 2 or more alienations, the 1st acquirer shall be liable 1st, & so on habitual residence
successively. 2. Judicial persons - place where their
legal representative is established or
Bad Faith Acquirer of Property Alienated in Fraud of Creditors where they exercise their principal
• Liable to the creditor for damages, if it should be impossible for the function
transferee to return the subject property. In fraud of creditors From the time of the discovery of the
o The knowledge of the evasive & fraudulent designs of the debtor fraud & after he has unsuccessfully
makes the said transferee’s acquisition tainted with bad faith. exhausted all other legal remedies
• If the transferee in bad faith transfers the property to a subsequent buyer Contracts entered into without the From the time of knowledge of the
who is likewise in bad faith, the latter shall have the obligation to return said knowledge & approval of the litigants or transaction & unsuccessful exhaustion
property if it is still possible to do so. If not, he shall be liable for damages. of competent judicial authority of all other legal remedies
o However, if such buyer is in good faith, his purchase is valid, making it
impossible for the 1st transferee to return the property, in which case CHAPTER 7. VOIDABLE CONTRACTS.
such 1st transferee shall be liable for damages.
*Article 1390. The ff. contracts are voidable or annullable, even though there may
Class Discussion have been no damage to the contracting parties:
Q: A is the creditor of B. B mortgaged a property for the debt he owed A. B did not (1) Those where one of the parties is incapable of giving consent to a contract;
pay, so A tried to foreclose on the property of B. B, however, had already sold the (2) Those where the consent is vitiated by mistake, violence, intimidation, undue
property, back when he had not yet received the summons for foreclosure. Is B guilty influence or fraud.
of fraud? These contracts are binding, unless they are annulled by a proper action in court.
A: No. There is no writ of attachment or judgment yet. They are susceptible of ratification.

Article 1389. The action to claim rescission must be commenced within 4 years.
For persons under guardianship & for absentees, the period of 4 years shall not
begin until the termination of the former’s incapacity, or until the domicile of the
latter is known.
Different Grounds & Beginning of Cause of Action
*NOTE: In all cases, aggrieved party must have unsuccessfully exhausted all
possible remedies to enforce the obligation or to recover what has been lost.
Those under guardianship From the time the incapacity terminates
Voidable Contracts
• Valid until annulled
• Any defect or infirmity causing its annullable nature can be cured by the party
aggrieved or injured by ratification
• Effects of annulment operate prospectively
o Do NOT retroact to the time the contract was made
• Grounds enumerated are already explained under Article 1327-1344.
• *Damage need not exist.
Class Discussion: Rundown of Grounds for Annulment

166 | Katrina C. Gaw | Block C 2018

1. Deaf-mute who cannot write (remember, again, that “read & write” is not the § During A’s minority, though obtaining a court order to sell the
qualifier) property of his ward, B fraudulently transferred A’s property to
2. Minor a 3rd party.
3. Fraud § A cannot take action yet because B is the one taking charge of
4. Intimidation his affairs. However, A must file a case against B within 4 years
5. Violence from the time:
6. Undue influence • A reaches the age of majority, &/or
7. Drunkenness • The guardianship has ceased
8. Hypnotism
9. Mistake Extrajudicial Demand
10. Persons suffering from civil interdiction • GR: Extrajudicial demand of creditor shall interrupt the running of the
11. Incompetents under guardianship prescriptive period
12. Insane or demented persons o HOWEVER, this only applies to a determinate conduct that can be
demanded
*Article 1391. The action for annulment shall be brought within 4 years. • If a contract of sale is alleged as voidable, & the aggrieved party who was
This period shall begin: coerced or fooled (creditor-seller) makes an extrajudicial demand for the
In cases of intimidation, violence or undue influence, from the time the defect of the reconveyance of the property prior to the filing of the suit, the prescriptive
consent ceases. period is NOT interrupted
In case of mistake or fraud, from the time of the discovery of the same. o Reason: A voidable contract is valid until annulled by the courts;
And when the action refers to contracts entered into by minors or other debtor-buyer thus has no obligation to acede to a demand until the
incapacitated persons, from the time the guardianship ceases. courts annul it
o In voidable contracts, judicial demand is necessary to interrupt the
Start of Periods running of the prescriptive period.
1. Intimidation, violence or undue influence (IVU) – from the time the defect of
the consent ceases *CASE: Mialilhe v. CA
o Ex. B wants to lease his property to A. Lesson: For intimidation & force, the period begins 4 years from the time the
§ He coerces A to enter into said lease contract by continually intimidation ceases, & this period is not stopped by extrajudicial demand; one must
threatening A with serious bodily injury. go immediately to the courts.
• A is excused from not filing a case for annulment while Facts: X claimed that, during the Marcos era, he was intimidated & forced to enter
the threat is still existing into a contract with DBP, a government bank, that led to the forced conveyance of
§ If B finally reforms & stops the threats, the 4-year period for A his property to DBP. X made several extrajudicial demands for the return of his
to annul the contract will commence from the cessation of the property. X filed suit to recover the property on Mar. 23, 1990. Will the action still
threat prosper?
o CASE: Rodriguez v. Rodriguez Held: No. The action has prescribed. Marcos left the Philippines on Feb. 24, 1986;
§ Facts: X filed a case for annulment against Y on the ground of this X should have filed suit on or before Feb. 24, 1990. Since there had been no
duress, 28 years after the intimidation is claimed to have annulment of the contract yet, there was no determinate duty for DBP to heed the
occurred, & 9 years after Y died. demand to reconvey.
§ Held: Action is already barred by prescription.
2. Mistake or fraud – from the time of the discovery of the same Class Discussion
o Ex. A, an expert jeweler, induces B in 1990 to buy a ring, knowingly GR: When you make a written extrajudicial demand, the prescriptive period will start
misrepresenting to B that it was made in diamond when it was made to run anew.
only of crystal. EXC: In annulment, this rule does not apply. (Mialilhe v. CA)
§ If B discovers the fraud in 1997, the 4-year period shall start
only from 1997. Article 1392. Ratification extinguishes the action to annul a voidable contract.
3. Minors or other incapacitated persons – from the time the guardianship
ceases Article 1393. Ratification may be effected expressly or tacitly. It is understood that
o Ex. B is A’s guardian. there is a tacit ratification if, with knowledge of the reason which renders the
contract voidable & such reason having ceased, the person who has a right to invoke

167 | Katrina C. Gaw | Block C 2018

it should execute an act which necessary implies an intention to waive his right.
Ratification
• The act of curing the defect which made the contract annullable
• Ex. If A is coerced by B to lease B’s property.
o Express ratification –After B stops the coercion, A writes a letter to B
stating that A will continue the lease.
o Tacit ratification – After B stops, A willingly & continuously pays the
rentals for the subject leased premises to be able to live in the same
o In both cases, if A files an action to annul the agreement based on
force, it will not prosper even if it is within the 4 years.
CASE: Francisco v. GSIS
Lesson: There can be no ratification by a corporation of acts performed by an officer
if he has not been given apparent authority by the corporation, or if his acts are not
later validated by the corporation.
Facts: X, the plaintiff, sent a letter of compromise to GSIS, which GSIS validly
accepted. The terms of the offer were clear, & over the signature of GSIS’s general
manager, X was telegraphically informed that her proposal was accepted. It was sent
by the GSIS secretary & the manager never disowned the same.
• In a letter remitting the payment of P30,000 advanced by X’s father, X quoted
verbatim the telegraph of acceptance.
• This was in itself notice to the corporation of the terms of the allegedly
unauthorized telegram. Notwithstanding this notice, GSIS pocketed the
amount and kept silent about the telegram.
Was there ratification on the part of the corporation?
Held: Yes. The Court found sufficient evidence of apparent authority through the
conduct & actuations of the corporations concerned. This silence, taken together
with the unconditional acceptance of 3 other subsequent remittances from plaintiff,
constitutes a binding ratification of the original agreement.
CASE: Liquidators v. Kalaw
Lesson: The apparent authority of the one in a supposedly annullable contract will
serve as a barrier to further corporate action later, even if the by-laws of a
corporation require a different process.
Facts: Kalaw entered into a contract with NACOCO with only the general maanger’s
consent & without prior board approval.
• The practice of NACOCO has been to allow the general manager to negotiate
& execute contracts for & in NACOCO’s behalf without prior board approval.
• The by-laws, however, required the board to give their stamp of prior approval
in all corporate acts.
Are the Kalaw contracts valid acts?
Held: Yes. The Kalaw contracts are valid corporate acts, because the board itself, by
its acts and through acquiescence, practically laid aside the by-law requirement of
prior approval.
Tacit Ratification
1) Person who has the right to invoke ratification has knowledge of the reason
which renders the contract voidable
168 | Katrina C. Gaw | Block C 2018
2) The reason has ceased
3) Person executes an act which necessarily implies an intention to waive his
right
CASE: Spouses Viloria v. Continental Airlines
Lesson: Implied ratification can take diverse forms, such as by silence or
acquiescence; by acts showing approval or adoption of the contract; by acceptance
& retention of benefits flowing therefrom.
Facts: The Spouses Viloria claimed that their consent in buying the airplane ticket
was vitiated & therefore the contract was annullable. At the same time, however,
they used their right under the same contract to purchase new tickets. Is the
position of the spouses tenable?
Held: No. The Spouses impliedly ratified the contract when they exercised their right
to use the subject tickets for the purchase of new ones. Ratification extinguishes the
action to annul a voidable contract.
It is to be noted also that, simultaneous to asking for a refund on the ground of
vitiated consent, the Spouses seek a refund based on the airline’s supposed bad
faith in reneging on its undertaking to replace the subject tickets. In doing so,
Spouses Viloria are actually asking for a rescission of the subject contracts based on
contractual breach. Resolution, the action referred to in Art. 1191, is based on the
defendant’s breach of faith, a violation of the reciprocity between the parties, & a
claim for a reimbursement in view of the other party’s failure to comply with his
obligations under the contract is one for rescission or resolution.
However, annulment under Article 1390 and rescission under Article 1191 are 2
inconsistent remedies.
Resolution (Art. 1191) Annulment (Art. 1390)
All the elements to make the contract One of the essential elements to a
valid are present formation of a contract, which is
consent, is absent
Defect is in the consummation stage of Defect is already present at the time of
the contract when the parties are in the the negotiation and perfection stages of
process of performing their respective the contract
obligations
Accordingly, by pursuing the remedy of rescission under Art. 1191, the Vilorias had
impliedly admitted the validity of the subject contracts, forfeiting their right to
demand their annulment. A party cannot rely on the contract and claim rights or
obligations under it and at the same time impugn its existence or validity. Indeed,
litigants are enjoined from taking inconsistent positions.
Class Discussion
Just like rescission, voidable contracts are subject to ratification.
Article 1394. Ratification may be effected by the guardian of the incapacitated
person.
Guardian & Ratification
• Guardian – administers the person & properties of the ward
o Everything undertaken for the ward is for the latter’s best interest
 • Ratification can be made by the guardian of an incapacitated person.
• Ex. If an insane person entered into a contract with a carpenter to repair the
roof of his house, this contract can be annulled, as it was entered into by an
incapacitated person.
o But also, the guardian can make an express or tacit ratification of the
repair, especially if it redounds to the benefit of the ward
Article 1395. Ratification does not require the conformity of the contracting party
who has no right to bring the action for annulment.
Ratification as a Unilateral Act
• Generally done by the injured party, not by the party causing injury
• The consent of the injuring party is not required because such party normally
desires the effectivity of the contract anyway from its inception
Article 1396. Ratification cleanses the contract from all its defects from the moment
it was constituted.
Effects of Ratification
• Transforms the contract completely as one without infirmity
• Cures the defect which initially made the contract voidable
• Retroacts to the day when the contract was entered into
Article 1397. The action for the annulment of contracts may be instituted against all
who are thereby obliged principally or subsidiarily. However, persons who are
capable cannot allege the incapacity of those with whom they contracted; nor can
those who exerted intimidation, violence, or undue influence, or employed fraud, or
caused mistake base their action upon these laws of the contract.
Theory of Relativity vis-à-vis Art. 1397
• GR: Strangers to a contract cannot sue either or both of the contracting
parties to annul & set it aside, because contracts take effect only between
the parties, their assigns, & heirs.
o Ex. Under the law, heirs are not liable beyond the value of the property
he received from the decedent.
• EXC (Ibañez v. HSBC, as explained in Malabanan v. Gaw Ching): He who is not
the party obligated principally or subsidiarily in a contract may perhaps be
entitled to exercise an action for nullity, if:
1) He is prejudiced in his rights with respect to one of the parties
2) He can show the detriment which positively would result to him from
the contract in which he had no intervention
o A contract that affects a stranger to the said contract can be
nullified only to the extent that such nullification is absolutely
necessary to protect the plaintiff’s lawful rights.
§ No need to set aside the entire contract.
Class Discussion
169 | Katrina C. Gaw | Block C 2018
Q: Can a 3rd person file case for annulment?
A: GR: NO.
EXC: Injury or damage or prejudice; then that 3rd person can file a case for
annulment.
Q: A (debtor) borrowed money from B (creditor). A & B entered into a contract of
mortgage, under which the house and lot of A was mortgaged. This was entered into
by force and intimidation. Can a mortgagor sell his property under mortgage?
A: Yes.
Q: If the contract stipulates that he cannot sell the property, is that valid?
A: No.
Q: A, so he would no longer have problems, sold the mortgaged property to C. If A
does not pay, but now C owns the house and lot, can B still foreclose the house and
lot?
A: Yes, because this is a real right (one of the exceptions to the principle of relativity).
Q: Can C file a case for annulment of contract of mortgage?
A: Yes, because he suffers prejudice and is affected. Hence, though he is a 3rd
person, he can file the case for annulment.
CASE: Malabanan v. Gaw Ching
Lesson: A person leasing the property from a lessor does not fall under the exception
of 3rd parties who can filed an action for annulment of any contract the lessor may
enter into with a 3rd person.
Facts: X & Y executed a sale of X’s property to Y. Gaw Ching wishes to intervene,
invoking his right of preemption in respect of the house & lot involved. Gaw Ching
leased the lot from X for many years already. Can Gaw Ching intervene?
Held: No. Gaw Ching does not fall in the exception to the general rule that strangers
in a contract cannot file an action to annul it.
• X thrice offered the land to Gaw Ching but the latter had refused to buy. Since
Gaw Ching did not accept the offer to sell & did not buy the land, he suffered
no prejudice by the sale of the same piece of land to Y. No fraud was thus
worked upon him notwithstanding his insinuation that the sale of the land to
Y had preceded the offer to himself.
• The fact that Gaw Ching had been lessee was simply not enough basis for a
right to bring an action to set aside the contract of sale between X & Y. A
lessee, it is elementary, cannot attack the title of his lessor over the subject
matter of the lease.
CASE: Armentia v. Patriarca
Lesson: Generally, an intestate20 heir is not contemplated as one of the parties that
can be considered principally involved; only forced21 or testamentary heirs are. Thus,
intestate heirs cannot file actions to annul contracts entered into by the original
owner & 3rd parties.
Facts: X was the brother of deceased Y; X is an intestate, rather than a forced heir
under the law on succession. Y was free to dispose her properties the way she liked,
20Someone who inherits the properties of the deceased who has left no will.
21An heir who cannot be disinherited except for good causes recognized by law & whose share in his
ancestor's estate cannot be impaired by the will of the ancestor or even by gifts made inter vivos.
because she had no ascendants or descendants. Does X have standing to annul a
contract entered into by Y with another disposing Y’s property?
Held: No. X is not a forced heir. He is not obliged principally or subsidiarily under the
contract. Y did not transmit to him by devise or otherwise any right to the property,
the subject thereof. On the contrary, Y voluntarily disposed of it. No creditors are
defrauded; there are none. No legitimes are impaired. Therefore, X has no cause of
action to annul or to rescind the sale.
CASE: Concepcion v. Sta. Ana
Facts: X was the only surviving legitimate brother of Y, who died without issue &
without leaving a will. In Y’s lifetime, she sold & conveyed three parcels of land for a
fictitious consideration to Z, who secured transfer certificate of title of said lands
issued under Y’s name; Z has held possession of the property since Y’s death.
X claims this is causing him damage & contract should be annulled. Can X get the
conveyances annulled?
Held: No. In this case, Y never transmitted to X any right arising from the contract
with Z. X is just an intestate heir.
• An action to annul a contract entered into whenever they are tainted with the
vice which invalidate them, may be brought not only by any person principally
bound, but also by his heir to whom the right & obligation arising from the
contract are transmitted. Hence, if no such rights, actions or obligations have
been transmitted to the heir, the latter cannot bring an action to annul the
contract in representation of the contracting party who made it.
o The testamentary or legal (forced) heir continues in law as the juridical
personality of his predecessor-in-interest, who transmits to him from
the moment of his death such of his rights, actions & obligations as
are not extinguished thereby.
• In this case, Y voluntarily made the sale to Z, which X cannot now protest. As
Y had no forced heir (& only an intestate heir, X), she was free to dispose of
her property as she wished, even without any consideration, unless she is in
fraud of her creditors (which she is not).
• A voluntary conveyance, without any consideration whatever, is prima facie
good as between the parties, & such an instrument cannot be declared
fraudulent as against creditors in the absence of proof, that there was at the
time of the execution of the conveyance a creditor who could be defrauded by
the conveyance.
CASE: Bañez v. CA
Lesson: A squatter to a property cannot be considered a stranger with a substantial
right to a 3rd party contract even if he occupies the property they live in, for he
acquired possession in bad faith & his rights are not prejudiced.
Facts: X entered into & built his house upon PHHC’s land without the consent of the
latter. PHHC executed a deed of sale in favor of Y & there were subsequent transfers
of ownership. X is suing because his rights, he claims, are substantially affected by
PHHC’s actions. Can X get the contract of PHHC & Y annulled?
Held: No. X has no right over the property, being a mere trespasser. Only strangers
those whose rights are prejudiced & who can prove the detriment which they would
positively suffer can interfere with a contract between 2 stranger parties.
170 | Katrina C. Gaw | Block C 2018
Those Estopped
• Action for annulment cannot be filed by the person who caused the defect in
the contract.
o The one who committed fraud cannot annul the contract on the
ground that there was fraud. He is estopped from asserting the
grounds which were principally initiated by him.
o A litigant cannot come to court with “unclean hands.”
• Annulment cannot likewise be filed by the person who is capacitated to enter
into the contract if the ground is the incapacity of the other party.
o Ex. If a minor & person of age entered into a contract of sale of a
particular car, the person of age cannot file a case to annul the
contract based on the fact that the other contracting party was a
minor.
o The minor, however can file a case upon reaching the age of majority
because it is at this time when the guardianship of the parents
ceases.
• BUT: If the case filed is NOT for annulment of contract but for the
enforcement of the contract, the party who is capacitated may file such
action against the minor. The minor’s liability will depend on the kind of
misrepresentation the child made, & the extent of the child’s benefit:
o Active misrepresentation - the minor deliberately & intentionally
undertakes to inform the other party & expressly declares in the
contract that he is of majority age, when in fact he is not of age
§ The minor will be liable to pay whatever his obligation is under
the contract as if his liability is that of a person who is of age.
o Passive misrepresentation - the minor was able to enter into the
contract without doing anything to declare his true age, such minor
shall be liable only up to the extent that he has been benefited by the
contract.
Class Discussion
Recall the distinction between active & passive misrepresentation earlier discussed.
his representation is PASSIVE representation, NOT active representation (if it were
active, he cannot file a case to annul the contract).
• Ex. “I, A, 26 years old …” but A is 17 & thus a minor – active
misrepresentation
• Ex. “I accept the terms of this contract …” without stating age, A being 17 & a
minor – passive misrepresentation
Article 1398. An obligation having been annulled, the contracting parties shall
restore to each other the things which have been the subject matter of the contract,
with their fruits, & the price with its interest, except in cases provided by law.
In obligations to render service, the value thereof shall be the basis for damages.
Article 1399. When the defect of the contract consists in the incapacity of one of the
parties, the incapacitated person is not obliged to make any restitution except
insofar as he has been benefited by the thing or price received by him.

Decree of Annulment
• Contracting parties must return to their original position
• Ex. for things - In a contract of sale of a car, the (1) car must be returned to
the owner-seller & the (2) purchase money with the corresponding (3) interest
must be returned to the buyer.
• Ex. for services - If the contract involves some service like the tutoring of a
particular child, the value of the tutoring must be paid to the tutor by way of
damages.
Incapacity as Defect
• When the defect consists in the incapacity of one of the parties, the
incapacitated person is not obliged to make any restitution except insofar as
he has been benefited by the thing or price received by him
• Ex.: A minor entered into a contract of loan with a bank.
o If minor uselessly spent part of the proceeds, the bank cannot recover
such uselessly spent money even if a court decrees that the obligation
is annulled. The minor has no obligation to restore such money.
o BUT: The bank can recover from the minor such part of the proceeds
which was beneficial to him, like money spent to enroll in a school.
o It must be noted that the bank cannot even file a case against the
minor.
§ It can only recover by way of a counterclaim in a complaint for
annulment filed by the minor when he reaches the age of
majority.
Article 1400. Whenever the person obliged by the decree of annulment to return the
thing cannot do so because it has been lost through his fault, he shall return the
fruits received & the value of the thing at the time of the loss, with interest from the
same date.
When Thing is Lost
• When the object cannot be returned, because it was lost by the person
obliged to return it due to the fault of the said person, the (1) value of the
object at the time of the loss, (2) its fruits & (3) interest from time of loss
shall be given instead to satisfy the order of restitution.
• Ex. A is compelled by B to have an exchange of their respective cars. The
contract is subsequently annulled. A & B must return what each of them has
received from each other.
o If A cannot return the car obtained by way of the exchange because he
lost it, he shall undertake restitution by paying B an amount
equivalent to the value of the car plus interest, if any.
Article 1401. The action for annulment of contracts shall be extinguished when the
thing which is the object thereof is lost through the fraud or fault of the person who
has a right to institute the proceedings.
If the right of action is based upon the incapacity of any one of the contracting
parties, the loss of the thing shall not be an obstacle to the success of the action,
171 | Katrina C. Gaw | Block C 2018
unless said loss took place through the fraud or fault of the plaintiff.
*Doctrine of Unclean Hands
• GR: Action is extinguished if the object is lost through fault or fraud of the one
who has a right to institute the proceedings
o Ex. If A coerced B to sell to him a car, B can seek the annulment of the
sale.
§ BUT: If B lost the car by intentionally destroying it, he cannot
file the annulment case as such right will be considered
extinguished.
• BUT: If it is based upon the incapacity of any of the parties – loss shall not be
an obstacle to the success of the action, unless the loss is due to the fault or
fraud of the plaintiff
o Reason – an incapacitated person is not obliged to make any
restitution except when it has benefited him (Art. 1399)
o Ex.: If an incapacitated person, such as a deaf-mute who cannot write,
purchases a car & later he files a case to annul the contract of sale,
the mere fact that the car has been lost will not abate the proceedings
for annulment.
§ The incapacitated person is not obliged to make any restitution
EXCEPT when it has benefited him. Hence, since the object of
the contract has been lost, no benefit can accrue in his favor.
§ HOWEVER, if the incapacitated person loses the car through
his own fault, then the case will be dismissed.
• WON you are incapacitated, if you lose the property through your own fault,
you do not have the right to file an action for annulment anymore.
Class Discussion
GR: If the thing is lost through fortuitous event, the case can continue
EXC: If the thing is lost through fault or fraud
Article 1402. As long as one of the contracting parties does not restore what in
virtue of the decree of annulment he is bound to return, the other cannot be
compelled to comply with what is incumbent upon him.
Restitution
• Requires the return by the parties of what each has received from the other.
• If one of them cannot restore to the other what he has received from the said
other, such other person cannot be compelled to return what he, in turn, has
received.
o BUT: If one of the parties is incapacitated, he is not obliged to return
what he has received except insofar as he has been benefited by the
thing or price received by him (Art. 1399).
CHAPTER 8. UNENFORCEABLE CONTRACTS.
*Article 1403. The ff. contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given
 no authority or legal representation, or who has acted beyond his powers;22
(2) *Those that do not comply with the Statute of Frauds as set forth in this
number. In the ff. cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some note or memorandum
thereof, be in writing, & subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be received without the writing,
or a secondary evidence of its contents:
a. An agreement that by its terms is not to be performed within a year
from the making thereof;
b. A special promise to answer for the debt, default, or miscarriage of
another;
c. An agreement made in consideration of marriage, other than a mutual
promise to marry;
d. An agreement for the sale of goods, chattels, or things in action, at a
price not less than P500, unless the buyer accept & receive part of
such goods & chattels, or the evidences, or some of them, of such
things in action, or pay at the time some part of the purchase money;
but when a sale is made by auction & entry is made by the auctioneer
in his sales book, at the time of the sale, of the amount & kind of
property sold, terms of sale, price, names of the purchasers & person
on whose account the sale is made, it is a sufficient memorandum;
e. An agreement for the leasing for a longer period than 1 year, or for the
sale of real property or of an interest therein;
f. A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a contract.
Article 1404. Unauthorized contracts are governed by Article 1317 & the principles
of agency in Title X of this Book.
Unenforceable Contracts in This Chapter
• A contract may have ALL the requisites for perfection but may still be
unenforceable.
Contracts without Authority
• Discussed under Art. 1317
o Non-authority is also governed by the principles of agency in Arts.
1868-1932 of the Civil Code.
• If a contract has been entered into without authority, it cannot be enforced.
Contracts Where Both Parties Are Incapable of Giving Consent
• Ex. If a contract is entered into by a minor & by a deaf-mute who cannot read
& write, such contract is unenforceable.
o BUT: If only one is incapacitated, the contract will only be voidable.
Non-Compliance with the Statute of Frauds
• The Statute is designed to prevent forgery
22 In relation to this, Regal Films v. Concepcion was repeated in discussion (see p. 124 for the case).
172 | Katrina C. Gaw | Block C 2018
• The Statute mandates that for certain executory contracts to be enforceable
in court, the only evidence that can be submitted is written proof (e.g., notes
or memoranda)
o ALSO: These writings need not be in one document; it can be in 2 or
more notes which, taken together or by reference with other writings,
must clearly reveal all essential requisites of a contract & also the
signatures of the parties charged or their agent
• No particular form of language or instrument is necessary to constitute a
memorandum or note in writing; any document or writing, formal or informal,
written either for the purpose of furnishing evidence of the contract or for
another purpose, which satisfies all the requirements of the statute as to
contents and signature, a sufficient memorandum or note.
• “Paper Connected” Rule – ANY document can be combined with another
document as proof
o The rule has been applied to allow the consideration together, when
properly connected, of a letter & an order of court, a letter & order for
goods, a letter & a deposition, letters or telegrams & undelivered
deeds, wills, correspondence & related papers, a check & a letter, a
receipt & a check, deeds & a map, a memorandum of agreement & a
deed, a memorandum of sale & an abstract of title, a memorandum of
sale and a will, a memorandum of sale & a receipt, & a contract, deed,
and instructions to a depository in escrow.
o The number of papers connected to make out a memorandum is
immaterial.
LECTURE FROM DEAN MEL
The Statute of Frauds is the most important aspect of unenforceable contracts.
When one states that a contract is “within Statute of Frauds,” he means that the
contract CANNOT be enforced.
IF one says the contract is “removed” from the Statute of Frauds, that means the
contract can already be enforced.
To be removed from the Statute of Frauds, it must be either:
1. In writing, & subscribed by the person charged
• Need not be in one document; it may be in a series of documents, so long
as all the parts of the conract (cause, object, consent) can be seen
2. In the executory stage; i.e., it is about to be executed
Partial execution removes it from Statute of Frauds
Scenario #1
Q: X made an ad which is complete in all details. Y approached X, “Are you X?” X said
“Yes!” Y said, “I accept!” Is there a perfected contract?
A: YES, except there is a specific manner of consenting provided.
Q: X changed his mind the week after. Y tried to enforce. Will the case prosper?
A: YES, it will prosper. This is because it was NOT subscribed by the person charged.
Q: Y asked X to sign the contract. X signed the contract. Then a week after X decided
to rescind. Is this already enforceable?
A: No, because both X and Y are charged. Y should have also signed the contract.
Scenario #2
Q: The document states: “I, Juan, will buy Lot A for P1M; signed Juan dela Cruz.” Is it
removed from the Statute of Frauds?
A: No, because BOTH Juan and the seller should have signed not just Juan.
Q: The document states: “I, Juan, after receiving the amount of P1M, will sell Lot A
for P1M; signed Juan dela Cruz.” Seller has already accepted payment, but buyer did
not sign. Is this already enforceable?
A: YES, because it has been partially executed AS SEEN IN THE DOCUMENT ITSELF.
Scenario #3
Q: A is the owner. B is the contractor. A said to B, “Construct for me a building.
Please start the construction 2 years from now.” This contract was oral. The
consideration is P1B. A already paid B P500M. Is the transaction still within the
Statute of Fraud or already removed?
A: For this particular ground (contracts that will be performed beyond 1 year), partial
execution means COMPLETE FULFILLMENT by 1 party of his obligation. P1B should
have already been paid! Partial payment of P1B is not enough. (Babao v. Perez) –
“BUT NOTHING LESS THAN FULL PERFORMANCE BY ONE PARTY WILL SUFFICE.”
Scenario #4
Q: A is the creditor; B is the debtor. X told A in front of B, “If B doesn’t pay, I’ll pay.
This is my special promise to you.” B did not pay. So A filed a case for specific
performance against X. Will it prosper?
A: NO, because the special promise is subsidiary. There must be exhaustion first with
B before A can go after X.
CASE: Paredes v. Espino
Facts: D wrote P a letter stating that he (D) accepted P’s offer as to the price &
object of the contract. This was followed up by telegrams between the two. Is the
agreement here enforceable?
Held: Yes. The documents presented constitute adequate memoranda of the
transaction & removed it from the Statute of Frauds.
CASE: Limektai Sons Milling Co. v. CA
Facts: The contract of sale of a real property in this case was not written down in a
deed of sale. Can it still be enforceable?
Held: Yes. Despite there being no deed of sale, there are abundant notes &
memoranda which evidence the elements of a perfected contract of sale.
• Exhibit P – A letter authorizing the sale of the property & giving a price
therefor
• Exhibit B – An authority to sell the property for a given price
• Exhibit C – An authority to allow the buyer to enter the premises & make an
inspection
• Exhibit E – A letter confirming the transaction
173 | Katrina C. Gaw | Block C 2018
• Exhibit S – Checks for the price of the lot
All these show the elements of a perfected contract of sale.
Statute of Frauds Applies Only to Executory Contracts
• The Statute of Frauds does NOT apply when the contract has already been
totally or partially performed.
• Ex. A contract of sale of real property in installment is not within the Statute
of Frauds, even if it is not in writing, if the first installment has already been
paid, since this is already partial performance on the part of the buyer.
*CASE: Babao v. Perez
Lesson: (1) Partial performance of an oral contract which supposedly would fall
within the Statute of Frauds removes the same from the Statute.
(2) BUT: For an oral agreement partially performed to be enforceable, the
agreement must be certain, definite, clear, unambiguous & unequivocal in its terms.
Also, the oral contract must be fair, reasonable, and just in its provisions for equity to
enforce it on the ground of part performance.
Facts: B allegedly bound himself to convert a 156 hectare parcel of forest land into a
farm with “bananas, bamboo trees, coconuts, rice, & other crops,” & administer the
same during the lifetime of P, while P bound herself to give S ½ of the land as
improved, with all the improvements thereon upon S’s death. Is this oral agreement,
partially performed, enforceable?
Held: No. The agreement suffers from vagueness. It does not say, for example, if B
should plant ½ hectare of coconuts, or rice, & another ½ of corn. No sane property
owner would enter into such an agreement because the time, effort, & money that it
takes to plant coconut trees is more than that for bananas & bamboos. On the part
of S, her end of the bargain is also incapable of execution; how was she supposed to
deliver ½ at her death? Testimonies of witnesses also varied as to what exactly S
said; one party heard S say that B should plant only coconut trees, because “the
land would eventually fall in his hands.”
There can be no part performance until there is a definite and complete agreement
between the parties. All the essential terms of the contract must be established by
competent proof, and shown to be clear and unambiguous. This clearness and
definiteness must extend to both the terms and subject matter of the contract.
The rule that the court will not specifically enforce a contract for the sale of land
unless its terms have been definitely understood and agreed upon by the parties,
and established by evidence, is especially applicable to oral contracts sought to be
enforced on the ground of part performance. Its terms must be so clear and
complete as to allow no reasonable doubt respecting its enforcement according to
the understanding of the parties.
Partial Performance – Examples of How Manifested
• When improvements are made on the subject property pursuant to the
contract
• When rentals are paid
• When a buyer takes possession on the basis of a verbal contract to purchase
the property
• Payment of taxes and relinquishment of rights
 • Tender of payment coupled with other acts indicating partial performance
CASE: Paterno v. Jao Yan
Facts: X & Y originally entered into a written contract of lease, where Y was the
lessee. However, they subsequently modified the agreement orally. In an action
related to this modified oral agreement, Y sought to present evidence of partial
performance. Can this be accepted?
Held: Yes. Since there is partial performance in this case, the oral contract is
removed from the Statute of Frauds. Where an oral contract of sale has been
partially executed by payment of the price, oral testimony is admissible to evidence
the existence of the contract. The taking of possession by the lessee and the making
of valuable improvements and the like, on the faith of the oral agreement, may
operate to take the case out of the prohibition of the Statute of Frauds as well.
2.
CASE: Read Drug & Chemical Co. v. Nattans
Lesson: A parol agreement of a landlord to extend a lease for a specified term of
years & a specified rental, provided that the tenant made certain extensive repairs
to the property, is enforceable under the Statute of Frauds, where the tenant fully
performed his part of the agreement.
Enumeration of Contracts Within Statute of Frauds
• These grounds are exclusive
o Hence, a right of first refusal, a right given to a person to be preferred
in the sale of a property in case the owner decides to sell the same, is
not included
o The setting up of boundaries is not included
o The oral partitioning of real property is not included
o An agreement creating a right-of-way is not included
Contracts Within the Statute of Frauds
1. An agreement which, by its terms, is not to be performed within
1 year from the making thereof
o Ex. An agreement orally entered into in 1987 for a person to
commence a painting in 1989 must be in writing to be enforceable
o Ex. A contract which stipulates a certain type of activity will be
commenced within the year from the making of a contract, but it can
only be fully accomplished after one year from the same
§ Thus: If the parties agree on Jan. 1997 for a building's
construction to be commenced on Nov. 1997, but it will be
finished on Jan. 1998
o BUT: If a contract is entered into where one party fully completed his
undertaking within 1 year & the other party could only finish beyond 1
year, the said contract is removed from the Statute of Frauds
§ Ex. In the building example, if one party already fully paid the
builder the complete consideration for the construction of the
same 6 months after making the contract, the contract is
removed from the Statute of Frauds
174 | Katrina C. Gaw | Block C 2018
o Hence: To remove the case from the Statute of Frauds, all that is
required is complete performance within 1 year by 1 party, no matter
how many years may lapse before the agreement is performed by the
other.
§ BUT: Nothing less than full performance by one party will
suffice
o If the contract stipulates that it will be executed immediately upon
signing, although it has been reset to another date by agreement of
the parties so that it can be finished only beyond 1 year, the contract
is removed from the Statute.
o If initially, a contract should have been finished within 1 year, but it
could only be finished beyond the 1-year period, the contract is
removed from the Statute of Frauds.
Special promise to answer for the debt, default, or miscarriage
of another
o “Special promise” – applies to express & tacit promises in fact made,
& not in cases where the duties are created by law without promissory
assent
o A promise is not within this clause of the Statute unless there is an
obligation of some 3rd person to the promisee, either already existing
or subsequently exisiting
§ Also, the promise must be made to the promisee, NOT the
debtor
o “Debt, default and miscarriages” – includes ALL legal obligations
under which a person can come, contractual or non-contractual,
requiring a money payment or any other kind of performance
o The commitment of the promisor to pay the debt of another should
NOT immediate discharge the debtor from his debt at the time of the
making of the promise; if that is the case, then there is novation which
will not fall under the Statute.
o The promise must be in the nature of a collateral or subsidiary
obligation, & NOT an original one.
§ Hence, if one merely promises to pay the obligation of another
once a debt becomes due, this would not be within the Statute
of Frauds, as that would in effect be an indemnity agreement
where the promisor is also an original & principal debtor.
§ Ex. If S promises C to answer for P’s debt, whether S’s promise
is simultaneously made with the inception of P’s obligation or
for a separate consideration, S’s obligation is collateral to P’s &
within the Statute of Frauds as a general rule.
• BUT: If no obligation exists between P & C, S’s promise
is original & not within the Statute, because he is not
really answering for another’s default.
o In joint obligations, there is no “special promise,” so that would not fall
under the Statute of Frauds, since each person answers for their own
obligation.
 o *In solidary obligations, it depends on whether or not the promisor
knew that only one of the solidary debtors would truly be benefited by
the payment.
§ If both promisors are the buyers or borrowers, they both
become debtors & their oral promises are binding without
needing to comply with the Statute of Frauds.
§ *BUT: If one of several promisors is to benefit, the other
lending credit as security, & this is known to all parties
involved, the one lending credit is answering for the debt of
another within the statute. This is just as true where the
promise of one who lends his credit is in terms conditioned
upon default by the one for whose benefit the consideration
inures.
§ *Class Discussion: As a general rule, when there is solidary
liability, this would not fall within the Statute of Frauds.
HOWEVER, If a 3rd party is an accommodation party & all
parties to the main transaction know that that is so, the
arrangement falls within the Statute of Frauds.
o Suretyshhips & promises of guaranty are within the Statute of Frauds.
§ Ex. P & S agree to be solidarily liable to C for $200 in 6 months.
P is to own the horse with the knowledge of C. In this case, the
promises are solidary, S is just a surety since it is P who will
truly benefit. S’s defense of the Statute of Frauds would apply.
o CASE: Reiss v. Memije
§ Facts: D entered into a contract with B for the repair of a
house. B undertook to bring the necessary materials. However,
B had no commercial standing in the community so he was not
able to purchase the materials needed. D, who had better
commercial standing, went with B to P’s lumberyard & after
satisfying P as to his financial capacity, D entered into an
agreement whereby P would deliver the needed materials to
D’s house for B’s use. However, balance for the lumber that
was brought to D’s house remained. P thus sued D for payment
for the lumber. All this happened orally. Is the promise of D to
answer for the lumber enforceable?
§ Held: Yes. The true test as to whether a promise is within the
Statute lies in the answer to the question whether the promise
is an original or a collateral one. If the promise is an original or
an independent one; that is, if the promisor becomes thereby
primarily liable for the payment of the debt, the promise is not
within the Statute. But, on the other hand, if the promise is
collateral to the agreement of another & the promisor becomes
thereby merely a surety, the promise must be in writing.
Taking into consideration all the circumstances of the case at
bar, SC held that the credit for the lumber was extended solely
and exclusively to D under the verbal agreement had with him,
and therefore, that the provisions of the statue did not require
that it should be made in writing. D admitted that B had no
175 | Katrina C. Gaw | Block C 2018
commercial credit. From the testimony of B, it was clear that
when the agreement for the delivery of lumber was made, the
credit was extended not to B but to D. The precise language in
which the verbal agreement was made does not appear from
the evidence, and while it is true that P to the agreement as
one whereby defendant “guaranteed” payment for the lumber,
the evidence shows that the word was not used by this witness
in its technical sense, and that he did not mean thereby to say
that D guaranteed payment by the B, but rather that after
satisfying P as to his own financial responsibility, D obligated
himself to pay for the lumber.
o When one advances debt at the request of another (on his promise to
repay it) to pay the debt of a third party, not being made at all upon his
credit, the liability of the party on whose request & promise it was
made is original & not collateral, & not within the Statute of Frauds.
3. Agreement made in consideration of marriage other than a
mutual promise to marry
o Ante-nuptial agreements & marriage settlements must be in writing
§ Family Code further requires that these be (1) signed by the
parties & (2) executed before marriage
§ Under the Family Code, failure to satisfy this requisite makes
the contract VOID.
o A mutual promise to marry does not fall within the Statute because a
breach of such promise per se is not actionable.
4. Agreement for the sale of goods, chattels, & things in action, at
a price not less than P500
o Ex. A contract to sell a fountain pen worth P5,000 must be in writing to
be enforceable
o BUT: If one already paid for the pen, the contract is partially performed
already & hence removed from the Statute
o ALSO: In an auction sale, the recording of the sale in the sales book is
enough memorandum to remove the contract from the Statute
5. Agreement for the leasing of property for a period longer than 1
year
o Ex. A contract of lease for 2 years must be in writing to be enforceable
6. Sale of real property or any interest therein
o A sale of real estate must be in writing to be enforceable, BUT it need
not be notarized or in a public instrument to be enforceable
o Notarization is needed only to bind 3rd persons & so that the Registry
of Deeds will accept the deed for registration
o Ex. from Class Discussion – Interest in a co-ownership of a piece of
real property falls within the Statute of Frauds; if a person sells his
1/3 interest in a property, that also has to be in writing.
7. Representation as to the credit of a 3 rd person
o A representation of the creditworthiness of another which turns out to
be untrue may be a cause of action for damages if the same were
given in bad faith
 o But an untrue representation made in good faith, with the other party
having all the opportunity to investigate the truth of the same, will lead
to no damages being awarded
o Ex. If A represents to G that X is a millionaire, but X is without cash as
of the moment & G lends X money, such representation by A must be
in writing.
Class Discussion
Representation of credit – THIS IS ACTUALLY NOT A CONTRACT
Q: X says to Y, “A is rich! Lend A money!” Y lent money to A because of X. As it turns
out, A is poor. Y sued X. Will case prosper?
A: No, Statute of Frauds. Otherwise, it would be so quick for people to say! This
would be defraudation.
Q: Is the contract of loan between A and Y annullable?
A: It will be annullable only if A & Y are in good faith & are mutually mistaken.
Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article
1403, are ratified by the failure to object to the presentation of oral evidence to
prove the same, or by the acceptance of benefits under them.
CASE: Limektai Sons Milling v. CA
Lesson: Contracts infringing the Statute of Frauds are ratified when the defense fails
to object, or asks questions on cross-examination. In this case, counsel for
respondents examined petitioner’s witnesses on the contract itself & other details of
the contract. Even assuming that parol evidence was initially admissible, the same
became competent and admissible because of the cross-examination, which elicited
evidence proving the evidence of a perfected contract. The cross-examination on the
contract is deemed a waiver of the defense of the Statute of Frauds.
CASE: Rodriguez v. CA
Facts: A particular sale was questioned & only receipts were introduced as evidence
to prove the sale, without showing from those receipts of the basic elements of a
contract. However, oral evidence was given in the proceedings & the other party
failed to object to said evidence. Does the case fall within the Statute of Frauds?
Held: No. There was already ratification because of the failure to object to the
presentation of oral evidence which proved the sale & acceptance of consideration.
Benefits Already Received
• If benefits have already been obtained from the agreement, the Statute of
Frauds will no longer be a defense
• Ex. If A sold to G a real property, & A was already given the purchase price,
the contract of sale of real property can be enforced even if the same is not
in writing.
When Statute of Frauds Can be Invoked
• The Statute can only be invoked in case of violation of contracts or specific
performance
176 | Katrina C. Gaw | Block C 2018
• If the only purpose of the suit is to prove lawful possession of a real property
for purposes of registration, the absence of written evidence to prove such
real interest over the real property in order to prove violation of the Statute
cannot be invoked.
Class Discussion
A contract is no longer unenforceable under the Statute of Frauds if:
1. There is partial execution
2. Failure to object to the presentation of oral evidence to prove the same
3. There is acceptance of benefits under them
Article 1406. When a contract is enforceable under the Statute of Frauds, & a public
document is necessary for its registration in the Registry of Deeds, the parties may
avail themselves of the right under Article 1357.
Compelling the Other Party
• When an agreement in Art. 1403 (2) is in writing & therefore enforceable, &
the law requires registry in the Registry of Property, the contracting parties
may compel each other to observe the form required once the contract has
been perfected.
o They may do so simultaneously with the action upon the contract.
• CASE: Almirol vs. Monserrat
o Facts: By virtue of a verbal sale, the applicant came into actual
possession of the land. The applicant sought the registration of the
subject lot already in his possession. The opposition claimed that oral
proof of the contract cannot be adduced in court where the
registration was being questioned. Doe the Statute apply?
o Held: No. Parol evidence of sale is adduced not for the purpose of
enforcing performance thereof, but on the basis of the lawful
possession of the applicant, entitling him to have the land thereby
sold registered in his name. Thus, the Statute of Frauds is not
applicable.
• A mere tenant in the subject property cannot invoke the doctrine in the
Almirol case.
Article 1407. In a contract where both parties are incapable of giving consent,
express or implied ratification by the parent, or guardian, as the case may be, of one
of the contracting parties shall give the contract the same effect as if only one of
them were incapacitated.
If ratification is made by the parents or guardians, as the case may be, of both
contracting parties, the contract shall be validated from the inception.
Incapacity of Both Parties & Ratification
• In case both parties are incapacitated, & the guardians of one of them
ratifies the contract, the same shall be transformed into an annullable
contract.
• If ratification is by the parents or guardian of both parties, the contract shall
be valid, without any defect or infirmity at all.

*Article 1408. Unenforceable contracts cannot be assailed by 3rd persons.
Unassailable by 3rd Parties
• It is useless for a 3rd person to assail an unenforceable contract since it
cannot be executed anyway
CHAPTER 9. VOID & INEXISTENT CONTRACTS.
LECTURE FROM DEAN MEL
From the list of void contracts, you must determine which are technically inexistent &
which are ostensible, but void.
As for those technically inexistent, one of the elements is missing (hence making it
technically inexistent).
• Ostensibly simulated
• Cause or object does not exist at time of transaction
• Intention of the parties relative to the principal object of the contract cannot
be ascertained – e.g., X told sell Y that he would sell to Y his boat, Isabelle. It
turns out that X has 3 boats named Isabelle.
As for those which are ostensible but void, all the elements are existent, but they are
still void under the law.
• Whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy
• Expressly prohibited or declared void by law
Object is outside the commerce of men; impossible service – could be both
These distinctions are important for determining the applicability of the “in pari
delicto” doctrine, & WON it should apply or not apply.
• GR: In void contracts, pari delicto will NOT apply; if you enter into a void
contract, each of the parties has a remedy against the other & either can still
file an action to have the cause declared void.
• EXC: In some cases, pari delicto will apply & the parties will not have rights
against each other; these include those in Art. 1411 (where the cause or the
object is illegal & criminal) or Art. 1412 (where it is civil, not criminal, but with
a “forbidden cause”). In both these cases, both parties must know it is void.
They will have no remedy against each other.
• EXC to EXC:
(1) In Art. 1412, if one is in bad faith, & one is in good faith, the one in
good faith can still run after the one in bad faith.
(2) Art. 1413 (usurious interest IF there is a usury law; but still, around
33-35% interest p.a. is void according to the SC not because it is
against the law, but because it is against morals) – in these cases, the
WHOLE INTEREST will be void. All of this is true even if both parties
know that the interest to the loan or contract, which they both sign, is
void (hence, the debtor may still file a case to have the whole interest
177 | Katrina C. Gaw | Block C 2018
declared void).
(3) Art. 1414, repudiation of the implementation of the contract. But if
public interest so requires, the repudiator can get the money bank.
• Q: A gives B 1,000 to beat C up. Is there a contract?
• A: Yes. This is an ostensible but void contract.
• Q: Can it be enforced?
• A: No, because it falls under Art. 1411 (crime).
• Q: Do A & B have any remedy against each other?
• A: No, because they are in pari delicto. If B beats C up & later
claims the money from A, B cannot do so, because of the in pari
delicto doctrine. It is the same if A already paid B, and B doesn’t
beat C up – A will not be able to get a refund from B.
• NOTE: But if public interest so requires, the repudiator can get
the money bank. For example, in the same example, A is a PWD
who needs money back to fund food expenses.
(4) Art. 1415 – Incapacitated (not allowed) – but if it will serve the
interest of justice, the person may require.
(5) Art. 1416 – Merely prohibited (e.g., the kabit system) – if for public
policy, he can still recover
(6) Art. 1417 – Overpricing which is against the law – the buyer can
recover
(7) Art. 1418 – Labor (below minimum wage) – recovery can be made by
worker
(8) Art. 1419 – Labor (as regards hours of work) – recovery can be made
by worker
Note: In void contracts, restitution will apply EXCEPT where the case is criminal.
In void contracts, there is no –
1. Prescription
2. Laches
Third parties can file a case to declare a contract void if they can show interest,
prejudice, or injury.
*Article 1409. The ff. contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived.

CASE: De Leon v. CA
Lesson: The continued existence of a marriage cannot be made the basis of a
contract; such a contract is void.
Facts: The parties, who were husband & wife, stipulated that “in consideration for a
peaceful & amicable termination of relations between the undersigned & her lawful
husband,” the husband would give some properties to the wife & monthly support
for the children, & the wife would agree to a judicial separation of property plus the
amendment to the divorce proceedings initiated by the wife in the United States to
conform to the agreement
Held: The agreement is contrary to law, Filipino morals & public policy because the
consideration of the agreement is the termination of the marriage by the parties
which they cannot do on their own & without any legal basis.
CASE: Pena v. De Los Santos
Lesson: A person who obtains title to a property from a seller whose title is void does
not acquire any right pertinent to the same property.
Facts: Atty. X obtained a piece of real property through a prohibited sale – he got the
property from a litigation in which he took part, which is prohibited under Art. 1491
(5) of the Civil Code. The sale was executed while the property was still the subject of
litigation. Atty. X sold the same property to Y. Does Y acquire any right over the
property?
Held: No. Since the property conveyed to Atty. X was still the object of litigation, the
deeds of conveyance executed by the latter are deemed inexistent. Under Art. 1409,
contracts which are expressly prohibited or declared void by law are considered
inexistent and void from the beginning. This being so, Atty. X could not have
transferred a valid title in favor of Y over the lot.
Furthermore, there is no need to bring a separate action for the declaration of the
conveyance as void. A void contract is one which has no force and effect from the
very beginning. Hence, it is as if it has never been entered into and cannot be
validated either by the passage of time or by ratification.
Also, the need to bring a separate action for declaration of nullity applies only if the
void contract is no longer fully executory. Contrary to Y’s stance, the deeds of
conveyance made in favor of Atty. X in 2005 cannot be considered as executory
because at that time the judgment award ceding the subject lot to J & R (Atty. X’s
clients who originally owned the lot) was not yet implemented. A writ of execution
was issued only in 2008. If the void contract is still fully executory, no party need
bring an action to declare its nullity; but if any party should bring an action to enforce
it, the other party can simply set up the nullity as a defense.
There is also no estoppel here, since the act is against public policy. The rationale
advanced for Art. 1491 (5) is that public policy disallows the transactions in view of
the fiduciary relationship involved, i.e., the relation of trust and confidence and the
peculiar control exercised by these persons. It is founded on public policy because,
by virtue of his office, an attorney may easily take advantage of the credulity and
ignorance of his client and unduly enrich himself at the expense of his client. The
principle of estoppel runs counter to this policy and to apply it in this case will be
tantamount to sanctioning a prohibited and void transaction.
178 | Katrina C. Gaw | Block C 2018
CASE: Gardner v. CA
Lesson: An absolutely simulated contract is void.
Facts: A contract purporting to be a sale of land was really without consideration.
Said contract was intended merely to protect a party to a joint venture for the cash
advances he was to make for the realty subdivision that the parties wanted to put
up.
Held: The contract was absolutely simulated and therefore null and void.
CASE: Prudential Bank v. Panis
Lesson: A contract which violates a law is void.
Facts: A grantee of a government sales patent mortgaged the same within the
prohibition provided by the Public Land Act that no encumbrance or alienation
should be made of the property subject of the patent within 5 years from the
issuance thereof.
Held: The mortgage was null and void for being in violation of law.
CASE: Maharlika Publishing Corp. v. Tagle
Lesson: Public order & public policy dictates that a public official cannot participate
in a bidding for foreclosed property, as it gives rise to suspicions of insider
information.
Facts: The wife of a GSIS official, acting for her husband who was an influential
Division Chief of the GSIS, was allowed to bid on a foreclosed property, and she
eventually won the bidding.
Held: The bidding and the contract of sale resulting therefrom as null and void as
they violated Article 1491 prohibiting public officers and employees from purchasing
property under their administration in an auction sale.
CASE: Cui v. Arellano University
Lesson: Scholarships are not just a business scheme; they are part of public policy in
order to award students who deserve the merit. Thus, it cannot be waived because a
student is transferring schools.
Under the principles relating to the doctrine of public policy, as applied to the law of
contracts, courts of justice will not recognize or uphold a transaction which in its
object, operation, or tendency, is calculated to be prejudicial to the public welfare, to
sound morality, or to civic honesty.
Facts: A student scholar, who decided to move to another school, was required to
refund the amount of his free tuition, which he initially got from a scholarship
granted to him by the school on the basis of a contract. He had signed said contract,
which stated: “In consideration of the scholarship granted to me by the University, I
hereby waive my right to transfer to another school without having refunded to the
University the equivalent of my scholarship cash.”
Held: The refund cannot be properly demanded because the waiver was against
public policy. The scholarship is based on the memorandum issued by the Director
of Private Schools; a contract of waiver is in direct violation of the memorandum. In
determining a public policy of the State, courts are limited to a consideration of: (1)
the Constitution, (2) the judicial decisions, (3) the statutes, and (4) the practice of
government officers.
CASE: Marubeni Corporation v. Lirag
Lesson: Contracts obtained through the influence of higher executive officials in
government are void for being against public policy.
Facts: A consultancy agreement was obtained from a government agency through
the use of influence of executive officials.
Held: The contract is void. Any agreement entered into because of the actual or
supposed influence which the party has, engaging him to influence executive
officials in the discharge of their duties, which contemplates the use of personal
influence and solicitation rather than an appeal to the judgment of the official on the
merits of the object sought is contrary to public policy.
CASE: Prudential Bank v. Rapanot
Lesson: Since Sec. 18 of PD 957 prohibited the mortgage of a condominium unit by
a developer without the written approval of the NHA, the violation of the law makes
any mortgage by a developer void.
CASE: Gullermo v. Phil. Information Agency
Lesson: A contract entered into with the government without an appropriation law
funding the project & a certificate of appropriation & fund availability required by the
Administrative Code is void.
*CASE: Spouses Abella v. Spouses Abella
Lesson: An unconscionable rate of interest is void for being contrary to morals. A
monthly interest rate of 2.5% (translating to 30% annual interest) is unconscionable.
The willingness of the parties to enter into a relation with an unconscionable interest
rate is inconsequential to the validity of the stipulated rate.
The imposition of an unconscionable rate of interest on a money debt, even if
knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a
repugnant spoliation and an iniquitous deprivation of property, repulsive to the
common sense of man. It has no support in law, in principles of justice, or in the
human conscience nor is there any reason whatsoever which may justify such
imposition as righteous and as one that may be sustained within the sphere of
public or private morals. The imposition of an unconscionable interest rate is void for
being “contrary to morals, and the law.”
In determining whether the rate of interest is unconscionable, the mechanical
application of pre-established floors would be wanting. The lowest rates that have
previously been considered unconscionable need not be an impenetrable minimum.
What is more crucial is a consideration of the parties’ contexts. Moreover, interest
rates must be appreciated in light of the fundamental nature of interest as
compensation to the creditor for money lent to another, which he or she could
otherwise have used for his or her own purposes at the time it was lent. It is not the
default vehicle for predatory gain. As such, interest need only be reasonable. It ought
not be a mechanism for the creditor's unjust enrichment at the expense of another.
CASE: Spouses Mallari v. Prudential Bank
Lesson: Interest rates at 23% per annum (at less than 2% interest per month) & a
12% penalty charge are not unconscionable.
179 | Katrina C. Gaw | Block C 2018
• Jurisprudence establishes that a 24% p.a. stipulated interest rate is not
considered unconscionable; thus, the 23% p.a. interest rate imposed in the
loan in this case is not excessive or unconscionable.
• Jurisprudence establishes that as to penalty charges, a 1% surcharge on the
principal loan for every month of default is valid. This surcharge or penalty
stipulated in a loan agreement in case of default partakes of the nature of
liquidated damages under Art. 2227, and is separate and distinct from
interest payment. Also referred to as a penalty clause, it is expressly
recognized by law. It is an accessory undertaking to assume greater liability
on the part of an obligor in case of breach of an obligation. The obligor would
then be bound to pay the stipulated amount of indemnity without the
necessity of proof on the existence and on the measure of damages caused
by the breach.
CASE: Spouses Jonsay v. Solidbank
Lesson: In the recent cases of Mallari v. Prudential Bank & Spouses Villanueva v. CA,
SC did not consider unconscionable the contractual interest rates of 23-24% per
annum. In Mallari, the Court upheld the loans obtained between 1984 and 1989
which bore interest from 21-23% per year; in Spouses Villanueva, the loans secured
in 1994 carried interest of 24% per year were upheld. In Advocates for Truth in
Lending v. BSP Monetary Board, the SC that in the later 1990s, the banks' prime
lending rates which they charged to their best borrowers ranged from 26% to 31%.
CASE: Aujero v. Phil. Communications Satellite Corp.
Lesson: Not all waivers and quitclaims are invalid as against public policy. If the
agreement was voluntarily entered into and represents a reasonable settlement, it is
binding on the parties and may not later be disowned simply because of a change of
mind. It is only where there is clear proof that the waiver was wangled from an
unsuspecting or gullible person, or the terms of settlement are unconscionable on
its face, that the law will step in to annul the questionable transaction. But where it
is shown that the person making the waiver did so voluntarily, with full
understanding of what he was doing, and the consideration for the quitclaim is
credible and reasonable, the transaction must be recognized as a valid and binding
undertaking.
Facts: An employee wanted a declaration that a deed of quitclaim & release he
signed was null & void, because he got a lesser retirement benefit than what he
believed was a proper amount on account of pressure & “dire necessity.” Should his
prayer be granted?
Held: No. While the law looks with disfavor upon releases and quitclaims by
employees who are inveigled or pressured into signing them by unscrupulous
employers seeking to evade their legal responsibilities, a legitimate waiver
representing a voluntary settlement of a laborer's claims should be respected by the
courts as the law between the parties.
However, in this case, the employee bewailed claimed that he was coerced but failed
to coerced present evidence of the coercion. That the petitioner was all set to return
to his hometown and was in dire need of money would likewise not qualify as undue
pressure sufficient to invalidate the quitclaim. "Dire necessity" may be an acceptable
ground to annul quitclaims if the consideration is unconscionably low and the
employee was tricked into accepting it, but is not an acceptable ground for annulling
the release when it is not shown that the employee has been forced to execute it.
Finally, the employee here is not an ordinary laborer. He is mature, intelligent and
educated with a college degree, who cannot be easily duped or tricked into
performing an act against his will. As no proof was presented that the said quitclaim
was entered into through fraud, deception, misrepresentation, the same is valid and
binding.
CASE: Irao v. By the Bay Inc.
Facts: In the lease contract here being assailed by the lessee, it was stipulated that
if the lessee failed to comply with any of the terms of the lease, the lessor would
have the right to enter & retake possession of the leased property, without necessity
of filing suit in court. Is such a stipulation valid?
Held: Yes. Contractual stipulations empowering the lessor and/or his representative
to repossess the leased property extrajudicially from a lessee, as in the present
case, have been held to be valid. Being the law between the parties, they must be
respected. The lessee cannot thus feign ignorance that the repossession of the
leased property by the lessor was the appropriate legal measure that the lessee also
authorized under their contract.
Further Examples of Void Contracts
• A stipulation in a contract prohibiting a mortgagor to sell the property
mortgaged is void.
o Art. 2130, which provides that “a stipulation forbidding the owner
from alienating the immovable mortgaged shall be void.”
o HOWEVER, a stipulation prohibiting the re-mortgage to another of the
same property already mortgaged to the creditor-mortgagee is valid.
• The non-payment of the purchase price of a valid contract of sale is not
among the instances where the law declares a contract null and void.
o At most, the non-payment gives a cause of action for rescission or
specific performance.
Effect of a Void Contract
• Defect is permanent & incurable – no ratification
o A void agreement will not be rendered operative by the parties’ alleged
partial or full performance of their respective prestations.
• It produces no legal effects at all.
• Ex. A & V enter into a contract for the sale of opium. A delivers but V does not
want to initially pay.
o The later payment of V does not make the contract valid. It is still void.
• CASE: Arsenal v. IAC
o Lesson: A void contract can never be ratified, even if a new one is
executed to fix the old one. Further, equity or estoppel cannot give
validity to a void contract.
§ The original owners of a homestead remain the rightful owners
despite the fact that they themselves granted the homestead
to someone else or that they acknowledged the grantee as the
rightful owner.
180 | Katrina C. Gaw | Block C 2018
o Facts: Respondent, in 1957, bought from grantee-petitioners a
homestead patent a property subject of the patent within the
prohibitory period provided by law, which therefore made the same
void as being against public policy.
§ Respondent was in possession of the said property even up to
1974 when the case was filed.
§ The original owners in this case want the land back, but they
never disaffirmed the contracts executed between them and
the respondent. More than that, they expressly sustained the
title of the latter in court and failed to show any interest in
recovering the land.
o Held: SC refused to award the property to the said individual even if
another contract was executed after the prohibitory period ratifying
the previous sale. It also held that the infirmity could not be cured by
equity because the individual himself transgressed the law.
§ In cases where the homestead has been the subject of void
conveyances, the law still regards the original owner as the
rightful owner subject to escheat proceedings by the State. The
land is awarded back to the original owner even if he was
equally guilty with the vendee in circumventing the law.
§ Pari delicto doctrine may not be invoked, since it would run
counter to a fundamental policy of the State, that the forfeiture
of a homestead is a matter between the State and the grantee
or his heirs. Until the State had taken steps to annul the grant
and asserts title to the homestead the purchaser is, as against
the vendors or his heirs, no more entitled to keep the land than
any intruder.
Article 1410. The action or defense for the declaration of the inexistence of a
contract does not prescribe.
Judicial Declaration
• There is no need to judicially declare a void contract void; the judicial
decision merely confirms it.
• It can be filed at anytime and has no prescriptive period, even as a defense.
• Ex. If A and B enter into a contract, where it is stipulated that, for a valuable
consideration to be given by B, A is to construct a 3-storey building in 3 days,
such a contract is void because it contemplates an impossible service.
o B can just treat it as void even without a court action making such
contract void.
o HOWEVER, B can file a case to declare that the contract is void so that
he can get back what he has given as valuable consideration to A.
• Laches does not apply when resisting an imprescriptible legal right
• Restitution generally applies
o If both parties have no fault or are not guilty, the restoration of what
was given by each of them to the other is in order
Article 1411. When the nullity proceeds from the illegality of the cause or object of
the contract, & the act constitutes a criminal offense, both parties being in pari
delicto, they shall have no action against each other, & both shall be prosecuted.
Moreover, the provisions of the Penal Code relative to the disposal of effects or
instruments of a crime shall be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent
one may claim what he has given, & shall not be bound to comply with his promise.
Void Contracts due to Criminal Activities
• Ex dolo malo non oritur actio & in pari delicto potior est conditio defendentis.
o The law will not aid either party to an illegal agreement; it leaves the
parties where it finds them.
• Ex. If A & B enter into a contract whereby A is to kidnap X & to place X in the
custody of B, and the car to be used for the kidnapping shall thereafter be
given to A as the latter’s payment, the cause of the contract is clearly void &
even constitutes a criminal offense.
o If A is successful in kidnapping X, & B does not give the car, A has no
action against B for the delivery of the car.
o If B already delivers the car & A does not fulfill his obligation, B has no
right to go against A.
o Both are in pari delicto & both shall be prosecuted for kidnapping. The
car will be disposed of as an instrument of the crime in accordance
with the Revised Penal Code.
• Arts. 1411 & 1412 are NOT APPLICABLE to inexistent contracts
o In pari delicto doctrine only applies to contracts with illegal
consideration or subject matter, whether the attendant facts
constitute an offense or misdemeanor, or whether the consideration
involved is merely rendered illegal.
o If a contract has absolutely no consideration at all, or there is total
absence of consent, or there is absence of an object, such contract is
inexistent & therefore the rule on pari delicto will not apply.
Article 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the ff. rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of
the other’s undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what
he has given by reason of the contract, or ask for the fulfillment of what has
been promised him. The other, who is not at fault, may demand the return of
what he has given without any obligation to comply with his promise.
CASE: Lita Enterprises, Inc. v. IAC
Lesson: Though certain schemes such as the kabit system may not be criminal, they
may be considered against public policy; any contract based on such a scheme is
inexistent & the parties, if both at fault, shall be in pari delicto.
Facts: The parties herein operated under an arrangement, known as the “kabit
system,” whereby a person who has been granted a certificate of convenience
allows another person who owns motor vehicles to operate under such franchise for
181 | Katrina C. Gaw | Block C 2018
a fee. However, a certificate of public convenience is a special privilege conferred by
the government.
Held: The contract is void, & the parties can claim no reliefs as they are in pari
delicto. The system is seen as the root of corruption in many government
transportation offices, & though not criminal, it is void for being against public policy.
CASE: Heirs of Marciana Avila v. CA
Lesson: Parties to an illegal contract that are contrary to law will not be able to
recover what they have given, nor can they ask for fulfillment.
Facts: A teacher bought property in violation of the Administrative Code prohibiting
public officials from purchasing property sold by the government for non-payment of
taxes.
Held: The contract was void because it was contrary to law. The teacher, as a party
to an illegal transaction cannot recover what she gave by reason of the contract or
ask for the fulfillment of what had been promised her pursuant to Article 1412 of the
Civil Code.
CASE: Compania General De Tabacos de Filipinas (Tabaclera) v. CA
Lesson: Parties who enter into a contract to evade creditors are also in pari delicto &
cannot have claims against one another.
Facts: Buyer Tabaclera & a seller of certain sugar quota, which was previously
mortgaged to certain banks, entered into a contract of sale purposely intending to
negate the lawful rights & claim of the banks.
• The banks, however, had already foreclosed on the mortgage.
• Tabaclera then claimed that it should be reimbursed of what it gave the seller
in the event that it was ordered to reconvey the sugar quota to the banks.
Held: Tabaclera & the seller cannot recover, because they are both in pari delicto.
They both had the common intention of negating the banks & acting in bad faith,
even if what they did is not contrary to any express provision of law.
CASE: Rodriguez v. Rodriguez
Lesson: Family members who enter into transactions to evade taxes, though this
would not be illegal per se, are in pari delicto & cannot recover whatever they lost.
Facts: A mother sold property to her daughter; the daughter then sold the property to
her father. These transactions were done to for convert the paraphernal property of
the mother to conjugal property. This would vest half interest on the husband &
evade the prohibition against donations from one spouse to another during
coverture.
The wife, contending that the sale was a circumvention of the said prohibition and
therefore void according to law, filed a case for the nullification of the transactions.
Held: The wife could no longer recover. While the Court did not consider the
transactions simulated, it regarded the same as a circumvention of the legal
prohibition against donations between spouses. However, all the parties were guilty,
& thus no one was entitled to recover.
When Only One Party is At Fault
• The one at fault – cannot recover what he has given, or ask fulfillment of
what was promised to him
 • The one without fault – may demand the return of what he has given without
any obligation to comply with his promise
Article 1413. Interest paid in excess of the interest allowed by the usury laws may be
recovered by the debtor, with interest thereon from the date of the payment.
Usury Law
• Under the Usury Law, in case of usurious interest, the whole interest will be
recoverable.
• Ex. In a loan of P1,000, with interest of 20% per annum or P200 for one year,
if the borrower pays said P200, the whole P200 is the usurious interest, not
just that part thereof in excess of the interest allowed by law.
o The whole P200 is void, since payment of said interest is illegal.
o Effect of Art. 1413 – adds that the wrongly paid interest can be
recovered “with interest thereon from the date of payment
• HOWEVER, this does not lead to forfeiture of the principal
Article 1414. When money is paid or property delivered for an illegal purpose, the
contract may be repudiated by one of the parties before the purpose has been
accomplished, or before any damage has been caused to a third person. In such
case, the courts may, if the public interest will thus be subserved, allow the party
repudiating the contract to recover the money or property.
CASE: De Leon v. CA
Lesson: When the parties repudiate a void contract before it is accomplished, the
courts may choose to allow the repudiating party to recover the money.
Facts: The parties entered into a void contract, as the consideration was the
termination of marital relationship. The husband’s mother, who already previously
gave P380,000 to the wife pursuant to the void contract, resisted the attempt by the
wife to enforce the other provisions of the agreement on the ground that the
contract was void.
The lower court ruled that no enforcement can be made because the parties are in
pari delicto, & therefore the mother cannot recover the P380,000.
Held: The mother can recover the P380,000, as the letter-agreement she & the wife
entered into was repudiated before its purpose was accomplished.
Article 1415. Where one of the parties to an illegal contract is incapable of giving
consent, the courts may, if the interest of justice so demands, allow recovery of
money or property delivered by the incapacitated person.
Incapacity as an Exception to Pari Delicto Rule
• Ex. A is a minor and he enters into a contract with B, whereby B sells to A
prohibited drugs.
o The court may allow the minor to recover the money he paid B in
purchasing the illegal drugs. However, this is within the discretion of
the court.
Article 1416. When the agreement is not illegal per se but is merely prohibited, & the
182 | Katrina C. Gaw | Block C 2018
prohibition by the law is designed for the protection of the plaintiff, he may, if public
policy is thereby enhanced, recover what he has paid or delivered.
CASE: Ras v. Sua
Lesson: A disregard or violation of the conditions of the land grant in RA477 & the
Public Land Act does not produce automatic reversion of the property to the State,
nor work to defeat the grantee’s right to recover the property he had previously
disposed of or encumbered.
Facts: A property acquired from the government pursuant to a law designed to give
land to the landless was, in violation of the spirit of said law, leased to 3rd parties.
Said parties then refused to have the property reconveyed to the possession of the
owner-grantee despite violation of the lease agreement.
In their defense, the 3rd-party possessors claimed that repossession cannot be made
because the parties were in pari delicto and that the proper party to file the suit was
the government who granted the land to the owner.
Held: SC ruled that the property should be returned to the owner-grantee, as here it
would be favorable to the interests of public policy. The contentions of the 3rd-party
possessors are premised on the incorrect assumption that upon the plaintiff’s
violation of RA 477 he automatically loses his rights over the land and said rights
immediately revert to the State.
Article 1417. When the price of any article or commodity is determined by statute, or
by authority of law, any person paying any amount in excess of the maximum price
allowed may recover such excess.
When Law Provides Highest Amount
• It is illegal to charge the buyer higher than the statutory ceiling
• The excess from the limit shall be recoverable
Article 1418. When the law fixes, or authorizes the fixing of the maximum number of
hours of labor, and a contract is entered into whereby a laborer undertakes to work
longer than the maximum thus fixed, he may demand additional compensation for
service rendered beyond the time limit.
Overtime Pay
• Now governed by the Labor Code
• If an employer and employee enter into a contract where the employee shall
work only 8 hours a day for a specified compensation, such employee cannot
be forced to work beyond the said time
o If he is required to do so, he should be paid for the extra time
Article 1419. When the law sets, or authorizes the setting of a minimum wage for
laborers, & a contract is agreed upon by which a laborer accepts a lower wage, he
shall be entitled to recover the deficiency.
Minimum Wage
 • Ex. If according to law A is to receive P200 a day, & he enters into an Void v. Rescissible v. Unenforceable v. Voidable
employment contract providing that he is to get P150 a day, the contract is Contract Is damage Ratifiable? Can third Is there Can the action Can
an integral persons restitution? to assail there be
void. Thus, A can demand the difference of P50. part of the assail? prescribe? laches?
cause of
Article 1420. In case of a divisible contract, if the illegal terms can be separated action?
from the legal ones, the latter may be enforced. Void No No Yes GR: Yes No No
EXC: Cases
where pari
Divisible Contracts delicto
• If a void provision in a contract directly affects the entirety of the contract, the applies
Rescissible Yes Yes Yes Yes Yes Yes
contract can be considered void. Unenforceable No Yes No No Yes Yes
o HOWEVER, if the provision is independently separable from the other Voidable No No Yes Yes Yes Yes
provisions, such provision alone shall be considered void.
• Ex. In a contract of loan secured by a collateral of the debtor’s property TITLE III. – NATURAL OBLIGATIONS.
which, as stipulated in the contract, shall automatically be owned by the
creditor in the event of non-payment of the debt, the loan itself is valid but Article 1423. Obligations are civil or natural. Civil obligations give a right of action to
the security is void. compel their performance. Natural obligations, not being based on positive law but
o This is pactum commissorium; for the forfeiture to be valid in case of on equity & natural law, do not grant a right of action to enforce their performance,
non-payment the collateral must be foreclosed & sold at auction to the but after voluntary fulfillment by the obligor, they authorize the retention of what has
highest bidder. been delivered or rendered by reason thereof. Some natural obligations are set forth
in the ff. articles.
Article 1421. The defense of illegality of contracts is not available to 3rd persons
whose interests are not directly affected. Rationale of Natural Obligations (1947 Code Commission)
• On the part of the payor – give rise to a moral, rather than legal, duty to pay
Mutuality of Contracts & Void Contracts or perform, but the person thus performing feels that in good conscience he
• GR: There can only be mutuality of obligations in a contract which affects the should comply with his undertaking which is based on moral grounds
parties involved therein. o He should not be allowed by law to take back what he has rightly
• EXC: If a 3rd person is greatly prejudiced as his interest is directly affected, he done
may file a case for the nullification of a contract or set the same as a defense • On the part of the payee – under the laws in force, the payee is obliged to
even if said prejudiced person is not a party to the void contract. return the amount received by him because the payor was not legally bound
o Ex. If A & B enter into a contract of sale of real property, where A sells to make the payment; this is unfair to the payee, who deserves to be paid
a particular land which he does not own to B for an illegal • Equity, morality & natural justice are the foundation of natural law
consideration, such a contract is void. • Examples of natural obligations in Title III are NOT exclusive
§ If the particular land area sold encroaches on the property of
X, a 3rd person, he can seek the nullification of such contract *Article 1424. When a right to sue upon a civil obligation has lapsed by extinctive
as it directly affects his interest. prescription, the obligor who voluntarily performs the contract cannot recover what
he has delivered or the value of the service he has rendered.
Article 1422. A contract which is the direct result of a previous illegal contract, is
also void & inexistent. Paying Despite Extinctive Prescription
• Ex. The prescriptive period to file a case based on a written agreement is 10
Void Contract & Subsequent Inexistent Contract years from the time the right of action accrues. If a creditor, by virtue of a
• If a subsequent contract proceeds from an inexistent contract, the written loan contract, does not collect the amount of the loan after 10 years
subsequent contract is likewise void. from the time it should be paid, such creditor can no longer collect from the
debtor.
o However, if the debtor, despite the lapse of the period & knowing that
the debt has already prescribed, pays the creditor, such debtor can no
longer recover such payment.

183 | Katrina C. Gaw | Block C 2018

*Article 1425. When without the knowledge or against the will of the debtor, a 3rd
person pays a debt which the obligor is not legally bound to pay because the action
thereon has prescribed, but the debtor later voluntarily reimburses the 3rd person,
the obligor cannot recover what he has paid.
3rd Person Paying Against Will of Debtor
• Ex. A is indebted to Z but the collection of such debt has already prescribed.
o If M pays the debt to Z, &, later on, A voluntarily reimburses M, such
payment shall be considered valid & A cannot recover such amount
from Z on the ground that M should not have paid him.
*Article 1426. When a minor between 18 & 21 years of age who has entered into a
contract without the consent of the parent or guardian, after the annulment of the
contract voluntarily returns the whole thing or price received, notwithstanding the
fact that he has not been benefited thereby, there is no right to demand the thing or
price thus returned.
*Article 1427. When a minor between 18 & 21 of age, who has entered into a
contract without the consent of the parent or guardian, voluntarily pays a sum of
money or delivers a fungible thing in fulfillment of the obligation, there shall be no
right to recover the same from the obligee who has spent or consumed it in good
faith.
Minors & Payment
• An incapacitated person is not obliged to make any restitution except insofar
as he has been benefited by the thing or price received by him.
• A person who is “between 18 & 21 years of age” is not anymore a minor
because the age of majority today, pursuant to RA 6809 is 18.
o HOWEVER, if ever the law is still to apply, it means that a minor, who
voluntarily makes payment or restitution of what he has obtained by
contract even though he has no legal obligation to make payment or
restitution, can no longer recover what he has returned.
Article 1428. When, after an action to enforce a civil obligation has failed, the
defendant voluntarily performs the obligation, he cannot demand the return of what
he has delivered or the payment of the value of the service he has rendered.
Defendant Performing Obligation Despite Failure of Civil Action
• Ex. If A is indebted to B for P1,000 & a civil suit is filed to collect the amount
but such suit is dismissed, A need not pay the said amount but, if he
voluntarily makes payment, he can no longer recover such payment.
Article 1429. When a testate or intestate heir voluntarily pays a debt of the decedent
exceeding the value of the property which he received by will or by the law of
intestacy from the estate of the deceased, the payment is valid and cannot be
rescinded by the payer.
Voluntary Payment of Heir in Excess of Inherited Property
184 | Katrina C. Gaw | Block C 2018
• Ex. A is indebted to X for P10,000. A later dies, with M as his heir who is
entitled only to P5,000 from the estate of A. If M voluntarily pays X P10,000,
M can no longer recover such an amount.
Article 1430. When a will is declared void because it has not been executed in
accordance with the formalities required by law, but one of the intestate heirs, after
the settlement of the debts of the deceased, pays a legacy in compliance with a
clause in the defective will, the payment is effective & irrevocable.
Legacy Paid in a Defective Will
• Ex. M provided in his holographic will that his car shall go to his driver X.
Later, the holographic will turns out to be partly type-written & therefore it is
void as such will should be wholly hand-written by the testator.
o If, despite the nullity of the will, M’s heir, Z, still voluntarily gives the
legacy of the car to X, it shall be valid & cannot be revoked anymore.
TITLE IV. – ESTOPPEL.
Article 1431. Through estoppel an admission or representation is rendered
conclusive upon the person making it, & cannot be denied or disproved as against
the person relying thereon.
Estoppel & Its Application
• The doctrine of estoppel having its origin in equity, its application depends on
the special circumstances of each case
o However, in each case, estoppel must be determined after carefully
considering the material facts of the case lest injustice may result
• Estoppel cannot be sustained by mere argument or doubtful inference; it
must be clearly proved in all its essential elements by clear, convincing &
satisfactory evidence.
• Estoppel is not applicable:
(1) Against government suing in its capacity as sovereign or asserting
governmental rights
(2) When a law or public policy will be violated
(3) Against government owing to the mistakes or errors of its officers
o Any error made by a tax official in the assessment of taxes
does not have the effect of relieving the taxpayer from the full
amount of liability as fixed by law.
(4) To questions of law
o Estoppel applies only to questions of fact
o If an act, conduct or misrepresentation of the party sought to
be estopped is due to ignorance founded on innocent mistake,
estoppel will not arise
Class Discussion
Estoppel deals with conclusions of FACT, not conclusions of law.
Q: If X, in a birth certificate, checks the box “legitimate” but it turns out X is
legitimate, is X bound by the ticked box?
A: NO. Legitimacy and illegitimacy is a conclusion of law, not a mistake of fact.
CASE: Republic v. Go Bon Lee
Lesson: Government is never estopped by mistakes on the part of its agents.
Facts: The government, in 1951, filed a petition to cancel the certificate of
naturalization of a Chinese who was granted naturalization in a court in Cebu in
1941 & who took his oath of allegiance in 1942. The Chinese man claimed that his
case could no longer be reopened due to estoppel.
Held: The doctrine of estoppel or of laches does not apply against the Government
suing in its capacity as Sovereign or asserting governmental rights.
*CASE: SM Land v. BCDA
Lesson: Estoppels against the public are not favored. They should not be invoked
except in a rare and unusual circumstances, and may not be invoked where they
would operate to defeat the effective operation of a policy adopted to protect the
public. Nevertheless, the government must not be allowed to deal dishonorably or
capriciously with its citizens, and must not play an ignoble part or do a shabby thing;
and subject to limitations, the doctrine of equitable estoppel may be invoked against
public authorities as well as against private individuals.
Facts: SM was repeatedly assured by the BCDA, a government entity, that it will
respect SM’s rights. As a result, SM incurred large expenses & went through much
trouble. Can the government be held in estoppel?
Held: Yes. BCDA cannot find solace in the general rule that the State is not barred by
estoppel by the mistakes or errors of its officials or agents. Clearly, estoppel against
the government can be invoked in this case. This is in view of the fact that despite
BCDA’s repeated assurances that it would respect SM’s rights as an original
proponent, and after putting the latter to considerable trouble and expense, BCDA
went back on its word to comply with its obligations under their agreement and
instead ultimately cancelled the same. BCDA’s capriciousness becomes all the more
evident in its conflicting statements as regards whether or not SM’s proposal would
be advantageous to the government.
Class Discussion
GR: Government is not subject to estoppel
EXC: SM Landing v. BCDA (grave injustice)
Article 1432. The principles of estoppel are hereby adopted insofar as they are not in
conflict with the provisions of this Code, the Code of Commerce, the Rules of Court &
special laws.
Article 1433. Estoppel may be in pais or by deed.
Estoppel by Deed
• Estoppel by deed is a bar which precludes one party to a deed & his privies
from asserting as against the other party & his privies any right or title in
185 | Katrina C. Gaw | Block C 2018
derogation of the deed, or from denying the truth of any material facts
asserted in it.
o Technical in nature
o May conclude a party without reference to the moral equities of his
conduct.
• When a man has entered into a solemn engagement by deed, he shall not be
permitted to deny any matter which he has asserted therein.
• Aim: To prevent circuity of actions, & to compel party to fulfill their contracts.
• Where estoppel by deed arises, it is generally limited to an action on the deed
itself; in a collateral action, there is ordinarily no estoppel.
*Estoppel in Pais (Equitable Estoppel)
• A situation where, because of something which he has done or omitted to do,
a party is denied the right to plead or prove an otherwise important fact.
• It is the principle by which a party who knows or should know the truth is
absolutely precluded, both at law & in equity, from denying, or asserting the
contrary of, any material fact which by his words or conduct, affirmative or
negative, intentionally or culpable negligence, he has induced another, who
was excusably ignorant of the true facts & who had a right to rely upon such
word or conduct, to believe & act upon them thereby, as a consequence
reasonably anticipated, changing his position in such a way that he would
suffer injury if such denial or contrary assertion was allowed.
• Rests upon facts & circumstances of a particular case
Class Discussion
• One example of when estoppel in pais is involved is when there is estoppel in
relation to a written instrument.
• Estoppel only affects parties thereto and their successors-in-interest.
Essential Elements of Estoppel in Pais
(1) Conduct amounting to false representation or concealment of material facts
or at least calculated to convey the impression that the facts are otherwise
than, & inconsistent with, those which the party subsequently attempts to
assert;
(2) Intent, or at least expectation that this conduct shall be acted upon, or at
least influenced by the other party;
(3) Knowledge, actual or constructive of the actual facts.
Essential Elements of Estoppel by Conduct/Deed
(1) There must have been a representation or concealment of material facts;
(2) The representation must have been with knowledge of the facts;
(3) The party to whom it was made must have been ignorant of the truth of the
matter; &
(4) It must have been made with the intention that the other party would act
upon it.
Article 1434. When a person who is not the owner of a thing sells or alienates &
delivers it, & later the seller or grantor acquires title thereto, such title passes by
operation of law to the buyer or grantee.
Illustrative Example
• If A, who is not the owner of a car sells the same to B, the sale is
unenforceable because A has no authority to sell the property.
o BUT: If A himself delivers the property to B, & later A buys the same
from the real owner N, A cannot claim the property as his on the
ground that when he sold it to B, he was not the owner of the same.
o B shall be preferred by the law, which will treat the sale as completely
valid even though at the time it was actually made, the seller is not the
owner.
CASE: Estoque v. Pajuimala
Facts: A co-owner sold a land which he co-owned 2 other owners. The next day, that
co-owner completely acquired the property from the other 2 owners. Such sale was
assailed as invalid because the seller could not have sold the interest of the other
co-owners without their consent.
Held: The sale was valid because the vendor, the next day, acquired the entire
property from her co-owners & became the sole owner.
Article 1435. If a person in representation of another sells or alienates a thing, the
former cannot subsequently set up his own title as against the buyer or grantee.
Agent
• If A constituted B as his agent to sell a car & the car was in fact sold by B, A
cannot later on claim that he was the owner to invalidate the transaction.
Article 1436. A lessee or a bailee is estopped from asserting title to the thing leased
or received, as against the lessor or bailor.
Lessee & Bailee
• Lessee - acknowledges the fact that he is not the owner of the property & he
has only the peaceful possession thereof under such terms & conditions as
the owner & the lessee have mutually agreed.
• Bailee in commodatum - merely acquires the use of the thing loaned but not
its fruits. A bailee likewise acknowledges the fact that he is not the owner of
the non-consumable object delivered to him for his use for a certain period of
time with the obligation to return the same at the expiration of said period.
Article 1437. When in a contract between 3rd persons concerning immovable
property, 1 of them is misled by a person with respect to the ownership or real right
over the real estate, the latter is precluded from asserting his legal title or interest
therein, provided all these requisites are present:
(1) There must be fraudulent representation or wrongful concealment of facts
known to the party estopped;
(2) The party precluded must intend that the other should act upon the facts as
misrepresented;
(3) The party misled must have been unaware of the true facts; &
186 | Katrina C. Gaw | Block C 2018
(4) The party defrauded must have acted in accordance with the
misrepresentation.
3rd Party Fraudulence
• Ex. A & B have a contract of lease where A, the lessee, has been given a
preferential right to buy the property in the event that B, the lessor, decides
to sell the property.
o A approaches Z, and tells him that the property is his (A’s) already
because he (A) has already exercised his preferential right, & that only
the documentation is to be done. A also tells Z that the property is
being eyed by a corporation, which intends to buy the same.
§ This representation is made to entice Z to buy the property and
then later resell it to said corporation, thereby giving him
enormous profit.
o However, the real owner, in fact, has not yet offered the property for
sale such that A could not have exercised his preferential right. Also
there is really no corporation intending to buy the property.
o Because A is a seasoned real estate broker, Z relied on A’s fraudulent
representation and buys the property.
o Later on, A cannot assert a claim on the property contending that the
sale is unenforceable for not having the consent of the true owner, B,
at the time it was sold.
Article 1438. One who has allowed another to assume apparent ownership of
personal property for the purpose of making any transfer of it, cannot, if he received
the sum for which a pledge has been constituted, set up his own title to defeat the
pledge of the property, made by the other to a pledgee who received the same in
good faith & for value.
Pledge
• A thing pledged must be placed in the possession of the creditor, or of a 3rd
person by common agreement.
o A pledge is constituted by the absolute owner of the thing pledged to
secure the fulfillment of a principal obligation.
o The person constituting the thing must have free disposal of his
property, or, in the absence thereof, he must be legally authorized for
the purpose.
• Ex. A does not want to be known as the owner of a Mercedes Benz. He tells
everybody that said car is owned by B. B knows of this representation of A &
goes along with it. A even gives B the authority to sell, encumber or alienate
the property. A instructs B to obtain a loan; B decides to pledge the property
for said loan, which he obtains from X. The proceeds of the loan however
goes to A who, in the first place, instructed B to obtain the loan.
o As pledgee, X now is in possession of the car. The loan becomes due.
X warns B that if no payment is made, the pledge will be foreclosed.
Learning of this legal threat by X, A cannot resist the foreclosure by
claiming that the pledge of the car is invalid because B does not
actually own it. A is estopped.

Article 1439. Estoppel is effective only as between the parties thereto or their
successors-in-interest.
Mutuality in Estoppel
• GR: An equitable estoppel must be mutual & reciprocal
o Unless both parties to a transaction are bound by an estoppel, neither
is bound.
• CASE: Castrillo v. CA
o Facts: Isabel sold her 1/3 share of Lot No. 188 to Dimaranan in 1932
at the time when she was not yet the owner thereof.
§ Isabel acquired ownership only when her sister, Crispina,
executed a formal deed of sale in her favor in 1934, covering
an area of 252 sqm., thereby rendering unquestionable the
ownership of Dimaranan.
§ The heirs of Crispina assailed the lower court’s application of
estoppel provided for in Article 1434.
o Held: Estoppel can be applied. If anybody at all may be heard to
challenge the application of the doctrine of estoppel in favor of
Dimaranan, it is only the party against whom it may be invoked — in
this case, the vendor, Isabel, from whom they acquired the disputed
property. Crispina having conveyed the same to Isabel, neither she nor
her successors may raise the point to their advantage. For them to do
so would in effect be to deny the rights of Isabel.
TITLE V. – TRUSTS.
CHAPTER 1. GENERAL PROVISIONS.
Article 1440. A person who establishes a trust is called the trustor; one in whom
confidence is reposed as regards property for the benefit of another person is known
as the trustee; & the person for whose benefit the trust has been created is referred
to as the beneficiary.
Article 1441. Trusts are either express or implied. Express trusts are created by the
intention of the trustor or of the parties. Implied trusts come into being by operation
of law.
Trust Defined
• Trust - the right enforceable solely in equity, to the beneficial enjoyment of
property, the legal title to which is vested in another
o But the word ‘trust’ is frequently employed to indicate duties,
relations, and responsibilities which are not strictly technical trusts.
• Express Trusts - those created by the direct & positive acts of the parties, by
some writing, deed, or will, or by words either expressly or impliedly evincing
an intention to create a trust
• Implied Trusts - those which, without being expressed, are deducible from the
nature of the transaction as matters of intent, or which are super-induced on
187 | Katrina C. Gaw | Block C 2018
the transaction by operation of law as matters of equity, independently of the
particular intention of the parties
o Resulting Trust - raised or created by the act or construction of law,
but in its more restricted sense it is a trust raised by implication of law
& presumed always to have been contemplated by the parties, the
intention as to which is to be found in the nature of their transaction,
but not expressed in the deed or instrument of conveyance
§ Ex. Article 1448-1455, Civil Code
o Constructive Trust - a trust “raised by construction of law, or arising by
operation of law; not created by any words, either expressly or
impliedly evincing a direct intention to create a trust, but by the
construction of equity in order to satisfy the demands of justice. It
does not arise by agreement or intention but by operation of law.
§ Ex. If a person obtains legal title to property by fraud or
concealment, courts of equity will impress upon the title a so-
called constructive trust in favor of the defrauded party. A
constructive trust is not a trust in the technical sense.
Imprescriptibility of Express Trusts
• A trustee can never acquire by prescription the ownership of the property
entrusted to him
o Property held in trust can be recovered by the beneficiary regardless
of the lapse of time
• An action to compel a trustee to convey property registered in his name in
trust for the benefit of the cestui que trust does not prescribe
• The defense of prescription cannot be set up in an action to recover property
held by a person in trust for the benefit of another
• HOWEVER, acquisitive prescription may bar the action of the beneficiary
against the trustee in an express trust for the recovery of the property held in
trust where:
(1) The trustee has performed unequivocal acts of repudiation amounting
to an ouster of the cestui que trust;
(2) Such positive acts of repudiation have been made known to the cestui
que trust; &
(3) The evidence thereon is clear & conclusive
Prescription & Implied Trusts
• Resulting Trusts – the rule of imprescriptibility of the action to recover
property held in trust might apply as long as the trustee has not repudiated
the trust
• Constructive Trusts – prescription may supervene such an implied trust
• Either way, action may be barred by laches
• CASE: Salvatierra v. CA
o Lesson: An action for reconveyance of registered land based on an
implied trust may be barred by laches. The prescriptive period for such
actions is 10 years from the date the right of action accrued.
§ The registration of an instrument in the Register of Deeds
constitutes constructive notice to the whole world. Thus, the
 discovery of the fraud is deemed to have taken place at the
time of registration. Such registration is deemed to be a
constructive notice that the alleged fiduciary or trust
relationship has been repudiated.
Express v. Implied Trusts
Express Trusts Implied Trusts
Created by the intention of the trustor or Comes into being by operation of law
the parties
Created by direct & positive acts of the Those which, without being expressed,
parties, by some writing, deed, will or by are deducible from the nature of the
words evidencing intention to create a transaction by operation of law as
trust matters of equity, independent of the
particular intention of the parties
When intention to establish a trust is If the intent to establish a trust is to be
clear taken from circumstances or other
matters indicative of such intent
CASE: Go v. Estate of De Buenaventura
Facts: Felisa, in 1960, transferred a property she owned to her daughter Bella, her
son-in-law, Delfin, & Felimon, to assist the 3 of them in procuring a GSIS loan. Her
title to the property was cancelled & a new one was issued in the names of Bella &
Felimon. When Felisa died, the heirs of Felisa registered their adverse claim on the
new title with Bella & Felimon’s names. Later, however, in 1997, the annotation was
cancelled by the heirs of Felimon & by way of sale, the property was transferred to
Go. During the trial, it was shown to the court that Felisa had written a letter in 1970
where she said she was transferring the title of the property to Bella & Felimon for
their acquiring of a GSIS loan. (1) Was there a trust agreement created in this case?
If so, what kind? (2) Has the action to reconvey prescribed? (3) Is Go a purchaser in
good faith?
Held: There was an express trust in this case.
(1) Under Art. 1444, no particular words are required for the creation of an express
trust, it being sufficient that a trust is clearly intended. It is possible to create a trust
without using the word "trust" or "trustee." Conversely, the mere fact that these
words are used does not necessarily indicate an intention to create a trust. The
question in each case is whether the trustor manifested an intention to create the
kind of relationship which to lawyers is known as trust. It is immaterial whether or
not he knows that the relationship which he intends to create is called a trust, and
whether or not he knows the precise characteristics of the relationship which is
called a trust.
Further, a trust may have a constructive or implied nature in the beginning, but the
registered owner's subsequent express acknowledgement in a public document of a
previous sale of the property to another party effectively converted the same into an
express trust.
Taking the contents of the letter into consideration, SC differed from the finding of
the lower courts that an implied trust was established; instead, SC held that an
express trust was duly proved in this case. The words of Felisa in the 1970 letter
absolutely declared her intention of transferring the title over the property to Bella,
188 | Katrina C. Gaw | Block C 2018
Delfin & Felimon in order to merely accommodate them in securing a loan from the
GSIS. She likewise stated clearly that she was retaining her ownership over the
subject property and articulated her wish to have her heirs share equally therein.
Hence, while in the beginning, an implied trust was merely created between Felisa,
as trustor, & Bella, Delfin, & Felimon, as both trustees & beneficiaries, the execution
of the September 21, 1970 letter settled, once & for all, the nature of the trust
established between them as an express one, their true intention irrefutably extant
thereon.
Bella's attempt to thwart the express trust established in this case by claiming that
she affixed her signature on the September 21, 1970 letter only "to appease" her
mother, Felisa, and that she could afford to sign the letter since the title covering the
subject property was in their name as owners anyway, does not hold water. The
mere issuance of the certificate of title in the name of any person does not foreclose
the possibility that the real property may be under co-ownership with persons not
named in the certificate or that the registrant may only be a trustee or that other
parties may have acquired interest subsequent to the issuance of the certificate of
title," as in this case. Registration does not vest title; it is merely the evidence of
such title.
(2) As to the issue of prescription, there has been no prescription yet. In this case,
the repudiation of the express trust happened when the property was sold to Go in
1997. The case to reconvey the property was filed in the same year, only a few
months after the sale of the property to Go.
(3) As to Go being a purchaser in good faith, it was held that he was not. A purchaser
in good faith is one who buys the property of another without notice that some other
person has a right to, or an interest in, such property and pays a full and fair price for
the same at the time of such purchase, or before he has notice of some other
person's claim or interest in the property. Corollary thereto, when a piece of land is in
the actual possession of persons other than the seller, the buyer must be wary and
should investigate the rights of those in possession. Without making such inquiry,
one cannot claim that he is a buyer in good faith. When a man proposes to buy or
deal with realty, his duty is to read the public manuscript, that is, to look and see
who is there upon it and what his rights are. A want of caution and diligence, which
an honest man of ordinary prudence is accustomed to exercise in making
purchases, is in contemplation of law, a want of good faith. The buyer who has failed
to know or discover that the land sold to him is in adverse possession of another is a
buyer in bad faith.
Go admitted in his testimony that 2 months had lapsed before the sale could be
consummated because his lawyer advised him to request Bella, one of the sellers, to
cancel the encumbrance annotated on the title of the subject property. He also
claimed that he had no knowledge about the details of such annotation, and that he
was aware that individuals other than the sellers (the other heirs of Felisa) were in
possession of the subject property.
Such knowledge of the existence of an annotation on the title covering the subject
property and of the occupation thereof by individuals other than the sellers negates
any presumption of good faith on the part of Go when he purchased the subject
property. A person who deliberately ignores a significant fact which would create
suspicion in an otherwise reasonable man is not an innocent purchaser for value, as
in this case.

Article 1442. The principles of the general law of trusts, insofar as they are not in
conflict with this Code, the Code of Commerce, the Rules of Court & special laws are
hereby adopted.
Class Discussion
Must trusts be in writing for –
1. Validity? No. It can still be valid though it is only proven by parol evidence.
2. Enforceability? Yes.
3. Greater efficacy? Yes.
But a failure to write down the trust agreement does NOT affect the validity of the
trust agreement.
CHAPTER 2. EXPRESS TRUSTS.
*Article 1443. No express trusts concerning an immovable or any interest therein
may be proved by parol evidence.
Express Trusts & Parol Evidence
• Parol evidence – oral evidence
• To prove an express trust over immovable properties or any interest therein,
there must always be a showing of some documents proving the same
• CASE: Pascual v. Meneses
o Facts: Certain properties were claimed by different persons. Some of
the heirs contended that there was allegedly an express trust over
some of the real estates constituted by some claimant as co-owners
who, however, did not present any documentary proof of the same.
o Held: For immovables, there must be a document. Mere oral evidence
is not enough.
• CASE: Ramos v. Ramos
o Lesson: An express trust must be proven by clear, satisfactory, &
convincing evidence. It cannot rest on vague & uncertain evidence or
on loose, equivocal or indefinite declarations.
o Facts: The evidence showed that the properties claimed to be held in
trust was actually the subject of a partition.
o Held: The plaintiffs did not prove any express trust in this case. The
expediente of the intestate proceeding, Civil Case No. 217, particularly
the project of partition, the decision and the manifestation as to the
receipt of shares negatives the existence of an express trust. Those
public documents prove that the estate of Martin Ramos was settled
in that proceeding and that adjudications were made to his seven
natural children.
*CASE: Quirino v. Ramos
Lesson: Art. 1443 is an evidentiary rule; if the oral testimony of an alleged express
trust is offered without objection, the testimony as to the trust will be admissible.
Facts: There was a verbal trust agreement between the Spouses Ramos & Penalber,
where Penalber had told the Spouses Ramos that she was purchasing a lot but
189 | Katrina C. Gaw | Block C 2018
placing it in the name of the Spouses Ramos. When the transaction was done &
Penalber sought the turning over of the property to her, the Spouses Ramos refused.
During trial proper, when Penalber was explaining their verbal agreement, there was
no objection raised. Can the fact that the express trust was not in writing still be
raised before the SC?
Held: No. The requirement in Art. 1443 that the express trust concerning an
immovable or an interest therein be in writing is merely for purposes of proof, not for
the validity of the trust agreement. Art. 1443 is in the nature of a statute of frauds.
The statute does not deprive the parties of the right to contract with respect to the
matters therein involved, but merely regulates the formalities of the contract
necessary to render it enforceable. The effect of non-compliance is simply that no
action can be proved unless the requirement is complied with. Oral evidence of the
contract will be excluded upon timely objection. But if the parties to the action,
during the trial, make no objection to the admissibility of the oral evidence to
support the contract covered by the statute, and thereby permit such contract to be
proved orally, it will be just as binding upon the parties as if it had been reduced to
writing.
Despite this holding, however, SC ultimately did not grant the petition of Penalber,
because the transaction itself did not seem to support her claim that there was an
express trust.
Article 1444. No particular words are required for the creation of an express trust, it
being sufficient that a trust is clearly intended.
No Particular Words
• For as long as the intention to establish a trust is very clear from the proofs,
whether by some writing or deed or will or by words, an express trust is
created.
Article 1445. No trust shall fail because the trustee appointed declines the
designation, unless the contrary should appear in the instrument constituting the
trust.
Declining Trustee
• An express trust must be implemented even if the trustee appointed declines
the designation.
o In case of refusal to accept the trust by the trustee, the court will
appoint a trustee.
• HOWEVER, if the appointment of the trustee is a material provision, the
trustor can provide that a refusal of the trustee to accept the trust shall result
in the failure or nullification of the same.
Article 1446. Acceptance by the beneficiary is necessary. Nevertheless, if the trust
imposes no onerous condition upon the beneficiary, his acceptance shall be
presumed, if there is no proof to the contrary.
Acceptance by Beneficiary
• Trust property is designed to benefit a cestui que trust or a beneficiary.
 o If the beneficiary does not want the trust, the trustor will not be • A trust will not be created when for the purpose of evading the law prohibiting
estopped from deciding on another beneficiary. one from taking or holding real property, one takes conveyance thereof in the
• The acceptance of the beneficiary may be express or implied name of a 3rd person
• If the trust imposes no onerous condition upon the beneficiary, his o Ex. When, under a homestead law, a certain person is disqualified
acceptance shall be presumed, if there is no proof to the contrary. from obtaining a homestead patent over a certain property, it cannot
o Onerous condition - one which the beneficiary is required to perform to be contended that the actual possessor of the property is merely a
make the trust effective or is one which should be done for as long as trustee of the disqualified person who claims to be the real beneficiary
the trust exists. of the homestead patent.
§ No onerous condition - an act of gratuity or liberality; therefore § The alleged trust is of doubtful validity since it would promote a
the acceptance of the beneficiary shall be presumed. direct violation of the Public Land Act as regards the
acquisition of a homestead patent.
CHAPTER 3. IMPLIED TRUSTS. § A homestead applicant is required by law to occupy & cultivate
the land for his own benefit, & not for the benefit of someone
Article 1447. The enumeration of the ff. cases of implied trust does not exclude else.
others established by the general law of trust, but the limitation laid down in Article • If there is an express intention to create a trust, the trust is express & not
1442 shall be applicable. implied, even if the situations falls under any of the provisions in this chapter.
o Ex. If a document exists clearly involving a situation under Art. 1453
Class Discussion but the same document states that the trustor is constituting an
Express trust’s source of obligation – contract express trust to the beneficiary, such trust will not be considered an
Implied trust’s source of obligation – the LAW; here, the law recognizes the implied implied, but express.
consent of the parties to enter into the contract
*CASE: Spouses Inalvez v. Bayang Nool
Resulting Trusts v. Constructive Trusts Lesson: Co-ownership is a form of trust and every co-owner is a trustee for the
Resulting Trusts Constructive Trusts others. Before the partition of a land or thing held in common, no individual or co-
Based on the equitable doctrine that Created by the construction of equity in owner can claim title to any definite portion thereof. All that the co-owner has is an
valuable consideration & not legal title order to satisfy the demands of justice & ideal or abstract quota proportionate share in the entire land or thing. Should a co-
determines equitable title or interest; prevent unjust enrichment owner alienate or mortgage the co-owned property itself, the alienation or mortgage
presumed to always have been shall remain valid but only to the extent of the portion which may be allotted to him
contemplated by the parties in the division upon the termination of the co-ownership. In case of foreclosure, a
Arise from circumstances of the Arise contrary to intention against one sale would result in the transmission only of whatever rights the seller had over of
consideration involved in a transaction who, by fraud, duress or abuse of the thing sold.
whereby one person thereby becomes confidence, obtains or hold the legal
invested with legal title but is obligated right to property, which he ought not, in CASE: Clemente v. CA
in equity to hold his legal title for the equity, & good conscience, to hold Lesson: Resulting trusts arise from the nature or circumstances of the consideration
benefit of another involved in a transaction whereby one person becomes invested with legal title but is
Hence: In constructive trusts, consent is obligated in equity to hold his title for the benefit of another. It is founded on the
not relevant. The trust will be rammed equitable doctrine that valuable consideration and not legal title is determinative of
into you by the court. equitable title or interest and is always presumed to have been contemplated by the
1. 1448 1. 1450 parties. Since the intent is not expressed in the instrument or deed of conveyance, it
2. 1449 2. 1454 is to be found in the nature of the parties’ transaction. Resulting trusts are thus
3. 1451 3. 1455 describable as intention-enforcing trusts. An example of a resulting trust is Art. 1453
4. 1452 4. 1456 of the Civil Code.
5. 1453
*NOTE: Enumeration of types of implied trusts & categories taken from Estate of CASE: Policarpio v. CA
Cabacungan v. Laigo. Lesson: A constructive trust (aka maleficio, a trust ex delicto, a trust de son tort, an
involuntary trust) does not arise on every moral wrong in acquiring or holding
When There is No Trust property or on every abuse of confidence in business or other affairs; ordinarily such
a trust arises & will be declared only on wrongful acquisitions or retentions of

190 | Katrina C. Gaw | Block C 2018

property of which equity takes cognizance. It has been broadly ruled that a breach of
confidence although in business or social relations, rendering an acquisition or
retention of property by one person unconscionable against another, raises a
constructive trust.
A constructive trust is substantially an appropriate remedy against unjust
enrichment. It is raised by equity in respect of property, which has been acquired by
fraud, or where although acquired originally without fraud, it is against equity that it
should be retained by the person holding it.
Facts: A representative of the tenants of an apartment, instead of negotiating the
sale of the apartment for & on behalf of the tenants as he was tasked to do under
their association, bought the property for himself to the detriment of the tenants.
Held: There is a constructive trust in this situation & the representative acted in
breach of the trust reposed in him by his co-tenants; the representative must
execute a conveyance to the particular tenant.
CASE: Estate of Cabacungan v. Laigo
Lesson: A trust will follow the property through all changes in its state and form as
long as such property, its products or its proceeds, are capable of identification,
even into the hands of a transferee other than a bona fide purchaser for value, or
restitution will be enforced at the election of the beneficiary through recourse
against the trustee or the transferee personally. This is grounded on the principle in
property law that ownership continues and can be asserted by the true owner
against any withholding of the object to which the ownership pertains, whether such
object of the ownership is found in the hands of an original owner or a transferee, or
in a different form, as long as it can be identified. Accordingly, the person to whom is
made a transfer of trust property constituting a wrongful conversion of the trust
property and a breach of the trust, when not protected as a bona fide purchaser for
value, is himself liable and accountable as a constructive trustee. The liability
attaches at the moment of the transfer of trust property and continues until there is
full restoration to the beneficiary. Thus, the transferee is charged with, and can be
held to the performance of the trust, equally with the original trustee, and he can be
compelled to execute a reconveyance.
Article 1448. There is an implied trust when property is sold, & the legal estate is
granted to one party but the price is paid by another for the purpose of having the
beneficial interest of the property. The former is the trustee, while the latter is the
beneficiary. However, if the person to whom the title is conveyed is a child, legitimate
or illegitimate, of the one paying the price of the sale, no trust is implied by law, it
being disputably presumed that there is a gift in favor of the child.
Illustrative Example
• A sold to B his shares of stock in a corporation. While the property is in the
name of B, it is X who pays the property so that he can make use of the
benefits of the shares of stock like the dividends.
o B is the trustee while X is the beneficiary.
o If X expressly tells A & B that he intends to create a trust-relationship
from the transaction, it is clearly an express trust.
191 | Katrina C. Gaw | Block C 2018
§ However, if he does not do so, the law nevertheless considers
it an implied trust.
o If B is the legitimate or illegitimate child of X, no trust is implied by law,
it being disputably presumed that a gift has been made to B by X.
CASE: Padilla v. CA
Facts: A mortgagor sold the mortgaged property to a 3rd party who did not know that,
by the time he bought it, it was already foreclosed & consolidated in favor of the
mortgagee. The mortgagee later allowed the reselling of the property to the original
owner, but it was the 3rd-party-buyer who paid the price in order that his purchase of
the same will push through.
Subsequently, the original owners confirmed their sale to the 3rd-party buyer.
Held: An implied trust exists. The sale to the 3rd-party buyers was purely a matter of
form, as they were the mortgage debtors. They should be considered implied
trustees under an implied or resulting trust for the benefit of the real owner.
CASE: Gabutan v. Nacalaban
Lesson: (1) Parol evidence can be used to prove an implied trust since it is not
dependent on an express agreement nor required to be evidenced in writing; the
parol evidence, however, must be trustworthy.
(2) Art. 1448 provides in part that there is an implied trust when property is sold, &
the legal estate is granted to one party (the trustee) but the price is paid by another
for the purpose of having the beneficial interest of the property (the beneficiary). The
trust created here, which is also referred to as a purchase money resulting trust,
occurs when there is (1) an actual payment of money, property or services, or an
equivalent, constituting valuable consideration; (2) & such consideration must be
furnished by the alleged beneficiary of a resulting trust.
Facts: M’s money was used to buy a property, but the title was placed in G’s name. G
is one of M’s sons. M purchased the property because F wanted to build a pharmacy
on it. According to the testimonies in the case, it was really M’s practice to put her
properties in the name of her children, though it was she who really financed their
purchasing. M’s heirs filed a an action for reconveyance to get the property back
from N, to whom the certificate of title that had G’s name on it had transferred to. N
argued that G was the true owner of the property. (1) Are N’s contentions tenable?
(2) Has the action prescribed? (3) Can C, who got the property from N, be a buyer in
good faith?
Held: (1) No. The testimony was able to establish the existence of the trust in this
case. The action for reconveyance is thus proper. An action for reconveyance is a
legal and equitable remedy granted to the rightful landowner, whose land was
wrongfully or erroneously registered in the name of another, to compel the registered
owner to transfer or reconvey the land to him.
(2) No. An action for reconveyance based on an implied or a constructive trust
prescribes 10 years from the alleged fraudulent registration or date of issuance of
the certificate of title over the property. However, an action for reconveyance based
on implied or constructive trust is imprescriptible if the plaintiff or the person
enforcing the trust is in possession of the property. In effect, the action for
reconveyance is an action to quiet the property title, which does not prescribe. The
reason is that the one who is in actual possession of the land claiming to be its
owner may wait until his possession is disturbed or his title is attacked before taking
steps to vindicate his right. His undisturbed possession gives him a continuing right
to seek the aid of a court of equity to ascertain and determine the nature of the
adverse claim of a third party and its effect on his own title, which right can be
claimed only by one who is in possession.
The fact of actual possession of G of the property, during the lifetime of M & even
after her death, is an undisputed and established fact. Thus, the complaint for
reconveyance is imprescriptible. It follows, with more reason, that G, etc. cannot be
held guilty of laches as the said doctrine, which is one in equity, cannot be set up to
resist the enforcement of an imprescriptible legal right.
(3) No. C, who got the property from N, is a buyer in bad faith & cannot be entitled to
the property. The title in the first place was under G’s name, not N’s. Furthermore, C
was aware that the heirs of M were possessing the property. Hence, C was not in
good faith.
CASE: Bautista v. Bautista
Facts: In the business, as a practice, the co-owners would together finance the
purchasing of property, but would just title the property in the name of one person. Is
an implied trust created in this case?
Held: Yes. Although a certificate of title is the best proof of ownership of a piece of
land, the mere issuance of the same in the name of any person does not foreclose
the possibility that the real property may be under co-ownership with persons not
named in the certificate or that the registrant may only be a trustee or that other
parties may have acquired interest subsequent to the issuance of the certificate of
title. The principle that a trustee who puts a certificate of registration in his name
cannot repudiate the trust by relying on the registration is one of the well-known
limitations upon a title. This case also involved a trust under Art. 1448.
A trust, which derives its strength from the confidence one reposes on another
especially between families, does not lose that character simply because of what
appears in a legal document.
Article 1449. There is also an implied trust when a donation is made to a person but
it appears that although the legal estate is transmitted to the donee, he
nevertheless is either to have no beneficial interest or only a part thereof.
Example of a Donation that is an Implied Trust
• Ex. A donation of a lot & the apartment on it was made by M to N.
o Despite the donation, M was still to get all the rentals of the
apartment.
• This is an implied trust where the trustee is the donee & the beneficiary is the
donor. This is a case of a resulting trust.
Article 1450. If the price of a sale of property is loaned or paid by one person for the
benefit of another & the conveyance is made to the lender or payor to secure the
payment of the debt, a trust arises by operation of law in favor of the person to
whom the money is loaned or for whom it is paid. The latter may redeem the
property & compel a conveyance thereof to him.
192 | Katrina C. Gaw | Block C 2018
Implied Trust in Sale of Property
• Ex. A wanted to buy the property of Z. X made the payment using his own
money for the benefit of A. The money was a loan to A.
o When the purchase was made, the property was placed under the
name of X. This was done so that X will have an assurance that the
debt of A can be paid.
o In this case, the trustee is the lender (X).
§ A can later redeem the property by paying X the money
paid for the property. Thereafter, A can compel X to
convey the property.
Article 1451. When land passes by succession to any person & he causes the legal
title to be put in the name of another, a trust is established by implication of law for
the benefit of the true owner.
Implied Trust in Succession
• Ex. A is the only compulsory heir of M who dies. After payment of the debt of
M, the net estate of M should go to A.
o However, if A causes the title to the estate to be placed in the name of
Z, an implied trust is created for the benefit of A.
Article 1452. If 2 or more persons agree to purchase property & by common consent
the legal title is taken in the name of one of them for the benefit of all, a trust is
created by force of law in favor of the others in proportion to the interest of each.
Implied Trust in Co-Ownership
• Ex. A, B and C are co-owners of a particular land in equal parts but, by
agreement of all of them, the whole of the property is registered under the
name only of C.
o In this case, C is the trustee of the respective 1/3 shares of A & B, the
other co-owners.
Article 1453. When property is conveyed to a person in reliance upon his declared
intention to hold it for, or transfer it to another or the grantor, there is an implied
trust in favor of the person whose benefit is contemplated.
Property Conveyed in Reliance Upon His Declared Intention to Hold it For Another
• Ex. A told B that the property sold should be in his name because he shall
only hold it for the benefit of X, the real owner. An implied trust is created in
favor of X.
Article 1454. If an absolute conveyance of property is made in order to secure the
performance of an obligation of the grantor toward the grantee, a trust by virtue of
law is established. If the fulfillment of the obligation is offered by the grantor when it
becomes due, he may demand the reconveyance of the property to him.
An Absolute Conveyance to Secure Performance of Obligation
 • Ex. M is indebted to N. A particular property was conveyed to N by M to
secure such indebtedness. N holds the property only in trust for M. N is the
trustee.
o Upon payment of the debt, M can demand that the property be
returned to his name.
Article 1455. When any trustee, guardian or other person holding a fiduciary
relationship uses trust funds for the purchase of property & causes the conveyance
to be made to him or to a 3rd person, a trust is established by operation of law in
favor of the person to whom the funds belong.
Trustee’s Use of Funds Held in Trust
• Ex. N constituted B as the trustee of his funds for the benefit of X.
o B, using the trust fund, purchased property & placed it under his name
or under the name of X.
o A trust is created; the trustee is either B or X & the trust is in favor of
Z.
Article 1456. If property is acquired through mistake or fraud, the person obtaining it
is, by force of law, considered a trustee of an implied trust for the benefit of the
person from whom the property comes.
Property Acquired Through Mistake or Fraud
• Ex. A fraudulently made X sign an alleged loan agreement which actually
turned out to be an absolute sale of X’s property.
o The sale is voidable; a trust is deemed created by force of law.
o The trustee is A; A is merely holding the property for the benefit of X.
• CASE: Gonzales v. Jimenez
o Facts: The buyer bought a property from the seller who subsequently
fraudulently caused the issuance of a patent & a certificate of title to
his son over the same property.
o Held: The situation falls under Article 1456 & therefore an implied
trust is created in favor of the buyer. The seller & his son are deemed
to hold the property in trust for the benefit of the buyer who is the
person prejudiced by the fraudulent act.
Article 1457. An implied trust may be proved by oral evidence.
Oral Evidence
• An implied trust can be proven by oral evidence - it is deducible from the
nature of the transactions as matters of intent or which are super-induced on
the transaction by operation of law, independently of the particular intention
of the parties
TITLE XVII. – EXTRA-CONTRACTUAL OBLIGATIONS
CHAPTER 1. QUASI-CONTRACTS
193 | Katrina C. Gaw | Block C 2018
Article 2142. Certain lawful, voluntary, & unilateral acts give rise to the juridical
relation of quasi-contract to the end that no one shall be unjustly enriched or
benefited at the expense of another.
Quasi-Contracts
• NOT an implied contract
o No meeting of them minds between the parties (M: And yet, the
obligations are enforced just like a contract).
• A juridical relation is created by a quasi-contract so that no one shall be
unjustly enriched at the expense of another
Class Discussion
Quasi-contract is not an implied contract because there is no meeting of the minds
(e.g., solutio indebiti).
Article 2143. The provisions for quasi-contracts in this Chapter do not exclude other
quasi-contracts which may come within the purview of the preceding article.
Quasi-Contracts Explicitly Found in its Chapter in the Civil Code
(1) The obligation incident to the officious management of the affairs of other
persons (gestion de negocios ajenos)
(2) The recovery of what has been improperly paid (cobro de lo indebido)
Quasi-Contracts Not Limited to Those in Civil Code
• There are many quasi-contractual obligations, but it would be impractical for
the Code to enumerate them all
• The Code concentrates on 2 without attempting to exclude the other kinds
• The 2 are explicitly in the Code because:
o They are not considered in the other parts of the Code
o They are the most conspicuous of the quasi-contracts
• Other quasi-contracts, according to Jorge Giorgi (Italian jurist) —
o Payments made upon an existing consideration which fails;
o Payments wrongly made upon a consideration which is contrary to law,
or opposed to public policy;
o Payments made upon a vicious consideration or obtained by illicit
means
SECTION 1. NEGOTIORUM GESTIO.
Article 2144. Whoever voluntarily takes charge of the agency or management of the
business or property of another, without any power from the latter, is obliged to
continue the same until the termination of the affair & its incidents, or to require the
person concerned to substitute him, if the owner is in a position to do so. This
juridical relation does not arise in either of these instances:
(1) When the property or business is not neglected or abandoned;
(2) If in fact the manager has been tacitly authorized by the owner;
In the first case, the provisions of Article 1317, 14︎ 3 (1) & 1404 regarding
unauthorized contracts shall govern.
In the second case, the rules on Agency in Title X of this Book shall be applicable.
Negotiorum Gestio
• Not performed for profit
• Ex. A abandons his property, a mango plantation, & his business therein. B
decides to manage the business & the property so that the business will earn
upon harvest time. B does this without any authority from A.
o B therefore becomes an officious manager without expectation of any
profit or remuneration. B must continue managing the property or the
business until it is terminated. He can also require A to have him (B)
substituted if A is in a position to do so.
o If the property is not abandoned, all acts of A unauthorized & any
contract entered into by him shall be generally unenforceable.
o If B were authorized, the law on agency shall apply.
CASE: Sison & Azarraga v. Balgos
Lesson: The ff. are circumstances under which one may undertake to carry out a
business matter for another (Manresa)
(1) That they relate to determined things or affairs
(2) That there be no administrator or representative of the owner who is charged
with the management thereof;
(3) That there is no express or tacit mandate on the part of the owner, for it very
often may happen even without his knowledge;
(4) That the actor be inspired by the beneficent idea of averting losses &
damages to the owner or interested party through the abandonment of the
things that belong to him or of the business in which he may be interested;
that administration is not for profit, or with the avaricious idea of gain.
Facts: The guardian of certain minors died without paying the redemption price on
behalf of the minors with respect to a certain property to which the said minors were
entitled.
• The uncle of the said minors took upon himself to deposit the redemption
price in court so that the period to redeem will not prescribe.
• The authority of the said uncle to do so was questioned.
Held: There was a quasi-contract created; therefore the act of the uncle in preserving
the property of the minors was valid. The uncle’s actions were for the benefit of the
kids.
• Art. 1893: The owner of property or a business who avails himself of the
advantages of the administration of another, even when he has not expressly
ratified it, shall be liable for the obligations contracted for his benefit.
o He shall indemnify the administrator for the necessary expenses
which he may have in charge of his duties.
o The same obligation shall pertain to said owner when the object of
said administration should have been to avoid any imminent or
manifest damage, even when no profit results therefrom.
• The minor, although usually incapable of contracting or binding himself,
cannot disavow the efficacy of the contracted obligation when it redounds to
his benefit, because of the principle that no one may enrich himself to the
prejudice of another.
194 | Katrina C. Gaw | Block C 2018
Class Discussion
This is LEGAL TRESPASSING.
• GR: Once you enter, you must preserve it until the real owner comes back.
The preserver is called the officious manager. He intrudes so that the
abandoned or neglected property is preserved.
• The preserver’s degree of diligence is that of a good father of a family.
• If the preserver delegates the job of preserving to a third person, he is
solidarily liable with said third person as regards the preservation of the
property.
• If the preserver intrudes & conducts risky undertakings even for fortuitous
event, the preserver will be liable for destruction EXCEPT if the destruction is
imminent; if he does not give someone more competent than him to preserve
the property, the preserver would be liable.
Article 2145︎ . The officious manager shall perform his duties with all the diligence of
a good father of a family, & pay the damages which through his fault or negligence
may be suffered by the owner of the property or business under management.
The courts may, however, increase or moderate the indemnity according to the
circumstances of each case.
Degree of Diligence for Officious Manager
• A good father of a family - the ordinary degree of care which a reasonable &
prudent person will do given the same circumstances
• If he causes damage to the property of the owner, he shall be liable to such
owner
• An officious manager is in a sense an intruder in the business or the property
of the owner.
o BUT: If his intrusion is with the objective of preserving & taking care of
the property without any intent to gain, a quasi-contract is created.
• The officious manager cannot escape liability by stating that there was no
obligation on his part to take over the property or business in the first place.
o Once he takes over, he has the responsibility to take care of it.
• If the owner suffers damage due to the negligence or fault of the officious
manager, the court can increase or moderate the indemnity according to the
circumstances.
Article 2146. If the officious manager delegates to another person all or some of his
duties, he shall be liable for the acts of the delegate, without prejudice to the direct
obligation of the latter toward the owner of the business.
The responsibility of 2 or more officious managers shall be solidary, unless the
management was assumed to save the thing or business from imminent danger.
Delegation of Management
• The officious manager can delegate the management of the properties to
another.
o BUT: He will be responsible for the acts of the said delegate.
 • Such person to whom the management has been delegated shall likewise be
directly responsible to the owner.
• The liability of 2 or more officious managers is solidary.
o The owner can seek the full amount of damages from anyone of the
officious managers.
Article 2147. The officious manager shall be liable for any fortuitous event:
(1) If he undertakes risky operations which the owner was not accustomed to
embark upon;
(2) If he has preferred his own interest to that of the owner;
(3) If he fails to return the property or business after demand by the owner;
(4) If he assumed the management in bad faith.
Rules for Fortuitous Events
• GR: The happening of a fortuitous event affecting an obligation excuses the
person charged from performing the obligation.
• In case of negotiorum gestio, Article 2148 does NOT excuse the officious
manager from liability due to fortuitous event.
Situations Where Officious Manager is Liable for Fortuitous Events
1) When the officious manager undertakes risky operations which the owner is
not accustomed to embark upon.
• Ex. If the business of the owner is simply providing a warehouse for
dolls, & the officious manager decides to allow the storing of highly
inflammable materials in the warehouse, the officious manager shall
be liable if the warehouse is burned due to a fortuitous event, such as
the striking of lightning.
2) When the officious manager has preferred his own interest to that of the
owner.
• Ex. The officious manager takes over the business of the owner of
warehousing goods. In the meantime, the officious manager also
stores some of his goods in the warehouse. In the event that a flood
occurs, and he first saves his goods, before the goods of the owner &
the latter’s clients, from being destroyed, the officious manager will be
liable for the loss due to the fortuitous event.
3) When the officious manager fails to return the property or business after
demand by the owner.
• Once the owner demands the return of the business, the officious
manager should readily return it. He has no right to keep it for himself.
4) When the officious manager assumes the management in bad faith.
• Ex. The officious manager takes over the warehousing business of the
owner so that he can get the clients of the owner for his (officious
manager’s) own warehousing business.
Article 2148. Except when the management was assumed to save the property or
business from imminent danger, the officious manager shall be liable for fortuitous
events︎ :
(1) If he is manifestly unfit to carry on the management;
195 | Katrina C. Gaw | Block C 2018
(2) If by his intervention he prevented a more competent person taking up the
management.
Further Liability For Fortuitous Events
• The officious manager has no business taking over the abandoned property
or business of somebody if he has no knowledge or is not competent to
undertake the management.
o Ex. If a teacher takes on the farming business of another, he shall be
liable for any damage caused by a fortuitous event because he
should have known that he cannot undertake something which he
has no competence in.
§ IF another person who is competent to take over the farming
business decides to manage the same & the said teacher
prevents him from doing so on the ground that he has been
there first, such teacher will be liable if the property is
destroyed by a fortuitous event.
§ HOWEVER, if the teacher manages the farming business to
save it from imminent danger, he will not be liable for
damages caused by a fortuitous event.
Article 2149. The ratification of the management by the owner of the business
produces the effects of an express agency, even if the business may not have been
successful.
Ratification = Express Agency
• Ratification - the owner agrees to whatever the officious manager has done.
o Cures even the defects which the officious manager has committed
• If ratification happens, the law on agency applies—even if the business is not
successful, such agency by virtue of ratification shall be recognized.
Article 2150. Although the officious management may not have been expressly
ratified, the owner of the property or business who enjoys the advantages of the
same shall be liable for obligations incurred in his interest, & shall reimburse the
officious manager for the necessary & useful expenses & for the damages which the
latter may have suffered in the performance of his duties.
The same obligation shall be incumbent upon him when the management had for its
purpose the prevention of an imminent & manifest loss, although no benefit may
have been derived.
Reimbursement to Officious Manager
• The owner must always reimburse the officious manager for all expenses
which have inured to the benefit or advantage of the owner.
o Ex. If the officious manager pays taxes on the property so that it will
not be foreclosed, the owner must reimburse the officious manager.
• Even if no benefit has been derived but the officious manager takes over to
save the property or business from imminent loss, the officious manager
should also be reimbursed for obligations incurred for the owner’s interest,
including useful & necessary expenses.

Article 2151. Even though the owner did not derive any benefit & there has been no
imminent and manifest danger to the property or business, the owner is liable as
under the 1st par. of the preceding article, provided:
(1) The officious manager has acted in good faith, &
(2) The property or business is intact, ready to be returned to the owner.
Good Faith & Intact
• WON there is benefit & WON there is imminent danger, the officious manager
should be reimbursed for useful & necessary expenses & of payment made in
furtherance of the owner’s interest if:
o The officious manager has acted in good faith &
o The property or business is intact, ready to be returned to the owner.
§ The very fact that the property is intact means that the officious
manager has prudently & with due diligence managed the
property.
Article 2152. The officious manager is personally liable for contracts which he has
entered into with 3rd persons, even though he acted in the name of the owner, &
there shall be no right of action between the owner & 3rd persons. These provisions
shall not apply:
(1) If the owner has expressly or tacitly ratified the management; or
(2) When the contract refers to things pertaining to the owner of the business.
3rd Persons & Officious Manager
• If the officious manager decides to manage the property or business, & for
this reason, he buys some decorations to be placed in the property, such
officious manager shall be the only one responsible for the payment of such
decorations even if he acts in the name of the owner.
o The seller of the decorations has no right of action against the owner
in the event the officious manager does not pay for them.
• BUT: The owner shall pay for said purchases if he expressly or tacitly ratifies
the act of the officious manager.
o Ex. If the buying and selling of decoration is the very object of the
business of the owner, the owner shall be liable.
Article 2153. The management is extinguished:
(1) When the owner repudiates it or puts an end thereto;
(2) When the officious manager withdraws from the management, subject to the
provisions of Art. 2144;
(3) By the death, civil interdiction, insanity or insolvency of the owner or the
officious manager.
Repudiation
• The management is extinguished if the owner repudiates it (puts an end to it).
• The owner still has the power of dominion over his property or his business.
Hence his decision must prevail over that of the officious manager. If owner
does not want the officious manager, this decision should prevail.
196 | Katrina C. Gaw | Block C 2018
• CASE: Benedicto v. Board of Administrators
o Facts:
§ After People Power I, the properties & assets of Broadcast City
were abandoned, & no one was looking after them.
§ When the PCGG was created, its chairman, Sen. Jovito
Salonga, requested the Ministry of National Defense & the
Ministry of Information to sequester Broadcast City pending
clarification of its uncertain financial condition & its legal &
beneficial ownership.
§ E.O. 11 – Cory Aquino created a Board of Administrators to
manage Broadcast City & said that the Board:
• Would exercise “all the powers imposed on trustees
under the principles of the general law on trust &
officious managers under the law on extra- contractual
obligations”
• Would have an existence coterminous with the
investigation of the seized assets by the PCGG & the
final disposition of the seized assets.
• Would hold office “at the pleasure of the President.”
§ Pet. filed an action against PCGG to annul the sequestration &
to recover management of Broadcast City.
• PCGG & Pet. entered into an agreement to reorganize
the Board of Broadcast City & allow the Pet. to nominate
2/3 of the members of the Board.
§ The Board of Administrators refused to relinquish management
& operation to the newly organized Board.
o Held: The role of the Board of Administrators has become functus
oficio. In negotiorum gestio, the authority of the officious manager of a
business is extinguished when the owner demands its return.
Withdrawal of Officious Manager
• The officious manager can withdraw, putting an end to his management.
• BUT: He must require the person concerned or the owner to substitute him if
the owner is in a position to do so (Article 2144).
o If the owner is not in a position to do so, he must continue & only
withdraw upon the termination of the affair & its incidents.
Death, Civil Interdiction, Insanity, or Insolvency
• Death – the duty to be officious manager naturally ceases
• Civil interdiction – an accessory penalty to a principal penalty as
punishment for the commission of a crime; deprives the offender, during
the time of his sentence, of the rights of:
o Parental authority or guardianship, either as to the person or
property of the ward
o Marital authority
o Management of his own property
o Disposal of such property by any act or any conveyance inter
vivos
 • Insanity – deprives the person of reason
• Insolvency – deprives the person of the financial liquidity to manage his
affairs as his liabilities surpass his assets
SECTION 2. – SOLUTIO INDEBITI
Article 2154. If something is received when there is no right to demand it, & it was
unduly delivered through mistake, the obligation to return it arises.
Requisites of Solutio Indebiti (City of Cebu v. Piccio)
(1) When he who paid was not under the obligation to do so; &
(2) The payment was made by reason of an essential mistake in fact.
CASE: Velez v. Balzaraza
Lesson: When there is no intention to charge interest or rentals & there is only a
principal, any payment made in excess of said principal must be returned to the
obligor. Solutio indebiti exists when:
(1) There is no right to collect these excess sums; &
(2) The amounts have been paid through mistake
Facts: The defendants paid money which did not constitute either payment of rentals
or interest & therefore was not due.
• The parties in their contracts never intended that either rents or interest
should be paid
• When these payments were made, they were intended by defendants to be
applied to the principal, but they already overpaid the amounts loaned to
them.
Held: This is a situation of solution indebiti; the plaintiff must return the excess
payments made by the defendants.
• Lawmakers have used the principle that “no one shall be unjustly enriched at
the expense of another” to shape laws in the Civil Code & in the conflict of
rights
CASE: Adres v. Manufactureres Hanover & Trust Corp.
Facts: X is engaged in the manufacture of ladies garments, children’s wear, etc.
under the name “Irene Wearing Apparel.” Among X’s foreign buyers is Facets
Funwear, Inc. (FACETS).
• FACETS would from time to time remit certain amounts of money in payment
to X for the products it purchased.
• In Aug. 1980, FACETS instructed the FNSB bank to transfer $10,000 to X; the
FNSB bank informed its local partner bank, PNB.
• Acting on said instruction, PNB told Y, the respondent Manufacturers Hanover
& Trust Corp., to effect the transfer of the $10,000.
o However, the payment was not effected immediately because the
payee designated in the telex for the transfer was only “Wearing
Apparel (no Irene).”
§ When PNB asked for a follow-up, Y sent another telex which
was correctly forwarded to X; thus, X received the $1O,000.
197 | Katrina C. Gaw | Block C 2018
• Meanwhile, FACETS heard about the delay due to the failure of the 1st telex,
& asked FNSB to instead use another Phil. bank, PCIB instead.
o FNSB, also unaware that PNB had successfully asked Y to send the
$10,000, instructed PCIB to pay the same amount to X.
o On Sept. 1980, X received a 2nd $10,000.
• Y debited the amount to FNSB for the 2nd $10,000 effected through PCIB.
o FNSB then discovered that Y had made a duplication of the
remittance, & asked for the credit of its account in the amount of
$10,000; Y complied with the request.
• Y asked X for the return of the extra $10,000, but X refused to pay.
o RTC ruled that the payment was not made by mistake, but by
negligence, & thus X was not unjustly enriched.
• Before SC, X argues that it had the right to demand & retain the 2nd $10,000,
because even after the 2 $10,000s are credited to X’s receivables, FACETS
still owes X $49,324. Thus, there was no unjust enrichment. Also, the
employees of FNSB were just negligent.
Does solutio indebiti apply here?
Held: Yes. X must return the 2nd $10,000 paid by mistake.
The contract of X is with FACETS. It is FACETS & not Y that is indebted to X. On the
other hand, the contract for the transmittal of dollars FACETS to X was entered into
by Y with FNSB.
X, although referred to as the payee, was not privy to the contract of remittance of
dollars. Neither was Y a party to the contract of sale between X & FACETS. There
being no contractual relation between them, X had no right to apply the 2nd $10,000
remittance delivered by mistake by Y to the outstanding accounts of FACETS.
• On the issue of negligence, FACETS sent only 1 remittance. FNSB only
requested that Y remit $10,000; this is the only remittance requested by
FNSB as per instruction of FACETS.
o The mistake was actually due to the remittance having the same
reference invoice number, 26380.
o Y made the remittance on the wrong assumption that X did not receive
the 1st remittance.
• X invokes the equitable principle that when one of 2 innocent persons must
suffer by the wrongful act of a 3rd person, the loss must be borne by the one
whose negligence was the proximate cause of the loss.
o GR: Principles of equity (or common law) cannot be applied if there is
a statutory provision of law specifically applicable to a case.
• Y’s suit was filed well within the 6 years prescriptive period for actions based
upon a quasi-contract, so the defense of prescription also cannot apply.
Class Discussion
What’s the difference between natural obligation and solutio indebiti?
Payment is needed in both.
In both cases, payment was not due.
BUT in solutio indebiti, you do not know if it is due or not.
In natural obligation, YOU KNOW IT’S NOT DUE, AND YET YOU PAID.
CASE: Sebastian Siga-An v. Villanueva
Lesson: In the case, it was established that respondent paid interest to
petitioner. Respondent was under no duty to make such payment since there was
no express stipulation in writing that there would be interest on the loan. Hence, the
payment was clearly a mistake. Since petitioner received something when there was
no right to demand it, he has an obligation to return it.
Article 2155. Payment by reason of a mistake in the construction or application of a
doubtful or difficult question of law may come within the scope of the preceding
article.
Mistake Due to Difficult Provision of Law
• GR: Solutio indebiti invokes only a mistake of fact
• EXC: Art. 2155 – A mistake of law is allowed if the mistake is brought about
by the construction or application of a doubtful or difficult question of law
CASE: Gonzalo Puyat & Sons Inc. v. City of Manila
Lesson: When multiple laws overlap, making it difficult to determine the taxes which
one must pay, the tax payments made by mistake in the interpretation of said laws
are recoverable.
• The taxpayer has no voice in the imposition of the burden. He has the right to
presume that the taxing power has been lawfully exercised. He should not be
required to know more than those in authority over him, nor should he suffer
loss by complying with what he bona fide believes to be his duty as a good
citizen.
Facts: The appellee (Gonzalo) paid taxes which were not due by mistake, as it was
actually exempted; the mistake in payment was, among others, the result of a
complicated correlation & application of various municipal & national laws.
• Appellee: This is solution indebiti, because the payments could not have been
voluntary.
o At most, they were paid “mistakenly and in good faith” & “without
protest in the erroneous belief that it was liable thereof.”
o Voluntariness is incompatible with protest & mistake.
Held: Solutio indebiti should apply.
• Gonzalo is exempted from the payment of the tax in question, as manifested
from the reply of the City Treasurer stating that sales of manufactured
products at the factory site are not taxable either under the Wholesalers’
Ordinance or under the Retailers’ Ordinance.
o The taxes were paid, through mistake. The appellant City of Manila, at
the very start, notwithstanding the Ordinance imposing the Retailer’s
Tax, had no right to demand payment thereof.
• Gonzalo did not voluntarily make the payment, as Manila avers, but paid
believing it was due.
o In such situation, the amount paid, even without protest, is
recoverable.
Article 2156. If the payer was in doubt whether the debt was due, he may recover if
he proves that it was not due.
198 | Katrina C. Gaw | Block C 2018
Debt Not Due
• Ex. A debtor pays a creditor prematurely because he is not sure whether the
debt is already due. The creditor accepts it. The debtor can recover what he
has paid prior to the due date of the debt provided that the demand for
reimbursement is NOT made after the debt has become due.
Article 2157. The responsibility of 2 or more payees, when there has been payment
of what is not due, is solidary.
Solidary Obligation of Multiple Payees Under Solutio Indebiti
• Ex. A is indebted to B and C for P2,000. The obligation is of a solidary nature
such that A can pay only to one of them the whole obligation, and the debt is
considered paid as to both.
o If A pays B the amount of P2,000, the debt is considered paid. It is up
to C to claim from B his share of the credit which is P1,000.
o If there is payment by mistake, A can recover what he paid from B or
C. This is true, even if in the meantime, C has not yet obtained his
P1,000.
Article 2158. When the property delivered or money paid belongs to a 3rd person, the
payee shall comply with the provisions of Article 1984.
Payment Made Belongs to 3rd Person
• Art. 1984 - The depositary cannot demand that the depositor prove his
ownership of the thing deposited.
o NEVERTHELESS, should he discover that the thing has been stolen &
who its true owner is, he must advise the latter of the deposit.
§ If the owner, in spite of such information, does not claim it
within the period of 1 month, the depositary shall be relieved of
all responsibility by returning the thing deposited to the
depositor.
o If the depositary has reasonable grounds to believe that the thing has
not been lawfully acquired by the depositor, the former may return the
same.
• Ex. A is obliged to pay B his obligation by giving B a watch. Despite the fact
that the payment is not yet due, A gives B the watch which turns out to be
stolen from X.
o At the time of his receipt of the watch, B has no obligation to ask A
questions as to who owns the watch.
§ HOWEVER, if B later finds out that X really owns the watch, B
must advise X that he (B) is in possession of his (X’s) watch. X
must claim the watch within one month from the advice.
• If X does not claim the watch, B is excused from all
liability if, A, because of solutio indebiti, claims back the
watch, & B gives back the watch to A.
o HOWEVER, if at the time A gives the watch of B, the latter has
reasonable grounds to believe that it has been acquired unlawfully, B
can return the same to A.

Article 2159. Whoever in bad faith accepts an undue payment, shall pay legal
interest if a sum of money is involved, or shall be liable for fruits received or which
should have been received if the thing produces fruits.
Bad Faith Acceptance of Undue Payment
• If the creditor knows that the payment is not yet due & payment is tendered
to him, he must inform the debtor that payment is not yet due.
o Should the creditor accept such premature payment, he is in bad
faith.
§ He shall be liable for interest from the time he accepts
payment up to the time he returns it upon demand of the
debtor.
CASE: Spouses Abella v. Spouses Abella
Lesson: (1) When a debtor is made to pay unconscionable interest rates & these
rates are reduced, so that the debtor has now given the creditor amounts in excess
of what he owes, there is solutio indebiti & the creditor must reimburse the debtor
under said quasi-contract.
In this case, as respondents had already fully paid the principal and all conventional
interest that had accrued, they were no longer obliged to make further payments.
Any further payment they made was only because of a mistaken impression that
they were still due. Accordingly, petitioners are now bound by a quasi-contractual
obligation to return any and all excess payments delivered by respondents.
(2) SC also posited that the holding in Nacar – which provides that “when an
obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court
at the rate of 6% per annum” – is applicable to obligations arising from quasi-
contracts such as solutio indebiti. However, since in this case, the excess payment
was made by mistake & no bad faith was shown, SC did not hold petitioners liable
for the 6% interest.
CASE: Sebastian Siga-An v. Villanueva
Lesson: In this case where the person who accepted undue payment did it in an
oppressive manner (by first filing 5 BP 22 cases against the debtor, pestering the
debtor to pay interest & threatening to block her transactions if she would not pay
interest, forcing her to pay interest even if the loan never stipulated interest
payments to begin with), SC awarded moral damages, exemplary damages, &
attorney’s fees, as well as legal interest at 6% per annum, to the debtor, on top of
the return of the excess the debtor paid.
Article 2160. He who in good faith accepts an undue payment of a thing certain &
determinate shall only be responsible for the impairment or loss of the same or its
accessories & accessions insofar as he has thereby been benefited. If he has
alienated it, he shall return the price or assign the action to collect the sum.
Acceptance Not Knowing it Was Due
199 | Katrina C. Gaw | Block C 2018
• Ex. A is obliged to give B a house on Jan. 1, 1997. Believing that it was due
on Aug. 1, 1996, A delivered the house on said date. B likewise did not know
that the house was still due on Jan. 1, 1997. B was in good faith.
o On Nov. 1996, the house was rented in the amount of P2,000/hour by
a movie producer for a particular motion picture &, while shooting, the
kitchen was accidentally burned. After the shooting of the motion
picture, B was paid the rent in the amount of P30,000 for 15 hours.
o On Dec. 1996, A discovered that the house was not yet due &
demanded its return. B can return the house & pay the amount of the
kitchen which has been impaired, because he (B) has been benefited
by the house when he had it rented.
Article 2161. As regards the reimbursement for improvements & expenses incurred
by him who unduly received the thing, the provisions of Title V of Book II shall govern.
Rules for Reimbursement Incurred by the One who Unduly Received the Thing
• Art. 546 - Necessary expenses shall be refunded to every possessor; but only
the possessor in good faith may retain the thing until he has been reimbursed
therefor.
o Useful expenses shall be refunded only to the possessor in good faith
with the same right of retention, the person who has defeated him in
the possession having the option of refunding the amount of the
expenses or of paying the increase in value which the thing may have
acquired by reason thereof.
• Art. 547 - If the useful improvements can be removed without damage to the
principal thing, the possessor in good faith may remove them, unless the
person who recovers the possession exercises the option under par. 2 of the
preceding article.
• Art. 548. - Expenses for pure luxury or mere pleasure shall not be refunded to
the possessor in good faith; but he may remove the ornaments with which he
has embellished the principal thing if it suffers no injury thereby, & if his
successor in the possession does not prefer to refund the amount expended.
• Art. 549 - The possessor in bad faith shall reimburse the fruits received &
those which the legitimate possessor could have received, and shall have a
right only to the expenses mentioned in par. 1 of Art. 546 & in Art. 443.
o The expenses incurred in improvements for pure luxury or mere
pleasure shall not be refunded to the possessor in bad faith; but he
may remove the object for which such expenses have been incurred,
provided that the thing suffers no injury thereby, & that the lawful
possessor does not prefer to retain them by paying the value they may
have at the time he enters into possession.
• Art. 550 - The costs of litigation over the property shall be borne by every
possessor.
• Art. 551 - Improvements caused by Nature or time shall always inure to the
benefit of the person who has succeeded in recovering possession.
• Art. 552 - A possessor in good faith shall be liable for the deterioration or loss
of the thing possessed, except in cases in which it is proved that he has
acted with fraudulent intent or negligence, after the judicial summons.
 o A possessor in bad faith shall be liable for deterioration or loss in
every case, even if caused by fortuitous event.
• Art. 553 - One who recovers possession shall not be obliged to pay for
improvements which have ceased to exist at the time he takes possession of
the thing.
Article 2162. He shall be exempt from the obligation to restore who, believing in
good faith that the payment was being made of a legitimate & subsisting claim,
destroyed the document, or allowed the action to prescribe, or gave up the pledges,
or cancelled the guaranties for his right. He who paid unduly may proceed only
against the true debtor or the guarantors with regard to whom the action is still
effective.
3rd Person in an Obligation & Solutio Indebiti Situation
• Ex. A is indebted to B in the amount of P1,000. It is an oral contract of loan &
hence it prescribes in 6 years from the time it falls due.
o X is the guarantor of the indebtedness. As guarantor, X will only pay B
if B has unsuccessfully exhausted all efforts to collect from A upon the
maturity of the debt.
o The debt becomes due & A fails to pay B. B has not yet exhausted all
efforts to collect from A.
o Believing that he is principally liable also for the debt, X pays B on the
5th year since the debt has become due. B also believed in good faith
that he could collect from X & hence accepts the payment from X. In
the meantime, more than 6 years have already lapsed since the debt
has become due. B does not demand from A anymore because he has
already been paid by X on the 5th year.
§ Here, X paid B by mistake. X cannot recover the money paid by
mistake from B because, if this is allowed, B cannot anymore
recover payment from A as B’s cause of action against A has
prescribed. X can only recover from A, the true debtor.
§ Since a quasi-contract of solutio indebiti exists from the time X
made the payment on the 5th year, he has 6 years from such
payment within which to file an action against A, the principal
debtor. This is because a quasi-contract prescribes after 6
years from the time the cause of action accrues, the action to
collect from A is still effective.
Article 2163. It is presumed that there is a mistake in the payment if something
which had never been due or had already been delivered was delivered; but he from
whom the return is claimed may prove that the delivery was made out of liberality.
Presumption of Mistake in Payment
• A debtor who pays in solutio indebiti may recover what he has paid by
mistake.
o HOWEVER, the person to whom the payment has been made can
show that such payment is a gift or donation by showing the proper
evidence like a valid deed of donation.
200 | Katrina C. Gaw | Block C 2018
SECTION 3. – OTHER QUASI-CONTRACTS
Article 2164. When, without the knowledge of the person obliged to give support, it
is given by a stranger, the latter shall have a right to claim the same from the former,
unless it appears that he gave it out of piety & without intention of being repaid.
Art. 206, Family Code
• Art. 2164 was adopted by the Family Code
CASE: De Marcaida v. Redfern
Lesson: For one to recover under this provision, it must be proven —
(1) That support has been furnished a dependent of one bound to give support
but who fails to do so;
(2) That the support was supplied by a stranger;
(3) That the support was given without the knowledge of the person charged with
the duty.
(4) That the support is given with the expectation of recovering it.
Facts: A spouse borrowed a sum of money on different occasions from her sister.
The sister & her husband then sued the husband of the borrowing spouse for
reimbursement.
Held: The sister & her husband were not able to obtain reimbursement, due to the
absence of the 1st & 2nd requisite.
• For the 1st – It was not shown that the wife ever complained to her husband
for support or that her husband actually denied her support; in fact, the
husband gave an contradictory testimony that he instructed his agent to
furnish his wife with any reasonable sum she needed, yet the wife never took
advantage of said offer. Also, the husband’s support lessened because of
some financial issues he faced, which is a valid reason under the law.
Article 2165. When funeral expenses are borne by a 3rd person, without the
knowledge of those relatives who were obliged to give support to the deceased, said
relatives shall reimburse the 3rd person, should the latter claim reimbursement.
Obligation to Pay Funeral Expenses
• The ff. are obliged to support each other:
1) Spouses;
2) Legitimate ascendants & descendants;
3) Parents & their legitimate children & the legitimate & illegitimate
children of the latter (grandchildren);
4) Parents & their illegitimate children & the legitimate & illegitimate
children of the latter;
5) Legitimate brothers & sisters, whether of full or half-blood.
• Whenever 2 or more persons are obliged to give support, the liability shall
devolve upon the ff. persons in the ff. order:
1) Spouse;
2) Descendants in the nearest degree;
3) Ascendants in the nearest degree; &
 4) The brothers and sisters.
• Ex. A was the daughter of X & Y. A died. G, a stranger, was the one who
shouldered the expenses for A’s funeral.
o If G did this benevolent act as an act of charity, X & Y need not
reimburse him.
o If G intended to be reimbursed, he can only be paid after demanding
payment from X & Y.
Article 2166. When the person obliged to support an orphan, or an insane or other
indigent person unjustly refuses to give support to the latter, any 3rd person may
furnish support to the needy individual, with right of reimbursement from the person
obliged to give support. The provisions of this article apply when the father or mother
of a child under 18 years of age unjustly refuses to support him.
Art. 207 of the Family Code
• Adopts this provision; only adds that a parent shall also be liable if he fails to
give support to the child when urgently needed.
Article 2167. When through an accident or other cause a person is injured or
becomes seriously ill, & he is treated or helped while he is not in a condition to give
his consent to a contract, he shall be liable to pay for the services of the physician or
other person aiding him, unless the service has been rendered out of pure
generosity.
When a Person is in an Accident & is Helped
• Ex. A is bumped by a car & is seriously injured. He becomes unconscious. X
sees A and brings him to the hospital. A’s injuries need immediate treatment
but, since he is in coma, he cannot give his consent. The doctor nevertheless
treats his injuries lest it becomes more serious.
o When A recovers, he has the obligation to pay the services of the
doctor unless the latter does not want to be paid.
Article 2168. When during a fire, flood︎ , storm or other calamity, property is saved
from destruction by another person without the knowledge of the owner, the latter is
bound to pay the former just compensation.
Calamity & Saving of Property by Another
• Ex. The house of A starts to catch fire but A is not in the house. When the
garage of the house is already on fire, B︎ goes inside the burning garage &
pushes the car of A out of the same without the knowledge of A. The car is
saved from destruction.
o A is bound to pay B just compensation unless B does not want to
accept it.
Article 2169. When the government, upon the failure of any person to comply with
health or safety regulations concerning property, undertakes to do the necessary
work, even over his objection, he shall be liable to pay the expenses.
201 | Katrina C. Gaw | Block C 2018
Government & Services to Unwilling Citizens
• Ex. A municipal ordinance prohibits the throwing of spoiled food outside of
the house in a waste can without any plastic bag. X does not abide by the
said ordinance & continually throws spoiled food in a wooden garbage
container in his house. To prevent the spread of disease, the municipal
government can put the spoiled food inside a plastic bag first & then provide
X with a garbage can at his expense even if he does not want to.
Article 2170. When by accident or other fortuitous event, movables separately
pertaining to 2 or more persons are commingled or confused, the rules on co-
ownership shall be applicable.
Movables Commingling
• The commingling here is unintentional & the result of an accident or
fortuitous event.
Article 2171. The rights and obligations of the finder of lost personal property shall
be governed by Article 719 & 720.
Arts. 719 & 720 of the Civil Code
• Art. 719: Whoever finds a movable, which is not treasure, must return it to its
previous possessor. If the latter is unknown, the finder shall immediately
deposit it with the mayor of the city or municipality where the finding has
taken place.
o The finding shall be publicly announced by the mayor for 2
consecutive weeks in the way he deems best.
o If the movable cannot be kept without deterioration, or without the
expenses which considerably diminish its value, it shall be sold at
public auction 8 days after publication.
o 6 months from the publication having elapsed without the owner
having appeared, the thing found, or its value, shall be awarded to the
finder. The finder and the owner shall be obliged, as the case may be,
to reimburse the expenses.
• Art. 720: If the owner should appear in time, he shall be obliged to pay, as a
reward to the finder, 1/10 of the sum or of the price of the thing found.
Article 2172. The right of every possessor in good faith to reimbursement for
necessary & useful expenses is governed by Article 546.
Article 546 of the Civil Code
• Necessary expenses – refunded to every possessor
o BUT: Only the possessor in good faith may retain the thing until he has
been reimbursed therefor.
• Useful expenses – refunded only to the possessor in good faith with the same
right of retention, the person who has defeated him in the possession having
the option of refunding the amount of the expenses or of paying the increase
in value which the thing may have acquired by reason thereof.
Article 2173. When a 3rd person, without the knowledge of the debtor, pays the debt,
the rights of the former are governed by Article 1236 & 1237.

Article 2174. When in a small community a majority of the inhabitants of age decide
upon a measure for protection against lawlessness, fire, flood, storm or other
calamity, any one who objects to the plan & refuses to contribute to the expenses
but is benefited by the project as executed shall be liable to pay his share in the
expenses.

Small Communities & Order

• Ex. The people of a certain barrio decide to engage a security force to protect
their community because of rampant lawlessness. For this reason, the people
agree to contribute to the expenses of this security force. G however refuse to
make any contribution. In the event that the security force apprehend robbers
intending to rob the house of G, G should pay his share in the expenses for
the community’s engagement of the security force to protect the people from
criminals.

Article 2175. Any person who is constrained to pay the taxes of another shall be
entitled to reimbursement from the latter.

Another Person Pays Another’s Tax

• Ex. A is the neighbor of G whose property is about to be forfeited to the
government because of unpaid real estate taxes.
o A can pay the taxes but G must reimburse him.

202 | Katrina C. Gaw | Block C 2018