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b.)abnormal – when he is forced by means of a judicial • In order that there may be substantial performance of an
obligation, there must have been an attempt in good faith
proceeding either to comply with prestation or to pay to perform, without any willful or intentional departure
therefrom
• The non-performance of a material part of a contract will
indemnity
prevent the performance from amounting to a substantial
compliance
ART 1233 – “A debt shall not be understood to have been
paid unless the thing or service in which the oligatoin
ART 1239. In obligations to give, payment made by one who (1) If after the payment, the third person acquires the
does not have the free disposal of the thing due and creditor's rights;
capacity to alienate it shall not be valid, without prejudice
to the provisions of article 1427 under the Title on “Natural (2) If the creditor ratifies the payment to the third person;
Obligations”
(3) If by the creditor's conduct, the debtor has been led to
• consignation will not be proper here. In case the creditor believe that the third person had authority to receive the
accepts the payment, the payment will not be valid except payment. (1163a)
in the case provided in article 1427
• payment shall be considered as having benefited the
ART 1240. Payment shall be made to the person in whose incapacitated person if he made an intelligent and
favor the obligation has been constituted, or his successor reasonable use thereof, for purposes necessary or useful to
in interest, or any person authorized to receive it him, such as that which his legal representative would
have or could have done under similar circumstances, even
• the authority of a person to receive payment for the if at the time of the complaint the effect of such use no
creditor may be longer exists (e.g., taxes on creditor’s property, money to
extinguish a mortgage on creditor’s property)
a.) legal – conferred by law (e.g.,guardian of the incapacitated, • the debtor is not released from liability by a payment to
administrator of the estate of the deceased) one who is not the creditor nor one authorized to receive
the payment, even if the debtor believed in good faith that
he is the creditor, except to the extent that the payment
b.) conventional – when the authority has been given by the
inured to the benefit of the creditor
creditor himself (e.g., agent who is appointed to collect from the
debtor
• in addition to those mentioned above, payment to a third
person releases the debtor:
• the payment to the creditor after the credit has been Art. 1246. When the obligation consists in the delivery of an
attached or garnished is void as to the party who obtained indeterminate or generic thing, whose quality and
the attachment or garnishment, to the extent of the circumstances have not been stated, the creditor cannot
amount of the judgment in his favor. demand a thing of superior quality. Neither can the debtor
• The debtor upon whom garnishment order is served can deliver a thing of inferior quality. The purpose of the
always deposit the money in court by way of consignation obligation and other circumstances shall be taken into
and thus relieve himself from further liability consideration. (1167a)
Art. 1244. The debtor of a thing cannot compel the creditor • If there is disagreement between the debtor and the
to receive a different one, although the latter may be of the creditor as to the quality of the thing delivered, the court
same value as, or more valuable than that which is due. In should decide whether it complies with the obligation,
obligations to do or not to do, an act or forbearance cannot taking into consideration the purpose and other
be substituted by another act or forbearance against the circumstances of the obligation
obligee's will. (1166a) • Both the creditor and the debtor may waive the benefit of
this article
• Upon agreement of consent of the creditor, the debtor may
deliver a different thing or perform a different prestation in Art. 1247. Unless it is otherwise stipulated, the extrajudicial
lieu of that stipulated. In this case there may be dation in expenses required by the payment shall be for the account
payment or novation of the debtor. With regard to judicial costs, the Rules of
• The defects of the thing delivered may be waived by the Court shall govern. (1168a)
creditor, if he expressly so declares or if, with knowledge
thereof, he accepts the thing without protest or disposes of • This is because the payment is the debtor’s duty and it
it or consumes it inures to his benefit in that he is discharged from the
burden of the obligation
• Art. 1248. Unless there is an express stipulation to that
effect, the creditor cannot be compelled partially to receive
(5) When the title of the obligation has been lost. (1176a) 4.) The amount or thing due was placed at the disposal of the
• When the consignation has already been made and the ISSUE: WON NARIC is liable to pay plaintiff damages
creditor has accepted it or it has been judicially declared as
proper, the debtor cannot withdraw the thing or amount HELD:
deposited unless the creditor consents thereto. If the
creditor authorizes the debtor to withdraw the same, there
What singularly delayed the opening the stipulated LOC which in
is a revival of the obligation, which has already been
turn, caused the cancellation of the allocation in Burma (and the
extinguished by the consignation, and the relationship of
forfeiture of the 5% deposit) was the inability of the appellant
debtor and creditor is restored to the condition in which it
corporation to meet the condition imposed by the Bank for
was before the consignation. But third persons, solidary
granting the same. Also, its culpability arises from its willful and
co-debtors, guarantors and sureties who are benefited by
deliberate assumption of contractual obligations even as it was
the consignation are not prejudiced by the revival of the
well aware of its financial incapacity to undertake the prestation
obligation between the debtor and the creditor
(manifested in its letter of application with PNB) Article 1170
provides that those who in the performance of their obligations are
CASES guilty of fraud, negligence, or delay and those who in any manner
contravene the tenor thereof are liable for damages.
ARRIETA v NATIONAL RICE AND CORN CORP (NARIC)
*In view of RA 527 which specifically requires the discharge of
Plaintiff participated in a public bidding called by NARIC for the obligations only “in any coun or currency which at the time of
supply of 20k metric tons of Burmese rice and was awarded the payment is legal tender for public and private debt”, the award of
contract. Subsequently, plaintiff and NARIC entered into a Contract damages in US dollars made by the lower court is modified by
of Sale of Rice (in which the defendant in turn would commit itself converting it into Philippine pesos at the rate of exchange
to pay by means of a letter of credit in US currency in favor of the prevailing at the time the obligation was incurred or when the
plaintiff and/or supplier in Burma. Despite its commitment to pay contract in question was executed.
immediately, the defendant took the first step to open the letter of
credit one month after the execution of the contract (July 30 KALALO v LUZ
1952). It was stated in the application (for the LOC) that they do
not have a sufficient deposit with PNB to cover the amount
On November 17 1959, plaintiff-appellee Octavio Kalalo, a licensed
required as a condition for the opening of LOC and they were
civil engineer entered into an agreement with defendant-appellant
asking to be treated as a special case in consideration to the fact
Alfredo Luz, a licensed architect whereby the former was to render
that its supplier has a deadline to meet which is on August 4,
engineering design services to the latter for fees, as stipulated in
1952.
the agreement, Kalalo sent to Luz a statement of account to which
was attached an itemized statement of architect’s account
On August 4 1952, PNB informed appellant NARIC that its according to which the total engineering fee asked by engineer
application for LOC has been approved with the condition that 50% amounted to P116,565 from which sum was to be deducted the
marginal cash deposit be paid and that drafts are to be paid upon previous payments made in the amount of P57K. Luz then sent a
presentment. However, NARIC is not in any financial position to resume of fees to Kalalo (May 18 1962). Said fees, according to
meet the condition. Consequently, the credit instrument applied appellant amounted to P10,861.08 instead of the amount claimed
for was opened only on September 8 1952 (more than 2 mos from by appellee. On June 14 1962, appellant sent appellee a check for
the execution of the contract – after the 15 day grace period). As a
Santos received two diamond rings with a total value of Php47,000 Subsequently, as a consequence of the extra-judicial settlement of
in 1966 from the petitioner. The rings were delivered to her for the matter negotiated by the petitioners and the bus insurer
sale on commission and that they would be returned upon demand Phlippine First Insurance Company (PFICI)—Bienvinido Nacario’s
if unsold. The rings were not sold nor were they returned when widow, Alicia received P18500. In consideration of the amount she
demanded by Hahn. executed a “Release of Claim” in favor of the petitioners and PFICI
releasing and forever discharging them from all actions, claims,
and demands arising from the accident. She likewise executed an
Issue: WON an offer of payment on installment made by Santos
affidavit of desistance in which she formally manifested her lack of
can be validly rejected?
interest in instituting any case, either civil or criminal against
petitioners.
Held: Yes. Petitioner can validly reject he offer to pay for the rings
on installment because Hahn was entitled to payment in full. If
A year and ten months after the accident the parents of Nacario,
such payment could not be made she is obligated to return the
filed a complaint for damages against the petitioners. They alleged
rings. According to Article 1233 of the Civil Code, “a debt shall not
that petitioners failed to fulfill their promise that as extra-judicial
be understood to have been paid unless the thing or service in
settlement, they shall be indemnified for the death of their son and
which the obligation consists has been completely delivered or
for the damage to the tricycle the purchase price of which they
rendered as the case may be.”
only loaned to the victim.
RIESENBACK v CA
Aurelio Costales likewise applied for a job in Guam and also paid
Php1500. Diappointed for not being able to go to Guam he asked
On July 27, 1988 petitioner consigned and deposited with the Clerk CALTEX v IAC
of Court of RTC Cebu the sum of Php113,750. Respondent
subsequently filed a manifestation Accepting Consignation and Nature: Action for the collection of sum of money.
Motion to Dismiss on August 1, 1988. In the manifestation he
stated, inter alia, that”without necessarily admitting the Facts:
correctness of obligation of plaintiff to defendant, the latter hereby
manifests to accept the said amount of Php113750 which is
On January 12, 1978, private respondent Asia Pacific Airways Inc.
consigned by plaintiff, provided that the present complaint be
entered into an agreement with petitioner Caltex whereby the
dismissed outright with costs against plaintiff.
latter agreed to supply private respondent’s aviation fuel
requirements for two years from January 1, 1978 until December
Issue: WON the acceptance with reservation made by plaintiff in 31, 1979. Pursuant thereto, Caltex supplied respondent’s fuel
his manifestation of the consignation is valid? requirements. As of June 30, 1980 Asia Pacific had a balance of
Php4,072,682.13 representing the unpaid price of the fuel
Held: YES. Private respondent’s acceptance of the amount supplied. To settle this obligation respondent executed a Deed of
consigned by the petitioner-debtor with a reservation or Assignment on June 30, 1980 wherein it assigned to Caltex its
qualification as to the correctness of the petitioner’s obligation is receivables or refunds of Special Fund Import Payments from the
legally permissible. Citing Tolentino (cited 3Llerena 263), the court National Treasury of the Philippines to be applied as payment for
said that before a consignation can be judicially declared proper, its balance with Caltex. On February 12, 1981, pursuant to the
the creditor may prevent the withdrawal of the amount consigned Deed of Assignment a treasury warrant in the amount of
by the debtor, by accepting the consignation, even with Php5,475,24 was issued to Caltex. Four days later, respondent
reservations. having learned that the amount covered by the Deed of
Assignment exceeded the amount of his obligation with Caltex
A creditor could accept a valid consignation even with reservation asked for a refund of the excess. Caltex made a refund pf
as to his right to damages and other claims (Sing Juco v. Php900,000 plus in favor of private respondent. The latter
Cuaycong, 46 Phil. 81 ). believing itself to be entitled to a larger amount by way of refund
demanded the refund of the remaining amount which petitioner
explained in its letter response that the remaining amount not
On the contrary, when the creditor’s acceptance of the money
returned Php510,550.63 represented interest and service charges
consigned is conditional and with reservations, he is not deemed to
at the rate of 18% per annum on the unpaid and overdue account
have waived he claims he reserved against his debtor. Thus, when
of respondent from June 1, 1980 to July 31, 1981.
the amount consigned does not cover the entire obligation, the
creditor may accept it, reserving his right to the balance.
Issue: WON the deed of assignment is in fact a dation in payment
which totally extinguished the obligation of Asia Pacific and
Doctrine: Acceptance of consignation with reservation to other
therefore Caltex will no longer have any right to interests accruing
claims arising from the obligation is valid.
after the assignment?
It was also stipulated the the termination of the lease would only Rebus sic stantibus also does not apply because the assassination
be by “mutual agreement of the parties” of Ninoy in 1983 and the announcement of Pres. Marcos of the
snap elections to be held in Feb 1986 which already caused
On January 1986, PNCC got a Temporary Use Permit, and so the political turmoil in the country preceded the contract. (i.e. PNCC
Raymundos wrote a letter demanding for the first annual rent signed the contract knowing fully well these antecedent events)
which since the clearance has arrived, commenced the lease
contract. At any rate, the unforeseen event and causes mentioned by the
petitioner are not the legal or physical impossibilities contemplated
PNCC requested to cancel the lease and discontinue the project by said article.
“due to financial, as well as technical difficulties.”
Disposition: Petition denied. CA affirmed.
The Raymundos filed a complaint for specific performance, and the
lower court granted them P492,000 rental for 2 years, which CA CONDONATION OR REMISSION
affirmed.
Arts 1270-1274
PNCC thus filed this petition for certiorari. This time, PNCC invokes
Art. 1266 of the CC and the principle of rebus sic stantibus to be Art. 1270. Condonation or remission is essentially
released from the obligatory force of the contract of lease. gratuitous, and requires the acceptance by the obligor. It
may be made expressly or impliedly.
Ar. 1266 CC: The debtor in obligations to do shall also be released
when the prestation becomes legally or physically impossible One and the other kind shall be subject to the rules which
without the fault of the obligor. govern inofficious donations. Express condonation shall,
furthermore, comply with the forms of donation. (1187)
Rebus sic stantibus – a tacit condition, said to attach to all
treaties, that they shall cease to be obligatory as soon as the state Art. 1271. The delivery of a private document evidencing a
of facts and conditions upon which they were founded has credit, made voluntarily by the creditor to the debtor,
substantially changed. (said to be the basis of Art 1267 of CC) implies the renunciation of the action which the former had
against the latter.
Held:
If in order to nullify this waiver it should be claimed to be
inofficious, the debtor and his heirs may uphold it by
Trans- Pacific Industrial Supplies Inc. borrowed P1.3M from the Art. 1275. The obligation is extinguished from the time the
Associated Bank, with promissory notes, a chattel mortgage and characters of creditor and debtor are merged in the same
land mortgaged as security. person. (1192a)
The mortgaged lands were sold, and the proceeds amounting to • Merger or confusion is the meeting in one person of the
P1,386,614.20 was applied to the re-structured loan; and so the qualities of creator and debtor with respect to the same
bank returned the duplicate original copies of the promissory notes obligation. It erases the plurality of subjects of the
with the word “PAID.” obligation. Further, the purposes for which the obligation
may have been created are considered as fully realized by
However, the bank demanded from Trans-Pacific payment of the merger of the qualities of debtor and creditor in the
P492,100 representing accrued interest, did not release the same person.
mortgage over 2 parcels of land and claimed that the release of
the promissory notes were erroneous. • Requisites of merger or confusion are: (1) It must take
place between the creditor and the principal debtor, (2)
Initially Trans-Pacific expressed its willingness to pay, but later the very same obligation must be involved, for if the
refused and instituted an action for specific performance against debtor acquires rights from the creditor, but not the
the bank to deliver the mortgaged land. Trial Court ruled in favor particular obligation in question in question there will be no
of Trans Pacific. CA reversed. merger, (3) the confusion must be total or as regards the
entire obligation.
• As to origin
• it may be legal;
(4) That they be liquidated and demandable; The five requisites of a legal compensation are enumerated in
the Article. All requisites must be present before compensation can
(5) That over neither of them there be any retention or be effectual.
controversy, commenced by third persons and
communicated in due time to the debtor. (1196) • First Requisite—That each of the obligators be bound
principally and that he be at the same time a principal
• For compensation to take place, the parties must be creditor of the other. >>The parties must be mutual
mutually debtors and creditors (1) in their own right, and creditor and debtor of each other and their relationship is a
(2) as principals. Where there is no relationship of mutual principal one, that is, they are principal debtor and creditor
creditors and debtors, there can be no compensation. of each other.
Because the 1st requirement that the parties be mutually
debtors and creditors in their own right, there can be no • Second Requisite—That both debts consist in such a sum
compensation when one party is occupying a of money, or if the things due are consumable, they be of
representative capacity, such as a guardian or an the same kind, and also of the same quality if the latter
administrator. The 2nd requirement is that the parties has been stated. >>When the debts consist of money,
should be mutually debtors and creditors as principals. there is not much of a problem when it comes to
This means that there can be no compensation when one compensation to the concurrent amount. It is a matter of
party is a principal creditor in one obligation but is only a mathematical computation. When the debt consist of
surety or guarantor in the other. things, it is necessary that the things are consumable
which must be understood as ‘fungible’ and therefore
• The things due in both obligations must be fungible, or susceptible of substitution. More than that they must be of
things which can be substituted for each other. the same kind. If the quality has been states, the things
• Both debts must be due to permit compensation. must be of the same quality.
• Demandable means that the debts are enforceable in
court, there being no apparent defenses inherent in them. • Third Requisite—That the two debts are due. >> A debt is
The obligations must be civil obligations, including those ‘due’ when its period of performance has arrived. If it is a
that are purely natural. An obligation is not demandable, subject to a condition, the condition must have already
therefore, and not subject to compensation, in the been fulfilled. However, in voluntary compensation, the
following cases: (1) when there is a period which has not parties may agree upon the compensation of debts which
yet arrived, including the cases when one party is in a are not yet due.
state of suspension of payments; (2) when there is a
suspensive condition that has not yet happened; (3) when • Fourth Requisite—That they be liquidated and demandable.
the obligation cannot be sued upon, as in natural >> A debt is considered ‘liquidated’ when its amount is
obligation. clearly fixed. Of if it is not yet specially fixed, a simple
mathematical computation will determine its amount or
It is not enough that the debts be liquidated. It is also essential Art. 1282. The parties may agree upon the compensation of
that the same be demandable. A debt is demandable if it is not yet debts which are not yet due. (n)
barred by prescription and it is not illegal or invalid.
• The liability of the guarantor is only subsidiary; it is Art. 1284. When one or both debts are rescissible or
accessory to the principal obligation of the debtor. If the voidable, they may be compensated against each other
principal debtor has a credit against the creditor, which before they are judicially rescinded or avoided. (n)
can be compensated, it would mean the extinguishment of
the guaranteed debt, either totally or partially. This
• Although a rescissible or voidable debt can be
extinguishment benefits the guarantor, for he can be held
compensated before it is rescinded or annulled, the
liable only to the same extent as the debtor.
moment it is rescinded or annulled, the decree of
rescission or annulment is retroactive, and the
From Dean Pineda: compensation must be considered as cancelled. Recission
of annulment requires mutual restitution; the party whose
Exception to the Rule On Compensation; Right of Guarantor to obligation is annulled or rescinded can thus recover to the
Invoke Compensation Against Creditor. The general rule is that for extent that his credit was extinguished by the
compensation to operate, the parties must be related reciprocally compensation, because to that extent he is deemed to
as principal creditors and debtors of each other. Under the present have made a payment.
Article, the guarantor is allowed to set up compensation against
the creditor. Art. 1285. The debtor who has consented to the assignment
of rights made by a creditor in favor of a third person,
Art. 1281. Compensation may be total or partial. When the cannot set up against the assignee the compensation which
two debts are of the same amount, there is a total would pertain to him against the assignor, unless the
compensation. (n)
• Assignment before compensation. The assignment may be • This article applies to legal compensation and not to
made before compensation has taken place, either because voluntary compensation.
at the time of assignment one of the debts is not yet due
or liquidated, or because of some other cause which Art. 1287. Compensation shall not be proper when one of
impedes the compensation. As far as the debtor is the debts arises from a depositum or from the obligations of
concerned, the assignment does not take effect except a depositary or of a bailee in commodatum.
from the time he is notified thereof. If the notice of
assignment is simultaneous to the transfer, he can set up Neither can compensation be set up against a creditor who
compensation of debts prior to the assignment. If notice has a claim for support due by gratuitous title, without
was given to him before the assignment, this takes effect prejudice to the provisions of paragraph 2 of Article 301.
at the time of the assignment; therefore the same rule (1200a)
applies. If he consents to the assignment, he waives
compensation even of debts already due, unless he makes
a reservation. • The prohibition of compensation when one of the debts
arises from a depositum (a contract by virtue of which a
person [depositary] receives personal property belonging
to another [depositor], with the obligation of safely
Art. 1288. Neither shall there be compensation if one of the (2) interests stop accruing on the extinguished obligation of the
debts consists in civil liability arising from a penal offense. part extinguished;
(n)
(3) the period of prescription stops with respect to the obligation
• If one of the debts consists in civil liability arising from a or part extinguished;
penal offense, compensation would be improper and
inadvisable because the satisfaction of such obligation is (4) all accessory obligations of the principal obligation which has
imperative. been extinguished are also extinguished.
• The person who has the civil liability arising from crime is • Renunciation of Compensation. Compensation can be
the only party who cannot set up the compensation; but renounces, either at the time an obligation is contracted or
the offended party entitled to the indemnity can set up his afterwards. Compensation rests upon a potestative right,
claim in compensation of his debt. and a unilateral decision of the debtor would be sufficient
renunciation. Compensation can be renounced expressly of
Art. 1289. If a person should have against him several impliedly.
debts which are susceptible of compensation, the rules on
the application of payments shall apply to the order of the • No Compensation. Even when all the requisites for
compensation. (1201) compensation occur, the compensation may not take place
in the following cases: (1) When there is renunciation of
• It can happen that a debtor may have several debts to a the effects of compensation by a party; and (2) when the
creditor. And vice versa. Under these circumstances, law prohibits compensation.
Articles 1252 to 1254 shall apply.
(2) Substituting the person of the debtor 1. Partial – when there is only a modification or change in
some principal conditions of the obligation
(3) Subrogating a third person in the rights of a creditor
2. Total – when the old obligation is completely extinguished
• Novation is a juridical act of dual function. At the time it NOVATION IS NOT PRESUMED
extinguishes an obligation it creates a new one in lieu of
the old Art 1292. In order that an obligation may be extinguished
by another which substitutes the same, it is imperative that
• Classification of Novation it is so declared in unequivocal terms, or that the old and
the new obligations be on every point incompatible with
• as to nature
each other
1. Subjective or personal – either passive or
active. Passive if there is substitution of
the debtor. Active if a third person is • Novation must be clearly proved since its existence cannot
subrogated in the rights of the creditor. be presumed.
2. Objective or real – substitution of the • In an express novation, contracting parties disclose that
object with another or changing the their object in making the new contract is to extinguish the
principal conditions old contract. Otherwise, the old contract remains in force
SUBSTITUTION BY DELEGACION
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 asArt 1295. The insolvency of the new debtor, who has been
the payment has been beneficial to the debtor. proposed by the original debtor and accepted by the
creditor, shall not revive the action of the latter against the
Art 1237 Whoever pays on behalf of the debtor without the knowledge
original obligor, except when said insolvency was already
or against the will of the latter, cannot compel the creditor to
existing and of public knowledge, or known to the debtor,
subrogate him in his rights, such as those arising from a
when he delegated his debt.
mortgage, guaranty or penalty.
Art 1302 It is presumed that there is legal subrogation:
• Provides two exemptions by which the creditor is permitted
to sue the old debtor:
1. When a creditor pays another creditor who is preferred,
even without the debtor’s knowledge
1. When the insolvency was prior to the delegacion and is
publicly known;
2. When a third person, not interested in the obligation, pays
with the express or tacit approval of the debtor.
2. When the old debtor knew of such insolvency at the time
he delegated the obligation.
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.
• The knowledge of the creditor that the new debtor was
insolvent at the time of delegacion, will bar him from
recovering from the old debtor.
SUBSTITUTION BY EXPROMISION
EFFECT OF NOVATION TO ACCESSORY OBLIGATIONS
(Without the knowledge of the debtor)
Art 1296. When the principal obligation is extinguished in
Art 1294. If the substitution is without the knowledge or consequence of a novation, accessory obligations may
against the will of the debtor, the new debtor’s insolvency subsist only insofar as they may benefit third person who
or non-fulfillment of the obligation shall not give rise to any did not give their consent.
liability on the part of the original debtor.
• The extinguishment of the principal obligation by novation
• Intent of the law is to release the old debtor from any extinguishes the obligation to pay interests, unless
further liability in passive subjective novation, except in otherwise stipulated.
the exceptional cases in art 1295 which applies to • This article is specially applicable to substitution of
delegacion. debtors.
(3) When, even without the knowledge of the debtor, a • Example: (2) a third person pays with the
person interested in the fulfillment of the obligation pays, consent (expressly or tacitly) of the debtor,
without prejudice to the effects of confusion as to the • There will be subrogation and the payor
latter’s share can exercise all the rights of the creditor
rising from the very obligation itself,
• Payment to Preferred Creditor whether against the debtor or against third
persons.
• Example: X has two obligations: (1) a mortgage
debt in favor of Pedro and (2) a simple unsecured
obligation in favor of Jose. • Payment by Interested Party
• If Jose pays the mortgage obligation to • Persons who have an interest in the fulfillment of
Pedro, even without the knowledge of the obligation are those who would be benefited by
Juan, then Jose would be subrogated in the the extinguishment of the obligation. Ex:
rights of Pedro • Co-debtors
• It is not material what amount Jose • Sureties
actually pays to Pedro; so long as Pedro • Guarantors
accepts such amount as full payment of • Owners of property mortgaged or pledged
the mortgage credit, there will be to secure the obligation
subrogation.
• However, the debtor in cases like this, can
still set up against the new creditor the • Example: Solidary debtor pays the obligation, he is
defenses which he could have used against subrogated in the rights of the creditor.
the original creditor, such as: • The scope of this subrogation, however,
• Compensation; should not be misunderstood. The payor
cannot take advantage of the solidarity and
• Payments already made; or
recover the amount in excess of his share
• Vice or defect of the original of the obligation from any of his co-
obligation debtors.
• The solidarity terminates by his payment
• Payment with Debtor’s Approval and the obligation among the co-debtors
• Example: (1) a third person pays the creditor becomes joint.
without the consent of the debtor, he is only
entitled to reimbursement from the debtor for the EFFECT OF SUBROGATION
amount paid by him.
• If amount paid < credit : even if the Art 1303. Subrogation transfers to the person subrogated
creditor has accepted it as full payment, the credit with all the rights thereto appertaining, either
the third person is entitled to
CASES: Doctrine:
Ruling: Ruling:
• Court upheld the judgment of the respondent Judge in • The agreement does not expressly extinguish the
setting aside his first order in accordance with the Agreed obligations existing in said judgment. On the contrary, it
Stipulation of Facts. expressly recognizes the obligations existing between the
• The presence of animus novandi (intent) is undeniable for parties in said judgment and expressly provides a method
there is a later decision expressly superseding the earlier by which the same shall be extinguished.
one. • The contract, instead of containing provisions “absolutely
• The later decision was the result of a compromise, it had incompatible” with the obligations of the judgment,
the effect of res judicata. The parties, therefore, were expressly ratifies such obligations and contains provisions
bound by it. for satisfying them.
• Court ruled in favor of defendant. When the plaintiff failed
Doctrine: to comply with the conditions of said contract, the
defendant had a right to resort to the methods provided by
When, after judgment has become final, facts and law for the satisfaction of the obligations created by the
circumstances transpire which render its execution judgment.
impossible or unjust, the interested party may ask the court
to modify or alter the judgment to harmonize the same with Doctrine:
justice and the facts.
• In order that an obligation be extinguished by
ZAPANTE v DE ROTAECHE novation, the law requires that the novation or
extinguishment shall be expressly declared or that
Ramon Echevarria, as legal representative of a commercial firm, the old and new obligations shall be absolutely
commenced an action against Zapanta for the purpose of incompatible.
recovering a sum of money. Judgment was rendered in favor of
plaintiff firm. Zapanta and the firm entered into an agreement TAN SIUCO v HABANA
which contained a provision that “said commercial firm shall be at
liberty to enter suit against him” with reference to the judgment. The plaintiff Tan Siuco entered into a written contract with
By virtue of the agreement, Zapanta continued to make payments defendant Habana for the construction of a certain building. At
but left a certain amount of balance. For failure of Zapanta to different times during the construction, modifications, alterations
comply with the provisions of the agreement, the defendant sued and changes were requested by the defendant. Before any change
for the purpose of recovering the balance. A writ of execution was was made, the question of plaintiff’s compensation was mentioned
and that in referring to such changes, the defendant said “pase
Issue: WON the petitioner was released from his obligation under
• The law states that there must be an express intention to the counter-guaranty agreement by virtue of novation.
novate – animus novandi. A novation is never presumed.
• When the defendant said “pase cuenta” (bring in your bill),
Ruling:
the court reasoned that defendant intended that plaintiff
should bring in his bill for the reasonable value of any
alterations and changes which were made at his request. • NO, the petitioner was not released under his obligation by
• There is no claim or pretense that anything was said by virtue of the counter-guaranty agreement.
either party about terminating or rescinding the contract. • A perusal of the terms of the counter-guaranty agreement
The statement “bring in your bill” was never intended to reveals that it is one of indemnity.
apply to the original contract and should be confined and • Based on the terms of said agreement, the liability of the
limited to a bill for the amount of any changes, alterations, petitioner has likewise matured upon demand. The release
or modifications made at defendant’s request. of his obligation by virtue of novation must be proved by
• Thus, plaintiff was never released from the original clear and convincing evidence.
contract. He was entitled to recover upon a quantum • In the absence of an express release, nothing less than a
meruit, and as to what was the reasonable value of the showing of complete incompatibility between the two
building as it was constructed. obligations – “agreement of counter-guaranty” and the
compromise agreement – would justify a finding of
Doctrine: novation by implication.
• No such incompatibility exists in this case between the two
obligations that would sustain the defense of novation.
• The intention of the parties to novate must be very
clear and expressed.
GARCIA JR. v CA
GUERRERO v CA
Western Minolco Corporation (WMC) obtained from Philippine
Investments Systems Organization (PISO) two loans. Garcia and
Jose Robles borrowed a sum of money from Chan Too, to ensure
Kahn executed a surety agreement binding themselves jointly and
payment of which the Alto Surety and Insurance Co. executed a
severally for the payment of the loan. Upon failure of WMC to pay
bond, whereby it bound itself jointly and severally with Robles for
• Novation requires the validity of a new obligation. Additional information from the case
• A valid new obligation is an essential requisite for
the novation of a previous valid obligation.
• Extinctive novation requires:
• In the case of juridical persons particularly a
corporation, a valid obligation must be given effect
1. a previous valid obligation
through persons with authority to enter into
contract/agreement in behalf of the corporation.
2. the agreement of all parties to the new contract
3. the extinguishment of the obligation
LIGUTAN v CA
4. validity of the new obligation
3. the subjects
• Novation through a change of the object or principal
conditions of an existing obligation is referred to as an
• Ex: substitution of the debtor or the subrogation of objective (or real) novation.
the creditor
• If objective novation is to take place, it is essential that
• Extinctive novation does not necessarily imply that the the new obligation expressly declare that the old obligation
new agreement should be complete by itself; certain terms is to be extinguished or that the new obligation be on
and conditions may be carried, expressly or by implication, every point incompatible with the old one.
over to the new obligation.
• The rule that novation is never presumed is not to be
BROADWAY CENTRUM v TROPICAL FOOD avoided by merely referring to partial novation. The will to
novate, whether totally or partially, must appear by
Petitioner Broadway Centrum and private respondent Tropical Hut express agreement of the parties, by their acts which are
executed a contract of lease. Tropical Hut was experiencing low too clear and unequivocal to be mistaken.
sales volume and was proposing for a reduction in rentals.
Broadway, recognizing that the low sales volume was the result of Applying the law to the case
the temporary closure of a major thoroughfare, executed a
“provisional and temporary” agreement with Broadway which
temporarily reduced the rentals of Tropical conditioned upon good • The provisional and temporary agreement did not
faith implementation by Tropical of the six principal suggestions of extinguish or alter the obligations of Tropical and the rights
Broadway to improve operations of Tropical. Months after, of Broadway under the lease contract.
Broadway informed Tropical that rental will be increased gradually.
Tropical was adamant that it cannot afford any increase in rentals. 1. The agreement was by its own terms a “provisional and
temporary agreement” conditioned upon good faith
Issue: WON the provisional and temporary agreement had novated implementation of six suggestions made by Broadway to
the contract of lease. improve the operations of Tropical. The non-specification
by Broadway of the period of time during which the
reduced rentals would remain in effect, only meant that
Ruling: Broadway retained for itself the discretionary right to
return to the original contractual rates whenever Broadway
Basis in law felt it appropriate to do so.
Ace-Agro asked for reconsideration but received no reply. Hence, A force majeure scenario can extinguish an obligation;
Ace-Agro issued a memorandum to their employees stating that however, this was not entirely true to the case due to the
their service with Cosmos is terminated as well as the employment abovementioned reason.
of its people. The employees filed a complaint for illegal dismissal
before the Labor Arbitrator. II. CONTRACTS
RTC, then, rendered its decision in favor of Ace-Agro; Cosmos • Sanchez Roman – a juridical convention manifested in
appealed. The CA reversed the decision finding favor for Cosmos. legal form, by virtue of which one or more persons bind
• The Code states “two persons”; what is meant actually is 2. Natural elements – exist as part of the contract even if the
parties do not provide for them, because the law, as suppletory to
“two parties”. For a contract to exist, there must be two
the contract, creates them
parties.
• A party can be one or more persons.
3. Accidental elements – those which are agreed by the parties
and which cannot exist without stipulated
* Husband & Wife:
* Stages of a Contract:
• Husbands and wives cannot sell to each other as a
protection of the conjugal partnership.
• They can however enter into a contract of agency. • 3 stages:
CASES:
Art. 1306. The contracting parties may establish such * Juridical Qualification:
stipulations, clauses, terms & conditions as they may deem
convenient, provided they are not contrary to law, morals, • Juridical Qualification is different from validity. It is the law
good customs, public order, or public policy. that determines juridical qualification.
• The contract is to be judged by its character and courts will
* Freedom to contract: look into the substance and nor to the mere from of the
transaction.
• Any person has the liberty to enter into a contract so long
as they are not contrary to law, morals, good customs, * Limitations on Stipulation:
public order or public policy.
• The legislature, under the constitution, is prohibited from 1. An act or a contract is illegal per se is on that by
enacting laws to prescribe the terms of a legal contract. universally recognized standards us inherently or by its
nature, bad, improper, immoral or contrary to good
* Validity of Stipulations: conscience.
• Any and all stipulations not contrary to law, morals, good * Contrary to law:
customs, public order or public policy is valid
Examples: Issue:
1. A promissory note which represents a gambling debt is • In the multitude of issues raised, the most important for us
unenforceable in the hands of the assignee. is WON RA 908 can supersede the contracts entered into
2. Stipulations to pay usurious interests are void. by some Planters and the Milling Company.
3. A contract between to public service companies to divide
the territory is void because it impairs the control of the Held:
Public Service Commission.
4. Agreement to declare valid a law or ordinance is void.
• Yes, the SC upheld that the law shall prevail since it was
enacted for social justice and police power measure for the
CASES:
promotion of labor conditions in sugar plantations; hence
whatever rational degree of constraint it exerts on freedom
Associacion de Agricultures de Talisay-SIlay, Inc. Trino of contract and existing contractual obligations is
Montinola, Fernando Cuenca, Eduardo Ledesma, Emilio constitutionally permissible.
Jison, Nilo Lizares, Nicolas Jalandoni & Sec. of Labor • The obvious objective of the Act is more to induce the
centrals to enter into written agreements with the planters
vs. in their respective districts providing for better sharing
ratios than the old 60-40 scheme, rather than to directly
Talisay-Silay Milling Co., Inc., & Luzon Surety Co., Inc., PNB fix for them such ratio in the manner prescribed in Section
& The Sugar Quota Administrator 1. Were it the intent of the Act to definitely fix said sharing
ratios, without regard to the contractual agreements
between the parties, it would have been worded
Nature: Appeal from the decision of the Court of First Instance of
accordingly in the clearest terms, considering that such
Manila
fixing would amount to a curtailment of the freedom of
contract and may, therefore, be upheld only when the
Facts: legislative intent is manifest and the exertion of police
power in the premises is reasonably justified.
In this long and complex case which includes, labor and • Decision of CFI Manila MODIFIED. RA 809 not
constitutional issues, the most important for us is that the Planters unconstitutional.
and the Milling Company entered into a contract prior to RA 809
which was enacted as a social justice measure designed to make * Contrary to Morals:
the profits of the sugar industry redound to the laborers.
Examples: CASES:
* Contrary to Public Order: He had maintained his scholarship until his senior year when his
uncle moved to Abad Santos University to become the Law dean
there.
• Public order means the public weal or public policy. It
represents the public, social, and legal interest in private
Ramos followed suit and graduated in the latter university. To
law that which is permanent and essential in institutions,
secure permission to take the bar he needed the transcripts of his
which, even if favoring some individual to whom the right
records in defendant Arellano University. He petitioned Arellano to
pertains, cannot be left to his own will.
issue to him the needed transcripts. The university refused until
• A contract is said to be against public order if the court
after he had paid back the P1,033 87 which defendant refunded to
finds that the contract as to the consideration or the thing
him as above stated. As he could not take the bar examination
to be done, contravenes some established interest of
without those transcripts, plaintiff paid to defendant the said sum
society, or is inconsistent with sound policy and good
under protest. This is the sum which plaintiff seeks to recover from
morals, or tends clearly to undermine the security of
defendant in this case.
individual rights.
Issue:
Examples:
* Attorney’s Fees:
• The binding effect of contract on both parties is based on
the principles:
• Even if there is a stipulation, a client can dismiss his
lawyer and the latter can only claim compensation based
1. that obligations arising from contracts have the force of
on quantum meruit.
law between the contracting parties
• The fees must be reasonable depending on the difficulty of
the case, the skills involved, etc.
2. that there must be mutuality between the parties based on
their essential equality, to which is repugnant to have one
Art. 1307. Innominate contracts shall be regulated by the
party bound by the contract leaving the other free
stipulations of the parties, by the provisions of Titles I & II
therefrom.
of this Book, by the rules governing the most analogous
nominate contracts, and by the customs of the place.
A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the
* Innominate Contracts:
contracting parties is void.
Nobody is allowed to enter into a contract, and while the contract Art 1311. Contracts take effect only between the parties,
is in effect, leaves, denounces or disavows the contract to the their assigns and heirs, except in case where the rights and
prejudice of the other. obligations arising from the contracts are not transmissible
by their nature, or by stipulation or by provision of law. The
* When Stipulated: heir is not liable beyond the value of the property he
received from the decedent.
• However, when the contract so stipulates that one may
terminate the contract upon a reasonable period is valid. If a contract should contain some stipulation in favor of
• Judicial action for the rescission of the contract is no longer a third person, he may demand its fulfillment provided he
necessary when the contract so stipulates that it may be communicated his acceptance to the obligor before its
revoked and cancelled for the violation of any of its terms revocation. A mere incidental benefit or interest of a person
and conditions. This right of rescission may be waived. is not sufficient. The contracting parties must have clearly
and deliberately conferred a favor upon a third person.
* Express Agreement:
* Parties bound by contract:
* Requisites of Article:
* Enforcement of contract:
• General Rule: it pertains to the other contracting party or 4. If a third person induced a party to violate his side of the
promisee, who may exercise it without the consent of the contract, the other party may sue the third person for
promisor. But it may be agreed that the revocation should damages.
have the consent of the promisor. 5. Requisites:
• The right of revocation cannot be exercised by the heirs or
assignees of the promisee; they might not want to honor
1. the existence of a valid contract
the decedent’s promise.
Art 1315. Contracts are perfected by mere consent, and The CFI found for Batchelder and order CB to resell the amount
from that moment the parties are bound not only to the involved at the preferred rate as against RA 2609 which granted
fulfillment of what has been expressly stipulated but also to CB the power, inter alia, to decontrol the foreign exchange
all the consequences which, according to their nature, may rate. The lower court further held that the issuance by the CB of a
be in keeping with good faith, usage and law. monetary policy creates a contractual obligation with those who
shall sell or buy dollars.
* Perfection of Consensual Contracts:
Issue:
• Perfection of a contract, in general: the moment from
which it exists; the juridical tie between the parties arises • WON the issuance of a monetary policy by it, thereafter
from that time. implemented by the appropriate resolutions, as to the rate
• Perfection of Consensual Contracts: the mere consent of exchange at which dollars after being surrendered and
which is the meeting of the minds of the parties upon the sold to it could be re-acquired, creates a contractual
terms of the contract obligation.
• consent may not be expressly given.
Held:
* Binding Effect of Consensual Contracts:
2. implied
What was done by the Central Bank was merely to issue in
pursuance of its rule-making power the resolutions relied
upon by plaintiff, which for him should be impressed with a • The ratification has a retroactive effect from the moment
contractual character. of its celebration, not from its ratification.
• Before ratification, the contract is in a state of suspense;
Art 1316. Real contracts, such as deposit, pledge or its effectivity depends on its ratification. The other party
commodatum, are not perfected until the delivery of the must not do anything prior to ratification that shall
object of the obligation. prejudice the rights of the other party.
• When not ratified, the person who entered into a contract
in behalf of another without authority becomes liable to
* Perfection of real contracts:
the other party, if he did not inform the latter that he does
not have any representation or authority.
Real contract is not perfect by mere consent. The delivery of the • When such deficiency or lack of authority has been relayed
thing is required. to the other, he cannot claim for damages against he
person without authority.
Delivery is demanded, neither arbitrary nor formalistic.
ESSENTIAL REQUISITES OF CONTRACTS
Art 1317. No one may contract in the name of another
without being authorized by the latter, or unless he has by Art. 1318. There is no contract unless the following
law a right to represent him. requisites concur:
A contract entered into in the name of another by one (1) Consent of the contracting parties;
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 (2) Object certain which is the subject matter of the
contract;
• Tolerated fraud includes minimizing the defects of the Incidental fraud only obliges the person employing it to pay
thing, exaggeration of its good qualities, and giving it damages. (1270)
qualities that it does not have. This is lawful
misrepresentation known as dolus bonus. This is also • Fraud is serious when it is sufficient to impress, or to lead
called lawful astuteness. an ordinarily prudent person into error; that which cannot
• These misrepresentations are usually encountered in fairs, deceive a prudent person cannot be a ground for nullity.
markets, and almost all commercial transactions. They do • Besides being serious, the fraud must be the determining
not give rise to an action for damages, either because of cause of the contract. It must be dolo causante.
their insignificance or because the stupidity of the victim is • When both parties use fraud reciprocally, neither one has
the real cause of his loss. an action against the other; the fraud of one compensates
• The thinking is that where the means of knowledge are at that of the other. Neither party can ask for the annulment
hand and equally available to both parties, one will not be of the contract.
heard to say that he has been deceived.
Art. 1345. Simulation of a contract may be absolute or
Art. 1341. A mere expression of an opinion does not signify relative. The former takes place when the parties do not
fraud, unless made by an expert and the other party has intend to be bound at all; the latter, when the parties
relied on the former's special knowledge. (n) conceal their true agreement. (n)
• An opinion of an expert is like a statement of fact, and if • Simulation is the declaration of a fictitious will, deliberately
false, may be considered a fraud giving rise to annulment. made by agreement of the parties, in order to produce, for
the purposes of deception, the appearance of a juridical
Art. 1342. Misrepresentation by a third person does not act which does not exist or is different from that which was
vitiate consent, unless such misrepresentation has created really executed.
substantial mistake and the same is mutual. (n)
Art. 1346. An absolutely simulated or fictitious contract is
• The general rule is that the fraud employed by a third void. A relative simulation, when it does not prejudice a
person upon one of the parties does not vitiate consent third person and is not intended for any purpose contrary to
and cause the nullity of a contract. law, morals, good customs, public order or public policy
• Exception: If one of the parties is in collusion with the third binds the parties to their real agreement. (n)
person, or knows of the fraud by the third person, and he
is benefited thereby, he may be considered as an • In absolute simulation, there is color of a contract, without
accomplice to the fraud, and the contract becomes any substance thereof, the parties not having any intention
voidable. to be bound.
• In relative simulation, the parties have an agreement
Art. 1343. Misrepresentation made in good faith is not which they conceal under the guise of another contract.
fraudulent but may constitute error. (n) Example: a deed of sale executed to conceal donation.
No contract may be entered into upon future inheritance • Things are impossible when they are not susceptible of
except in cases expressly authorized by law. existing, or they are outside the commerce of man.
Personal acts or services impossible when they beyond the
• All services which are not contrary to law, morals, ordinary strength or power of man.
good customs, public order or public policy may • The impossibility must be actual and contemporaneous
likewise be the object of a contract. (1271a) with the making of the contract, and not subsequent
thereto.
• The impossibility is absolute or objective when nobody can
• Things which are outside the commerce of man:
perform it; it is relative or subjective when due to the
special conditions or qualifications of the debtor it cannot
1. Services which imply an absolute submission by those who be performed.
render them, sacrificing their liberty, their independence or • The absolute or objective impossibility nullifies the
beliefs, or disregarding in any manner the equality and contract; the relative or subjective does not.
dignity of persons, such as perpetual servitude or slavery;
Art. 1349. The object of every contract must be determinate
2. Personal rights, such as marital authority, the status and as to its kind. The fact that the quantity is not determinate
capacity of a person, and honorary titles and distinctions; shall not be an obstacle to the existence of the contract,
3. Public offices, inherent attributes of the public authority, provided it is possible to determine the same, without the
and political rights of individuals, such as the right of need of a new contract between the parties. (1273)
suffrage;
Art. 1350. In onerous contracts the cause is understood to Art. 1352. Contracts without cause, or with unlawful cause,
be, for each contracting party, the prestation or promise of produce no effect whatever. The cause is unlawful if it is
a thing or service by the other; in remuneratory ones, the contrary to law, morals, good customs, public order or
service or benefit which is remunerated; and in contracts of public policy. (1275a)
pure beneficence, the mere liberality of the benefactor.
(1274) Art. 1353. The statement of a false cause in contracts shall
render them void, if it should not be proved that they were
• In onerous contracts, the cause need not be adequate or founded upon another cause which is true and lawful.
an exact equivalent in point of actual value, especially in (1276)
dealing with objects which have a rapidly fluctuating price.
There are equal considerations. • Where the cause stated in the contract is false, the latter
• A remuneratory contract is one where a party gives may nevertheless be sustained by proof of another licit
something to another because of some service or benefit cause.
given or rendered by the latter to the former, where such
service or benefit was not due as a legal obligation. The Art. 1354. Although the cause is not stated in the contract,
consideration of one is greater than the other’s. it is presumed that it exists and is lawful, unless the debtor
• A gratuitous contract is essentially an agreement to give proves the contrary. (1277)
donations. The generosity or liberality of the benefactor is
the cause of the contract. There is nothing to equate.
Dumez vs. NLRC In a situation wherein one or both parties consider that certain
matters or specifics, in addition to the subject matter and the
Facts: causa should be stipulated and agreed upon, the area of
agreement must extend to all points that the parties deem
material or there is no contract.
Petitioner is a French company which hires Filipino workers
through a ECCOI, a company existing in the Philippines. Dumez
needed 4 Senior Draftsmen who were willing to work for Somoso vs. CA
$600/month at Saudi Arabia. Private respondent Jose was among
the draftsmen that were hired by ECCOI in behalf of Dumez. The Facts:
employment agreement of Jose showed that his monthly base
salary would be $680. This discrepancy was discovered when The spouses Somosa purchased from Conpinco one unit VHS (23k)
Dumez began preparing the papers related to respondent’s first with accessories and one unit Cinema Vision (124.5k) with
month salary. The discrepancy was reported to ECCOI who in turn complete accessories. They made partial payments which were
claimed that it was a mere typographical error. Meanwhile, Jose evidenced by provisional receipts. However, by Aurgust 27, 1979,
insisted on being paid $680 per month as stated in his no further payments were made. On November of the same year,
employment agreement. Dumez eventually dismissed Jose on the petitioner demanded that Conpinco pull out the VHS unit because
grounds of “surplus employee, excess of manpower and “it was not the unit requested for demonstration.” Petitioner also
retrenchment.” A case was filed by Jose before the POEA and then requested the return of the 15k deposit. In response, conpinco
before the NLRC who ordered Dumez to pay the respondent’s sent petitioners a collection letter for the Cinema Vision and for the
salary for the unexpired portion of 1 year. National VHS. Petitioners are claiming that there was no perfected
contract of sale between them and respondent Conpinco as there
Issue: WON there existed a valid contract between Dumez and was no meeting of the minds of the parties upon the thing which is
Jose? the object of the contract and upon the price of the said
thing. Petitioners claim they only requested a demonstration.
Held: NO
Issue: WON there was a contract?
Ratio:
Held: YES
The amount of monthly salary base was a prime consideration of
the parties in signing the employment contract. Mutual mistake, Ratio:
however, prevented the proposed contract from arising.
The claims of petitioners are belied by the two documents of sale
The mutual mistake here should be distinguished from a mistake signed by the spouses as buyers which documents were notarized.
which vitiates consent in a voidable contract.
The acts of petitioners before and after the delivery of the National
VHS negates any claim that the set was delivered for
demonstration purposes only and that there was no meeting of the
Petitioners were selling a parcel of land located in Tacloban. They Dauden-Hernaez vs. De los Angeles (1969)
expressed willingness to sell the property at 6.5M to private
respondents as long as the latter would make known its decision to This is a petition for a writ of certiorari to set aside certain orders
buy not later than July 31, 1978. The private respondents reply, of the CFI of Quezon City dismissing a complaint for breach of
thru a letter stated “we agree to buy property proceed to Tacloban contract and damage, etc.
to negotiate details.” The respondents are now filing a complaint
for specific performance which the petitioners want dismissed on Facts:
the ground of lack of cause of action. The judge ruled negatively
on the motion to dismiss.
• Marlene Dauden-Hernaez is a motion picture actress who
has filed a complaint against private resp Hollywood Far
Issue: WON the facts show the existence of a perfected contract of East Productions Inc and its President Ramon Valuenzela
sale? to recover P14, 700 representing a balance due to said
actress for her services as leading actress in two motion
Held: NO pictures produced by the company and to recover
damages.
Ratio: • Her petition was dismissed by the lower court because “it
was defective because not evidenced by any written
Art. 1319 CC: Consent is manifested by the meeting of the offer document, either public or private considering that the
and the acceptance upon the thing and the cause which are to claim is more than P500 ” thereby violating Article 1356
constitute the contract. The offer must be certain and the and 1358 of the Civil Code.
acceptance absolute. A qualified acceptance constitutes a counter-
offer. Acceptance made by letter or telegram does not bind the Issue:
offerer except from the time it came to his knowledge. The
contract, in such a case, is presumed to have been entered into in WON the court below abused its discretion in ruling that a contract
the place where the offer was made. for personal services involving more than P500 was either invalid
or unenforceable under the last par of 1358 of the CC.
The telegram instructing Atty Gamboa to “proceed to Tacloban to
negotiate details” is the key that negates and makes it legally Held:
impossible for the court to hold that respondents’ acceptance of
petitioners offer, was the “absolute” one that Art. 1319 requires.
• Yes. The court below abused its discretion. There was a
misunderstanding of the role of the written form in
“to negotiate” is practically the opposite of the idea that an contracts, as ordained in the present CC.
agreement has been reached.
4.1. Art 1744: Stipulation bet the common carrier and the shipper Facts:
or the owner limiting the liability of the former for the loss
destruction or deterioration of the goods to a degree less than • Juana Cantos assisted by her husband Jose Alano filed a
extraordinary diligence xxx complaint against the defendant Jose Babasa alleging that
the complainant Cantos has the right to repurchase the
4.2. Art 1773: A contract of partnership is void, whenever land which her father pledged to guarantee a debt of
immovable property is contributed thereto, if an inventory of said P1300 in favor of Fulgencio Babasa and Maria Cantos, the
property is not made, signed by the parties, and attached to the parents of the defendant (relative siguro ng complainant
public instrument. yung defendant, pinsan siguro).
• The contract entered into on July 18, 1883 stipulated a
condition that the creditors should enjoy the usufruct of
4.3. Art. 1874: When a sale of a piece of land or any interest
said land from the date of contract and that for seven
therein is through an agent, the authority of the latter shall be in
years to take possession of the land as if their own and
writing; otherwise, the sale shall be void.
Held:
• Judgment affirmed.
REFORMATION OF INSTRUMENTS
No. Her action has already prescribed.
In declaring the said contract to be void, CA ran counter to the Riviera Filipina v CA 2002
well-settled maxim that between two possible interpretations, that
which saves rather than destroys is to be preferred. Facts Riviera Filipina, Inc. entered into a contract of lease with
Juan Reyes involving 1,018 square meters of real property owned
Lim Yhi Luya v CA 1980 by Reyes. Paragraph 11 of the lease contract expressly provided
that “lessee shall have the right of first refusal should the lessee
decide to sell the property during the term of the lease.” When
Facts: Lim Yhi Luya entered into a contract of sale with private
Reyes decided to sell the property in 1988, he entered into a
respondent, Hind Sugar Company, wherein the latter sold to the
series of negotiations with Riviera Filipina but the parties failed to
former 4,085 piculs of sugar. The terms of the contract which was
agree on the price for the subject property. Riviera Filipina, Inc.
drawn by the respondent company explicitly stated “cash upon
clearly expressed its refusal to go beyond the price of 5,000 per
signing of this contract”. Much of the sugar was properly delivered
square meter. Another interested party offered to purchase the
to the plaintiff in the next few months except for a remaining 350
same property for 5,300 per square meter. Riviera Filipina was
piculs of sugar. When plaintiff filed an action to compel the
well-informed that there were other interested buyers but did not
delivery of the remaining 350 piculs, private respondent company
know of specific price offered by other party. Riviera Filipina now
contended that no payment had yet been made by the plaintiff,
filing suit against Reyes and 3rd party purchaser, contending that
contrary to the terms stipulated in their contract. Plaintiff had no
their right of first refusal was violated because they were not given
receipt to prove that payment had been made but contends that
the opportunity to match the offer of 5,300 per square meter.
the terms stipulated in the contract is sufficient proof that
payment had been made at around the time the contract was
signed. Issue WON right of first refusal in the contract of lease may be
interpreted as to require that the lessee have specific knowledge of
the price offered by other interested parties, thereby amounting to
Issue: WON the statement “cash upon signing of this contact” in
a right to match.
the contract of sale drawn up by the respondent company may be
interpreted as sufficient proof that payment had in fact been
made. Held No. “Intention of the parties shall be accorded primordial
consideration and in case of doubt, their contemporaneous and
subsequent acts shall be principally considered.”
Held: Yes. Although the contract is ambiguous enough to admit of
several valid interpretations, the interpretation to be taken shall
not favor the respondent company since it is the party who caused The actions of the two principal parties involved in the contract of
the ambiguity in its preparation. (see Art 1377) The ambiguity lease shaped their understanding and interpretation of the “right of
raised by the use of the words or phrases in the questioned first refusal” to mean simply that should Reyes decide to sell the
provision must be resolved and interpreted against the respondent property during the term of the lease, such sale should first be
company. offered to Riviera. Riviera's stubborn approach in its negotiations
with Reyes showed crystal clear that there was never any need to
disclose such information.
Art. 1382. Payments made in a state of insolvency for In addition to these presumptions, the design to defraud
obligations to whose fulfillment the debtor could not be creditors may be proved in any other manner recognized by
compelled at the time they were effected, are also the law of evidence. (1297a)
rescissible. (1292)
Art. 1388. Whoever acquires in bad faith the things
Art. 1383. The action for rescission is subsidiary; it cannot alienated in fraud of creditors, shall indemnify the latter for
be instituted except when the party suffering damage has damages suffered by them on account of the alienation,
no other legal means to obtain reparation for the same. whenever, due to any cause, it should be impossible for him
(1294) to return them.
Art. 1384. Rescission shall be only to the extent necessary If there are two or more alienations, the first acquirer shall
to cover the damages caused. (n) be liable first, and so on successively. (1298a)
For persons under guardianship and for absentees, the Thus Francisco Sr. filed an action for Rescission of the contract.
period of four years shall not begin until the termination of Lower court dismissed the case. CA reversed: rescinded the
the former's incapacity, or until the domicile of the latter is contract and ordered UFC to 1. Return the Mafran Sauce formula
known. (1299) and trademark 2. Pay Francisco Sr. his salary since Dec 1960 until
the return of the Mafran formula and trademark and 3. Pay
Notes: attorney’s fees and costs.
* 4 years from when? Example insane , from lucid interval ba? Held: CA correctly observed that UFC schemed and maneuvered to
ease out and dismiss Francisco Sr. from the service as chief
chemist, in flagrant violation of the Bill of Assignment; and that
* 1st remedy (since subsidiary action ang rescission) is to ask for
the notice of recall was to placate Francisco Sr. Therefore in
the amount of lesion to be repaired.
addition UFC is 4. Enjoined from using in any manner said Mafran
sauce trademark and formula and 5. pay legal interest on
UFC V CA Francisco Sr.’s salary.
Magdalo V. Francisco, Sr. invented the Mafran sauce, a food The general rule is that rescission of a contract will not be
seasoning made out of banana (ketchup?) and had the formula permitted for a slight or casual breach, but only for such
patented and the name registered as his own trademark. substantial and fundamental breach as would defeat the very
object of the parties making the agreement. The question of
In May 1960, Francisco Sr. entered into a contract with Universal whether a breach of a contract is substantial depends upon the
Food Corporation entitled “Bill of Assignment” wherein Francisco attendant circumstances.
assigned the USE of the Mafran sauce formula to UFC (right to
mass produce and sell) in exchange for a permanent assignment Recall: Art 1191 CC: The power to rescind obligations is implied in
as Second Vice President and Chief Chemist with a salary of reciprocal ones, in case one of the obligors should not comply with
P300/month, and becoming a member of the Board of Directors. what is incumbent upon him.
On November 30, 1960 UFC dismissed Francisco and the staff The injured party may choose between the fulfillment and the
working on the Mafran sauce on the pretense of scarcity and high rescission of the obligation with the payment of damages in either
prices of raw materials; but 5 days later, the President and case. He may also seek rescission even after he has chosen
General Manager of UFC Tirso T. Reyes, ordered the fulfillment, if the latter should become impossible.
Auditor/Superintendent and the Assistant Chief Chemist to produce
the Mafran sauce in full swing, to recall the laborers dismissed
The Court shall decree the rescission claimed, unless there be just
(except for Francisco Sr.) and to hire additional daily laborers. The
cause authorizing the fixing of a period.
Mafran sauce produced was of inferior quality because of the
absence of Francisco Sr. who alone knew the exact formula.
J. J.B.L. Reyes: RTC dismissed the petition and found par. 8 to be an option clause
that cannot bind Carmelo for lack of separate and distinct
A rescission for breach of contract under Art 1191 CC is not consideration.
predicated on injury to economic interests of the party plaintiff,
but on the breach of faith by the defendant, that violates the CA reversed; par. 8 – right of first refusal according to art. 1479
reciprocity between the parties. It is not a subsidiary action, and par. 2.
Art 1191 may be scanned without disclosing anywhere that the
action for rescission thereunder is subordinated to anything other Held: Par. 8 is a right of first refusal, so the contract between
than the culpable breach of his obligations by the defendant. This Carmelo and Equatorial must be rescinded.
rescission is a principal action retaliatory in character, it being
unjust that a party be held bound to fulfill his promise, when the
Ratio: the right was incorporated for Mayfair’s protection; Mayfair
other violates his. Hence the reparation of damages for the breach
should be given the right to match the P11.3M price. Equatorial is
is purely secondary.
a buyer in bad faith.
3. Lot covered by TCT 15684 • Maxima Castro, accompanied by Valencia, applied to RBC
for an industrial loan of 3 thousand
• A fourth lot was adjacent to Lot 15684, which was not
• The Valencia spouses applied for a 3 thousand peso loan
as well, which was also granted
owned by Carlsons Dev’t.
• 1985: Carlsons constructed a two-storey house on the
• Both loans being granted, Castro was made to sign a
promissory note, as a principal in the first, and as a co-
third lot (erroneously indicated to be covered by TCT
maker in the Valencia note. They were secured by a real-
15515)
estate mortgage on Castro’s house and lot.
• Lots 15515 and 15516 mistakenly surveyed to be located
on lot number 4
• Castro received a Notice of Sheriff’s Sale in satisfaction of
the obligation covering the two promissory notes
• The fourth lot was sold to Sps. Theis by Carlsons Dev’t.,
covered by said TCTs. The Theis did not immediately
• Only then did she realize that the mortgage was
encumbrance not just for her 3k loan, but also for
occupy the lot; went to Germany instead. Upon return,
the 3k loan of the Valencias; she was made to sign
they discovered that the lot was owned by another
without knowledge of this fact
• Theis insisted on buying lot number 4, which was not
possible as it was not owned by Carlsons; instead,
• She filed a suit for annulment from the second
promissory note and the mortgage covering this,
Carlsons Dev’t. offered lots 1 and 2, which was refused.
and the annulment of the foreclosure sale.
• This time, Theis insisted on lot number 3; counter-offer by
Carlson to return purchase price x 2, refused.
• Carlsons filed an action for annulment on the ground of Issue: WON fraud can be alleged to free Castro from responsibility
mistake with respect to the 2nd promissory note
Issue: WON Carlsons can seek for annulment on the ground of Held: Yes
mistake
• Two ways of ratification of contracts infringing the Statute Art. 1408. Unenforceable contracts cannot be assailed by
are: a) failure to object to the presentation of oral third persons.
evidence; b) acceptance of benefits under them, since the
Statute does not apply to contracts which are partially • The defense of the Statute is personal to the party to the
executed. Cross examination of the witnesses testifying agreement. Thus, it cannot be set up by strangers to the
orally on the contract amounts to a waiver or to a failure agreement.
to object. (Abrenica v. Gonda,as cited by Paras; Maam
Rowie also made reference to this in one of her short
kwentos). • Just as strangers cannot attack the validity of voidable
contracts, so also can they not attack a contract because
of its unenforceability. Indeed the Statute of Frauds cannot
Art. 1406. When a contract is enforceable under the Statute be set up as a defense by strangers to the transaction.
of Frauds, and a public document is necessary for its (Ayson v. CA, 97 Phil. 965).
registration in the Registry of Deeds, the parties may avail
themselves of the right under Article 1357.
Issue: No. The Statute applies only to executory contracts, but there is
no perfected contract in this case, therefore there is no basis for
1) WON the document is valid the application of the Statute. The application of such statute
presupposes the existence of a perfected contract and requires
Yes. The private conveyance of the house and lot is therefore valid only that a note or memorandum be executed in order to compel
between Aparato and the spouses. It is a private document but judicial enforcement thereof. What took place was only prolonged
this fact does not detract from its validity. Generally, contracts are negotiation to buy and sell.
obligatory, in whatever form such contracts may have been
entered into, provided all the essential requisites for their validity VOID OR INEXISTENT CONTRACTS
are present. When however the law requires that a contract be in
some form for it to be valid or enforceable, that requirement must What contracts are void or inexistent?
be complied with. Under Article 1358 requires that certain acts and
contracts must be in a public document. Under Art. 1403, sales of
The following contracts are void or inexistent from the beginning:
real property must be in writing. Since the Pagpapatunay is in
writing, it is enforceable under the Statute. But since it is not a
public document, it does not comply with Art. 1358. However, the • Those whose cause, object or purpose is contrary to law,
requirement of Art. 1358 is not for the validity but for its efficacy. morals, good customs, public order or public policy;
• Those which are absolutely simulated or fictitious;
Villanueva v. CA, 1997
TC rendered decision declaring all of the contracts null and void Doctrine: A void or inexistent contract is one which has no force
except for the first contract of lease. Both parties appealed. and effect from the beginning. These are of two types:
SC modified TC’s decision in that it also declared the first contract (1) those where one of the essential requisites as provided for by
of lease as null and void along with the rest. Art 1318 is wanting;
Doctrine: SC cancelled the contract of lease in this case not on the (2) those declared to be so under Art 1409.
basis of it allegedly being contrary to the expressed will of one of
the contracting parties (Santos’), rather it was voided because of By contrast, a voidable or annullable contract is one in which the
its illegal causa. Based on the testimonies gathered, the contracts essential requirements for validity under Art 1318 are present, but
were entered into in an effort to circumvent the Constitutional vitiated. Such contracts may be rendered perfectly valid by
prohibition against the transfer of lands to aliens. It became clear ratification, which can be express or implied.
that the arrangement was a virtual transfer of ownership whereby
the owner divests himself in stages not only of the right to enjoy
Art 1327 provides that insane or demented persons cannot enter
the land, but also of the right to dispose of it—rights the sum total
into contracts, But, if ever they do, the legal effect is that the
of which is ownership. Thus, this illicit purpose became the illegal
contract is voidable or annullable as provided for in Art 1390.
causa rendering the contracts void.
Agan, Jr. vs Philippine International Air Terminals Co., Inc. Doctrine: It is inherent in public biddings that there shall be fair
competition among the bidders. Any contract that circumvents this
Petitioner seek to prohibit the Manila International Airport concept shall be declared null as being contrary to public policy.
Authority (MIAA) and the Dept of Transportation and
Communications (DOTC) from implementing contracts and III. NATURAL OBLIGATIONS
agreements executed by the Philippine Givernment through the
DOTC and the MIAA and the Phil Intl Air Terminals Co., Inc 1. Definition
(PIATCO).
Natural obligations are those based on equity and natural law,
DOTC engaged the services of Aeroport de Paris (ADP) to conduct which are not enforceable by means of court action, but which,
a comprehensive study of the Ninoy Aquino Intl Airport (NAIA) and after voluntary fulfillment by the obligor, authorize the retention
determine whether the present airport can cope with the traffic by the oblige of what has been delivered or rendered by reason
development up to 2010. A group of business leaders formed thereof. In other words, they refer to those obligations without
Asia’s Emerging Dragor Corp (AEDC) to explore the possibility of sanction, susceptible of voluntary performance, but not through
investing in the construction and operation of a new airport compulsion by legal means.
terminal. AEDC submitted an unsolicited proposal to the
Government through DOTC/MIAA for the development of NAIA
2. vs Civil Obligations
International Passenger Terminal III (NAIA IPT III). A committee
called the Prequalification Bids and Awards Committee (PBAC) was
constituted by the DOTC for the implementation of the NAIA IPT Natural Obligations Civil Obligations
III project. A consortium headed by People’s Air Cargo and
Basis Equity and natural law Positive law
Warehousing Co., Inc. (Paircargo), among others, submitted their
proposal to PBAC. PBAC found Paircargo as the most qualified to Enforceability Not enforceable by Enforceable by court
undertake the project. Sometime after this determination, court action action
Paircargo incorporated with PIATCO. AEDC, along with a slew of
other petitioners, filed with the RTC Pasig a petition to declare the
3. vs Moral Obligations
1997 Concession Agreement between the Government and PIATCO
null and void for being contrary to the Constitution, the BOT
(Build-Operate-Transfer) Law and its Implementing Rules and Natural Obligations Moral Obligations
Regulations.
Existence of juridical There exists a juridical No juridical tie
tie tie between the parties whatsoever.
SC declared the assailed agreement as void for being contrary to not enforceable by
public policy. A close comparison of the draft Concession court action.
Agreement attached to the Bid Documents and the 1997
Effect of fulfillment Voluntary fulfillment Voluntary fulfillment
Concession Agreement reveals that the documents differ in at least
produces legal effects does not produce legal
two very important respects. While the Court concedes that a
Trust distinguished from Guardianship or Executorship: 1. Express Trusts—created by the parties, or by intention of
the trustor
• In a trust, the trustee or holder has LEGAL title to the 2. Implied Trusts—created by operation of the law; two kinds
property.
• A guardian, administrator or executor does not have.
Held:
Doctrine: Ratio:
Doctrine: