Civil Law Outlines

-OBLIGATIONS
AND CONTRACTS

JOEMER C. PEREZ
 I
Philippine Copyright 2010
\ TABLE OF CONTENTS
I
'
by
Chapter I: Introduction to Obligations I
Joemer C. Perez
Chapter 2: Nature and Effect of Obligations 10

A l l rights reserved. No part of this b o o k may be Chapter 3: Remedies 26

r epr oduced in any form or b y any e l e ctr o n i c or
Chapter 4: Kinds of Obligations 35
me chani cal means, inc luding informatio n storage_
.
and retrieval systems, without written permission
Chapter 5: Extinguishment of Obligations 75
from the author, except quoted brief passages in a
review or in judicial or other official proceedings. Chapter 6: Introduction to Contracts 131

Chapter 7: Essential Requisites of Contract 150

Chapter 8: Form of Contracts 1 89

. '
Chapter 9: Reformation of lnstruments 194

Chapter I 0: Interpretation of Contracts 200

Serial No. 199
------
Chapter 1 1 : Defective Contracts 207

Chapter 12: Natural Obligations 247

Any copy of this book not bearing!!' signature 250
Chapter 13: Estoppel
of the author shall be considered as proceeding
from an illegal source. Chapter 14: Trusts 257

ISBN 978-971-0ll-217-3

Published by

Central Book Supply, Inc.

927 Quezon Avenue, Quezon City
Philippines 1 104
 Preface

Everything should be made as simple as possible,

but not any simpler.
- Einstein

Civil law is an enonnous subject, which covers a wide range of

topics from the simple to the more complex. A student of civil law is
prone to be overwhelmed by the largeness of the subject, particularly as
he prepares for the bar exams.

This work is an attempt to help the student navigate this vast

field. It is a basic presentation of civil law in outline fonn. It provides
a logical arrangement and synthesis of civil law rules and principles
based chiefly on coda! provisions and relevant jurisprudence.
Commentators are also cited whenever useful or appropriate. The
arrangement of topics in the Civil Code has been followed as far as
practicable.

My aim is to give students a substantial understanding of the

essential principles and rules of civil law, with as much nuance as
possible, but without overwhelming them with the more abstruse
theories and issues.

JCP
2010
\

ToNani
and Alfonso.

To me you are perfect,

just the way you are.

.
 Chapter 1

Introduction to Obligations

I. IN GENERAL

A. DEFINITION: An obligation is a juridical necessity to give, to

do or not to do. (Art. 1156)

The definition in Art. 1156 is incomplete as it considers

obligations only from the side of the obligor, omitting the
creditor. Obligation may be defined more comprehensively as a
juridical relation whereby a person (the creditor) may demand
from another (the debtor) the observance of a determinate
conduct and, in case of breach, may obtain satisfaction from
the assets of the debtor. 1

Note that the obligation defined under Art. 1156 refers to civil
'
obligations, i.e., obligations which are enforceable by courts
under the law. They are different from natural obligations,
which are not enforceable by the courts under the law, but
when performed, they are binding, under the prh1ciples of
conscience or moral justice. A common example of a natural
obligation is a prescribed debt which cannot be enforced in
courts; however, when it is paid by the debtor, the payment
becomes binding on the said debtor.

B. CONCEPTS: The notion of a civil obligation imports three

2
concepts :

1. Cre dit - right of a person (creditor) to demand a

prestation or the observance of a particular conduct, which
the law will enforce;

1 JBL Reyes, "Observations on the New Civil Code," Lawyers Journal, Vol. XVI, pp. 47-50,
January 31, 1951, p. 47, citing Arias Ramos.
' Id.

2. Debt -duty of another person (debtor) to render a
prestation or observe a particular conduct; and
Note that in obligations, the credit is a personal right,
in which is enforceable against a particular or definite
person (although it is not necessary that such person be
presently identified), as opposed to a realright, which
is enforceable against the whole world (erga ornnes).'
3. Responsibility-right of the creditor to obtain satisfaction
from the debtor's patrimony in case of the debtor's breach.
The debtor is liable with all his property, present and
future, for the fulfillment of his obligations, subject t
the exemptions provided by law. (Art. 2236)
C. ELEMENTS: An obligation is constituted upon the concurrence
of the following essential elements:4
1 . The vinculum juris or juridical tie which is the efficient
cause established by the various sources of obligations
(law, contracts, quasi-contracts, delicts and quasi-delicts);
2. The object which is the prestation or conduct required to
be observed (to give, to do or not to do); and
3. The subject-persons who, viewed from the demandabilify
of the obligation, are the active (obligee) and the passive
(obligor) subjects.
II. SOURCES OF OBLIGATION
Obligations arise from the foliowing sources: (Art 1 157)
' See Sps. Adorable v. CA, G.R. No. 1 1 9466, November 25, 1999.
Ang Yu Asuncion v. CA, 238 SCRA 602 (1994).
2 3
A. LAW
I. Not P resum ed . Obligations derived from law are not
presumed. Only those expressly detem1ined in the Civil
Code or in special laws are demandable. (Art. 1 1 58)
a. A legal norm can reqiiire that a particular party be
chargeable with a prestation or undertaking to give or
to deliver or to do or to render some service. But it
must be shown that such legal provision in fact exists.5
b. A father-in-law has no legal obligation to support his
daughter-in-law. Such obligation cam10t be
presumed.6
2. Applicable Law. Obligations derived from law shall be
regulated by the precepts of the law which establishes
them; and as to what has not been foreseen, by the
provisions of Book IV of the Civil Code. (Art. 1 158)
3. Examples of Obligations Created By Law:
a. Obligation between spouses or between parents and
children to provide support under the Family Code;
b. Obligation by emplcyer to provide certain benefits to
employees under the Labor Code;
c. Obligation to reimburse necessary expenses under the
law on property;
d. Obligations of the owners of a servient estate to the
owners of the dominate estate under the law on
easements; etc.
5 Batchelder v. Central Bank, G.R. No. L-25071, July 29, 1972.
' Pelayo v. Lauron, 12 Phil. 453 (1909).
 B. CONTRACTS
1. Obligations arising from contracts have the force of law
between the contracting parties and should be complied
with in good faith. (Art. 1159)
2. Definition. A contraci is a meeting of minds between two
persons whereby one binds himself, with respect to the
other, to give something or to render some service. (Art.
1305)
See discussion on Contracts in Chapters 5, et seq.
C. QUASI-CONTRACTS
l.. Applicable Law. Obligations derived from quasi-contracts
shall be subject to the provisions of Chapter l , Title XVII,
of Book IV of the Civil Code. (Art. 1160)
2. Definition. Quasi-contracts are obligations ariing from
certain lawful, voluntary and unilateral acts, to the end that
no one shall be unjustly enriched or benefited at the
expense of another. (Art. 2142)
there is no consent in the sense of
In quasi-contracts, .
a c. The pertinent provisions of Title XVIII of Book IV,
meeting of minds between the parties; thus there is no
contract. However, in view of the peculiar
circumstances or factual environment, consent is
presumed, to tho end that a recipient of benefiis or
favors resulting from lawful, voluntary and unilateral
acts of. another may not be unjustly enriched at the
expens of another.7
3. Examples:
1 Philippine National Bank v. CA. G.R. No. 97995, January 21, 1993.
4 5
a. . Negotiorum Gestio - 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 and its incidents, or to require the person
concerned to substitute him, if the owner is in a
position to do so. (Art. 2144)
. b. Solutio Indebiti - If something is received when there
is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises. (Art.
2152)
D. ACTS OR OMISSIONS PUNISHED BY LAW
1. Applicable Law. Civil obligations arising from criminal
offenses shall be governed by the penal laws, subject to the
following provisions of the Civil Code:
a. Article 2177;
b. The pertinent provmons of Chapter 2, Preliminary
Title, on Human Relations, and
regulating damages. (Art. 1161)
2. Civil Lia bil ity Arising From Crime. Under Art. 100 of
the Revised Penal Code, every person criminally liable for
a felony is also civilly liable. The Civil Code also provides
that in crimes, the defendant shall be liable for all damages
which are the natural and probable consequences of the act
or omission complained of.' (Art. 2202) It is not necessary
that such damages have been foreseen or could have
reasonably been foreseen by the defendant. (Art. 2202)
Civil liability arising from crime may be proved by
preponderance of evidence. (Arts. 29, 30, 35) Thus, it
 is possible that an accused wh6 is acquitted because of
reasonable doubt may nonetheless be held liable civilly
based on preponderance of evidence. (Id.)
3. Deemed Instituted. When a criminal action is instituted,
the civil action for the recovery of civil liability arising
from t)ie offense charged shall be deemed instituted with
the criminal action, unless the offended party -
a. Waives the civil action,
b. Reserves the right to institute it separately or
c. Institutes the civil action prior to the criminal action.8
4. Independent Civil Action. In the following cases
provided by the Civil Code, the offended party may file an
independent civil action, which shall proceed
independently of the criminal action and shall require only
a preponderance of evidence':
a. Civil action based 0n an obligation not arising from the
act or omission complained of as a felony. (Art. 3 1)
Example: a civil action for breach of contract of
deposit, independent of a criminal action for
estafa. 1 0
b. Violation of civil or constitutional rights and liberties.
(Art. 32)
'
c. Defamation, fraud and physical injuries. (Art. 33)
"Physical irifuries" is used in the generic sense. It
is not limited to the crime of physical injuries, but
' Rules of Court, Rule 1 1 1 , Section 1(a).
' See also Rules of Court, Rule 1 1 1 , Section 3.
. 10 I Tolentino 1 27.
6 7
includes homicide (whether attempted, frustrated
or consUmmated). 1 1
d. Failure of a policeman or peace officer to render aid or
protection to any person in case of danger to life or
property. (Art. 34)
The peace officer is primarily liable for damages,
and the city or municipality is subsidiari\y liable.
(Art. 34)
5. No Double Recovery. In no case (even in independent
civil actions) may the offended 'party recover damages
twice for the same act or omission charged in the criminal
action. 1 2
E. QUASIDELICTS
1 . Applicable Law. Obligations derived from quasi-delicts
shall be governed by the provisions of Chapter 2, Title
XVII of Book IV, and by special laws. (Art. 1 1 62)
2. Definition. Whoever by act or omission causes damage to
another, there being fault or negligence, is obliged to pay
for the damage done. Such fault or negligence, if there is
no pre-existing contractual relation between the parties, is
called a quasi-delict. (Art. 2176)
Negligence is defined as the. failure to exercise the
standard of care that a reasonably prudent person
would have exercised in a similar situation.P
3. Distinguished from Other Sources of Obligation.
Negligence as a source of obligation may be classified into
three 1 4:
" Carandang vs. Santiago, 97 Phil. 94; Madeja v. Caro, G.R. NO. L-51183, December 21, 1983.
"See Rules of Court, Rule 1 1 1 , Section 3.
"Janssen Pharmaceutica v. Silayro, G.R. No.. 172528, February 26, 2008.
 may also be criminally prosecuted for criminal negligence .
a. Culpa contractual - the parties have a pre-existing (this is. culpa criminal), which will also give rise to civil
contractual relations; the negligence is an incident of liability. The acquittal of the accused in the criminal case
the performance of the contractual obligation, and does not carry with it the extinction of the civil liability
serves to increase the liability arising from the based on quasi-delict,19 because they are based on different
contractual obligation.15 sources of obligation.

b. Culpa aquiliana (or extra-contractual or quasi-delict)

- the parties generally have no pre-existing contractual
relations; it is the negligence itself which creates the
obligation (and therefore the juridical relation between
the parties).1 6

However, it has been held that quasi-delict may

arise even if there is pre-existing contractual
relation, as the act which breks the contract niay
also be a quasi-delict.17

c. Culpa criminal negligence punished by law, as under

-

Art. 3 65 of the Revised Penal Code on criminal

negligence.

The foregoing liabilities (and the corresponding liabilities)

are independent of each other, provided that the offended
party cannot recover more than once.18

Thus, e.g., a taxi passenger who became a victim of a

vehicular accident may sue the taxi operator under their
contract of carriage (this is culpa contractual), an.d also sue
the driver of the other vehicle which collided with the taxi
for quasi-delict, since they had no pre-existing contractual
obligations (this is culpa aquiliana). The negligent drivers

14 See First Philippine International Bank v. CA, G.R. No. 1 1 5849, January 24, 1996.
15 Sps. Batal v. Sps. Tomina9a, G.R. No. 164601, September 27, 2006.
" Sps. Batal v. Sps. Tominaga, G.R. No. 164601, September 27, 2006.
11 Air France v. Carrascoso, 18 SCRA 155 (1966), Singson vs. Bank of the Philippine Islands, 23

SCRA 1 1 1 7 (1968), Coca-Cola Bottlers Philippines, Inc. v. CA, G.R. No. 1 1 0295, October 18, .
1993. " Manliclic v. Calaunan, G.R. No. 150157, January 25, 2007. Safeguard Security Agency v.
" See First Philippine International Bank v. CA, G.R. No. 1 15849, January 24, 1996. . Tangco, G.R; No. 165732, December 14, 2006.
8 9
 Chapter 2
Nature and Effect of
Obligations
I. OBLIGATION TO GIVE
A. OBLIGATION TO GIVE A DETERMINATE THING
1. A determinate thing is one that has been specified or
distinguished from others of the same kind. For example,
the car with plate number JCP-888.
2. When what is to be delivered is a determinate thing, the
creditor may compel the debtor to make the delivery (in
addition to damages). (Art. 1165)
a. This .means that the creditor can compel the debtor to
deliver the thing actually specified in the obligation,
and the debtor is not allowed to substitute another
thing:
b. If the obliger delays, or has promised to deliver the
same thing to two or more persons who do not have the
same interest, he shall be responsible for any fortuitous
event until he has effected the delivery. (Art. 1165)
3. The obligation to give a determinate thing includes the
following accessory obligations:
a. To take care of the thing with the proper diligence of a
good father ofa family. (Art. 1163)
1. Unless the law or the stipulation of the parties
requires another standard of care. (Art. 1163)
IO
ii. Thus, the vendor has the obligation to preserve the
thing from the perfection of the contract until the
thing is delivered to the vendee.2
b. To deliver the fruits of the thing from the time the
obligation to deliver the thing arises. (Art. 1164)
I
However, the creditor shall acquire no real right
over the thing until the same has been delivered to
1 him. (Art. 1164)
(1) A personal right is the power of one person to
demand of another, as a definite passive
subject, the fulfillment of a prestation to give,
to do, or not to do. On the other hand, a real
i right is the power belonging to a person over a
specific thing, without a passive subject
I individually determined.'1
(2) Delivry is required for a creditor to acquire a
real right over the thing; before such delivery,
the creditor only has a personal right to compel
the debtor to deliver the thing to him.
c. To deliver all of the accessions and accessories of the
thing, even though they may not have been mentioned.
(Art. 1166)
B. OBLIGATION TO GIVE AN INDETERMINATE THING
1. An indeterminate thing is one that is generic or indicated
only by its kind, without being specified or distinguished
from others.ofthe same kind. For example,."a car."
20
Seven Brolhers Shipping Corp. v. CA, G.R. No. 109573, July 13, 1995.
21
Sps. Adorable v. CA, G.R. No. 1 1 9466, November 25, 1999.
11
 2. If the thing is indeterminate or generic, he may ask that the
obligation be complied with at the expense of the debtor.
(Art. 1 1 65) III. TRANSMISSIBILITY OF OBLIGATIONS

a. The obligation is satisfied by giving to the creditor a A. GENERAL RULE: All rights acquired in virtue of an obligation
generic thing, at the debtor's expense. This is in are transmissible, subject to laws or stipulations to the contrary.
addition to damages. (Art. 1 178)

b. B. EXCEPTIONS: Rights and obligations which are not

The_ obligation to give a generic thing does not carry
with it the accessory obligations to preserve the thing transmissible -
a!1d deliver its fruits, accessions and accessories,
because a generic thing is not individualized. I. By nature; (Art. 1 3 1 1)

2. By stipulation of the parties; (Art. 1 3 1 1 ) or

II. OBLIGATION TO DO AND NOT TO DO .
3 . By provision oflaw.23 (Art. 1 3 1 1)
A. OBLIGATION TO Do: If a person obliged to do something fails
to do it, the same shall be executed at his cost. (Art. 1 1 67) Examples: legal support (Article
300), parental
authority (Article 327), usufruct (Article 603),
I. This same rule shall be observed if he does it m
contracts for a piece of work (Article 1726),
contravention of the tenor of the obligation. (Art. 1 1 67) partnership (Article 1830) and agency (Article 1 919).

2. Furthermore, it may be decreed that what has been. poorly

done be undone. (Art. 1 1 67) IV. PERFORMANCE OF OBLIGATIONS

Note that the debtor cannot be compelled to do the A. IN GENERAL: The thing or service in which the obligation
thing, since it would violate his personal liberty. He consists must be completely delivered or rendered, as the case
can only be held liable for damages. may be. (Art. 1233) See further discussion regarding Payment.

B. OBLIGATION NOT TO Do: When the obligation consists in not B. RECEIPT OF PRINCIPAL: The receipt of the principal by the
doing, and the obligor does what has been forbidden him, it creditor without reservation with respect to the interest, shall
shall also be undone at his expense. (Art. 1 168) give rise to the presumption that said interest has been paid.
(Art. 1 176)
Thus, constructions which are made despite the prohibition
or restrictions in the Deed of Restrictions may be
demolished.'2

22 C.ajardo Jr. v. Freedom to Build, Inc., G.R. No. 134692, August 1 , 2000. " Estate of Hemady v. Luzon Surety Co., 100 Phil. 388 (1956).

12 13
 If the debt produces interest, payment of the principal shall
not be deemed to have been made until the interests have A. DELAYORMORA
been covered. (Art. 1253)
1 . Requisites. In order for the debtor to be in default (mora
'9
c. RECEIPT OF LATER INSTALLMENT: The receipt of a later solvendi), the following requisites must be present :
installment of a debt without reservation as to prior
installments, shall likewise raise the presumption that such a. That the obligation be demandable and already
installments have been paid. (Art. 1 176) liquidated;

D. USURIOUS TRANSACTIONS: They are governed by special b. That the debtor delays performance; and
laws. (Art. 1 175)
c. That the creditor requires the performance judicially or
Circular No. 905 of the Central Bank, adopted on extrajudicially (demand).
December 22, l 982, has expressly removed the interest
ceilings prescribed by the Usury Law. Thus, the Usury It is important to determine when the debtor is in
24

Law is now "legally inexistent" or "inffective." default because the debtor becomes liable from that
30
time for damages (usually in the form of interest).
However, courts may modify interest rates when found (Art. 2209) The debtor also assumes the risk for a thing
to be iniquitous or unconscionable
under the (even for a fortuitous event) from the time of default.
2'
circumstances (such as 66% per annum , 72% per (Art. 1 1 65)
26 27
annum, or 1 08-120% per annum ).
2 . General rule o n demand requirement. Those obliged to
deliver or to do something incur in delay from the time the
V. NON-PERFORMANCE OF OBLIGATION obligee judicially or extrajudicially demands from them the .
(BREACH OR DEFAULT) fulfillment of their obligation. (Art. 1 1 69)

31
Those who in the performance of their obligations are guilty of Filing of case in court is a judicial demand.
fraud, uegligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages. (Art. 1 170) 3. Exceptions to demand requirement. The demand by the
creditor shall not be necessary in order that delay may exist
In general, every debtor who fails in the performance of his in any of the following instances: (Art. 1 1 69)
obligations is bound to indemnify for the losses and damages
28
caused thereby.
Phil. 962; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando v.
" Medel v. CA, G.R. No. 131622, November 27, 1996. Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657.
2s Medel v.
CA, G.R. No. 131622, NoVember27, 1998. " Social Security System v. Moonwalk Developmenl and Housing Corp., G.R. No. 73345, April
26 Carpo v. Chua, G.R. Nos. 150773 & 153599, September 30, 2005. 7, 1993; Santos Ventura Hocorma Foundation, Inc. v. Santos, G.R. No. 153004, November 4,
" Dino v. Jardines, G.R. No. 145671, January 31, 2006. 2004.
" Arrieta vs. National Rice & Corn Corp., 10 SCRA 79 (1964), citing De la Cruz v. Seminary of " Malayan Insurance Co., Inc. v. CA, G.R. No. L59919, November26, 1 966.
Manila, 18 Phil. 330; Municipality of Moncada v. Cajulgan, 21 Phil. 184; De la Cavada v. Diaz, 37 " United Coconut Planters Bank v. Sps. Beluso, G.R. No. 159912, August 17, 2007.
14 15
 a. By express provrswn or stipulation. When the
obligation or the law expressly so declare; or
The fact that the contract fixes the schedule of
payment does not dispense with the demand
requirement32 ; the contract must specifically state
that demand is not necessary or that the debtor is
waiving the requirement of demand.
b. Time is of the essence. When from the nature and the
circumstances of the obligation it appears t_hat 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; .?r
i. For example, delivery of wedding cake at a
specified date of the wedding.
ii. When a common carrier undertakes to convey
goods, they should be delivered at destination
within a reasonable time, in the absence of any
agreement as to the time of delivery.33
c. Demand is useless. When demand would be useless, as
when the obliger has rendered it beyond his power to
perform.
For example, when the obliger had already
disposed of the thing to be delivered.
4. Creditor's Default. The creditor may also incur default
. (mora creditoris or accipiendi) when h refuses to accept
32See Social Security System v. Moonwalk Development and Housing Corp., G.R. No. 73345,
April 7, .1993.
"Maersk Line v. CA, G.R. No. 94761, May 17, 1993.
16
the performance without valid reason. A creditor in default
bears the risk of accidental loss due to fortuitous events.34
Such creditor's default is not negated by the debtor's
failure io consign the thing to be delivered.35
5. 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. (Art.
1169)
From the moment one of the paf\ies fulfills his
obligation, delay by the other begins. (Art. 1169)
In reciprocal obligations, the performance of one is
conditioned on the simultaneous fulfillment of the
other obligation.36
B. FRAUD
1. Definition, "Fraud" under Art. 1170 refers to bad faith or
. malice in the performance of an obligation which is already
existing. It is a conscious and intentional design to evade
the normal fulfillment of existing obligations.37 The
consequence of this "fraud" is liability for damages and
'
rescission of the obligation.
It should be differentiated from "fraud" under Art.
1338 (contracts) and Art. 839(5) (wills), which refers
to deceit (dolo) as a vice of consent in the execution of
contract or wills. The consequence of this "fraud" is
"'Vda. De Villaruel v. Manila Motor Co., Inc., 104 Phil. 926 (1958).
" Vda. De Villaruel v. Manila Motor Co., Inc., 104 Phil. 926 (1958).
" Abaya vs. Standard Vacuum Oil Co., 101 Phil. 1262 (1957). Boysaw v. lnterphil Promotions,
Inc., 148 SCRA 643 (1987).
"Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc. and Myers Building Co., G.R. No. L-
25885, January 31, 1972, 43 SCRA 93
17
 the voidability of the contract and invalidity of the b. Culpa aquiliana (or extra-contractual or quasi-delict)
will.38 - the parties generally have no pre-existing contractual
relations; it is the negligence itself which creates the
2. Always Dem a ndable. Responsibility arising from fraud is obligation (and therefore the juridical relation between
demandable in all obligations. (Art. 117 1) the parties).41

a. Any waiver of an action for future fraud is void. (Art. i. However, it has been held that quasi-delict may
1 17 1) arise even if there is pre-existing contractual
relations, as the act which breaks the contract may
b. Thus, it was held that a stipulation completely also be a quasi-delict.42
exempting a party from any liability in case of loss '
notwithstanding its bad faith, fault or negligence is ii. Note that in culpa aquiliana, the employer may
void.39 avoid liability for the negligence of his employee
by invoking the defense of due diligence of a good
C. NEGLIGENCE father of the family. (Art. 2180) In culpa
contractual, this defense is not available.43
I. Liability for Negligence. Responsibility ansmg from
negligence in the performance of every kind of obligation c. Culpa criminal - negligence punished by law, as under
is also demandable, but such liability may be regulated by Art. 365 of the Revised Penal Code on criminal
the courts, according to the circumstances. (Art. 1 172) negligence.

2. Definition. The fault or negligence of the obliger consists 3. Negligence with Bad Faith. When negligence shows bad
.

in the omission of that diligence which is required by the faith, the provisions of Articles 1 171 (on fraud) and 2201,
nature of the obligation and corresponds with the paragraph 2 (liability for all damages reasonably
circumstances of the persons, of the time and of the place. attributable to the non-performance), shall apply.
(Art. 1 173) As previously discussed, negligence or culpa
may be of three kinds: Wanton negligence in effecting the plans, designs,
specifications, and construction of a building is
a. Culpa contractual. - the parties have a pre-existing equivalent to bad faith. 44
contractual relations; the negligence is an incident of
the perfonnance of the contractual obligation, and
serves to increase the liability arising from . the
contractual obiigation.40
41 Sps. Batai v. Sps. Torninaga, G.R. No. 164601, September 27, 2006.
"Air France v. Carrascoso, 18 SCRA 155 (1966), Singson vs. Bank of !he Philippine Islands, 23
SCRA 1 1 17 (1968),
. Coca-Coia Bottlers Philippines, Inc. v. CA, G.R. No.110295, October 18,
1993.
43 el Pardo v. Manila Eler.lrtc Co., 52 Phil. 900, 904 (1929); De Gula v. Manila Electric Railroad
38 See J.B.L. Reyes, Lawyers' Journal, Jan. 31, 1951, p. 47. and Light Co., 40 Phil. 706, 710 (1920); Manila Railroad Co. v. Compania Transatlanlica, 38 Phil.
39 Philippine Commercial international Bank v. CA, G.R. No. 97785, March 29, 1996. 875, 889-890 (1918); Herbosa v. CA, G.R. No. 1 190867, January 25, 2002.
)' Sps. Batai v. Sps. Tominaga, G.R. No. 164601, September 27, 2006. 44 Nakpil & Sons v. CA, G.R. No. L-47851, Oclober3, 1986.

18 19
 4. Or dinary Diligence. If the law or contract does not state 5. Extraordinary Diligence. Certain businesses or
the diligence which is to be observed in the performance, professions required the "highest degree of care" because
that which is expected of a goodfather of a family shall be of their nature. Examples:
required. (Art 1173)
a. Common Carriers - for the protection of life and
a. This connotes reasonable care which an ordinarily ' property. 50
prudent person would have observed when confronted
with a similar situation.45 b. Banks -because of the fiduciary nature of their
relationship with their depositors.5 1
b. Examples:
c. Pharmacies - because of their potential harm to human
i. Placing a cellphone in a bag and holding on to that life.52
bag is ordinarily sufficient care of a cellphone
while travelling on board the LRT.46 D. OTHER VIOLATIONS OF THE OBLIGATION

ii. A shipping company exercised due diligence hen I. The phrase "in any manner contravene the tenor" of the
its vessel sailed only after the main engine, obligation includes any illicit act or omission which
machineries, and other auxiliaries were checked impairs the strict and faithful fulfillment of the obligation
and found to be in good running condition; when and every kind of defective performance.53 Examples:
the vessel was manned by competent and
experienced officers; and when the master ordered a. Supplier failed to deliver the cinema films subject of a
an inspection upon the occurrence ofvibrations.47 booking contract.5"

iii. A store supervisor who did nothing even if it had b. Shipping company failed to deliver the cargo within a
been informed that a counter was unstable and reasonable time (delay of two months from the
posed a danger to C)lStomers, is negligent.48 estimated date of arrival).55

iv. A towing service which failed to ensure that its
tugboat was free of mechanical problems is
negligent, particularly considering that the barge to
be towed was wholly dependent on the tugboat for
propulsion.49
45 Crisostomo v. CA, G.R. No. 138334, August 25, 2003.
c. Bank failed to keep a safety deposit box from being
flooded and failed to inform the depositor of the flood,
50 Tiu v. Arriesgado, G.R. No. 138060, September 1, 2004; Calaias v. Court of Appeals, 332
SCRA 356 (2000); Kapalaran Bus Line v. Coronado, 176 SCRA 792 (1 989);
51 Bank of the Philippine islands v. CA, G.R. No. 102383, November 26, 1992, 216 SCRA 51;
Far East Bank and Trust Company v. Quirimil, G.R. No. 148582, January 16, 2002.
5 2 Mercury Drug Corp. v. De Leon, G.R. No. 165622, October 17, 2008.

"Cruz v. Gangan, G.R. No. 143403, January 22, 2003. 53 Arrieta vs. National Rice & Corn Corp., 10 SCRA 79 (1964); Magat vs. Medialdea, 121 SCRA
47 Wildvailey Shipping Co. v. CA, G.R. No. 1 19602, October 6, 2000. 418 (1983).
"Jarco Marketing Corp. V. CA, G.R. No. 129792, December 21, 1 999. 54 Acme Films, Inc. vs. Theaters Supply Corporation, 63 Phn. 657 (1936)

" Cargolitt Shipping, Inc. vs. L. Acuario Marketing Corp., G.R. No. 146426, June 27, 2006.
. 55 Maersk Line v. CA, G.R. No. 94761, May 17, 1 993.

20 21
 which led to the destruction of the stamp collection VI. EXCUSE FOR NON-PERFORMANCE:
stored therein.56 FORTUITOUS EVENT

d. Supplier stopped deliveries, thereby unilaterally A. DEFINITION: A fortuitous event (also known as force majeure)
terminating an existing distributorship agreement is one which could not be foreseen, or which, though foreseen,
without legal justification.'' was inevitable. (Art. 1174). It may either be -

e. Repairman failed to repair a typewriter and even 1. "Act of God" if caused by nature, such as earthquakes, -
returned it "in shambles.'"' epidemics or pestilence,62 floods or storms,63 fire, etc., or

f. Constructio\l company deviated from the plans and 2. "Act of man" if caused by humans (other than the
specification, and architect provided defective plans obligor), such as war,64 robbery, rebellion, etc.
and specifications."
B. GENERAL RULE - No LIABILITY: No person shall be
2. When an obligation, regardless of its source (i.e.,, law, responsible for fortuitous events. (Art. 1174) To exempt the
contracts, quasi-contracts, delicts or quasi-delicts), is obligor from liability for a breach of an obligation due to a
breached, the contravenor can be held liable for fortuitous event, the following requisites must concur:65
damages.60
1. The cause of the breach of the obligation must be'
a. If the obligor acted in goodfaith, he shall be liable for independent of the will of the debtor;
those damages that are the natural and probable
consequences of the breach of the obligation and which 2. The event must be either unforseeable o r unavoidable;
the parties have foreseen or could have reasonably
foreseen at the time the obligation was constituted. 3. The event must be such as to render it impossible for the
(Art. 2200) debtor to fulfill his obligation in a normal mauner; and

b. In case of.fraud, badfaith, malice, or wanton attitude, 4. The debtor must be free from any participation 111, or
the guilty party is liable for all damages which may be aggravation of the injury to the creditor.
reasonably attributed to the non-performance of the
obligation.61 (Art. 2201) C. EXCEPTIONS: The obligor is liable for breach even due to
fortuitous events in the following cases:

" Crame Sy Panco v. Gonzaga, 10 Phil. 646 (1908).

soSia v. CA, G.R. No. 102970, May 13, 1993. "Government v. Bingham, 13 Phil. 558 (1909).
" Pacmac, Inc. v. CA, G.R. No. 72405, May 29, 1987. "Castro v. Longa, 89 Phil. 581 (1951).
" Chaves v. Gonzales, G.R. No. L-27454, April 30, 1 970. " Nakpil & Sons v. CA, G.R, No. L-47851, October 3, 1986, citing Vasquez v. Court of Appeals,
" Nakpil & Sons v. CA, G.R. No. L-47851, October 3, 1986. 138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austna v. Court of Appeals, 39 SCRA
"Eastern Shipping Lines v. CA, G.R. No. 97412, July 12, 1994. 527: Republic of the Phil. v. Luzon Stevedonng Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil.
" Magat vs, Medialdea, 121 SCRA 418 ( 1983). 657.
22 23
 1. In cases expressly specified by the law. (Art. 1174)
2. When it is declared by stipulation. (Art. 1174)
3. When the nature o f the obligation requires the assumption
of risk. (Art. l 174)
4. If the obligor delays, or has promised to deliver the same
thing to two or more persons who do not have the same
interest. (Art. l 165)
5. When. the obligor is guilty of contributory fault or
n egligence.66 (Art. 1 170)
If upon the happening of a fortuitous event, \here
concurs a corresponding fraud, negligence, delay or
violation or contravention in any manner of the tenor
of the obligation, which results in loss or damage, the
obligor caimot escape liability.67
i. Street robbery resulting in the loss of jewelry
entrusted to the victim may be considered a
fortuitous event, but the victim must be free of
contributory fault or negligence (she must have
taken the necessary precautions).68
ii. Carnapping per se is not a fortuitous event. Thus, a
mere police report of the carnapping is not
. sufficient to exonerate the obligor who lost a car
due to the camapping: It must be established that
the event was an act of God or was done solely by
third parties, and that the obligor had no fault or
participation therein.69
"Austria v. CA, G.R. No. L-29640, June 10, 1971.
"Nakpil & Sons v. CA, G.R. No. L-47851 , October 3, 1986.
"Ausfna v. CA. G.R. No. L-29640, June 10, 1971.
69 Jimmy Co v. CA, G.R. No. 124922, June 22, 1998.
24
iii. The collapse of a building due to an earthquake
would not absolve the architect and the constructor
upon showing that there were defects in the design
and construction of the said building. 70
iv. Malfunction or loss of brake is not a fortuitous
event, because the owner/driver of a vehicle is
supposed to know about the conditions of his
vehicle and keep it off the street if mechanically
defective. 71
v. Tire blow-out is also not a fortuitous event if
caused by factors which could have been easily
discovered with a thorough check-up of the
2
vehicle.7
vi. A fire which occurred in a vessel is not a fortuitous
event where it was shown to have originated from
a crack in the fuel oil tank which should have been
discovered upon inspection of the vessel.73
vii. A common carrier which proceeds with the sailing
of its vessel despite knowledge of an incoming
g
typhoon is guilty of ne ligence and cannot invoke
fortuitous event.74
10 Nakpil & Sons v. CA, G.R. No. L47851, October 3, 1986.
11 Thermochem, Inc. v. Naval, G.R. No. 131541, October 20, 2000.
12 La Mallorca v. De Jesus, G.R. No. L-21486, May 14, 19136.
" Edgar Cokaliong Shipping Lines, Inc. V. UCPB General Insurance Company, Inc., G.R. No.
146018, June 25, 2003.
"Asia Lighterage and Shipping, Inc. v. CA, G.R. No. 147246, August 19, 2003.
25
 may ask that it be undone at the expense of the debtor.
(Art. 1168)
Chapter 3

Remedies Note: If the obligation is reciprocal, breach by one party

will entitle the other party to demand rescission (as an
alternative to performance). (Art. 1191) See further
discussion below.
I. IN GENERAL

2. Damages. The creditor may also ask for damages in case

Civil obligations necessarily entail the availability of remedies by
ofbreach or non-performance by the debtor. (Art. 1170)
which they can be enforced by the creditor.
B. SATISFACTION OF CLAIMS: When a creditor avails himself of
A. PRINCIPAL REMEDIES: In general, to enforce an obligation,
the remedies allowed by law (supra), and he succeeds in
the creditor may demand performance and/or indemnity for
obtaining a favorable judgment, he will naturally be interested
da ma ges.
in getting satisfaction of the award in his favor. He may do so
by taking the following successive measures against his
I. Performance.
debtor:75 (see Art. 1177)

a. In obligation to give a determinate thing, the creditor

I. Exhaust the properties of the debtor through levying by
may demand specific performance, or to compel
attachment and execution upon all the property of the
delivery of the thing due. (Art. 1165)
debtor, except such as are exempt by law from execution;
b. In obligation to give a generic thing, the creditor may
2. Exercise all the rights and actions of the debtor, save those
demand substituted peiformance, i.e., that the
personal to him (accion subrogatoria); and
obligation be complied with at the expense of the
debtor.
3. Seek rescission o f the contracts executed b y the debtor in
fraud of their rights (accion pau/iana).
c. In obligation to do, the creditor may demand
substituted performance, i.e., that the obligation be
a. The foregoing remedies are successive. Thus, a
executed at the cost of the cost of the debtor. The
creditor may also demand that what has been poorly
creditor can resort to accion subrogatoria only after he
has exhausted the properties of the debtor. And he can
done be undone. (Art. 1167)
only resort to accion pau/iana after he has resorted the
first two remedies. 76
d. In obligation not to do, the creditor may demand
desistance (or "negative performance," as it were) by
the debtor from doing the forbidden thing. The creditor
may ask for an injunction for this purpose. If the
forbidden thing has already been done, the creditor
"Adorable v. CA, G.R. No. 1 1 9466, November 25, 1999.
76 Adorable v. CA, G.R. No. 1 1 9466,
Novembe r 25, 1999.

26 27
 b. Thus, accion subrogatoria and accion pauliana
considered "subsidiary remedies m .
c. Another measure which the creditor may take is to file
an action to declare the nullity of absolutely simulated
transfers by the debtor. This is often confused with
rescission, but the two remedies are different'8 -
i. In rescission, the transfer by the debtor is real or
actual; in simulation, the transfer is fictitious and
merely apparent.
n. In rescission, there must be intent to defraud
(actual or prest1mptive); in simulation, no such
intent is required.
iii. In rescission, the creditor must have first exhausted
the assets of the debtor; in simulation, this is not
required.
1v. In rescission, the transfer is set aside insofar only
. as necessary to satisfy the creditor's claim; in
simulation, the entire transfer is set aside.
v. In rescission, the action prescribes in
simulati.on, the action to set aside the transfer does
not prescribe.
n. REMEDIES IN BREACH OF
RECIPROCAL OBLIGATIONS
Reciprocal obligations are defined as those that arise from the
same cause, and in which each party is a debtor and a creditor of
the other, such that the obligation of one is dependent upon the
11
JBL Reyes & Ricardo Puna, Outlineof Philippine Civil Law, Vol. IV (1958 ed.) (hereafter "IV
Reyes .& Puna"), pp. 34-35.
78 IV Reyes & Puna 38 (citing Puig Pena and Manresa).
28
are obligation of the other.79 Example: In a contract of sale, the buyer's
obligation to pay the purchase price and the seller's obligation to
deliver the thing sold are reciprocal.so
In case of breach of obligation, the injured party may choose
beiween the fulfillment of the obligation (specific performance)
and the rescission ofthe obligation, with the payment of damages
in either case. (Art. 1191)
A. RESCISSION (OR RESOLUTION)
I. 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. (Art. 1191)
a. This is predicated on the breach of faith by the
defendant which is violative of the reciprocity between
the parties. 81 It is retaliatory in character, it being
unjust that a party be held bound to fulfill his promises
when the other violates hi.s.82
Examples: (1) a party may cancel its charter
contract with a shipping company if the latter's
boat fails to arrive in time for loading83; (2) a
4 years; in lessor may cancel the lease contract if the lessee
fajls to pay rent84; (3) a seller may rescind if the
buyer fails to pay the purchase price. 85
b. Rescission or resolution under Art. 1191 is for breach
of stipulations, and should not be confused with
"Presbitero, Jr. v. CA, G.R. No. 102432, January 21, 1993.
so Leonardo v. Maravilla, G.R. No. 143369, November 27, 2002.
" Pryce Corporation v. Philippine Amusement and Gaming Corporation, G.R. No. 157480, 6
May 2005; Spouses Francisco v. DEAC Construction, Inc., G.R. No. 171312, February 4, 2008.
" Universal Food Corporation v. CA, G.R. No. L-29155, May 13, 1970, 33 SCRA 1 (JBL Reyes,
concurring).
"ADR Shipping Services, Inc. v. Gallardo, G.R. No. 134873, September 17, 2002.
84 Cruz v. IAC, G.R. No. 72313, December 29, 1989.
" Almira v. CA, G.R. No. 1 15966, March 20, 2003.
29
 rescission under Art. 1381, et seq., which is the setting
aside of contracts due to lesion oi economic damage
suffered by the plaintift'6 (e.g., a creditor seeks the
rescission of a fraudulent disposition of property made
by his insolvent debtor in favor of third persons).
Rescission under Art. 1 191. is a principal action,
while rescission under Art. 1381, et seq. is
subsidiary (in the latter, the plaintiff must show
that he has no other recourse to repair the damage
he suffered).
c. Rescission presupposes that the obligation or contract
exists. Thus, one cannot ask for the declaration of
nullity of a contract, and at the same seek its rescission
:
under Art. 1 1 9 1 . 87
2. The injured party may also seek rescission, even after he
has chosen specific performance, if the latter should
become impossible. (Art. 1 191)
3. The court shall decree the rescission claimed, unless there
be just cause authorizing the fixing of a period. (Art. 1 191)
a. The right to rescind is not absolute. It is not permitted
for a slight or casual breach, but only for such breaches
as are so substantial and fundamental as to defeat the
object of the parties in entering into the agreement. 88
b. In lease, however, if the lessee fails to pay the rent '
within the stipulated period, the court cannot grant him
"Universal Food Corporation v. CA, G.R. No. L29155, May 13, 1970, 33 SCRA 1 (JBL Reyes,
concurring); Ong v. CA, G.R. No. 97347, July 6, 1999.
" Pan Pacific Industrial Sales Co., Inc. v. CA, G.R. No. 125283, February 10, 2006.
"Universal Food Corporation v. Court of Appeals, 33 SCRA 1, May 13, 1 970; Roque v. Lapuz,
96 SCRA 741, March 31, 1 980; Multinational Village Homeowners Association, Inc. vs. ARA
Security & Surveillance Agency, Inc., G.R. No. 154852, October 21, 2004.
30
an extended period because Art. 1659 does not give the
court such discretion. 89
4. Generally, the power to rescind must be invoked judicially;
it cannot be exercised solely on a party's own judgment
that the other has committed a breach of the obligation.'
a. However, the injured party my consider the contract
as rescinded and act accordingly, even without prior.
court action or before any judicial. pronouncement of
breach. But his unilateral determination is provisional,
since the other party may challenge it by suing him in
court. It is then the court which will finally determine
if the rescission should be set aside or affirmed.9t
b. Practically speaking, extrajudicial rescission is feasible
if the injured party has -not yet performed; he can
rescind and simply refuse to perform his own
prestation. Thus, a buyer can simply withhold
payment if the seller is not ready to deliver. However,
if the injured party has already performed, such as a
buyer who has already paid the purchase price, he
would have to seek judicial rescission so the court can
compel the infractor to make him whole (e.g., for the
buyer to recover the price he has already paid).92
c. Also, in the sale of immovables, a demand for
rescission must be made either judicially or by notarial
act, even if it is stipulated that rescission shall take
place upon failure to pay on time. (Art. 1 592)
" IV Tolentino 180, citing Mina v. Rodriguez, (CA) O.G. Supp., August 30, 1941, p. 65.
' Tan v. CA, G.R. No. 80479, 28 July 1989, 175 SCRA 656, 661-662. Ong v. Bognalbal, G.R.
No. 149140, September 12, 2006.
" UP v. Delos Angeles, 35 SCRA 102 (1970); Cruz v. IAC, G.R. No. 72313, December 29, 1989.
" IV Tolentino 177-178.
31
 5. Rescission may be availed of by the injuredparty. A party cannot demand specific performance (or even rescission

may not seek rescission if he was the one who prevented under Art. 191 1).98
the .other party from fulfillment of the obligation.93
a. Thus, e.g., in a contract to sell a parcel of land, the

6. In exceptional cases, partial rescission may be ordered. obligation to covey title is conditioned upon full

Example: when a construction is already 75% complete, payment of the contract price. Until then, ownership

rescission may be ordered as to the portion which remains remains in the seller. If the price is not paid, the

unfinished. 94 obligation to convey title does not arise, and the buyer
cannot compel performance.99

7. The right to rescind may be waived, expressly or impliedly.

Example: unqualified acceptance of late payments is an b. Also, in a contract to sell scrap iron upon the buyer's

implied waiver of the right to rescind on the basis of such opening of a letter of credit, the seller cannot be

late payments. 95 compelled to sell if the buyer failed to open a letter of

credit.100

8. In case of rescission, mutual restituiion is required., This

' 3. Where the plaintiff is t11e party who did not perform his
means bringing the parties back to their original status
prior to the inception of the contract.96 They must return to undertaking under the contract, he is not entitled to insist

each other. what they respectively reserved (less damages, upon the performance of the contract by the defendant, or

if proper). recover damages by reason of his own breach.101

B. SPECIFIC PERFORMANCE 4. The right to demand specific performance is without

prejudice to the rights of third persons who have acquired

1 . Specific performance is a remedy which is alternative to the thing, in accordance with Articles 1385 and 1388 and
rescission. The injured party caunot have both. Thus, e.g., , the Mortgage Law. (Art. 1 191)
the lessor cannot rescind the contract and recover
possession of the leased property, and at the same time Thus, the obligee may no longer demand specific

demand future rents. 97 performance if the thing to be given has already

been sold by the obligor to a ihird party in good
faith.
2. The breach contemplated in Art. 1 9 1 1 is the obligor's
failure to comply with an obligation already extant. If the
obligation is subject to a suspensive condition which has
not been fulfilled, the obligation did not even arise or exist,
and could not have been breached. Thus, the other party

" Penalosa v. Santos, G.R. No. 133749, August 23, 2001.

" Spouses Francisco v. DEAC Construction, Inc., G.R. No. 171312, February 4, 2008. " Ong v. CA, 310 SCRA 1 (1999).
95 Development Bank of the Phlllppines v. CA, G.R. No. 137557, October 30, 2000.
99 Ong v. CA, 310 SCRA 1 (1999).
100 Visayan Sawmill, Inc. v. CA, G.R. No. 83851, March 3, 1993.
96 Laperal v. Solid Homes, Inc., G.R. No. 130913, June 21, 2005, 460 SCRA 375; Unlad
101
Resources Dev't Corp. v. Dragon, G.R. No. 149338, July 28, 2008. Seva vs. Alfredo Beiwin, 48 Phil. 581; Boysaw v. lnterphil Promotions, Inc., G.R. No. L-
" Rios v. Jacinto, 49 Phil. 7 (1926).' 22590, March 20, 1987.

32 33
 C. DAMAGES
Chapter 4
I. Damages shall be awarded in either case of specific
performance or rescission of the obligation. Kinds of Obligations

In case of rescission, the damages must be those

consistent with the abrogation of the contract, and not J. PURE AND CONDITIONAL OBLIGATIONS
.those which effectively amount to specific
performance. Thus, in case a lease is rescinded, the A. DISTINCTION BETWEEN PURE AND CONDITIONAL
lessor may demand rental arrears and damages done to
0
the leased property, but not future rents. 1 2 1. Pure - obligation whose performance does not depend on
a condition (i.e., a future and uncertain event, or a past
2. Interest may, in the discretion of the court, be allowed upon event unknown to the parties) or a period (i.e., a :future day
damages awarded for breach of contract. (Art. 221 0) which must necessarily come). (Arts. 1 1 79, 1 1 81, 1 193)

3. In case both parties have committed a breach 1of the a. A pure obligation is demandable at once. (Art. 1 1 79)
obligation -

The necessity of an actual demand is not

a. The liability of the first infractor shall be equitably considered a condition, because nothing can
tempered by the courts. (Art. 1 1 92) prevent a creditor from making a demand any
!OS
time.
The second infractor is not liable for damages at
all; the damages for which he would have been b. Examples: a loan which provides no condition or
liable are compensated by the mitigation of the period for repayment, 1 06 a "demand note" which is
103
first infractor' s liability. payable upon demand.

This is subject to the discretion of the court on
what is equitable under the circumstances. 104
b. If it cannot be determined which of the parties first
violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages.
(Art. 1 192)
2 . Cond itio nal - In conditional obligations, the acquisition of
rights, as well as the extinguishment or loss of those
already acquired, depends upon the happening of a
condition. (Art. 1 1 81)
a. A condition is a future and uncertain event, or a past
event unknown'to the parties. (Art. 1 1 79)

i. "Future and uncertain event"

102Rios v. Jacinto, 49 Phil. 7 (1926).
'" Ong v. Bognalbal, G.R. No. 149140, September 12, 2006. 105 IV Tolentino 143.

"' Ong v. Bognalbal, G.R. No. 149140, September 12, 2006. See also art. 2215. '' Floriano v. Delgado, 1 1 Phil. 154 (1908).
34 35
 B. KINDS OF CONDITIONS
Despite the language of Art. 1 179 which refers
to "future or uncertain event," a condition 1 . Suspensive and Resolutory
must be both future and uncertain. If the
element of uncertainty is lacking, it becomes a . a. Suspensive condition (also known as condition
period, which is a "day certain" or that which precedent) - if the acquisition of rights is dependent on
must necessarily come, although it may not be the condition.
known when. (Art. 1 193)
b. Resolutory condition (also known as condition
Thus, a condition is uncertain to hapjJen, while subsequent) - if the extinguishment of rights already
'
a period is certain to come. Passing the bar is acquired is dependent on the condition.
a condition; while death of a particular person
is period. 2. Potestative, Casual or Mixed

ii. "Past event unknown to the parties" a. Potestative Condition - if the fulfillment of the
condition depends on the will of one of the parties.
A past . . event, having happened already, is
always certain. It is only the parties' i. The conditional obligation (not just the condition)
knowledge of that event which may be is void when the fulfillment of the condition
uncertain. Example: after bar exam results depends upon the sole will of the debtor. (Art.
were released but before they were published, 1 1 82)
a father says to his son, "I will give you a car if
you passed the bar exams." (1) E.g., when the obligor says "I will pay you
when I like it (or when I consider it properJi'
b. If the condition is suspensive, the obligation is not In this case, the obligation is illusory or not
demandable until the performance of the condition. meant to be fulfilled.1'

When the consent of a party to a contract is given An offer to pay the value of the stock
subject to .the fulfillment of a suspensive condition, subscription after the offerer had harvested
the contract is not perfected unless that condition is fish is a condition dependent upon her sole
first complied with.107 will and, therefore, potestative in nature
and renders the obligation void.109
c. If the condition is resolutory, the obligation is
demandable at once, but without prejudice to the (2) However, when the debtor binds himself to
effects of the happening of the event. (Art. 1 179) pay when his means permit him to do so, the
obligation shall be deemed to be one with a

'' Ruperto v. Kosea, 26 Phil 227, December 4, 1913; Gonzales v. Heirs of Cruz, G.R. No, '' Vda. De Mistica v. Spouses Nagial, G.R. No. 137909, December 1 1 , 2003.
131784, September 16, 1999. ''Trillana v. Quezon College, Inc., 93 Phil. 383 (1953).
36 37
 .l
period. (Art. 1 1 80) It is subject to the 11. Examples: "I will pay you as soon as I receive the
provision of Art. 1 1 97, i.e., the creditor's proceeds from the sale of my property in Spain",
remedy is to file an action to fix a period. i.e., the debtor had already decided to sell h!s
property, which sale is dependent on external
(3) This rule applies only when the condition is factors like the availability of a buyer.112
suspensive. 110 When the potestative condition
is resolutory, the obligation is valid.111 , "I will give you this ring ifyou marry my son."
Example: "I will allow you to use my house
until I want to get it back." 3. Impossible and Unlawful Conditions

ii. The conditional obligation is valid if the a. . These conditions refer to:
fulfillment of the condition depends on the sole
will of the creditor. i. Conditions which are physically impossible

Example: "I will give you P500 ifyou wart it" Example: condition that a man give birth;
or "I will give you my house if you enter the
priesthood." ii. Conditions which are unlawful or juridically
impossible, because contrary to good customs or
b. Casual Condition - if the fulfillment of the conditin public policy or prohibited by law. (Art. 1 1 83)
depends upon chane or the will of third persons (not
the will of any of the contracting parties). - Example: payment of money conditioned upon
killing someone or seducing a third person's
i. The conditional obligation is valid. (Art. 1 1 82) wife.

ii. Example: "I will give you my umbrella if it rains b. The impossible or unlawful conditions shall annul the
after our dinner," or "I will give you my car ifyour obligation which depends upon them. (Art. 1 183)
son learns how to drive."
Note that this rule applies only to contracts or
c. Mixed Condition - if the fulfillment of the condition onerous obligations. In gratuitous obligations
depends upon the will of one of the contracting parties (simple/remuneratory donations and testamentary
and other circumstances, including the will of third provisions) with impossible or unlawful condition,
persons. only the condition is void or deemed not imposed.
(Arts. 727, 873) This is because in the latter, the
i. The conditional obligation is valid. (Art. 1 1 82) true consideration is the liberality of the donor or
testator.

110
Vda. De Mistica v. Spouses Nagiat, G.R. No. 137909, December 1 1 , 2003.
111 Taylor vs. Uy Tieng Piao, 43 Phil. 873 (1922).
11' Hermosa v. Longora, 93 Phil. 977 (1953).
38 39
 c. If the obligation is divisible, that part thereof which is
not affected by the impossible or unlawful condition
shall be valid. (Art. 1183)
Example: "I will pay you Pl,000 ifyou give me
your book, and an additional P500 ifyou can make
it dance. " The first obligation is valid, but the
second is not.
d. The condition not to do an impossible thing shall be
considered as not having been agreed upon. (Art. 1 183)
The obligation remains valid and becomes a pure one.
Example: "I will pay you Pl, 000 if you do not
make this car swim."
e. Art. 1 1 83 refers to the impossibility of condition
existing at the time of the creation of the obligation; in
such a case, the obligation is rendered void ab initio. It
should not be confused with exfinguishment of the
obligation due to impossibility of performance (Art.
1266), or because it has become certain that the
condition will not be fulfilled (Art. 1 1 84). 113
C. CONSTRUCTIVE FULFILLMENT
1. 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. (Art. 1 1 84)
Example: payment of money on the condition that X
must pass the bar exams by 2015 the obligation is
- city ordinances, or if the obliger cancels a contract
extinguished if 2015 expires without X passing the bar,
or ifX dies before then.
"' IV Tolentino 156156.
40
2. 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. (Art. 1 1 85)
Example: payment of money to X and Y on the
condition that they will not marry each other. until they
are both 25 years old - the obligation becomes
effective if they both reach their 25th birthday without
marrying each other, or if Y dies before her 25th
birthday.
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. (Art. 1 1 85) .
3 . The condition shall be deemed fulfilled when the obliger
voluntarily prevents its fulfillment. (Art. 1 1 86)
a. Example: .the manager under a management contract
- who is unjustly prevented by the other party to perform
his management duties is still entitled to his
management fees.114
b. The obliger's prevention must be unjustifiable for it to
constitute constructive fulfillment. If there is legal or
contractual basis for the prevention, there is no
constructive fulfillment.115
Examples: if the owner of the house stops work on
his house because the contractor violated certain
upon a an stipulation that he has a right to do so.116
1 14Nielson & Company, Inc. v. Lepanto Consolidated Mining, G.R. No. L-21601, Decembe r 17,
1966.
m 1v Tolentino 162.
11' Taylo r v. Uy Tieng Piao, 43 Phil. 873 (1922).
4t
 (a) when it perishes (e.g., house is burned
c. By analogy, if the condition is resolutory and the down), or
obligor voluntarily causes its fulfillment, the condition (b) when it goes out ofcommerce (e.g., land is
is not considered fulfilled. expropriated by the government), or
{c) when it disappears in such a way that its
D. EFFECTS existence is unknown or it cannot be
recovered (e.g., jewelry is stolen).
I. Before Fulfillment of Suspensive Condition. Before the
suspensive condition is fulfilled, the following rules iii. When the thing deteriorates without thefault of the
govern: debtor, the impairment is to be borne by the
creditor; (Art. 1 1 89) -

a. The creditor may bring the appropriate actions for the

preservation of his right. (Art. 1 1 88) This means that the creditor must accept the
thing in its deteriorated condition.
Examples: (i) creditor may sue to enjoin the qebtor
from doing things that would cause the loss or iv. Ifit deteriorates through the fault of the debtor, the
deterioration of the object of the obligation, or (ii) creditor may choose between (1) the rescission of
to enjoin debtor from concealing his property or the obligation and (2) its fulfillment, with
(iii) to compel execution of public instrument; (iv) indemnity for damages in either case; (Art. 1 1 89)
creditor may also cause the registration of deeds of
sale or mortgage. v. If the thing is improved by its nature, or by time,
the improvement shall inure to the benefit of the
b. If the debtor has paid by mistake, he may recover the creditor; (Art. 1 1 89)
same. (Art. 1 1 88)
Appreciation in value of land is generally a -- '
c. In case of obligation to give (a determinate thing), the consequence of nature and time. 1 1 7
following rules shall be observed in case of the
improvement, loss or deterioration of the thing during vi. If it is improved at the expense of the debtor, he
the pende11cy of the condition: shall have no other right than that granted to the
usufructuary. (Art. 1 189)
1. If the thing is
lost without the fault of the debt r,
the obligation shall be extinguished; (Art. 1 1 89) In this case, the debtor may remove the
improvements, but only if it will not cause
ii. If the thing is lost through the fault of the debtor, damage to the thing. (Art. 579) The debtor
he shall be obliged to pay damages; (Art. 1 1 89) may also set off the improvement against the

The thing is lost- 1 11

Mactan Cebu International Airport Authority v. Tudtud, G.R. No. 174012, November 14, 2008.
Heirs of Tito Moreno v. Mactan Cebu International Airport Authority, G.R. No. 156273, October
15, 2003.
42 43
 damage or deterioration he may have caused.
(Art. 580)
2. Upon Fulfillment of Suspensive Condition
a. The effects of a conditional obligation to give, once the
condition has been fulfilled, shall retroact to the day of
t'1e constitution of the obligation. (Art. 1 1 87)
i. Thus, the creditor's right will generally prevail
over acts or dispositions made by the debtor during
the pendency of the condition.
ii. However, the debtor is generally not obliged to
give the fruits or interests received during the
1
pendency of the condition.
(!) If the obligation is reciprocal, the fruits and
interests during the pendency of the condition
shall be deemed to have been mutually
compensated. (Art. 1 1 87)
(2) If the obligation is unilateral, the debtor shall
appropriate the fruits and interests received.
(Art. 1 1 87)
Exception, if there is a contrary intention,
whether express or implied from the nature
and circumstances of the obligation. (Art.
1 1 87)
b. In obligations to do and not to do, the courts shall
deten,nine, in each case, the retroactive effect of the
condition that has been complied with. (Art. 1 1 87)
44
3. Upon Fulfillment of Resolntory Condition
a. In obligations to give - upon the fulfillment of
resolutory condition, the obligation is extinguished and
the parties shall return to each other what they have
received. (Art. 1 190)
In case of loss, deterioration or improvement of the
thing, the provisions of Art. 1 1 89 (supra) shall be
applied to the party who is bound to return.
b. In obligations to do and not to do - upon the
fulfillment of the resolutory condition, the courts shall
determine, in each case, the effect of the
extinguishment of the obligation. (Art. 1 1 90, in rel. to
Art. 1 1 87)
II. OBLIGATIONS WITH A PERIOD
A. IN GENERAL
1. Period or Term. Obligations with a period or term are
those which become demandable or which terminate upon
the arrival of a "day certain". A day certain is that which
must necessarily come, although it may not be known
when. (Art. 1 1 93)
a. Examples: January 1, 2025 is a day certain because it
must necessarily come. The death of a certain person,
X, is also a day certain, because it must necessarily
come, although it is not known when.
b. If the uncertainty consists in whether the day will come
or not, the obligation is conditional, and it shall be
regulated by the rules of Art. 1 1 93. Examples: the sale
45
 by the debtor of his other properties118 or the obtaining arrival of the period, he may recover the thing paid or
of a loan from a bank.1 19 delivered, with the fruits and interests. (Art. 1 195)

Otherwise put, a period is a fature and certain 3. Retroactivity. Unlike a condition, a period has no effect
event, as opposed to a condition which is a future on the existence of the obligation, but only on their
and uncertain event.120 demandability or performance. Thus, the arrival of a
period does not have a retroactive effeci.121
2. Period may be Susp ensive or Resolutory.
C. BENEFIT OF THE PERIOD
a. Obligations with Suspensive Period (ex die) - they
are obligations for ";hose fulfillment a day certain has I. In General. Whenever in an obligation a period is
been fixed, and shall be demandable only when that designated, it is presumed to have been established for the
day comes. (Art. 1 193) benefit of both the creditor and the debtor. (Art. 1 196)

Examples: A promissory note payable ,on 1 a. Thus, in such a case, the debtor may not be compelled
January 2025; a service which must be performed to perform the obligation before the arrival of the
one year from the execution of the contract. period, and the creditor may not be compelled to
accept performance before the arrival of the period.
b. Obligations with Resolutory Period (in diem)- they
take effect at once, but terminate upon arrival of the b. Also, because the term is generally for the benefit of
day certain. (Art. 1 1 93) both creditor and debtor, a contract whose term has
already expired may only be renewed if both parties
Example: A usufruct that will end on 1 January consent. 122
2025.
2. Exception. The period may be established in favor of
B. EFFECTS either the creditor or the debtor, if it should so appear from
the tenor of the obligation or other circumstances. (Art.
1. Loss, Deterioration or Improvement. In case of loss, 1 1 96)
deterioration or improvement of the thing before the arrival
of the day certain, the rules in Article 1 1 89 on conditional a. If the period is for the benefit of the debtor, he may not
obligations shall be observed. (Art. 1 1 94) be compelled to perform the obligation before the
arrival of the period, but he may validly do so (pre
2. Advance Payment by Mistake. If the obligor is unaware payment) if he so wishes.
of the period or believes that the obligation has become due
and demandable, and thus pays or delivers before the

1 18Dandoy v. CA, G.R. No. 150089, August 28, 2007. 121 IV Tolentino 186-187.
110 Berg v. Magdalena Estate, Inc., 92 Phil. 110. 122 Fernandez v. CA, 166 SCRA 577 (1988); LL and Co. v. Huang Chao Chun, G.R. No. 142378,
120 Dandoy v. CA, G.R. No. 1 50089, August 28, 2007. March 7, 2002; Josefa v. San Buenaventura, G.R. No. 163429, March 3, 2006.
46 47
 Example: If the obligation provides that payment
may be made "within" the stipulated period, or "on d. When the debtor violates any undertaking, in
or bfore" the stipulated date, the period is for the consideration of which the creditor agreed to the
benefit of the debtor. The debtor then has the period; or
right, but not the duty, to pay before the deadline.
e. When the debtor attempts to a.bscond.
b. If the period is for the benefit of the creditor, he may
.not be compelled to accept performance before the D. FIXINGOF PERIOD
arrival of the period, but he may validly demand
performance if he so wishes. I. When Applicable. The courts may fix the duration of the
period in the following cases:
The creditor may decline pre-payment for various
reasons - he may want the interest on his money, a._ If the obligation does not fix a period, but from its
he may want to avoid the risk of holding his nature and the circumstances it can be inferred that a
money, or the risk of near-term deprecia\ion in period was intended. (Art. 1 197)
currency, etc.
'

1. Examples: When the debtor undertakes to pay "as

3. Loss of the Benefit of the Period. The debtor. shall lose
the right to make use of the period (i.e., the creditor may
demand perfom1ance by the debtor even before the arrival
of the period) in any of the following cases: (Art. 1 198)
a. When after the obligation has been contracted, he
becomes insolvent, unless he gives a guaranty or
security for th debt;
b. When he does not furnish to the creditor the guaranties
or securities which he has promised;
c. When by his own acts he has impaired said guaranties
or securities after their establishment, and when
through a fortuitous event they disappear, unless he'
immediately gives new ones equally satisfactory;
Example: Debtor's failure to renew or extend the
12
surety bond he furnished. 3
12
soon as possible,"1 24 or as soon as he has money, 5
126
or "little by little", or when his means permit
.
him to do so. (Art. 1 1 80)
ii. Example: When a donation imposes conditions but
does not fix the period within which to comply
2
with them, the court must fix the perio.d. 1 7
1
In one case, 28 the Supreme Court held that
compliance with condition to build a school
had already been delayed for more than 50
years, it was no longer necessary to fix a
period. The correctness of this ruling is
1" Gonzales v. Jose, 66 Phil. 369 (1938).
12s See Patente v. Omega, 93 Phil. 218 (1953). The Supreme Court should have applied Article
1197 (Art. 1 1 28, old CC), instead of Art. 1182 (Art. 1 1 1 5, old CC). The clause "as soon as
possible or as soon as I have monej' indicates that a period was intended. Besides1 application
of Art. 1182 would have resulted in a pure obligation, instead of one where the court may fix the
period.
120 Seoane v. Franco, 24 Phil. 309 (1913).

m Barretto v. City of Manila, 7 Phil. 416 (1907).

123 1 28 Central Philippine University v. CA, 246 SCRA 51 1 (1995).
Gaile v. Fonacier, G.R. No. L-11827, July 31, 1961.
48 49
 doubtful. First, there is no such exoeption in
Art. 1 1 97 requiring the fixing of a period.
Second, it is necessary to fix a period if only to
fix the time from which the 4-year prescriptive
period for revocation should be reckoned.129
b. If the period depends upon the will of the debtor.
1 1 97)
Ill. ALTERNATIVE AND FACULTATIVE OBLIGATIONS
A. ALTERNATIVE OBLIGATIONS, IN GENERAL
I. Alternative Obligation. In an alternative obligation, there
is more than one object, and the fulfillment of one is
(Art. sufficient, determined by the choice of the party who has
the right to choose.1 32

But if the performance of the obligation depends a. Examples: (i) obligation to deliver a TV or a
upon the sole will of. the debtor (purely refrigerator - it is sufficient for the debtor to deliver
potestative), the obligation is void. (see Art. 1 1 82) either a TV or a refrigerator, not both; (ii) obligation of
a fire insurance company to rebuild the insured house
c. In case of breach of reciprocal obligation, the court destroyed by fire or to pay its value.133
may fix a period '(instead of ordering rescissi<;m) if
' Contrast with Conjunctive Obligation:
there is a just cause for the same. (Art. 1 1 91) b. There are also
several objects, which must all be fulfilled.134
2. Premature Until Period is Fixed. Until the period is first
determined, there can be no breach of contract or failure to Example: Obligation to deliver a TV and a
0
perform the obligation.1 3 Before the fixing of the period, refrigerator - the debtor must deliver both TV and
it would be premature for the creditor to complain of the refrigerator.
debtor's alleged breach.1 3 1
c. Contrast with Facultative Obligation: There is only
3. Standard in Fixing the Period. In every case, the courts one object, but the debtor may substitute another
shall determine such period as may under the , object.
circumstances have been probably contemplated by the
parties. (Art. 1 1 97) 2. Complete Performance. A person altenratively bound by
different prestations shall completely perform one of them.
4. Finality. Once fixed by the courts, the period cannot be (Art. 1 199)
changed by the courts. (Art. 1 197)
The creditor cannot be compelled to receive part of one
and part of the other undertaking. (Art. 1 1 99)

129 SPJ dissent of J. Davide In Central Philippine University v. CA, 246 SCRA 511 (1995).

"' Ungson vs. Lopez, 50 Off. Gaz. 4297; Concepcion vs. People of the Philippines, 74 Phil. 63;
Gonzales vs. De Jose, 66 Phil .. 369; Pages v. Basilan Lumber Company, G.R. No. L-
10679, November29, 1958, "'See Chavez v. PEA-Amari, G.R. No. 133250, May 6, 2003. J. Ynares-Santiago, dissenting.
131 Spouses Vasquez v. Ayala Corp.. G.R. No. 149734, November 19, 2004; Spouses Edrada v. "' Ong Guan Can v. Century Insurance Co., Ltd., 46 Phil. 592 (1924).
Spouses Ramos, G.R. No. 154413, August 31, 2005. "' IV Tolentino 203.
50 51
 B. RIGHT TO CHOOSE, BY DEBTOR of the obligation, the latter may rescind the contract with
damages. (Art. 1203)
I. General Rule. The right of choice belongs to the debtor.
(Art. 1200) 5. In Case of Loss of Alternative Prestations.

Exception: Unless it has been expressly granted to the a. Loss ofAll

creditor.
i. Due to Debtor's Fault - When, through the fault
2. Limitations . of the debtor, all the things which are alternatively
the object of the obligation have been lost, or the
a. The debtor cannot choose part of one prestation and compliance of the obligation has become
part of another prestation. (Art. 1 199) impossible - the creditor shall have a right to
indemnity for damages. (Art. 1204)
b. The . debtor shall have no right to choose those
prestations which are impossible, unlawful or which The indemnity shall be fixed taking as a basis
could not have been the object of the obligatio . h (Art. the value of the last thing which disapp,eared,
1 200) or . that of the service which last became
impossible. (Art. 1204)
Thus, if the obligation permits payment in local or
foreign currency, but the government outlawed all Damages other than the value of the last
foreign currency, the debtor may only pay in the . thing or service may also be awarded. (Art.
local currency. 135 1 204)

c. The debtor shall lose the right of choice when among ii. Not Due to Debtor's Fault - If the loss or
the prestations whereby he is alternatively bound, only impossibility is not, due to the debtor's fault (for

one is practicable. (Art. 1 202) example, because of fortuitous event, or because of

the creditor) the debtor is relieved of liability.
3 . Effectivity. The choice shall produce no effect except from (A1ts. 1 1 74, 1203)
the time it has been communicated. (Art. 1201)
b. Loss ofSome
The selection may be made in any form, as long as it is
unequivocal. It may even be made tacitly, such as by i. If only some of the alternative prestations are lost,
actually performing the chosen prestation. the debtor is not liable even if the loss is due to his
fault, because he can still comply by choosing the
4. Impairment of Right to Choose. If through the creditor's remaining prestations available.
acis the debtor cannot make a choice according to the terms
ii. If the loss of one or some of the prestations is due
to the creditor's fault, however, the debtor may
"' Tambunting de Legarda v. Miailhe, 88 Phil. 637.

52 53
 choose to rescind the obligation with damages
(A11. 1203).
C. RIGHT TO CHOOSE, BY CREDITOR
1. When App licable. The creditor has the right to choose
. between alternative prestations only when it is expressly
given to him. (Arts. 1200, 1205)
2. Effectivity. When the choice has been expressly given to
the creditor, the obligation shall cease to be alternative
from the day when the selection has heen communicated to
the debtor. (Art. 1205)
2. Pending tlte Creditor's Choice. Until the selection1by the
creditor, the responsibility of the debtor shall be governed
by the following rules:
a. 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;
b. If the loss of one of the things occurs through the fault
of the debtor, the creditor may claim either -
i. Any of those subsisting, or
n. The price of that which, through the fault of the
debtor, has disappeared, with a right to damages;.
c. 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.
Note: 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. (Art. 1205)
54
l). lill.C'llLTll.1:WE OBLlGll.TlONS
l. Yacultative Obligation. This is when only otie prestation
has been agreed upon, but the obligor may render another
in substitution. (A1t. 1206)
Contrast with Alternative Obligation: In a facultative
obligation, there is only one principal prestation. If the
said principal prestation is void, or lost, or becomes
impossible, the obligation is extinguished, even if the
substitutes are still available. On the other hand, in an
alternative obligation, the obligation is not
extinguished by the nullity, loss or impossibility of one
or some of the alternatives, as long as other alternatives
are still available.
2. Before Substitution - The loss or deterioration of the
thing intended as a substitute, through the negligence of the
obligor, does not render him liable. (Art. 1 206)
3. Upon Substitution - Once the substitution, has been
made, the obligor is liable for the loss of the substitute on
account of his delay, negligence or fraud. (Art. 1206)
IV TOINT AND SOLIDARY OBLIGATIONS
.
A. IN GENERAL: In both joint and solidary obligations, there is a
concurrence or plurality of debtors and/or creditors in the same
obligation. They differ, however, in the extent ofthe obligation
to which each debtor can be held liable and/or the extent which
each creditor can demand. .
1-. In a joint obligation (mancomunada or pro rata), each of
the debtors is liable only for a proportionate part of the
debt; and each of the creditors is entitled only to a
55
 136
proportionate part of the credit. Otherwise put, each that each of the debtors is liable only for a proportionate
143
creditor can recover only his share of the obligation, and part of the debt. (Art. 1 207)
137
each debtor can be made to pay only his part.
a. The credit or debt shall be presumed to be divided into
Example: The obligation is joint ifA, B, and C say as many shares as there are creditors or debtors, the
"We promise to pay P300 to X'. A, B, and C are liable credits or debts being considered distinct from one
only for P 100 each. another, subject to the Rules of Court governing the
multiplicity of suits. (Art. 1208)
2. In a solidary obli gati on (joint and several or juntas o
separadamente or in solidum), each of the debtors is liable b. Thus, if the obligation or judgment holding several
for the entire obligation, and each of the creditors is persons liable is silent as to the nature of extent of their
138 144
entitled to demand the whole obligation. Otherwise put, liability, such liability is consideredjoint.
.

each creditor may enforce the entire obligation, and each

139
debtor may be obliged to pay it in full. (Art. 1207) 2. Exception. There is a solidary liability only in any of the
following instances (Art. 1207):
Example: The obligation is solidary if A, B, and C say,
"We jointly and severally promise to pay P300 to X', a. When the obligation expressly so states,
in which case A (or B or C) can be made to pay the
entire P300. The obligation is also solidary if it says It is not required that the party use the precise word
"individunlly and jointly," 140 or "together or "solidary"; it is enough that the obligation state, for
separate{v,'.' 14 1 or if it says, "I promise to pay"142 example, that each of the debtors can be compelled
145
signed by two or more persons. to pay the entire debt.

B. JOINT OBLIGATION IS THE GENERAL RULE b. When the law requires solidarity,

I . General Rule. In case of concurrence of two or more Examples: Liability for quasi-delict (Art. 2194)
creditors or of two or more debtors in one and the same and liability arising from crime (Art. 1 10, RPC).
obligation, the presumption is that the obligation is joint so See also Arts. 927, 1824, 1 9 1 1 , 1915, 2157 of the
Civil Code.

c. When the nature of the obligation requires solidarity.

1 36 Solidbank Corp. v. Mindanao Ferroalloy Corp., G.R. No. 153535, July 28, 2005, citing PH
Credit Corporation v. CA, 421 Phil . 821, 832, November 22, 2001; Inciong, Jr. v. CA, 327 Phil. Example: Liability for torts or other wrongful acts
364, 373, June 26, 1996; Quiombing v. CA, 189 SCRA 325, 328, August 30, 1990; The Imperial
Insurance, Inc. v. David, 218 Phil. 298, 302, November 21, 1984. (e.g., abuse of rights, libel, infringment, etc.) is
"'Ouiombing v. CA, 189 SCRA 325, 328, August 30, 1990.
138 Inciong, Jr. v. CA. G.R. No. 96405, June 26, 1996.

139 Quiombing v. CA, 189 SCRA 325, 328, August 30, 1990.

'" Ronquillo v. CA, G.R. No. L-55138, September 28, 1984. 143 Inciong, Jr. v. CA, G.R. No. 96405, June 26, 1996.
"' "Juntos o separadamenre: Parot v. Gemora, 7 Phil. 94 (1906). 1 44Contreras v. Felix, 78 Phil. 570 (1947).
145 Juan Ysmael & Co., Inc. v. Salinas, 73 Phil. 601 (1942).

"' Paro\ v. Gemora, 7 Phil. 94 (1906).

56 57
 considered solidary,'46 because a "moral wrong 2. The indivisibility of performance does not prevent the
cannot be divided into parts. "147 Thus: corporal obligation from being considered joint.
directors and officers are solidarity liable with the
corporation for the te1mination of employees done a. The indivisibility of an obligation does not necessarily
8
with malice or bad faith. 14 give rise to solidarity. Nor does solidarity of itself
imply indivisibility. (Art. 1210)
C. EFFECTS OF JOINT OBLIGATION
b. The indivisible obligation is still presumed joint.
I. In a joint obligation, the debt/credit is legally divided into However, in such a case of joint indivisible obligation
as many shares as there e creditors or debtors, the credits
or debts being considered distinct from one another. (Art.
1 208) Thus, because tl)e shares are distinct from each other i. The right of the creditors may be prejudiced only
by their collective acts, (Art. 1209) and

a. A joint creditor cannot act in representation , of the ii. The debt can be enforced only by proceeding
others. Neither can a joint debtor be compelled to against ail the debtors. (Art. 1209)
answer for the liability of the others.149
(1) Since the prestation can only be performed by
b. The effect of a demand or interruption ofprescription all of the debtors, they must all be sued. If one
is limited only to the particular creditor or debtor who of the debtors cannot perform, the prestation
made or received the demand or intefl'\lption.1 50 becomes incapable of performance and is
converted to liability for damages. The
c. The extinguishment of the obligation of one of the debtors are liable only for their proportionate
debtors does not affect the shares of his co-debtors. shares in the damages.

d. The nullity or vices of obligation affecting one of the (2) If one of the debtors should be insolvent, the
debtors do not necessarily extend to the shares of his others shall not be liable for his share. (Art.
co-debtors. 1209)

e. The insolvency of one of the debtors does not increase (3 ) Example: If X, Y and Z are. liable to deliver a
the liability of his co-debtors. (see Art. 1 209) Toyota Altis to A, the obligation is indivisible
(X cannot just deliver a 1/3 Altis), and also
joint (X cannot be compelled to deliver the
"' Worcester v. Ocampo, 22 Phil. 42 (1912). Lafarge Cement v. Continental Cement entire Altis alone). A must sue X, Y, and. Z
Corporation, G.R. No. 155173, November 23, 2004, 443 SCRA 522. together. If Z cannot perform, the obligation is
"' IV Tolentino 222.
"' Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, G.R. No. 1 13907, 20 converted to liability for the value of the Altis,
April 2001, 357 SCRA 77, 93-94. which X, Y, and Z must all pay, but only pro
1" Sembrano v. City of Butuan, G.R. No. 1 63605, September 20, 2006.

1so Agoncillo v. Javier, 36 Phil. 424 (1916).

rata (113 of the value for each).

58 59
 because active solidarity is essentially a mutual
D. EFFECTS OF SOLIDARY OBLIGATION agency, which involves a relation of confidence.

I. Classification a s to S nbj ect. Solidarity may be classified b. Passive Solidarity, or solidarity in the debtors - each
as: of the debtors can be made to answer for the others,
with the resulting right to recover from the other co
a. Active Solidarity, or solidarity in the creditors - each debtors their respective shares; there is a mutual
creditor has the authority to claim and enforce the guaranty. 153
rights of all, with the resulting o.bligation of paying his
co-creditors their respective shares; there is mutual c. Mixed Solidarity, or solidarity in both the creditors and
representation or agency. 151 the debtors.

i. Each of the solidarity creditors may sue alone, and 2. Varied Solidarity. Solidarity may exist although the
payment to the suing creditor is sufficient to creditors and the debtors may not be bound in the same
discharge the el'.tire obligation.152 manner and by the same periods and conditions. (Art.
, .

1211)
ii. Each of the solidary creditors may do whatever
may be useful to the others, but not anything which Example: X , Y, and Z are solidarily liable t o J for
may be prejudicial to the latter. (Art. 1212) P30,000. X's liability matures in Year l, Y's in Year 2
and Z's in Year 3. Solidarity still exists in such a
(1) Thus, a solidary creditor may interrupt scenario. In Year 1, J may sue X or. Y or Z (because
prescription or make a demand (for the debtor they are solidarily liable), but only for Pl0,000 (the
to be in default and for interest to run), which portion which matures in Year I). In Year 2, J may
is beneficial to his co-creditors. sue X or Y or Z (because they are solidarily liable), but
only for P20,000 (the portion which matures by Year
(2) Note, however, that under Art. 1215, a solidary 2) .1 54
creditor may effect the novation,
compensation, confusion or remission of the 3. Extinguishment of the Obligation, In General
debt, which shall extinguish the obligation.
However, the creditor who extinguished the a. In general, payment of the debt to one of the solidary
obligation shall be liable to the others for the creditors, or made by one of the solidary debtors, is
share in the obligation corresponding to them. sufficient to extinguish the debt. (Arts. 1214, 1217)

111 .. A solidary creditor cannot assign his rights without 1. The paying debtor is generally entitled to
the consent of the others. (Art. 1213) This is reimbursement of t11e shares of his co-debtors.
(Art. 1 217)

151 Quiombing v. CA, 189 SCRA 325, 328, August 30, 1990. "' IV Tolentino 228.
152 Quiombing v. CA, 189 SCRA 325, 328, August 30, 1990. "' lnchausti & Co v. Yulo, 34 Phil. 978.
60 61

ii. The collecting creditor is generally responsible to
give to his co-creditors their corresponding shares.
(Art. 1215)
b. 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.
(Art. 1215)
i. With such extinguishment, the debtors are released
from their obligation to the creditors. However -
a. As among the creditors, the creditor who may
have extinguished or collected the debt shall be
liable to the others for their correspnding
share in the credit. (Art. 1215)
b. As among the debtors, the debtor who caused
the extinguishment of the obligation is entitled
to recover from his co-debtors their shares in
whatever he may have paid. or given up to
extinguish the obligation. (see Art. 1217)
Example: If X, Y and Z are solidarily liable to
N for P30,000, which debt is extinguished by
compensation with X's credit against N for the
same amount, then N is entitled to recover
P l 0,000 each from Y and Z as their share in
the obligation.
ii. In case the remission was made after the. debt had
already been totally paid, apply Art. 1219 (infra).
iii. Novation. - generally, a mere extension of time
for payment given to some of the solidary debtors
does not constitute a novation which will
62
extinguish the obligation or the solidarity of the
obligation.155
However, in case of suretyship (wherein the
surety is solidarily liable with the principal
debtor), an extension of time granted by the
.
creditor to the principal debtor (without
consent of surety) will extinguish the liability
of the surety.'56 (Art. 2079)
But mere . delay by the creditor in
collecting from the debtor is not an
extension which will discharge the
surety.157 (Art. 2079)
3. Payment to Solidary Creditors
a. If no demand has been made by the solidary creditors,
the debtor may pay any one of them (Art. 1214) -
such payment will be sufficient to extinguish the
obligation.158
b. If any demand, judicial or extrajudicial, has been made
by one of them, payment should be made to him. (Art.
1214)
4. Payment by Solidary Debtors
a. Payment made by one of the solidary debtors
extinguishes the obligation. (Art. 1217)
1'' lnchausti & Co v. Yulo,
34 Phil. 978.
"' El Banco Espanol Filipino v. Donaldson Sim & Co., 5 Phil. 418 (1905); Radio Corp. of the
Philippines v. Roa, G.R. No. 42829, September 30, 1935; Cochingyan v. R & B Surety and
Insurance Co., 151 SCRA339 (1987). See also Art. 2079. .
157 Palmares v. CA, G.R. No. 126490, March 31, 1998; Filipinas Textile Mills, Inc. v. CA, G.R.
No. 1 19800, November 12, 2003.
155 Quiombing v. CA, 189 SCRA 325, 328, August 30, 1990.
63
 If two or more solidary debtors offer to pay, the
creditor may choose which offer to accept. (Art.
1217)
b. Right ofDebtor-Payor to Reimbursement
i. 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. (Art. 1217)
(!) If the payment is made before the debt is due,
no interest for the intervening period may be
demanded. (Art. 1 2 17)
(2) When one of the solidary debtors 'cannot,
because of his insolvency, reimburse his share
to the debtor paying the obligation, such share
shall be borne by all his co-debtors, 111
proportion to the debt of each. (Art. 1217)
Example: X, Y and Z are solidarily liable to
pay P45,000. X pays the entire debt, which is
thus extinguished. X can then recover P15,000
from Y and P1 5,000 from Z as their respective
shares (1/3 each) in the debt. In case Z is
inso lven his share shall be borne by X and Y:
Y will therefore reimburse P7,500 (in addition
to his original share of Pl5,000), while the
other P7,500 will be a loss shouldered by X.
(3) Note that if the payor is merely a surety, he is
not principally liable for the debt. Thus, he
may generally recover from the principal
debtors the entire payment he has made. 159
1" See Inciong, Jr. v. CA, G.R. No. 96405, June 26, 1996.
64
ii. The debtor-payor is not entitled to reimbursement
from his co-debtors if his payment is made after.
the obligation has prescribed or become illegal.
(Art. 1218)
(1) The debtor-payor is also not entitled to
reimbursement if he pays a debt which had
already been extinguished (e.g., already paid or
remitted)
(2) In case of prescribed debt, the debtor-payor
cannot recover his payment from the creditor
under the rules on natural obligations. (Art.
1424) But in other cases where the obligation
to pay does not exist, the debtor-payer may
recover his payment from the creditor under
the rules on quasi-contracts. (Art. 2154)
c. Enforcement against Solidary Debtors. The creditor .
may proceed against any one of the solidary debtors or
some or all of them simultaneously. (Art. 1216)
i. The choice is left to the solidary creditor to
determine against whom he will enforce
collection:''
ii. The creditor may sue any of the solidary co
debtors; he need not implead all of them as they
are not indispensable parties.161
iii. The creditor may aiso choose to collect only part
of the debt from some of the solidary debtors, and
the remaining part from the other solidary debtors.
160
Inciong, Jr. v. CA, G.R. No. 96405, June 26, 1996.
161Quiombing v. CA, G.R. No. 93219, 30 August 1990, 189 SCRA 331; Amor de Castro v. CA,
G.R. No. 1 1 5838, July 18, 2002; Cerezo v. Tuazon, G.R. No. 141 538, March 23, 2004.
65
 Such course of action does not convert the solidary fault of the solidary debtors, the obligation shall be
obligation into a joint one.162 extinguished. (Art. 1221)

iii. The demand made against one of them shall not be b. With Fault or Delay - If there was fault on the part of
an obstacle to those which may suqsequently be any one of them, all shall be responsible to the creditor,
directed against the others, so long as the debt has for the price and the payment of damages and interest.
not been fully collected. (Art. 1 2 1 6) (Art. 1221)

6. Remission of Debt i. But the faultless debtors may recover against the
guilty or negligent debtor. (Art. 1221)
a. Remission of a. Share after Payment. The remission
made by the creditor of the share which affects one of ii. The same rule applies if the thing is lost or the
the solidary debtors does not release the latter from his performance has become impossible after one of
responsibility towards the co-debtors, in case the debt the solidary debtors has incurred in delay through
had been totally paid by anyone of them before the the judicial or extrajudicial demand upon him by
1
remission was effected. (Art. 1219) the creditor, even if the loss or impossibility was
due to fortuitous event. (Art. 1221)
1. . The debtor whose share was "remitted" must still
pay his share to reimburse the debtor-payor. 8. Defenses of Solidary Debtors

ii. Strictly speaking, there can be no "remission" of a a. As mentioned, the creditor may proceed against any
debt which had already been extinguished by one of the solidary debtors or some or all of them
payment simultaneously. (Art. 1216) The choice is left to the
solidary creditor to determine against whom he will
b. Remission of the Entire Debt. The remission of the enforce collection.163 He need not implead all of them
whole obligation, obtained by one of the solidary . ' 4
as they are not md'1spensable part1es. 1 6
debtors, does not entitle him to reimbursement from his
co-debtors. (Art. 1 220) b. A so!idary debtor may, in actions filed by the creditor,
avail himself of the following defenses1 65:
Because the debtor who obtained the remission did
not pay or lose anything. i. Defenses which are derivedfrom the nature of the
obligation - these are defenses which pertain to
7. Loss or Impossibility of Performance the validity or enforceability of the obligation.

a. Without Fault or Delay - If the thing has been lost or

if the prestation has become impossible without the '" Inciong, Jr. v. CA, G.R. No. 96405, June 26, 1996.
164 Quiombing v. CA, G.R. No. 93219, 30 August 1990, 189 SCRA 331; Amor de Castro v. CA,

G.R. No. 1 15838, July 18, 2002; Cerezo v. Tuazon, G.R. No. 141538, March 23, 2004.
'" Lafarge Cement v. Continental Cement Corporation, G.R. No. 1 55173, November 23; 2004,
'" Republic Glass Corp, v. Qua, G.R. No. 144413, July 30, 2004. 443 SCRA 522.
66 67
 They are total defenses (the debtor cannot be held
liable at all).
ii. Defenses which are personal to him or pertain to
his own share;
(1) Defenses which are personal to the defendant
debtor. (such as minority, insanity or vitiated
consent) are total defenses.
(2) Defenses which pertain to the share of the
defendant-debtor (e.g., that his share is not yet
due or has. already been extinguished) are
. partial defenses, i.e., the defendant cannot be
held liable for the portion correspondipg to
him, but he can still be held liable for the
shares of his co-debtors.166 .
iii. Defenses which personally belong to the other
debtors (or pertain to their shares) - these are
partial defenses, i.e., the defendant-debtor cannot
be held liable for the portions corresponding to the
debtor with the defense.167 (Art. 1 222)
Example: X, Y, and Z are solidarily liable to J
for P30,000. X's liability matures in Year l , '
Y ' s in Year 2 and Z's in Year 3. Y was insane
at the time the obligation was contracted.
(a) If Y is sued, he can invoke his insanity and
be excused altogether (a defense personal to
him, and a total defense).
(b) If X is sued in Year 2, he can only be held
liable for P l0,000. As to the share ofY, X can
invoke Y's insanity (a defense personal to Y,
"' lnchausti & Co v. Yulo, 34 Phil. 978.
"' lnchausti & Co v. Yulo, 34 Phil. 978.
68
and a partial defense). As to the share of Z, X
can raise the derense that it has not yet become
due (a defense pertaining to Z's share, and a
partial defense).
(c) lfZ is sued in Year 2, he can be held liable
for P l 0,000 corresponding to X, which had
already. become due. As to the share of Y, Z
can invoke Y's insanity (a defense personal to
Y, and a partial defense). As to . his own share,
Z can rais"e the defense that it has not yet
become due (a .defense pertaining to his own
share, and a partial defense).
V. DIVISIBLE AND INDIVISIBLE OBLIGATIONS
A. IN GENERAL
1. Indivisible Obligation. An obligation is indivisible when
it cannot be validly performed in parts, whatever may be
the nature of the thing which is the object thereof. 168
2. Divisible Obligation. An obligation is divisble when it can
be validly performed in parts.
B. DISTINGUISHED FROM DIVISIBILITY OF THING
I. The divisibility of the obligation refers to the prestation,
and not to the object thereof.169 Divisibility of obligation
refers to its susceptibility of partial performance.
Divisibility of the object refers to its capacity to be
divided into .parts without diminishing its value
disproportionately.
16'
Nazarenov. CA, G.R. No. 138842; October 18, 2000.
169
Nazareno v. CA, G.R. No. 138842, October 18, 2000.
69
 An obi igation may be considered indivisible even
when its object is divisible. For example, the
obligation to pay insurance premium is generally
considered indivisible/70 even if the sum of money to
be paid is divisible.
2. The divisibility or indivisibility of the things that are the
object of obligations in which there is only one debtor and
only one creditor does not alter or modify the nature or
effects of the obligation. (Art. 1223)
c. JOINT INDIVISIBLE OBLIGATION: A joint indivisible
obligation is an obligation of several debtors where each debtor
is liable only for his part (joint) but the obligation cannot be
validly performed in part .(indivisible). Thus, it must be
performed by all of the debtors, and it can be enforced nly by
proceeding against all of them. (Art. 1209)
If any of the debtors does not comply with his undertaking, the
joint indivisible obligation gives rise to indemnity for damager..
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. (Art. 1 224)
Example: A, B, and C are jointly liable to deliver a laptop
computer valued at P30,000 to X. The delivery can only be
done by all of the debtors. If C cannot deJiver, the obligation to
deliver the laptop gives rise to an obligation to indemnify X for
P30,000. A and B, who were ready to perform, can only be
held liable for P l 0,000 each.
"'.Makati Tuscany Condominium Corp. v. Court of Appeals, G.R. No. 95546, 6 November 1992,
215 SCRA 462, 466.
70
D. DETERMINING DIVISIBILITY
1 . Indivisible. (a) Obligations to give definite things and (b)
those which are not susceptible of partial performance
shall be deemed to be indivisible (see Art. 1233)
2. Divisible. 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. (Art. 1225)
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. (Art. 1 225)
3. in obligations not to do, divisibility or indivisibility shall
be determined by the character of the prestation in each
particular case. (Art. 1225)
VI. OBLIGATIONS WITH A PENAL CLAUSE
A. IN GENERAL
1 . Definition. A penal clause is an accessory obligation
which the parties attach to a principal obligation for the
purpose of insuring the performance thereof by imposing
on the debtor a special prestation (generally consisting in
the payment of a sum of mony) in case the obligation is
not fulfilled or is irregularly or inadequately fulfilled.171
Example: A lease contract may provide that in case of
breach, the lessee would forfeit his rental deposit,1 72 or
171
Pryce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005.
172Country Bankers Insurance Corp. v. Court of Appeals, G.R. No. 85161, 9 September 1991,
201 SCRA 458, 464-465; Fort Bonifacio Development Corp. v. Yllas Lending Corp., G.R. No.
158997, October 6, 2008.
71
 should pay the rentals corresponding to the rema1rung
period of the lease.173 A stipulation for attorney's fees is
also considered a penal clause.114
2. Functions. A penal clause serves (a) to strengthen the
coercive force of the obligation; (b) to provide for
liquidated damages resulting from a breach of
obligation;175 and (c) to punish the obligor.176
3. Effect of Nullity. The nullity of the.penal clause does not
carry with it that of the principal obligation. (Art. 1 230)
a. But the nullity of the principal obligation carries with it
that of the penal clause. (Art. 1230)
b. This is because the penal clause is just an accessory .
obligation.
B. EFFECT
1 . General Rule: Penalty as Alternative. In obligations with
a penal clause, the penalty shall substitute the indemnity
for damages and the pa0nent of interests in case of
noncompliance. (Art. 1 226)
a. Proof of actual damages suffered by the creditor is not
necessary in order that the penalty may be demanded.
(Art. 1228)
Thus, there is no difference between penalty and
liquidated damages in terms of their legal
results.177
"' Piyce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005.
m Yap Tico & Co. v. Alejano, 53 Phil. 986 (1929).
m Llgutan v. CA, G.R. No. 138671, Februaiy 12, 2002.
1 76 Pamintuan v. CA, G.R. No. L26339, December 14, 1979.
m Lambert vs. Fox, 26 Phil. 588 (1914); Yap Tico & Co. v. Alejano, 53 Phil. 986 (1929);
Pamintuan v. CA, G.R. No. L-26339, December 14, 1979.
i2
b. The penalty may be enforced only when it is
demandable in accordance with the provisions of the
Civil Code. (Art. 1226)
2. Exceptions: Penalty as Cumulative Remedy. Damages
may still be demanded. (in addition to the penalty178) in the
following exceptional cases;
a. If there is stipulation for this;
b. If the obligor refuses to pay the penalty; or
c. If the obligor is guilty of fraud in the fulfillment of the
obligation. (Art. 1226)
In the foregoing cases, the purpose of the penlty is to
punish the obligor for the breach. rn
3. Limitations.
a. The debtor cannot exempt himself from the
performance of the obligation by paying the penalty.
(Art. 1 227)
Except in case where this right has been expressly
reserved for the debtor. (Art. 1227)
b. The creditor cannot demand the . fulfillment of the
obligatio.n and the satisfaction of the penalty at the
same time. (Art. 1227)
a. Except in case this right has been clearly granted to
the creditor. (Art. 1 227)
b. However, if after the creditor has decided to
require the fulfillment of the obligation, the
performance thereof should become impossible
m Piyce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005, citing Ligutan v. CA, G.R. No.
138671, Februaiy 12, 2002.
17' Piyce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005.
73
 without his fault, the penalty may be enforced.
(Art. 1227)
Chapter 5

C. REDUCTION OF PENALTY Extinguishment of

,
1 . Partial or Irregular Compliance. The judge shall Obligations
equitably reduce the penalty when the principal obligation
has been partly or irregularly complied with by the debtor.
(Art. 1228) 1. IN GENERAL

2. Iniquitous or Unconscionable Penalty. Even if there has A. Art. 123 1 enumerates the following causes of extinguishment
been no performance, the penalty may also be reduced by of obligations which are governed by Chapter 4, Title V of
the courts if it is iniquitous or unconscionable. (Art. 1 228) Book IV of the Civil Code:

The question of whether a penalty is reasona)lle or 1. Payment or performance;

iniquitous is addressed to the sound discretion ' of the 2. Loss of the thing due;
courts. To be considered in fixing the amount of 3. Condonation or remission of the debt;
penalty are factors such as: 4. Confusion o r merger of the rights o f creditor and debtor;
5. Compensation; and
1. The type, extent and purpose of the penalty; 6. Novation.
ii. The nature of the obligation;
iii. The mode of the breach and its consequences; B. Other causes of extinguishment of obligations which are
iv. The supervening realities; and governed elsewhere in the Civil Code: (Art. 1231)
v. The standing and relationship of the parties.1 80
I. Annulment;
2. Rescission;
3 . Fulfillment of a resolutory condition; and
4. Prescription.

C. Other causes of extinguishment not mentioned by Art. 1 23 1 :

1. Death - it extinguishes obligations which are purely

1

personal 1 8 (e.g., support; criminal liability and the civil

. 1 82
obl'1gatton ar1s1ng
' . ftom cnme.
' );

181 Lapuz Sy v. Eufemlo, 43 SCRA 177, January 31, 1972; Javier Security Special Watchman
1aoPryce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005, citing Ligutan v. CA, G.R. No. Agency v. Shell.Craft & Button Corp., 1 1 7 Phil. 218, January 31, 1963.
138677, February 12, 2002. "' Republic v. Cojuangco, Jr., G.R. No. 139930, April 17, 2006.
74 75

2. Arrival of resolutory period;
B. PAYMENT BY THE PROPER PERSON
3. Mutual desistance - since mutual agreement can create a
contract, mutual desistance by the parties can cause its I . In General. The obligation must be paid by the debtor, and
extinguishment1 83; the creditor is entitled to demand payment by the debtor.
(see Art. 1236)
4. Unilateral desistance - some contracts, such as agency and
partnership, may be terminated by the will of one of the Moreover, in obligations to give, the payment must be
parties. made by one who has: (a) the free disposal of the thing
due; and (b) capacity to alienate. (A1t. 1239)

II. PAYMENT OR PERFORMANCE Without these two requisites, the payment shall not
be valid. (Art. 1 239185)
A. IN GENERAL
2. Third Party Payor. The creditor is not bound to accept
I . Definition. Payment means not only the delivery of payment or performance by a third person who has no
money but also the performance, in any other manner, of interest in the fulfillment of the obligation. (Art. 1236)
.
an obligation. (Art. 1232)
a. Exception: If there is a stipulation to the contrary.
2. Requisites. A debt shall not be understood to have been (Art. 1236)
paid unless the thing or service in which the obligation
consists has been completely delivered or rendered, as the b. A partial payment made by a stranger to the obligation
case may be. (Art. 1233) without the authorization of the debtor will not stay the
running of the period of prescription with respect to the
Requisites for the payment to extinguish the obligation (see . remainder of the debt. 186
discussion below):184

3. Rights of the Third Party"Payor.

a. Identity of the prestation - the very thing due must be
delivered or released. (See Art. 1244; infra) a. If the payment was with the knowledge and consent of
the debtor -
b. Integrity of the prestation - the prestation must be
fulfilled completely. (see Art. 1248; infra) i: The payor can demand from the debtor what he has
paid (full reimbursement). (Art. 1236)
c. Payor - payment must be made by theproper person.

d. Payee payment must be made to the proper person. '" Art. 1239 provides that the rule is without prejudice to Art. 1427, which provides for payments
-

made by a "minor between 18 and 21 years of age." Since the age of minority is now 18 years,
1" Saura Import & Export Co., Inc. v. DBP, G.R. No. L-24968 April 27, 1972.
. Art. 1427 may be considered inoperative.
"' See Alonzo v. Sps. San Juan, G.R. No. 137549, February 1 1 , 2005. 186 Agoncillo v. Javier, 38 Phil. 424 (1918).

76 77
 If the payor does not intend to be reimbursed
by the debtor, the payment 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. (Art. 1238)
The intent not to be reimbursed must be
proven; it is not presumed.1 87
ii. The payor is legally subrogated to the rights of the
creditor, such as those arising from a mortgage,
guaranty, or penalty. (Art. 1237; see also Art.
1302[1])
b. If the payment was without the knowledge or qgainst
'
the will of the debtor -
i. The payor can demand from the debtor what he has
paid, but only insofar as the payment has been
beneficial to the debtor. (Art. 1236)
(1) Thus, the payor cannot recover overpayment,
or payment of a debt that had already been
prescribed, remitted, compensated, paid or
otherwise extinguished.1 88
The payor may, in proper cases, recover
from the recipient of the payment which is
1 void even when the debtor acted in utmost good faith, or by
not due. 89
(2) An insurance agent who pays the claim of the
insured out of his personal money may be
barred from obtaining reimbursement under his
contract of agency with the insurer (if he
"' Carandang v. Heirs ofDe Guzman. G.R. No. 160347, November 29, 2006.
"' PCIB v. CA, G.R. No. 121989, January 31, 2006; Phil. Export and Foreign Loan Guarantee
Corp.v. V. P. Eusebio Construction, Inc.. G.R. No. 140047, July 13, 2004.
'" PCIB v. CA, G.R. No. 121989, January 31, 2006.
78
disobeyed the latter's instruction or exceeded
his authority), but such agent may get
reimbursement from the insurer insofar as the
latter was benefited by the payment (under Art.
1236, 2nd par.).190
ii. The payor cannot compel the creditor to subrogate
him in his rights, such as those arising from a
mortgage, guaranty, or penalty. (Art. 1237)
Actually, even if the creditor is willing to
subrogate the payor, this cannot be done
without the debtor's consent.191
C, PAYMENT TO THE PROPER PERSON
1 . In General. Payment shall be made to any of the
following:
a. The person in whose favor the obligation has been
constituted, or his successor in interest; (Art. 1240)
b. . Any person authorized to receive the payment. (Art.
1 240)
2. Payment to Wrong Party. Payment made to a wrong
party does not extinguish_ the obligation, if there is no fault
or negligence on the part of the creditor. Such payment is
mistake, or through error induced by the fraud of a third
person. Such payment does not prejudice the creditor, and
accrual of interest is not suspended by it.192
3. Capacity. Payment to a person who is incapacitated to
administer his property shall be valid if he has kept the
190 Dominion Insurance Corp. v. CA, G.R. No. 129919, February 6, 2002.
191 IV TolentirlJl 283.
192
Allied Banking Corp. v. Lim Sia Wan, G.R. No. 133179, March 27, 2008.
79
 thing delivered, or insofar as the payment has been (2) Other examples 194 : (a) heir who collects the
beneficial to him. (Art. 1241) credits of the estate but is later found to be
incapacitated to succeed; (b) assignee of a
3. Payment to a Third Pa!ty. In general, payment to a third credit who collects it, but the assignment is
party is void and will not extinguish the obligation. later rescinded or annulled; and (c) holder of
However - an instrument payable to bearer, who merely
found it.
a. Payment made to a third person shall be valid insofar
as it has redounded to the benefit of the creditor. (Art. ii. Possession of the credit is not the same as
1241) possession of the document evidencing the credit.
Thus, the physical holder of a promissory note is
Such benefit to the creditor need not be proved in the not necessarily in possession of the credit, if such
following cases: holder is not the creditor named in the note.

i. f after the payment, the third person acquirs the 4. Judicial Order to Retain the Debt. Payment made to the
'
creditor's rights; creditor by the debtor after the latter has been judicially
ordered to retain the debt shll not be valid. (Art. 1243)
ii. If the creditor ratifies the payment to the third
person; This refers to a situation where the credit has been
garnished by a court (by virtue of a writ of execution or
iii. If by the creditor's conduct, the debtor has been led preliminary attachment) to answer for the creditor's
to believe that the third person had authority to liability in a case or litigation.
receiv the payment. (Art. 1241)
Example: J has a credit of P l ,000 against K. J is
b. Payment made in good faith to any person in then sued by X, who obtained a writ of preliminary
possession of the credit shall release the debtor. (Art. attachment on J's properties. Thus, the sheriff
1242) garnished J's credit by notifying K. K should
refrain from paying the P l ,000. IfK pays J despite
1. The "person in possession of the credit" refers to the garnishment, such payment would not be valid
the person who, under the circumstances, appears as far as X is concerned, and X may hold K liable
to be entitled to the payment. (assuming X eventually obtains a judgment against
J) 195
.
(1) Example: The lessee may pay rentals to the
registered owner of the leased premises.193 D. IDENTITY OF PRESTATION

1" IV Tolentino 289.

'" See National Bank v. Olatunga Lumber Co., 54 Phil .. 346 (1930);Tec Bi & Co. v. Chartered
"' Orala v. IAC, G.R. No. 73471, May 8, 1 990. Bank of India, 41 Phil. 819(1917).
80 81
 1 . In General. For payment to be valid, the very thing due
must be delivered or released.196 (Art. 1233)
a. In obligations to give a determinate thing- the debtor
of a . thing cannot compel the creditor to receive a
different one, althcugh the latter may be of the same
value as, or more valuable than that which is due. (Art.
. 1244)
Example: If X is obligated to deliver his Toyota Altis
(Plate Number JCP 888) to Y, X cannot compel Y to
accept another Toyota Altis, or even a Mercedes Benz.
b. In obligations to give an indeterminate or generic
thing-
I. The debtor must deliver must deliver a thing
which meets the quality and circumstances
stipulated. (Art. 1246)
ii. If the quality and circumstances have not been
stated, the creditor cannot demand a thing of
superior quality. Neither can the debtor deliver a .
thing of inferior quality. (Art. 1246)
The purpose of the obligation and other
circumstances shall be taken into
consideration. (Art. 1246)
b. In obligations to do or not to do - an act or
forbearance cannot be substituted by another act or
forbearance against the obligee's will. (Art. 1244)
2. Dation in Payment. While the debtor is required to
deliver or perform the very thing due, the debtor and
creditor may of course agree otherwise. For instance, they
196 A!onzo v. Sps. San Juan, G.R. No. 137549, February 11, 2005.
82
may agree to a dation in payment or dacion en pago,
whereby property is alienated to the creditor in satisfaction
of a debt in money. (Art. 1245). Dati6n in payment
requires delivery and transmission of ownership of a thing
owned by the debtor to. the creditor as an accepted
equivalent of the performance of the obligation.197
a. Dation in payment is governed by the law on sales.
(Art. 1245) The creditor is deemed to be buying the
thing or property of the debtor, the payment for which
is to be charged against the debtor's debt.198
i. In its modern concept, what actually takes place in
dacion en pago is an objective novation of the
obligation where the thing accepted as an
equivalent of the performance of an obligation is
considered as the object of the contract of sale,
while the debt is considered as the purchase
price.199
ii. In any case, common consent is an essential
prerequisite, be it sale or novation, to have the
effect of totally extinguishing the debt or
obligation.'00
b. There is no dation in payment when there is no
transfer of ownership in the creditor's favor, as when
the possession of the thing is merely given to the
creditor by way of security21 (e.g., as pledge,
mortgage,202 or under trust receipts arrangement203).
197 Fort Bonifacio Development Corp. v. Yllas Lending Corp., G.R. No. 158997, October 6, 2008,
citin!lfhilippine National Bank v. Pineda, G.R. No. 46656, 13 May 1991, 197 SCRA 1 .
196 Filinvest Credit Association v. Philippine Acetylene Co., G.R. No. L-50449, January 30, 1 982.
'" Filinvest Credit Association v. Philippine Acetylene Co., G.R. No. L-50449, January 30, 1982.
200
Filinvest Credit Association v. Philippine Acetylene Go., G.R. No. L-50449, January 30, 1982.
201 Philippine National Bank v. Pineda, G.R. No. 46658, 13 May 1991, 197 SCRA 1 .
202
DBP v. CA, G.R. No. 1 1 8342, January 5, 1998.
203 See also Vintola v. Insular Bank of Asia and America, G.R. No. L-73271 , 29 May 1987, 150
SCRA 578; Landi & Co. (Phil.) Inc. v. CA, G.R. No. 159622. July 30, 2004.
83
 2. Exceptions/Qualifications.
c. Requisites for dation in payment:204
a. When there is a stipulation to the contrary. (Art. 1248)
1. There must be a perfonnance of the prestation in
lieu of payment (animo solvendz) which may b. When the debt is in part liquidated and in part
consist in the delivery of a corporeal thing or a real unliquidated, the creditor may demand and the debtor
right or a credit against the third person; may effect the payment of the fonner without waiting
for the liquidation of the latter. (Art. 1 248)
ii. There must be some difference between the
prestation due and that which is given in c. Substantial Performance. When the obligation has
substitution (aliudpro alio); and been substantially performed in good faith, the obligor
may recover as though there had been a strict and
iii. There must be an agreement between the creditor complete fulfillment, Ii:ss damages suffered by the
and debtor that the obligation is immediately obligee. (Art. 1234)
extinguished by reason of the perfonnanc,e of a
'
prestation different from that due. i. Example: A construction which is 97 ,5%
complete.207
E. lNTEGRITY OF THE PRESTATION
ii. There must be an attempt in good faith to perform
I. In General. The prestation must be fulfilled completely.205 the obligation, without any willful or intentional
8
A person entering into a contract has a right to insist on its departure therefrom. 20
perfonnance in all particulars.206
iii. Where there has been substantial perfonnance,
a. Partial perfonnance is generally not allowed. The rescission under Art, 1 1 9 1 is not proper.209
creditor cannot be compelled partially to receive the
prestations in which the obligation consists. Neither d. Acceptance Without Protest. When the obligee accepts
may the debtor be required to make partial payments. the perfonnance, . knowing its incompleteness or
(Art. 1248) irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied
b. Examples: In an obligation to pay certain amount of with. (Art. 1235)
money, the full amount must be paid; in aiJ. obligation
to construct a house, the construction must be i. This is based on the principles of waiver and
completed. estoppel.

20
Aquintey v. Sps, Tibong, G.R. No. 1 66704, December 20, 2006.
20sAlonzo v. Sps. San Juan, G.R. No. 137549, February 1 1 , 2005,
200 Palmares v. CA, G.R. No. 126490, March 31, 1998. Empire East Land Holdings, Inc. v.
..
207 Diesel Conslruclion Co., Inc. v. UPSI Property Holdings, Inc. G.R. No. 1 54885, March 24,
2008.
we See Sps, Buenaflorv. CA, G.R. No. 142021, November29, 2000.

209 Angeles v. Calasanz, G.R. No. L42283, March 18, 1985.

Capitol Industrial Construction Groups, Inc,, G.R. No. 168074, September 26, 2008,

84 85
 ii. The law does not require the protest or objection of contractor, and hired another contractor - the
the creditor to be made in a particular manner or at obligee may no longer recover from the previous
a particular time. So long as the acts of the contractor the cost to finish the construction.213
creditor, at the time of the incomplete or irregular
. payment or within a reasonable time thereafter, (c) The obligee, knowing that the construction is
evince that the creditor is not satisfied with said unfinished, barred the contractor's workers and
payment or performance, the obligation shall not stopped payment of the progress billings but did
be deemed fully extinguished.210 not demand completion of the work - the obligee
cannot demand the cost of the completion works.2.14
iii. An obligee is deemed to have waived strict
compliance when the following elements are F. 0THER PROVISIONS
present:
I. Expenses. Unless it is otherwise stipulated, the
(I) An intentional acceptance of the defective or extrajudicial expenses required by the payment shall be for
incomplete performance; the account of the debtor. With regard to judicial costs, the
Rules of Court shall govern. (Art. 1247)
(2) With actual knowledge of the incompleteness
or defect; and 2. Currency. The payment of debts in money shall be made
in the currency stipulated, and if it is not possible to deliver
(3) Under circumstances that would indicate an . such currency, then in the currency which is legal tender in
intention to consider the performance as the Philippines. (Art. 1249)
complete and renounce any claim arising from
the defect a. R.A. 529 prohibited the stipulation of a currency other
than Philippine currency, but R.A. 8 i 83 removed this
Mere receipt of partial payment is not per prohibition. Thus, obligations or transactions may now
se equivalent to a waiver of the balance or g
be paid in the currency a reed upon by the parties.215
acceptance of incomplete performance.211 '
b. Obligations in foreign currency may be discharged in
iv. Examples: (a) the bank accepted delayed payments Philippine currency based on the prevailing rate at the
6
of a loan on several occasions without objection.212 time ofpayment. 21

(b) The obligee, without protest, took over an "' Empire East Land Holdings, Inc. v. Capitol Industrial Construction Groups, Inc., G.R. No.
168074, September 26, 2008.
unfinished construction, deducted the value of the
'" Hanjin Heavy Industries & Construction Co., Ltd. v. Dynamic Planners & Construction Corp.,
unfinished work from the payment to the G.R. Nos. 169408 & 170144, April 30, 2008
215 C.F. Sharp & Co. v. Northwest Airlines, Inc., G.R. No. 133498, 18 April 2002, 381 SCRA 314;

BPI v. Leobrera, G.R. No. 137147, November 18, 2003.

21 6
'" sguerra v. Villanueva, G.R. No. L-23191, December 19, 1967. C.F. Sharp & Co. v. Northwest Airlines, Inc., G.R. No. 133498, 1 8 April 2002, 381 SCRA 314;
'" Amor de Castro v. CA, G.R. No. 1 1 5838, July 18, 2002. Esguerra v. Vnlanueva, G.R. No. L- BPI v. Leobrera, G.R. No. 137147, November 18, 2003. Note that this is the same rule even
23191, December 19, 1967. when R.A. 529 was in effect. Kalalo v. Cruz, 34 SCRA 337 11970]; Ponce v. Court of Appeals, et
. al., 90 SCRA 53311979]; General Insurance & Surety Corporation v. Union Insurance Society of
'" See Pagsibigan v. CA, G.R. No. 90169, April 7, 1993.
86 87

3. Payment in Legal Tender. The delivery of promissory
notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment
only (a) when they have been cashed, or (b) when through
the fault of the creditor they have been impaired. (Art.
1249)
a. In the meantime, the action derived from the original
obligation shall be held in the abeyance. (Art. 1249)
b. The delivery of a negotiable instrument does not, by
itself, operate as payment. The obligation is not
extinguished and remains suspended until the payment
by commercial document is actually realized.2 17
,
c. A check, whether a manager's check or ordinary check,
is not legal tender, and an offer of a check in payment
of a debt is not a valid tender of payment and may be
refused receipt by the obligee or creditor.'"
The creditor's acceptance of the check, however,
implies an undertaking of due diligence in
presenting it for payment. If such diligence is
wanting, and debtor sustains loss as a resul it will
be held to operate as actual payment of the debt or
obligation for which it was given.219
d. The clause of Article 1249 relative to the impairment
of commercial paper by the fault of the creditor, is
generally applicable only to instruments executed by
canton, Ltd., 179 SCRA 530 11989]; Republic Resources and Development Corporation v. CA,
203 SCRA 164 [1991]; San Buenaventura v. CA, 181 SCRA 197 11990]; Philippine Manpower
Services, inc. v. NLRC, 224 SCRA 691 [1993].
211 Philippine Airlines, Inc. v. Court of Appeals, .G.R. No. 49188, 30 January 1990, 181 SCRA
557, 568; Citibank, N.A. v. Sabeniano, G.R. No. 156132, October 16, 2006.
'" Philippine Airlines, Inc. v. Court of Appeals, G.R. No. 49188, 30 January 1990, 181 SCRA
557, 568; Citibank, N.A. v. Sabeniano, G.R. No. 156132, October 16, 2006.
'" Papa v. A. U. Vancla & Co., G.R. No. 105188, January 23, 1998.
88
third persons and delivered by the debtor to the
creditor, and does not apply to instruments executed by
the debtor himself and delivered to the creditor.220
Impairment may happen if a bill of exchange
(issued by third party) is dishonored and is not
protested on time, resulting in the loss of right of
recourse.221 .
e. A check may be used for the exercise of the right of
redemption, the same being a right and not an
obligation. The. tender of a check is sufficient to
compel redemption (but is not in itself a payment that
relieves the redemptioner from his liability to pay the
redemption price).222
3. Extraordinary Inflation or Deflation. 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. (Art. 1250)
a. Extraordinary inflation exists when there is a decrease
or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common
fluctuation in the value of said currency, and such
increase or decrease could not have been reasonably
foreseen or was manifestly beyond the contemplation
of the parties at the time of the establishment of the
210 National Marketing Corp. v. Federation of United NAMARCO Distributors, Inc., G.R. No. L-
22578. January 31, 1973, citing Compania General de Tabacos v. Molina, 5 Phil. 142.
'" Quiros v. Tan-Guinlay, 5 Phil. 675 (1906). See, however, Papa v. A. U. Valencia & Co., G.R.
No. 105188, January 23, 1998, involving checks drawn by the debtor himself.
221 Siana v. Gimenez, G.R. No, 132768, September 9, 2005; Fortunado vs. CA, 196 SCRA 269,
279 (1991).
89
 obligation.223 It does not include a normal "erosion" in i. . If the undertaking is to deliver a determinate thing,
the value of the currency which is a universal trend.224 the payment shall be made wherever the thing
might be at the moment the obligation was
b. For Art. 1250 to apply, the inflation (or deflation) must constituted. (Art. 1251)
be extraordinary, such as in Germany where the
deutschemark went from 4.2 to the U.S. dollar in 1921 , ii. In any other case, the place of payment shall be the
to 4.2 trillion to the U.S. dollar in 1923.
225 domicile of the debtor. (Art. 1251)

c. The economic crisis in the 1980's (50.34% inflation If the debtor changes his domicile in bad faith
rate in 1984), or in 1997 (the Asian financial crisis, or after he has incurred in delay, the additional
where there was a drop in the dollar-peso exchange expenses shall be borne by him. (Art. 1251)
rate by l 7 points), does not constitute extraordinary
inflation.'26 G. APPLICATION OF PAYMENTS

d. The existence of extraordinary inflation m,ust be 1 . In General. The rules on application of payments apply to
officially proclaimed by competent authorities, i.e., the a person owing several debts of the same kind of a single
Bangko Sentral.227 creditor. (Art. 1252)

4. Place of Payment. They are not applicable to a person whose obligation as

a mere surety is both contingent and singular; his
a. Payment shall be made in the place designated in the liability is confined to such obligation, and he is
obligation. (Art. 1251) entitled to have all payments made applied exclusively
to said obligation and to no other.228
b. If there is no express stipulation on the place, the
following rules apply - 2. General Rule - Debtor's Right. The debtor who has
various debts of the same kind in favor of one and the same
creditor may declare at the time of making the payment, to
which of them the payment must be applied. (Art. 1252) In
other words, the right to specify which among his various
223 Singson v. Caltex, G.R. No. 137798, October 4, 2000; Huibonhua vs. Court of Appeals, G.R. obligations to the same creditor is to be satisfied first rests
Nos. 95897 and 102604, December 14, 1999; Sierra vs. Court of Appeals, 229 SCRA 60; Hahn '29
with the debtor.

vs. Court of Appeals, 173 SCRA 675; Filipino Pipe and Foundry Corporation vs. NAWASA, 161
SCRA32.
,,. Fiiipino Pipe and Foundry Corporation vs. NAWASA, 161 SCRA 32; Singson v. Caltex, G.R. Exceptions/Limitations:
No. 137798, October 4, 2000; Citibank, N.A. v. Sabeniano, G.R. No. 156132, February 6, 2007.
220 Filipino Pipe and Foundry Corporation vs. NAWASA, 161 SCRA 32.
a. If the parties stipulate otherwise. (Art.
.

"' Singson v. Caltex, G.R. No. 137798, October 4, 2000; Citibank, N.A. v. Sabenlano, G.R. No. 1252)
156132, February 6, 2007.
221 Citibank, N.A. v. Sabeniano, G.R. No. 156132, February 6, 2007; Telengtan Bros. & Sons v.

U.S. Lines, Inc., G.R. No. 132284, February 28, 2006; Ramos v. Court of Appeals, G.R. No.
1 1 9872, 7 July 1997, 275 SCRA 167, 175; Mobil Oil Philippines, Inc. v. Court of Appeals, 180 2" Magdalena Estates, Inc. v. Rodriguez, G.R. No. L-1841 1 , December 17, 1966.
SCRA 651 (1989). 229 Paculdo v. CA, G.R. No. 123855, November 20, 2000.

90 91
 b. Application shall not be made as to debts which are not
yet due. (Art. 1252) ii. An interest-bearing debt is more onerous than one
without interest.231

Unless the application is made by the party for

whose benefit the term has been constituted (Art. iii. The older debt is more onerous than a more recent

1252) one232 (unless the more recent debt bears interest,

while the older one does not233).
c. If the debtor accepts from the creditor a receipt in
which an application of the payment is made, the iv. A secured debt is more onerous than an unsecured

former cannot complain of the same, unless there is a debt.234

cause for invalidating the contract. (Art. 1252)

b. If the debts due are of the same nature and burden, the

The debtor is deemed to have waived his right to payment shall be applied to all of them proportionately.
apply payments and acquiesced to the creditor's (Art. 1253)
application.
H. PAYMENT BY CESSION

d. If the debt produces interest, payment of the principal

shall not be deemed to have been made until the I. In General. The debtor may cede or assign his property to
interests have beeu covere.d. (Art. 1253) his creditors in payment of his debts.
(Art. 1255)

Thus, if the creditor agrees to apply a payment to a. This cession is voluntary on the part of the debtor. It is

the principal, it may be assumed that the interest also subject to the acceptance by the creditors.

had already been paid or wai:ved.230

b. The creditors do not become owners of the property

3. In Default of the Foregoing Rules. When the payment assigned (unlike in dation in payment). The creditors

carmot be applied in accordance with the preceding roles, merely become authorized to convert the property into

or if application can not be inferred from other cash, which will be used to pay their credits.

circumstances (e.g., if neither the debtor nor the creditor

makes the application), apply the following roles: c. Payment by cession contemplates the existence of two
or more creditors, and involves the assignment of all

a. The debt which is most onerous to the debtor, among the debtor's property.235

those due, shall be deemed to have been satisfied. (Art.

1253) In general -

i. A debt incurred as a principal is more onerous than

'" Menzl & Co. v. Quing Chuan, 69 Phil, 46 (1939).
a debt as a mere surety or guarantor. '" Phil. National Bank v. Veraguth, 50 Phil. 253 (1927).
"' Menzi & Co. v. Quing Chuan, 69 Phil. 46 (1939).
'" Swagman Hctels and Travel In v. CA, G.R. No. 161 135, April 6, 2005; Al)ama v. CA, G.R. '"Traders Insurance & Surety v. Dy Eng Giok, 104 Phil. 606 (1956j.
No. 126609; January 29, 2004. '" DBP v. CA, G.R. No. 1 18342, January 5, 1998.

93
 2. Effect. This cession, unless there is stipulation to the creditor cannot accept or refuses to accept payment.140
contrary, shall only release the debtor from responsibility (Art. 1258)
for the net proceeds of the thing assigned. (Art. 1255)
i. If the tender of payment (which has been refused)
'
The agreements which, on the effect of the cession, are is not followed by consignation, the debtor is not
made between the debtor and his creditors shall be discharged from the obligation.241
governed by special laws. (Art. 1255)
ii. Tender of payment must be distinguished from
I. TENDER OF PAYMENT AND CONSJGNATION consignation. Tender is the antecedent of
consignation, that is, an act preparatory to the
I . In General. consignation, which is the principal act with results
in the discharge of the obligation. Tender of
a. Tender ofpayment is the manifestation by the debtor payment may be extrajudicial, while consignation
of his desire to comply with or to pay the obligation.236 is necessarily judicia!.242
If the creditor to whom tender of payment has been
made refuses without just cause to accept it, !lie debtor 2. Consignation Without Prior Tender. As a rule,
shall be released from responsibility by the consignation must be preceded by tender of payment to
consignation of the thing or sum due. (Art. 1256) discharge the obligation. However, in the following cases
specified by Art. 1256, consignation alone shall discharge
i. Tender of payment must be made in legal tender to the obligation:
be valid. 237
a. When the creditor is absent or unknown, or does not
However, payment in check may be considered appear at the place of payment;
valid, if no prompt objection to said form of
. . 8
payment 1s made.23 b. When he is incapacitated to receive the payment at the
time it is due;
ii. A letter merely expressing intent to pay, but not
accompanied by payment, is not equivalent to c. When, without just cause, he refuses to give a receipt;
tender of payment.239
d. When two or more persons claim the same right to
b. Consignation is the act of depositing the thing due collect;
with the court or judicial authorities whenever the
e. When the title of the obligation has been lost. (Art.
236 Ramos v. Sarao, G.R. No. 149756, 1 1 February 2005, 451 SCRA 103, 118119. 1256)
'" Sooo v. Militante, 208 Phil. 151, 160 (1983); see also Philippine Airlines, Inc. v. Court of
Appeals, G.R. No. 49188, 30 January 1990, 181 SCRA 557, 568; Citibank, N.A. v. Sabeniand,
G.R. No. 156132, October 16, 2006.
23e Saco v. Militante, 208 Phil. 151, 160 (1983); Pabugais v. Sahijwanl, G.R. No. 156846,
"' Pabugais v. Sahijwanl, G.R. No. 156846, February 23, 2004.
February 23, 2004. 241 Solid Homes, Inc. v. Laserna, G.R. No. 166051, April 8, 2008.
.
239 Vda. De Zuluela v. Octaviano, G.R. No. L-55350, March 28, 1983.
. 242 Saco v. Militante, 208 Phil. 151, 160 (1983).

94 95
 3. Requisites. In order that consignation may be effective, the payment thereby avoiding consignation and the
debtor must show compliance with the following subsequent litigation. 249
reqllisites:243
d. The amount due was placed at the disposal of the
a. There was a debt due
244; court; (Art. 1258) and

Consignation is not necessary where the payor e. After the consignation had been made,. the person
seeks to exercise a right (such as the right of interested was notified thereof. (Art. 1258)
redemption245 or repurchase246 or option247),
instead of performing an obligation. Tender of Two notices are required: prior to and after the
payment is sufficient for such exercise of right. consignation. The reason for the second notice is to
enable the creditor to withdraw the goods or
b. The consignation of the obligation had been made money deposited, to avoid risk of deterioration,
50
because the creditor to whom tender of payment was depreciation or loss. 2
made rfused to accept it without just cause, or ecause
of any of the grounds in Art. 1256 which dispenses Notes:
with the need for tender of payment; (Arts. 1256, 1258) i. Strict compliance. The foregoing reqms1tes and
mandatory and must be strictly complied with.m
If the creditor justly refused to accept the. payment
because it was not in legal tender, consignation is ii. Inejfectuar consignation. The consignation shall be
not proper.248 ineffectual (a) if there is failure in any of the
foregoing requisites252; or (b) if the consignation is
c. Previous notice of the consignation had been given to not made strictly in.consonance with the provisions
the person interested in the performance of the which regulate payment. (Art. 1257)
obligation; (Art. 1257)
iii. Applicability. The . foregoing reqnisites do not
This is to give the creditor an opportunity to strictly apply to debts pursuant to a judgment. In
reconsider his unjustified refusal and to accept such a case, if the judgment creditor refuses to
accept the payment of the amount due on the
judgment, the court may direct the money to be
243 Soco v. Militante, 208 Phil. 151, 160 (1983); Pabugais v. Sahijwani, G.R. No. 156846,
February 23, 2004.
244 Ascue v. CA, G.R. No. 84330, May 8, 1991.
245 Villanueva v. Malaya, G.R. No. 94617, April 12, 2000, citing Co. vs. Philippine National Bank,
1 14 SCRA 842; De Castro vs. Intermediate Appellate Court, 165 SCRA 654; Enage vs. De
Escano, 38 Phil. 687.
246 Legaspi v. CA, 142 SCRA 82, 88 (1986), citing Asturias Sugar Central v. .Pure Cane 249 Cabanos v. Calo, G.R. No. L-10927, October 30, 1958, 104 Phil. 1058; Limkako vs. Teodoro.
Molasses Co., 60 Phil. 255 (1934), Villegas v. Capistrano, 9 Phil. 416; Rosales v. Reyes, et al., 74 Phil. 313; Socov. Militante, 208 Phil. 151, 160 (1983).
25 Phil. 495; Paez, eta\. v. Magno, 46 O.G.,p, 5425. Cabanas v. Calo, G.R. No. L-10927, October 30, 1958, 104 Phil. 1058; Saco v: Militante, 208
247 Vda. de Quirino v. Pa\arca, 29 SCRA 1 [196g] citing Asturias Sugar Central v. Pure Cane Phil. 151, 160 (1 g83).
Molasses Co., 60 Phil. 255 and Conejero v. CA, L-21812, April 29, 1966. 251 Saco v. Militante, 208 Phil. 151, 160 (1983);
"' Roman Catholic Bishop of Malolos, Inc. v. \AC, G.R. No. 72110, November 16, 1990. 252 Pabugais v. SShijwanl, G.R. No. 156846, February 23, 2004.

96 97
 paid in court and when this is done, order even before the actual approval of the
'53 '55
satisfaction of the judgment to be entered. court or acceptance by the creditor.

4. Effect of Consignation. ii. After the creditor has already accepted the
consignation, or after the . court has already
a. Cancellation or Discharge of the Obligation. Once the declared that consignation is proper .- the debtor
consignation has been duly made, the debtor may ask may withdraw the thing or sum deposited only if
the judge to order the cancellation of the obligation. the 'creditor consents.
(Art. 1 260)
If the creditor should consent or authorize the
b. Expenses. The expenses of consignation, when withdrawal -
properly made, shall be charged against the creditor.
(Art. 1259) (a) The creditor shall lose every preference
which he may have over the thing. (Art.
c. Withdrawal. 1261)

1. Before the creditor has accepted the consignation, (b) The co-debtors, guarantors and sureties
or before a judicial declaration that the shall be released. (Art. 1261)
consignation has been properly made - the debtor
may withdraw the thing or the sum deposited,
allowing the obligation to remain in force. (Art. ill . LOSS OF THE THING DUE
1260)
A. IN GENERAL - IN 0BLIGATIONS TO GIVE A
At this point, the debtor is still the owner of the DETERMINATE THING
property deposited and may thus withdraw
254
it. 1. General Rule. An obligation to deliver a determinate thing
shall be extinguished if it should be lost or destroyed
It has been held, however, that when all without the fault of the debtor, and before he has incurred
the requisites for consignation are in delay. (Art. 1262)
complied with (and there is no reason to
disapprove the consignation), the property a. Broadly speaking, loss (as a cause for extinguishment
deposited becomes for the account of the of the obligation) refers to the impossibility of
creditor, who must bear .the risk of loss, performance of the prestation.

The impossibility which extinguishes obligation

refers to that which occurred after the creation of
253 Salvante v. Cruz, 88 Phil. 236 (1951): Francisco v. Bautista, G.R. No. 44167, December 19,
1990.
254 IV Tolentino 331. 255 Sia v. CA, 92 Phil. 355 (1952).

98 99
 the obligation. If the impossibility existed at the
time of the creation of the obligation, it is void ctb
initio. (Art. 1348)
b. A thing is considered Jost when it: (i) perishes; (ii)
goes out of commerce; or (iii) disappears in such a way
that its existence is unlmown or it cannot be recovered
(Art. 1 1 89, S;tpra).
c. Partial Loss If the Joss is partial, the courts shall
- 1 165 (Art. 1265).
determine whether, under the circumstances, the partial
loss is so important as to extinguish the obligation.
(Art. 1264)
d. The extinguishment of an obligation which has ,become
impossible to perform follows from the principle that
no person shall be liable for fortuitous events, or those
which could not be foreseen, or which, though
foreseen, were inevitable. (Art. 1 1 74, supra).
2. Exceptions. The obligation is not extinguished, and the
debtor is thus liable for damages, in any of the following
cases:
a. When, by law, the obligor is liable even for fortuitous
events. (Arts. 1262, 1 174)
The bailee (Art. 1 942), depositary (Art. 1 979) and
the officious manager (Art. 2147) are, by law,
liable for fortuitous events under certain
circumstances.
b. When, by stipulation, the obligor is liable even for
fortuitous events. (Arts. 1262, 1 174)
c. When the nature of the obligation requires the
assumption ofrisk. (Arts. 1262, 1 1 74)
100
d. When the obligor is guilty of contributory fault or
negligence.256 (Arts. 1262, 1 1 70)
Presumption Whenever the thing is lost in the
-
possession of the debtor, it shall be presumed that
the Joss was due to his fault:
(1) unless there is proof to the contrary, and
without prejudice to the provisions of article
(2) except in case of earthquake, flood, storm, or
other natural calamity. (Art. 1265)
e. When the Joss or impossibility occurred after the
obligor has incurred in delay. (Arts. 1262, 1 1 65)
f. When the obligor has promised to deliver the same
thing to two or more persons who do not have the same
interest. (Art. 1 1 65)
g. When the obligation to give the thing due arose from a
criminal offense. (Art. 1268)
When debt of a thing certain and determinate
proceeds from a criminal offense, the debtor shall
not be exempted from the payment of . its price,
whatever may be the cause for the loss. (Art. 1268)
Unless the thing having been offered by him to
the person who should receive i the latter
refused without justification to accept it. (Art.
1268)
3. Creditor's Remedy. The obligation having . been
extinguished by the loss of the thing, the creditor shall have
: ;
'" Austria v. CA, G.R. No. L-29640, June 10, 1971.
101
 all the rights of action which the debtor may have against a. Physical impossibility arises when the prestation, by its

third persons by reason of the loss. (Art. 1 269) nature, cannot be accomplished or performed.

Under this provision, the creditor may seek recourse to
the insurance indenmity for the thing lost.257
4. Effect on Reciprocal Obligations. In
obligations, the release of the debtor due to loss or
impossibility also releases the creditor from the counter
prestation, because each obligation depends on the other.258
Impossibility refers to the nature of the thing to be
done, and not to the inability of the obligor to do it.
If others can perform the prestation, it is not
reciprocal impossible.'"
b. Legal impossibility arises when the prestation becomes
illegal or prohibited by law.

B. IN OBLIGATIONS TO GIVE A GENERIC THING 2. Extreme Difficulty Due to Unforeseen Events When the .

service has become so difficult as to be manifestly beyond

In General, Loss Does Not Cause Extinguishment In an the contemplation of the parties, the obligor may also be
obligation to deliver a generic thing, the loss or des puction released therefrom, in whole or in part. (Art. 1267)
of anything of the same kind does not extinguish the
.
obligation. (Art. 1263) a. Art. 1267 is said to be based on the principle of rebus
sic stantibus, under which the parties are considered to
a. This rule is based on the principle that the genus of a have stipulated in the light of certain prevailing
thing can never perish. Genus nunquan perit.'59 conditions, and once these conditions cease to exist,
the contract also ceases to exist. However, Art. 1267 is
b. An obligation to pay money is generic; therefore, it is not an absolute application of the principle of rebus sic
not excused by fortuitous loss of any specific property stantibus, which would endanger the security of
of the debtor.260 contractual relations. The parties to the contract must
be presumed to have as'sumed the risks of unfavorable
C. IN OBLIGATIONS TO Do developments. It is therefore only in absolutely
exceptional changes of circumstances that equity
1. Imp ossibility The debtor in obligations to do shall also be
. demands assistance for \he debtor.
released when the prestation becomes legally or physically
impossible without the fault of the obligor. (Art. 1 266) . An "abrupt change in the political climate of the
cow1try after the EDSA Revolution" and the
debtor's "poor financial condition" do not warrant
application of Art. 1267262
"'A. Urrutia & Co. v. Saco River Plantation, Inc., 26 Phil. 632 (1913).
2ss IV Tolentino 337, 346, citing Colin & Capitant; Von Tuhr; Perez Gonzalez & Alguer; and

Enneccerus1 Kipp & Wolff. b. If performance has become impossible altogether, Art.
259 Gaisano Cagayan, Inc. v. Insurance Company of North America, G.R. No. 147839, June 8,

2006, citing Bunge Corp. and Universal Comm. Agencies v. Elena Camenforte & Company, 91
1266 should be applied.
Phil. 861, 865 (1952).
"" Gaisano Gagayan, Inc. v. Insurance Company of North America, G.R. No. 147839, June 8,, "' Reyes v..Caltex (Philippines), Inc., 84 Phil. 654 (1949).
2006, citing Ramirez v. Court of Appeals, 98 Phil. 225, 228 (1956). "' Phil. National Construction Co. v. CA, G.R. No. 1 1 6896, May 5, 1997.
i02 103
 donations with respect . to acceptance, amount, and
revocation:265
IV. CONDONATION OR REMISSION OF THE DEBT
a. Condonation must be accepted by the debtor. (Art.
A. IN GENERAL 1 270)

l. Definition. Condonation or remission is an act of liberality If the debtor refuses to accept the condonation, but
wlrereby the creditor, without receiving any equivalent, the creditor still does not enforce the debt, the debt
renounces the enforcement of the obligation, which is may eventually be extinguished by prescription.
accordingly extinguished in its entirety or in that part
23
remitted. 6 b. The condonation is subject to the rule on inofficious
donations, i.e., the amount condoned cannot be more
2. Gratuitous. Condonation or rem1ss10n is essentially . than what the creditor may give by will. (Art. 1 270, in
gratuitous, and requires the acceptance by the obligor. (Art. rel. to Art. 752)
1 270)
4. Effect on Accessory Obligation. The renunciation of the
It is an essential characteristic of remission that it be principal debt shall extinguish the accessory obligations.
gratuitous, that there is no equivalent received for the (Art. 1273)
benefit given; once such equivalent exists, the nature of
the act changes.264 a. But the waiver of the accessory obligation shall leave
. the principal obligation in force. (Art. 1273 ) Thus, the
i. It may become dation in payment when the accessory obligation of pledge may be waived without
creditor receives a thing different from that affecting the principal debt previously secured by the
stipulated; or pledge.

ii. It may become a novation, when the object or b. It is presumed that the accessory obligation of pledge
principal conditions of the obligation should be has been remitted when the thing pledged, after its
changed; or delivery to the creditor, is found in the possession of

'
the debtor, or of a third person who owns the thing.
iii. It may become a compromise, when the matter (Art. 1274)
renounced is in litigation or dispute and in
exchange of some concession which the creditor B. MANNER OF CONDONATION: Condonation may be made
receives. expressly or impliedly. (Art. 1 270)

3 . Governing Rules. Condonation i s essentially a donation l. Express condonation - shall comply with the forms of
of the credit to the debtor, and is thus subject to the rule on donation. (Art. 1271)

'" Dizon v. CTA, G.R. No. 140944, April 30, 2008.

"' Dizon v. CTI\ G.R. No. 140944, April 30, 2008. "' IV Tolentino 354.

104 105
 V. CONFUSION OR MERGER OF RIGHTS
If the condonation is made mortis causa, the forms of a
will must be followed. A. CONCEPT

2. Implied con dona tion. The Civil Code provides two 1 . The obligation i s extinguished from the time the characters
instances where condonation is implied: of creditor and debtor are merged in the same person. (Art.
1275)
a. The delivery of a private document evidencing a credit,
made voluntarily by the creditor to the debtor, implies 2. Confusion or merger usually takes place when the debtor
the renunciation of the action which the former had acquires the credit. Example: X borrowed Pl0,000 from
against the latter. (Art. 1271) his father, who subsequently died and left X as his sole
heir. X thus succeed to his father's credit of Pl0,000
1. Whenever the private document in which the debt against X. Thus, as far as the Pl 0,000 credit is concerned,
appears is found in the possession of the debtor, it the characters of creditor and debtor have become merged
shall be presumed that the creditor delivered it in the person of X.

vo I untarily, unless the contrary is prov d. (Art.
1272) 3. Confusion or merger may also take place when the creditor
acquires an encumbered property. Example: when the
ii. The waiver may be nullified if inofficious, but the mortgagee acquires the mortgaged property, the mortgage
debtor and his heirs may uphold it if they can obligation is extinguished266 (but not necessarily the
prove that the delivery of the document was made principal obligation secured by the mortgage).
in virtue of payment of the debt. (Art. 1271)
B. EFFECT AND EXTENT
b. An implied condonation may also result from the
presun1ption that the accessory obligation ofpledge has 1. Confusion or merger which takes place in the person of the
been remitted when the thing pledged, after its delivery principal debtor or creditor enefits the guarantors. (Arf.
to the creditor, is found in the possession of the debtor, 1276)
or of a third person who owns the thing. (Art. 1274)
a. But merger which takes place in the person of any of
However, being a mere presumption, it may be the guarantors does not extinguish the obligation. (Art.
overcome by proof that no condonation was 1276)
intended.
b. Example: X is indebted to Y, which debt is guaranteed
by J. If X's debt to Y is extinguished due to merger,
J's obligation as guarantor (which is merely accessory)
is also extinguished. But if J acquires Y's credit

'" Yek Tong Lin Fire & Marine Insurance v. Yusingco, 64 Phil. 473 (1937).
106 107
 thereby extinguishing J's obligation as guarantor, this b. According to Cause
does not affect X's . obligation. J can still collect from
x. i. Legal -takes place by operation of law when all
the requisites . are present.'68 (infra)
2. Confusion does not extinguish a joint obligation except as
regards the share corresponding to the creditor or debtor in ii. Conventional takes place when the parties agree
-

whom the two characters concur. (Art. 1277) to compensate their mutual obligations even in the
absence of some requisites.269 (A1't. 1 282) (il)jra)
If the obligationis solidary, it may be extinguished by
the confusion or merger between any of the creditors In certain cases, compensation may be claimed
with any of the debtors. (see Art. 1215) by only one of the parties, by waiving his right
to object to it. This is calledfacultative
compensation. Example: if X's debt to Y is
V. COMPENSATION pure, while Y's debt to X is with a term for
Y's benefit and has not yet become due, Y
A. IN GENERAL may object to the compensation, but Y may
also choose to waive the term and claim
! . Definition. Compensation (or offsetting) is a mode of compensation.
extinguishing (to the concurrent amount) the obligations of
persons who, in their own right and as principals, are iii. Judicial compensation decreed by a court in a
-

reciprocally debtors and creditors of each other.267 (Art. case where the defendant has counterclaims against
1278) the plaintiff.

2. Kinds of Compensation. If one of the parties to a suit over an obligation

has a claim for damages against the other, the
a. According to Extent former may set it off by proving his right to
said damages and the amount thereof. (Art.
i. Total when the two debts are of the same
- 1283)
amount, in which case both debts are totally
extinguished. (Art. 1281) B. LEGAL COMPENSATION

ii. Partial when the two debts are not of the same
- I. In General. Legal compensation takes place by operation
amount, in which case the debts are extinguished of law (ipso Jure) when all the requisites are present 270 It
only to the concurrent amount. (Art. 1281)
168
PNB Madecor v. Uy, G.R. No. 129598, Augusl 15, 2001; Francia v. IAC, G.R. No. L-67649,
June 28, 1968.
169 PNB Madecor v. Uy, G.R. No. 129598, August 15, 2001; Francia v. IAC, G.R. No. L-67649,
201
PNB Madecor v. Uy, G.R. No. 129596, August 15, 2001; see also Francia v. IAC, G.R No. L June 26, 1988.
67649, June 26, 1968. 11o PNB Madecor v. Uy, G.R. No. 129598, August 15, 2001.

108 109
 occurs even without the awareness of the parties, (Art.
1290) or even against their will or without their consent.271 (4) Taxes cannot be compensated with the
Its effects arise at the moment when all the requisites taxpayer's claim against the Government,
concur.272 because taxes are not "debts" and the
Government and the taxpayer cannot be
2. Requisites. In order that (legal) compensation may be considered creditor and debtor to each other.277
proper, the following five requisites are necessary (Art.
1279): b. That both debts consist in a sum of money, or if the
. things due are consumable, they be of the same kind,

a. That each one of the obligors be bound principally, and also of the same quality if the latter has been
and that he be at the same time a principal creditor of stated;
the other;
Compensation is also possible for fungible things
The parties must be mutually debtors and creditors (not necessarily consumable) because, by their
in their own right and as principals.273 very nature, fungible things may be substituted for
each other.'78 .
(1) Thus, X corporation's debt to Y cannot be
offset with Y's debt to a stockholder of X, c. That the two debts be due;
because the corporation is distinct from its
stockholder.'74 d. That they be liquidated and demandable;

(2) Also, the debt of partnership ABC to X cannot i. "Liquidated" means that the existence and amount
be offset with X's debt to B (a partner in of the debt are determined, as opposed to
ABC).275 "unliquidated" claims (such as damages) which are
still disputed and whose amount is not yet
(3) A share of stock is not a credit against the determined. Compensation cannot extend to
corporation, and stockholders, as such, are not unliquidated, disputed claim existing from brea:ch
creditors of the corporation. Thus, a of contract.'79
corporation's credit against its stockholder
cannot be offset with the latter's share of ii. "Demandable" means that the debt is legally
stock.276 enforceable, i.e., it is a civil (and not natural
obligation), it has not yet prescribed, it is not
subject to a suspensive period or condition which
211 Bank of the Philippine Island v. Court of Appeals, 325 Phil. 930, 938 (1996).
212 Republicv. Court of Appeals, G.R. No. 25012, July22, 1975, 65 SCRA 186, 190. has not yet.happened, and it is not unenforceable.
2n
PNB Madecor v. Uy, G.R. No. 129598, August 15, 2001; see also Francia v. IAC, G.R. No. L
67649, June 28, 1988.
211
274 See CKH Industrial and Development Corp. v. CA, G.R. No. 1 1 1890, May 7, 1997, 272 SCRA Francia v. IAC, G.R. No. L67649, June 28, 1988.
21s
333. See IV Tolentino 369-370,
210 Escano v. Heirs of Escano, 28 Phil. 73 (1914). 279 Silahis Marketing Corp. v. IAC, G.R. No, 74027, December 7, 1989. See also Sps. Mirasol v.
276 Garcia v. Lim Chu Sing, 59 Phil. 562 (1934). CA, G.R. No. 128448, Februaiy 1, 2001.

110 . 1il
 a. Ifcompensation has already taken place before the
Note, _however, that when one or both debts are assignment - the obligation is deemed extinguished
rescissib/e or voidable, they may be by operation of Jaw, and the debtor is thus discharged
compensated against each other before they are of liability by invoking the compensation.
judicially rescinded or avoided. (Art. 1284)
'
They are considered valid until annulled or Exception: if the debtor consented to the
rescinded. assignment, this is considered a waiver of the
compensation.
iii. Legal compensation is possible even though the
debts may be payable at different places, but there b. Ifcompensation has not yet taken place before the
shall be an indemnity for expenses of exchange or assignment (because, e.g., the debts are not yet mature
transportation to the place of payment. (Art. 1286) or liquidated) -

e. That over neither of them there be any retention or i. If the debtor consented - he cannot set up against
controversy, commenced by third perspns and the assignee the compensation which would pertain
communicated in due time to the debtor. (1196) to him against the assignor. (Art. 1285)

Example: When a credit is garnished by court Unless the assignor was notified by the debtor
(execution or attachment). at the time he gave his consent, that he
reserved his right to the compensation. (Art.
2. Who May Invoke . Generally, compensation may be 1285)
invoked or claimed by the principal debtor (who is also at
the same time a principal creditor). ii. Jf the debtor was informed of the assignment, but
did not consent thereto -he may set up the
However, the guarantor may also set up compensati,on compensation of debts before the assignment, but
as regards what the creditor may owe the principal not of subsequent ones. (Art. 1285)
debtor. (Art. 1280) That is, the guarantor may invoke
any available compensation between the principals, iii. If the debtor was not informed of the assignment
and thus benefit from the extinguishment of the - he may set up the compensation of all credits
principal obligation which results from such prior to the assignment and also later ones until he
compensation. had knowledge of the assignment. (Art. 1285)

3. Assignment of Credit.280 In case the creditor assigned his Note: The reason for the foregoing rules is to protect a
credit to a third party, who then attempts to enforce it, the party from being fraudulently deprived of the benefits
debtor has the foJlowing rights: of compensation.281

'' IV Tolentino 374-375, citing Manresa. '" IV Reyes & Puno 155, citing Manresa.
112 1 13
 4. Plurality of Debts. If a persou should have agaiust him a. That each of the parties can dispose of the credit he
several debts which are susceptible of compensation, the seeks to compensate, and
rules on the application of payments shall apply to the
order of the compensation. (Art. 1289) b. That they agree to the mutual extinguishment of their
credits.
Thus, the debt which is most onerous to the debtor,
among those due, shall be deemed to have been offset. D. LIMITATIONS: The following debts cannot be compensated-
If the debts due are of the same nature and burden, the
offsetting shall be applied to all of them I. Debts arising from a contract of depositum; (A . 1287)
proportionately. (Art. 1289 in rel. to Art. 1253)
2. Debts arising from a contract of commodatum; (Art. 1287)
5. Effect of Compensation. When all the requisites
mentioued in Article 1279 are present, compensation talces a. Both depositurn and commodatum are based on the
effect by operation of law, and extinguishes both ciebts to trust and confidence of the depositor or bailor
' that the
the concurrent amount, even though the cred tors and i thing deposited or lent will be returned.
debtors are not aware of the compensation. (Art. 1290)
b. The prohibition is against the depositary and the
C. CONVENTIONAL COMPENSATION borrower, in favor of the depositor and bailor. The
depositor and bailor may choose to waive the benefit
I. In General. Conventional (or voluntary) compensation is and set up compensation (facultative).
compensation by agreement; it takes place when the parties
agree to compensate their mutual obligations even in the c. Note that bank deposits (whether fixed, savings or
absence of some requisites.'" current deposits) are considered simple loans (Art.
1 980), and are therefore subject to compensation or
Thus, the parties may agree upon the compensation of set-off against the depositor's obligations to the
debts which are not yet due. (Art. 1282) bank.'85

2. Requisities. Conventional compensation is possible only 3. Claims for support due by gratuitous title; (Art. 1287)
when the parties are mutual creditors and debtors of each
l
other.283 Aside from this, the requ rements of conventional a. Allowing compensation may defeat the purpose of
co1npensation are:284 support, which is to maintain the person to be
supported and answer his needs. It may also defeat the
exemption of support from attachment and execution.
(FC, Art. 205)
282 PNB Madecor v. Uy, G.R. No. 129598, August 15, 2001; Francia v. IAC, G.R. No. L67649,
June 28, 1988.
283 CKH Industrial and Development Corp. v. CA, G.R. No. 1 11890, Mar 7, 1997, 272 SCRA

333.
'" CKH Industrial and Development Corp. v. CA G.R No. 111890. May 7, 1997, 272 SCRA
333. 285 Sps. Nlsce v. Equitable PC/ Bank, G.R. No. 167434, February 19, 2007,

1 14 115
 b. Support in arrears may be subject to compensati: lb.at ta;,es t'tl.e \)\ace cit t'tl.e fo=et. h ne>'1at\C>n t\\at .\s
because the need for the same has already passed. (M ,, mete\1 modif\catory (;<:ies n<:i\ <:a'll'Oe t'tl.e e'!,.\\n'i!,'l.\\\m.en\
301, par. 2, in rel. to Art. 1287) <:>1.1\\.e <:i\:1\\1!,a\\<:it\, \.e., \\\.e <:>\(; <:i\)\\1!,a\\<:in s'l.\:ls\s\s \ci ,fue
e'!,.\.ent \na\ \\ tema'm.s com\la\\'o\e 'W\.\b. \b.e amencl.atot'j
"'
4. Debts consisting of civil liability arising from a penal aiteement.

offense. (Art. 1288)

c. Novation has dual function: (i) extinguish an
to
- The prohibition is against the offender, in favor of the existing obligation, and (ii) to substitute a new one in
offended party. The offended party may choose to its p\ace.289
waive the benefit and set up compensation
(facultative). d. Extinctive novation does not necessarily imply that the
new agreement should be complete by itself; certain
5. Obligation to,pay taxes to the government. Taxes are not tenns and conditions may be carried, expressly or by
"debts", and are not subject to compensation as a matter of implication, over to the new obligation.290
public policy.'86
2. Classification.

VII. NOVATION a. According to Manner

A. IN GENERAL i. Express - when the parties declare in unequivocal

terms that the new obligation novates or
I. Definition. Novation is a mode of extinguishing an extinguishes the old .one. (Art. 1292)
obligation by changing its object or principal conditions,
by substituting a new debtor in place of the old one, or by ii. Implied- the novation is inferred from the fact that
snbrogating a third person to the rights of the creditor. 287 the old and the new obligations are on every point
(Art. 1291) incompatible with each other. (Art. 1292)

a. In order that an obligation may be extinguished by The test of incompatibility is whether the two
another which substitutes the same, it is imperative: (i) obligations can stand together, each one having
that it be so declared in unequivocal terms, or (ii) that an independent existence; if they cannot and
the old and the new obligations be on every point are the subsequent obligation
irreconcilable,
1
incompatible with each other. (Art. 1292) would extinguish the first. 29

b. Novation, properly speaking, is extinctive, i.e., an old

obligation is terminated by the creation of a new one
266Francia v. IAC, G.R. No. L-67649, June 28, 1988, citing Republic v. Mambulao Lumber Co., 4
SCRA 622.
"' Garcia v. Llamas, G.R. No. 1 54127, December 8, 2003.
"' Garcia v. Llamas, G.R. No. 154127, December 8, 2003.
'" California Bus Lines, Inc. v. State Investment House, Inc., 463 Phil. 689, 702 (2003). Sps.
Bautista v. Pilar Dev't Corp., G.R. No. 135046, August 17, 1999.
290 Ligutan v. CA, G.R. No. 138677, February 12, 2002.
291
lloilo Traders Finance, In v. Heirs of Sps. Oscar Soriano, Jr., 452 Phil. 82 (2003).

i 16 117
 1
b. According to Cause b e c\a\me<': on\'j b'f tbe llebtor, anll be \m"Q\\el\\'f
waives it by agreeing to tb.e new ob\igation?-94
1. Objective - novation caused by change in the
object or principal conditions (Art. 1291 [l])
b. The parties concerned must agree to a new contract.

ii. Subjective novation caused by change in the

i. There must be an intention to novate or animus
-

person of the debtor or the creditor (Art. 1291 [2] novandi.

& [ 3 ])
ii. This requirement presupposes that the parties have
3. Requisites. For novation to take place, the following
. . 22 the capacity to agree to the new contract.
reqms1tes must concur: 9

c. The old contract must be extinguished.

a. There must be a previous valid obligation.

If the original obligation was subject to a

i. If the original obligation was void, the n vation is
suspensive or resolutory condition, the new
also void. (Art. 1298) obligation shall be under the same condition,
unless it is otherwise stipulated. (Art. 1299)
Exception: when a ulment may be claimed
only by the debtor or when ratification
d. There must be a valid new contract.
validates acts which are voidable. (Art. 1298)
i. If the new obligation is void, the original one shall
ii. If the original obligation was voidable, the
subsist, unless the parties intended that the former
novation is valid, because the debtor's consent is
relation should be extinguished in any event. (Art.
deemed a ratification of the original obligation or
1297)
an implied waiver of its defect. (see Art. 1298)
ii. If the new contract' has not yet been executed, the
Exception: in expromision, wherein the debtor previous obligation is not novated and remains
does not consent
subsisting.295

m. If the original obligation has prescribed, the

iii. If the new contract is voidable, it is valid until
novation is valid. A prescribed debt is a natoral
annulled (Art. 1390), so the novation becomes
obligation and suffices as a consideration for the
2 effective. But once the new contract is annulled, it
new obligafion. 93 Besides, the prescription may
is deemed void, so the novation becomes
ineffective as well.

'" Garcia v. Llamas, G.R. No. 154127, December 8, 2003; Sueno v. Land Bank, G.R. No.
174711, September 17, 2008.
294 Estrada v. Villaroel, (CA) 40 O.G. (5th Supp.)
201, cited in IV Tolentino 398.
293 Villaroel v. Estrada, 71 Phil. 140 (1940).
"' Sueno v. Land Bank, G.R. No. 17471 1 , Seplember 17, 2008.
118
1 19
 iv. If the new contract is unenforceable (because it is
not in writing, per the Statute of Frauds), novation In other words, there must be essential change.301
296
cannot be proven. Changes that breed incompatibility must be essential in
nature and not merely accidental.302 Even if there is no
4. Not Pres u med . Novation is never presumed, and the express novation, such essential change would cause an
animus novandi (intent to novate), whether totally or implied novation by creating an incompatibility between
partially, must appear by express agreement of the parties, the old and the new obligations.
or by their acts that are clear and unmistakable.297
On the other hand, accidental changes - or changes
5. Effect on Accessory Obligation. When the principal which are merely incidental to the main obligation, or refer
obligation is extinguished in consequence of a novation, merely to secondary agreements - do not cause extinctive
accessory obligations are also extinguished. {Art. 1296) novation.303 The novation is merely modificatory, in which
This is because the accessory obligations (e.g., mortgage case the new agreement will not have the effect of
and pledge) were given to secure a particular obligation extinguishing the first but would merely supplement it or
and the solvency of a particular debtor; thus, a cqange in supplant some but not all of its provisions.304
the obligation or debtor destroys the basis of the consent to
. .
give the accessory obl"1gatlons.298 2. Determination of the Natre of Change. It is thus
important to determine if the change refers to the object or
"Exception": accessory obligations may subsist only the principal conditions (essential change), or merely to
insofar as they may benefit third persons who did not incidental conditions (accidental change). The
give their consent. (Art. 1296) However, these determination is factual in nature, and relative to the
obligations for the benefit of third persons are in reality circumstances of the case, the intention of the parties, the
distinct obligations.299 economic importance of the modification, and other similar
factors.305
B. OBJECTIVE NOVATION
3. Examples of essential changes.
I. Essential Change vs. Accidental Change. Objective
novation is caused by change in the object or in the a. Change in the price.306
principal conditions of the obligation. (Art. 1291) Changes
in the juridical relation300 (from ccimmodatum to lease of b. Reduction of the period or duration of an easement of
things, or from negotiorum gestio to agency, or from a right of way. 307
mortgage to antichresis, or from a sale to a loan) may also
be subsumed under this category.
301 Young v. CA, G.R. No. 83271, May 8, 1991.
"' Pilipinas Bank v. Ong, G.R. No. 1 33176, August 8, 2002; California Bus Lines, Inc. v. State
"' Evadel Realty & Dev't Corp. v. Sps. Soriano, G.R. No. 144291, April 20, 2001. Investment House, Inc., G.R. No. 147950, December 1 1, 2003.
"' Philippine Savings Bank v. Manalac, Jr., G.R. No. 145441, 26 April 2005, 457 SCRA 203, io3 Young v. CA, G.R. No. 83271 , May 8, 1991; lloilo Traders Finance, Inc. v. Heirs of Sps.
218. Oscar Soriano, Jr., 452 Phil. 82 (2003); Young v. CA, G.R. No. 83271, May 8, 1991.
'" IV Tolentino 395. . '' lloilo Traders Finance, Inc. v. Heirs of Sps. Oscar Soriano, Jr., 452 Phil. 82 (2003).
299 IV Tolentino 396. "5 IV Tolentino 389, citing Castan.

'" See Ligutan v. CA, G.R. No. 138677, February 12, 2002. 306 Matute v. Hernandez, 66 Phil. 68 (1938).

120 .
121
 c. Change from a contract to sell (written) to a contract of i. Extension of the period315 - the period affects
lease (even if merely verbal).308 only the performance of the obligation and does
not create a new one.
d. Change from a sale of real estate to a conditional sale
of real estate.309 ii. Restructuring of the payment scheme (e.g., from
repayment in one year to repayment in twenty
In a contract of sale, the title to the property passes quarterly instalhnents31 6, or providing for a new
to the vendee upon the delivery of the thing sold; schedule ofpayments and additional security"')
in a contract to sell, ownership is, by agreement,
reserved in the vendor and is not to pass to the iii. Change or reduction in the interest rate.318
vendee until full payment of the purchase price;
It has been held that an obligation to pay
e. Change from trust receipt agreement to a simple money is not novated by an instrument that
loan.'10 expressly recognizes or ratifies the old,
changes only tile terms of payment, and adds
'

f. Change from a mortgage to antichresis.311 other obligations not incompatible with the old
ones, or where , the new contract merely
g. Change from a sale to a loan.312 supplements the old one.'19

c. In a construction contract, changes for the redesign of

4. Examples of incidental changes.
the structure and corresponding reduction in the
a. Execution of a mortgage to secure the payment of a contract price (particularly where the contract states
loan313 - the contract of loan is not novated by the that changes may be made in the works without
mortgage, which is merely an accessory contract. invalidating the contract). 320

C. SUBJECTIVE NOVATION: Subjective novation is novation by

b. Changes in the terms of payment . of an obligation to
pay,314 such as: changing the person of the debtor or the person of the creditor.

307 Kabankalan Sugar Co. v. Pacheco, 55 Phil. 555 (1930).

'' Gofii v. CA, G.R. No. L-27434, September 23, 1986.
315 Kabankalan Sugar Co. vs. Pacheco, No. 33654, 29 December 1930, 55 Phil. 555; Tible v.
309 Heirs of Bernabe v. CA, G.R. No. 154402, July 21, 2008.
Aquino, G.R. No. L-28967, 22 July 1975, 65 SCRA 207, 218; Pascual v. Lacsamana, 100 Phil.
'10 Pilipinas Bank v. Ong, G.R. No. 133176, August 8, 2002.

'" Jagunap vs. Mirasol, [CA], 48 O.G. 3911, cited in Ugutan v, CA, G.R. No. 138677, February 381, 385 (1956).
316 Sps. Reyes v. BPI Family Savings Ban G.R. Nos. 149840-41, March 31, 2006.
12, 2002.
" 7 California Bus Lines, lnc.. v. State Investment House, Inc., G.R. No. 147950, December 1 1
"' Soncuya vs. Azarraga, 65 Phil. 635 (1938), cited In Llgutan v. CA, G.R. No. 138677, February '
12, 2002. . 2003.
'" Ugutan v. CA, G.R. No. 138677, February 12, 2002. Asia Banking Corp. v, Lacson Company, "' Bank of P.I. vs. Abaladejo, No. 30490, 27 March 1929, 53 Phil. 14; Sps. Aguilar v. Manila
Inc., 48 Phil. 482 (1926), . Banking Corp., G.R. No. 1579 1 1 , September 19, 2006. '
319 Sps. Reyes v. Court of Appeals, G.R. No. 147758, 26 June 2002, 383 SCRA 471, 482.
314 Magdalena Estates, Inc. vs. Rodnguez, 18 SCRA 967, as reiterated in Velasquez vs. Court of
Ar peals, 309 SCRA 539, 320 Gammon Phil., Inc. v. MRTDC, G.R. No. 1 44792, January 31, 2006.

122 123
 1. Change in the Debtor
iii. The consent of the old debtor is not always
a. Necessity of Consent required. (Art. 1293) Thus, substitution of the
debtor may be classified into two kinds, depending
i. The consent of the creditor .to the change in the on whether the old debtor has given consent:326
debtor is always required. (Art. 1293)
(1) Expromision - the initiative for the change
(1) The consent may be express or implied, and does not come from (and may even be made
may be given at any time while the agreement without the knowledge or against the will of)
with the debtor subsists.'21 the debtor, since it consists of a third person's
assumption of the obligation. As such, it
(2) For novation to take place, the creditor milst requires the consent of the thi.rd person and the
consent (expressly or impliedly322) to the creditor.
release of the old debtor. 323
(2) Deliigacion - the debtor offers, and the
The mere fact that the creditor receives a creditor accepts, a third person who consents
guaranty or accepts payments from a third to the substitution and assumes the obligation;
person does not constitute a novation and thus, the consent of these three persons are
does not extinguish the obligation of the necessary.'27
original debtor. 324
b. Effect ofInsolvency ofNew Debtor
(3) Without the creditor's consent to release the
old debtor, there is no novation; the third i. In expromision (substitution is without the
person who has assumed the obligation of t,he knowledge or against the will of the old debtor) -
debtor merely becomes a co-debtor or a surety. the new debtor's insolvency or non-fulfillment of
325 the obligations shall not give rise to any liability on
the part of the original debtor (i.e., the old
ii. The consent of the new debtor is aiso always obligation shall not be revived). (Art. 1294)
required.
ii. In delegacion (substitution is proposed by the
321
Asia Banking Corp. v. Elser, 54 Phil. 994 (1929). original debtor and accepted by the creditor) - the
322 Aquintey v. Sps. Tibong, G.R. No. 166704, December 20, 2006, citing Babst v. Court of new debtor's insolvency shall not revive the action
Appeals, 403 Phil. 244, 259-260 (2001).
323 Aquintey v. Sps. Tibong, G.R. No. 166704, December 20, 2006, citing Lopez v. Court of
of the latter against the original obligor, but (unlike
Appeals, L33157, June 29, 1982, 1 1 4 SCRA 671, 688. in expromision) it is subjection to the following
'" Magdalena Estates Inc. v. Rodriguez, 125 Phil. 151, 157 (1966). Quinto v. People, G.R. No. exceptions -

126712, April 14, 1999, citing Rios vs. Jacinto, etc., 49 Phil. 7; Garcia vs. Khu Yek Ching, 65
Phil. 466; La Campana Food Products, Inc. vs. Philippine Commercial and Industrial Bank, 142
SCRA 394.
325 Ajax Marketing Corp. v. CA, G.R. No. 118585, September 14, 1995; Aquintey v. Sps. Tibong,
326 Garcia v. Llamas, G.R. No. 154127, December 8, 2003.
G.R. No. 166704, December 20, 2006. '" Garcia v. Llamas, G.R. No. 154127, December 8, 2003.
124 125
 (I) when said insolvency was
of public knowledge,
delegated his debt, or
(2) when said insolvency was
and known to the debtor,
his debt. (Art. 1295)
c. Right ofNew Debtor
already existing and 2. Change in the Creditor or Subrogation.
when the debtor
a. Jn General. Subrogation is the transfer of all the rights
of the creditor to a third person, who substitutes him in
already existing all his rights.328 It transfers to the persons subrogated
when he delegated
the credit with all the rights thereto appertaining, either
againsi the debtor or against third person, be they
guarantors or possessors of mortgages, subject to
stipulation in a conventional subrogation. (Art. 1303)

Payment by the new debtor gives him the rights

Subrogation of a third person in the rights of the
mentioned in Articles 1236 and 1237. (Art. 1293) creditor is either legal or conventional. (Art. 1 300)
Thus:

b. Conventional Subrogation - is subrogation which

i. In expromision (without the knowledge or against
takes place by agreement329; it requires the consent of
,
the will of the old debtor) -
the original parties and of the third person. (Art. 1301)

(1) The new debtor may recover from the qld

1. Conventional subrogation must be clearly
debtor only insofar as the payment has been
established in order that it may take effect. (Art.
beneficial to the old debtor. (Art. 1236)
. 1300)

(2) The new debtor, upon payment, cannot be

ii. Distinguished from Assignment of Credit.
subrogated to the rights of the creditor. (Art.
Conventional subrogation is not identical to
1237) . .
t , thus330:
assignment of erectt

ii. In delegacion (with the knowledge and consent of (1) Conventional sbrogation:
the old debtor) -

(a) the debtor's consent is necessary;

(1) The new debtor may demand from the old
debtor what he has paid. (Art. 1236) (b) extinguishes an obligation and gives rise to
a new one;
(2) The new debtor, upon payment, is legally
subrogated to the rights of the creditor. (Art.
1302[2])
"' Astro Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corp., G.R. No.
136729, September 23, 2003. Philippine National Bank vs. Court of Appeals, G.R. .No. 128661,
August 8, 2000, 337 SCRA 381, 404.

3i9 Astra Electronics Corp. vs. Philippine Export and Foreign loan Guarantee Corp., G.R. No.

136729, September 23, 2003.

"' Licaros v. Gatmaitan, G.R. No. 1 42838, August 9, 2001; Leoonio v. Capitol Dev't Corp., G.R.
No. 149040, July 4, 2007.
126
127
 (c) the nullity of an old obligation may be i. Legal subrogation is not presumed, except in cases

cured by subrogation, such that the new expressly mentioned in the Civil Code. (Art. 1 300)
obligation will be perfectly valid;
ii. There is legal subrogation in the following cases:

(2) Assignment ofcredit: (Art. 1302)

(1) When a creditor pays another creditor who is

(a) the debtor's consent is not required;
preferred, even without the debtor's
knowledge; (Art. 1302)
Nonetheless, the debtor must have
knowledge (either by formal notice or
Example: if an unsecured creditor pays off
some other means) of the assignment
a secured creditor, or if a creditor with
so that he may pay the debt to tl'ie
junior security pays off a creditor with
proper party (the assignee).331 The
senior security.
debtor who, before knowing of the
assignment, pays his creditor :shall be
(2) When a third person, not interested in the
released from the obligation. (Art.
1 626) . obligation, pays with the express or tacit
approvalofthe debtor; (Art. 1302)
(b) assigmnent refers to the same right which
passes from one person to another; (3) When, even without the knowledge of the
debtor, a person interested in the fulfillment of
the obligation pays, without prejudice to the
(c) the nullity of an obligation is not remedied
effects of confusion as to the latter's share.
by the assigmnent of the creditor's right to
(Art. 1302)
another.

c. Legal Subrogation is subrogation which talces place

-
(a) Examples f interested persons: co
debtors, sureties, guaranties, mortgagors
by operation of law because of certain acts. 332 The
and pledgors.
parties' consent or agreement is not necessary, and it
may take place even without the debtor's
(b) By express provision of Art. 2067, the
knowledge. 333
guarantor who pays is subrogated by
virtue thereof to all the rights which the
creditor had against the debtor.
331.Ledonio v. Capitol Dev'\ Corp., G.R. No. 149040, July 4, 2007, citing Sison v. Yap Tico, 37
Phil. 584, 587-588 (1918) and Aquintey v. Spouses Tibong, G.R. No. 166704' 20 December
2006. (c) The insurer who pays a claim for
332 Astra Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corp., G.R. No. indemnity is legally subrogated to the
136729, September 23, 2003. Chemphil Import & Export Corp. vs. Court of Appeals, G.R. Nos.

rights of the person indemnified. The
1 12438-39, December 12, 1 995, 251 SCRA 257, 279.
333 Astra Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corp., G.R. No.
136729, September 23, 2003. .

128 129
 insurer may then seek to recover from the
person who is liable for the loss.334
Chapter 6
d. Effect of Partial Payment. - A creditor, to. whom
Introduction to Contracts
partial payment has been made, may exercise his right
for the remainder, and he shall be preferred to the
person who has been subrogated in his place in virtue
of the partial payment of the same credit (Art. 1304) I. IN GENERAL

\. Definition. The Civil Code defines a contract as "a meeting of

minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some
service." (Art. 1305)

a. "Meeting of minds" - once the minds of the contracting

parties meet, a valid contract exists, whether it is reduced
to writing or not'" (except in certain contracts, infra).

i. The area of agreement must extend to all points that

the parties deem material. Otherwise, there is no
contract.336

ii. While a contract need not be in writing, the lack of

signature on the draft written contract is indicator that
the parties did not reach agreement on all points
deemed material.337

b. "Two persons" there must be at least two parties to a

-

contract. However, a contract may also be multilateral, or

involving more than two parties.

Autocontracts are contracts made by a single person

representing two parties (one is a party he represents,
while the other is either another party he represents or
he himself, in his personal capacity). Generally,

"' Federal Express Corp. v. American Home Assurance Co., G.R. No. 150094, August 18, 2004. "' National Irrigation Administration v. Gamit. G.R. No. 85869, November 6, 1992.
citing Philippine Americen General Insurance Co., Inc. v. Sweet Lines, Inc., 212 SCRA 194. 3" A. Magsaysay. Inc. v. Cebu Portland Cement Co., 1.00 Phil. 351 (1956).
August 5, 1992 337 A. Magsaysay, Inc. v. Cebu Portland Cement Co., 100 Phil. 351 (1956).

130 131
 autocontrac.ts are permissible if not expres ly ii. However, some contracts are real contracts, i.e., they
8
prohibited.33 Express prohibitions may be found in are not perfected until the delivery of the object of the
Article 1941 (sales) and Article .1890 (agency). obligation. (Art. 1 3 1 6) Examples: deposit, pledge and
commodatum.
However, this rule does not apply to administrators
of decedent's estates, in view of the fiducia1y m. In a solemn orformal contract, compliance with certain
relationship that they occupy with respect to the . formalities prescribed by law is essential in order to
heirs of the deceased and their responsibilities make the act valid, the prescribed form being an
toward the probate court. An administrator is not essential element thereof. Example: donation of real
permitted to deal with himself as an individual in property. .
any transaction concerning trust property. 339
c. Consummation begins when the parties perform their
c. "One binds himself, with respect to the other" - the respective undertakings under the contract culminating in
contract may .also be reciprocal, wherein both parties are the extinguishment thereof.
obliged to perform a prestation.
3. Classification of Contracts. The following are some of the
2. Stages of Contract.340 common classifications of contracts341 -

a. Negotiation covers the period from the time the a. According to dependence:
prospective contracting parties indicate interest in the
contract to the time the contract is concluded (perfected). i. principal - may exist alone (e.g., lease, sale or loan)
ii. accessory existence. depends on another contract
-

b. Perfection of the contract takes place upon the concurrnnce (e.g., pledge, mortgage, or suretyship)
of the essential elements thereof. Until the contract is
perfected, it cannot, as an independent source of obligation, b. According to perfection:
serve as a bindingjnridical relation.
i. consensual - perfected upon consent (e.g., sale);
i. In general, contracts are consensual, i.e., perfected by ii. real - perfected upon delivery, in addition to consent
mere consent (Art. 1 315), or upon a mere meeting of (e.g., commo.datum or pledge);
minds, i.e., the concurrence of offer and acceptance, on iii. formal - perfected upon execution of required
the object and on the cause thereof. Example: sale formalities (e.g., donation or mortgage of real
(Art. 1 458). property)

c. According to cause:

'" IV Tolentino 408

"' Jaroda v. Cusi, Jr., G.R. No. L-28214, July 30, 1969.
"' Ang Yu Asuncion v. CA, 238 SCRA 602 (1994); San Miguel Properties Phllippines, Inc. v.
Spouses Huang, G.R. No. 137290, July 31, 2000, 336 SCRA 737. "' IV Tolentino 410411 .
132 133
 i. onerous - parties exchange equivalent values (e.g., E.g., a renunciation of interest in real
sale); and property as payment of loan by the
33
ii. gratuitous - one party does not receive an equivalent renouncer is analogous to sale. 4
(d) Customs of the place.

value (e.g., commodatum)

d. According to the parties obliged: (3) Contracts which do not strictly conform to the
standard contracts . are allowed and may be

i. bilateral - both parties are required to perform considered innominate contracts. 344

reciprocal prestations (e.g., sale);

ii. unilateral - only one party is required to perform a
prestation (e.g., commodatum or gratuitous deposit) II. AUTONOMY OF CONTRACT

e. According to name: The contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they
i. nominate (those with particular names, like sle, lease, are not contrary to law, morals, good customs, public order, or

deposit, etc.) public policy. (Art. 1306)

ii. innominate (those without particular names)
A person's freedom to contract about his own affairs is part ofthe

(1) Innominate contracts are traditionally divided inio liberty of the individual under the Constitution. However, this

four types: freedom is not absolute and must yield to the common good.345
Thus, stipulations which are contrary to law, morals, good customs,

(a) Do ut des (I give and you give); public order or public policy are void.

(b) Do ut facias (I give and you do);

(c) Facio ut des (I do and you give)342; A. "LAW''
(d) Facio utfacias (I do and you do).
I. Applicable laws form part of and are read into the contract

(2) Innominate contracts are regulated by the without needfor any express reference.346

following: (Art. 1307)

2. Examples of contracts or stipulations prohibited by law:

(a) Stipulation ofthe parties;

(b) Provisions of Titles I (Obligations) and II a. Pactum commissorium - The creditor cannot

(Contracts) of Book !Vof the Civil Code; appropriate the things given by way of pledge or

(c) Rules governing the most analogous nominate

contract;
'" Perez v. Pomar, 2 Phil. 682 (1903); Corpusv. CA, G.R. No. L-40424, June 30, 1980.
.
343 Caolbes, Jr. v. Caoibes-Pantoja, G.R. No. 162873, July 21, 2006.
344 Santos v. Acuna, 100 Phil. 230 (1956)
34' People v. Pomar, 46 Phil. 440 (1924).
346. lntra-Strata Assurance Corp. v. Republic, G.R. No. 156571, July 9, 2008; Maritime Company
of the Philippines v. Reparations Commission, G.R. No. L-29203, July 26, 1971, 40 SCRA 70.

134 135
 mortgage, or dispose of them. Any stipulation to the
contrary is null and void. (Art. 2088)
b. Stipulation in contract of employment discriminatirig
against women (Labor Code, Art. 135) or prohibitirig
them from gettirig married.347 (Labor Code, Art. 136)
c. An agreement :o deprive a court of jurisdiction
conferred on it by law is void.348 Jurisdiction over an
action is conferred by law, and may not be changed by
.
mere agreement ofthe parties.349
B. MORALS AND GOOD CUSTOMS
I. Morals and good customs refer to general prii:iciples of
morality which have received a good measure' of social
acceptance.350 According to the Code Commission, morals
and good customs are distinct concepts, but some
commentators disagree.351
2. Examples:
a. Iniquitous, exorbitant and unconscionable stipulations
on interest rates, penalties and attorney's fees,352 such
as interest rates of 66% per armum,353 72% per
armum,354 or 108-120% per armum.355 Note, however,
that there is no fixed mle on what is unconscionable; in
one case, interest rate of 7% per month (or 84% per
armum) was upheld.356
'" Phil. Telephone and.Telegraph v. NLRC, G.R. No. 1 1 8978, May 23, 1997.
"' Principe v. Philippine-Singapore Transport Services, Inc., G.R. No. 80918, August 16, 1989.
'" Calimlim, et al. vs. Ramirez, et al., 118 SCRA 399; De Jesus, et al. vs. Garcia, et al., 19
SCRA554.
350 IV Tolentino 418.
351 See, e.g., IV Tolentino 418.
'" Imperial vs. Jaucian, G.R. No. 149004, April 14, 2004, 427 SCRA 517, 519.
'" Medel v. CA, 359 Phil. 820 (1998).
354 Carpo v. Chua, G.R. Nos. 150773 & 153599, September30, 2005.
'" Dino v. Jardines, G.R. No. 145871, January 31, 2006.
356 Sps. Pascual v. Ramos, G.R. No. 144712, July4, 2002.
136
b. Contracts for domestic. services without payment of
wages are void. 357
C. PUBLIC POLICY OR PUBLIC ORDER
1 . Public policy or public order refers to the public good or
the interest of the society. No person can lawfully do that
which has a tendency to be injurious to the public or
against the public good. 358
2. Examples:
a. Void: stipulation that a credit card holder who reported
the loss/theft of his credit card continues to be liable
for unauthorized charges until the credit company
notifies .its member establishments. Such clause leaves
the holder at the mercy of the credit card company.359
b. Void: stipulation which repudiates the existence of
employer-employee relationship to circumvent the
compulsory coverage of the employee under the Social
Security law. 360 The employment status of a person is
defined and prescribed by law and not by what the
parties say it should be. 36 1
c. Void: agreement to stifle prosecution of a crime.362 It
. would be detrimental to the administration ofjustice.
351 See De las Reyes v. Alo]ado, 1 6 Phil. 499 (1910).
"' Ferrazzini v. Gsell, 34 Phil. 697 (1916).
'" Ermitano v. Court of Appeals, 365 Phil. 671 (1999); Acol v. Phn. Commercial Credit Card,
Inc.. G.R. No. 1.35149, July 25, 2006.
"' Republic v. Asiapro Cooperative, G.R. No. 172101, ovember 23, 2007.
'" Republic v. Aslapro Cooperative, G.R. No. 172101, November 23, 2007, citing Chavez v.
National Labor Relations Commission, supra note 26 a.I 493; Lopez v. Metropolitan Wateiworks
and Sewerage System, G.R. No. 154472, 30 June 2005, 462 SCRA 428, 445446.
"' Arroyo vs. Berwln, 36 Phil. 386 (1917); Monterey vs. Gomez, et al., 104 Phil. 1059 (1958);
United General Industries, Inc. v. Par; G.R. No. L-30205, March 15, 1982.
137
 d. Void: a stipulation by a common carrier exempting h. Valid: automatic forfeiture clause in sale by
itself from liability or limiting its liability for injury or installment, which deems any previous payments
363 forfeited and the contract automatically rescinded upon
loss caused by its own negligence. (see Art. 1745)
the failure of the buyer to pay three successive monthly
i. However, a stipulation fixing the sum that may be installments or any one yearend lump sum payment.368
recovered from a common. carrier is valid if it is
reasonable and just under the circumstances, and i. Valid - provision in deed of restrictions that a buyer of
has been fairly agreed upon. (Art. 1750) a parcel of land automatically becomes member of the
homeowners' association and must pay association
ii. In a contract of private carriage, the parties may dues.369
validly stipulate that the shipowner is not liable for
loss of or damage to the cargo caused even by the j. Valid: stipulation in the sale of soCialized housing that
negligence of the ship captain. As the contract is the buyer must be in a.ctual possession of the house at
not of common carriage, public interest is not all times and cannot dispose of the same within 5
strictly involved.364 years.370

e. Void: stipulation for the commission of an agent in the k. Valid: stipulation that the creditor may apply any of the
prosecution or following-up of applications for import debtor's moneys in the creditor's hands for the
allocations or foreign exchange allocations from the payment of the debtor's obligation.371
365
govenunent.
3. "Non-involvement clauses" are those which prevent an
f. Valid: provision in a construction contract providing employee from working for another employer. In general,
for a I -year period during which the contract is liable they are valid if there are reasonable limitations as to time,
for defects. Contractor cannot be expected to make a trade and place, and if they .are not greater than is necessary
perpetual guarantee on all materials and to afford a fair and reasonable protection to the
366
workmanship. employer.372 Examples:

g. Valid: fixed-period employment contracts, unless the a. Clause prohibiting the employee from working for any
period was purposely intended to circumvent the company or business in the Philippines for 5 years -

employee's right to his security of tenure. 367 void, as there is no limitation as to trade.373

363 Ysmael & Co. v. Barretto, 51 Phil. 90. "' Valarao v. CA0G.R. No. 130347, March 3, 1999.
36" Valenzuela Hardwood and Industrial Supply, Inc. v. CA, G.R. No. 102316, June 30, 1997. 369 Cariday Investment Corporation v. Court of Appeals, 176 SCRA 31 (1989); Bel Air Village

365 Tee v. Tacloban Electrlc and Ice Plant Co., 105 Phil. 168 (1959); Sy Suan v. Regala, 105 fhil. Association, Inc. v. Dionisio, 174 SCRA589 (1989).
1024 (1959). 3;o Republic v. David, G.R. No. 155634, August 16, 2004.
366 William GolangcO Construction Corporation, v. Philippine Commercial International Bank, 371 National Sugar Trading v. PNB, G.R. No. 151218, January 28, 2003.
G. R. No. 142830, March 24, 2006. "'Tiu v. Platinum Plans Phil., Inc., G.R. No. 163512, February 28, 2007.
367 Brent School vs. Zamora, 181 SCRA 702 [1990]. 373 Ferrazziniv. Gsell, 34 Phil. 697, 714 (1916).

138 139
 b. Clause prohibiting the employee from working for any
company engaged in the same businesses of his former
employer for I year void, as the limitation as to
-
trade is not reasonable; the employee only worked in
the abaca business of the employer, and not in. any of
its numerous other businesses.374
c. Clause prohibiting employee from opening, owning or
having any connection with any other drugstore within
a radius of four miles from the employer's place of
business d1iring the time the employer was operating
his drugstore valid.315
- faith, usage and law. (Art. 13 15)
d. Clause prohibiting an independent agent for 1 year
from engaging directly or indirectly in actiyities of
other companies that compete with the business of her
principal valid.316
-
e. Clause prohibiting employee from engaging in any pre
need business akin to her employer's within 2 years
valid.371
III. CHARACTERISTICS
A. AUTONOMY: (see discussion above)
B. CONSENSUALITY: Contracts are generally deemed perfected
by mere consent. (Art. 13 15) No special form is necessar>y.
(Art. 1356)
Exceptions: In formal contracts (e.g., donation; mortgage
of real property), compliance with special formalities is
374 G. Martini, Ltd. v. Glaiserman, 39 Phil. 120, 125 (1918).
375 Del Castillo v. Richmond, 45 Phil. 679, 683 (1924).
376 Consulta v. Court of Appeals, G.R. No. 145443, March 18, 2005, 453 SCRA 732, 745.
377 Tiu v. Platinum Plans Phil., Inc., G.R. No. 163512, February 28, 2007.
.
140
also required. In real contracts (e.g., commodaturn;
pledge), delivery of the object is also required.
C. OBLIGATORINESS: Obligations arising from contracts have the
force of law between the contracting parties and should be
complied with in good faith. (Art. 1 1 59)
!. From the perfection of contract, 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
2. The mere fact that one has made a poor bargain may not be
a ground for setting aside the agreement. 378 The law does
not relieve a party from the effects of an unwise, foolish or
disastrous contract, entered into with full awareness of
what he was doing and entered into and carried out in good
faith. Courts have no jurisdiction to look into the wisdom
- of the contract entered into by the parties or to render a
decision different therefrom. 3 79
D. MUTUALITY: The contract must bind both contracting parties;
its validity or compliance cannot be left to the will of one of
them. (Art. 1308)
! . The determination of the performance may be left to a third
person, whose decision shall not be binding until it has
been made known to both contracting parties. (Art. 1309)
The determination shall not be obligatory if it is
evidently inequitable. In such case, the courts shall
decide what is equitable under the circumstances. (Art.
1310)
'" Fernandez v. Manila Electric Railroad, etc., Co., 14 Phil. 274 (1909).
379Sanchez v. Court of Appeals, 345 Phil. 155, 190-191 (1997).
141
 2. Under the principle of mutuality, no party can renounce a b. A subsidiary of the creditor corporation cannot collect
contract unilaterally or without the consent of the other. from the debtor. 386
30
To abandon a contract, mutual assent is required. 8
2. Transmissibility. UnderArt.
1 3 1 1, contracts are generally
Unless the parties stipulated that either one of them transmissible to the assigns and heil"s of the original
may unilaterally terminate the contract.381 contracting parties, except in the following cases387

3. Escalation clauses which grant the creditor an absolute a. Where the rights and obligations are not transmissible
right to adjust the interest independently and upwardly, by their nature.
without the consent of the debtor, is void.'82
This refors to rights and obligations which are
E. RELATIVITY: Contracts take effect only between the parties, strictly personal (intuitu personae). Examples:
-
their assigns and heirs. (Art. 1 3 1 1)
. (1) Those relating to family relations (such as
1 . Not Binding on Third Parties. Contracts can only
'
bind parental authority, action for nullity or
the parties who entered into it, and it generally cannot annulment of marriage or for legal separation,
favor or prejudice a third person, even if he is aware of cohabitation);
such contract and has acted with knowledge thereof. Since
a contract may be violated only by the parties thereto as (2) Those arising from public law (such as
against each other, a party who has not taken part in it suffrage or public office);
cannot sue for performance, unless he shows that he has a
real interest affected thereby.383 (3) Those which involve or require the personal
skills, characteristics, qualifications or
a. A party who is not privy to the contract cannot sue circumstances of a particular individual (such
upon breach thereof.384 Similarly, a person who is not as a contract for a concert by a famous singer,
privy to a contract cannot be sued or held liable for or a portrait commissioned from a
breach thereof.385 distinguished painter);
.

(4) Criminal responsibility (Art. 89, Revised Penal

Code)
"' HDMF v. CA, G.R. No. 118972, April 3, 1 998: Professional Academic Plans, Inc. v.
Crisostomo, G.R. No. 148599, March 14, 2005.
381 Cruz v. Puna, G.R. No. L-50998, January 31, 1983. However, civil liability arising from crime
"' Philippine National Bank v. Court of Appeals, G.R. No. 107569, November 8, 1994, 238 continues to be an obligation of the
SCRA 20; Sps. Florendo v. CA, G.R. No. 101771 , December 17, 1996; New Sampaguita
Buflders Construction, Inc. v. Philippine National Bank, G.R. No. 148753, July 30, 2004; deceased offender's estate.388
Fioirendo v. Metrobank, G.R. No. 148325, September 3, 2007; Equitable PCI Bank v. Ng Sheung
Ngor, G.R. No. 171545, December 19, 2007.
363 MWSS v. Bautista, G.R. No. 171351, March 14, 2008; Sps. Borromeo v. CA, G.R. No.
169846, March 28, 2008. 3" Sps. Borromeo v. CA, G.R. No. 169846, March 28, 2006.
384 Sps. Tan v. G.V.T. Engineering Services,,G.R. No. 1 53057, August 7, 2006. 3" Estate of K. H. Hemady v. Luzon Surety Co., 100 Phil. 388 (1956).
"' Integrated Packaging Corp. v. CA, G.R. No. 115117, June 8;2000. 368
Beiamala v. Poiinar, G.R. No. L-24093, November 18, 1967.
142 143
 b. Where the rights and obligations are not transmissible
by stipulation.
c. Where the rights and obligations are not transmissible
by provision oflaw.
Examples: usufruct (Art. 603); agency (Art. 1919)
commodatum (Art. 1939)
Note: The heir is not liable beyond the value of the
property he received from the decedent. (Art. 1 3 1 1)
Money debts left by the decedent are not transmissible
in the sense that they are paid from the estate of the
decedent, and only the net estate or remainder goes to
the heirs. If the decedent's estate is not sufficient to
'
pay his debts, his heirs cannot be held liable for said
debts in their personal capacity.389
3 . Qualifications to the Principle of Relativity. In the
following cases, a contract may be said to affect even non
parties390: (a) stipulation pour autrui (Art. 131 1); (b)
contracts creating real rights (Art. 1 3 1 2); (c) creditors'
right to rescind contracts which defraud them (Art. 1313);
..
(d) stranger's liability for unlawful interference with a
contract (Art. 1 3 14); (e) accion decreta (Art. 1729).
These are further discussed below.
4. Stipulation Pour Autrui. If a contract should contain
some stipulation in favor of a third person (stipulation pour
autrui), he may d.emand its fulfillment provided he
communicated his acceptance to the obliger before its
revocation. (Art. 1 3 1 1)
a. To constitute a valid stipulation pour autrui, a mere
incidental benefit or interest of a person is not
"' See Rules of Court, Rules 88-90.
390 Sps. Lagandaon v. CA, G.R. Nos. 102526-31, May 21, 1998. J. Vitug, dissenting.
144
sufficient. The contracting parties must have clearly
and deliberately conferred a favor upon a third person.
(Art. 1 3 1 1)
b. Requisites of a valid stipulation pour autrui'91 :
i. There _must be a stipulation in favor of a third
person;
ii. The stipulation in favor of a third person should be
a part, not the whole, of the contract;
iii. The contracting parties must have clearly and
deliberately conferred a favor upon a third person,
not a mere incidental benefit or interest;
(1) There must be an intent to benefit a third party,
and to recognize Ilim as the primary party-in
interest and privy in the promise. Put
otherwise, the contracting parties must have
intended to create a cause of action in favor of
the beneficiary.392
(2) An agent who stands to receive a commission
under a contract to sell a property is not a
beneficiary of a stipulation pour autrui and
thus cannot enforce the contract. His interest
is merely incidental.393
iv. The third person must have communicated his
acceptance to the obliger before its revocation; and
(1) Acceptance may be in any form. Even if the
benefit amounts to a donation, the acceptance
391 Baluyot v. CA, G.R. No, 122947, July 22, 1999; Sps. Ramos v. CA, G.R. No. 132196,
December 9, 2005.
392 Limitless Potentials, Inc. v, Quilala, G.R. No. 157391, July 15, 2005.
393 Uy v, CA, G.R. No, 120465, September 9, 1999.
145
 need not follow the fonnalities required for the provisions of the Mortgage Law and the Land Registration
acceptance of a donation.394 Laws. (Art. 1312)

(2) Acceptance may be implied from the third A real right directly affects the property subject to it;
party's enjoyment of benefits under the thus, whoever comes into possession of such property
stipulation,395 or from his perfonnance of his must respect that real right.401
obligations under the stipulation.396
Example: a registered mortgage over a property is
(3) Before acceptance by the third party, the binding even on a third person who subsequently
original contracting parties may revoke the acquires it, even if he was not party to the
stipulationpour autrui. mortgage.402
'

v. Neither of the contracting parties bears the legal 6. Contracts to Defraud Creditors. Creditors are protected
. representation or authorization of the third party. in cases of contracts intended to defraud them. (Art. 1313)

c. Examples: (i) a stipulation in a sublease contract that a. Example: contracts of the debtor disposing his property
the sublessee should directly pay rent to the principal gratuitously, without reserving sufficient property to
lessor391; (ii) a stipulation in a deed of donation pay off his previous debts. (Art. 1387)
requiring the donee to transfer title over a portion of
the subject property to the present occupants of the said b. The defrauded creditor may sue for the resc1ss1on
portion398; (iii) a stipulation in a deed of partition that (accion pau/iana) of the contract intended to defraud
the frnits of a particular parcel of land will be given to him. (Art.13 81, par. 3 ; Art. 1 1 77)
the Church to defray certain religious expenses399; (iv)
a stipulation in a contract between BANKARD, a 7. Unlawful Interference with Contracts. Any third person
credit card company, and its affiliated establishment who induces another to violate his contract shall be liable
that the latter will honor the BANKARD credit card for damages to the other contracting party. (Art. 1 314)
offered by a cardholder.400
a. Elements of unlawful or tortious interference403:
5. Contracts Creating Real Rights. In contracts creating
real rights, third persons who come into possession of the i. Existence of a valid contract;
object of the contract are bound thereby, . subject to the ii. Knowledge on the part of the third person of the
existence of contract; and
iii. Interference of the third person is without legal
394 Florentino v. Encarnacion, Sr., G.R. No. L-27696, 30 September 1 977, 79 SCRA 193;
Limitless Potentials, Inc. v. Quilala, G.R. No. 157391, July 15, 2005. justification or excuse.
"' Florentino v. Encarnacion, Sr., G.R. No. L-27696, 30 September 1977, 79 SCRA 193.
"' Tabar v. Becada, 44 Phil 619 (1923).
397 Limitless Potentials, Inc. v. Ouilala, G.R No. 157391, July 15, 2005.
"' Baluyot v. CA, G.R. No. 122947, July 22, 1999. '' IV Tolentino 438.
399 Florentino v. Encarnacion, Sr., G.R. No. L-27696, 30 September 1977, 79 SCRA 193. 4o2 Sps. Paderes v. CA, G.R. No. 147074, July 15, 2005.
<00 403
Mandarin Villa, Inc. v. CA,.G.R. No. 1 19850, June 20, 1996. So Ping Bun v. CA, G.R. No. 120554, September 21, 1999.
146 147
 b. Examples.\ (a) X induced the owner to lease a building
to him, knowing that said building had already been
Unless it is ratified, expressly or impliedly, by the
leased to another person, y44; (b) J induced the owner person on whose behalf it has been executed, before it
of a cinema film to break his contract of lease with a
is revoked by the other contracting party. (Art. 13 17)
theater owner, K, and lease the film to J, for the
purpose of exhibiting it in another theater in the same
Ratification is generally retroactive. It is as though
city.405
authority to do the act had been previously given,
except where the rights of third parties have
c. Remedies:
intervened between the act and the ratification.'0'

i. The wronged party is entitled to damages, but the

liability for damages of the meddler cannot be .

worse than the liability of the contracting party

who breached the contract.406

ii. Injunction is also

a proper remedy to res ain such
unlawful interference.'07

8. Accion directa. Those who put their labor upon or furnish

materials for a piece of work undertaken by the contractor
have an action against the owner up to the amount owing
from the latter to the contractor at the time the claim is
made. (A1t. 1729)

IV. UNAUTHORIZED CONTRACTS

I. 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. (Art. 1 317)

2. 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. (Art. 1317)

404 So Ping Bun v. CA, G.R. No. 120554, September 21, 1999.

405 Gilchrist v. Cuddy, 29 Phil. 542 (1915);

406 Daywalt v. Corporaclon de PP. Agustinos Recoletos, 39 Phil. 587 (1919).
407 Yu v. Court of Appeals, G.R. No. 86683, January 21, 1993.
40' De Jesus v. Daza, 77 Phil. 170 (1946).
148
149
 a. The offer must be certain. (Art. 1 3 1 9)
Chapter 7

Essential Requisites of b. The acceptance must be absolute. (Art. 1319)

Contract A qualified acce'ptance constitutes a counter-offer.

(A11. 1319)

L GENERAL PROVISIONS c. In addition to the subject matter and the consideration,

the area of agreement must extend to all points that the
There is no contract unless the following requisites concur: parties deem material.4\0

1 . Consent o f the contracting pa11ies; B. OFFER

2. Object certain which is the subject matter of the contract;

.
1. Definition. "Offer" means a unilateral proposition which
one party makes to the other for the celebration of the
3. Cause o fthe obligation which i s established. (Art. 13 18) Contract. 4J I

Note that for formal contracts, compliance with special formalities
is additionally required. For real contracts, delivery of the
object is additionally required.
2. Certain. The offer must be certain. (ii.rt. 13 19)
There is an offer in the context ofArticle 1 3 1 9 only if
the contract caii come into existence by the mere
acceptance of the offeree, without any further act on

II. CONSENT the part of the offerer. Hence, the offer must be
.
definite, complete and intentional.412

A. IN GENERAL .
An. invitation to negotiate,4" or an offer to
I. Concept. Consent is the conformity of the parties to the "entertain" or deliberate on whether to purchase a

terms of the contract; the acceptance by one of the offer yacht,414 is not a definite offer.
made by the other; the concurrence of the minds of the
parties on the objeCt and the cause which shall constitute 3 . Effectivity. An offer is effective until either party becomes
the contract. 409 incapacitated, or until the offer is withdrawn by the offerer.

2. Manifestation. Consent is manifested by the meeting of

the offer and the acceptance upon the thing and the cause "" A. Magsaysay, Inc. v. Cebu Portland Cement Co 100 Phil. 351 (1 956); Bugatti v. CA, G.R.
.

No. 138113, October 17, 2000.

which are to constitute the contract. (Art. 1 3 1 9) 41 1 Sps. Paderes v. CA, G.R. No. 147074, July 15, 2005.

41 2 Sps. Paderes v. CA, G.R. No. 1 47074, July 15, 2005.

413 Sps. Paderes v. CA, G.R. No. 147074, July 15, 2005.
4'
Greater Metropolitan Manila Solid Waste Management Committee v. JANCOM Environmental
Corp., G.R. No. 163663, June 30, 2006. 41 4 Rosenstock v. Burke, 46 Phil. 217

150 151
 a. Incapacity. . An offer becomes ineffective upon the
death, civil interdiction, insanity, or insolvency of (2) Also, a unilateral promise to sell must be
either party before acceptance is conveyed. (Art. 1323) distinguished from a bilateral promise to buy
and sell which, as long as the object is
"Conveyed" means the time when the offerer determinate and the price certain, is
learns of the acceptance by the offeree. reciprocally demandable.41 8 (Art. 1479, first
par.)

b. Withdrawal. As a general rule, the offerer may

withdraw the offer at any time before he learns of the Note also that a unilateral promise to sell,
acceptance by the offeree. when accepted, becomes a bilateral
promise to buy and sell.419
The withdrawal is effective immediately after its
manifestation, such as by its mailing, and not ii. As an exception, the offer may not be withdrawn
necessarily when the offeree learns of its when it is founded upon a consideration, as
withdrawal.415 Thus, if A makes an offer to Ji!, and B something paid or promised. (Art. 1324) The
mails his acceptance to A, but before receipt thereof, A consideration must be separate and distinct from
already mails withdrawal to B, there is no contract. the price in the principal contract. In such a
The offer is deemed withdrawn upon B's mailing of situation, a contract of "option" is created.
withdrawal (before the contract could be perfected by
B's receipt of the acceptance). (1) An "option contract" grants a person the
choice, for a distinct and sep'arate
When Period is Given. When the offerer has allowed consideration, to purchase a determinate thing
42
the offeree a certain period to accept - at a predetermined fixed price. 0

i. As a general rule, the offer may still be withdrawn (2) Withdrawal of the offer or option would be a
at any time before acceptance by communicating breach of the option contract, which would
such withdrawal. (Art. 1324) .Thus, a unilateral render the offerer liable for damages.421
promise to sell under Art. 1479 may be withdrawn
at any time.416 In case of . breach, the remedy of the
offeree/optionee is damages for breach of
(1) However, this right should not be exercised the option contract,. and not damages or
whimsically or arbitrarily, as it could give rise specific performance of the contract which
to a claim for damages under Art. 1 9 on abuse is the object of the option. The option
ofrights.417 contract is distinct from the main contract

4" Laudico v. Anas, 43 Phil. 270 (1922). 416 Ang Yu Asuncion v. CA, 238 SCRA 602, 612 (1994).
41' Atkins, Kroll & Co. v. Cua, 102 Phil. 948 (1958); Ang Yu Asuncion v. CA, 238 SCRA 602, 613 419 Atkins, Kroll & Co. v. Cua, 102 Phil. 948 (1958).
420 Beaumont v. Pneto, 41 Phil. 670 (1916).
(1994).
421 Ang Yu Asuncion v. CA, 238 SCRA 602, 614 (1 994).
417 Ang Yu Asuncion v. CA, 238 SCRA 602, 613 (1994).

152 153
 (e.g., sale) which is the object of the seek specific performance of the owner' s
option.422 obligation to grant him the right of first
refusal427 (by allowing the right-holder to .
(3) If the consideration given is really intended as buy the property at the same terms and
part of the consideration for the main contract, conditions at which it was sold to the third
the main contract conld be deemed party).
perfected.423 Thus, an "earnest money" in a
contract of sale is evidence of its perfection. 4. Advertisements.
(Art. 1482)
a. Unless it appears otherwise, business advertisements of
(4) A "right offirst refusar' (where X gives Y the things for sale are not definite offers, but mere
right to buy a property should X decide.to sell invitations to make an offer. (Art. 1325)
it) is not an option contract because it depends
on whether X will decide to sell the property b, Advertisements for bidders are simply invitations to
. 2
and on terms that are not yet determmte.4 4 make proposals, and the advertiser is not bound to
accept the highest or lowest bidder, unless the contrary
Since it is not an option contract, a right of appears. (Art. 1326)
first refusal does not need separate
consideration to be valid. The right of first c. Public advertisements offering rewards or prizes, such
refusal may be a clause in a principal as in contests or competitions, constitute unilateral
contract (e.g., lease), in which case the promise. When a member of the public performs an
consideration for the right of first refusal act pursuant to the offer (e.g., participates in the
forms part of the consideration for the contest), such action constitutes an acceptance which
. .
prmc1pa1 contract.'2' converts the promise into a contract binding on the
advertiser.428
In case the right of first refusal is violated
- i.e., the owner sells the property to a
third person without first allowing the
right-holder to purchase it - the right of Appeals, G.R. No. 1 173!i5, Aprtl 5, 2002, 380 SCRA 245, 259-260; Tanay Recreation Center
holder may: (a) seek the rescission of the and Development Corp. v. Fausto, G.R. No. 140182. April 12, 2005.
421 Equatorial Realty Developmen\ Inc. v. Mayfair Theater, Inc., 264 SCRA 483, 509-10 (1996);
sale as a rescissible contract426; and (b)
Paranaque Kings Enterprises, Inc. v. CA, 268 SCRA 727 (1997); Riviera Filipina, Inc. vs, Court
of Appeals, G.R. No. 117355, April 5, 2002, 380 SCRA 245, 259-260; Tanay Recreation Center
and Development Corp. v. Fausto, G.R. No. 140182. April 12, 2005.
"' Ang Yu Asuncion v. CA, 238 SCRA 602, 614 (1994). Note that in Ang Yu Asuncion v. CA, 238 SCRA 602, 614615 (1994), the Supreme Court
423 Ang Yu Asuncion v. CA, 238 SCRA 602, 614 (1994); Sps. Co v, CA, G.R. No. 1 12330, (through J. Vitug) held that a right of first refusal is not governed by the law of contracts, and
August 17, 1999. violation cannot give rtse to action for specific pertormance. It Is covered by the provisions of
42 Ang Yu Asuncion v. CA, 238 SCRA 602, 614-615 (1994). Equatortal Realty Development, Inc. human relations and violation may give rtse to damages for abuse of rights under Art. 19. In
v. Mayfair Theater, Inc,, 264 SCRA 483, 500 (1996).

Equatortal, J. Vitug dissented and reiterated that a right of first refusal cannot be considered a
"" Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 264 SCRA 483, 505 (1996). contract because the basic terms (particularly the consideration for the future sale) wou1d have
426 Equatorial Realty Development, In v. Mayfair Theater, Inc,, 264 SCRA 483, 510 (1996);

. yet to be determined and fixed.

Paranaque Kings Enterprtses, Inc. v. CA, 268 SCRA 727 (1997); Riviera F1lipma, Inc. vs. Court 429 Dela Rosa v. BPI, 51 Phil. 926 (1924).

154 155
 C. ACCEPTANCE
1. Definition. Acceptance is the conformity by the offeree to
the proposition of the offerer.
2. Absolute.
a. The acceptance must be absolute. (Art. 1319)
To produce a contract, the acceptance must not
qualify, modify or vary the terms of the offer.
There is no acceptance sufficient to produce
consent, when a condition in the offer is removed,
.or a pure offer is accepted with a condition, or
when a term is established, or changed, in the
acceptance, or when a simple obligation is
converted by the acceptance into an alternative
one; in other words, when something is desired
which is not exactly what is proposed in the
offer.429
b. A qualified acceptance constitutes a counter-offer.
(Art. 1 3 1 9)
Any modification or variation from the terms of
the offer annuls the latter and frees the offerer.430
The original offerer is free to accept or refuse the
counter-offer.
3. Knowledge of the Acceptance. The acceptance of an offer
must be made known to the offerer.431 The contract is
perfected only from the time the acceptance of the offer is
made known to the offerer.432 Unless and until the offerer
42' Sps. P.aderes v. CA, G.R. No. 1 47074, July 15, 2005.
430 Sps. Paderes v. CA, G.R. No. 147074, July 15, 2005.
'" Malbarosa v. CA, G.R. No. 125761, April 30, 2003, citing Jardine Davies, Inc. v. Court of
Appeals, et al., 333 SCRA 689 (2000).
432 Malbarosa v. CA, G.R. No. 125761, April 30, 2003.
i56
knows of the acceptance, there is no meeting of the minds
of the parties, no real concurrence of offer and
acceptance.433
a. The offerer may withdrriw his offer before he learns of
the acceptance thereof by the offeree.434 The contract is
not perfected if the offerer withdraws his offer, and the
withdrawal is made before he learns of the
acceptance.435
b. Acceptance made by letter or telegram does not bind
the offerer except from the time it came to his
knowledge. (Art. 13 19)
The contract,' in such a case (acceptance by letter
or telegram), is presumed to have been entered into
in the place where the offer was made. (Art. 1 3 1 9)
c. An offer made through an agent is accepted from the
time acceptance is communicated to him (i.e., the
agent). (Art. 1 322)
A messenger or intermediary or Jetter-earner who
brings the offer is not necessarily an agent. The
contract is not perfected by communicating the
acceptance to a messenger.
4. Express or Implied. An acceptance may be express or
implied. (Art. 1320)
a. Acceptance may be implied from the contemporaneous
and subsequent acts of the contracting parties. Thus,
performance of the conditions in a "conditional
"' Malbarosa v. CA, G.R. No. 125761, April 30, 2003, citing Enriquez v. Sun Life Assurance, 41
Phil. 269. Laudico v. Arias, 43 Phil. 270 (1922).
"4 Laudico v. Arias, 43 Phil. 270 (1922).
4" Laudico v. Arias, 43 Phil. 270 (1922); Malbarosa v: CA, G.R. No. 125761, April 30, 2003.
157
 counter-offer" amounts to acceptance of said counter D. CAPACITY TO GIVE CONSENT
offer. 436
I . Capacity. As a general rule, any person of legal age can

b. In general, the offeree is not bound to answer a give consent to a contract unless there is a ground for his

proposal, and his silence per se cannot be construed as incapacity provi_ded by law.

an acceptance.437 As an exception, however,

acceptance may be implied from silence if clearly Capacity is presumed; the party who alleges the

warranted by the circumstances. (see Art. 1 870) incapacity of a certain person has the burden to prove

such incapacity. 440

c. If the offeree requires express acceptance, it should be

done expressly. (Art. 1321) 2. Incapacity. The following cannot give consent to a
contract:

5. Time, Place and Manner. The person making the offer

may, fix the time, place, and manner of acceptance, all of a. Unemancipated minors (Art. 1327)
which must be complied with. (Art. 1321)
i. The reference to "unemancipated" minors is meant

a. An acceptance which is not made in the manner, place to distinguish them from minors who had been

or period prescribed by the offerer is not effective but emancipated by marriage (under the Civil Code,
constitutes a counter-offer, which the offerer may . persons below 1 8 years old could marry). With the

accept or reject. 438 Family Code setting the age of consent for
marriage to 18 years old, which is also the age of

b. In general, when the offerer has not fixed a period for majority, there is no longer a possibility of an
the offeree to accept the offer, and the offer is made to emancipated minor.
a person present, the acceptance must be made
immediately. 439 n. A minor (near the adult _age) who misrepresented
that he was of legal age may be deemed estopped

6. Revocation of Acceptance. Acceptance may be revoked, to deny his lack of capacity.44 1 This doctrine,
but the revocation must be niade known to the offerer however, has been criticized on the ground that a
before he learns of the acceptance. For as soon as the minor cannot be bound by his representations in
offerer learns of the acceptance, the contract is deemed the same way that he cannot be bound by his

perfected. contracts. 442

44 Calalan v. Basa, G.R. No. 159567, July 31, 2007, citing Miguela Carillo v. Justimiano Jaojoco

436 JardineDavis, Inc. v. CA, G.R. No. 1 28066, June 19, 2000.
'" Mendoza v. CA, G.R. No. 116710, June 25, 2001.
438 Malbarosa v. CA, G.R. No. 125761, April 30, 2003.
439 Malbarosa v. CA, G.R. No. 125761, April 30, 2003.
46 Phil. 957, 960 (1924), Vitalista, el al. v. Perez, et al., G.R. No. 164147, June 16, 2006, 49 {
SCRA 127.
441 Mercado v. Espiritu, 37 Phil. 215 (1917); Suan v. Alcantara, 85 Phil. 669 (1950).
442 J. Padilla, concurring, in Suan v. Alcantara, 85 Phil. 669 (1950). J. Padilla cited Young vs.
Tecson, 39 O.G. 953.

158 159
 b. Insane or demented persons; (Art. 1 327) Note that in this case, the burden of proof
has shifted to the party alleging sanity or
1. Contracts entered into during a lucid interval are lucidity.
valid. (Art. 1328)
c. Deaf-mutes who do not know how to write. (Art.
ii. Contracts agreed to in a state of drunkenness or 1327)
during a hypnotic spell are voidable. (Art. 1328)
3. Other Grounds for Incapacity/Disqualification. The
Notes: incapacity declared in Article 1327 .is subject to the
(!) The person who questions the sanity of a party modifications determined by law, and is understood to be
to a contract must prove that such party was of without prejudice to special disqualifications established in
unsound mind at the time of the making of the the laws. (Art. 1329)
contract.443
a. The Rules of Court provide that an "incompetent"
(a) It is not sufficient to show ,that the person may be placed 6n guardianship. The word
'
contracting party was judicially declared "incompetent" includes:446
incompetent several days after the
execution of the contract444 i. Persons suffering the penalty of civil interdiction;

(b) A person suffering from schizophrenia ii. Hospitalized lepers;

does not necessarily lose . his competence
to intelligently dispose his property. The iii. Prodigals;
said illness waxes and wanes over many
years, with only very slow deterioration of iv. Persons who are deaf and dumb who are unable to
intellect. The party who challenges the read and write;
capacity of the schizophrenic must still
show that at the time of the contract, the v. Persons who are of unsound mind, even though
schizophrenic was not of sound mind.445 they have lucid intervals, and

(2) A person who has been judicially declared vi. Persons not of unsound mind, but by reason of age,
mentally incapacitated and placed on disease, weak mind, an.d other similar causes,
guardianship may still validly enter into cannot, without outside aid, take care of
contracts if it can be shown that he had a lucid themselves and manage their property, becoming
interval at the time of execution. thereby an easy prey for deceit arid exploitation. .

"' Carrillo v. Jao]oco, 46 Phil. 597 (1924); Ctalan v. Basa, G.R. No. 159567, July 31 , 2007.
444 Carrillo v. Jaojoco, 46 Phil. 597 (1924).
445 Catalan v. Basa, G.R. No. 159567, July 31, 2007. "' Rule 92, Section 2.
.
160 161
 b. The law also provides for specific disqualifications, by error; freedom is vitiated by violence, intimidation
. or undue

such as the disqualification of foreigners to acquire il:ifluence; spontaneity is, vitiated by fraud.449

land or the disqualification of spouses to sell to each

other. Defect or lack ofvalid consent, to make a contract voidable,
must be established by full, clear and convincing evidence, and

4. Effect of lncapacity. not merely by a preponderance thereof.450 The presumption is

that a person takes ordinary care of his concerns and that

a: If one of the parties to a contract is incapacitated, the private transactions have been fair and regnlar.451

contract is voidable (not void). (Art. 1390)

1. Mistake.
b. If both parties to a contract are incapacitated, the
contract is unenforceable (not void). (Arts. 1403[3] and a. In order that mistake may invalidate consent, it should
1407) refer to:

If a party is disqualified by law, the cqntract is i. The substance of the thing which is the object of
void, the contract (Art. 1 3 3 1), or

E. VICES OF CONSENT ii. Those conditions which have principally moved

one or both parties to enter into the contract. (Art.
Consent is essential to the exiStence of a contract. If consent is 1331)
absent, the contract is non-existent.
441
(I) Mistake as to the identity or qualifications of
If consent is present, but it was given through mistake, one of the parties will vitiate consent only
violence, intimidation, undue influence, or fraud, the contract is when such identity or qualifications have been
voidable. (Art. 1330) the principal cause of the contract. (Art. 1331)

Consent has the following requisites: (1) it should be intelligent Identity or qualifications can usually
or with an exact notion of the matter to which it refers; (2) it become material in obligations to do (e.g.,

should be free; and (3) it should be spontaneous.448 These to perform in a concert or paint a portrait).
requisite characteristics are vitiated by the aforementioned
vices or defects of consent intelligence in consent is vitiated (2) A simple mistake of account shall give rise to
its correction. (Art. 1331)

'"Amado v. Salvador, G.R. No. 171401, December 13, 2007.
"' Lim, Jr. v. San, G.R. No. 159723, 9 September 2004, 438 SCRA 102, 106107; Leonardo v.
CA, G.R. No. 125485, 13 Seplember2004; Vcia. De Ape v. CA, G.R. No. 133638, April 15, 2005;
Catalan v. Basa, G.R. No. 1 59567, July 31, 2007; Espino v. Vicente, G.R. No. 168396, June 22,
2006; Amado v. Salvador, G.R. No. 171401, December 13, 2007.
162
'" Lim, Jr. v. San, G.R. No. 159723, 9 September 2004, 438 SCRA 102, 106-107; Leonardo v.
CA, G.R. No. 125485, 13 September 2004; Vda. De Ape v. CA, G.R. No. 133638, April 15, 2005.
450 Lim, Jr. v. San, G.R. No. 159723, 9 September 2004, 438 SCRA 102; Acabal v. Acabal, G.R.
No. 148376, March 31, 2005.
451 Heirs of Zambas v. CA, G.R. No. L-54070, February 28, 1983.
163
 This refers to error in mathematical be considered valid even if there is a mistake
computation. The amount intended will in the designation of its lot number or TCT
govern. number.456 The remedy here is reformation of
instrument.
Notes:
(1) The concept of error in Art. 1331 includes b. There is no mistake if the party alleging it knew the
both: (a) ignorance, which is the absence of doubt, contingency or risk affecting the object of the
knowledge with respect to a thing, and (b) contract. (Art. 1333)
mistake properly speaking, which is a wrong
conception about said thing, or a belief in the i. To invalidate consent, the error must be real and
existence of some circumstance, fact, or event, not one that could have been avoided by the party
which in reality does not exist. In both cases, alleging it. An error so patent and obvious that
there is a lack of full and correct knowledge nobody could have made it, or one which could
about the thing.452 have been avoided by ordinary prudence, cannot be
invoked by the one who made it in order to annul
Examples of mistake proper: (a) ale of a d his contract.457
parcel of land which the seller mistakenly
thought he owned453; (b) sale a parcel of ii. Alleged mistake as to the area of the land or
land which the seller thought and encroachments thereon may be considered
represented to be 30 hectares, but turned inexcusable as it could be avoided through a
out to be only 18 hectares454 geodetic survey.458

(2) The error must be the . causal, not merely c. Mutual error as to the legal effect of an agreement
incidental, factor that induced the complaining when the real purpose of the parties is frustrated, may
ss
party to enter into the contract. 4 vitiate consent. (Art. 1334)

Error as to quality (a DVD movie which i. As a rule, mistake of law,459 or misappreciation of

turned out to be boring) or as to value (a the legal import of the contract, 460 will not vitiate
jewelry which turned out tO be overpriced) consent.
is generally merely incidental.
ii. Art. 1334 provides for an exception, but the
(3) Mere error as to designation will not vitiate following requisites must be present: (a) the error
consent, as long as the intended object is clear . is mutual; (b) it refers to the legal effect of the
Thus, a sale of a particular parcel of land may
"' Atilanov. Atilano, G.R. No. L-22487, May 21, 1969.
"' Alcasid v. CA, G.R. No. 104751, October 7, 1994; Domingo Realty, Inc. v. CA, G.R. No.
452 Sps. Theis v. CA, G.R. No. 126013, February 12, 1997. 126236, January 26, 2007.
'" Sps. Theis v. CA, G.R. No. 126013, February 12, 1 997. "' Domjngo Realty, Inc. v. CA, G.R. No. 126236, January 26, 2007. .
"' Asian v. Jalandoni, 45 Phil. 296 "' Dandan v. Ariel Realty & Management Corp., G.R. No. 173114, September 8, 2008.
450 Periquet v. Reyes, G.R. No. L-23886, December 29, 1967. "' Periquet v. Reyes, G.R. No. L-23886, December 29, 1967.
164 165
 agreement; (c) the real purpose of the parties is weakness, tender age or other handicap, the courts
jiustrated. must be vigilant for his protection. (Art. 24)

iii. Art. 1334 may encompass mistake as to the nature e. If a party signed a contract without knowing what it
.
of the contract.461 Thus, if A promises to lend B a was, there is no consent, and the contract is
' vo1' d.465
particular thing, and B agrees in the belief that it is

donated to him, there is no contract.462 2. Violence.

d. When one of the parties is unable to read, or if the a. There is violence when in order to wrest consent,
contract is in a language not understood by him, and serious or irresistibleforce is employed. (Art. 1335)
mistake or fraud is alleged, the person enforcing the Requisites of violence as a vice of consent:
contract must show that the terms thereof have been .

fully explained to the former. (Art. 1332) i. The force must be: the determining cause of the
contract, or. must have caused the consent to be
(i) Note that Art. 1332 creates a presumption of given;
mistake and fraud, upon a showing that: (!) one of
the parties is unable to read, or (2) the contract is in ii, The force must be serious or irresistible.
a language not understood by him. If these
circumstances .are shown,. the burden shifts to the b. Violence shall annul the obligation, although it may
other party (who seeks to enforce the contract) to have been employed by a third person who did not
rebut the presumption of mistake and fraud463 (by take part in the contract. (Art. 1336)
showing that the contract was fully explained to
the disadvantaged party and was freely consented 3. Intimidation.
to).464

a. There is intimidation when one of the contracting

ii. If the illiterate party is the one seeking to enforce
the contract, he need not prove that the contracts
was fully explained to him.
iii. A11. 1334 is based on the principle that when one
of the parties is at a disadvantage on account of his
moral dependence, ignorance, indigence, mental .
parties is compelled to give his consent by a reasonable
and well-grounded fear of an imminent and grave evil
upon his person or property, or upon the person or
property of his spouse, descendants or ascendants.
(Art. 1 335)
Requisites of intimidation as vice of consent466:

i. The intimidation must be the determining cause of

the contract, or must have caused the consent to be
'" IV Tolentino 488.
'" IV Tolentino 478. given;
"' Sales v. CA, G.R. No. L40145, July 29, 1992; Leonardo v. CA, G.R. No. 125485, 13
September 2004. '" Baranda v. Baranda, G.R. No. L-73275, 20 May 1987, 150 SCRA 59.
'" Sales v. CA, G.R. No. L-40145, July 29, 1992. "' De Leon v. CA, G.R. No. 80965, June 6, 1990.
166 167

u. The threatened act be unjust or unlawful;
A threat to enforce one's claim through
competent authority, if the claim is just or
legal, does not vitiate consent. (Art. 1335)
(a) There is nothing unlawful in a threat to sue
as a means to enforce a claim, even if a
claim proves to be unfounded, as long as
the claimant believes it was his right to do
so.467
(b) Thus, therei s no intimidation in a threat to
file an estafa case against an eriployee
unless the latter resigns,'68 or to file
criminal charges against a bank . teller
unless she returns the proceeds of a
spurious check,'69 or to foreclose a
mortgage unless the debtor signs
promissory notes to restructure the loan.470
(c) Thus, a threat to file a case for immorality
against a bar candidate if he does not
marry a girl he had sex with, does not
vitiate consent. 47 1
iii. The threat must be real and serious, there being an
evident disproportion between the evil and the
resistance which all men can offer, leading to the
choice of the contract as the lesser evil; and
"' Lee v. CA. G.R. No. 90423, September 6, 1991, Berg v. National City Bank of New York, 102
Phil. 309, 316.
466 Callanta v. NLRC, G.R. No. 105083, August 20, 1993.
'" Lee v. CA, G.R. No. 90423, September 6, 1991.
"' Development Bank of the Phils. v. CA, G.R. No. 138703, June 30, 2006; 'Development Bank
of the Phils. v. Perez, G.R. No. 148541, November 11, 2004.
471 Ruiz v. Atienza, CA, 40 O.G. 1903.
168
iv. The threat produces a reasonable and well
groundedfear fro1n the fact that the person from
whom it comes has the necessary means or ability
to inflict the threatened injury.
b. To determine the degree of intimidation, the age, sex
and condition of the person
. shall be borne in mind.
(Art. 1335)
i. Mere reluctance or hesitation in giving consent
does not vitiate it. To vitiate consent, it must be
shown that the party acted against his will under a
pressure he cannot resist; or that his sense,
judgment, and his will rebel and he refuses
absolutely to act as requested, but is nevertheless
overcome by force or intimidation to such an
extent that he becomes a mere automaton and acts
mechanically only. 472
ii. A high level of education usually entails that a
person is less susceptible to intimidation.473
c. Intimidation shall annul the obligation, although it may
have been employed by a third person who did not
take part in the contract. (Art. 1336)
4. Undne lnflnence.
a. There is undue influence when a person takes improper
advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice.
. (Art. 1337)
Undue influence is any means employed upon .a
party which, under the circumstances, he could not
"'Lee v. CA, G.R. No. 90423, September 6, 1991, citing Vales v. Villa, 35 Phil, 769, 789.
473See Lee v. CA, G.R. No. 90423, September 6, 1991; Sicangco v, NLRC, G.R. No. 110261,
August 4, 1994; Amkor Technology Phils, Inc. v. Juangco, G.R. No. 166507, January 23, 2007,
169
 well resist and which controlled Iris volition and ignorance, indigence, mental weakness, tender age,
induced him to give his .consent to the contract, and other similar handicap.478 (Art. 24)
which otherwise he would not have entered into. It
must destroy the free agency of a party and ii. In some exceptonal cases, the court may even set
interfere with the exercise of that independent aside prejudicial stipulations in an adhesion
discretion which is necessary for determining the contract (such as a clause on an inconvenient
advantages or disadvantages of a proposed venue).479 A typical example is transportation
contract.474 tickets, which are usually accepted by passengers
or the riding public without paying much attention,
b. The following circumstances shall be considered (Art. particularly when the available common carriers
0
1337): serving a given area "are few ,48

i. The confidential, family, spiritual and other iii. Note, however, that contracts of adhesion are not
.relations between the parties, or invalid per se and not strictly against the law; they
'
are as binding as ordinary contracts.481 This is
ii. The fact that the person alleged to have been particularly so in contracts entered into by
unduly influenced was suffering from mental educated persons or by seasoned businessmen,
weakness, or was ignorant or in financial distress. since they are presumed to have acted with due
care and to have signed the contracts with full
However, financial distress per se cannot be knowledge of its import.482 The court may also .
equated with undue influence.475 consider the nature of the transaction and the
amount of money involved; major transactions
c. Contracts ofAdhesion - A contract of adhesion is one involving huge sums of money are naturally
wherein almost all of the provisions are drafted by one deemed to have b.een entered only with care,
party. The participation of the other party is limited to deliberation and diligent study.483
affixing his signature or his 'adhesion' to the
contract.476

i. Any ambiguity, obscurity or doubt in a contract of

adhesion is construed or resolved strictly against
the party who prepared it.477 The purpose of this is
to protect a party who is disadvantaged because of
"'Alcasid v. CA, G.R. No. 1 04751, October 7, 1994.
4" Sps. Carpo v. Chua, G.R. Nos. 150773 & 153599, September 30, 2005.
476 Equitable PCI Bank v. Ng Sheung Ngor, 541 SCRA233, 239 (2007).
477 Spouses Panlilio v. Citibank, N.A., 539 SCRA 69, 93 (2007). See also Ayala Corporation vs.
Ray Burton Development Corporation, 294 SCRA 48, 69 (1998); Spouses Litonjua v. L&R Corp.,
328 SCRA 796, 805 (2000); Rizal Commercial Banking Corporation v. Court of Appeals, 305
SCRA 449, 454-455 (2002).
47' Ayala Corporation vs. Ray Burton Development Corporation, 294 SCRA 48, 6869 (1998).
419 Sweet Lines, Inc. v. Teves, 83 SCRA361 (1978).
"' Sweet Lines, Inc. v. Teves, 83 SCRA 361 (1978).
481 Rizal Commercial Banking Corporation v. Court of Appeals, 305 SCRA 449, 454 (2002);
Ayala Corporation vs. Ray Burton Development Corporation, 294 SCRA 48, 67-68 (1998).
482 Development Bank of the Philippines vs. National Merchandising Ccrporation, 40 SCRA 624
(1971); Spouses Liton)ua v. L&R Corp., 328 SCRA 796 (2000); Pilipino Telephone Corporation v.
Tecson, 428 SCRA 378 (2004); Dia v. St. Ferdinand Memorial Park, Inc., 509 SCRA 453 (2006);
Spouses Panlilio v. Citibank, N.A., 539 SCRA 69 (2007); Uy v. People, G.R. No. 174899,
September 1 1, 2008.
'" Development Bank of the Philippines vs. National Merchandising Corporation, 40 SCRA 624
(1971); Pilipino Telephone Corporation v. Tecson, 428 SCRA 378 (2004); Spouses Panlilio v.
Citibank, N.A., 539 SCRA 69 (2007); Uy v. People, G.R. No. 174899, September 1 1 , 2008.

170 171
 d. Undue influence shall annul the obligation, although it
may have been employed by a third person who did b. Classification. The fraud or dolo which is present at
not take part in the contract. (by analogy with Art. the time of birth or perfection of a contract may either
1336) be dolo causante or dolo incidente.
488

5. Fraud. i. Dalo causante or causal fraud - insidious words

or mchinations of one of the contracting parties,
a. In General. There. is fraud when, through insidious through which the other is induced to enter into a
words or machinations of one of the contracting contract which, without them, he would not have
parties, the other is induced to enter into a contract agreed to. (Art. 1338)
which, without them; he would not have agreed to.
(Art. 1338) (I) Dalo causante detennines or is the essential
cause of the consent. It is the type of fraud
i. "Insidious words or machinations" include false which vitiates consent. 489
promises, the exaggeratio11 of hopes or benefits,
the abuse of confidence, the use of !pretended (2) To vitiate consent, the following requisites
names, qualities, or powers, and the thousand other must ollcur490:
forms of deceit, .by which one may be misled.484
(a) It must have been employed by one
ii. The fraud under Art. 1338 which is deemed a vice contracting party upon the other (Art. 1342
of consent refers to that which is employed prior or and 1344);
simultaneous to the creation of the contract.4"
This should be distinguished from fraud under Art. (b) It must have induced the other party to
1 171, which is fraud in thefulfillment of a contract enter into the contract (Art. 1338);
or obligation already existing. Fraud under Art
1 1 71 is bad faith in the performance of an (c) It must have been serious (Art. 1344);
obligation or a conscious and intentional design to
evade the normal fulfillment of existing (d) It mnst have resulted in damage and injury
obligations.486 to the party seeking annulment.

iii. Good faith is presumed, and allegations of fraud ii. Dalo inc/dente or incidental fraud - fraud which
must be proved .
by clear and convincing is not serious in character and without which the
evidence.487 other party would still have entered into the
contract. 491

'" Strong v. Gutierrez Repide, 6 Phil. 680 (1906).

"' Caram, Jr. v. Laureta, G.R. No. L-28740, February 24, 1981. 488 Geraldez v. CA, G.R. No. 108253, February 23, 1994.
486 Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc. and Myers Building Co., G.R. No. L
489Geraldez v. CA, G.R. No. 108253, February 23, 1994.
25885, January 31, 1972, 43 SCRA 93 "" Alcasid v. CA, G.R. No. 104751, October 7, 1994.
.. 487 Chiang Yla Min v. CA, G.R. No. 137932, March 28, 2001.
"' Geraldez v. CA, G.R. No. 108253, February 23, 1994.
172 173


remained unimpaired regardless of the

Dalo incidente refers only to some particulars
or accident of the obligations. It merely obliges
the person employing it to pay damages. 492
(Art. 1344)
c. Determination ofFraud.
i. Failure to disclose facts, when there is a duty to
reveal them, as when the parties are bound by
confidential:relations, constitutes fraud. (Art. 1339)
Examples: (1) X, the managing director and
controlling stockholder of company ABC
purchased, through an agent, additiol)al ABC
shares from an existing stockholder; Y.
!mew, but did not disclose to Y, that the value
of the shares would be greatly enhanced
because of a transaction being negotiated.
was held that the purchase was fraudulent. As
managing director, X .had the duty to disclose
the circumstances affecting the value of the
shares. 493
(2) A mortgaged his .land to Bank to secure a
loan. A then sold the land to Z who assumed
the mortgage. Z entered into an agreement
"'.ith the Bank for the restructuring of A's lo\lll
and for the discharge of the mortgage. Bank
later cancelled its agreement with Z when it
discovered that the real consideration for A's
sale of the land to. Z was much higher than
consideration of the sale.494
ii. The usual exaggerations in trade, when the other
party had an opportunity to !mow the facts, are not
in themselves fraud lent. u (Art. 1 340)
(1) The law allows considerable latitude to seller's
statements or dealer's talk; it is natural for the
seller to exaggerate the value, qualities and
characteristics of his products. The buyer is
expected to make the proper inquiries and not
to simply rely on or accept the seller's
assertions at face value.495
X (2) However, there may be fraud if the seller
makes false statements of fact or gives his
products false appearances which are designed
It to mislead.
(3) Also, Art. 1 10 of the Consumer Act (RA 7394)
prohibits "false, deceptive or misleading
advertisement" to induce the purchase of
consumer products or services496
"4 Rural Bank of Sta. Maria, Pangasinan v. CA, G.R. No. 1 10672, September 14, 1999.
4" Songco v. Sellner, 37 Phil. 254; Trinidad v. IAC, G.R. No. 65922, December 3, 1991.
496 "ARTICLE 1 10. Fatsa Deceptive or Misleading Advertisement. - It shall be unlawful for any
person to disseminate or to cause 1he dissemination of any false, deceptive or misleading
advertisemant by Philippine mail or in commerce by print, radio, television, outdoor
advertisement or other medium for the purpose of inducing or which is likely to induce directly or

what Bank thought. It was held that there was indirectly the purchase of consumer products or services.
An advertisement shall be false, deceptive or misleading if it is not in conformity with the
no fraud in Z's failure to disclose the real provisions of this Act or if it is misleading in a material respect. - In determining whether any
consideration for the sale, as Z had no duty to advertisement Is false, deceptive or misleading, there shall be taken into account, among other
things, not only representations made or any combination thereof, but also the extent to which
make such disclosure; the bank security
the advertisement fails to reveal material facts in the light of such representations, or materials
with respect to consequences which may result from the use or application of consumer products
4" Geraldez v. CA, G.R. No. 108253, February 23, 1994. or services to which the advertisement relates under the condition prescribed in said
493 Strong v. Gutierrez Replde, 41 Phil. 947; 213 U.S. 419. advertisement, or under such conditions as are customaiy or usual."
174 t75
 iii. A mere expression of an opinion does not signify ii. Dalo incidente only obliges the person employing
fraud. (Art. 1341) it to pay damages. (Art. 1344)

Unless (!)' made by an expert and (2) the other F. SIMULATED CONTRACT
party has relied on the former's special
knowledge. (Art. 1341) 1 . Definition. Simulation occurs when an apparent contract is
a declaration of a fictitious wil deliberately made by
iv. Misrepresentation by a third person does not vitiate agreement of the parties, in order to produce, for the
consent. (Art. 1342) purpose of deception, the appearance of a juridical act
which does not exist or is different from that which was
0
Unless (1) such misrepresentation has created really executed. 5 0
substantial mistake and (2) the same is mutual.
(Art 1342) 2. Requisites of simulation501:

The deceived person has a cause of action a. An outward declaration of will different from the will
against the third prson who aeceived of the parties;
him.497
b. The false appearance must have been intended by
v. Misrepresentation made in good faith is not mutual agreement; and
fraudulent but niay constitute error. (Art. 1343)
c. The purpose is to deceive third persons.
d. Effects of Fraud.
3. Types of Simulation. Simulation of a contract may be
i. Dula causante makes the t<Ontract voidable, absolute or relative. (Art. 1345)
provided that it is: (a) serious, an4 (b) has not been
employed by both. contracting parties. (Art. 1344) a. Absolute simulation - when the parties do not intend
to be bound at all. (Art. 1345)
Dalo causante also renders the person
employing it liable for damages. 498 i. Example: When X and Y enters into a sale of land,
but did not really intend it; no consideration was
The fraud is serious when it is sufficient , to given and the land was not delivered.
impress, or to lead an ordinarily prudent
person into error.499 n. An absolutely simulated or fictitious contract is
void (Art. 1346), because consent is totally absent.

500 Villaflor v. Court of Appeals, 280 SCRA 297, 337 (1997): Mendezona v. Ozamiz, G.R. No.
"' Hill v. Veloso, 31 Phil. 160 (1915). 143370, February 6, 2002; Sps. Payongayong v. CA, G.R. No. 144576, May 28, 2004.
498 Geraldez v. CA, G.R No. 108253, February 23, 1994. 501 Loyola v. Court of Appeals, 326 SCRA 285, 294 (2000); Penalosa v. Santos;363 SCRA 545,

'" Sierra v. CA, G.R. No. 90270, July 24, 1992. 556 (2001); Sps. Payongayong v. CA, G.R. No. 144576, May 28, 2004.

176 177
 Ill. OBJECT OF CONTRACTS
iii. An absolutely simulated contract must be
distinguished from a fraudulent contract or "Object" is the thing, right or service which is the subject matter of
alienation. 502 the contract. (see Arts. I 3 1 8 and 1347)

(I) In absolutely simulated- contract, no contract The following are the requisites for a thing, right or service to be an
really exists or was intended; it may thus be object of contracts:
attacked by any creditor, at any time, and even
if the debtor is not insolvent. A. WITIDN THE COMMERCE OF MAN

(2) In fraudulent alienation, a contract exists and I. All things which are not outside the commerce of man,
was intended to take effect (for a fraudulent including futUre things, may be the object of contracts.
purpose). If intended to defraud a creditor, it (Art. 1347)
may be rescinded by creditors prior to the
contract, upon showing that the debtor is a. Things "outside the commerce ofman" are those which
insolvent, and within a prescription1 period of are not susceptible of appropriation or private
four years. ownership. 503

b. Relative Simulation - when the parties conceal their b. Examples: (i) public office'04 and political rights; (ii)
true agreement. (Art. 1345) purely personal rights, such as those arising from
family relations; and (iii)
properties of public
i. Example: When X and Y enters into a purported dominion, such town plaza,'05 airport lands and
8
sale of land, but their real intent is for it to be buildings,'06 forest lands,5 07 roads and highways,50
0 1
donation, or equitable mortgage. foreshore land,'09 watershed,'1 submerged lands. 51

ii. The real or true agreement is binding on the c. Even fature things may be the object of contracts. (Art.
parties, provided that: 1 347) Future things are those which are not yet
existing, or not yet owned by the obligor at the time of
( I) It does not prejudice a third person, and the contract.

(2) It is not intended for any purpose contrary to 503 See Land Bank v. Republic, G.R. No. 150824, February 4, 2008 and Republic v. CA. G.R.
law, morals, good customs, public order or No. 126316, June 25, 2004.
504 Collantes v. CA, G.R. No. 169604, March 6, 2007.
public policy. (Art. 1346)
505 Municipality of Cavite v. Rojas, 30 Phil. 602 (1915); Espiritu v. Municipal Council, 102 Phil.

866 (1958).
5" Manila International Airport Authority v. CA, G.R. No. 155650, July 20, 2006.
"' Land Bank v. Republic, G.R. No. 150824, February4, 2008.
50 Villarico v. Sarmiento, G.R. No. 136438, November 1 1 , 2004.

'' Republic v. CA, G.R. No. 126316, June 25, 2004.

"' Santa Rosa Realty Dev't Corp. v. CA, G.R. No. 112526, October 12, 2001.
so2 Rodriguez v. Rodriguez, 20 SCRA 908 (1967); IV Tolentino 517. 51 1 Chavez v. Public Estates Authority, G.R. No. 133250, May 6, 2003 an<! November 1 1 , 2003.

178 179
 (2) That the object of the contract forms part of.the
Thus, a person may sell "future goods", i.e., those inheritance; and

which are not yet existing at the time of perfection

of sale, but are to be manufactured or acquired (3) That the promissor has, with respect to the
thereafter. (Art. 1462) object, an expectancy of a right which is purely
hereditary in nature.
d. No contract may be entered into upon future
inheritance except in cases expressly authorized by iii. The exception referred to in Art. 1347 is a partition
law. (Art. 1 347) inter vivas under Art. 1080. A person may, during
his lifetime, make a partition of his properties, but
i. Future inheritance is any property or right that a such partition takes effect only upon his death, and
person may in the future acquire by succession.512 1
is revocable at any time during his lifetime.5 7

(1) A renunciation of the right to inherit from 2. All rights which are not intransmissible may also be the
someone who is still alive is void.m object of contracts. (Art. 1 347)

(2) A partition by the heirs of the property they 3. All services which are not contrary to law, morals, good
expect to inherit frorn some.one who is still customs, public order or public policy may likewise be the
alive is void.514 object ofa contract. (Art. 1347)

ii. To be considered a "contract upon a future B. POSSIBLE

inheritance," the following reqnisites must
concur:515 Impossible things or services cannot be the object of contracts.
(Art. 1 348)
(I) That the succession has not yet been opened;
It is impossible for a lessor to undertake the maintenance of
Upon the death of deceden the succession the public drainage system; he can only maintain the
. . 18
opens, and the heirs may thus enter into pnvate
. pipes
. .
or dramage of the 1eased premises. 5
contracts over their shares in the
inheritance, even before the settlement or C. CERTAIN
16
partition of the estate. 5
I . As to Kind. The object of every contract must be
determinate as to its kind. (Art. 1349)

512 Blas v. Santos, 1 1 1 Phil. 503 (1961); J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882, March
1 1 , 2005.
"' Uson v. Del Rosario, G.R. No. L-4963, January 29, 1953.
514 Tordilla v. Tordilla, 60 Phil. 162 (1934). 517 J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882, March 1 1 , 2005.
515 J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882, March 1 1 , 2005. '" Guevent Industrial .Dev't Corp. v. Phil. Lexus Amusement Corp., G.R. No. 159279, July
. 11,
51' Osorio v. Osorio, 41 Phil. 531 (1921). 2006.
180 181

 The object may be generic (a car, a dog). (see Art. 2. Cause of Contracts.
1 1 65)
a. In onerous contracts, the cause is understood to be, for
2. As to Quantity. The fact that the quantity is not each contracting party, the prestation or promise of a
determinate shall not be an obstacle to the existence of the thing or service by the other. (Art. 1350)
.
contract, provided it is possible to determine the same,
without the need of a new contract between the parties. i. In a sale, the cause consists of the seller's
(Art. 1349) undertaking to deliver the property and the buyer's
undertaking to pay the purchase price. The cause
The quantity must at least be determinable, based on should not be confused with the object, which is
circumstances stipulated in the contract. the thing sold.

ii. In mortgage, surety, guaranty or

IV. CAUSE OF CONTRACTS "accommodati-0n", the cause is the same as that of
the principal obligation secured by the mortgage,
A. IN GENERAL . . 521
surety, guaranty or accomrnodatton.

I. Definition. Cause i s the essential reason which moves the This is true even if the mortgagor, surety,
contracting parties to enter into it. In other words, the cause guarantor or accommodating party is a third
is the immediate, direct and proximate reason which party or stranger to the principal obligation.522
justifies the creation of an obligation through the will of the
51
contractmg parties. 9
.

b. In remuneratory contracts, the cause is the service or

benefit which is remunerated. (Art. 1350)
Although the term consideration is often used
interchangeably with cause .or "causa ", the two are not Bonuses granted to employees to excite their zeal
exactly similar. "Causa" is broader than consideration and efficiency, with consequent benefit for the
(an Anglo-American legal concept), as "causa" employer, do not constitute donation having
encompasses even a natural obligation and pure 2
l'b 1or a const'derat'10n.5 3
1 eral'tty c
liberality as sufficient cause for a contract.520
c. In gratuitous contracts (contracts ofpure beneficence),
the cause is the mere liberality of the benefactor. (Art.
1350)

121
Pyle v. Johnson, 9 Phil. 249 (1907); China Banking Corporation v. Lichauco, 46 Phil. 460
(1924); Acuna v. Veloso, 50 Phil. 241 (1927); Severino v. Severino, 56 Phil. 185 (1931); Sps.
'" General Enterprises Inc. vs. Lianga Bay Logging Co., 1 1 SCRA 733 (1964); Basic Books Carpo v. Chua, G.R. Nos. 150773 & 153599, September 30, 20Q5:

(Phil.), Inc. vs. Lopez, et al., 1 6 SCRA 291 (1966); Uy v. CA, G.R. No. 120465, September 9, 522 China Banking Corporation v. Lichauco, 46 Phil. 460 (1924); Acuna v. Veloso, 50 Phil. 241
1999; Roxas v. De Zuzuarregui, Jr., G.R. No. 152072, January 31, 2006, 481 SCRA 258, 276; (1927);
Camacho v. CA, G.R. No. 127520, February 9, 2007. '" Philippine Long Distance Co. vs. Jeturlan, G. R. L-7756, July 30, 1955, cited in Liguez v. CA,
520 IV Tolentino 530-531.
102 Phil. 577 (1957).
182 183
 a. Example I: In a case where the National Housing
i. This covers contracts designed solely and Authority bought lands to be used for housing, there is
exclusively to procure the welfare of the a failure of cause when it turned out that the lands are
beneficiary, without any intent of producing any not suitable for housing.528
satisfaction for the donor or without serving the
self-interest of the donor.524 b. Example 2: Where the owner of a company transferred
his shares to a government. crony with the motive of
ii. Examples: commodatum; donation.525 obtaining a government contract, the motive was
deemed the (illegal) cause.529
B. DISTINGUISHEJJ FROM MOTIVE: The particular motives of the
parties in entering into a contract are different from the cause c. Example 3: Where a man donated land to a woman
thereof. (Art. 1 351) While cause is the essential reason for the with the motive of getting her to agree to have sexnal
contract, motive is the particular reason of a party in entering relations with him, the motive was deemed the (illegal)
into a contract and which does not affect the other party.526 cause.530

I. Example: In the sale o f a computer, the cause for0the buyer C. EXISTENCE OF CAUSE: Contracts must have a cause, as it is an
is the seller's undertaking to deliver a computer to him. essential requisite. Contracts without cause produce no effect
The buyer' s motive may be different, e.g., to be able to surf whatever (Art 1352), i.e., void.
the internet, or edit his photos, or start an online business.
I. Presumption. Although the cause is not stated in the
2. Ordinarily, a party's motives for entering .into the contract contract, it is presumed that it exists (and is lawful), unless
do not affect the contract. A party's motive does not even the debtor proves the contrary. (Art. 1354)
have to be known to the other party.
2. Distinguished from Failure to Pay the Consideration.
3. However, as an exception, the motive may be regarded as Lack of consideration is different from failure to pay the
the cause "'V11hen the motive predetermines the cause", i.e., consideration. The former prevents the existence of a valid .
when the contract is conditioned upon the attainment of the contract, while the latter results in a right to demand the
motives of one of the contracting parties. 527 fulfillment or cancellation of the obligation under an
existing valid contract.531

5" Philippine Long Distance Co. vs. Jeturian, G. R. L-7756, July 30, 1955, cited in Liguez v. CA,
102 Phil. 577 (1957).
52' Although donation is referred to as an act of liberality under Art. 725, it Is actually a contract,
since it requires the consent of both parties. See concurring opinion of J. Antonio In Alejandro v.
Geraldez, G.R. No. L-33849, August 18, 1977. 528 Uyv. CA, G.R. No. 120465, September9, 1999.
5" Republic vs. Claribel, 36 SCRA534 (1970); Uyv. CA, G.R. No. 120465, September 9, 1999. '" E. Razon Inc. vs. Philippine Ports Authority, 151 SCRA 233 (1987).
527 Llguez v. CA, 102 Phil. 577 (1957); E. Razon Inc. vs. Philippine Ports Authority, 151 SCRA "' Liguez v. CA, 102 Phil. 577 (1957).
233 (1987); Philippine National Construction Corp. vs. Court of Appeals, 272 SCRA 183 (1997); 53 1 San Miguel Properties Philippines., inc. v. Huang, 336 SCRA 737 (2000); Montecillo v.
Uyv. CA, G.R. No. 120465, September9, 1999. Reynes, G.R. No. 13801 B, July 26, 2002.
184 185
 Where the deed of sale states that the purchase price consideration, is contrary to public policy and the due
has been paid but in fact has never been paid, the ded administration ofjustice.536

of sale is void ab initio for lack of consideration.532

c. Where the owner of a company transferred his shares
3. Manner of Payment. In a contract of sale, a definite to a government crony with the motive of obtaining a
agreement on the manner of payment of the price is an government contract, the motive was deemed the
essential element.'33 The agreement as to the manner of , (illegal) cause.'37
payment goes into the price, such that a disagreement on
the manner of payment is tantamount to a failure to agree d. Where a man donated land to a woman with the motive
on the price or consideration.534 of getting her to agree to have sexual relations with
him, the motive was deemed the (illegal) cause.'38
n. LEGALITY OF CAUSE: The cause must be legal. Contracts
with unlawful cause produce no effect whatever (Art. 1352), 3. False Cause. The statement of a false cause in contracts
i.e., void. shall render them void, unless it should be proved that they
were founded upon another cause which is true and lawful.
'
I. Presumption. The cause is presumed lawful. Although (Art. 1353)
the cause is not stated in the contract, it is presumed that it
(exists and) is lawful, unless the debtor proves the contra1y. E. ADEQUACY OF CAUSE
(Art. 1354)
I. General Rule. As a general rule, lesion (injury) or
2. Unlawful Cause. The cause is unlawful if it is contrary to inadequacy of cause shall not invalidate a contract. (Art.
law, morals, good customs, public order or public policy. 1355)
(Art. 1352) Examples:
The Jaw does not require that the price or consideration
a. The tetmination of marital relations is an unlawful be equal to the exact value of the subject matter of the
consideration which renders the contract void.'" contract."' It will not relieve a party from the
consequences of an unprofitable contract or bad
b. An agreement to stifle the prosecution of a person bargain.'40
charged with a crime, for a pecuniary or other valuable
2. Exceptions -
532 Ocejo Perez & Co. vs. Flores, 40 Phil. 921; Mapalo vs. Mapalo, G.R. No. L21489, May 19,
1966, 1 7 SCRA 114, 122; Vda. De Catindig v. Heirs of Catalina Roque, 74 SCRA 83; a. In cases specified by law. (Art. 1355)
Montecillo v. Reynes, G.R. No. 138018, July 26, 2002.
533 Amado v. Salvador, G.R. No. 17140.1 , December 13, 2007, citing Marnelego v. Banco Filipino

Savings and Mortgage Bank, G.R. No. 161524, 27 January 2006, 480 SCRA 399, 408; Co v. 53 S Arroyo v. Berwin, 36 Phil. 386 (1917).
Court of Appeals, G.R. No. 123908, 9 February 1998, 286 SCRA 76, 85; Velasco v. Court of 151 SCRA233 (1987).
537 E. Razon Inc. vs. Philippine Ports Authority,
Appeals, 151-A Phil. 868, 887 (1973). 536 Liguez v. CA, 102 Phil. 577 (1957).
534 Amado v. Salvador, G.R. No. 171401, .December 13, 2007, citing Toyota Shaw, Inc. v. Court 539 Sps. Buenaventura v. Court of Appeals, G.R. No. 126376,
20 November 2003, 416 SCRA
of Appeals, G.R. No, 1 1 6650, 23 May 1995, 244 SCRA 320, 328; R.F. Navarro and Co. v. Sugar 263; People's Air Cargo & Warehousing Co., Inc. v. CA, G.R. No. 1 17847, October 7, 1998;
Producers Cooperative Marketing Association, 1 1 1 Phil. 820, 828 (1961). Sps. Paguyo v. Astorga, G.R. No. 130982, September 16, 2005.
'35 De Leon v. CA, G.R. No, 80965, June 6, 1990. '' Vales v. Villa, 35 Phil. 769 (1916).

186 187
 . 1. Under Art. 1381, contracts which are entered into
Chapter 8
in behalf of wards or absentees are rescissible if
they suffer lesion by more than one-fourth of the Form of Contracts
value of the things which are the object of the
contracts.

I. IN GENERAL
ii. Also, inadequacy of price may indicate an intent to
defraud creditors, which may render the contract A. GENEJl, RULE: FORM NOT NECESSARY. Contracts shall be
rescissible under Art. 1381. obligatory, in whatever form they may have beetr entered into,
provided all the essential. requisites for their validity are
b. If there has been fraud, mistake or undue influence. present. (Art. 1356)
(Art. 1355)
1. Our contractual system upholds the spirit and intent of the
i. Le.\ion or inadequacy of price may indicate, that the contracting parties over the formalities. Contracts are
consent (of the party suffering lesion) was' vitiated
generally deemed perfected by mere consent. (Art. 13 15)
by fraud, mistake or undue influence, which
renders the contract voidable.
2. Thus, the general rule is that the form (oral or written) is
irrelevant to the binding effect inter partes of a contract
ii. Gross inadequacy of price does not affect a
that possesses the three validating elements of consent,
contract of sale, except as may indicate a defect in
subject matter, and causa.541
the consent, or that the parties really intended a
donation or some other act or contract (Art. 1470) For example, the following contracts are consensual,
and are thus valid even if they are merely oral:

i. sale; 542
ii. lease;543
..
in. contract fior services;
544
iv. partition;'" .

541 Dauden-Hernaez v. Delos Angeles, G.R. No. L-27010, April 30, 1969.
s.:1 Yaneza v.CA, G.R. No. 149322, November 28, 2008. See also Carbonell v. CA, G.R. No. L
29972, January 26, 1976; Delos Reyes v. CA, G.R. No. 129103, September 3, 1999.
54J See Pagurayan v. Reyes, G.R. No. 154577, July 23, 2008; Pasricha v. Don Luis Dison

Really, G.R. No. 136409, March 14, 2008: Chua Tee Dee v. CA, G.R. No. 135721, May 27,
2004.
'

.
544 DaudenHernaez v. Delos Angeles, G.R. No. L-27010, April 30, 1969.
545 Chavez v. lntennedlate Appellate Court, G.R. No. 68282. November 8, 1990, 191 SCRA 211,

216; Tan v. Lim, G.R. No. 128604, Seplember 25, 1998, 296 SCRA 455, 474-475: Hernandez v.

Anda!, 78 Phil. 196, 203 (1947).

188 189
 (5) Contract of' partnership when an immovable is

However, the binding . effect o f oral contracts i s generally contributed there must be an inventory of the
3. -

limited to the contracting parties (inter partes). The law property, signed by the parties, and attached to the

usually requires registration for a contract to be binding on public instrument (Art. 1773);
third persons, and an oral contract cannot be registered
unless it is reduced into a public document.546 (6) Real estate mortgage (Art. 1 874); and

B. EXCEPTIONS: WHEN FORM IS NECESSARY. Article 1356 of (7) Contract of antichresis, wherein the amount of
the Code establishes only two exceptions, to wit: principal and interest must be specified in writing.
(Art. 2134)
I. When Required B y Law for Validity o r Enforceability.
Form is necessary for contracts for which the law itself 2. When Required by Law to Prove the Contract. Form is
requires that they be in some particular form (writing) in necessary for contracts that the law requires to be proved
order to make them valid and enforceable. by some writing (memorandum) of its terms, as in those
covered by the old Statute of Frauds, now Article 1403(2)
I
These are called solemn or formal contracts. The of the Civil Code . .
following are examples:
a. Their existence is not provable by mere oral testimony
(!) Donation of immovable property, which the law or para! evidence.
(Art. 749) requires to be embodied in a public
instrument in order "that the donation may be b. The form required is for evidentiary purposes only.
valid," i.e., existing or binding. Thus, the Statute of Frauds would not apply if:

(2) Donation of movables worth more than P5,000.00 i. The contrct is wholly or partly executed, or
which must be in writing, "otherwise the donation
shall be void" (Art. 748); ii. The parties permit a contract to be proved, without
any objection.547
(3) Contracts to pay interest on loans (mutuum) which
must be ''expressly stipulated in writing" (Art. Note: In the foregoing exception cases, the requirement of form
1956); and is absolute and indispensable. (Art. 1356) If the formal
requirement has not been complied with, a party cannot
(4) Stipulation limiting the liability of carrier to a seek its enforcement or compel compliance with the formal
degree less than extraordinary diligence, which requirement (Art. 1356), because the law does not
must be in writing and signed by the shipper/owner recognize any existing or enforceable contract to begin
of the goods (Art. 1744); with.

Domalagan v. Bolifer, 33 Phil. 471 (1915-1916); Swedish Match, AB v. CA, G.R. No. 128120,
547
'" See Campillo v. CA, G.R. No. 56483, May 29, 1984. October 20, 2004.

190 191
II. FORMAL REQUIREMENT c. The power to administer property, or any other power
AS A MATTER OF CONVENIENCE which has for its object an act appearing or which
should appear in a public document, or should
A. IN GENERAL: [f the law requires a document or other special prejudice a third person;
fonn, such as in the acts and contracts enumerated in Article
1 358 (infra), the contracting parties may compel each other to d. The cession of actions or rights proceeding from an act
observe that fonn, once the contract has been perfected. (Art. appearing in a public document.
1357)
2. The foregoing requirement of a public document in Art.
1. This right may be exercised simultaneously with the action 1358 is only for convenience, not for validity or
upon the contract. (Art. 1357) enforceability. 549

2. This right presupposes the existence of a valid contract.548 . Thus, failure to follow the proper fonn (e.g., non
It is not available or cannot be exercised for contracts appearance before the notary public) does not
where form is necessary for validity/enforceabil ty (i.e., i invalidate the contract. The parties can simply compel
solemn contracts) or for proving the contracts (i.e., each other to observe that fonn, once the contract has
contracts covered by the Statute of Frauds). (Art. 1356, been perfected.550
supra)
c. PRIVATE DOCUMENT (AT LEAST): Contracts Art. 1358
B. PUBLIC DOCUMENT REQUIREMENT provides that "all other contracts where the amount involved
exceeds five hundred pesos must appear in writing, even a
1. Under Art. 1358, the following must appear in a pnblic private one. But sales of goods, chattels or things in action are
document: governed by Articles, 1403, No. 2 and 1405." (Art. 1358)

a. Acts and contracts which have for their object the This does not mean that contracts involving more than
creation, transmission, modification or extinguishment P500 are void or unenforceable if not in writing. It is
of real rights over immovable property; not enough that the law should require that the contract
be in writing, as it does in Art. 1 358. The law must
Sales of real property or of an interest therein are further prescribe that without the writing the contract is
governed by Articles 1403, No. 2, and 1405, i.e., not valid or not enforceable by action.'5 1
they must appear in writing (even a private
document) to be enforceable;

b . . The cession, repudiation or renunciation of hereditary

rights or of those of the conjugal partnership of gains;
54'Penalosa v. Santos, 416 Phil. 12 (2001 ).
55o Penalosa v. Santos,416 Phil. 12 (2001).
548 Solis v. Barroso, 53 Phil. 912 (1928). "' DaudenHemaez v. Delos Angeles, G.R. No. L-27010, Apnl 30, 1969.
192 193

Chapter 9
Reformation of Instruments
I. IN GENERAL
A. NATURE: Reformation is a remedy (originally in equity),
whereby a written instrument is made or construed so as to
express or conform to the real intention of the parties, where
some mistake, fraud, inequitable conduct or accident has
occurred or been committed. In granting reformation, the court
is not making a new contract for the parties, but establishing
and perpetuating the real contract between the partie which,
under the technical rules of law, could not be
. enforced but for
such reformation.552
Art. 1359 provides that 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.
1. 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. (Art. 1359)
2. Reformation is an exception to theparol evidence rule, i.e.,
that "when the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed
upon and there can be, between the parties and their
successors in interest, no evidence of such tenns other than
. v. Stalwart Mgt. Services Corp., G.R. No. 157439, July 4, 2007.
ss2 Quiros
v. Arjona, G.R. No. 158901, March 9, 2004, 425 SCRA 57, 65; MultiVentures Capital
& Mgl Corp. v. Stalwart Mgt. Seivices Corp., G.R. No. 157439, July4, 2007.
194
the contents of the written agreement."553 One of the
exceptions to the parol evidence rule is "the failure of the
written agreement to express the true intent and agreement
of the parties."
3. In an action for reformation o f instrument, the court does
not attempt to make another contract'.for the parties, but
simply confirms and perpetuates the real contract between
the parties. 554
Reformation involves a determination of the true intent
of the parties. It involves a question of fact and not a
mere question of law, and is different from mere
interpretation of the contract.555
B. PURPOSE: Equity orders the reformation of an instrument in
order that the true intention of the contracting parties may be
expressed. The rationale of the doctrine of reformation is that it
would be unjust and inequitable' to allow the enforcement of a
written instrument which does not reflect or disclose the real
meeting of the minds of the parties.556
C. REQUISITES557
1. There must have been a meeting of the minds of the parties
to the contract;
2. The instrnment does not express the true intention of the
parties; and
553 Rule 130, Section 9. National lrngation Administration v. Gamit, G.R. No. 85869, November 6,
1992.
554 National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992; Quiros v.
Arjona, G.R. No. 158901, March 9, 2004, 425 SCRA 57, 65; MulU-Ventures Capital & Mgl Corp.
555 National Irrigation Administration v. Gamit, G. R. No. 85869, November 6, 1992.
556 National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992.
557 National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992; Tuazon v.
CA, G.R. No. 1 19794, October 3, 2000.
195
 The presumption is that an instrument sets out the true
agreement of the parties thereto558; thus, the.burden of
proving otherwise is on the party who insists that the
contract should be reformed. 559
3. The failure of the instrument to express the true intention
of the parties is due to mistake, fraud, inequitable conduct
or accident.
(who did not understand the language in which the
contract was written).561
2. Mistake By One Party; Concealment By the Other.
When one party was mistaken and the other knew or
believed that the instrument did not state their real
agreement, but concealed that fact from the fonner, the
instrument may be reformed. (Art. 1363)

C. IGNORANCE, LACK OF SKILL, NEGLIGENCE OR BAD FAITH:

II. SPECIFIC INSTANCES OF REFORMATION
A. MUTUAL MISTAKE: When a mutual mistake of the parties
causes the failure of the instrument to disclose their real
agreement, said instrument may be reformed. (Art.
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
1361) . be reformed.
I

B. MISTAKE BY ONE PARTY D. SALE WHICH JS REALLY A MORTGAGE OR PLEDGE: If two

I. Mistake By One Party; Fraud or Inequitable Conduct
By the Other. If one party was mistaken and the other
acted fraudulently or inequitably in such a way that the
instrument does not show their true intention, the former
may ask for the reformation of the instrument. (Art.
a. Example I: When the parties agreed on a contract of .
lease, but one of the parties SlllTeptitiously inserted
certain stipulations which were .noi agreed upon.560 '
parties agree upon the mortgage or pledge ofreal 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. (Art. 1365; see also Arts. 1 602-1605)
1362)
III. WHEN REFORMATION IS NOT PROPER
A. GRATUITOUS ACTS: There shall be no reformation in the
following cases: (Art. 1366)

b. Example 2: When the parties agreed to a sale subject to 1. Simple <;ionations inter vivas wherein no c.ondition is
repurchase, but the defendant did not include the imposed; and
condition of repurchase unbeknownst to the plaintiff
2. Wills.

Donations and wills are purely gratuitous dispositions

"' BA Finance Corporation v. Intermediate Appellate Court, G.R. No. 76497, January 20, 1993, of property, so the law will not normally interfere with
217 SCRA 261, 277; MultlVentures Capital & Mgt. Corp. v. Stalwart Mgt. Services Corp., G.R.
. No. 157439, Ju 4, 2007.
"' Huibonhoa v. Court of Appeals, 378 Phil. 386, 407 (1999); Multi-Ventures Capital & Mgt.
Corp. v. Stalwart Mgt. Services Corp., G.R. No. 157439, July 4, 2007.
550 National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992. 561 Ong Chua v. Carr, 53 Phil. 975.
196 197
 how the donor or testator wanted to dispose of his 1. The provisions of the Civil Code primarily apply to the
property. reformation of instruments. (Art. 1 360)

Att. 789 provides that "when there is an imperfect 2. The principles of the general law on the reformation of
description, or when no person or property exactly instruments are adopted insofar as they are not in conflict
answers the description, mistakes and omissions with the provisions of the Civil Code. (Art. 1 360)
must be corrected, if the error appears from the
context of the will or from extrinsic evidence." This B. PROCEDURE
refers merely to errors or imperfections in the
description, not to the manner of disposition.562 I. D'eclaratory Relief. The procedure for the reformation of
instrument shall be governed by rules of court to be
:B. Vorn AGREEMENTS: There shall be no reformation when the promulgated by the Supreme Court. (Art. 1369)
real agreement is void (Art. 1 366)
Under the Rules of Court, the ruies on declaratory
Reformation would be useless if the actual agrement is relief apply to actions for reformation of instrument.564
'
void and cannot be enforced.
2. Real Party in Interest. Reformation may be ordered at the
C. ESTOPPEL: When one of the parties has brought an action to instance of either party or his successors in interest, if the
enforce the instrument, he cannot subsequently ask for its mistake was mutual; otherwise, upon petition of the injured
reformation. (Art. 1367) party, or his heirs and assigns. (Art. 1368)

But a party who is sued on a contract may file a 3 . Prescription. The prescriptive period for reformation is
counterclaim for its reformation. '63 10 years (Art. 1 144), counted from the time the right of
action accrues, i.e., the time the other party manifests an
D. NO MEETING OF MINDS: If mistake, fraud, inequitable intention (by overt acts) not to abide by the true agreement
conduct, or accident has prevented a me.eting of the minds of of the parties (not necessarily the time of execution of the
the parties, the proper remedy is not reformation of the contract). 565
instrument but annulment of the contract.

IV. GOVERNING LAW AND RULES

A. GOVERNING LAW "' Rule 63, Section 1 .

555 Tormon v. Cutanda, 1 1 9 Phil. 84 (1963); Veluz v . Veluz, 133 Phil .459 (1968); Naga

Telephone Co., Inc. v. CA, G.R. No. 107112, February 24, 1994, 230 SCRA 351; Pilipinas Shell
Pelroleum Corporation v. John Bordman Ltd. of lloilo, Inc., G.R. No. 1 59831, October 14, 2005,
473 SCRA 151; Multi-Realty Development Corp. v. akati Tuscany Condominium Corp., G.R.
'" IV Tolentino 556. No. 146726, June 16, 2006. See, however, RoselloBentirv. Leanda, G.R. No. 128991, Apnl 12,
"' See Gojo v. Goyala, G.R. No. L-26768, October 30, 1 970 and Cebu Contractors Consortium 2000 and Cebu Contractors Consortium Co. v. CA, G.R. No. 107199, July 22, 2003, .which
Co. v. CA, G.R. No. 107199, July 22, 2003. counted the prescriptive period from the time of execution of the contract

198 l99
 parties, the literal meaning of its stipulations shall control.
(Art. 1370)
Chapter 10

Interpretation of Contracts Where the language of a written contract is clear and

9
unambiguous, there is no room for construction.56
The contract must be taken to mean .that which, on its

I. IN GENERAL face, it purports to mean, unless some good reason can

be assigned to show that the words should be

"Interpretation" is the act of making intelligible what was before understood in a different sense.570

not understood, ambiguous, or not obvious. It is a method by which

the meaning of language is ascertained. The "interpretation" of a 2. Intention Prevails. If the words appear to be contrary to

contract is the determmation of the meaning attached to the words the evident intention of the parties, the ltter shall prevail

written or spoken which make the contract. 566 over the former. (Art. 1370)

Where the language of a written contract is clear and unambiguoi'.is'
'
. there is generally no room for construction or interpretation.567
Interpretation comes into play when the court finds, upon a
preliminary inquiry, that the contract is ambiguous, i.e., susceptible
of two or more reasonable alternative interpretations. Where the
B. DETERMINING THE INTENTION
1 . Contemporaneous and Subsequent Acts. In order to
judge the intentipn of the contracting parties, their
contemporaneous and subsequent acts. shall be principally

written terms of the contract are n.ot ambiguous and can only be considered. (Art. 1371)
read one way, the court will interpret the contract that way as a
matter of law. If the contract is determined to be ambiguous, then a. Note that by this principle, the court can look into

the interpretation of the contract is left to the court, to resolve the extrinsic evidence, outside the four corners of the

ambiguity in light of the evidence. '68 written contract.

b. This falls under the exception to the "parol evidence

IT. PRINCIPLES. OF INTERPRETATION rule." Under Rule 130, Section 9, when the terms of
an agreement have been reduced to writing, it is

A. PRIMACY OF INTENTION generally considered as containing all the terms agreed

upon and there can be, between the parties and their

1 . Plain Meaning Rule. If the terms of a contract are clear successors-in-interest, no evidence of such terms other

and leave no doubt upon the intention of the contracting than the contents of the written agreement.

'" National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992. 569 Olivares v. Sarmiento, G.R. No. 158384, June 12, 2008, citing Heirs of the Late Spouses

'" Olivares v. Sarmiento, G.R. No. 158384, June 12, 2008, c1ling Heirs of the Late Spouses
Aurelio and Esperanza Balite v. Lim, G.R. No. 152168, 10 December 2004, 446 SCRA 56:
Tuazon v. Court of Appeals, 396 PM. 32 (2000)..
'"Abad v. Goldloop Properties, Inc., G.R. No. 168108, April 13, 2007.
200
Aurelio and Esperanza Bal:te v. Lim, G.R. No. 152168, 10 December 2004, 446 SCRA 56;
Tuazon v. Court of Appeals, 396 Phil. 32 (2000)..
"' Bautista v. CA, 379 Phil. 386, 399 (2000): Abad v. Goldloop Properties, Inc., G.R. No.
168108, April 13, 2007.
201
 However, a party may present evidence to modify, a contract, and shall fill the omission of stipulations which
explain or add to the terms of the written agreement if are ordinarily established. (Art. 1 376)
he puts in issue in his pleading:
C. CONTRA PROFERENTUM: The interpretation of obscure words
i. An intrinsic ambiguity, mistake or imperfection in or stipulations in a contract shall not favor the party who
the written agreement; caused the obscurity. (Art. 1377)

ii. The failure of the written agreement to express the 1. Any ambiguity is to be taken contra proferentum, i.e.,
true intent and agreement of the parties thereto; construed against the party who drafted the contract and
caused the ambiguity which could have been avoided by
iii. The validity of the written agreement; or the exercise of a little more care. 571

iv. The existence of other terms agreed to by the 2. Thus, any ambiguity, obscurity or doubt in a contract of
parties or their successors-in-interest after the adhesion is construed or resolved strictly against the party
execution of the written agreement. who prepared it.'72 But where no such ambiguity,
obscurity or doubt exists, no such construction is
2. Scope of Terms. However general the terms of a contract warranted.573
may lie, they shall not be understood to comprehend things
that are distinct and cases that are different from those D. IMPOSSIBILITY OF SETTLING DOUBTS: When it is absolutely
upon which the parties intended to agree. (Art. 1372) impossible to settle doubts by the rules established in articles
1 370-1377, the following rules apply (Art. 1378):
3. Most Effectual Interpretation. If some stipulation of any
contract should admit of several meanings, it shall be 1. If the doubts refer to incidental circumstances -

understood as bearing that import which is most adequate

to render it effectual. (Art. 1373) a. Where contract is gratuitous, the least transmission of
rights and interests shall prevail. (Art, 1 3 78)
4. Holistic Interpretation. The various stipulations of a
contract shall be interpreted together, attnbuting to the
doubtful ones that sense which may result from all of them
takenjointly. (Art. 1 374)
571 Orient Air Services and Hotel Representatives vs. Court of Appeals; 197 SCRA 645 [1991];

5. Consistency with the Nature and Object. Words which
may have different significations shall be understood in
that which is most in keeping with the nature and object of
Nacu vs. Court of Appeals, 231 SCRA 237 [1994]; De Leon vs. Court of Appeals, 186 SCRA 345
[1990]; Equitable Banking Corporation vs. Intermediate Appellate Court, 161 SCRA 518 [1988];
Eastern Assurance and Surety Corp. vs. IAC, 179 SCRA 562 [1989]; Prudential Bank v. Alviar,
G.R. No. 150197, July 28, 2005.
512 Sps. Panlilio v. Citibank, NA, G.R. No. 156335, November 28, 2007, citing Bay View Hotel v.

the contract. (Art. 1375) Ker and Co., Ltd., G.R. No. L28237, Atigust 31, 1982, 116 SCRA 327, 334; Eastern Shipping
Lines Inc. v. Margartne.Verkaufs-Union GmbH, G.R. No. L31087, September 27, 1979, 93
SCRA 257, 262; Eastern Assurance and Surety Corp. v. Intermediate Appellate Court, G.R. No.
6. Usage or Custom. The usage or custom of the place shall 69450, November 22, 1989, 179 SCRA 561, 568; Orient Air Services and Hotel Representatives
be borne in mind in the interpretation of the ambiguities of v. Court of Appeals, G.R. No. 76931, May 29, 1991, 197 SCRA645, 655.
"' Sps. Panlilio v. Citibank, N.A., G.R. No. 156335, November 28, 2007.
202 203
 b. Where contract is onerous, the doubt shall be settled in
favor of the greatest reciprocity of interests. (Art.
1378)
'
A contract which may be interpreted as either a
sale with repurchase or a loan with mortgage
should be construed as the latter, as it involves the
. . . .
greatest rec1proc1ty of mterests.574
2. 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. (Art. 1378)
III. RULES OF COURT PROVISIONS
The principles of interpretation stated in the Rules of Court shall
likewise be observed in the construction of contracts. (Art. 1379)
Rule 130 provides for the following rules in the interpretation of
documents:
I. Interpretation of a writing according to its legal
meaning. The language of a writing is to be interpreted
according to the legal meaning it bears in the place of its
execution, unless the parties intended otherwise. (Sec. 10)
2. Instrument construed so as to give effect to all
provisions. In the construction of an instrument where
there are several provisions or particulars, such a
construction is, if possible, to be adopted as will give effect
to all. (Sec. 1 1)
3. Interpretation according to intention; general and
particular provisions. In the construction of an
"' Olina vs. Medina, 13, Phil. 379; Labasan v. Lacuesta, G.R. No. L25931, October 30, 1978.
204
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.
12)
4. Interpretation according to circumstances. For the
proper construction of an instrument, the circumstances
under which it was made, including the situation of the
subject thereof and of the parties to it, may be shown, so
that the judge may be placed in the position of those whose
language he is to interpret. (Sec. 13)
5. Peculiar signification of terms. The terms of a writing are
presumed to have been used in their primary and general
acceptation, but evidence is admissible to show that they
have a local, technical, or otherwise peculiar signification,
and were so used and understood in the particular instance,
in which case the agreement must be construed
accordingly. (Sec. 14)
6. Written words control printed. When an instrument
consists partly of written words and partly of a printed
form, and the two are inconsistent, the former controls the
latter. (Sec. 15)
7. Experts and interpreters to be used in explaining
certain writings. When the characters in which an
instrunient is written are difficult to be deciphered, or the
language is not understood by the court, the evidence of
persons skilled in deciphering the characters, or who
understand the language, is admissible to declare the
characters or the meaning of the language. (Sec. 16)
8. Of two constructions, whic.h preferred, When the terms
of an agreement have been intended in a different sense by
the different parties to it, that sense is to prevail against
either party in which he supposed the other understood it,
205
 and when different constructions of a provision are
otherwise equally proper, that is to be taken which is the Chapter 11
most favorable to the party in whose favor the provision
was made. (Sec. 17) Defective Contracts

9. Construction in favor of natural right. When an

instrument is equally susceptible of two interpretations, one I. IN GENERAL
is favor of natural right and the other against i the former
5
is to be adopted. (Sec. 18) The Civil Code classifies defective contracts into four 75:

10. Interpretation according to usage. An instrument may be A. RESCISSIBLE CONTRACTS: They are the least infirm .contracts.
construed according to usage, in order to determine its true Though valid and possessing all the essential requisites of
character. (Sec. 19) contracts, they may be set aside forhaving caused economic
damage to one of the contracting parties or to a third party.

B. VOIDABLE CONTRACTS: They are contracts where the consent

of one party is defective, either because of want of capacity to
give . consent, or because consent is vitiated by mistake,
violence, intimidation, undue influence, or fraud. They are
considered valid until annulled.

c. UNENFO)l.CEABLE CONTRACTS: They are contracts which

cannot be enforced (unless ratified) because of lack of
authority, or of the required writing, or because of incapacity of
both parties.

D. VOID CONTRACTS: They are the most infirm contracts. One or

more of _the essential requisites are absent, making them
absolute nullity and without any effect.

'" See J. Vilug's dissent in Equalorial Realty Development, Inc. v. Mayfair Theater, Inc., 370
SCRA 56, 90 (2001). See also Balane, Defective Contracts in Philippine Civil Law, Journal of the
IBP, Vol. 30, No. 2 (3rd and 4th Quarters 2004).

206 207
II. RESCISSIBLE CONTRACTS
A. IN GENERAL
I. In terms of their efficaciousness, resCissible contracts are
regarded, among the four types of defective contracts, as
being the closest to perfectly executed contracts: A
rescissible contract contains all the requisites of a valid
contract and is considered legally binding, but by reason of
injury or damage to either of the contracting parties or to
third persons, such as creditors, it is susceptible to
rescission at the instance of the party who may be
prejudiced thereby.576
2. A rescissible contract is valid, binding and effective until it
is rescinded. The proper way by which it can be asailed is
by an action for rescission based on any of the causes
expressly specified by law.577
3. The rescission of rescissible contracts (under Art. 1381, et
seq.) should be distinguished from "rescission" or
"resolution" under Art. 1 1 9 1 .578
a. Rescission under Art. 1 1 9 1 is a remedy for breach of
obligations, while rescission under Art. 1381 is a
remedy for the economic injury caused by a contract. .
Thus, rescission under Art. 1 191 may be filed only
by a contracting party; rescission under Art. 13 8 1
may be filed even by a third party.
b. Rescission under Art. 1 191 is a principal action, while
rescission under Art. 1381 is subsidiary (in the latter,
srs See J. Vitug's dissent in Equatorial R,ealty Development, Inc. v. Mayfair Theater, Inc., 370
SCRA 56, 90 (2001 ).
577 See J. Vitug's dissent in Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 370
SCRA 56, 90 (2001). .
'" Universal Food Corporation v. CA, 144 Phil. 1 (1970); lringan v. Court of Appeals, 418 Phil.
286, 296297 (2001); Rivera v. Del Rosario, G.R. No. 144934, January 15, 2004.
208
th plaintiff must show that he has no other recourse to
repair the damage he suffered).
c. Prescription for rescission under Art. \ 1 9 1 is 10 years
. for written contracts (Art. 1 144) or 6 years for oral
contracts (Art. 1 1 45), while prescription for rescission
under Art. 1381 is 4 years. (Art. 1389)
B. CAUSES: Contracts validly agreed upon may be rescinded in
the cases established by law. (Art. 1380) Under Art. 1 3 8 1 , the
following contracts are rescissible:
I. Lesion to Wards. Those contracts which are entered into
by guardians whenever the wards whom they represent
suffer lesion by more than one-fourth of the value of the
things which are the object thereof; (Art. 1381)
2. Lesion to Absentees. Those contracts agreed upon in
representation of absentees, if the latter suffer lesion by
more than one-fourth of the value of the things which are
the object thereof; (Art. 1381)
a. "Lesion" means the damage caused to the ward or
absentee due to the discrepancy between the
consideration received and the value of the things
alienated.
b. Rescission referred to in the first two items (contracts
by guardians, or for absentees) shall not take place
with respect to contracts approved by the courts. (Art.
1386)
c. Court approval is required for acts of ownership (as
distinguished from mere acts of administration)
executed by guardians or representatives of absentees.
If court approval is lacking, the contract is
unenforceable for lack of authority (Art. 1403, par. 1 ),
even if lesion is not shown.
209
 iv. Evidence of large indebtedness or complete
3. Fraud of Creditors. Those contracts undertaken in fraud insolvency.
of creditors when the latter cannot in any other manner
collect the claims due them; (Art. 1381) v. The transfer of all or nearly all of his property by a
debtor, especially when he is insolvent or greatly
a. All contracts by virtue of which the debtor alienates embarrassed financially.
property by gratuitous title are presumed to have been
entered into in fraud of creditors, when the donor did vi. The fact that the transfer is made between father
not res.erve sufficient property to pay all debts and son, when there are present other of the above
contracted before the donation. (Art. 1387) circumstances.

b. Alienations by onerous title are also presumed vii. The failure of the vendee to take exclusive
fraudulent when made by persons against whom some possession of all of the property.
judgment or writ of attachment has been issued. (Art.
1387) 4. Things Under Litigation. Those contracts which refer to
things under litigation if they have been entered into by the
The decision or attachment need not refer to the defendant without the knowledge and approval of the
property alienated, and need not have been litigants or of competent judicial authority; (Art. 1381)
obtained by the party seeking the rescission. (Art.
1387) 5 . By Provision of Law. All other contracts specially
declared by law to be subject to rescission. (Art. 1381)
c. In addition to these presumptions, the design to defraud
creditors may be proved in any other manner Payments made in a state of insolvency for obligations
recognized by the law of evidence. (Art. 1387) The to whose fulfillment the debtor could not be compelled
following circumstances are considered badges of at the time they were effected, are also rescissible.
fraud in a sale579: (Art. 1382)

i. The fact that the consideration of the conveyance is For Art. 1382 to apply, it is required that: (a) the
fictitious or is inadequate. payment is made in a state of insolvency; and (b)
the obligation paid was not yet due at the time of
ii. A transfer made by a debtor after suit has been the payment.
begun and while it is pending against him.
C. WHO MAY FILE: The action for rescission may be filed by the
iii. A sale upon credit by an insolvent debtor. following persons580:

'" Oria v. McMicking, 21 Phil. 243 (1912). 560

IV Tolentino 587.
210 2il
 1 . The injured person (the ward or absentee suffering lesion;
the creditor defrauded; or the plaintiff in a case where the (1) if the transferee acquired the property
thing in litigation was alienated); gratuitously, he is obliged to surrender it
regardless of his good faith or bad faith.
2. The heirs of such person;
(2) if the transferee acquired the property
3. The creditors of such person (accion subrogatoria, by onerously (with consideration), he is obliged to
virtue of Art. 1 177). surrender it only if he acted in bad faith. (Art.
1385)
D. REQUISITES
f. The action to claim rescission must be commenced
I. General Requisites - withinfour years. (Art. 1389)

a. Rescission must be for a cause provided by law. (Arts. For persons under guardianship and for absentees,
1380, 1381) the period of four years shall not begin until the
termination of the farmer's incapacity, or until the
b. Since rescission is a subsidiary action, it can be domicile of the latter is known. (Art. 1389)
instituted only when the party sufferin& damage has no
other legal means to obtain reparation for the same. 2. Requisites for Rescission of Contracts in Fraud of
(Art. 1383) Creditors (Accion Pauliana)581 -

c. Rescission shall be only to the extent necessary to a. That the plaintiff asking for rescission, has a credit
cover the damages caused. (Art. 1384) prior to the alienation, although demandable later;

d. Rescission can be carried out only when he who If the plaintiff has no credit at the time the
demands rescission can return whatever he may be defendant entered into a transaction, the latter
obliged to restore. (Art. 1385) could not have intended to defraud him.

This applies to contracts which are rescissible due b. That the debtor has made a subsequent contract
to lesion suffered by the ward or absentee. conveying a patrimonial benefit to a third person;

e. Rescission shall not take place when the things which c. That the creditor has no other legal remedy to satisfy
are the object of the contract are legally in the his claim, but would benefit by rescission of the
possession of third persons who did not act in bd conveyance to the third person;
faith. (Art. 1 3 85)

In case of a fraudulent transfer by the debtor of his

property, 581Siguan v. Um, G.R. No. 134685, November 19, 1999; Khe Hong Cheng v. CA, G.R. No.

144169, March 28, 2001.

. .

2i2 2i3
 i. As a subsidiary remedy (Art. 1383), an accion
pauliana presupposes the following: I) a
judgment; 2) the issuance by the trial court of a
writ of execution for the satisfaction of the
judgment, and 3) the failure of the sheriff to
enforce and satisfy the judgment of the court. 582
ii. If a creditor seeks to rescind a transaction before
he has exhausted all the properties of the debtor,
the action to rescind may be dismissed as
premature. 583
If the debtor has other properties available, it
would be premature to even consider if the
subject transaction is ftaudulent.584
iii. Thus, the 4-year prescription period commences to
run only upon discovery by the judgment creditor
that the debtor no longer had any properties to
satisfy the debt.585 (The period is not reckoned
from the date of the rescissib!e transaction or the
registration thereof.)
d. That the act being impugned isfraudulent;
i. The creditor seeking rescission has the burden of
proving fraud, although he may rely on certain
disputable presumptions under Art. 1387
'
(supra).586
ii. To' overcome the presumption of fraud, it must be
established that the conveyance was made (I) in
'" Khe Hong Cheng v. CA, G.R. No. 144169, March 28. 2001.
"' Khe Hong Cheng v. CA, G.R. No. 144169, March 28. 2001.
"' Siguan v. Lim. G.R. No. 134685, November 19, 1 999.
"' Khe Hong Cheng v. CA, G.R. No. 144169, March 28, 2001.
'" Union Bank of the Philippines v. Sps. Ong, G.R. No. 152347, June 21, 2006.
2i4
good faith, and (2) for a sufficient and valuable
consideration.'87
e. That the third person who received the property
conveyed, if by onerous title, has been an accomplice
in thefraud.
For acontract to be rescinded for being in fraud of
creditors, both contracting parties must be shown
to have acted maliciously so as to prejudice the
creditors.588
E. EFFECTS: Rescission creates the obligation to return the things
which were the object of the contract, together with their fruits,
and the price with its interest. (Art. 1385)
I. Consequently, it can be carried out 011ly when he who
demands rescission can return whatever he may be obliged
to restore. (Art. 1385)
2. Neither shall rescission take place when the things which
are the object of the contract are legally in the possession
ofthirdpersons who did not act in badfaith. (Art. 1385)
a. In this case, indemnity for damages )Jlay be demanded
from the person causing the loss. (Art. 1385)
b. If the buyer acted in good faith in purchasing a
property (particularly if he relied on a certificate of title
which has no adverse annotations), i.e., he did not
know of the seller's debts, the sale cannot be
rescinded.589
"' China Banking Corp. v. CA, G.R. No. 129644, September 7, 2001; MR Holdings v. Bajar,
G.R.No. 138104, April 1 1 , 2002.
"'Union Bank of the Philippines v. Sps. Ong, G.R. No. 152347, June 21; 2006.
"' Union Bank of the Philippines v. Sps. Ong, G.R. No. 152347, June 21, 2006.
215
 3. Whoever acquires in bad faith the things alienated in fraud
of creditors, shallindemnify the latter for damages suffered b. If both parties lack capacity, the contract is
by them on account
of the alienation, whenever, due to any unenforceable. (Art. 1403, par. 3)
cause, it should be impossible for him to return them. (Art.
1 388) c. Lack of capacity is different from lack of authority. If
the contract is entered into in the name of another
If there are two or more alienations, the first acquirer person by one who has been given no authority or
. shall be liable first, and so on successively. (Art. 1388) legal representation, or who has acted beyond his
powers, the contract is unenforceable. (Art. 1403, par.
l ; Art. 1 3 1 7)
III. VOIDABLE CONTRACTS
2. Vitiated Consent. Those where the consent is vitiated by
A. IN GENERAL mistake, violence, intimidation,_ undue influence or fraud.
(Art. 1391)
I. Voidable or anullable contracts are existent, valid, and
binding, although they can be annulled because oi want of See discussion on these vices of consent supra.
capacity or vitiated consent of one of the parties.590
C. ACTION FOR ANNULMENT
2. Voidable contracts are valid and binding until set aside in
an aciion for that purpose (Art. 1 390). Before annulment, 1 . Direct Action. The validity of a voidable contracts may be
they are effective and obligatory between parties.591 assailed only by a ''proper action in court" (Art. 1 390), i.e.,
through an action for that purpose.592
3. They can be confinned or ratified (Art. 1 390).
The validity of voidable contracts cannot be attacked
4. A contract may be voidable even though there may have collaterally (like voidable marriages593 or voidable
been no damage to the contracting parties. (Art. 1390) judgments594). This differentiates them from void
contracts (or marriages or judgments), the validity of
B. CAUSES : The following contracts are voidable or annullable which can be attacked collaterally.

2. Who May File.

I. Lack of Capacity. Those where one of the parties is
incapable of giving consent to a contract; (Art. 1391) a. The action for the annulment of contracts may be
instituted by all who are thereby obliged principally or
a. Thus, a contract executed by a senile or demented subsidiarity. (Art. 1 397)
person (who cannot enter into contracts under Art.
1327) is voidable.
592 MWSSv. CA, G.R. No. 1 26000, October7, 1998.
590 MWSS v. CA, G.R. No. 1 26000, October 7, 1998.
"' Vda. De Jacob v. CA, G.R. No. 135216, August 19, 1999.
591 MWSS v. CA, G.R. No. 126000, October 7, 1998.
594 Gomez v. Concepcion, 47 Phil. 717 (1925).

216 217
 1. Strangers to a contract cannot sue to annul and set i. Persons who are capable cannot allege the
. aside the same. incapacity of those with whom they contracted.
(Art. 1397)
Thus, a squatter or trespasser cannot annul the
contract of sale of a land to which he was not a ii. Persons who exerted intimidation, violence, or
party ,595 undue influence, or employed fraud, or caused
mistake cannot base their action upon these flaws
n. "Exception": There have been cases holding that a of the contract. (Art. 1397)
stranger may sue for annulment when he is
prejudiced in his rights with respect to one of the 3.. Prescription. The action for annuhnent shall be brought
contracting parties and can show detriment which within four years. (Art. 1391)
. would positively result to him from the contract in
6
which he has no intervention.59 This period shall begin:

Note, however, that the exception , giving a. In cases of intimidation, violence or undue influence -

strangers the standing to set aside a contract from the time the defect of the consent ceases. (Art.
usually rests on a basis other than the 1391)
voidability cif!'a contract. For instance, 'a
creditor may set aside a contract defrauding A contract executed under the pressure of the
him (for being rescissible)591 ; a co-owner may President/dictator may be annulled within four
6
set aside a sale made by another co-owner in years from his deposition. 00
excess of his portion (for being void insofar as
it affected the portion of the plaintiff b. In case of mistake or fraud - from the time of the
owner).'98 discovery of the same. (Art. 1391)

b. The plaintiff must be the injured party or victim, and i. Discovery commences from the date of the
not the party responsible for the defect. 599 execution of the contract601 or, at the very least,
from the date of registration thereof with the
Register of Deeds, as registration is constructive
60
notice to the world. 2

"' Banez v. CA. G.R. No. L-30351, September 1 1 , 1974.

'" Teves v. People's Homesite and Housing Corporation, 23 SCRA 1141 (1968); Reyes v. CA,
G.R. No. 94214, December 1, 1992.
'" Guzman Bocaling & Co. v. Bonnevie, G.R. No. 86150, March 2, 1992; See Equatorial Realty
Development, !nc. v. Mayfair Theater, Inc., 264 SCRA 483, 500 (1996), J. Panganiban, separate
concurring.
"' Fernandez v. Fernandez, G.R. No. 143256, August 28, 2001.
"' Reyes v. CA, G.R. No. 94214, December 1, 1992; Samahan ng Magsasaka sa San Josep v.
Vallsno, G.R. No. 158314, June 3, 2004.
218
60o MWSS v. CA, G.R. No. 126000, October 7, 1998; Miailhe v. CA, G.R. No. 108991, March 20,
2001.
601 Sps. Dela Cruz v. Sps. Segovia, G.R. No. 149801, June 26, 2008.
602 MWSS v. CA, G.R. No. 126000, October 7, 1998, citing Pascua vs. Florentino, 136 SCRA
208; Balbin vs. Medalla, 108 SCRA 666; Guerrero vs. CA, 126 SCRA 109; Marcopper vs.
Garcia, 143 SCRA 178; Ramos vs. CA, 112 SCRA 542. See also Government Service Insurance
System v. Santiago, G.R. No. 155206, 28 October 2003, 414 SCRA 563, 571, citing Philippine
Economic Zone Authority v, Fernandez, 411 Phn. 107, 1 1 9 (2001).
219
 ii. If consent is totally absent, the contract is void and a<lopt\on ol: tb.e act, OI acceptance an<i tetent\on ol:
605
hence imprescriptible.603 benefits fl.owing thereftom.

c. Jn case of contracts entered into by minors or other b. Examples of ratification:

incapacitated persons - from the time the
guardianship ceases. (Art. 1391) i. Acceptance and retention of benefits .under the
voidable contract;''
D. RATIFICATION
ii. Use of the proceeds of the voidable contract;607
1 . Concept. Voidable contracts are susceptible of ratification.
(Art. 1 390) Ratification extinguishes the action to annul a iii. Introduction by the seller of the buyer as the new
voidable contract. (Art. 1 392) owner of the property .608

a. Ratification means that a person knowingly and 3. Who May Ratify.

voluntarily adopts or gives sanction to an unaut)iorized
or defective act, which would otherwise not be binding. a. For voidable contracts due to lack of capacity,
on him.604 ratification may be effected by the incapacitated person
(upon gaining capacity) or by his guardian (during the
b. Ratification requires that: (a) the ratifying party knows ward' s incapacity). (Art. 1394)
of the reason which renders the contract voidable; and
(b) such reason has ceased. (Art. 1393) b. Fcir voidable contracts due to vice of consent,
ratification may be effected by the person whose
2. Manner. Ratification may be effected expressly or tacitly. consent was vitiated.
(Art. 1393)
. c. Ratification does not require the conformity of the
a. There is a tacit (or implied) ratification if; with contracting party who has no right to bring the action
knowledge of the reason which renders the contract for amiulment. (Art. 1395)
voidable and such reason having ceased, the person
who has a right to invoke it should execute an act 4. Effect of Ratification. Ratification cleanses the contract
which necessarily implies an intention to waive his from all its defects from the moment it was constituted.
right. (Art. 1393) (Art. 1396)

Implied ratification may take various forms - like

silence or acquiescence, acts showing approval or

603 FiEstate Golf & Development, Inc. v. Navarro, G.R. No. 152575, June 29, 2007, citing Heirs
of Rosa Dumaliang v. Damiano Serban, G.R. No. 155133, 21 February 2007 and Baranda v.
Baianda, G.R. No. L-73275, 20 May 1987, 150 SCRA 59.
005
Yasuma v. Heirs of De Villa, G.R. No. 150350, August 22, 2006.
606 MWSS vs. Court of Appeals, 297 SCRA 287, 307 (1998); Francisco v. Herrera, G.R. No.
139982, November 21, 2002.
607 Phil. Free Press Inc. v. CA, G.R. No. 132864, October 24, 2005.

6"' MaglucotAw vs. Maglucot. 329 SCRA 78, 94 (2000). 606 Sps. Alfredo v. Sps. Borras, G.R. No. 144225. June 17, 2003.

220 221
 Ratification retroacts to the time the contract was
made.
E. EFFECT OF ANNULMENT
1. I n General. The effect o f annulment of the contract i s to
wipe it out of existence, and to restore the parties, insofar
as legally and equitably possible, to their original situation
before the contract was entered into. If a voidable contract
is annulled, the restoration of what has been given is
proper.609
2. General Rule: Restitution. An obligation having been
annulled, the contracting parties shall restore to each other
the things which have been the subject matter of the
contract, with their fruits, and the price with its nterest,
except in cases provided by law. (Art. 1398)
a. In obligations to render service, the value thereof shall
be the basis for damages. (Art. 1398)
b. 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.
c. The principle of unjust enrichment applies here. Thus,
if a lease is annulled, the lessee cannot demand the
return of past rentals which correspond to the period
0 '
that he was in possession.of the property.61
3. Exception: Incapacity. 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
'' Katipunan v. Katipunan, Jr., G.R. No. 132415, January 30, 2002; Villanueva v. Ctiiong, G.R.
No. 159889, June 5, 2008.
"' IV Tolentino 607608.
222
except insofar as he has been benefited by the thing or
price received by him. (Art. 1399)
4. Inability to Make Restitution.
a. Due to Loss of the Thing Caused by Plaintiff. - 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. (Art. 1401)
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, unless said loss took place through the
i fraud or fault of the plaintiff. (Art. 1401)
b. Due to Loss of the Thing Caused by Defendant.
Whenever the person obliged by the decree of
annulment to return the thing can not do so because it
has been lost through his fault, he shall returri the fruits
received and the value of the thing at the time of the
loss, with interest from the same date. (Art. 1400)
(Art. 1402) c. Restatement of the Rule. - In case the thing which is
the object of the contract has been lost (regardless of
the cause of voidability of the contract - whether due
to incapacity or vice of consent), the following rules
apply:
i. If loss is through the fraud or fault of the plaintiff
(the party who has the right to institute the action)
- the action for annulment is barred (Art. 1401);
ii. If loss is through the fraud orfault ofthe defendant
the action is not barred; the defendant must pay
the value of the thing at the time of the loss (with
223
 interest from the same date) as well as the fruits defective act, which would otherwise not be binding on
received. (see Art. 1400); him.613

iii. If loss is not due to thefraud or fault of any party a.
(such as by fortuitous event) - the action is not
barred; restitution may still be effected by paying
the value of the thing at the time of loss, but
without interest (since the payer was not at fault).
Ratification may be express or implied. (see Art. 1 3 1 7)
Implied ratification may take various forms - like
silence or acquiescence, acts showing approval or
adoption of the act, or acceptance and retention of
benefits flowing therefrom.614

. . ' 15
b. Rat1'fi1catton 1 s generaIIy retroact1ve.6
IV. UNENFORCEABLE CONTRACTS
3. Who May Assail. Unenforceable contracts cannot be
A. IN GENERAL assailed by third persons. (Art. 1408)

I . Concept. Unenforceable contracts are those which cannot 4. Types. There are three categories of unenforceable
be enforced in court (unless they are ratified) becatlse they contracts (Art. 1403):
are entered into without or in excess of authority, or they
do not comply with the statute of frauds, or both of the a. Those entered into in the name of another person by
contracting parties do not possess the required legal one who has been given no authority or legal
capacity.611 representation, or who has acted beyond his powers;

a. Unenforceable contracts cannot serve as basis for a suit b. Those that do not comply with the Statute of Frauds;
or action; the courts will refuse to enforce them and and
dismiss the suit. '

c. Those where both parties are incapable of giving

b. In a suit founded on an unenforceable contract, the consent to a contract.
defendant can interpose its unenforceability as a
defense and ask for the dismissal of the suit.612 (The These categories are further discussed below.
defendant's failure to set up this defense may be
deemed a waiver thereof and a ratification of the . B. LACK OF AUTHORITY
contract.)
1. Unauthorized Contracts. The first category of
2. Ratification. Unenforceable contracts may be ratified. unenforceable contracts are unauthorized contracts, or
(Art. 1403) Ratification means that a person knowingly.and those entered into in the name of another person by one
voluntarily adopts or gives sanction to an unauthorized or

613
Ma9lucol-Aw vs. Maglucot, 329 SCRA 78, 94 (2000).
611 Mercado v. Allied Banking Corp., G.R. No. 171460, July 27, 2007. 014
Koji Yasuma v. Heirs of De Villa, G.R. No. 150350, August 22, 2006.
612 Rule 16, Section 1 (i). '"De Jesus v. Daza, 77 Phil. 170 (1946).

224 225
 who has been given no authority or legal representation, or the party with whom he has contracted (Art. 1 897),
who has acted beyond his pow,ers. unless -

' i. The principal ratifies the contract (see Art. 1 898),

a. Example 1: If X sold the car of his friend Y, without
the latter's authorization, the sale is unauthorized and or
thus unenforceable
ii. The other contracting party is aware of the limits
b. Example 2: If A was authorized by the owner of a of the agent's power (in which case the contract is
house to lease it out to third persons, but A sold it void). (Art. 1 898)
instead, the sale is beyond A's powers and thus
unenforceable. C. STATUTE OF FRAUDS

c. The unauthorized sale by a co-owner of the entire co I. Noncompliance with the Statute o f Frauds. The second
owned property is unenforceable as to the pro-indiviso type of unenforceable contracts are those that do not
shares of his co-owners who did not consent.61 6 comply with the Statute of Frauds as set forth in Art. 1403.
I

2. Governing Law. Unauthorized contracts are governed by a. The Statute of Frauds refers to the law which requires
Article 1 3 1 7 and the principles of agency under the Civil certain contracts or transactions to be put in writing
Code. (Art. 1404) and signed by the party charged thereby. Its purpose is
to prevent fraud and perjury in the enforcement of
a. Under Art. 1 3 17, no one may contract in the name of obligations depending for their evidence on the
another without being authorized by the latter, or unassisted memory of witnesses. 6 17
unless he has by law a right to represent him. A
contract entered into in the name of another by one b. Contracts covered by the Statute of Frauds cannot be
who has no authority or legal representation, or who proven without the writing or through oral evidence
has acted beyond his powers, shall be unenforceable. (Art.1403), unless the other party fails to object (Art.
(Art. 1 3 17) 1405).

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.
(Art. 1317)
b. Under the principles of agency, if the agent exceeds the
scope of his authority, the agent is personally liable to
2. Contracts Covered by the Statute of Frauds. In the
following cases an agreement shall be unenforceable by
action, unless the same, or some note or memorandum
thereof, be in writing, and subscribed by the party charged,
or by his .agent:

617 Swedish Match, AB v. CA, G.R. No. 128120, October 20, 2004; Sps. Torcuator v. Sps.

"' Cabales v. CA, G.R. No. 162421, August 31, 2007. Bernabe, G.R. No. 134219, June 8, 2005.
226 227
 a. An agreement that by its terms is not to be performed
within a year from the making thereof; (Art. 1403, par.
2, subpar. a)
I. The statute of frauds applies if the agreement is;
its own terms, not to be perfonned within
It does not apply if the agreement is merely silent
on the time ofperfonnance.618
ii. The statute of frauds applies if the agreement is not
to be perfonned on both sides within
does not apply if the agreement is to be fully
perfonned on one side within 1 year.619
iii. The statute of frauds applies only to executory
contracts. It does not apply to contracts w ich had
already been executed (whether fully or partially,
and whether on one or both sides).620
a. Thus, it does not apply to a contract of sale
which had been partially executed by the
parties, with the transfer of the possession of
the property to the buyer and the partial
payments of the purchase price thereof.621
b. If a contract has been totally or partially
perfonned, the exclusion of parol evidence
would promote fraud or bad faith, for it would
enable the defendant to keep the benefits
already derived by him from the transaction,
and at the same time, evade the obligations
assumed or contracted by him thereby.622
618
Arroyo v. Azur, 76 Phil. 493 (1946).
619 Philippine National Bank v. Philippine Vegetable Oil Co., 49 Phil. 857 (1927).
620 Ciemeno v. Lobregat, G.R. No. 137845, September 9, 2004.
621 Clemeno v. Lobregat, G.R. No. 137845, September 9, 2004.
"' Swedish Match, AB v, CA, G.R. No. 128120, October 20, 2004.
228
b. A special promise to answer for the debt, default, or
miscarriage of another; (Art. 1403, par. 2, subpar. b)
This applies to the obligation of the defendant as a
'
by guarantor of a third party. If the obligation is the
1 year. principal debt of the defendant (e.g., supplier
provided lumber to the defendant for his account,
and not for the account of the defendant's
contractor who took delivery of the lumber), the
23
Statute of Frauds does not apply . 6
1 year. It
c. An agreement made in consideration of marriage,
other than a mutual promise to marry; (Art. 1403, par.
2, subpar. c)
a. Thus, the father of the groom-to-be may not sue
the father of the bride-to-be on an oral agreement
that the fonner would improve the latter's house in
4
consideration of the marriage of their children.62
5
b. A mutual promise to marry is not enforceable, 62
even if written. However, a breach thereof may
give rise to liability for damages if attended with
6
bad faith, 62 or an action to recover money or
property advanced on account of the promise.627
d. An agreement for the sale ofgoods, chattels or things
in action, at a price not less than five hundred pesos.
(Art. 1403, par. 2, subpar. d)
i. The Statute of Frauds does not apply (no writing
required) if:
623 Reiss v. Memije, 15 Phil. 350 (1910).
624 Cabague v. Auxilio, 92 Phil. 294 (1952). See lso Domalagan v. Bolifer, 33 Phil. 471 (1916).
625
De Jesus v. Syqula, 58 Phil. 866 (1933).
'" Garcia v. Del Rosario, 33 Phil. 189; Cabague v. Auxilio, 92 Phil. 294 (1952); Baksh v. CA,
G.R. No. 97336, February 19, 1993.
6" De Jesus v. Syquia, 58 Phil. 866 (1933).
229
 a. the buyer accepts and receives part of such iii. In a sale of land through an agent, the authority of
goods and chattels, or the evidences, or some the agent should be in writing; otherwise, the sale
of them, of such things in action, or shall be void. (Art. 1 784)

b. the buyer pays at the time some part of the f. A representation as to. the credit of a third person.
purchase money. (Art. 1403, par. 2, subpar. d) (Art. 1403, par. 2, subpar. f)

ii. When a sale is made by auction and entry is made This person who makes a representation as to the
by the auctioneer in his sales book, at the time of credit of a third person is actually a stranger to the.
the sale, of the amount and kind of property sold, contract between that third person and the person
terms of sale, price, names of the purchasers and who relies on the representation. Thus, the liability
person on whose account the sale is made, it is a of the person who makes the representation is
sufficient memorandum: (Art. 1403, par. 2, subpar. actually not ex contractu but arising from tort.
d) Thus, it has been said that this category of
unenforceable contracts was improperly
Note that in such an exceptional situiion, the included.631
signature of the party charged is not required.
3. Requirement of Note or Memorandum. If a contract is
e. An agreement of the leasing for a longer period. than covered by the Statute of Frauds under Art. 1403, par. 2,
one year, or for the sale of real property or of an "the same, or some note or memorandum thereof, [must]
interest therein; (Art. 1403, par. 2, subpar. e) be in writing, and subscribed by the party charged."
However, for a note or memorandum to satisfy the Statute
1. A right of first refusal is different from a contract
of Frauds, it must be complete in itself and cannot rest
of sale of real property, and is not covered by the
partly in writing nd partly ii;i parol (oral) evidence.632
statute of frauds.628

a. The note or memorandum must contain the names of

ii. The statute of frauds does not apply to a partition, the parties, the terms and conditions of the contract,
which does not involve the transfer of property but and a description of the property sufficient to render it
merely a confirmation of title.629 Thus, an oral capable of identification. Such note or memorandum
pai1ition is valid.630 must contain the essential elements of the contract
expressed with certainty that may be ascertained from
the note or memorandum itself, or some other writing
to which it refers or within which it is connected,
. . 1 ' 633
828
without resortmg to paro ev1dence.
Rosencor Development Corporation v. lnqulng, G.R. No. 140479, 8 March 2001, 354 SCRA
119; Barbosa v. Hernandez, G.R. No. 133564, July 10, 2007.
829 PadaKilario v. CA, G.R. No. 134329, January 19, 2000; Vda. de
Reyes v, Court of Appeals
199 SCRA 646, 657 (1991), citing Thunga Chui v. Que Bentec, 2 Phil. 561, 563-564 (1903)
,

and "' IV Reyes & Puna 254.

Barcelona, et al. v. Barcelona and Court of Appeals, 100 Phil. 251, 255 (1956).
'32Swedish Match, AB v. CA, G.R. No. 128120, October20, 2004.
"' Tan v.lim, G.R. No. 128004, September 25, 1998.
'" Swedish Match, AB v. CA, G.R. No. 128120, October 20, 2004.
230 231
 Thus, a note which does not indicate the price and
the mode of payment is insufficient.634
b. The note or memorandum need not be contained in a
single document, nor, when contained in two or more
papers, need each paper be sufficient as to contents and
signature to satisfy the statute. Two or more writings
properly connected may be considered together,
matters missing or uncertain in one may be supplied or
rendered certain by another, and their sufficiency will
depend on whether, taken together, they meet the
requirements of the statute as to contents and as to
signature. 635
The exchange of correspondence between the
parties may constitute sufficient wi'iting
evidence the agreement for purposes of complying
with the statute of frauds.636
4. Evidence. Where the Statute of Frauds is applicable,
"evidence . . . of the agreement cannot be received without
the writing, or a secondary evidence of its contents." (Art.
1403, par. 2). In other words, parol or oral evidence is
barred.
But the other party should promptly object to the
presentation of oral evidence; failure to do so would be
a waiver of such objection and a ratification of the
contract. (Art. 1405)
Cross-examination regarding the contract may be
deemed a waiver of the objection to parol
evidence.637
634 Swedish Match, AB v. CA, G.R. No. 128120, October 20, 2004.
"' Limketkai Sons Milling, Inc. v. CA, G.R. No. 1 1 8509, December 1, 1995.
636 City of Cebu v. Heirs of Rubi, 306 SCRA 408 (1999).
"'Abrenica vs. Gonda, 34 Phil. 739 (1916); Taloslg vs. Vda. de Nieba, 43 SCRA 472 (1972);
Limkelkai Sons Milling, Inc. v. CA, G.R. No. 1 18509, December 1, 1995.
232
5 . Ratification. Contracts infringing the Statute of Frauds are
ratified by:
a. The failure to object to the presentation of oral
evidence to prove the same (Art. 1405), or
b. The acceptance of benefit under them. (Art. 1405)
In an oral lease, construction by the lessee of
buildings on the leased property
. is a ratification of
6
the contract. 38
6. Distinguished from the Public Documents Requirement.
Unenforceable contracts under the Statute of Frauds should
to not be confused with contracts which require a public
document under Arts. 1357 and 1358. The latter group of
contracts are perfectly enforceable - either because they
comply with the Statute of Frauds (e.g., there is a written
note or memorandum, albeit in private document), or
because they are not covere!i by the Statute of Frauds at all.
The parties may just need them to appear in a public
document for convenience or for registration purposes, in
which case they may simply compel each other to execute
the corresponding public document
When a contract is enforceable under the Statute of
Frauds, and a public document is necessary for its
registration in the Registry of Deeds, the parties may
avail themselves of the right under Art._ 1357, i.e.,
compel each other to execute a public document. (Art.
1406)
'" Sps. Camara v. Sps. Maiabao, G.R. No. 154650, July 31, 2003.
.
233
 D. lNCAPACITY OF BOTH PARTIES b. Technically, "inexistent" contracts are those in which
an essential element is lacking (as opposed to contracts
1 . Incapacity of Both Parties. The third type of where the elements are present, but illegal). 641
unenforceable contracts are those where both parties are
. incapable of giving consent to a contract. 2. Ratification. A void contract cannot be ratified (Art
.

1409).
If only one of the contracting parties is incapacitated,
the contract is voidable. (Art. 1391) 3 . Waiver. The right to set up the defense of illegality of a
contract cannot be waived. (Art. 1409)
2. Ratification. Ratification may be made by the parent or
guardian, as the case may be, of the capacitated parties. 4. lmprescriptible. The action or defense for.the declaration
(Art. 1407) of the inexistence of a contract does not prescribe. (Art.
1410)
a. If the contract is ratified by the parent/guardian of one
of the contracting parties, the effect is to make the 5. Who can Invoke. The right to set up the nullity of a void
contract voidable ("as if only one of the parti'es were or non-existent contract is not limited to the parties; it is
incapacitated"). (Art. 1407) extended to third persons who are directly affected by the
contract, whenever juridical effects founded thereon are
42
b. If the contract is ratified by the parent/guardian of both asserted against him. 6
contracting parties, the effect is to make the contract
valid ("the contract shall be validated from the But the defense of illegality of contract is not available
inception"). (Art. 1407) to third persons whose interests are not directly
affected. (Art. 1421)

V. VOID AND INEXISTENT CONTRACTS B. DISTINGUISHED FROM OTHER DEFECTIVE CONTRACTS

A. IN GENERAL 1. Rescissible Contracts.

1 . Concept. A void or inexistent contract is one which. has no a. Rescissible contracts - valid and binding until
force and effect from the very beginning. Hence, it is as if rescinded, as all the essential elements are present; they
it has never been entered into.639 are rescissible only because of an economic injury
suffered by another person.
a. It produces no civil effect and does not create, modify Void contracts -void from the beginning because one
or extinguish a juridical relation.640 of the essential elements is lacking.

'" Francisco v. Herrera, G.R. No. 139982, November 21, 2002. 641 See Gonzales vs. Trinidad, 67 Phil. 682 (1939).
"' Hulst v. P.R. Builders, Inc., G.R. No. 156364, September 3, 2007. . 642 Arsenal v. IAC, 227 Phil. 36 (1986).

234 235
 b. Rescissib/e contracts - can be attacked onl y by the Void contracts - can be attacked directly or
persons injured thereby. coJlateraJly.
Void contracts - can be attacked by any person

directly affected. e. Voidable contracts - can be ratified.

Void contracts .,-- cannot be ratified.
c. Rescissible contracts - rescission prescribes in four
years. 2. Unenforceable Contracts.
Void contracts - the action for declaration ofnullity is
imprescriptible. a. Unenforceable contracts - may be valid, although
they may not be enforced or proved (unless ratified).
d. Rescissib/e contracts - can be attacked directly (in an Void contracts -void from the beginning because one
action for rescission). of the essential elements is lacking.
Void contracts - can be attacked directly or
collaterally. b. Unenforceable contracts - can be assailed only by the
parties to the contract.
2. Voidable Contracts. 643 Void contracts - can be assailed by any person
directly affected.
a. Voidable contracts - valid and binding until annulled;
they are voidable because of a defect in one of the c. Unenforceable contracts the defense of
essential elements. unenforceability must be set up or the objeciion to
Void contracts -void from the beginning becauseone parol evidence must be raised in timely manner,
of the essential elements is Jacking. otherwise they are waived. .
Void contracts - defense of nullity or illegality cannot
b. Voidable contracts - can be attacked only by persons be waived.
obliged thereby, either principally or subsidiarily.
Void contracts - can be attacked by any person d. Unenforceable contracts - can be ratified.
directly affected. Void contracts - cannot be ratified.

c. Voidable contracts - annulment prescribes in four C. TYPES OF. VOID OR INEXISTENT CONTRACTS: In general,
years. void or inexistence contracts are those where one of the
Void contracts - the action for declaration of nullity is essential requisites of a valid contract (consent, object and
imprescriptible. cause) is totaJly absent. The absence may be in a legal sense,
e.g., a cause may be actuaJly present but if it is illegal or
d. Voidable contracts - can be attacked directly (in an immoral, it may be considered legally absent.
'
action for annulment).
More specifically, Art. 1409 provides that the following
contracts are inexistent and void from the beginning -

'" See Leonardo v. CA, G.R. No. 125485, September 13, 2004.
236 2'37
 1 . Those whose cause, object or purpose is contrary to law,
morals, good customs, public order or public policy; a. A personwho has leased his property to another person
cannot lease it again to a third party while the original
a. The cause for a contract is presumed lawful. (Art. lease was still valid and subsisting.648
1354)
b. Note that things having a potential existence may be
b. Examples of unlawful cause. the object of the contract of sale. (Art. 1461) What is
necessary is that the vendor can transfer ownership of
i. The termination of marital relations is an unlawful the thing sold at the time it is delivered. (Art. 1459)
consideration which renders the contract void.644
4. Those whose object is outside the commerce of men;
ii. An agreement to stifle the prosecution of a person
charged with a crime, for a pecuniary or other a. Things "outside the commerce of man" are those
valuable consideration, is contrary to public policy which are . not susceptible of appropriation or private
and the due administration ofjustice.645 ownership. 649

iii. Where the owner of a company transferred his b. Examples: (i) public office650 and political rights; (ii)
shares to a government crony with the motive of purely personal rights; such as those arising from
obtaining a government contract, the motive was family relations; and (iii) properties of public
deemed the (illegal) cause.646 dominion, such town plaza,651 airport lands and
buildings, 652 forest lands,'53 roads and highways,654
iv. Where a man donated land to a woman with the foreshore land,'55 watershed,'56 snbmerged lands.657
motive of getting her to agree to have sexual
relations with him, the motive was deemed the 5. Those which contemplate an impossible service;
(illegal) cause. 647
Impossible things or services cannot be the object of
2. Those which are absolutely simulated or fictitious; contracts. (Art. 1348) Example: It is impossible for a
lessor to undertake the maintenance of the public
An absolutely simulated or fictitious contract is void
(Art. 1 346), because consent is totally absent. The
648 Bercero v. Capitol Dev'\ Corp., G.R. No. 154765, March 29, 2007.
parties do not intend to be bound at all. (Art. 1345)
"' See Land Bank v. Republic, G.R. No. 150824, February 4, 2008 and Republic v. CA, G.R.
No. 126316, June 25, 2004.
3 . Those whose cause o r object did not exist at the time of 650 Collantes v. CA, G.R. No. 169604, March 6, 2007, ,
55' Municipality of Cavite v. Rojas, 30 Phil. 602 (1915); Espiritu v. Municipal Council, 102 Phil .
# '

the transaction;
866 (1958).
552 Manila International Airport Authority v. CA, G.R. No. 155650, July 20, 2006.

'" Land Bank v. Republic, G.R. No. 150824, February 4, 2008.

644 De Leon v. CA, G.R. No. 80965, June 5, 1990. "' Vlllarico v. Sarmiento, G,R. No. 136438, November 1 1 , 2004.
"' Arroyo v. Berwin, 36 Phil. 386 (1917). 555 Republic v. CA, G.R. No. 126316, June 25, 2004.
646 E. Razon Inc. vs. Philippine Ports Authority, 151 SCRA 233 (1987).
556 Santa Rosa Realty Dev'! Corp. v. CA, G.R. No. 112526, October 12, 2001.
," Liguez v. CA, 102 Phil. 577 (1957).
557 Chavez v. Public Estates Authority, G.R. No. 133250, May 6, 2003 and November 1 1 , 2003,

238 239
 drainage system; he can only maintain the private pipes
'8
or drainage of the leased premises. 6
6. Those where the intention of the parties relative to the
principal object of the contract cannot be ascertained;
Nullity results if the uncertainty refers to 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. (Art. 1378) If the uncertainty refers merely to
incidental circumstances, the contract is valid; the
rules in Art. 1378 apply to resolve the uncertainty.
7. Those expressly prohibited or declared void by law.
Example: The law generally generally
contracts uponfuture inheritance. (Art. 1347)
Note: A contract which is the direct result of a previous
(Art. 1422)
illegal contract, is also void and inexistent.
D. RULES ON RECOVERY
1. General Rule. Parties to a void agreement cannot expect
the aid of the law; the courts leave them as they are,
because they are deemed in pari delicto or "in equal
fault."6" Each must bear the consequences of his own
acts.660
No action arises from an illegal contract; no suit can be
maintained for its specific performance, or to recover the
property agreed to be sold or delivered, or the money
agreed to be paid, or damages for its violation; and where
656 Guevent Industrial Dev'! Corp. v. Phil. Lexus Amusement Corp., G.R. No. 159279,j July 1 1 ,
2006.
65' Bercero v. Capitol D,ev't Corp., G.R. No. 154765, March 29, 2007; Hulst v. P.R. Builders, Inc.,
G.R. No. 156364, September 3, 2007.
660 Bercero v. Capitol Dev't Corp., G.R. No. 154765, March 29, 2007.
240
the parties are in pari delicto, no affirmative relief of any
kind will be given to one against the other.661
In case of pari delicto, the defendant is in a better position
because the court refuses to give judicial relief to the
plaintiff. However, the court's refusal to lend aid to the
plaintiff is not intended to benefit the defendant. It is
intended to deter illegality.662
Exceptions:
a. The pari delicto rule does not apply to inexistent
contracts, i. e., contracts which are void because of the
absence of an essential element (as opposed to
contracts which are void because of illegality of the
rohibits cause or subject matter).663
Example: The pari delicto rule does not apply to
absolutely simulated contracts or (o contracts
without consideration (even if they may have been
entered for an illegal motive or purpose664).
b. The pari delicto rule does not apply ,if it would violate
public policy.665
a. Example 1: A squatter who had been ousted by a
fellow squatter is not barred from filing an
ej ectment suit on .the ground that they are both
squatters and in pari delicto. To deny a squatter
661 Silagan v. Intermediate Appellate Court, 196 SCRA 774, 765 (1991); Acabal v. Acabal, G.R.
No. 148376, March 31, 2005; Bercero v. Capitol Dev't Corp., G.R. No. 154765, March 29, 2007;
Hulst v. P.R. Builders, Inc., G.R. No. 156364, September 3, 2007.
662 Acabal v. Acabal, G.R. No. 146376, March 31, 2005.
"' Gonzales vs. Trinidad, 67 Phil. 682 (1939); Vasquez v. Porta, 98 Phil. 490 (1956); Madina v.
CA, G.R. No. 109355, October 29, 1999
664 Gonzales vs. Trinidad, 67 Phil. 662 (1939); Vasquez v. Porta, 96 Phil. 490 (1956).
6" Silagan v. IAC, 274 Phil. 182 (1991); Acierto v. De las Santos, 95 Phil. 887, 889 (1954).
241
 the right to sue for ejectment would invite mayhem
and lawlessness.666
b. Example 2: The pari delicto rule does not apply to
disbarment proceedings, as they are intended to
protect the public and the courts.667
c. The law permits the return of that which may have
been given under a void contract to:
i. The innocent party (Arts. 141 1-1412);
ii. The debtor who pays usurious interest (Art. 1413);
iii. The party repudiating the void contract before the
illegal purpose is accomplished or before damage
is caused to a third person.and if public interest is
' ii. When only one of the parties is guilty - they shall
subserved by allowing recovery (Art. 1414);
iv. The incapacitated party if the interest of justice so
demands (Art. 1415);
v. The party for whose protection the prohibition by
law is intended, if the agreement is not illegal per
se but merely prohibited and if public policy would
be enhanced by permitting recovery (Art. 1416);
and
vi. The party for whose benefit the law has been
intended such as in price ceiling laws (Art. 1417)
and labor laws (Arts. 1418-1419).
The foregoing instances are further discussed
below.
"' Pajuyo v. CA, G.R. No. 146364, June 3, 2004.
"' Mortel v. Aspiras, 100 Phil. 586, 592 (1956).
242
2. lllegal Cause or Object. When the nullity proceeds from
the illegality of the canse or object of the contract, the
following rules apply:
a. If the act constitutes a criminal offense:
i. When both parties are in pari delicto - they shall
have no action against each other, and both shall be
prosecuted. (Art. 1411) "In pari de/icto non oritur
actid. ,,
Moreover, the provisions of the Revised 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. (Art.
141 1)
have no action against each other, and the guilty
party shall be prosecuted. However, the innocent
party may claim what he has given, and shall not
be bound to comply with his promise. (Art. 1 4 1 1)
b. If the act does not constitute a criminal offense:
i. When both parties' are at fault - neither may
recover what he has given by virtue of the contract,
or demand the performance of the other's
undertaking. (Art. 1412)
ii.. When only one of the parties is at fault - (1) The
party at fault cannot recover what he has given by
reason of the contract, or ask for the fulfillment of
what has been promised him. (2) The party who is
aot at fault may demand the return of what he has
given without any obligation to comply with his
promise. (Art. 1412)
143
 Notes: The rule bars the party from pleading the
illegality of the contract either as a cause of action
or as a defense. Where the plaintiff can establish a
cause of action without exposing its illegality, the
vice does not affect his right to recover. 668
Thus, e.g., where a married man donated a
land to his paramour, who was minor at the
time, the paramour may later seek recovery of
the land on the strength of a donation regular
on its face. To defeat its effect, the donor (or
his heirs) may plead and prove that the same is
illegal. But if the donor is the guilty party or is
equally guilty with the donee, he is barred
. 9
from settmg up sueh 1 11egal'tty.66
E.g., where the father falsified a deed of
donation to her daughter (making it appear that
the donation was made jointly with his wife,
who was actually deceased, to avoid
inheritance taxes and costs of publication), the
father/donor and the daughter/donee are in pari
de/icto. The father/donor cannot be allowed to
file an action for annulment of the donation.670
3 . Illegal Purpose. When money i s 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. (Art. 1414)
"' Uguez v. CA, 1 02 Phil. 577 (1957). See, however, Tala Realty Services Corp. v. Banco
Filipino Savings and Mortgage Bank. G.R. No. 137533, November 22, 2002.
'" Liguez v. CA, 102 Phil. 577 (1957).
010 Ramirez v. Ramirez, G.R. No. 165088, March 17, 2006.
244
a. Thus, an alien who enters into a contract to buy a
land but rescinds the same before transfer of title
may be allowed to recover the purchase price he
paid (but not damages).671
b. In an agreement where the mother-in-law agreed to
transfer certain properties to her daughter-in-law in
consideration of the termination of marital
relations with her son, the court allowed the
mother-in-law to recover the properties since the
agreement was repudiated before the purpose has
been accomplished:612
4. Illegal Contract by an Incapacitated Person. 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. (Art. 1415)
5. Prohibited Contracts. When the agreement is not illegal
per se but is merely prohibited, and the prohibition by the
law is designated for the protection of the plaintiff, he may,
if public policy is thereby enhanced, recover what he has
paid or delivered. (Art. 1416)
6. Excess Interest or Price. ,
a. 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. (Art.
1413)
Circular No. 905 of the Central Bank, adopted on
December 22, J 982, has expressly removed the
interest ceilings prescribed by the Usury Law.
671 Hulst v. P.R. Builders, Inc., G.R. No. 156364, September 3, 2007.
'" De Leon v. CA, G.R. No. 60965, June 6, 1990.
245
 Thus, the U sucy Law is now "legally inexistent" or
"ineffective."673
b. When the price of any article or comnodity is
determined by statute, or by authority of Jaw, any
. person paying any amount in excess of the maximum
price allowed may recover such excess. (Art. 1417)
7. Overwork or Underpayment.
a. When the Jaw 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 _):ieyond
the time limit. (Art. 1418)
b. When the iaw sets, or authorizes the setting of a
minimum wage for laborers, and a contract is agreed
upon by which a laborer accepts a 19wer wage, .he shall
be entitled to recover the deficiency. (Art. 1419)
.
E. SEPARABILITY OF ILLEGAL TERMS: In case of a divisible
contract, if the illegal terms can be separated from the. legal
ones, the latter may be enforced. (Art. 1420)
"' Medel v. CA, G.R. No. 131622, November27, 1998.
246
Chapter 1 2
Natural Obligations
I. IN GENERAL
A. DISTINCTION BETWEEN CIVIL AND NATURAL OBLIGATIONS
Obligations are civil or natural. Civil obligations give a right of
action to compel their performance. (Art. 1423)
Natural obligations, not being based on positive Jaw but on
equity and natural law, do not grant a right of action to enforce
their performance, but , after voluntary fulfillment by the
obligor, they authorize the retention of what has been delivered
or rendered by reason thereof. (Art. 1423)
B. RATIONALE
The law recognizes certain instances wherein there is a moral,
but not a lega duty to perform or pay. If the obligor performs
or pays, out of his honor or conscience, he will not be
permitted to change his mind and recover what he has paid.
The law requires him to abide by his honor or conscience. 674
C. VOLUNTARINESS
I. "Voluntary performance" means that the obligor performs
an obligation with the knowledge that he cannot be legally
compelled to do so. If the payment is made by mistake
(i.e., the obligor thought that the obligation is civil), the
payor may recover under the principle of so/utio indebiti.
(Art. 21 54)
"' Report of the Code Commission, pp. 58-59.
247
 2. A natural obligation does not arise if performance is not a contract without the consent of the parent or guardian,

voluntary but was compelled by coercive processes (such voluntarily pays a sum of' money or delivers a fungible

as by writ of execution).675 thing i.n fulfillment of the obligation, there-shall be no right

II. EXAMPLES OF NATURAL OBLIGATIONS
A. PRESCRIBED OBLIGATIONS
I. Performance of Prescribed Obligations. When a right to
sue upon a civil obligation has lapsed by' extinctive
prescription, the obliger who voluntarily performs the
contract cannot recover what he has delivered or the value
to recover the same from the obligee who has spent or
consumed it in good faith. (Art. 1427)
Note that under current law, the age of majority is
18
years old. (Art. 234, FC, as amended by RA 6809)
Thus, Arts. 1426 and 1427 may be deemed inoperative.
C. VOLUNTARY PERFORMANCE BY DEFENDANT
Payment by Defendant Despite Failure of Action

of the service he has rendered. (Art. 1424) Against Him. When, after an action to enforce a civil
obligation has failed, the defendant voluntarily performs
2. Reimbursement of Payments for Precribed the obligation, he cannot demand the return of what he has

Obligations. When without the knowledge or aginst the delivered or the payment of the value of the service he has
will of the debtor, a third person pays a debt which the rendered. (Art. 1428)
obliger is not legally bound to pay because the action
thereon has prescribed, but the debtor later voluntarily . D. VOLUNTARY PERFORMANCE BY HEIR
reimburses the third person, the obliger cannot recover
what he has paid. (Art. 1425) I. Payment By Heir In Excess of His Inheritance. When a

testate or intestate heir voluntarily pays a debt of the

B. OBLIGATIONS OF A "MINOR" decedent exceeding the value of the property which he

received by will or by the law of intestacy from the estate

1 . Return b y "Minor" of Thing or Price Received. When a of the deceased, the payment is valid and cannot be

minor between eighteen and twenty-one years of age who rescinded by the payer. (Art.' 1429)

has entered into a contract without the consent of the parent

or guardian, after the annuhnent of the contract voluntarily 2. Payment of Legacy Under a Defective Will. When a will
returns the whole thing or price received, notwithstanding is declared void because it has not been executed in

the fact that he has not been benefited thereby, there is no accordance with the formalities required by law, but one of

right to demand the thing or price thus returned. (Art. the intestate heirs, after the settlement of the debts of the

1426) deceased, pays a legacy in compliance with a clause in the

defective will, the payment is effective and irrevocable.

2. Performance by a "Minor." When a minor between . (Art. 1430)

eighteen and twenty-one years of age, who has entered into

"' Manila Surety & Fidelity Co. v. Lim, 106 Phil. 771 (1959).
248 249

Chapter 13
Estoppel
I. IN GENERAL
A. CONCEPT
) permitted to assert any claim inconsistent with his
I . Through estoppel an admission or representation is
rendered conclusive upon the person making it, and cannot
be denied or disproved as against the person relying
thereon. (Art. 143 1 )
2 . A party may not go back ou his own acts and
representations to the prejudice of the other party who
relied upon them. 676
In the law of evidence, whenever a party has, by his
own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing
true, and to act upon such belief, he cannot, in any
litigation arising out of such declaration, act, or
omission, be permitted to falsify it. 677
3. The elements of estoppel are: 678
a. Representation by Estopped Party - the actor who
usually must have knowledge, notice or suspicion of
the true facts, communicates something to another in a
misleading way, either by wprds, conduct or silence;
616 Philippine National Bank vs. Intermediate Appellate Court, et al., 189 SCRA 680 (1990);
Caltex v. CA, G.R. No. 97753, August 10, 1992.
m Rules of Court, Rule_131, Sec. 2(a). Caltex v. CA, G.R. No. 97753, August 10, 1992.
"' British American Tobacco v. Camacho, G.R. No. 163583, August 20, 2008, citing Philippine
Bank of Communications v. Court of Appeals, 352 Phil. 1, 9 (1998).
250
b. Reliance by Party Invoking Estoppel - the other
person in fact relies, and relies reasonably or
justifiably, upon that communication;
The party invoking the doctrine must have been
misled to his prejudice. This is the most important
element of equitable estoppel.679
c. Prejudice to Party Invoking Estoppel - the other
person would be harmed materially if the actor is later
earlier conduct; and
d. Knowledge of Party Estopped - the actor knows,
expects or foresees that the other person would act
upon the information given or that a reasonable person
in the actor's position would expect or foresee such
action.
4. Estoppel cannot be predicated on an illegal act. As between
the parties to a contract, validity cannot be given to it by
estoppel if it is prohibited by law or is against public
policy.680
B. KINDS OF ESTOPPEL: Estoppel may be in pais or by deed.
(Art. 1433) Jurisprudence also recognizes estoppel by !aches.
I. Estoppel in pais or equitable estoppel - arises when
one, by his acts, representations or admissions or by his
silence when he ought to speak out, intentionally or
through culpable negligence, induces another to believe
certain facts to exist and such other party rightfully relies
679 Philippine Savings Bank v. Chowklng Food Corp., G.R. No. 177526, July 4, 2008, citing Vega
v. San Caos Milling Company Limited, G.R. No. 21549, October 22, 1924.
680 United Coconut Planters Bankv. Beluso, G.R. No. ,159912, August 17, 2007 citing Eugenio v.
Perdido, 97 Phil. 41, 44 (1955); Auyong Hian v. Court of Tax Appeals, G.R. No. L-26782, 12
September 1974, 59 SCRA 110, 133-134.
251
 and acts on such belief so that he will be prejudiced if the
former is permitted to deny the existence of such facts.681
2. Estoppel by deed or by record - occurs when a party to
a deed and. his privies are precluded from denying any
material fact stated in the said deed as against the other
2
party and his privies. 68
a. When a person has entered into a solemn engagement
by deed, he shall not be permitted to deny any matter
which he has asserted therein.683 Thus, e.g., in a deed
of mortgage which states that the mortgagor owns the
property, the mortgagee cannot subsequently assert
4 I
title. to the same.68
b. A void deed, however, may not be the basi of, an
estoppel. 685 Thus, where an extra-judicial partition and
special power of attorney were void due to lack of an
object certain, such deeds cannot be the basis . of
6
estoppel. 68
3 . Estoppel by /aches - a person who failed or neglected to
assert a right for an unreasonable and unexplained length
of time is presumed to have abandoned or otherwise
declined to assert such right. He cannot later on seek to
enforce the same, to the prejudice of the other party, who
has no notice or knowledge that the former would assert
such rights and whose condition has so changed that the
latter cannot, without injury or prejudice, be restored to his
former state.
a. In other words, estoppel by !aches arises from the
negligence or omission to assert a right within a
'" Ganzon v. Honorable Court of Appeals, 385 SCRA 399, 411-412 (2002).
'" Sps. Chien v. Sta. Lucia Realty & Dev't Inc., G.R. No. 162090, January 31, 2007.
'"Lopez v. CA, G.R. No. 127627, March 5, 2003.
''"' Sps. Del Campo v. CA, G.R. No. 108228, February 1 , 2001
ees Lopez v. CA, G.R. No. 127827, March 5, 2003.
"' Lopez v. CA, G.R No. 127627, March 5, 2003.
252
reasonable time, warranting a presumption that the
party entitled to assert it either has abandoned it or
declined to assert it. 687
.
b. The essential elements 'of !aches are688:
i. Conduct on the part of defendant or one under
whom he claims, giving rise to the sitnation
complained of;
ii. Delay in asserting 'complainant's right after he had
knowledge of the defendant's conduct and after he
has an opportnnity to sue;
iii. Lack of knowledge or notice on the part of the
defendant that the complainant would assert the
right on which he bases his suit; and
iv. Injury or prejudice to the defendant in the event
relief is accorded to the complainant.
C. PARTIES ESTOPPED
I. Estoppel i s effective only as between the parties thereto or
their successors in interest. (Art. 1439)
2. Estoppel generally does not lie against the State. The State
is not bound by the mistakes or errors of its agents or
officers.689
However, this principle does not apply if it will cause
injustice.690
&17 Philippine .National Construction Corporation v. National Labor
Relations CommiSslon, 366
Phfl. 678 (1999), citing Tijam v. Sibonghanoy,
. 131 Phil. 556 (1968) and Medija v. Patcho, 210
Phil. 509 (1983).
'" Sps. Domingo v. Roces, G.R. No. 147468, Aprfl 9, 2003.
"' Cudia v. CA, G.R. No. 110315, January 16, 1996; Republic v. CA, G.R. No. 126316, June 25,
2004; Administrative Code of 1967 (E.O. No. 292), Sec. 11 of Book I of Chapter 3.
690 Uy v. Commission of Audit, G.R. No. 130685, March 21, 2000.
253

D. GOVERNING LAW: The principles of estoppel are adopted
insofar as they are not in conflict with the provisions of the
Civil Code, the Code of Commerce, the Rules of Court and
special laws. (Art. 1432)
II. EXAMPLES OF ESTOPPEL
A. SELLER ACQUIRES TITLE TO THING SOLD: When a person
who is not the owner of a thing sells or alienates and delivers it,
and later the seller or grantor acquires title thereto, such title
passes by operation of law to the buyer or grantee. (Art. 1434)
1. Thus, e.g., if. at the time of the sale, the seller ownyd only
1/3 of the thing sold, but he later acquired the remaining
2/3, such acquisition validates the entire transaction and
title to the whole thing passes to the buyer.691
2. In one case, it was held ihat if at the time of the sale, the
seller was not yet the owner of the thing sold, but he later
inherits it, the title passes by operation of Jaw to the
buyer.692 However, this appears contrary to the prohibition
against contracts uponfature inheritance. (Art. 1347)
B. AGENT OF SELLER ACQUIRES TITLE TO THING SOLD: 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. (Art. 1435)
C. LESSEE OR BAILEE: A lessee or a bailee is estopped from
asserting title to the thing leased or received, as against the
lessor or bailor. (Art. 1436)
I. The tenant i s not permitted to deny the title of his landlord
at the time of the commencement of the relations of
"' Estoque v. Pajimula, G.R. No. L24419, July 15, 1968.
692
Pisuena v. Heirs of Unating, G.R. No. 132803; August 31, 1999.
254
landlord and tenant between them.693 The tenant can assert
title against his landlord if he acquired t11e property after
fue commencement of their lease.
2. Lessees are estopped to deny their landlord's title, or to
'
assert a better title not only in themselves, but also in some
third person, while they remain in possession of the leased
premises and until they surrender possession to the
landlord. 694
D. OWNER MISLEADS BUYER OF lMMOVABLE: When in a
contract between third persons concerning immovable
property, one of them is misled by a person with re.spec! to the
ownership or real right over , the real estate, the latter is
precluded from asserting his legal title or interest therein,
provided aU these requisites are present:
I. There must be fraudulent representation or wrongful
concealment of facts known to fue party estopped;
2. The party precluded must intend that the other should act
upon the facts as misrepresented;
3. The party misled must have been unaware of the true facts;
and .
4. The party defrauded must have acted in accordance with
the misrepresentation. (Art. 1437)
E. OWNER MISLEADS PLEDGEE: 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
693 Rules of Court, Rule 131, Sec. 2(b).
694 Julag-ay v. Estate of Buenaventura, Sr., G.R. No. 149788, May 31, 2006, citing VSC
Commercial Enterprises, Inc. v. Court of Appeals, Oscar Estopace and Jose Silapan, G.R. No.
121159, December 16, 2002, 394 SCRA 74; Geminian'o v. Court of Appeals, G.R. No. 120303,
July 24, 1996, 259 SCRA 344, 351, citing Borre v. Court of Appeals, 158 SCRA 560, 566;
Manuel v. Court of Appeals, G.R. No. 95469, July 25, 1991, 199 SCRA 603, 607; Munarv. Court
of Appeals, G.R. No. 100740, November 25, 1994, 238 SCRA372, 380.
255
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 Chapter 1 4
pledgee who received the same in good faith and for value.
(Art. 1438) Trusts

I. GENERAL PROVISIONS

A. DEFINITION: A trust is a legal relationship with respect to

property, between one person having an equitable ownership of
property and another person owning the legal title to such
property, in which the equitable ownership of the former
entitles him to the performance of certain duties and the
exercise of certain powers by the latter.695

1 . Note that in a trust relation, there is a separation of the

legal title and equitable ownership of the property. Legal
title is vested in one party (the trustee) while equitable
ownership is vested in another (the beneficiary).696

2. Note also that in a trust relation, equitable duties are

imposed on the holder of the legal title (the trustee). These
duties consist mainly of dealing with the trust property for
the benefit of the equitable owner (beneficiary).697

B. PARTIES TO A TRUST

I. Trustor - the person who establishes a trust. (Art. 1440)

2. Trustee the person in whom confidence is reposed as

-

regards property for the benefit of another person. (Art.

1440)

'" Caneza v. Rojas, G.R. No. 148788, November 23, 2007, citing Tigno v. Court of Appeals, 345
Phil. 486, 497 (1997) and Morales v. Court of Appeals, 274 SCRA 282 (1997).
"' Caneza v. Rojas, G.R. No. 148788, November 23, 2007
697 Tala Really Services Corp. v. Banco Filipino Savings & Mortgage Bank, 392 SCRA 506
(2002), citing Huang v. CA, 236 SCRA 420 (1994).

256 257
 3. Beneficiary - the person for whose benefit the trust has of Commerce, the Rules of Court and special laws are adopted.
been created. (Art. 1440) He is also called cestui que trust. (A1t. 1442)

The trustor and the beneficiary may be a single person.

II. EXPRESS TRUSTS
C. ELEMENTS OF A TRUST : The elements of a trust are: (1) the
trust res, or the property held in trust which must be duly A. CONCEPT: Express trusts are created by the intention of the
identified and definite; and the three parties, namely, (2) trustor or of the parties. (Art. 1441)
trustor; (3) trustee; and (4) beneficiarY.698
I. No particular words are required for the creation of an
D. KINDS OF TRUST: Trnsts are either express or implied. express trust, it being sufficient that a trust is clearly
intended. (Art. 1444)
I. Express trusts are created by the intention of the trustor or
of the parties. (Art. 1441) 2. Express trusts are created by the direct and positive acts of
the parties, by some writing or deed or will, or by words
2. Implied trusts
come into being by operation of l w. (Art. evincing an intention to create a trust.703
1441) Implied trusts are either resulting or constructive
trusts (see discussion infra). B. PROOF: Express trusts concerning an immovable or any
interest must be in writing to be enforceable. They cannotbe
E. LAWFUL PURPOSE: A trust will not be created or enforced ifit proved by parol or oral evidence. (Art. 1443)
is violative of the law or for the purpose of evading the law.699
However, in one case, the Court allowed oral testimony to
This usually happens when the beneficiary is legally prove the existence of a trust, which had been partially
prohibited or disqualified from acquiring or holding real performed.704
property, and uses the trustee as a "dummy." Examples are
prohibitions against land ownership by aliens,700 or C. ACCEPTANCE
restrictions in acquiring
property sold pursuant to
government housing programs701 or land distribution I. By Trustee - No trust shall fail because the trustee
702
programs. appointed declines the designation, unless the contrary
should appear in the instrument constituting the trust. (Art.
F. GOVERNING LAW: The principles of the general law of trusts, 1445)
insofar as they are not in conflict with the Civil Code, the Code
2. By Beneficiary - Acceptance by the beneficiary is
necessary. Nevertheless, if the trust imposes no onerous
'" Caneza v. Rojas, G.R. No. 148788, November 23, 2007.
'" Kiel vs. Estate of P.S. Sabert, 46 Phil. 193 (1924); Ramos v, CA, 232 SCRA 348 (1994); Tala
Realty Servics Corp. v. Banco Filipino Savings & Mortgage Bank, 392 SCRA 506 (2002)
100 Heirs of Yap v. CA, G.R. No. 133047, August 17, 1999. '' Ramos v. Ramos, 61 SCRA 284 (1974); Estate of Grimm v. Estate of Parsons, G.R. No.
101
Ramos v. CA, 232SCRA 348 (1994); Pigao v. Rabanillo, G.R. No. 150712, May2, 2006. 159810, October9, 2006, 504 SCRA 67, 81.
102 Saltiga de Romero v. CA, G.R. No. 109307, November 25, 1999. 7"' Ringor v. Ringor, G.R. No. 147863, August 13, 20d4, 436 SCRA 4% 496.

258 259
 condition upon the beneficiary, his acceptance shall be
presumed, if there is no proof to the contrary. (Art. 1446)
D. PRESCRIPTION: In . express trusts, a trustee cannot, by
prescription, acquire ownership over property entrusted to him
until and unless he repudiates the trust.705
1. This is because the possession of a trustee is not adverse706
(at least until repudiated).
2. In case of repudiation, the action prescribes in 10 years
from repudiation. 707
Ill. IMPLIED TRUSTS
A. CONCEPT: Implied trusts are created by operation of law. (Art.
1441) They come into being even in the absence of an express
,. intent by the parties to create a trust.
B. PROOF: An implied trust may be proved by .oral evidence.
(Art. 1457) This rule applies whether the implied trust.
concerns movables or immovables.
However, the evidence must be trustworthy and received
by the courts with extreme caution, and should not be made
to rest on loose, equivocal or indefinite declarations.708
705 Palma vs. Cristobal, 77 Phil. 712; Manalang vs. Canlas, 94 Phil. 776; Cristobal vs. Gomez, 50
Phil. 810; Sevilla vs. de los Angeles, 97 Phil. 875; Marabils vs. Quito, 100 Phil. 64; Bancairen
vs. Diones, 98 Phil. 122, 126; Juan vs: Zuniga, 62 O.G. 1351; 4 SCRA 1221; Jacinto vs. Jacinto,
L-17957, May 31, 1962. See Tamayo vs. callejo, 147 Phil. 31, 37; Canezo v. Rojas, G.R. No.
148788, November 23, 2007.
1oe Diaz vs. Gorricho and Aguado, 103 Phil. 261, 266; Laguna vs. Levantino, 71 Phil. 566;
Sumira vs. Vistan, 74 Phil . .138; Golfeo vs. Court of Appeals, 63 O.G. 4895, 12 SCRA 199;
Caladiao vs. Santos, 63 0.G. 1956, 10 SCRA 691.
101 Diaz v. Gorricho, 54 O.G. p. 8429; Escay v. CA, G.R. No. L-37504, December 18, 1974, 61
SCRA 369, 388; Secuya v. De Selma, G.R. No. 136021, February 22, 2000, 326 SCRA 244,
.
254.
100 Canazo v. Rojas, G.R. No. 148788, November 23, 2007.
260
c. KINDS OF IMPLIED TRUST: Implied trusts are : either resulting
or constructive trusts -
1 . Resulting trusts are based on the doctrine that valuable
consideration, and not legal title, determines the equitable
title or interest to a property, and are presumed always to
have been contemplated by the parties.709
a. Thus, e.g., there is a resulting trust when a property is
purchased by X but the consideration or purchase price
is paid by Y for the purpose of having the beneficial
interest over it.
b. Specific examples of resulting trusts may be found in
Arts. 1448, 1449, 1451, 14S 2 and 1453 (infra). 110
2. Constructive trust is created, not by any word evincing a
direct intention to create a trust, but by operation of law in
order to satisfy the demands of justice and to prevent 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.
711
a. E.g., when a trustee reg'isters the trust property in his
name by fraud or mistake, there is constructive trust.712
b. In express or resulting tiust, when the trustee dies, the
trust relations (being personal to the trustee) are
terminated. If the property is retained by the trustee's
709 Morales v. CA, G.R. No. 117228, June 19, . 1997, 274 SCRA 282; Aznar Brothers Realty
Company v. Aying, G.R. No. 144773, 16 May 2005, 458 SCRA 496; Lopez v. CA, G.R. No.
157784, December 16, 2008. '
710 Lopez v. CA, G.R. No. 157784, December 16, 2008.
711
Morales v. CA, G.R. No. 1 1 7228, June 19, 1997, 274 SCRA 282; Aznar Brothers Realty
Company v. Aying, G.R. No. 144773, 16 May 2005, 458 SCRA 496; Lopez v. CA, G.R. No.
157784, December 16, 2008.
712 Lopez v. CA, G.R. No. 157784, December 16, 2008.
261
 heirs (who actually have no right to do so), a
constructive trust is created.713
c. Constructive trusts are illustrated iu Arts. 1450, 1454,
1455 and 145.6 (infra).114
D. PRESCRIPTION
I. In Resulting Trusts - the trustee cannot, by prescription,
acquire ownership over the property entrusted to him until
and unless he repudiates the trust. 715
This rule is similar to that in express trusts, and is
based on .the principle that the trustee's possession is
not adverse.
2. In Constructive Trusts - prescription may run or
supervene even if the trustee does not repudiate the
relationship.716
a. This is because in constructive trust, no fiduciary
relation actually exists and the trustee does not
recognize the trust at all.717 The so-called trustee
neither accepts any trust nor intends holding the
property for the beneficiary. The holding of a
constructive trust is for the trustee liirnself, and
therefore, at all times adverse.
118
713 Canezo v. Rojas, G.R. No. 148788, November 23, 2007.
m Lopez v. CA, G.R. No. 157784, December 16, 2008.
715 Heirs of Candelarta vs. Romero, 109 Phil. 500, 502-3; Martinez vs. Grano, 42 Phil. 35;
Buencamino vs. Matias, 63 0.G. 11033, 16 SCRA 849; Canezo v. Rojas, G.R. No. 148788,
November 23, 2007.
'" Canezo v. Rojas, G.R. No. 148788, November 23, 2007, citing Buan Vda. de Esconde v.
Court of Appeals, 323 Phil. 81, 89 ( 19961.
111 Alzona vs. Capunitan, G.R. No. L-10228, February 28, 1962, 4 SCRA 450; Gerona vs. de
Guzman, G.R. No. L19060, May 29, 1964, 1 1 SCRA 153; Clartdad vs. Henares, 97 Phil. 973;
Gonzales vs. Jimenez, L-19073, January 30, 1965, 13 SCRA 80; Bonaga vs. Soler, 112 Phil.
651; J. M. Tuason & Co., vs. Magdangal, G.R. No. L-15539, January 30, 1962, 4 SCRA 84.
11 Canezo v. Rojas, G.R. No. 148788, November 23, 2007, citing Aznar Brothers Realty
Companyv. Aying, G.R. No. 144773, May 16, 2005, 458 SCRA496, 508.
' 262
b. An action for reconveyance based on constructive trust
prescribes in ten years (Art. l 144[b]), which begins to
run from the date of registration of the deed or the date
of the issuance of the certificate of title over the
property.7 19 Such registration/ issuance is constructive
notice that the registrant claims the property as his.720
But if the person claiming to be the owner thereof
is in actual possession of the property, the right to
seek reconveyance, which in effect seeks to quiet
title to the property, does not prescribe.121
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 722
c. Note, however, that whether the trust is resnlting or
constructive, its enforcement may be barred by
/aches. 723
E. EXAMPLES OF RESULTING TRUSTS: The following
enumeration of examples of resulting trusts is not exhaustive724
(Art. 1447) -
I. Beneficiary Pays the Purchase Price (also known as
"purchase money resulting trust"125). There is an implied
7" Belcodero v. CA, G.R. No. 89667, October 20, 1993.
12o
Lopez v. CA, G.R. No. 157784, December 16, 2008.
111 Heirs of Jose Olviga vs. Court of Appeals, G.R. No. 104813, October 21, 1993, 227 SCRA
330; Vda. de Cabrera v. CA, G.R. No. 108547, 3 February 1997, 267 SCRA 339; Mendizabal v.
Apao, G.R. No. 143185. February 20, 2006.
m Heirs of Jose Olviga vs. Court of Appeals, G.R. No. 104813, October 21, 1993, 227 SCRA
330; Vda. de Cabrera v. CA, G.R. No. 108547, 3 February 1997, 267 SCRA 339; Mendizabal v.
Apao, G.R. No. 143185. February 20, 2006.
"' Ramos v. Ramos, 61 SCRA 284, 300 (1974); Vda. De Esconde v. CA, G.R. No. 103635.
February 1, 1996. .
724 See Cuenco v. Vda. De Manguerra, G.R. No. 149844, October 13, 2004.
12s Morales v. CA, G.R. No. 117228, June 19, 1997.
263
 trust when property is sold, and the legal estate is granted
to one party but the price is paid by another for the purpose
of having the beneficial interest of the property. (Art. 1448)
The supposed "buyer" who receives title is the trustee,
while the person who pays the price is the beneficiary.
(Art: 1448)
lfowever, 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. (Art. 1448)
2. Donee Has no Beneficial Interest. There is also an
d
implied trust when a donation is made to a pers n 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. (Art. 1449)
3 . Inherited Property Titled in Trustee;s Name. When land
passes by succession to any person and he causes the legal
title to be put in the name of another, a trusris established
by implication of law for the benefit of the true owner.
(Art. 1451)
4 . Co-purchased PropertyTitled in Trustee's Name. Iftwo
. is established by operation of law in favor of the person to
or more persons agree to purchase property and by
common consent the legal title is taken in the name of' one
of them for the benefit of all, a trust is created by force of
law in favor of the others in proportion to the interest" of
each. (Art. 1452)
5. Property Conveyed to Trustee For Another. When
property is conveyed to a person in reliance upon his
declared intention to hold it for, or transfer it to another or
the granter, there is an implied trust in favor of the person
whose benefit is contemplated. (Art. 1453)
264
F. EXAMPLES OF CONSTRUCTIVE TRUSTS: The following
enumeration of examples of resulting trusts is not exhaustive
(Art. 1447) -
1 . Conveyance as Security for Purchase Price. If the price
of a sale of property is loaned or paid by cine person for the
benefit of another and the conveyance is made to the lender
or payor to secure the payment of the debt, a trust arises by
operation of law in favor of the person to whom the money
is loaned or for whom it is paid. The latter may redeem the
property and compel a conveyance thereof to him. (Art.
1450)
2. Conveyance as Security for Obligation. If an absolute
conveyance of property is made in order to secure the
performance of an obligation of the granter toward the
grantee, a trnst by virtue of law is established. If the
fulfillment of the obligation is offered by the granter when
it becomes due, he. may demand the reconveyance of the
property to him. (Art. 1454)
3 . Purchase Using Trust Funds. When any trustee, guardian
or other person holding a fiduciary relationship uses trnst
funds for the purchase of property and causes the
conveyance to be made to him or to a third person, a trust
whom the funds belong. (Art. 1455)
4. AcquisitiOn Through Mistake or Fraud. If property is
acquired through mistake or fraud, the person obtaining it
is, by force o.f law, considered a trustee of an implied trust
for the benefit of the person from whom the property
comes. (Art. 1456)
265
 a. Example J : X borrowed the certificate of title from Y,
tricked Y into sig1.1ing a deed of transfer and obtained a
26
transfer certificate ohitle in his (X's) name. 7

b. Example 2: The overseer of a property transferred the

727
tax declaration in his name using a fake quitclaim.

"' Rodrigo v. Ancilla, G.R. No. 139897, June 26, 2006.

m Sps. Bejoc v. Cabreros, G.R. No. 145849, July22, 2005.
266