Section 5.

– DIVISIBLE AND INDIVISIBLE OBLIGATIONS

OBLIGATION ACCORDING TO PERFORMANCE:

Art. 1223. 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 provisions of Chapter 2 of this Title.

The divisibility or indivisibility of obligations refers to the PERFORMANCE, not to

the thing or service which is the object or prestation of the obligation.

1.) Distinguish: Divisible v. Indivisible Obligation

a. DIVISIBLE OBLIGATION – may be partially performed;

example: to deliver 100 sacks of rice within 5 days; payment upon
delivery

b. INDIVISIBLE OBLIGATION – cannot be performed in parts;

example: to deliver a pair of male Rotweiller and female
Doberman dog.

2.) Different Kinds of Indivisibility

a.) LEGAL – provided by law

b.) CONVENTIONAL – agreed by parties to contract (Art. 1225, 3rd par.)
c.) NATURAL – by nature of object of obligation (e.g. contracts - to sing in a
club; to do surgical removal of a tumor in the brain)

3.) Distinguish Solidarity vs. Indivisibility (see Paras, Vol. IV)

 refers to Juridical tie bet. Parties - refers to Nature of obligation

 must have two or more debtors - may have only 1 debtor & 1
creditor
 fault of one is fault of others - fault of one is not fault of others

Art. 1224. A joint indivisible obligation gives rise to indemnity for

damages from the time anyone of the debtors does not comply with his
undertaking. The debtors who may have been ready to fulfill their
promises shall not contribute to the indemnity beyond the corresponding
portion of the price of the thing or of the value of the service in which the
obligation consists.

What are the characteristics of a JOINT INDIVISIBLE OBLIGATION?

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 o Object or prestation is indivisible;
o Parties must collectively perform or deliver, but are bound jointly, NOT
solidarily.
o Debtor who failed to comply his undertaking may be liable for damages, but
not the co-debtor who was ready to fulfill the obligation when due, except
for his actual share in the obligation.

ILLUSTRATE: Ali & Deo promised to deliver to Vicky a Hermes bag

worth P1.5M upon their return on Feb. 14, 2012, from their trip in Paris.
But Deo lost most of his money in the casino while they were in
Monaco. Ali was ready with his share to buy the Hermes bag but Deo
is now broke. Thus, they failed to buy and deliver the Hermes bag to
Vicky as promised. As a result, Vicky lost a possible profit of P300,000
from a “ready buyer”.

Legal Effects: The joint indivisible obligation is now converted into

monetary obligation to give P1.5M to Vicky. Ali is liable to give Vicky for his share in the
obligation for P750,000, but is not liable for Deo’s share. Why? For while the object of
obligation is indivisible, the performance of the obligation is Joint, not solidary. On the other
hand, Deo is now indebted to Vicky for the sum of P750,000, plus damages.

Art. 1225. For the purposes of the preceding articles, obligations to give
definite things and those which are not susceptible of partial performance
shall be deemed to be indivisible.

When the obligation has for its object the execution of a certain number
of days of work, the accomplishment of work by metrical units, or
analogous things which by their nature are susceptible of partial
performance, it shall be divisible.

However, even though the object or service may be physically divisible,

an obligation is indivisible if so provided by law or intended by the parties.

In obligations not to do, divisibility or indivisibility shall be determined

by the character of the prestation in each particular case.

HOW TO DE TERMINE DIVISIBILITY OF OBLIGATION:

1.) The divisibility of the object (prestation) does not determine divisibility of
the obligation.

 If the object is divisible, the obligation may be divisible or indivisible.

1. Example of Divisible Object and Divisible Performance of prestation:

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 Contract is for X to construct for Y, a two bedroom house, with 2 toilet/bath,
kitchen & dining room, living room and enclosed garage. Payment shall be
made by Y within 2 days, upon completion of each of the different phases of
constructions such as – (1) foundation, exterior wall – P700K; (2) roof – P100K;
(3) kitchen/dining – P800K; (4) two bedrooms and living room- P500K; (5)
toilet/bath and enclosed garage – P500K; (6) painting & finishing of interior
and exterior of the house – P400K. Start: Jan. 7, 2000 End/Delivery Date:
on or before Nov. 30, 2000.

2. Example of Divisible Object but Indivisible Performance of prestation is

required:
Contract is for X to construct for Y, a two bedroom house, with 2 toilet/bath,
kitchen & dining room, living room and enclosed garage. An initial
downpayment of P1M out of the P3M contract price package, shall be made by
Y and the full balance shall be paid only upon completion of the entire house
as specified in the contract. Here, performance of the different phases of
constructions shall be made, such as – (1) foundation, exterior wall; (2) roof;
(3) kitchen/dining; (4) bedrooms and living room; (5) toilet/bath and enclosed
garage; (6) painting of interior and exterior of the house. Start: Jan. 7, 2000
End/Delivery Date: on or before Nov. 30, 2000.

Parties X & Y agreed that the fully completed house must be delivered on or
before due date. Failure to fully finish the house based on the specifications
shall cause the payment of the full balance price to be withheld until the house
specifications are fully complied with within 30 days. Penalty of P1,000 shall be
meted to X for every day of delay reckoned from due date, to be deducted
from the construction bond of X.

 But if the object is indivisible, then the obligation becomes indivisible.

(Example: To sing the “Lupang Hinirang” in the opening of the SEA Games in Mla.;
To deliver the male Rotweiller dog named Rocco)

2.) The test of divisibility of an obligation is whether or not it is susceptible of

partial performance. (pars.1 & 2 above.)

o An obligation is indivisible when it is not susceptible of partial performance and

when the obligation is to give definite things. (Art. 1225, par.1)

o An obligation is divisible when it is susceptible to partial performance (Art. 1225,

par.2)

 Exception – [Art. 1225, par. 3: even if object or service is physically

divisible, obligation is indivisible - - - ]
i. If so provided by law, or
ii. If so intended by the parties

3.) “Susceptibility of partial performance” - refers to whether the separation

of delivery or execution is contrary or not to the intention or purpose of

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 the parties. It does not necessarily refer to whether the delivery of the
things or execution of acts in parts is impossible or not.

Example of INDIVISIBLE OBLIGATIONS:

1. Obligation to give definite things (Ex: to give a 1950 vintage car)
2. Obligations not susceptible of partial performance (Ex: Render the national
anthem in the SEA Games opening.)
3. Object or thing is divisible but obligation is deemed indivisible due to (a)
the intention of the parties or; (b) the law so provides. (Art. 1225, par.3)

Example of DIVISIBLE OBLIGATIONS:

1. When the object of the obligation is the execution of a certain number of
days of work. (Ex: Mason hired to build cement fence for 8 days).
2. When the object of the obligation is the accomplishment of work by
metrical units. (Ex: Laborers hired to build a canal W-1m.x L-100m x 1m)
3. When the object or purpose of obligation is susceptible of partial
compliance (Ex: Delivery of 100 sacks of rice supplies every week to a rice retailer;
instalment payments of debt)
4. When the object of obligation is the accomplishment or delivery of
analogous things such as to pay in installments.

Q. What are the effects of illegality of a part of a contract?

1.) DIVISIBLE CONTRACT - if a part thereof is illegal, the illegal part is void
& unenforceable. The remaining legal part is valid and enforceable.

2.) INDIVISIBLE CONTRACT – if a part thereof is illegal, the entire contact is

void and unenforceable.
NO PARTIAL PERFORMANCE IN INDIVISIBLE OBLIGATION - it is tantamount
to non-performance. An obligor/debtor who did not finish his work under
the indivisible obligation cannot recover payment for the partial work done.

Illustrate: Interior designer-A commissioned the artist B to paint a triptych (3-panel painting)
of the view of Taal volcano and the lake for P300,000. B however got fed up by the various
comments of A on how she wants the landscape to appear so as to match the colors of the
sala furnishings, that B simply walked out and abandoned the triptych painting. But artist-B
finished already one panel showing the lake view. So, B demanded to be paid in part for the
first panel based on quantum meruit.

Q. Can B legally require A to pay in part the first panel of triptych painting done?

A. No. A can refuse to pay B as the obligation to do the entire triptych of Taal lake is indivisible.
Partial performance of an indivisible obligation is tantamount to non-performance of the
contract. B cannot recover until he delivers a fully painted view of the Taal volcano and lake
in a triptych.

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 SECTION 6. - OBLIGATIONS WITH A PENAL CLAUSE

Art. 1226. In obligations with a penal clause, the penalty shall substitute
the indemnity for damages and the payment of interests in case of
noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance

with the provisions of this Code.

Q. State the CONCEPT OF PENAL CLAUSE

 It is an accessory undertaking to assume greater liability in case of breach.
 Attached to an obligation in order to insure performance of debtor/obligor.

Q. What is the NATURE OF PENALTY?

 Penalty generally is paid in sum of money
 It can also be any thing stipulated by the parties, or an act or abstention.
 It is a substitute for the indemnity for damages and interests in case of
breach of obligation, unless there is a contrary stipulation which can even
increase recovery of additional damages

Q. What are the PURPOSES OF PENALTY in a contract or obligation?

 To insure faithful compliance and strengthen the coercive force of the
obligation by threat of a greater liability in case of breach.
 To provide for liquidated damages
 To serve as reparation or punishment for non-performance of obligation

Examples:
1.) A contract whereby obligor will pay a certain sum of money or compounding
of interests on the agreed interests if he fails to perform his obligation on
time. (MDC v. Empire Insurance Co., 20 SCRA 557; Hodges v. Javellana, 4 SCRA 1128)

2.) Imposition of attorneys fees in case of breach of contract. (Luneta Motor Co. V.
Mosa, 73 Phil. 80)

3.) Forfeiture of what has been paid by failure to pay other instalments in the
purchase of lots. (Caridad Estates Inc., v. Santero, 71 Phil. 114)

4.) Stipulation that an employee shall be liable to his employer for damages if
he would engage in a business similar to that of his employer.(Gsell v Kock,
16 Phil. 1)

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 5.) A bond is in the nature of a penalty which may be forfeited for its full amount
even if the sum involved in the obligation is so much less (Lambert v. Fox, 26
Phil. 588)

Q. How is a PENAL CLAUSE in obligations CONSTRUED?

A. Obligations imposing penalties and forfeitures are strictly construed. Terms of
the contract are the measure of the parties’ liability.

Q. What are some cases where DAMAGES and INTERESTS may be recovered in
addition to penalty?
A. Damages and interests may also be recovered in addition to penalty: (1) if
there is express provision to this effect; (2) if debtor refuses to pay the
penalty; (3) if debtor is guilty of fraud in non-fulfillment of the obligation.

Q. What are the LIMITATIONS OF A PENAL CLAUSE?

A. It must not be contrary to law, morals, or public order.

NOTE: Please study the differences between PENALTY vs. FACULTATIVE and
ALTERNATIVE Obligations (pp. 258-259 Paras; p.263 Tolentinto)

Art. 1227. The debtor cannot exempt himself from the performance of the
obligation by paying the penalty, save in the case where this right has
been expressly reserved for him. Neither can the creditor demand the
fulfillment of the obligation and the satisfaction of the penalty at the same
time, unless this right has been clearly granted him. However, if after the
creditor has decided to require the fulfillment of the obligation, the
performance thereof should become impossible without his fault, the
penalty may be enforced.

1. GEN. RULE: DEBTOR cannot exempt himself from the performance of the
obligation by offering to pay the penalty.

EXCEPTION: Substitution for performance is however allowed if this right

is expressly reserved or granted to debtor in the contract or agreement.
(Implied reservation is not allowed)

2. GEN. RULE: Creditor cannot demand performance of the principal

obligation and collect the penalty at the same time.

Illustrate: A contracted B to build a chapel for him. B failed to construct according to

specs of contract and the workmanship was bad. A cannot confiscate the balance of
the contract price not yet paid and at the same time claim penalty under the contract.
A set-off was ordered by the court. (Navarro v. Mallari, 45 Phil. 242; also Vitug v.
Coronel, 40 Phil.686)

EXCEPTIONS:

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 a. Unless this right has been clearly granted to creditor in the obligation.
(Example: In obligations for payment of sum of money, if a penalty is stipulated
for delay or default , both principal obligation and penalty can de demanded by
creditor) Note: p. 265 Tolentino re - Clearly granted vs. Expressly reserved.

b. Where creditor demanded fulfilment of the principal obligation but its

performance become impossible due to the fault of the debtor. (See
discussion of Tolentino, Vol. IV, p. 266)

NOTE: (p. 187, Pineda, Obligations and Contracts, 2000 ed)

 If the fault is due to creditors own act, he cannot claim penalty
 If impossibility of fulfilment is due to fortuitous events, without fault or
delay of debtor, both principal obligation and penalty shall be extinguished.

Art. 1228. Proof of actual damages suffered by the creditor is not

necessary in order that the penalty may be demanded. (n)

REASONS:
1.) Penalty stipulated in a contract serves as punishment for the infraction of
the conditions stated in the contract, whether or not creditor suffered
damages (Lambert v. Fox, 26 Phil. 588);

2.) Lawful means to repair or substitute losses or damages.

NOTE: Creditor must however prove –

(a) existence of the penal clause in the contract, and;
(b) breach of the term or condition in contract.

Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor.
Even if there has been no performance, the penalty may also be reduced
by the courts if it is iniquitous or unconscionable.

Q. WHEN may the COURT EQUITABLY REDUCED the PENALTY?

1.) When the principal obligation has been partly complied with by the debtor in
good faith.

2.) When the principal obligation has been complied with by the debtor, but not
in accordance with the tenor of the agreement thus rendering the compliance
irregular.

3.) Even if there has been no performance, the penalty is iniquitous or

unconscionable. (i.e. penalty is revolting to conscience or common sense; grossly
disproportionate to damage suffered by creditor)

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NOTE: Courts will rigidly apply strict construction against enforcement of the
penalty in its entirety in the above cases.

Q. What are instances or cases when penalty cannot be enforced?

1. When the principal obligation has become impossible due to fortuitous
event;
2. When debtor is prevented by creditor to fulfil the obligation
3. When penalty agreed upon is contrary to morals or good customs.
4. When both parties are guilty of breach of contract.
5. When none of the parties committed any willfull or culpable violation of the
agreement, no one can invoke penalty clause against each other.
6. When breach of contract is committed by the creditor.

Art. 1230. The nullity of the penal clause does not carry with it that of
the principal obligation.

The nullity of the principal obligation carries with it that of the penal
clause.

Q. When does the NULLITY of penal clause arise?

A. NULLITY OF PENAL CLAUSE – arises because it is contrary to law, morals, good

customs, public order or public policy.

 Par. 1 Rule – “The nullity of the penal clause does not carry with it that of
the principal obligation.”

Reason: Efficacy of principal obligation does not depend upon the

effectivity of the penal clause.

o Valencia v. RFC, 103 Phil.444 – If the penal clause is void such as when it is contrary to
law, morals or good customs, public or public policy, the principal will remain
subsisting.

 Par. 2 Rule – “The nullity of the principal obligation carries with it that of
the penal clause.”

Reason: Penal clause is an accessory to the principal obligation. Penal

clause cannot exist alone, while Principal Obligation can.

o Municipality of Hagonoy, Bulacan v. Evangelista, 73 Phil. 586 – The contract of lease

entered by Municipality being VOID, it carries with it the nullity of the penal clause
attached to it.

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 Example: LGU X leased for 20 years to Y, 1 kilometer long the white beach fronts of the sea,
where Y build bamboo villas, restaurant and cabanas for rent to the public within 2 meters of
the seashore. Failure to pay the monthly rent of P50K/mo. will make Y liable liable for a penalty
clause of P10K/mo. of delay and automatic termination of the contract of lease. The lessee Y
failed to pay the rent on the 3rd year, and LGU X sued to collect the unpaid rent and penalty
and terminate the contract. Decide or resolve the case.

The contract of Lease is void as the property leased is part of public domain (Art. 424). Since
the principal lease contract is void, the penalty clause is also deemed void. LGU X cannot
collect the unpaid rent nor the penalty for late payment of rent. But the LGU-X can recover
the public domain property leased. (see - Mun. of Cavite v. Rojas, En Banc -G.R. No. L-9069,
March 31, 1915; Sanchez v. Mun. of Asingan, L-17635, March 30, 1963)

Q. What are some of the EXCEPTIONS to the rule that - nullity of principal
obligations carries with it nullity of penal clause?

1.) When the penalty is undertaken by a 3rd party for an obligation which is
unenforceable, voidable or natural, like a guaranty under Art. 2052.

Example: Creditor A, 21 yrs. old, entered into a loan contract of P30K with debtor B, who is
16 yrs old., with a penal clause that B will forfeit his new apple ipad & iphone should B fail to
pay the loan within one week. C, uncle of B, who owns an appliance/electronics store, served
as guarantor of the penal clause in writing – to deliver a new apple ipad & iphone should B fail
to pay the loan within the week.

B failed to pay A the debt of P30K within the period. Contract is unenforceable as debtor B is
a minor, deemed incapable of giving consent [Art. 1403, (3)]. But the guaranty of B’s uncle in
writing may subsist and creditor A can enforce this against C.

2.) When the nullity of the principal obligation itself gives rise to liability of
debtor for damages, such as when the vendor knew that the thing to be
delivered did not exist at the time of contract.

In this case, the vendor becomes liable for damages for his bad faith, although the contract
itself is declared void. The penalty becomes a substitute for damages, thus enforceable
against obligor. (see: Tolentino, Vol. IV)

Read/Report: SSS v. Moonwalk, G.R. No. 73345. April 7, 1993.

EXTINGUISHMENT OF OBLIGATIONS

Q. How can obligations be extinguished?

Art. 1231. Obligations are extinguished:
(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;

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 (4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission,

fulfillment of a resolutory condition, and prescription, are governed elsewhere in this
Code.

DISCUSSION:

Obligations may be extinguished by:

(1) PAYMENT OR PERFORMANCE (Articles 1232 – 1251)

Art. 1233. A debt shall not be understood to have been paid unless the thing or service
in which the obligation consists has been completely delivered or rendered, as the case
may be.

Requisites of Payment to Extinguish Obligation

Manner of fulfilment:
1. Delivery of the very thing or service due, fully and completely (identity &
integrity of prestation)

Parties for payment to extinguish obligation:

2. Person paying has capacity
3. Person receiving the payment has capacity to receive
4. Acceptance of payment by creditor

Time, place of payment:

5. Propriety of time, place and manner of payment

Art. 1232. Payment means not only the delivery of money but also the performance, in
any other manner, of an obligation.

Gen. Rule – to extinguish the obligation, the debtor must perform, pay or
deliver:
 the very thing that is the object of prestation, not a different one (identity)
 completely or in full, not partially or in installments (integrity)
 unconditional

Exceptions: Payment may be made in another manner, if creditor consents.

Q. What are the 4 Special Forms of Payments:

1. Dation in payment ( lack of identity - Art. 1245)
2. Application of Payments, or Imputation ( lack of integrity - Arts. 1252-1254)
3. Payment by Cession, or Assignment (lack of integrity - Art. 1255)

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 4. Tender of Payment and Consignation (payment is made not to creditor but to
court - Arts. 1256-1261)

1. DATION IN PAYMENT (ART. 1245)

Art. 1245. Dation in payment, whereby property is alienated to the creditor in

satisfaction of a debt in money, shall be governed by the law of sales.

Concept of Dation in Payment

o Background: Dacion en pago means basically handing back the keys to the lender and in
exchange the lender will fully discharge all mortgage debt. Debtor is discharged
from his liability. This procedure is based on Art 1175 of the Spanish Civil Code, which
establishes that a borrower can cancel his debt to the creditor by handing in exchange,
any of his assets.

o Dacion en pago, is the transmission of the ownership of a thing (or real right)
by the debtor to the creditor as an accepted equivalent of the performance of
obligation. (Filinvest Credit Corp. vs. Philippine Acetylene, Co., Inc., G.R. No. L-50449,
January 30, 1982)

o Dacion en pago extinguishes the obligation up to the value of the thing

delivered, unless the parties agree that the entire obligation is extinguished
(Lopez v. CA, 114 SCRA 671)

o If the debt is in money, law expressly provides that dation in payment, shall
governed by the law on sale. (Art. 1245; traditional concept)

Example: Debt of A to B is P1.5M. On due date, debtor A offered to creditor B his 300 sq.m.
lot as payment instead of the P1.5M cash. Creditor B agreed.
o It is as if there is a sale – debtor is seller and creditor is buyer.
o Here, prestation is changed. The requisite Identity of prestation is not complied.
o Legal Effect: obligation is extinguished by this special form of payment – dacion en
pago

Q. Is Dation in Payment tantamount to a Novation? How?

A. It is a form of novation in which there is change in the object involved in the
original contract. (Lim Tay v. CA, 293 SCRA 634)

o In its modern concept, what actually takes place in dacion en pago is an objective
novation of the obligation where the thing offered as an accepted 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. 5 In any case, common consent is an
essential prerequisite, be it sale or innovation to have the effect of totally extinguishing
the debt or obligation. (Filinvest Credit Corp. vs. Philippine Acetylene, Co., Inc., G.R. No. L-50449,
Jan. 30, 1982)

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 o NOVATION -
Art. 1291. Obligation may be modified by:
1) Changing their object or principal conditions;
2) Substituting the person of the debtor;
3) Subrogation a third person in the rights of the creditor.

o CASTAN: Dacion en pago is neither a sale nor a novation. It is not a sale since there is already
a pre-existing obligation unlike in sale. It is a special form of payment similar to but not equal
to a sale. It is not a novation because there is no new obligation created.

Q. What are the requisites for dacion en pago?

A. They are: (1) there must be a performance of the prestation in lieu of
payment (animo solvendi) which may consist in the delivery of a corporeal
thing, or a real right, or a credit against the third person;

(2) there must be some difference between the prestation due and that
which is given in substitution (aliud pro alio); and

(3) there must be an agreement between the creditor and debtor that the
obligation is immediately extinguished by reason of the performance of a
prestation different from that due. [Lo v. KJS Eco-Formwork System Phil., Inc., 459
Phil. 532, 539, (2003); Aquintey v. Spouses Tibong G.R. No. 166704].

2. APPLICATION OF PAYMENTS, OR IMPUTATION (ARTS. 1252-1254)

Art. 1252. He 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 same
must be applied. Unless the parties so stipulate, or when the application of payment is
made by the party for whose benefit the term has been constituted, application shall
not be made as to debts which are not yet due. If the debtor accepts from the creditor
a receipt in which an application of the payment is made, the former cannot complain
of the same, unless there is a cause for invalidating the contract.

Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been covered.

Art. 1254. When the payment cannot be applied in accordance with the preceding rules,
or if application cannot be inferred from other circumstances, the debt which is most
onerous to the debtor, among those due, shall be deemed to have been satisfied. If the
debts due are of the same nature and burden, the payment shall be applied to all of
them proportionately.

Q. What is APPLICATION OF PAYMENT ?

A. It is the designation of the debt to which should be applied a payment made
by a debtor who owes several debts in favour of the same creditor.

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  Simply put - which debt out of 2 or more debts owing to the same creditor
will be paid by the debtor.
 Creditor may refuse to accept the application of payments as he cannot be
compelled to accept partial performance of the obligation. (Integrity requisite)

Q. Why is it important to know the rules in application of payments?

A. To enable us to determine which one of the multiple or several debts has been
extinguished using the rules on application of payments.

REQUISITES FOR APPLICATION OF PAYMENT:

1. There must be 2 or more debts
2. The debts are owed by same debtor to same creditor (that is, there only 1
debtor & 1 creditor)
3. The debts are of the same kind (money debts obtained on different dates)
4. All the debts must be due, (unless contrary is stipulated)
5. The payment is not enough to cover or extinguish all the debts.

Q. Who is primarily given the right by law, to choose which among the several
debts will be paid?

A. The DEBTOR, subject to limitations or exceptions such as:

(a) If there was valid and contrary agreement that debtor cannot choose;
(b) If debtor owes 2 debts, all due and demandable, one for P50, another for
P200, and he pays P50, he cannot choose to apply it to the P200 debt as
the creditor cannot be compelled to accept partial payment under Art.
1248.

(c) If there is only one obligation bearing stipulated interest, the debtor cannot
apply the payment to the capital, because the law requires its application
to interest first (Art. 1253)

(d) The debtor cannot apply payment to a debt that is not yet liquidated;

(e) He cannot choose a debt with a period for the benefit of the creditor, when
the period has not yet arrived.

(f) When there is an agreement as to the debts which are to be paid first, the
debtor cannot vary the agreement.

Q. What is the effect if the debtor makes the proper application of payment but
the creditor refuses to accept it because he wants to apply it to another debt?

A. The creditor WILL INCUR IN DELAY.

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SUMMARY RULES IN APPLICATION OF PAYMENT:
1. Apply or impute payments in accordance with the agreement of parties.
2. It there is no agreement, the debtor has the right to choose and apply
payment to the different debts;
3. If the debtor does not choose, then creditor can choose and apply payment;
4. Application of payment be made to the most onerous debt [Art. 1254, par. 1]
 Ways to determine which is the more onerous obligation:
a. If one is bound as principal debtor in one obligation vs. surety in
another.
b. Sole debtor vs. as solidary co-debtor
c. Solidary debtor vs. joint debtor
d. Debt with interest vs. debt without interest
e. Oldest debt with interest vs. new debt with interest
f. Debt with security vs. Debt without security
g. Debt subject to general rules on damages vs. Debt with penal clause
h. Obligation when debtor is now in delay vs. Debtor not in default

NOTE: In case of a combination of the above characteristics of the debt,

each case must be solved according to its particular
circumstance.

Q. When is payment applied to all debts proportionally?

A. Debts are treated as equally onerous, and payment is applied to all debts
proportionately, in the following cases:
1.) if the debts are of same nature and burden (last par. Art. 1254 above);
2.) if it cannot be determined which debt is more onerous (Paras, Civil Code. IV, 1989
Ed. p.381)

Distinguish: APPLICATION OF PAYMENTS vs. CESSION (ASSIGNMENT)

(1) Number of Parties and Properties Involved

 APPLICATION OF PAYMENTS involves one debtor who pays two or more debts
of identical specie (monetary obligations) in favour of one creditor
 CESSION – involves one debtor who must cede all of his properties in favour
of 2 or more creditors

(2) Effect of Delivery/Transfer of Property by Debtor to Creditor

 APPLICATION OF PAYMENTS directly transfers the ownership of MONEY paid to

the creditor and may extinguish the obligation and release the debtor

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 CESSION – only the possession and administration (not ownership) of
properties are transferred to the creditors, with authority to sell the properties
and use the cash to pay the debts of debtor to the creditors;
 CESSION - only extinguishes the obligation or debt covered or paid by the
amounts realized from the sale of the properties assigned, unless otherwise
agreed upon.

3. PAYMENT BY CESSION OR ASSIGNMENT (Article 1255)

Art. 1255. The debtor may cede or assign his property to his creditors in payment of his
debts. This cession, unless there is stipulation to the contrary, shall only release the
debtor from responsibility for the net proceeds of the thing assigned. The agreements
which, on the effect of the cession, are made between the debtor and his creditors shall
be governed by special laws.

Concept of Payment by Cession or Assignment -

Q. HOW IS CESSION OR ASSIGNMENT DONE?
1.) Debtor (who is fully or partially insolvent) offers to pay his debts to creditor by ceding
or turning over all of his properties to the creditors.
2.) This is accepted by the creditors .
3.) Upon acceptance, the creditors sell the properties, then divide among
themselves the earnings of the sale, in the manner agreed between the
parties.
4.) If the proceeds of the sale of the property of the debtor is not enough to cover
or pay all the obligations or debts due, the unpaid amount remains due and
demandable.

o Payment by cession is a special form of payment because there is no

completeness of performance. The requisite Integrity is lacking. Payment is
often not completely fulfilled, a balance may still be due because of the
inadequacy of the debtor’s funds or properties.

Q. What properties of debtor may be exempt from cession to creditors?

A. (1) Family Home of debtor which is also reserved for certain family
beneficiaries living and depending upon debtor for legal support under Arts.
153-154 (superseding Arts. 223 and 226 of the Civil Code). But this is subject
to the exceptions and qualifications provided in Arts. 155, 156, 157, 158.

(2) Sufficient means or property to support himself and relatives entitled to

support as contemplated under Art. 750.

Art. 750. The donation may comprehend all the present property of the donor, or
part thereof, provided he reserves, in full ownership or in usufruct, sufficient

15
 means for the support of himself, and of all relatives who, at the time of the
acceptance of the donation, are by law entitled to be supported by the donor.
Without such reservation, the donation shall be reduced on petition of any person
affected.

Q. How is Payment by Cession in Art. 1255 Distinguished from Dacion en Pago in Art. 1245?
i. In dacion en pago, there is only one creditor, while in cession, there are 2
or more creditors;

ii. In dacion en pago, the debtor is solvent and applies only to some or part
of the debtor’s property, while in cession, the debtor is insolvent or
almost insolvent.

iii. In dacion en pago, the creditor immediately becomes the owner of the
property given by the debtor to satisfy his debt in money.
In payment by cession, the creditors do not become owners of the property
turned over by debtor to creditors. The creditors simply acquire the right to
sell the properties of the debtor and apply the proceeds of the sale to the
satisfaction of their credit.
iv. Payment by cession does not generally terminate all debts due since
normally there is still a balance due. The balance will continue to be due
unless the parties agree otherwise. Usually, the termination is only to the
extent of the net proceeds. The extinguishment of the obligation is pro
tanto.

v. Payment by cession must be distinguished from insolvency.

Q. What are the 2 Kinds of Insolvency?

i. Extrajudicial or Voluntary
o In extrajudicial insolvency, if there is a balance left, the debtor must
still pay.
o However, the debtor may limit which properties will be sold by the
creditors since the agreement is contractual. But in Cession, debtor
must turn over the whole of his properties.

ii. Judicial
o In judicial insolvency, the obligation is totally extinguished even if
there‘s still a balance. In Cession, there may still be balance due if the
properties are not enough to pay all the debts of debtor.
o In judicial insolvency, every property which is not exempt from
attachment or execution is made available for sale.

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4. TENDER OF PAYMENT AND CONSIGNATION (ARTICLE 1256-1261)

Art. 1256. If the creditor to whom tender of payment has been made refuses without just
cause to accept it, the debtor shall be released from responsibility by the consignation
of the thing or sum due.

Consignation alone shall produce the same effect in the following cases:

(1) When the creditor is absent or unknown, or does not appear at the place of
payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.

Art. 1257. In order that the consignation of the thing due may release the obligor, it must
first be announced to the persons interested in the fulfillment of the obligation. The
consignation shall be ineffectual if it is not made strictly in consonance with the
provisions which regulate payment.

Art. 1258. Consignation shall be made by depositing the things due at the disposal of
judicial authority, before whom the tender of payment shall be proved, in a proper case,
and the announcement of the consignation in other cases. The consignation having
been made, the interested parties shall also be notified thereof.

Art. 1259. The expenses of consignation, when properly made, shall be charged against
the creditor.

Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to
order the cancellation of the obligation.

Before the creditor has accepted the consignation, or before a judicial declaration that
the consignation has been properly made, the debtor may withdraw the thing or the
sum deposited, allowing the obligation to remain in force.

Art. 1261. If, the consignation having been made, the creditor should authorize the
debtor to withdraw the same, he shall lose every preference which he may have over
the thing. The co-debtors, guarantors and sureties shall be released.

CONCEPT OF TENDER OF PAYMENT AND CONSIGNATION:

1. What is Consignation?
o Consignation is the act of depositing the thing due with the court if the
creditor cannot accept or refuses to accept payment without just cause.
o Consignation is the special mode of payment and not the tender of payment.
o Consignation is a special mode of payment because payment is made not to
the creditor but to the court.

2. When can a debtor opt for consignation as a mode of payment to extinguish his obligation from
the creditor?

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 o Debtor can opt for Consignation when the creditor without just cause, refuses
to accept payment made by debtor. Here, creditor is in delay or in mora
accipiendi.
o Why consign? Because if the debtor just hold payment, if the creditor without
just cause refuses to accept payment, something still hangs above his head-
- interest may continue to ran, or; his property may still be serving as security
mortgage.
o Legal Effect of consignation?
- Debtor is released from his obligation to the creditor;
- Creditor will now bear the risk of loss of the money or thing properly
consigned

3. Is Tender of Payment required before Consignation in court may be effected?

o Yes. Gen. Rule: A prior tender of payment is required before consignation in
court becomes effective and release the debtor from his obligation.
o Tender of payment is a manifestation made by the debtor of his willingness,
readiness and ability to pay.

4. What would constitute Proper Tender of Payment?

a. Tender of payment must be for the whole amount (Joe’s Radio and Elect. Supply
v. Alto Electronic and Alto Surety, L-12376, Aug. 22, 1958)
b. It must be unconditional (Lapuz Sy v. Eufemio, L-10572, Sept. 30, 1958)

5. Does the written tender of payment have the effect of suspending the interest and its
accumulation?
o No. The stipulated interest accrues until such time that the principal is paid.
(Llamas v. Abaya, 60 Phil. 502)

6. Are there EXCEPTIONS to the rule that - tender of payment is required before Consignation in
court may be effected?

o There are Cases where Tender of Payment is Unnecessary before

Consignation may be effected. These are provided in Article 1256, par. 2, (1)
to (5) – x x x

“Consignation alone shall produce the same effect in the following cases:

(1) When the creditor is absent or unknown, or does not appear at the place of
payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;

18
 (5) When the title of the obligation has been lost. “

7. What are the Requisites for an effective or valid Consignation which must be complied with by
the Debtor?

i. That there was a debt due and demandable

o Obligation not yet due may be refused validly by creditor (Salvacion v. Cruz, 88 Phil. 236)
o If there is no debt due, consignation is unnecessary (Asturias Sugar Central v. Pure Cane
Molasses Co., 60 Phil. 255)

ii. There is a valid tender of payment to creditor, except when tender

is dispensable under any of the 5 cases in Art. 1256.

a. Tender of payment was refused unjustifiably

o The creditor’s refusal to accept must be without a valid cause, because if it is with
a valid cause, the deposit of the amount or thing will not extinguish the obligation.

b. Tender of payment is excused under Art. 1256 –

(1) When the creditor is absent or unknown, or does not appear at the place of
payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost. “

iii. That prior notice has been given to persons interested in the
fulfilment of the obligation.

o Before consignation or deposit to court of amount or thing, notice is given to persons

interested in the fulfilment of obligation such as: the creditor/s, if any, to the
guarantors, surety, other solidary co-creditors and solidary co-debtors, to allow them
to reconsider creditor’s refusal to accept tender of payment, and avoid unnecessary
litigation and other judicial costs.

o For creditor to reconsider his refusal to accept payment for consignation may be
adverse to him – release of debtor from liability; creditor bears the risk of loss of the
thing consigned, and; creditor is charged for the expenses of consignation in Art.
1259. (Ochoa v. Lopez, OG 5871)

o If prior notice is not made, debtor shall not be relieved from liability. (Bellis v. Imperial
& city of Manila, 52 Phil. 520)

iv. That the amount or thing due was placed at the court’s disposal

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 o Before the deposit, a consignation case must be filed in court. Without a suit, there
can be no valid consignation.

o Note: Other competent authority may refer to - (a) Payment of rentals due may be
made by consigning the same to a bank in the name of lessor with notice to the latter
(Alfonso v. CA, 168 SCRA 545) ; (b) Sheriff in cases of consignation of the amount of
redemption of property sold in execution by said sheriff.

o Jurisdiction – may be filed with RTC or MTC, depending on the amount or value of
property to be consigned. (Ascue v. CA, 196 SCRA 804)

v. That after consignation in court, second notice is made to

interested persons.

o The 2ND NOTICE AFTER CONSIGNATION may be effected – (a.) in the form of letter
addressed to the creditor/s or persons interested; (b.) thru service of summons and
copy of complaint upon defendant creditor (Limakako v. Limakako, 74 Phil. 313); (c.)
thru Publication in a newspaper of general circulation if creditor is absent/unknown.

o AFTER NOTICE, CREDITOR may: (1) accept the thing or amount deposited, thus
terminating payment; (b) refuse to accept the thing or sum, thus trial will proceed
to determine validity of consignation; (c) neither refuse or accept, trial proceeds
and debtor asks the court to cancel the debt after showing compliance of
consignation requirements.

o If the second notice, or after consignation notice is not complied with, consignation
is VOID as payment (Soco v. Militante, 123 SCRA 160; Valdellon v. Tengco, 141 SCRA
321).

o Second Notice after making the deposit or consignation is MANDATORY in case of

contractual debts.

o EXCEPTION: If the amount is due as a consequence of a final judgment (Salvante v.

Cruz, 88 Phil. 236; Arzaga v. Rumbaoa, 91 Phil. 499)

vi. Hearing
o Court determines whether consignation is proper
o Debtor asks the court to order the cancellation of the obligation

vii. Judgment of consignation

o Cancellation of the obligation covers both the principal and accessory obligations. (Art.
1260)

8. WHAT ARE THE EFFECTS OF CONSIGNATION ?

A. Once consignation is properly effected as above stated, the following effects
arise:

(1.) The court will order the cancellation of the obligation upon motion filed
by the debtor.

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 (2.) The debtor is then released from obligation, as if he had performed,
paid or fulfilled it at the time of consignation.

(3.) The accrual or growth of interest on the obligation is suspended from

the moment of consignation.

(4) Any increase or loss in value of the thing after consignation is borne by
the creditor.

8. Can the debtor still withdraw the thing or money deposited in court after consigning it to
court?

A. Yes. It is allowed provided it is done i.) before the creditor has accepted the
consignation, or; 2.) before judicial declaration that the consignation has been
properly made. [Art. 1260]

Q. What is the legal effect of this withdrawal by debtor?

A. The obligation of debtor remains in force. [ Art. 1260 ]

9. Assuming that consignation has been made, what are the effects if the creditor authorizes the
debtor to withdraw the same?

A. The creditor shall lose every preference which he may have over the thing.
The co-debtors (if any), guarantors and sureties of debtor shall be released
from their respective obligations to the creditor. [Art. 1261]

SECTION 4. - CONFUSION OR MERGER OF RIGHTS

Art. 1275. The obligation is extinguished from the time the characters of
creditor and debtor are merged in the same person.

CONFUSION OR MERGER OF RIGHTS – is the merging or meeting in one person

of the qualities or rights of creditor and debtor with respect to the same obligation.

Consequently, the obligation is extinguished, as it is absurd for a person to enforce

an obligation against himself. Creditor cannot sue himself as debtor.

REQUISITES FOR CONFUSION OR MERGER OF RIGHTS:

1. The merger must take place between the principal creditor and principal
debtor (Art. 1276);
2. The very same obligation must be involved.
3. The merger is definite and complete up to the extent of the concurrent value
or amount.

Illustration of Merger or Confusion of Rights:

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 1. To pay his P1Million obligation, Boy issued a “Pay to Cash” check to his creditor Kris. In
turn, Kris used the check to pay part of her P1.5 debt to Jim. Jim accepted this check
and then used this to pay for the second-hand Hammer vehicle he bought from Boy.

There is now a resulting merger in the person of Boy, the characters of the principal
debtor and principal creditor.

2. Jamby leased for P50K/mo. a house in Woodridge Subd. from her single aunt Concha.
When aunt Concha died, she bequeathed to Jamby, in her Will, the house and lot that
she is renting from her. As a result, there is now a merger in the person of Jamby, the
characters of obligor-lessee and obligee-lessor, or - debtor & creditor.

3. Study also case of Yek Tong Lin Fire etc. v. Yusingco, 64 Phil. 1062.

Q. What is the legal effect if the act creating the merger is revoked?
A. If the act which created the merger is revoked for some causes (like rescission,
nullity of will or contract), the merger is also revoked. Thus, the obligation is
revived in the same condition before merger.

Q. What are some of the Causes of Confusion or Merger?

1. Succession (compulsory, testate, intestate)
2. Donation
3. Negotiation of a negotiable instrument

Art. 1276. Merger which takes place in the person of the principal debtor
or creditor benefits the guarantors. Confusion which takes place in the
person of any of the latter does not extinguish the obligation.

Article 1276 applies to 2 Kinds of Merger:

1. Merger in the person of principal creditor and principal debtor;

o This 1st merger extinguishes the guaranty because the principal
obligation is extinguished; and the guaranty is merely an accessory
obligation. This type of merger benefits the guarantor.

Illustrate: Debtor Dan took a P2M loan from creditor Cora. Gorio, father of Dan
guaranteed the P2M debt of his son. Later, Cora donated her P2M credit to her son
Tom. Thereafter, Tom assigned this P2M credit to Dan, as Tom’s payment for the
residential lot he bought from Dan.

Merger now takes place in the person of Dan as the principal debtor and creditor. Dan
who is the debtor of Cora has now become the creditor of Cora to the value of P2M.
As a consequence, the obligation of Dan to Cora is extinguished. This benefits Dan’s
guarantor Gorio, as this also extinguished or released Gorio from his obligation as
guarantor of Dan’s debt.

2. Merger in the person of guarantor.

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 o In this type of merger, the principal obligation is not extinguished,
because the effectivity of the principal obligation is not dependent upon
the accessory obligation.

Illustrate: Assuming the same facts above, but this time, Tom assigned his credit to
the guarantor Gorio who is the real owner of the lot (instead of the debtor Dan). Gorio,
the guarantor, now acquires the P2M credit of Cora the creditor. Gorio can collect the
P2M debt from the principal debtor Dan. There is merger in Gorio the person of creditor
and guarantor.

Legal Effects:
(1) This released Gorio from his obligation as guarantor of the P2M debt to Cora.
(2) But the P2M principal obligation of debtor Dan remains; it is not extinguished. Now,
Gorio, the guarantor, becomes the new creditor who can collect payment from Dan.

Why is the P2M debt/obligation of Dan not extinguished?

i.) There is no complete merger or confusion in the same person of the characters of
principal debtor and principal creditor, since Gorio is a guarantor, not the debtor.
(Requisite 1 is lacking);

ii.) Gorio acquired the credit from Cora because of another obligation, that is, from
Gorio’s sale of the lot to Tom who is assignee of Cora. (Requisite 2 is lacking)

Note: Study further the illustrative cases in the books of Paras & Pineda.

Art. 1277. Confusion does not extinguish a joint obligation except as

regards the share corresponding to the creditor or debtor in whom the
two characters concur.

CONCEPT OF JOINT OBLIGATION: Joint obligation is a collective obligation where

there is a concurrence of two or more debtors or creditors, where each debtor is
liable only for his proportionate part of the debt, and each creditor is entitled only
to a proportionate part of the credit.

Q. Is a Joint obligation extinguished by confusion or merger?

o In a Joint obligation where there are several debtors and creditors, if there
occurs a merger between one principal debtor or principal creditor, this will not
extinguish the entire joint obligation.

o Reason: The merger or confusion is with respect only to the share of the debtor
or creditor concerned, in whom the two characters of principal debtor and
principal creditor merged. There is only partial extinguishment of the joint
obligation.

o If the merger takes place in the person of the debtor with regard to his share
in the debt, the creditors can still recover from the other joint debtors whose
part of the debt had not been extinguished by the merger in one debtor.

ILLUSTRATION:

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1. Good friends, Rene & Glory jointly (50-50 share) loaned P1M from Mike to start a cafe-
bistro business. Later, Mike assigned his whole credit to one of the debtors Glory, as
payment of the Olmedo painting Mike bought from Glory’s Gallery.

As a result, Glory’s share (P0.5M) in the joint obligation is extinguished due to the merger
of the characters of debtor and creditor in her person. There is now full merger or confusion
of the characters of debtor/creditor in the person of Glory.

On the other hand, joint co-debtor Rene remains liable to his share of P0.5M in the joint
obligation. But this time, Rene will pay his share in the debt (P0.5M) to Glory who now
owns the entire credit, no longer to Mike.

2. If Mike assigned only ½ of his credit (P0.5M) to Glory, the debt is not extinguished entirely;
except that part of the debt which pertain to Glory’s share of the debt.

Rene must still pay his share (P0.5M) in the joint obligation to Mike. But Glory is now
released from paying her share by reason of the merger of debtor/creditor characters on
her person on the concurrent sum of P0.5M.

CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACTS

GENERAL PROVISIONS

Art. 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation in which is established.

I. CONSENT – see discussion below.

II. OBJECT & CAUSE REQUISITES OF CONTRACT:
Illustrate: A sold LAND to B for P1M.
Q. What is the OBJECT or subject matter of the contract?
A. Object or subject matter of the contract - the LAND.

Q. What is the CAUSE of the contract?

A. Cause is the WHY or Reason parties entered into the contract.
For seller A – its B’s obligation to pay him P1M.
For buyer B – its A’s obligation to deliver the Land to him

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 Section 1. - CONSENT

Art. 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.

Acceptance made by letter or telegram does not bind the offerer except
from the time it came to his knowledge. The contract, in such a case, is
presumed to have been entered into in the place where the offer was
made.

DEFINITION & CONCEPT OF CONSENT – It is the conformity of the parties to the

terms of the contract freely and voluntarily. It is the concurrence of the minds of
the parties on the object and cause which shall constitute the contract.

Art. 1319 - 1st sentence: “Consent is manifested by the meeting of the offer and the acceptance
upon the thing and the cause which are to constitute the contract.

Consent is the most important requisite of a contract. Without it, the contract
may be deemed void or voidable or unenforceable.

 Elements of Consent :

1. PLURALITY OF SUBJECTS
o Number of parties is not to be confused with number of persons. One
party may be composed of 2 or more persons. Also, one person may
represent 2 parties, like in auto contracts.

2. LEGAL CAPACITY OF PARTIES

o Parties must be of legal age (18), with full mental capacity
o If party is a legal entity like a corporation, rep. must be authorized.

“VIVA through its Board of Directors, rejected such counter-offer. Even if it be

conceded arguendo that Del Rosario had accepted the counter-offer, the acceptance
did not bind VIVA, as there was no proof whatsoever that Del Rosario had the specific
authority to do so. Under the Corporation Code, unless otherwise provided by said
Code, corporate powers, such as the power to enter into contracts, are exercised by
the Board of Directors. However, the Board may delegate such powers to either an
executive committee or officials or contracted managers.” (ABS-CBN Broadcasting
Corp. v. CA, 301 SCRA 592)

3. INTELLIGENT and FREE WILL OF PARTIES

25
 o Consent to contract is given free from mistake, violence, intimidation,
undue influence or fraud. Otherwise, contract is voidable. (see - Art. 1330)

4. MANIFESTATION OF THE WILL - Express or Tacit

o Consent is manifested by the concurrence of offer and acceptance with
respect to the object of the contract.

(a) Express – by affixing one’s signature on the contract; verbal

expression of consent
(b) Implied - shown by conduct of parties like performing or paying by
debtor, and acceptance of performance or payment by creditor.
(c) Presumptive – presumed by law as in quasi-contracts in Title XVII,
Chapter 1, Civil Code

5. CONFORMITY of the INTERNAL WILL and its MANIFESTATION

o Conformity to the object, cause, terms of contract must be intelligent,
and free from all vices of consent
o Conformity by the parties must be real and not simulated or fictitious
o When offer and acceptance and concur and becomes a binding contract
is a question of fact to be determined by the court in case of dispute.

OFFER AND ACCEPTANCE

I. OFFER

Q. What is an Offer?

A. It is a unilateral proposition which one Party makes to the other for the
celebration of a contract.

Art. 1321. The person making the offer may fix the time, place, and
manner of acceptance, all of which must be complied with.

Read: Montinola v. Victorias Milling Co., 54 Phil. 782 (p. 451, Tolentino)

“The offerer may make his offer subject to any conditions he may see fit, and all
conditions imposed will be material elements of the offer and contract. “

Q. What kind of Offer is required for the contract to be perfected?

A. OFFER must be: i. Definite, ii. Complete, and iii. Intentional.

ROSENSTOCK v. BURKE, 46 Phil. 217

26
 Facts: H.W. Elser wrote a letter to the yacht owner Burke: “In connection with the yacht
Bronzewing, I am in position and am willing to entertain the purchase of it under the following
terms, xxx.” Plaintiff accepted all the terms.

Issue: Is the offer to purchase the yacht absolute and unconditional?

Held: The offer to purchase the yacht was not a definite offer to purchase. This did not give rise
to a contract which could compel the letter writer to buy the yacht.
x x x
“The word "entertain" applied to an act does not mean the resolution to perform said act, but
simply a position to deliberate for deciding to perform or not to perform said act. Taking into
account only the literal and technical meaning of the word "entertain," it seems to us clear that
the letter of the plaintiff cannot be interpreted as a definite offer to purchase the yacht, but
simply a position to deliberate whether or not he would purchase the yacht. It was but a mere
invitation to a proposal being made to him, which might be accepted by him or not.”

II. ACCEPTANCE

Q. What kind of Acceptance is required for the contract to be perfected?

A. ACCEPTANCE must be: i.) Absolute or Unequivocal, ii.) Unconditional

o Any variation or modification from the terms of the offer, annuls the offer.
(ABS-CBN Broadcasting Corp. v. CA, 301 SCRA 592)

Q. How is Acceptance manifested?

A. Art. 1320. An acceptance may be express or implied.

Q. Can Silence be deemed as an implied acceptance or not?

 Silence can be ambiguous. It can neither be acceptance nor rejection. But
can it also mean acceptance? One must look at the circumstances of the
case.

Example: A and B both own stalls which sell flowers in Dangwa market. C
regularly delivers 100 sacks of rice every Friday for a year now and payment
is made every end of the month. If A is not there, C just leaves it with A‘s
assistant. A did not call C.

C tried to do business with B. B was not there though. C left to B‘s assistant
10 sacks of rice. B did not call C.

Q. Is there an acceptance?
i.) A accepted the rice by implication because of the prior clear
arrangement that they have for a year now. If A did not want to accept
the rice, then A should have called.

27
 ii.) B‘s silence is not acceptance. The offer cannot be deemed definite,
complete and intentional. B has no obligation to accept as B does not
have any prior understanding or arrangement with C.

Q. What are the legal effects of a conditional acceptance or non-acceptance of an

offer?

A. CONDITIONAL ACCEPTANCE = COUNTER-OFFER

a. EFFECT OF NON-ACCEPTANCE – If the offer is not accepted, this means that

- there is no consent, and thus, no contract.

b. If the acceptance is CONDITIONAL or QUALIFIED, this is tantamount to a

COUNTER-OFFER by the offeree.

Legal Effect - the offeror is freed from the consequences of his offer, unless
he accepts the counter-offer.

Example – Batangan v. Cojuangco, 78 Phil. 481

Facts: Parties met and negotiated for a compromise. An attempted compromise of
P1,508.28 in cash was met with a tender of payment of P800 only.

Held: There is no meeting of minds.

Q. If acceptance is made by letter or telegram, when will this bind the offerer?

o Art. 1319, 2nd par. - “Acceptance made by letter or telegram does not
bind the offerer except from the time it came to his knowledge.”

ACCEPTANCE BY LETTER OR TELEGRAM – Acceptance of the offer by offeree will

bind the offeror, only from his knowledge of the acceptance by offeree.

o This is called Cognition Theory; or Manifestation theory in commercial law

o Offer and acceptance take effect only from the time knowledge is acquired by
the person to whom it is directed.

o But during intervening time, the offer or acceptance may be extinguished by

death or insanity or insolvency, of either party. If this happens before
acceptance is communicated to the offeror, the offer or acceptance becomes

Art. 1323. An offer becomes ineffective upon the death, civil

interdiction, insanity, or insolvency of either party before
acceptance is conveyed.

28
 Reason: The contract is not perfected until the concurrence of the wills of the parties.
Thus, the death of either party, or the loss of his capacity before perfection
of the contract, prevent the contractual tie from being forged.

WITHDRAWAL OF OFFER AND ACCEPTANCE

Both Offer and Acceptance can be revoked or withdrawn before contract is perfected.

I. Withdrawal of OFFER
o The Offerer may WITHDRAW BEFORE ACCEPTANCE OF OFFER by the other
party or offeree.

 Study : LAUDICO v. ARIAS, 43 Phil. 270

 There was no contract perfected because before the receipt of the letter of acceptance,
the offer had already been withdrawn by Arias. It does not matter that the letter of
withdrawal of Arias may have been received later by the offeree that the receipt of the
letter of acceptance by the offerer.

 What is essential is that the letter of withdrawal be made prior to the knowledge of the
acceptance of the offer. Xxx

Q. What are the Legal Consequences of Withdrawal of Offer Acceptance?

A. WITHDRAWAL OF OFFER AFTER ACCEPTANCE; LEGAL CONSEQUENCE –

1. Pending acceptance of offer, offerer is free to offer or contract with
another for the same subject matter. But offerer must first revoke his
offer before it is accepted.

2. Once acceptance is made before revocation of the offer and offerer knew
of the acceptance, the contract is deemed perfected and binding. Offerer
cannot now unilaterally withdraw his offer. Otherwise, offeror may be
liable for damages to the first offeree.

3. As between 2 offerees, the one whose acceptance perfected a contract

first is given priority; the other party has only an action for damages.

II. Withdrawal of ACCEPTANCE

Q. For withdrawal or revocation of acceptance by Offeree to be valid, when must

offeree make it?

29
A. REVOCATION OF ACCEPTANCE BY OFFEREE – must be made before knowledge
of his acceptance by the offeror. If revocation of acceptance is made timely, there
is no perfected contract for lack of consent.

Art. 1319, 2nd par. Acceptance made by letter or telegram does not
bind the offerer except from the time it came to his knowledge.

ILLUSTRATE:
Example 1: Offeror made the offer on March 1 by mail. The offer reached the
offeree on March 5. From the point of view of the Offeror, offer is counted from
March 5. He can still countermand before March 5.

 If the parties are face to face, then there is no problem since there is no
time gap.
 The problem arises when there is a time gap. Under Article 1319, there is
perfection of the contract when there is KNOWLEDGE BY THE OFFEROR of
the other party‘s acceptance; NOT upon actual acceptance by the offeree.

Example 2. Offeror A made the offer in Davao City on February 1. The offer
was sent through mail which is received by offeree B in Manila on February 7.
On that day, B accepted the offer. B e-mailed with confirmatory post mail sent
to Davao on February 8 signifying acceptance. On February 8, the party in
Manila becomes insane. On February 13, the mail reached Davao.

Q. Is there perfection of contract?

A. NO. Under Article 1319 (see above) and 1323 - there is no contract since
there was no contractual capacity.

Example 3. The offer was made by A in Cebu on March 1. It was received by

offeree B in Makati City on March 3. On March 4, the offeree B sends his
acceptance to A in Cebu. On March 5, the offeror A countermands/withdraws
the offer. Now, both acceptance and withdrawal of offer crossed in the mail.

Q. Which one will prevail – the acceptance or the withdrawal of offer?

A. Whichever mail reaches the destination first and/or who first knew of the
acceptance or, knew of the withdrawal will be considered.

o But where the offerer delays in bad faith, by refusing to open the mail
or read the letter of acceptance though he can do so, the contract is
deemed perfected.
o Perfection of the contract cannot be left to the caprice of the offeror. (see
- Tolentino, Vol. IV p. 454-555)
o How is this different from the ruling in the case of Laudico v. Arias?

30
Q. In case of successive agreements or contracts, when is the contract perfected
in such case?

A. SUCCESSIVE AGREEMENTS – A contract may be complex that the parties come

to an agreement on certain points to different successive stages.

 According to Swiss, Russian and Austrian Codes:

If the parties reach an agreement on the essential points of the contract,

reserving other points for future agreement, there is already perfection of
contract.

 German Code:
As the parties have not come to an agreement on all the points of the contract,
it cannot be considered as perfected.

o This is more in accord with principles of perfection of contract

o Gives more security to juridical relations.

 Comment of Sen. Tolentino, Vol. IV: Art. 1319 requires the concurrence of offer and
acceptance only as to the thing and the cause which are to constitute the
contract”, and not to all matters.

o INTENTION of the parties should control. Thus -

a.) If the intention of one or both parties is that there be concurrence on all
points, the contract is not perfected if there is a point of disagreement,
even if there is already agreement on the essential elements of the
contract.

b.) If there is no declaration that the agreement on an accessory or

subordinate matter is necessary, the contract will be perfected as soon
as there is concurrence on the object and the cause. The agreement on
the accessory obligations will be determined by future agreement.

ACCEPTANCE OF PUBLIC OFFERS:

31
o PUBLIC OFFERS – unilateral promise made publicly by advertising a reward,
compensation or prize for any person who performs a specific act or obtains a
particular result.

Example: i. Apprehension of a criminal,

ii. Return of a lost object,
iii. Finding or giving info about a missing person.

o A unilateral promise does not have an obligatory force unless there is an

acceptance which shall convert it into a contract. The performance of the act
for which a reward is promised is deemed an acceptance.

Art. 1322. An offer made through an agent is accepted from the time
acceptance is communicated to him.

o If the offeree accepted the offer made through an agent or authorized

representative of the offeror, the offer is deemed accepted from the time the
agent or attorney in fact has received the acceptance (written or verbal), and
not from the time that the offeror has known of the acceptance.

o An intermediary who is not an authorized agent of the offeror cannot bind the
latter.

o Similarly, the offeree may also act through an authorized agent who can
represent him (offeree) with binding effect.

Art. 1324. When the offerer has allowed the offeree a certain period to
accept, the offer may be withdrawn at any time before acceptance by
communicating such withdrawal, except when the option is founded upon
a consideration, as something paid or promised.

o ART. 1324 applies to an Offerer who provides for a PERIOD FOR ACCEPTANCE
or a fixed deadline to the offeree to accept or reject the offer.
o After lapse of the period, the offer is deemed withdrawn and offeror may refuse
acceptance thereafter, unless the offeror is still willing to accept.

Q. What about if there is no period for acceptance fixed by the offeror ?

A. It depends. If the offer is made to a person present, the acceptance must be

made immediately. This is immediately demandable.

If the offer is made to a person absent, acceptance may be made within such time,
that under normal circumstances, an answer can be received from the offeree. It
is as if there is a reasonable tacit or unspoken period, necessary for the offeree to
know and to respond or react to the offer.

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Q. Can the offeror withdraw the offer at any time before acceptance, before the
period for acceptance has expired, without any liability ?

A. (1.) YES. If offeror timely withdraws his offer before the acceptance and before
any option money is given by offeree, the offeror may withdraw the offer without
any liability.

Offeror in this case is entitled to change his mind as there is no contract perfected
yet between the parties.

(2.) NO. If offeror withdraws his offer after the offeree has given consideration for
the option granted. Offeror in this case may be liable for damages, and he may
even be required to execute the necessary contract of sale.

Q. What is the Rule in Crossing of Revocation and Acceptance?

A. Dean Pineda (p. 389) : If the offeror has revoked his earlier offer, but
meantime, the offeree has already accepted the offer. The rule may be as follows:

1.) If the acceptance by offeree arrives first and this is known to the offeror, the
contract is perfected.
2.) If the revocation arrives first and this is known by the offeree, no contract is
perfected.
3.) If the revocation and acceptance arrives at the same time or simultaneously,
the perfection of the contract shall be sustained or made effective.

 But how is this affected by the SC ruling of LAUDICO v. ARIAS, 43 PHIL. 270?

Q. What is an OPTION Contract?

A. It is a contract between the offeror and the offeree whereby for valuable
consideration, the offeror grants to the offeree the privilege to buy or not to buy
for a fixed price, certain object/s at any time within the specified period.

o Option contract is a preparatory contract, that is separate from the principal

contract.
o If the option is not supported by an independent consideration, the offeror
can withdraw the option any time even if already accepted by the offeree.

Art. 1324. When the offerer has allowed the offeree a certain period to accept, the
offer may be withdrawn at any time before acceptance by communicating such
withdrawal, except when the option is founded upon a consideration, as something
paid or promised.

33
 Art. 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price

certain is binding upon the promissor if the promise is supported by a consideration
distinct from the price.

 Article 1324 is related and similar to Article 1479, par. 2.

a.) Illusrate - OPTION CONTRACT:

 S offers to sell a car to B for P800,000. B needs to think about it, and so B asks
for five (5) days and pays S P5,000. The payment of P5,000 is a distinct
consideration from the price of the car. This distinct consideration of P5,000 is
payment for the 5-day period to decide whether to buy it or not. B is paying
for time.

The option contract is separate from the contract of sale.

S cannot sell the car to anybody else within that 5-day period. If S sells the
car to someone else within the 5-day period, he is guilty of contractual breach.
But B can buy the car before the end of the 5-day period and this will be a
valid sale.

b.) PROMISE TO SUSPEND SALE FOR BUYER WITHOUT OPTION CONTRACT:

o S offers to sell a car to B for P800,000. B could not decide immediately, so B
asks for 5 days from S to decide whether or not to accept and buy the car. B
does not pay S option money. Nonetheless, S promised to give B 5 days to
decide.

Q. On the 4th day B communicated to S his acceptance of the P800,000 price

offered by S. But it turned out that S has already sold the car to another on
the 3rd day, before the 5-day period. Can S be held liable in this case?

a. In Sanchez vs. Rigos, 45 SCRA 368 (1972), the Supreme Court said that
even if there was no option contract, S must still communicate the
withdrawal of the offer to B. If S does not communicate his withdrawal, it
is as if there is still a continuing offer to B. “This is upon the principle that
an offer implies an obligation on the part of the offeror to maintain it for
such length of time as to permit the offeree to decide whether to accept or
not, and therefore cannot arbitrarily revoke the offer without being liable
for damages, which the offeree may suffer.”

o The 1972 case of Sanchez v. Rigos abandoned the previous 1955 rule in
Soutwestern Sugar and Molasses Co. v. Atlantic Gulf Pacific Co. (97 Phil.

34
 249) which provides that: if the option is not backed up by a
consideration which is distinct from the purchase price, the offer may
still be withdrawn even if the offeree had already accepted the offer.

Professor Balane does not agree with the Sanchez v. Rigos ruling. He thinks
that if there is no valid option contract, there should be no continuing offer;
the Supreme Court should have explained this ruling.

c.) SPECIFIC PERFORMANCE:

 S offers to sell a car to B for P800,000. B needs to think about it, and so B asks
for 5 days and pays P5,000 option money to S. B decides to buy the car within
5 days. The car was not sold to anybody else. But this time, S simply does not
want to sell anymore the car to B.

Q. Can B sue S for specific performance – that is, compel S to sell B the car?
A. YES.

d.) DAMAGES:

 S offers to sell a car to B for P800,000. B needs to think about it, and so B asks
for 5 days and pays P5,000 option money to S. B decides to buy the car within
5 days. Before B is able to buy the car, S sells the car to X – a buyer in good
faith. What is the proper legal recourse of B in this case?
 B can no longer sue for specific performance since the car has been sold to a
buyer in good faith. But B may sue S for damages.

Note: Know the Difference between OPTION MONEY and EARNEST MONEY.

Art. 1325. Unless it appears otherwise, business advertisements of things

for sale are not definite offers, but mere invitations to make an offer.

BUSINESS OR SALES ADVERTISEMENTS – may or may not constitute definite

offers, depending on how the advertisements are made:

(1) If the advertisement has all the necessary specifics to constitute a contract, it
is a definite offer for sale of the thing advertised.

Illustrate: FOR SALE: House and Lot - 300 sq.m. floor area, concrete 2-story, 500sq.m. lot.
Built in 2000. Located: 8 Atlantic Drive, Ecoland Phase 3, Davao City. Price: P12.8 Million.
Payment in Cash. Clean title. Direct buyer only. Contact owner Mia Dy, at same address; Cell
09089012345 or Tel. 3012468.

Rule: If this advertisement/offer is accepted, the offeror/advertiser cannot

withdraw it after acceptance by buyer. Otherwise she may be liable for
damages.

35
(2) If the advertisement does not have all the elements of a contract, it is not a
definite offer. It is a mere invitation to make an offer.

Illustrate: FOR SALE: Second hand Honda Civic car, 2015 model, Price: P680,000.
Negotiable. Call Lea Du, Cell 09089012345.

Rule: This advertisement is an invitation to make an offer, which may or may

not be accepted by the advertiser or offeror.

o What are some examples of definite offers to public ?

Here, anyone can accept the offer by paying the price fixed:
a.) A vending machine for food or beverages
b.) A merchant who places articles with price tags for sale in his store.

Art. 1326. Advertisements for bidders are simply invitations to make

proposals, and the advertiser is not bound to accept the highest or lowest
bidder, unless the contrary appears.

ADVERTISEMENTS FOR BIDDING; EFFECT

o Where bidders are invited to make proposals. The advertiser is not bound to
accept the highest or lowest bid. The advertiser may reject the bid and cannot
be compelled to accept and execute a contract.

Exception: If the advertisement clearly shows that the best bid (highest or lowest
as the case may be), will be considered as giving rise to a binding contract.

NOTES re - BIDDING ADS:

a. The advertiser seeks the highest bid if he is selling a property;

b. And the lowest bid if he is seeking for services to be performed.
c. The advertiser or owner of the property to be sold at a public or private
auction sale, has the right to prescribe the manner, conditions and terms
of the bidding.
d. This provision is not applicable to bids in Judicial Sales where the highest
bid must necessarily be accepted.

Sources: Obligations and Contracts Books of Tolentino, Paras, Pineda, Balane

36
 CONSENT
Art. 1327. The following cannot give consent to a contract:

(1) Unemancipated minors;

(2) Insane or demented persons, and deaf-mutes who do not know how to
write.

Q. Who are the PERSONS WHO CANNOT GIVE CONSENT TO A CONTRACT?

1. UNEMANCIPATED MINORS – Those below 18 years of age. Those 18 years

and above may enter into contracts.
B. Arts. 1426 & 1427 are no longer applicable to minors between 18 and 21 years requiring
parental consent. R.A. 6809, reduced the age of majority to 18 yrs. old.

2. INSANE OR DEMENTED PERSONS – are detached from reality; cannot act

with legal consequences and thus, cannot contract. But they may enter into
valid contracts during their lucid intervals.

3. DEAF-MUTES WHO DO NOT KNOW HOW TO WRITE – are disqualified. But

those who can write and/or read may validly enter into contracts.

37
Q. What are the LEGAL EFFECTS OF CONTRACTS ENTERED BY INCAPACITATED
PERSONS:

a.) If only one party is incapacitated and thus cannot give consent, the
contract is voidable. (Armentia v. Patriarca, 125 Phil. 382; Art. 1390, [1]). But upon
reaching age of majority, i.e. 18 or above, he may ratify the contract and make it valid
as a consequence.

b.) If both parties are incapacitated to give consent, the contract is

unenforceable. (Art. 1407)

READ: Sample cases/rulings where minors are liable under the contracts they entered into
despite their minority - pp. 393-394 Pineda, Obligations and Contracts, 2000 ed.

1. MERCADO vs. ESPIRITU, 37 Phil. 37 (Bambalan v. Maramba, 51 Phil.

417; Sia Suan v. Alcantara, 85 Phil. 669)

• Contract effected by a minor who is an adolescent near the adult age, who
pretended to be of majority age, misleading the other party, will be deemed
valid & binding upon the minor based on estoppel. He cannot later excuse
himself from compliance with the obligations or seek annulment of the
contract for being voidable.

2. DE BRAGANZA ET AL v. DE VILLA ABRILLE, L-12471, April 13, 1959; 105

Phil. 456
There was silence in the contract as to the age of the minor, the fraud is
not actual but only constructive. The minor is not bound by his signature as
he is guilty only of passive misrepresentation. But he must still make
restitution up to the extent that he was benefited.

See – Art. 1489. x x x Where necessaries are sold and delivered to a minor
or other person without capacity to act, he must pay a reasonable price
therefor.

Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to
in a state of drunkenness or during a hypnotic spell are voidable.

WHO HAS THE BURDEN TO PROVE INSANITY OF CONTRACTING PARTY:

C. Insanity will be proved by one alleging it.
D. If a person is established to be insane, then the burden of proving that he
was lucid at the time he entered into the contract is shifted to the party
seeking to enforce the contract.

DRUNKENNESS:
E. The drunkenness must be such point that he has completely lost his mental
faculties and consciousness to capably enter into a contract but not if he is
still aware of what he is doing and its consequences.

38
Art. 1329. The incapacity declared in Article 1327 is subject to the modifications
determined by law, and is understood to be without prejudice to special
disqualifications established in the laws.

The person referred to in Art. 1327 is incapacitated because of his presumed lack
of intelligence and therefore his right to exercise the right to enter into a contract
is resctricted. Any contract entered into by the incapcacitated person is thus
deemed voidable. But he may still validly enter into a contract if made thru a
guardian. The disqualification is not absolute.

SPECIAL DISQUALIFICATIONS TO CONTRACT PROVIDED BY LAWS – are persons

absolutely disqualified by law; the restriction is upon the right itself. The
disqualification makes the contract VOID.

1.) Persons in Art. 1491 disqualified to enter into contracts because of

fiduciary relations or due to public policy. (Read article)

Example: A judge is prohibited to buy property subject of litigation in his court. Violates
Art. 1491. Sale is void

2.) Husband and wife (legal or living together as one) cannot donate, sell or
lease properties to one another. (Art. 87 Family Code; Art. 1490 NCC)

3.) Insolvent person until discharged (Act 1956, Sec. 24)

OTHER CAUSES OF INCAPACITY TO ENTER INTO CONTRACT – Rule 92, Sec. 2 of

the Revised Rules of Court considers the following persons as incompetent to enter
into contracts, and may be placed under judicial guardianship:

a.) Those under civil interdiction;

b.) Hospitalized lepers;
c.) Prodigals;
d.) Deaf and dumb who are unable to read and and write;
e.) Insane persons even if they have lucid intervals;
f.) Those who by reason of age, disease, weak mind and other similar
causes without outside aid, cannot take care of themselves and manage,
becoming easy prey for deceit and exploitation.

Unlike the persons specially disqualified by law, the above incompetent persons
are not totally prohibited to enter into contracts, in the sense that they may do so
through their guardians with approval of the court.

Art. 1330. A contract where consent is given through mistake, violence, intimidation,
undue influence, or fraud is voidable.

VICES OF CONSENT or DEFECTS OF WILL – makes the contract VOIDABLE.

F. REQUISITES OF CONSENT: To be valid, it should be (a) intelligent; (b)

free, and; (c) spontaneous.

39
 G. Consent is vitiated or becomes defective when proof is shown that -
intelligence is vitiated by mistake; freedom by violence, intimidation, or
undue influence; spontaneity by fraud.

H. PROOF REQUIRED: For the court to annul the contract on the ground of
defect of will or lack of valid consent, there must be full, clear and
convincing evidence, and not merely preponderance thereof (Centenera v.
Garcia, 29 Phil. 470).

Art. 1331. In order that mistake may invalidate consent, it should refer to the substance
of the thing which is the object of the contract, or to those conditions which have
principally moved one or both parties to enter into the contract.

Mistake as to the identity or qualifications of one of the parties will vitiate consent only
when such identity or qualifications have been the principal cause of the contract.

A simple mistake of account shall give rise to its correction.

Q. WHAT KIND OF MISTAKE OR ERROR WHICH VITIATES CONSENT?

A. The mistake or error which vitiates consent is one that refers to the substance
of the thing – i.) the object of the contract; ii.) the conditions which principally
moved one or both parties to enter into the contract.

CLASSIFICATION OF MISTAKES WHICH VITIATE CONSENT:

1. MISTAKE OF FACT – refers to mistake by a party or parties as to:

(a) Nature of Contract; (b) Object; (c) Substance of the thing; (d)
Quality of conditions of the thing; (e.) Identity or qualification of the
person; (f) Quantity of the thing where it is the main reason of the
contract.

2. MISTAKE OF LAW – refers to mistake incurred by one or both parties as to

the LEGAL EFFECT of the contract, transaction or act such as provided in
Art. 1334 which if the mutual error frustrates the intention of the parties
such mistake may vitiate consent cause the annulment of the contract.

As a gen. rule however, mistake of law does not render a contract voidable,
based on the principle that – “ignorance of the law excuses no one from
compliance therewith.”

MISTAKE OF FACT:

a.) Nature of the contract – may invalidate a contract

Example 1: A party thinks he affixed his thumbmark on a real mortgage

contract, when it was in fact a deed of sale of the land

40
 DUMASUG v. MODELO, 34 Phil. 252.

Plaintiff thought she was signing a document of a promise to pay sum of money
for expenses of a lawsuit she was involved in. But this turned out to be a sale
contract of her carabao and 2 parcels of land. SC held that this error of plaintiff
invalidates the contract because it goes to the very substance of the thing which
was the subject matter of the contract. Had the plaintiff fully knew of the nature
of the document, she would not have accepted nor signed it.

b.) Object of contract – refers to the substance or material of the thing

itself.

Example: A party pays P50K for a ring he thought has a diamond stone, which
is actually a well cut zirconia worth only P1000K; or pay for a 15 yr. old whiskey
when it is only a 5 yr. old vintage.

c.) Quality or Principal conditions of the thing – principal reason why the
party entered into the contract

Example: A party buys an Amorsolo painting for P1M, which turned out to be
an excellently made copy or a fake; or a land thought to be clean but actually
has a preferred lien or encumbrance.

d.) Mistake as to the Identity of the Person or his qualifications – but it

will vitiate consent only if such identity or qualification is the principal
reason why the party entered into the contract.

Example: X Lending Inc. agreed to lend money to Y believing that it is Z,

millionaire business man brother of Y who will serve as guarantor. It turned out
that it is Q, a public school teacher, who is Z’s twin, who guarantees for Y.

Example: A hired Dr. B thinking that he is doctor highly trained in reconstructive

and plastic surgery, but it turned out that Dr. B is a doctor specializing in
dermatology who attended short program studies on cosmetic surgery.

Example: A lawyer entered into a contract for himself in his own name. Later,
he alleged that he made a mistake in contracting for himself and not in the
name of his client. Is this allegation tenable? SC ruled that he acted in his own
name, there is no mistake in identity and thus he will be bound. (Joaquin v.
Mitsumine, 34 Phil. 858)

e.) Mistake or Error in Quantity – refers to error in the number or actual

dimension of the object of the contract, which makes it voidable, and
not mere accounting mistake which may corrected.

Example: A party bought the land for a certain price, because it was represented
to be 30 hectares which could produce 2000 piculs of sugar, but turned out to

41
 be only 18 hectares which produce only 800 piculs. SC held that it is annullable.
( Asian v. Jalandoni, 45 Phil. 296)

Example: If the intention of the parties is sale of land but there is mistake in
designating the lot to be sold in the document, different from what the buyer
saw and agreed to buy. The remedy is not annulment but mere reformation of
instrument, there being a meeting of minds of the parties to a contract. (Atilano
v. Atilano et al, 28 SCRA 231)

NOTES:
1. If the party incurred error in estimating or computing benefits in good faith,
it is not a ground for the annulment of contract as this does not go directly
to the essential elements of the contract itself. This will give rise only to its
correction. (Art. 1331, par. 3)

2. However, if the estimate or calculation is deliberately made in bad faith to

induce the other party to enter into the contract, there is not only mistake,
but fraud which may invalidate the contract under Art. 1338.

3. Mistake or error in the motive of a party does not vitiate consent as to annul
a contract.

Example: Abe buys a new car thinking that his carnapped car will not be recovered.
But this was later recovered and returned to him. The purchase of the new car could
not be set aside due to error in his motive.

4. Accidental or accessory conditions or qualities which exist but do not affect

its existence or substance. Here, consent is not affected and do not affect
validity of the contract.

Example: A buys a horse thinking that it will be a good race horse being born of fast runner
parents. If the horse turns out not to be so, this will not invalidate the contract.

Example: B buys from a flea market an old painting for P800, which turns out to be an old
Manansala now worth P1M. This error will not invalidate a contract.

Art. 1332. When one of the parties is unable to read, or if the contract is in a language
not understood by him, and mistake or fraud is alleged, the person enforcing the
contract must show that the terms thereof have been fully explained to the former.

WHEN FRAUD OR MISTAKE IS ALLEGED BY AN ILLITERATE PARTY.

 Legal Presumption: a person intends the ordinary consequences of his

voluntary act; a party is presumed to know the import of documents he signs
and will be bound thereby.

42
 Exception: Burden of proof is shifted to the party enforcing the contract -
1.) When one of the parties is unable to read, or,
2.) If the contract is in a language not understood by him (even if the party
is literate).

Failure to rebut or disprove the allegation of mistake or fraud based on the above
grounds, will sustain the charge of mistake or fraud. The contract will be set aside
or annulled.

Read: Sample Cases, pp. 407-408, Pineda, id.

Art. 1333. There is no mistake if the party alleging it knew the doubt, contingency or
risk affecting the object of the contract.

If the party alleging mistake to annul a contract, knowing the doubtful, and risky
character of the object of the contract, that is, he knows or should have known it
thru the exercise of ordinary diligence or prudence, he cannot use mistake as a
ground to invalidate the contract. He will be bound by it.

Art. 1334. Mutual error as to the legal effect of an agreement when the real purpose of
the parties is frustrated, may vitiate consent.

MUTUAL ERROR OF LAW MAY VITIATE CONSENT – Requisites:

1.) Error must refer to the legal effect of the agreement;
2.) It must be mutual;
3.) The real purpose of the parties is frustrated.

Illustrate: Jay is an heir of Juan who left a notarized will when he died. Jay sold to his friend
Jess a lot in Davao City that is bequeathed to him in the Will of his father. Both Jay and Jess
believed that the sale is valid. But the Will and Testament was denied on probate for failing to
comply with the requisite formalities of the law on succession plus the appearance of creditors
of testator Juan.

Thus, ownership of the lot is not yet passed to the heir Jay until the issues of succession is
resolved. Since it turned out that Jay is not yet the owner of the lot, the contract is voidable
due to the mutual error of the parties as to the legal effect of their agreement.

Art. 1335. There is violence when in order to wrest consent, serious or irresistible force
is employed.

There is intimidation when one of the contracting parties is compelled by a reasonable

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, to give his
consent.

To determine the degree of intimidation, the age, sex and condition of the person shall
be borne in mind.

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A threat to enforce one's claim through competent authority, if the claim is just or legal,
does not vitiate consent.

KIND OF VIOLENCE & INTIMIDATION THAT VITIATES CONSENT; ELEMENTS.

I. Concept of VIOLENCE – It is a serious, external and physical force applied upon

a party to prevent or compel him to act, thereby vitiating consent.

A. ELEMENTS OF VIOLENCE:

a.) Physical force that is serious and irresistible is used for the victim or
contracting party to submit;

b.) The physical force inflicted is the determining cause in the giving of consent
to the contract.

II. Concept of INTIMIDATION – It is an internal moral force or compulsion on the

will inducing the party to act. There is fear of imminent and grave danger on
his person, or loved ones, or property, compelling the victim or party to give
his consent to the contract.

A. ELEMENTS OF INTIMIDATION:

a.) That the threat be real, serious and imminent danger to his person, loved
ones or property;
b.) That it produces a reasonable fear that the person intimidating the party
will carry the threatened injury;
c.) That the threatened act be unjust or unlawful, for if it is, there is no
intimidation;
d.) That the intimidation is the cause of the contract, or reason for giving the
consent.

NOTA BENE:

1. A threat to sue in court to collect his claim against the party does not
invalidate a contract of assignment of properties to satisfy such claim, is
not the kind of actionable intimidation to void or annul the contract.

2. Where a man marries under threat to prevent his admission to the bar by
filing charges against him for immorality, cannot avoid the marriage on the
ground of duress or intimidation. (Ruiz v. Atienza, O.G. 30 Aug. 1941, p.1903)

3. A threat to report a murderer if he does not agree to pay sum of money to

the witness of the offense, constitute intimidation that may vitiate consent
and annul a contract. Here, the payor is made to agree to something which
has no relation to his crime. (p. 496, Tolentino, Civil Code, Vol. IV, 2004)

4. If the intimidation is merely incidental, the contract is not annullable.

(Example: A receives serious violent threat from B. A then buys from C a gun for protection.

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 Shortly, B died in an accident. A cannot now claim to annul the contract with C on the ground
of violence and intimidation.)

5. Moral coercion may not annul a contract entered by the party, but the courts
may reduce the amount if found excessive as modern law does not favour
strict enforcement of agreement of this nature. (Example: A is in imminent grave
danger. B saves him on A’s promise that he will pay B a certain sum if he saves A.)

Read: Case of – Vales v. Villa, 35 Phil. 769, 787-790.

Art. 1336. Violence or intimidation shall annul the obligation, although it

may have been employed by a third person who did not take part in the
contract. (1268)

VIOLENCE OR INTIMIDATION BY A THIRD PERSON – may result to a voidable

contract because the consent of the contracting party is vitiated.

Art. 1337. There is undue influence when a person takes improper

advantage of his power over the will of another, depriving the latter of a
reasonable freedom of choice. The following circumstances shall be
considered: the confidential, family, spiritual and other relations between
the parties, or the fact that the person alleged to have been unduly
influenced was suffering from mental weakness, or was ignorant or in
financial distress.

UNDUE INFLUENCE – is similar to moral coercion. It is a means employed upon a

party which, under the circumstances, he could not well resist, and has the effect
of controlling his volition, inducing him to give his consent to the contract, which
otherwise he would not have entered into.

Undue influence is different from Intimidation although they seem to be similar.

In intimidation, the threatened act is unlawful or unjust, while in undue influence,
it need not be so.

NOTA BENE :

1. The circumstances to determine undue influence, stated in this provision

are not exclusive, but to be taken as illustrative. Other analogous
circumstances may be considered depending on the coercive power by one
party and the susceptibility to influence on the other.

Example:
a.) illness of one party;
b.) gross inequality in bargaining power bet. the parties;
c.) one party is at a disadvantage by reason of moral dependence, ignorance,
indigence, mental weakness, age or other handicap. (Art. 24 )

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 2. In contracts of adhesion where one party alone fixes the terms of the
contract, and the other has merely to “take it or leave it”, there may be
economic inequality and the freedom to contract by the other party is
suppressed.

However, this is generally allowed by law as a product of modern business

development and practice. For one who adheres to the contract has also
the freedom to reject it. But contracts of adhesion are construed strictly
against the party that drew the contract.

Example: Air, sea and land transportation contracts, public utilities contracts with
water, gas and electricity, insurance contracts, some real estate contracts, franchise
contracts.

Art. 1338. There is fraud when, through insidious words or machinations

of one of the contracting parties, the other is induced to enter into a
contract which, without them, he would not have agreed to. (1269)

CONCEPT OF FRAUD VITIATING CONSENT. – It is every kind of deception whether

thru insidious machinations, manipulation, concealments or misrepresentation, for
the purpose of leading another party into error and to execute an act.

INSIDIOUS WORDS OR MACHINATIONS – deceitful scheme or plot, such as false

promises, concealment of material facts with intent to deceive, exaggeration of
hope and benefits, abuse of confidence, use of fictitious names, qualifications or
authority, to influence or induce the consent of the contracting party.

TWO KINDS OF FRAUD in the PERFECTION OF CONTRACT:

1. DOLO CAUSANTE – fraud that is the essential cause of the consent without
which the party would not have agreed to the contract; also known as
causal fraud. (Art. 1338)

Effect: Contract is VOIDABLE

Remedy: Annulment of contract plus Damages

(Read p. 423, Pineda id. for Sample Cases)

2. DOLO INCIDENTE – fraud that is not the decisive influence, nor the essential
cause in giving the consent to the contract as it refers only to an incident
which even if not present, the party would still agree to the contract; also
called incidental deceit or fraud.

(Legal effect is same with fraud in performance of obligation in Art. 1170, 1171)

Effect: Contract remains Valid

Remedy: Claim or action for Damages only

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REQUISITES OF FRAUD – to vitiate consent and to cause annulment of contract:

1.) Fraud was employed by one party upon the other;

2.) It must have induced the other party to enter the contract;
3.) It must have been serious deception or misrepresentation;
4.) It resulted in damage or injury to the victim-party.

Art. 1339. Failure to disclose facts, when there is a duty to reveal them,
as when the parties are bound by confidential relations, constitutes fraud.

Q. When is failure to disclose facts considered fraudulent?

A. When by reason of confidential relations, the party is duty bound to disclose

the facts, but instead concealed or omitted them with intent to deceive. Such
concealment or omission of material facts constitutes fraud, and may be a ground
for annulment of contract.

Example:
a.) Where the insured concealed the fact that he had a number of ailments,
including pulmonary tuberculosis, thus the insurance co. accepted the risk,
which it would have otherwise refused had it known the truth. (Musngi v. West
Coast Life Ins. Co., 61 Phil. 864)

b.) Where a director/manager of the corporation who negotiated and knew

that the govt. will be buying a valuable property of their corp., used an
agent to buy more stocks from another stockholder for a lower price. The
director/manager did not disclose to the latter that he had just negotiated
a sale that would increase the value of the corp. stocks. Had the stockholder
knew about the negotiated sale, she would not have sold her stocks yet.
The court held the purchase fraudulent and annulled the sale contract.
(Strong v. Rapide, 41 Phil. 947)

NOTES:

1. Non-disclosure of material facts to persons whom the party has no

confidential relations cannot be considered fraudulent. Opponents in
litigation have no confidential relations. (Escudero v. Flores, 97 Phil. 240)

2. Where there is an innocent non-disclosure of a fact between the parties

where there is no duty to reveal it, no fraud was committed. The legal
maxim “caveat emptor” may be applied. (Tuason v. Marquez, 45 Phil. 381)

Art. 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent.

USUAL EXAGGERATIONS IN TRADE OR BUSINESS (TOLERATED FRAUD) – are not

fraudulent per se, especially when the other party can verify the facts. Tolerated

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fraud includes minimizing the defects of the thing, and exaggerating its good
qualities, even giving it qualities that it may not have.

This is known as dealer’s or trader’s talk, which by long practice in commerce has
been tolerated and deemed not to affect validity of contract.

Exception: If the party commits act of malice and/or bad faith and prevents
verification or discovery of the truth by the other party.

OPPORTUNITY TO KNOW PRINCIPLE: Illustrate -

 Where the means of knowledge are available to both parties, one cannot be
claimed to have been deceived, and cannot thus annul the contract on grounds
of false represenation and/or exaggerations. (Sanga v. Zaballero, 59 Phil. 101)

 Where a buyer bought land based on the representations of its seller and has
visited the land and has the chance to examine it himself cannot later avoid
the contract based on false exaggerations. (Azarraga v. Gay, 52 Phil. 599)

 Or even if buyer has did not visit the land but had the opportunity to do so if
he so desired cannot annul the contract if the first class land turns out to be
only second class. (Puato v. Mendoza, 64 Phil. 457)

CAVEAT EMPTOR - Principle of “let the buyer beware”. The buyer has the duty to
be careful and exercise prudence and diligence in his dealings for his own
protection.

Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an
expert and the other party has relied on the former's special knowledge.

EXPRESSION OF OPINION :

1.) By an ORDINARY PERSON – is a mere opinion that does not signify fraud.

2.) By an EXPERT PERSON – is like a statement of fact, and if falsely made

to mislead the other party, will give rise to annulment of contract.

But if the expert was employed by the party who was misled, he cannot
ask for annulment as he is bound by the acts of his employee.

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual.

GEN. RULE: Misrepresentation by a third person inducing party to enter into a

contract does not vitiate consent, and will not annul the contract.

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I. Action for damages against the third person may however be filed by the party
injured.

GROUNDS FOR EXCEPTION:

1. If one of the parties is in collusion with the third person, or knows of the
fraud of the latter and he is benefitted as a result thereof. Both the party and the
third person in this case will be solidarily liable to the innocent party.

2. Even without connivance with the third person who misrepresented by

any of the parties, if this misrepresentation results to substantial mistake on the
part of the parties to the contract, the consent is vitiated by mistake (not by
fraud). The contract may be annulled by any or both of the parties.

Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute
error.

Note: If error is substantial and serious, it may vitiate consent, making the
contract voidable.

FRAUD THAT MAKES CONTRACT VOIDABLE: (also stated in Art. 1338 discussion)
1.) It must be serious, not mere exaggerations of trade;
2.) It should not be mutual; if in pari-delicto, neither party can seek
annulment of contract which will be treated valid by the court.
3.) It must be the determining cause of the contract (dolo causante).

INCIDENTAL FRAUD – when fraud is not the determining cause of the contract,
but merely incidental, person guilty is liable for damages; but contract remains
valid and will not be annulled.

Art. 1344. In order that fraud may make a contract voidable, it should be serious and
should not have been employed by both contracting parties. Incidental fraud only
obliges the person employing it to pay damages.

 If a 3rd person should commit violence or intimidation on 1 of the contracting

parties and this vitiates the contracting party‘s consent, then the contract may
be annulled (Article 1336).
 By analogy, if a 3rd person should exert undue influence on 1 of the contracting
parties and this vitiates the consent of the contracting party, then the contract
may be annulled.
 However, if the 3rd party commits fraud, damages is the only remedy unless
the fraud committed by the 3rd person has created a mutual substantial
mistake (Article 1342).

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Art. 1345. Simulation of a contract may be absolute or relative. The former takes place
when the parties do not intend to be bound at all; the latter, when the parties conceal
their true agreement.

Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation,

when it does not prejudice a third person and is not intended for any purpose contrary
to law, morals, good customs, public order or public policy binds the parties to their
real agreement.

CONCEPT OF SIMULATION OF CONTRACT – is the deliberate act of making a

fictitious agreement by the parties for the purpose of deception, when in fact the
juridical act that appears on the contract does not really exist or is different from
what is actually agreed upon. It involves a defect in the declaration of will by the
parties.

TWO KINDS OR CLASSES OF SIMULATION:

1.) ABSOLUTE SIMULATION (simulados) – the parties do not have any intention
to be bound by the contract. There is a color of a contract but its not really
intended to have any legal effect between the parties.

Example: Contract of sale of a fishpond. It is made to appear that there was a price paid when
in reality, there was none, as the sale and/or consideration was fictitious. (Vda. De Catalina v.
Heirs of Catalina Roque, 74 SCRA 83)

EFFECTS:
a.) Contract is VOID
Reason: it lacks element of true consent; generally fraudulent

b.) It is as if there was no transfer of property & title remains with transferor
or seller
c.) Arts. 1411 & 1412 may be applied depending on the circumstances of
absolute simulation.

2.) RELATIVE SIMULATION (dissimulados) – the parties conceal their real

agreement (hidden) under the guise of another contract (ostensible).

Example: Rene executed a Deed of Sale of his condo unit to his daughter, disguising their true
agreement which is actually a Donation.

EFFECTS: Contract may be VOID or VALID.

a.) VOID if it is: (a) prejudicial to 3rd persons; or (b) contrary to law,
morals, good customs, public order or public policy.

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 b.) VALID if – (a) it does not prejudice any one; (b) it does not have an
illicit purpose and not contrary to law, morals, good customs, public
order or public policy.

Q. Can the owner-simulator recover whatever is given under the fictitious or simulated
contract?

A. It depends.

o If the absolutely simulated contract does not have any illegal purpose, the
interested party may prove the simulation to recover what has been given
under the simulated contract.

o If the contract was intended for an illegal purpose, the contract is void and
the parties have no cause of action against each other. Articles 1411 and/or
1412 may be applied.

Q. What is the right of a third person prejudiced by the simulation of contract?

A. A third person prejudiced by a fraudulent simulated contract may attack the
nullity of the contract and file an action for its rescission or annulment.

If the third person is in bad faith or knew of the simulation, he can have no better
right than the person from whom he had acquired title.

If the third person is in good faith, such as when he acquired the property subject
of the simulated contract, this third person will be protected by law. The apparent
contract which he relied upon shall be deemed as the real contract.

ILLUSTRATE: X intends to avoid the impending attachment of his land by creditors

for his failure to pay his P5M debt. X then transferred his 5-ha. land to his cousin
Y thru a simulated or fictitious Deed of Sale. X and Y were in collusion. There was
no money paid for the sale. Later, without X’s knowledge, cousin Y sold this 5-
ha.land to Z, an innocent third party buyer. Q. What is the status of the sale of
Y to Z?

Answer: The law will consider the apparent contract of sale between Y and Z as a
true contract. In effect, the sale to the good faith buyer Z will be sustained as
valid and binding. This serves as a penalty for the fraud or deception by the
simulators X & Y.

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ART. 1348. Impossible things or services cannot be the object of
contracts.

Q. What constitutes impossible things or services?

IMPOSSIBLE THINGS:
a.) Not susceptible of existing;
b.) Outside the commerce of men

IMPOSSIBLE SERVICES:
a.) Acts beyond the ordinary power of man.

Q. What are the DIFFERENT KINDS OF IMPOSSIBILITY WHICH MAY OR MAY NOT
NULLIFY CONTRACTS?

1. ABSOLUTE OR OBJECTIVE -
 When nobody can perform it
 Nullifies a contract
 Determined objectively

2. RELATIVE OR SUBJECTIVE –
 When due to special condition or qualifications of the debtor it cannot
be performed.
 If temporary does not nullify a contract; nullifies when permanent

PARTIAL IMPOSSIBILITY; LEGAL EFFECTS

1. If the thing or service is partly possible and partly impossible, the effect will
depend whether it is divisible or indivisible.

2. If it is INDIVISIBLE, by its nature or intention of the parties, there is no

contract for it was either for the whole obligation or none at all.

3. If it is DIVISIBLE, then the contract is valid as to that which is possible to

perform.

LIABILITY FOR DAMAGES

Q. Is the debtor/obligor liable for damages when the object of the

contract is impossible?

A. It depends on the good faith or bad faith of the obligor or debtor.

As a general rule when the object of the contract is impossible, the contract if void
or inexistent. No juridical relation or obligation is created.

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1.) Thus, if the obligor/debtor is ignorant of the impossibility or is
unavoidable, he is not liable for damages that may be suffered by the
creditor.
2.) Also, if both parties have knowledge of the impossibility, no liability for
damages may be collected from obligor/debtor.
3.) If the obligor/debtor knew of the impossibility, or could have known it, he
may be liable for the losses incurred by creditor who relied on the contract,
but not for all kinds of damages arising from the non-performance of the
contract.

DIFFICULTY OF PERFORMANCE v. IMPOSSIBILITY OF PERFORMANCE

1. Mere inconvenience, unexpected impediments or increased expenses is not

enough to relieve the debtor of the obligation.

Equity cannot relieve from bad bargains simply because it is unfavourable

to the debtor or obligor. Debtor who does not perform in such cases must
be held liable for damages.

2. But if the obstacle to the performance of the object of the contract is so

great that for the obligor to overcome it, he must do a sacrifice that is
absolutely disproportionate to the prestation of the contract, taking into
account the ethical and economic considerations intended by the parties in
good faith, then, this must be considered impossible.

3. It is contrary to law and public policy to force the performance of a contract

that is harmful to life, liberty and property.

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