HARD NOTES

THE SAN PEDRO LECTURES

Obligations & Contracts – Full Transcript
1F 2014-2015

Edited & Compiled by:

T.K. Banta | K.P. Ongtenco

Ah | Abellar | Abesamis | Alarcon| Albano | Baldovino | Banta | Bello | Bugay | Castro | Cualoping | Cuizon | Custodio | De Luis |
Esguerra | Gandingco | Garcia | Go | Guiang | Lim | Luzano | Mangaya | Mendoza, L. | Mendoza, N. | Nierra | Ong | Ongtenco |
Penilla | Reyes, E. | Reyes, R. | Trias | Uy | Villamor | Wenceslao
 TABLE OF CONTENTS

Introduction, Default Rules 1 Payment to Creditor 84

Art. 1256 2 Legal Tender & Valid Tender 85
Causes of Breach 12 Application of Payments 90
Requisites of Default 17 Dacion en Pago 91
Reciprocal Obligations 23 Art. 1250 94
Mora Accipiendi 24 Cession 94
Compensatio Morae 26 Dacion v. Cession 95
Art. 1174 27 Art. 1256-1261 95
Effects of a Fortuitous Event 31 Requisites of Consignation 98
Art. 1177 35 Art. 1261-1269 101
Obligations 36 Rebus sic stantibus 102
Arts. 1187-1189 41 Arts. 1270-1290 103
Period v. Condition 42 Novation 111
Classification of Conditions 44 Subrogation 112
Arts. 1190-1192 47 Implied Novation 113
Requisites of a Term 59 Contracts 116
Art. 1197 60 Stages of a Contract 116
Art. 1198 61 Elements of a Contract 118
Kinds of Obligations 63 Principles of a Contract 118
Joint and Solidary Obligations 64 Art. 1313 123
Active and Passive Solidarity 69 Art. 1314 123
Arts. 1223-1225 71 MIDTERMS
Arts. 1226-1230 72 Complete Offer 131
Kinds of Penalty 73 Option 131
Payment 75 Right of First Refusal 132
Quantum Meruit 79 Consent 133
Art. 1340 138
Art. 1341 139
Art. 1346 139
Mortgage and Ownership 140
Art. 1347-1350 141
Art. 1354-135 145
Reformation 147
Ar. 1358 147
Art. 1378 149
Voidable Contracts 154
Unenforceable Contracts 157
Void Contracts 163
Estoppel 169
Laches 170
Trust 171
Art. 1454 172
Art. 1449 173
Art. 1451 173
Prescription 175
Art. 1112 175
Art. 1113 176
Art. 1129 177
Prescription of Action 178
Art. 1144 179
Art. 1145 179
Art. 1149 179
Bonus Discussion 180
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OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
TUESDAY,'04'NOVEMBER'2014'
'

'

INTRODUCTION"
What'are'you'supposed'to'learn'here?'You’re'supposed'to'learn'the'provisions'of'
the'law—'obligations'and'contract.'At'the'end'of'the'semester,'what'you'have'to'
learn' should' be' the' tools' of' analysis.' The' laws' may' change' but' the' thought'
process' would' be' how' you' understand' the' law,' how' you' look' at' it.' That' is'
something' that' you' will' hopefully' acquire' during' the' semester.' Of' course' you'
will' you' know' when' payment' will' be' made?' And' when' will' delivery' be'
made?' The' answer' [is' this]:' it' will' be' made' simultaneously.' If' there' is' no'
speculation,' then' there' will' be' payment' and' delivery' upon' execution' of' the'
contract.' The' exchange' of' the' price' and' the' car' will' happen' simultaneously,'
[because]'that'is'the'default'rule.'
'

'
should'memorize,'but'you'should'memorize'important'matters.'It'will'be'up'to' '

ILLUSTRATION"3:"WARRANTY"AGAINST"EVICTION"
you'what'the'important'matters'are.'
What'if,'let’s'say,'somehow,'the'buyer'is'subsequently'dispossessed'of'the'car'
'
because'it'turns'out'that'the'car'is'owned'by'somebody'else?'What'rule'will'
Let’s'start'with'the'subject'—'Obligations'and'Contracts.'
now' govern?'The' law' will' provide,' again,' by' default.' There' is' a' warranty'
'
against'eviction.'So'in'this'manner,'you'will'see'that'the'moment'the'parties'
DEFAULT"RULES""
enter' into' a' specific' legal' relationship,' a' set' of' background' rules' will'
For' a' better' perspective' of' this' course,' we' should' first' discuss' how' you' should'
automatically'apply.''
look'at'the'law:'the"law"is"basically"a"set"of"background,"rules"or"what"we"call" '

default"rules.' '
' [You'can'see'that]''if'you'understand'the'law'as'a'set'of'default'rules,'then'there'
What'do'I'mean'by'that?'Have'you'taken'up'Family'Law?'Well,'let’s'say'if'you' must'be'an'opt'out.'So'one'can'opt'out'of'the'default'rules.'[Let’s'go'back]'to'our'
enter'into'some'legal'relation,'a'set'of'rules'will'automatically'apply,'even'if'the' [earlier'examples]:'
parties'do'not'agree'on'this'terms.' 1. For' the' ACP:' how' do' you' opt' out?' You' will' have' a' pre2nup;' it' will'
' provide'complete'separation.'The'law'will'provide'[a'way]'for'you'to'
"
opt'out.''
ILLUSTRATION"1:"ACP"IN"MARRIAGE"
2. For' my' example' about' sales:' the' parties' can' stipulate' payment' first,'
[For]'example,'you'get'married.'Two'persons'may'get'married'immediately.'
and'then'delivery'after.'That'will'be'a'contrary'agreement;'contrary'to'
Without'you'knowing'about'the'specifics'of'the'marriage,'I'ask'you'—'what'is'
the'default'rule.'''
the'property'relation'of'the'couple?'Well,'you'should'be'able'to'answer'with'
'
the' default' rule' —' Absolute' Community' of' Property.' [Also,]' premise' your'
However,"there"are"legal"provisions"[whereby"it"is]"not"possible"for"you"to"opt"
answer'on'the'fact'that'the'reader'does'not'know'anything,'[which'means'that'
out."For'example,'can'you'sell'land'to'a'foreigner?'No,'because'the'law'says'that'
you]'do'not'say'ACP;'say'Absolute'Community'of'Property.'
' a'foreigner'cannot'own'land.'Can'you'have'an'agreement'in'your'pre2nup'saying'
' that' the' wife' will' never' have' authority' over' the' children?' No,' because' that' is'
You'have'to'understand'the'law'as'a'set'of'background'rules.'If'parties'enter'into' contrary'to'law.'[You'see],'there'are'certain'rules'from'which'the'parties'cannot'
specific'transactions,'even'if'they'don’t'agree'on'the'terms,'there'will'be'a'set'of' opt'out.'It'is'not'possible'for'them'to'stipulate'otherwise'or'agree'otherwise."
rules'that'will'apply.' "
' "

' ILLUSTRATION"4:"FORECLOSURE"OF"MORTGAGE"
ILLUSTRATION"2:"SIMULTANEOUS"DELIVERY/PAYMENT" Let’s' say,' for' example,' [in]' a' mortgage:' let’s' say' you' owe' money' to' a' bank;'
For' example,' [you' have]' a' sales' contract.' You' enter' into' a' contract' of' sale.' you'secure'it'with'a'mortgage.'You'gave'—'let’s'say'—'real'property'by'way'
Normally,'for'there'to'be'a'contract'of'sale,'the'parties'only'have'to'agree'on' of' mortgage' and' in' case' you' default,' the' bank' can' foreclose' your' mortgage.'
two'things'—'the'object.'Let’s'say,'[in'this'case]'it’s'a'car'with'plate'number' When'you'have'a'mortgage,'the'law'also'provides.'Can"there"be"a"stipulation"
1234.' [You' have' the]' object' —' Car' 1234,' and' a' price' of' PhP' 5,' 000.' The' in" the" mortgage" contract" that" the" bank" can" immediately" appropriate"
moment'they'agree'on'the'object'and'the'cost,'you'will'have'a'contract'of'sale.' ownership" of" the" property" upon" default" of" the" borrower?' That' cannot' be'
But' then' you' will' ask,' how' will' you' know' the' rules' that' govern' then?' How' done'because'there'is'a'law'that'there'can'be'no'automatic'appropriation'of'a'

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mortgage'property'upon'default.'So'there'are'instances'when'the'default'rule' have'to'offer'solutions.'That'is'an'example'of'a'solution'to'a'problem'being'posed'
is' mandatory.' There' can' be' no' opt' out.' But' nevertheless,' the' talent' or' the' by'a'client.'
creativity'of'a'lawyer'will'kick'in'in'those'instances.' '
So,'again,'remember,'the'law'is'a'set'of'default'rules.'So'you'will'always'have'to'
"

'
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remember' the' default' rule.' Do' not' go' to' the' exception.' Whenever' you' see' the'
ILLUSTRATION"5:"SELLING"LAND"TO"A"FOREIGNER"
problem,'go'through'the'hoops.'First:'what'is'the'general'rule?'Then,'[second],'go'
Let’s' take' the' example' a' while' ago.' Can" you" sell" land" to" a" foreigner?' The'
to'the'exception.'You'don’t'go'immediately'to'the'exception.'
answer' is' no.' But" can" it" be" possible" for" a" foreigner" to" be" a" beneficiary" of"
'
land?'The'answer'is'yes.'How'do'you'do'it?'You'layer.'What'is'layer?''
ART."1256"—"WHAT"IS"AN"OBLIGATION?"
'
Let’s'now'go'to'the'first'article,'what"is"an"obligation?"
Let’s'say'you'have'a'company.'Corporation'A,'B,'and'C.'Under'the'law,'only'
'
Filipino' nationals' can' own' land.' So' you' need' ownership' of' land.' This' '

corporation' should' be' a' Filipino' corporation' or' [owned' by]' a' Filipino' The'law'defines'and'obligation'as'a'juridical'necessity'to"give,'to"do,'or'not"to"
national.'For'that'[to'happen],'the'[Filipino'nationals'should'own]'60%.'So:' do.'
'

' '
LAND' !' owned' by' Corporation' A' !' in' turn,' owned' [60%]' by' That' is' the' legal' provision.' As' I' always' tell' my' class,' if' you' look' at' that' legal'
Corporation'B,'and'[40%]'by'X,'a'foreigner' provision,' it’s' not' good' English.' Why' is' it' not' good' English?' [It’s]' because' it'
' defines'something,'which'does'not'give'the'parties'involved.'Who'will'do'what?'
CORPORATION" B' !' in' turn,' will' be' owned' again,' [60%]' by' Who'will'receive?'Who'will'not'receive?'Who'will'not'do?'It'just'says'that'it'is'a'
Corporation'C,'and'[40%]'again'by'X,'the'same'foreigner' juridical'necessity'to'give,'to'do,'or'not'to'do.''
' '
CORPORATION" C" !' finally,' owned' [60%]' by' an' individual' Filipino,' Jurisprudence' explains' an' obligation' as' a' juridical" relation:' juridical' relation'
and'then'[40%']'by'X' whereby'one'party'called'the'creditor,'can'demand'from'another'party,'called'the'
' debtor' the' performance' of' a' determinative' conduct' or' a' specific' act,' which' we'
If'you'look'at'this,'is'this'valid?'Yes.'This'corporation'is'considered'a'Filipino' will' call' a' prestation.' [And]' in' case' of' failure' by' the' debtor' to' perform' the'
corporation,'therefore,'it'can'own'land.'But'if'you'analyze'it,'it'is'not'actually' required'prestation,'the'creditor'will'have'corresponding'remedies.''
beneficiary/owned' completely' by' a' Filipino' up' to' 60%.' In' fact,' the' foreigner' '
has' more' interest' in' this' company.' How' do' know?' Because' [he]' has' direct'
'

Specifically,'the'remedies"of"a"creditor'against'a'defaulting'debtor'are'
40%.' [At' one' point],' X' is' owning' 64%.' [He’ll' have]' economic' benefit,' not' 1. Resolution'
control.' Economic' benefit' will' go' to' X' —' 64%.' Is" that" legal?" Yes;' it’s' an' opt' 2. Specific'Performance;'and'
out'from'the'mandatory'rule:'“a'foreigner'cannot'own'land.”'But'make'sure' 3. Damages'
that'the'[Filipino]'guy'in'the'end'will'be'credible;'credible,'as'in,'in'a'position' '

'
to'make'investments'together'with'X'to'acquire'the'property.'Otherwise,'you'
[Creditor'can'choose]'resolution'or'specific'performance,'[which]'may'be'with'or'
will' have' a' problem.' What’s' that' problem?' [It’s]' the' violation' of' the' Anti?
without'damages,'or'[he'or'she]'can'just'have'a'claim'for'damages.'
Dummy' Law.' It' will' be' just' like' the' issue' being' raised' against' Binay,' Tiu'
'
being'a'dummy.'But'that'is'not'similar'to'this'one.'' '

' Again,'an"obligation"is"a"juridical"relation"whereby"the"creditor"can"demand"
It'is'not'a'circumvention'of'the'law,'by'the'way.'It'is'how'you'manipulate'the' from"the"debtor"the"performance"of"a"specific"prestation.''
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law'without'running'afoul'with'legal'restrictions.' '
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' The'prestation'may'be:'
So,'in'the'end,'hopefully,'you'will'learn'to'do'these'things'after'your'four'years,' 1. To'give;'
because'if'you'will'just'learn'the'answer'to'what'I'asked'you'—'“Can'a'foreigner' 2. To'do;'or'
own'land?”'[No]'—'then'your'client'is'a'foreigner,'[what'will'you'do?]'You'will' 3. Not'to'do'
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[This' means]' that' [i]n' the' case' of' default' —' meaning,' failure" by" the" debtor" to" PRESTATION1'
perform"the"prestation'—'the'creditor'can'have'certain'judicial'or'legal'reliefs.'I' Of'course,'[another'element]'is'the'prestation,'or'the'object.'The'prestation,'or'the'
just'mentioned'to'you'the'default'legal'remedies'that'the'creditor'gets'against'the' object' is' the' (1)' giving,' the' (2)' doing,' or' the' (3)' not' doing.' Think' of' any'
defaulting' debtor.'The' remedies,' again' are:' (1)$ Resolution,' with' or' without' transaction'and'you'will'be'able'to'classify'them'[according'to'any'of'these'three].'
damages;' (2)$ specific' performance,' with' or' without' damages;' and' (3)' just' Let’s'discuss'some'examples:'
damages.' 1. Obligation"to"give"
' Examples:'SALE,'LEASE'
ELEMENTS"OF"AN"OBLIGATION" [In'a'contract'of'sale,'the]'seller'conveys'property,'and'buyer'pays'price.'
So' just' from' that' definition,' you' would' gather' the' elements' of' an' obligation.' [In'a'contract'of'lease,'the]'owner'allows'use'of'property,'so'there'is'a'
What'are'the'elements?'' temporary' transfer' of' possession.' At' the' same' time,' there' is' an'
' obligation'to'pay'the'rental'by'the'lessee.'
2. Obligation"to"do"
"

Elements"of"a"valid"obligation:'
1. Juridical'tie' Example:'PROFESSIONAL'SERVICES''
2. Creditor' You' want' to' be' lawyers,' so' just' like' prostitutes,' you' will' have' to' do'
3. Debtor' service' to' get' a' fee.' That' is' an' obligation' to' do.' Any' contract' for'
4. Prestation' professional'service,'or'any'service'for'that'matter,'will'be'an'obligation'
'
to'do.''
'
3. Obligation"not"to"do"
JURIDICAL'TIE'
In'certain'contracts,'you'will'have'undertakings,'or'negative'covenants.'
You'will'see'there'the'juridical'relation'—'that'is'what'you'call'the'juridical"tie.'
Undertakings'may,'for'example,'[be'part'of]'a'loan'contract'where'there'
What'is'the'juridical'tie?''
will' be' a' restriction:' that' during' the' subsistence' of' the' loan,' the'
'
' borrower' cannot' encumber' —' meaning,' mortgage,' etc.' —' any' of' the'
The'juridical'tie'is'that'element"of"the"obligation"that"makes"it"mandatory"for" borrower’s'assets.'That'is'an'obligation'not$to$do.'Another'thing:'for'the'
the"debtor"to"perform"the"required"prestation." guys'here,'do'you'still'sign'a'waiver'when'you'enroll?'You'sign'not'to'
"

' join' any' hoodlum' organizations?' Yes,' that' is' an' example' of' an'
[An]' example' [of' this]' would' be' a' contract.' That’s' the' basis' for' the' debtor’s' obligation'not'to'do.'
obligation'to'perform'what'is'mandated'by'the'contract.'Or'a'law:'let’s'say,'a'law' '
mandating'taxpayers'to'pay'their'income'taxes'and'file'their'return.'That'will'be' How$about$marriage?$What$is$that$obligation?$It$is$an$obligation$to$do.$But$then,$it’s$also$
another'juridical'tie.'But'the'juridical'tie'will'refer'to'the'sources'of'an'obligation' an$obligation$to$give,$and$not$to$do.$It’s$a$lot$of$obligations,$actually.$$
and' there' are' how' many' sources?' There' are' five' sources' and' these' will' be' the' '
juridical'tie.'' The'moment'you'have'the'concurrence'of'all'these'elements,'then'you'will'have'
' an'obligation.''
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Five"sources"of"obligation:'
REQUISITES"OF"AN"OBLIGATION"
1. Contract'
Now,'let’s'go'through'the'requisites.'Let’s'take'first'the'parties,'the'creditor'and'
2. Law'
the'debtor.'What"are"the"requirements"for"the"parties"to"an"obligation?'
3. Quasi?contract'
'
4. Crime'
The' requirement' is' that' the'parties' —' the' debtor' and' the' creditor' —' should"be"
5. Quasi?delict'
'
determinate"or"at"least"determinable.'Why?'So'you'know'who'has'an'obligation'
' and'who'can'demand'performance'of'the'obligation.'
CREDITOR'AND'DEBTOR' '
Then'you'have'the'two'other'elements:'(1)'the'creditor,'and'(2)'the'debtor.'' "

ILLUSTRATION"6:"LOAN"CONTRACT"
'
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1 '' This' was' discussed' under' DETERMINATE/DETERMINABLE$ parties/prestations' but' for'
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Let’s' say' [you' enter' into]' a' contract.' Let’s' say,' you' have' a' contract' of' loan.'
You' will' have' two' legal' parties:' the' borrower,' and' the' lender.' Let’s' say' the'
bank'is'the'lending'to'someone.'Just'by'looking'at'the'loan'contract,'you'will'
identify'the'parties.'There'will'be'the:'
a. Bank,'as'creditor'
required'threshold'for'payment'of'taxes'will'be'obliged'to'pay'them'and'file'
the' corresponding' returns.' This' is' what' is' meant' by' a' party' to' an' obligation'
being'determinable,'at'the'very'least.'Based'on'the'standards'of'the'law,'you'
will'know'who'will'be'liable.'''
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'
b. Lender' Now,'with'respect'to'prestation,'just'like'the'parties,'it'should'be'determinate'or'
c. Name'of'the'borrower' at' least' determinable,' based' on' the' source' of' the' obligation.' If' there' is' any'
'

' ambiguity' or' there' is' difficulty' in' identifying' any' of' these' three' —' the' creditor,'
the' debtor' and' the' prestation' —' most' likely,' you" will" not" have" an" obligation,"
"

ILLUSTRATION"7:"CONTRACT"OF"SALE"AS"A"RECIPROCAL"OBLIGATION"
[Now],' you' have' a' contract' of' sale.' [There' is]' somebody' selling' a' car' for' precisely"because"you"lack"one"element.""
example.'You'will'see'[in'the'contract]'the'name'of'the'registered'owner,'the' "
seller,' and' the' buyer.' You' then' have' your' parties.' Of' course,' if' you' have' a' PRESTATION'MUST'BE'PHYSICALLY'AND'JURIDICALLY'POSSIBLE'
sale,' the' buyer' and' the' seller' are' technically" creditor" and" debtor" to" each" The' prestation,' aside' from' being' determinate' or' determinable,' must' be'
other.'The'seller'is'creditor'with'respect'to'the'payment'of'the'price,'and'the' physically'and'juridically/legally'possible.'If'it'is'legally'or'physically'impossible,'
seller'is'the'one'entitled'to'demand'payment.'On'the'other'hand,'the'buyer'is' then,'you'do'not'have'a'valid'prestation.'What'do'I'mean'by'this?'
a' creditor' with' respect' to' the' conveyance' of' the' property.' The' buyer' can' '
"

demand'conveyance'because'a'sale'is'a'bilateral"contract.'' ILLUSTRATION"9:"PHYSICALLY"AND"JURIDICALLY"POSSIBLE"PRESTATION"
[For'example],'you'have'a'contract'for'P100,000.'X'will'pay'P100,000'to'Y'if'Y'
'

'
Immediately,' you' can' identify' the' parties' in' the' contract:' you' have' a' seller' and' will' assassinate' a' politician.' Do' you' have' a' valid' contract?' No.' There’s' no'
you'have'a'buyer.'The'seller'is'obliged'to'convey'the'property'and'the'buyer'is' valid'contract.'There'is'no'obligation'because'it'is'legally"impossible.'
obliged'to'pay'the'price.'So:' '
• With'respect'to'the'property:'seller'='debtor' Now,' for' instance,' the' contract' provided' that' the' owner' would' pay' the'
• With'respect'to'the'payment:'buyer'='debtor' contract' P1M' if' contractor' will' demolish' the' building' of' owner' using' the'
' death'ray.'Again,'this'is'not'valid.'That’s'physically"impossible'because'there'
DETERMINATE/DETERMINABLE' is' no' such' thing' as' a' death' ray' right' now.' If' you' jump' from' the' rooftop' of'
And'then,'you'have'the'prestation,'which'should'be'determinate,'or'at'the'very' Powerplant' [and' survive]' without' any' gadget' —' is' that' physically'
least,' determinable.' What" do" I" mean" by" determinable?' There' are' certain' impossible?'Yes,'so'again,'there'will'be'no'obligation'in'that'case.''
'

obligations'wherein'you'will'not'immediately'know'who'parties'are.'' '
' PRESTATION'MUST'HAVE'MONETARY'VALUE'
Also,' prestations'somehow'should'have'a'monetary'value.'Why'is'there'a'need'
"

ILLUSTRATION"8:"ON"WHAT"IS"DETERMINABLE"
8."A"—"PROMISSORY"NOTE"PAYABLE"TO"BEARER"" for'a'monetary'value'for'the'prestation?'It'is'because'in'case'of'breach,'that'will'
For' example,' [you' have]' a' promissory' note' payable' to' bearer.' Immediately,' be'the'measure'of'damages.'Always'remember'the'remedies'of'the'creditor.'If'the'
you'will'not'know'who'will'be'entitled'to'payment.'You'will'know'only'the' debtor' defaults' or' breaches' the' obligation,' the' creditor' can' demand' (1)' specific'
one' entitled' to' payment' on" the" due" date,' that' is,' the' person' holding' the' performance,'(2)'resolution'with'or'without'damages,'or'(3)'just'damages.'
promissory'note'on'the'due'day'and'making'the'demand'for'payment.'On'the' '
face'of'the'document,'you'will'not'see'any'name'of'the'creditor,'but'based'on' NATURAL"OBLIGATION'
the'type'of'document,'you'will'know'who'it'will'be:'the'one'holding'it'when' [Always]' remember' the' definition' of' the' obligation.' Also,' [take' note' that]' the'
the'due'date'comes.' obligation' we' have' been' referring' to' is' a' civil' obligation.' This' is' different' from'
' what'you'will'learn'later'on'as'a'natural'obligation.''
8.B"—"LAW"IMPOSING"A"TAX' '
Or,' let’s' say' there' is' a' law' imposing' the' payment' of' income' taxes' or' filing' What"is"a"natural"obligation?"In'a'natural'obligation,'you'don’t'have'the'juridical'
corresponding' return' every' April' 15.' Just' by' reading' the' law,' you' will' not' tie'or'that'element'of'the'obligation'that'makes'it'mandatory'or'compulsory'for'
know' who' the' obligor' will' be.' [But' you' know' that' anybody' who]' meets' the' the'debtor'to'perform'the'prestation.'What'is'an'example'of'a'natural'obligation?'
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" resulting' to' physical' injuries.' That' claim' is' based" on" a" crime.' At' the' same'
time,'it'can'be'based"on"a"contract.'What'contract?'Contract'of'Carriage.'Or'it'
"

ILLUSTRATION"10:""BEYOND"THE"PRESCRIPTIVE"PERIOD""
Let’s'say,'you'owe'somebody'P100,000'based'on'a'promissory'note.'[Upon'the' can'be'based'on'tort'meaning,'no'crime'but'quasifdelict"or"negligence.''
arrival' of]' the' due' date,' and' upon' demand' by' the' creditor,' you' did' not' pay' '
the'amount'due'on'the'note.'If'you'have'that'situation,'the'creditor'will'have' You’ll' see' that' just' in' that' instance,' you' can' identify' three' sources' of' an'
10'years'to'enforce'payment'[because]'that’s'the'prescriptive'period.'Let’s'say,' obligation.'As'long'as'we'can'premise'a'cause'of'action'based'on'any'source'
15' years' lapsed' without' anything' being' demanded' by' the' creditor' —' what' of'obligation'then'you'have'a'valid'or'defensible'action.'Remember'that'one'
happens'to'the'obligation?'[From'being'a]'prescribed'obligation,'it"becomes"a" of' the' things' you' have' to' identify' when' filing' a' complaint' or' a' petition' in'
natural"obligation.'There'is'no'more'juridical'tie.'' court'will'be'the'basis'of'your'claim'[or'the]'source'of'the'obligation.'''
' '
However,'later'on'you'will'learn'that'if'the'debtor,'knowing'full'well'that'the' 11.B"—"TELEGRAM"
obligation' already' prescribed,' pays' the' obligation' nevertheless,' the' debtor' There' also' can' be' instance' where' you' can' have' different' sources' of' an'
will' not' be' entitled' to' recover' the' payment,' even' if' there' is' no' compelling' obligation'in'a'single'transaction.'
element'for'the'payment.''' '
'
A'long,'long'time'ago,'there'was'a'thing'called'a'telegram.'There'would'be'a'
'
sender' and' there' would' be' a' recipient.' In' the' middle,' you' have' the' service'
SOURCES"OF"AN"OBLIGATION"
provide'—'the'telecomm'company.'The'sender'will'normally'send'a'message'
As'I'said,'the'sources'of'an'obligation'are'what'constitute'the'juridical'tie.'There'
through'the'service'provider.'The'service'provider'will'have'two'terminals'or'
are' five' —' (1)' contracts,' (2)' law,' (3)' quasi?contracts,' (4)' delicts,' and' (5)' quasi?
offices.' Once' the' sender' sends' his' message,' one' guy' will' type' something'
delicts' —remember' them.' Those' are' the' only' sources' of' an' obligation.' If'
called'the'telex,'which'will'appear'to'the'next'guy,'who'then'delivers'it'to'the'
something' called' an' obligation' is' not' founded' on' any' one' of' them,' then' you'
recipient.' That’s' how' ancient' this' technology' is.' You' see,' you' have' here' the'
don’t'have'a'single'obligation.'The'enumeration"is"exclusive;'there'are'no'other'
contracting' parties' —' the' recipient' and' the' sender.' There' is' a' contract' for'
sources' of' an' obligation.' But' if' you' analyze' it,' the' sources' really' can' be'
services.' For' a' fee,' the' service' provider' renders' a' service' (sending' the'
categorized' into' two' only' —' (1)$contracts,' and' the' (2)$law' —' because' the' other'
message).' What' happened' in' this' case?' Sender' sent' a' message' through' the'
three'are'merely'governed'in'our'legal'system.'Obligations'arising'from'delicts,'
service' provider.' The' message' was' rightfully' encoded,' but' there' was' a'
quasi?delicts' and' quasi?contracts' are' merely' governed' by' the' relevant' legal'
running' joke' between' the' two' guys' manning' the' terminals,' so' they' added'
provisions.'You'will'find'them'generally'in'the'Civil'Code'and'the'Revised'Penal'
some' [indecent' words]' after' thee' message.' Unfortunately,' the' additional'
Code.' These' are' laws.' Contracts' as' a' source' will' be' the' private' transaction' of'
words' were' also' delivered' to' the' recipient.' When' the' recipient' sued' the'
parties.'
service' provider,' the' Supreme' Court' said' the' provider' was' liable' based' on'
'
two'things:'
DIFFERENT'SOURCES'OF'OBLIGATION'BASED'ON'A'SINGLE'EVENT'
1. Negligence'(quasi?delict),'and;'
Later'on'you'will'learn'that'if'an'accused'is'convicted'and'during'the'pendency'
2. Contract'(breach)'
of' the' appeal' he' dies,' all' obligations' of' that' accused,' whether' criminal' or' civil,'
Based' on' their' ruling,' we' can' see' that' the' case' is' an' example' of' one'
will' be' extinguished.' There’s' a' conviction' and' there' is' an' appeal.' When' I' say'
transaction'involving'two'sources'of'obligation.'Of'course'the'Supreme'Court'
civil,' we' are' referring' to' civil' obligations' arising' exclusively' from' the' crime.'
was' wrong' here.' The' claim' of' the' recipient' should' have' been' based' only' on'
However,'notwithstanding'the'extinction'of'that'liability'based'on'the'crime,'it'is'
negligence,' not' contract.' Why?' It’s' because' the' recipient' was' not' a' party' to'
still'possible'for'a'claimant'against'the'accused'to'run'after'the'accused'based'on'
the' service' contract' (between' the' service' provider' and' the' sender).' Instead,'
another'source.'This'time'not'based'on'the'crime,'but'on'a'quasi?delict'or'a'tort.'
sender' could' have' sued' on' breach' of' contract,' while' recipient' sued' on' the'
'
" basis'of'quasi?delict'or'negligence.''
ILLUSTRATION"11:"CLAIMS"FROM"DIFFERENT"SOURCES" '

'
11.A"—"ACCIDENT"
ARISING'FROM'LAW'
For'example,'there'was'an'accident'early'this'morning.'There'were'two'school'
Let’s' go' to' obligations' arising' from' law.' Civil' Code' provides' that' obligations'
buses' that' collided,' so' there' were' injuries.' In' this' case,' a' passenger' in' that'
arising' from' law' are' not" presumed.' Only' those' expressly' determined' are'
vehicle' can' have' a' claim' against' the' driver' based' on' reckless' imprudence'

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'

demandable.'What'does'this'mean?'This'means'that'if'there'is'an'obligation'and' '
the' source' is' a' law,' the' obligation' will' be' demandable' from' the' relevant' debtor' ARISING'FROM'QUASI?DELICT'
only'if'that'debtor'falls'squarely'within'the'contemplation'of'the'law.' Quasi?delicts'are'based'on'torts'or'acts'of'negligence.'What’s'an'example'of'this?'
' In'the'early'part'of'the'Civil'Code,'you'may'have'encountered'the'provisions'on'
Human'Relations'—'articles'19'and'20,'the'abuse"of"rights"doctrine.'[Claims'filed'
"

ILLUSTRATION"12:""
12.A"—"TAX"STATUTES"
With' regard' to' tax' statutes,' for' example,' there' are' two' rules:' (1)' tax' statutes'
are' strictly"construed"against"the"taxing"authority,' while' (2)' tax' exemptions'
are'strictly"construed"against"the"taxpayer.''
' ARISING'FROM'QUASI?CONTRACT'
Those' two' rules' of' statutory' construction' with' respect' to' tax' laws' echo' the'
principle'behind'the'relevant'civil'law'provision.'There'is'a'strict'construction'
of'tax'statutes'against'the'taxing'authority'because'an'obligation'based'on'law'
is' not' presumed.' For' you' to' be' a' taxpayer' liable' under' the' tax' statute,' you'
have'to'be'the'one'contemplated'to'be'the'taxpayer.'This'means,'for'instance,'
on'the'basis'of'those'provisions]'are'examples'of'obligations'arising'from'tort'or'
quasi?delict.'From'what'I'gave'you'earlier,'a'common'carrier'operated'recklessly.'
That'will'give'rise'to'a'liability'based'on'tort'or'negligence.'
'
Later' on,' you' will' learn' a' provision' in' the' Civil' Code' [that' contemplates'
situations]' wherein' although' there' is' no' contract,' a' party' will' still' be' liable' for'
certain' unilateral' acts' done.' For' example,' have' you' heard' of' the' term' solutio$
indebiti'or'unjust'enrichment?'Those'are'examples'of'quasi?contract.''
'
"

that' before' you' become' a' person' obliged' to' pay' income' tax,' you' have' to' go'
through' the' classification' of' the' persons' listed' with' their' corresponding'
thresholds.'If'you'have'an'income'of'only'so'much,'you'may'not'be'liable.'Or'
if'it'is'not'income'at'all'—'simply'a'gift'—'then'you'may'not'be'liable,'too.'It'
may'be'subject'to'donor’s'tax'but'not'to'income'tax.'
'
ILLUSTRATION"13:""UNJUST"ENRICHMENT""
When' you' receive' an' overpayment,' you' have' the' obligation' to' return' the'
excess.'Or,'let’s'say,'during'a'calamity,'you'managed'the'property'of'another'
and' that' person' benefitted' from' your' management.' That' person' will' have'
some'liability'to'you.'Another'quasi?contract'is'some'form'of'reimbursement.''
'

'
On'the'other'hand,'whys'is'the'rule'with'respect'to'exemption'different?'It'is' For' our' purposes' now,' what' is' important' is' to' remember' that' there' are' two'
because' with' exemption,' there' is' already' an' obligation' and' the' taxpayer' is' general'sources:'laws'and'contracts.''
merely'claiming'an'exception.'This'means'that'the'burden'is'on'the'taxpayer' '
to'show'that'he'or'she'indeed,'has'the'benefit'of'the'exemption.'' BENEFITS'OF'CONTRACTS'
' I' think' compared' to' law,' contracts' are' something' that' you' have' to' prefer' and'
12.B"—"BUILDING"CODE"CASE" master' because' a' contract' is' so' malleable.' You' can' manipulate' a' contract' using'
Another'example'is'a'case'filed'against'mall'operators'a'few'years'back.'One' your' requirements.' Let’s' say,' you' want' to' opt' out' of' the' default' rules,' you' just'
of' the' Cayetanos' was' claiming' that' mall' operators' should' provide' free' stipulate'otherwise.'
parking'spaces'to'customers.'What'was'the'basis?'The'claim'was'based'on'a' • Example" 1:' in' a' contract' of' sale' (seller' selling' property' to' buyer' for'
provision' in' the' Building' Code.' In' the' Building' Code,' there' was' a' provision' P1M),' just' by' applying' the' default' rules,' I' can' tell' you' how' this'
saying'that'if'you'build'a'mall,'you'have'to'comply'with'a'certain'ratio.'You' transaction' will' go' down.' The' seller' has' to' convey' the' property' in'
have' X' number' of' parking' spaces' for' every' square' meter' of' the' mall.' That’s' exchange' for' the' P1M.' If' the' seller' wants' payment' in' dollars,' can' that'
the'provision.'' be' done?' Yes,' but' they' have' to' agree' on' that' mode' of' payment' —' in'
' dollars.'Also,'if'they'want'successive'performance'of'the'prestation,'like'
So' based' on' that' provision,' a' claim' was' made' that' there' should' be' free' delivery' of' the' property' first' before' payment' of' the' price,' they' also'
parking'in'malls.'The'Supreme'Court'said'that'it'could"not"be.'An'obligation' have' to' stipulate.' Otherwise,' the' default' rule' will' be' simultaneous'
based' on' law' should' not' be' presumed;' here,' the' law' only' mandated' the' performance.' Or' let’s' say' the' buyer' wants' warranties,' even' if' it' is' a'
provision'of'parking'spaces'based'on'a'certain'ratio,'but'the"law"did"not"say" secondhand'car.'They'can'stipulate'warranties.'Anything'that'happens'
that"it"should"be"for"free.'' —'any'defect'in'the'car'or'anything'wrong'that'will'happen'to'the'car'
' —' will' be' at' the' cost' and' expense' of' the' seller' as' long' as' it' does' not'
Besides'the'Supreme'Court'said,'if'you'allow'that,'it'would'amount'to'taking' exceed' P100,000.' Those' things' they' can' stipulate.' In' this' sense' then,' a'
of'a'property'without'just'compensation.' contract'is'better'for'parties'because'they'get'to'control'the'transaction.''
'

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• Example" 2:' Parties' can' also' stipulate' that' if' a' dispute' —' let’s' say,' a'
breach' —' happened' in' the' contract,' they' would' not' go' for' judicial'
resolution,'but'for'arbitration.'We'all'know'going'to'court'is'expensive,'
time'consuming,'and'unpredictable.'So,'that’s'one'of'the'things'you'can'
do:'shut'out'the'courts,'another'strenuous'factor.'The'only'limitation'on'
the'things'you'can'stipulate'is'that'it'should'not'contravene'the'law'or'
some'relevant'policy.''
• Example"3:'what'can'you'stipulate'in'a'prenup?'Can'you'stipulate'there'
that' for' every' year' of' togetherness,' the' husband' or' the' wife' will' get'
P1M' and' collect' upon' termination' of' the' marriage?' It' will' depend' on'
your'perspective,'and'on'what'the'law'or'policy'says.'On'one'hand,'you'
can' say' that' this' will' be' commercializing' the' institution' of' marriage.'
However,'I'can'easily'counter'that'by'saying'that'in'fact,'we'are'giving'
an' incentive' for' them' to' stay' together' because' you' get' X' amount' for'
staying' every' year.' That' means' that' even' if' the' person' is' a' battered'
husband/wife,' he' or' she' will' stay' because' of' the' X' amount' to' be'
awarded'upon'the'marriage’s'termination.'
' imbued'with'public'interest,'so'it'is'not'really'shielded'from'court'interference'
Anyway,' my' point' is' that' a' contract' is' a' good' platform' of' doing' transactions'
because' you' can' stipulate' your' own' rules.' You' can' think' of' anything' that' you'
can'place'there,'as'long'as'you'are'able'to'sustain'the'legality'of'your'stipulations.'''
' say'you'have'a'contract'for'legal'services,'and'you'have'the'fee'of'X'amount,'
In'fact,'when'you'do'contracts,'you'really'anticipate'contingencies,'and'take'note'
of'what'may'happen'in'the'future.'When'you'anticipate'contingencies,'of'course'
you' can' provide' only' for' the' major' ones,' and' not' all' concerns.' That' is' why' in'
certain'contracts,'you'have'specific'provisions.''
• Example" 1:' Let’s' take' a' loan' contract' for' example.' If' you’ve' seen' one'
loan' contract,' you’ve' seen' it' all.' You' see' one' thick' loan' contract,' and'
you'have'seen'basically'all'the'terms.'However,'every'so'often,'certain'
requirements'that'are'specific'only'to'the'concern'of'the'parties'will'be'
made' in' the' loan' contract.' Let’s' say' the' borrower' is' not' willing' to'
provide'any'security,'like'a'mortgage'or'a'pledge.'What'the'buyer'may'
do'is'make'sure'all'the'creditors'will'be'in'equal'standing'or'priority.'At'
that' instance,' you' have' the' negative' pledge' covenant.' The' borrower'
will' never' encounter' any' asset' during' the' time' that' the' loan' is'
outstanding.'
• Example"2:'You'may'have'confidentiality'undertakings.'Confidentiality'
undertakings'will'require'that'the'one'receiving'information'would'be'
bound' not' to' disclose' anything' involving' the' principal,' whether' it’s'
business,' personal,' or' otherwise.' Why' is' that' important?' Let’s' say'
you’re' working' for' somebody.' Normally,' it' is' not' just' work' you' will'
learn;' you' will' learn' personal' information' and' you’re' not' bound' to'
discuss' or' disclose' personal' information' with' other' parties' except' for'
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the' purpose' of' work.' So' if' it’s' not' about' work,' you' cannot' disclose'
anything.'That'is'a'confidentiality'undertaking.''
• Example"3:'Another'possible'stipulation'is'a'non?compete'clause.'What'
is'a'non?compete?'It'is'a'restriction'on'the'employee'not'to'work'for'a'
competitor' of' the' prior' employer' for' a' certain' period' after' the'
termination' of' the' contract.' Is' that' valid?' Yes,' as' long' as' there' are'
limitations'to'it.'These'are'the'things'that'may'bind'people'by'contract,'
not'exactly'by'law.''
'
All'these'simply'mean'that'if'you'want'an'indemnity,'you'can'provide'it'in'the'
contract.'If'you'want'penalties,'state'that'also'in'the'contract.'Clearly,'a'contract'is'
something'that'is'better'for'private'transactions'of'the'parties.'
'
WHEN'THE'COURTS'CAN'INTERVENE'
'
"
ILLUSTRATION"14:"CONTRACT"FOR"LEGAL"SERVICES"&"CLIENT"REFUSES"TO"PAY"
Let'me'illustrate'another'example.'In'jurisprudence,'a'fee'for'legal'services'is'
or' intervention.' This' means' that' if' you' have' a' contract' for' legal' services,' a'
court' can' somehow' modify' your' terms.' Remember,' the' general' rule' is' that'
contracts"are"normally"protected"from"intervention"by"the"courts.'Now,'let’s'
plus'premium.'Client'wants'to'collect'from'his'debtor'—'for'instance,'a'loan'
—' an' obligation' of' P100M.' So,' your' client' came' up' with' a' contract' for' legal'
services.'Now,'you'wanted'him'to'pay'you'P1M'as'acceptance'fee,'plus'time'
charges,' plus' the' premium' (10%' of' amount' actually' collected).' You' then' do'
your'job'and'send'the'debtor'a'demand'letter.'The'debtor,'upon'receiving'the'
demand'letter,'paid'the'P100M.'When'you'try'and'collect'from'your'client,'he'
refuses' to' pay' of' course,' because' he' would' think' that' P1M' x' time' charges' +'
P10M'is'too'much'for'the'service'(sending'the'demand'letter).''
'
'
Most' likely,' if' you' go' to' court,' the' court' will' reduce' the' fee' based' on' quantum$
meruit.' That’s' a' possibility.' Because' what' is' concerned' here' is' a' fee' for' legal'
services,' the' court' will' have' greater' leeway' in' tinkering' with' the' terms' of' the'
contract.'So'if'you’re'the'lawyer,'what'do'you'do'now?'You'have'to'protect'your'
interest.'You'have'to'collect'the'entire'amount.'So'how'do'you'do'it?'How'do'you'
shield'your'fee?'You'can'split'your'contract.'One'for'legal'services,'and'one'for'
consultancy'services,'for'instance.'We’re'assuming'that'this'lawyer'has'an'ability'
to' render' services' other' than' legal' services.' In' which' case,' you' are' hedging' at'
least' that' component' falling' under' consultancy' services.' Consultancy' services'
therefore,'will'be'protected.'Then,'the'court'can'just'tinker'with'the'contract'for'
legal' services.' Yes,' it' is' possible' for' the' court' to' lump' them' together,' but' it' is'
Prepared'by:' ' ' ' ' ' ' ' '
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'
better'to'have'two'contracts.'In'short,'take'out'your'fees'from'the'framework'of'
legal'services;'make'it'a'contract'for'something'else,'and'protect'your'fees.''
' buyer'wanted'to'sue'or'claim'damages'from'seller,'buyer'can'do'so.'Of'
OBLIGATIONS"TO"THE"PRESTATION'
Let’s'now'go'to'obligations'to'the'prestations.'Let’s'begin'with'an'example.''
' '
"
ILLUSTRATION"15:"BREACH"OF"CONTRACT"OF"SALE"
Let’s'say'you'have'a'contract'of'sale.'You'then'have'an'obligation'arising'from'
a'contract.'You'have'a'seller,'and'a'buyer.'The'buyer'is'to'deliver'a'car'under'
license' plate' AAA' 111' and' the' price' in' exchange' of' it' is' P1M.' What' kind' of'
obligation'do'they'have?'They'have'an'obligation'to"give.''Seller'is'obliged'to'
convey' the' car' to' B,' and' B' is' obliged' to' pay' P1M' to' S.' Now,' what' are' the'
remedies' in' case' of' breach?' If' the' buyer' pays' but' the' seller' does' not' convey'
the' car,' the' buyer' can' either' sue' for' specific' performance' and/or' claim' for'
damages.'The'basis'for'the'claim'for'damages'will'be'the'breach'—'the'failure'
to' deliver' the' car' or' convey' the' car' as' per' contract.' Alternatively,' the' buyer'
can' opt' for' resolution.' This' is' termed' as' rescission' but' for' our' purposes,' we'
will'call'it'resolution.2'Resolution'with'or'without'damages'will'go'down'this'
way:'buyer'will'now'opt'to'set'aside'the'contract,'and'demand'that'the'seller'
return' his' P1M' plus' damages' due' to' the' breach,' and' for' the' seller’s' use' of'
buyer’s'money'for'the'time'being.''
'
'
In' our' example,' the' one' in' breach' of' the' obligation' is' the' seller.' Buyer' will' be'
entitled'to'these'remedies,'but'buyer'can'pursue'only'one.'Now,'however,'this'is'
an' obligation' to' give,' and' there' are' additional' obligations' arising' from' this'
prestation'(obligation'to'give).''
' In' some' instances,' the' prestation' may' have' been' done,' but' it' was' wrongly'
OBLIGATIONS'IN'AN'OBLIGATION'TO'GIVE'
What"are"the"obligations"in"an"obligation"to"give?"
1. There"is"an"obligation"to"perform"the"prestation."
In' this' case,' seller' is' supposed' to' deliver' a' determinate' thing.' If' he'
delivers' a' Ford' or' Honda' Model' 2014,' of' gray' color,' then' that' is' a'
generic'thing.'What'we'have'in'this'case'is'a'specific'car,'with'a'specific'
plate'number.''
2. There"is"an"obligation"to"perform"in"good"faith.'
The' seller' must' perform' in' good' faith.' So,' let’s' say' the' seller' is'
supposed'to'deliver'the'car'tomorrow.'Today,'seller'asked'a'taong$grasa'
to'sleep'in'the'car'overnight'before'delivery'of'the'car'just'to'spite'the'
buyer' because' the' seller' thought' he' got' the' wrong' end' of' the' deal.'
Hence,' the' next' day,' the' car' smells' like' taong$ grasa.' Of' course' there' is'
'''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' '
2 '' Resolution' is' the' remedy' under' Article' 1191' of' the' Civil' Code.' Just' not' that' there' is' another'
provision'that'uses'the'same'term'in'the'Civil'Code,'which'really'means'rescission'and'it'is'what'
is'contemplated'in'Article'1381.'These'are'two'different'things.''
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performance,' right?' Will' there' be' liability?' Yes,' because' it' is'
performance' in' bad' faith.' The' seller' soiled' the' car' before' delivery.' If'
course' detailing' will' just' cost' you' a' few' thousands' but' if' buyer' is'
meticulous,'buyer'can'sue'seller'for'failure'to'perform'in'good'faith.'
Prior'to'delivery,'what'should'seller'do'with'the'car?'Seller'has'possession'of'the'
car'prior'to'conveyance.'Seller'has'an'obligation.'What'is'the'obligation?"The"law"
says" if" it" is" an" obligation" to" give" a" determinate" thing," the" obligor" or" debtor"
should"take"care"of"the"thing,"using"“diligence"of"a"good"father"of"a"family.”"'
'
OBLIGATIONS'AND'REMEDIES'IN'AN'OBLIGATION'TO'DO'
What'if'it'is'an'obligation'to'do?'In'an'obligation'to'do,'the'creditor'will'have'the'
same'remedies.'He'can'opt'for'specific'performance,'or'if'it'is'a'service'that'is'not'
personal,' he' can' have' what' is' called' as' substitute' performance.3'So' what' does'
that'mean?'The'prestation'will'be'performed'or'will'be'done'at'the'expense'of'the'
debtor.''
'
"
ILLUSTRATION"16:"
16.A"—"SUBSTITUTE"PERFORMANCE"
Let’s'say,'the'service'is'to'paint'your'house'white,'but'contractor'did'not'do'
so.'As'the'creditor,'what'you'can'do'is'get'another'contractor,'and'charge'the'
cost' to' the' debtor' (the' previous' contractor' who' failed' to' perform' the'
prestation).'That'is'substitute"performance.''
'
16.B"—"RECTIFICATION""
done.'Instead'of'white,'the'house'was'painted'ecru'or'dirty'white.'Now,'what'
can'the'house'owner'do?'The'owner'can'ask'for'rectification.'That’s'another'
remedy:'to'rectify'a'wrongly'performed'service.''
'
'
OBLIGATIONS'AND'REMEDIES'IN'AN'OBLIGATION'NOT"TO'DO'
What' if' the' breach' was' with' an' obligation' not$ to' do?' Can' you' have' specific'
performance' [as' a' remedy]?' Technically' there’s' nothing' to' be' performed,' so'
what’s'the'remedy'if'debtor'is'doing'the'forbidden'thing?'The'answer'is'an'action'
to'enjoin'the'prohibited'act.'In'case'there’s'already'an'irreversible'performance'of'
the'prohibited'act,'the'remedy'will'be'one'for'damages.''
'
DUE"DILIGENCE'
What'does'“diligence'of'a'good'father”'mean?''
'
'''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' '
3 '' Actually,'you'can'also'have'the'same'thing'(substitute)'for'an'obligation'to'give,'if'the'object'is'
not'a'specific'thing.'
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'

ownership' of' the' property' until' conveyance' (which' will' happen' only' when' the'
'

“Diligence' of' a' good' father”' means' ordinary" diligence" or" due" diligence.' It'
means' diligence' exercised' by' a' person' with' respect' to' his' or' her' own' price' is' fully' paid' by' buyer).' Later' on,' you' will' learn' about' suspensive"
properties'or'affairs.'' conditions.'In'a'contract'to'sell,'payment'o'the'price'is'a'suspensive$condition'for'
"
the'conveyance,'because'only'upon'full'payment'will'conveyance'happen.'
'
'
What' should' be' a' standard' of' care?' Never' say' a' diligence' of' a' good' father' of' a'
So' what' did' Ayala' want' to' do' in' this' case?' They' did' not' want' to' cancel' the'
family,' just' say' due' diligence' or' ordinary' diligence.'Does' that' mean' there' is' a'
contract.' They' wanted' specific' performance' as' a' remedy,' which' means' that'
higher'standard'of'care?'Yes.'Sometimes'the'laws,'or'the'parties,'by'stipulation,'
Burton'still'pays'the'full'amount,'and'they'convey'the'property.'Now,'what'did'
provide'a'greater'standard'of'care.'For'common'carriers,'what'is'the'standard'of'
the'Court'say?''
care?' Extraordinary' diligence.' You' have' to' arrive' from' Point' A' to' Point' B'
'
without'any'incident.'That'is'a'strict'requirement'for'common'carriers,'unless$you$
CAN' THERE' BE' SPECIFIC' PERFORMANCE' IN' THIS' CASE?' No,"because"this"
are$flying$Virgin$Atlantic.'
is" a" contract" to" sell.' If' this' were' a' contract' of' sale,' and' buyer' failed' to' pay' the'
'
price,' seller' would' have' an' option' to' sue' for' specific' performance,' meaning' S'
Moreover,' in' a' contract,' you' can' stipulate' a' greater' degree' of' care.' Ordinarily,'
could' file' an' action' against' B' to' pay' the' price' and' accept' the' property.' Why' is'
when' property' is' mortgaged,' there' is' no' requirement;' it' is' just' due' diligence.'
that'not'possible'under'a'contract'to'sell,'according'to'the'Court?'It'is'because'the"
However,' the' mortgagee' can' require' that' the' mortgagor' fence' off' the' property,'
[ownership" of" the]" property" has" not" been" transferred" yet." Therefore,' Ayala'
or'install'guards.'That'will'be'imposing'a'greater'degree'of'diligence'or'care.''
cannot'compel'Burton'to'pay'because'the'latter'does'not'have'the'property'yet.''
'
'
Again,'remember"the"general"rule:"ordinary"diligence.'Let’s'say,'seller'is'obliged'
Now,' what' if' Ayala' conveyed' the' property' and' actually' executed' the' Deed' of'
to' convey' a' car.' However,' on' the' eve' of' conveyance,' seller' replaced' the' stereo'
Absolute'Sale'in'favor'of'the'buyer,'could'Ayala'force'payment?'Again,'this'time,'
system' with' an' AM' radio' and' the' tires' with' the' wheels' of' a' jeepney.' The' car' is'
Ayala'tells'the'Court'that'they'are'ready,'willing,'and'able'to'convey'the'property'
worth' P1M.' Clearly,' following' the' general' rile,' this' is' be' a' violation' of' that' the'
now.' Could' Ayala' compel' Burton' to' pay?' No," they" still" cannot.' Why' not?' The'
due'diligence'doctrine.'Hence,'even'if'the'parties'did'not'stipulate'it,'seller'has'to'
Supreme'Court'said'that'one'has'to'understand'it'by'comparing'a'contract'to'sell'
deliver'all'accessories.'Seller'cannot'remove'the'pliers,'the'spare'tire,'and'all'the'
with'a'contract'of'sale:'
works.'All'things'in'the'car'should'be'delivered'because'that'is'what’s'required'
• Contract"of"Sale:' there' is' already' conveyance;' therefore,' if' buyer' does'
by'the'default'rule'(perform'the'obligation'in'good'faith'and'with'due'diligence).''
not'pay,'seller'could'sue'for'collection'(specific'performance)'
'
• Contract" to" Sell:' there' was' no' payment' yet' of' the' full' price.' This' is' a'
CASES"[ARTS.'1156?1170]"
suspensive' condition' for' the' conveyance.' There' is' nothing" yet" to" be"
AYALA"LIFE"V."RAY"BURTON"
performed.'There'is'no'obligation'yet.''
Specific'performance'as'remedy'in'a'COS'&'inapplicability'to'CTS'
'
There'is'a'contract"to"sell'between'Ayala'Life'and'Ray'Burton.'Ayala'Life'is'the'
When'you'have'the'remedy'of'specific'performance,'you'are'referring'to'a'certain'
seller.'Ray'Burton'agreed'to'pay'30%'of'the'total'amount'as'downpayment,'and'
obligation'(in'this'case:'to'give/pay).'Here,'there'is'no'obligation'to'pay.'In'fact,'
the'rest'will'be'paid'in'installments'afterwards.'
there'is'a'consequence.'What$is$the$consequence?'The'limited'remedy'to'a'seller'is'
'
that'the'seller'could'retain'25%'of'all'payments'and'return'the'rest'to'the'buyer.''
Now,'what'was'a'peculiar'stipulation'in'the'contract?'If"Burton"did"not"pay"the"
'
installments"for"6"months"or"more,"then"Ayala"will"have"the"right"to"cancel"the" '

contract."Ayala'will'also'have'the'right'to'retain'the'entire'amount'paid'by'Ray' Does' that' mean' that' there' is' no' remedy' of' specific' performance' under' a'
Burton.' After' a' while,' Burton' notified' Ayala' that' he' could' no' longer' pay' the' contract'to'sell?'So,'if'I’m'going'to'formulate'a'true"or"false"question'and'if'it'
installments'so'he'requested'for'the'cancellation'of'the'contract.'' were' only' true' under' all' circumstances,' and' I’d' say:' “In" a" contract" to" sell,"
' specific" performance" is" not" available" as" a" remedy" to" creditor" against" a"
CONTRACT'OF'SALE'v.'CONTRACT'TO'SELL' defaulting"debtor.”'What'would'be'the'answer?'False.'Why'false?'You'have'
How'did'the'Court'explain'the'nature'of'CONTRACT"TO"SELL?'The'court'said' to'understand'the'ruling'of'the'SC'in'this'context.''
"

that' the' contract" to" sell' is' different" from" a" contract" of" sale.' In' the' former,' the' '
property'is'given'to'the'buyer'only'after'the'full'payment.'The'owner'also'retains'

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When'the'Court'stated'that'specific'performance'was'not'proper'to'a'contract'to' SUBSTANTIAL'BREACH''
sell,'it'was'referring'to'the'prestation'to'convey'property'and'to'compel'payment' What'was'the'remedy'which'seller'wanted'to'exercise?"The'seller'wants'the'title'
of' the' entire' price.' The' Court' distinguished' this' case' from' a' Contract' of' Sale,' of'the'land'back,'therefore,'the'seller'is'asking'for'a'resolution.'Seller'wanted'to'
where' there' is' already' conveyance.' It' does' not' necessarily' mean' that' a' party' cancel'the'contract'and'recover'the'property.'Under'Article'1191,'a'requirement'
cannot' sue' to' enforce' specific' probations' of' contract' because' if' you' will' look' at' for'resolution'is'a'breach"of"contract.'What'kind'of'breach?"Substantial"breach.'$
this'case,'the'Court'actually'enforced'a'contractual'provision.'What'provision?'It' '
was'that'the'seller'should'return'the'payment'less'the'retained'amount'allowed' In'the'earlier'case,'I'gave'you'an'example'of'specific'performance'as'a'remedy'in'
as'per'contract.'Or'reversely,'the'seller'—'if'the'buyer'was'demanding'payment' a'contract'of'sale,'and'when'it'is'not'applicable'in'a'contract'to'sell.'Now,'we'are'
of' the' entire' amount' —' could' counterclaim' that' there' should' be' a' retention' of' looking'at'resolution"as"a"remedy.''
25%.'In'such'case,'there'is'enforcement'of'a'specific'provision'of'the'contract,'and' '
there'is'specific'performance.'' Here,' you' have' a' contract' of' sale,' and' there' was' non?payment' of' the' price' —'
' P45,000.' Assuming' that' that' the' full' price' was' P120,000,' will' that' amount' to'
Again,' don’t' be' misled' by' the' ruling,' and' assume' that' in' a' contract' to' sell,' substantial'breach?'The'Court'ruled'YES.'If'the'Court'assumed'that'the'full'price'
specific'performance'has'no'room.'It'depends'on'what'you'are'enforcing.'If'you' was' P250,000,' would' that' still' amount' to' substantial' breach?' Still,' yes.' In'
are' enforcing' conveyance,' then' that' will' not' happen' until' full' payment' of' the' determining'whether'or'not'there'was'a'substantial'breach,'the'Court'also'added'
price' is' given,' because' there' is' no' obligation' yet' to' convey.' But,' if' you' are' the' fact' that' Cannu' was' not' able' to' pay' the' amortization.' Thus,' following' this'
referring'to'some'other'stipulations'in'the'contract,'then'it'is'possible'to'enforce' rule'on'Cannu,'substantial'breach'in'a'contract'of'sale'would'translate'to'what?'
that'stipulation.'' Somehow,' the' Court' defined' in' numerical' terms' what' could' substantial' breach'
' mean.'What'is'P45,000'/'P250,000?'18%.''
CANNU"V."GALANG" '
Resolution'as'remedy'in'a'COS'/'Measuring'substantial'breach' The'Court'said'—'assuming'these'were'the'right'amounts'—'that'there'was'still'
This' case' involves' the' Spouses' Galang' entering' into' a' contract' with' Cannu' to' substantial' breach' because' there' was' non?payment' of' at"least"18%"of"the"price.'
purchase'a'land'that'was'mortgaged.'They'entered'into'a'contract"of"sale.'A'land' That' is' why' this' case' was' good.' Somehow,' it' guides' parties' with' respect' to' the'
was' being' sold' for' P173,800.' In' fact,' there' were' two' amounts' being' thrown' threshold' of' measuring' substantial' breach.' It" said" 18%" would" constitute"
around.'What'were'the'amounts?'The'first'amount'was'173,800.'The'other'one'is' substantial"breach.'Because'of'that'substantial'breach,'the'seller'was'entitled'to'
120,000,'which'was'paid.'And'there'were'no'further'payments.'So'what'was'the' get'back'the'land'and'claim'damages'in'the'end.'Buyer'therefore,'could'not'force'
remedy'being'sought'in'this'case?' seller'to'sell'because'buyer'was'the'one'in'default.''
' '
So,'the'agreement'was'to'pay'P120,000'for'the'land,'plus'the'amortization.'But'in' LALICON"V."NHA"
the' Deed' of' Sale,' it' was' said' that' the' payment' to' be' paid' was' P250,000.' How' Substantial'breach'need'not'refer'to'non=payment'of'full'price'
much' was' actually' paid?' P120,000.' But' there' was' still' a' balance' of' P45,000' and' This'was'the'case'involving'the'Spouses'Alfaro'and'a'Deed'of'Sale'executed'by'
Galang' was' asking' Cannu' to' pay' for' the' balance.' Wait$ —$ what$ was$ the$ price?$ the' NHA' (National' Housing' Authority).' The' Deed' of' Sale' stipulated' that' the'
P120,000.$ But$ there$ is$ a$ claim$ that$ it$ is$ actually$ P250,000.$ How$ much$ was$ not$ paid?$ Alfaros'were'not'allowed'to'sell'(or'encumber,'etc.)'the'house'within'5'years'from'
P45,000.$So,$what$happened$here?$What$happened$to$the$contract?' the'date'of'the'release'of'the'mortgage.'How'many'contracts'were'involved'here,'
' then?'Two:'a'Deed'of'Sale,'and'mortgage.'However,'in'1990'(5'years'have'not'yet'
Galang'asked'Cannu'to'pay'the'balance,'but'Cannu'refused'to'pay.'The'agency' lapsed),'the'spouses'sold'it'to'Victor,'their'son.''
that' initially' agreed' to' the' loan' also' refused' Cannu’s' takeover' of' Galang’s' '
amortization' because' they' did' not' submit' enough' requirements.' As' already' Let’s'simplify:'NHA'sold'the'house'to'the'Spouses'Alfaro'for'a'price.'However,'
mentioned,' Cannu' refused' to' pay' the' remaining' P45,000,' so' after' 18' months,' there'was'a'condition'in'the'DOS'that'the'latter'was'not'allowed'to'sell'or'convey'
Galang' paid' the' remaining' balance' for' the' amortization.' Because' of' the' alleged' the'property'within'5'years'after'the'release'from'mortgage.'This'means'that'the'
breach'of'contract'(Cannu’s'failure'to'pay'P45,000'and'the'unsuccessful'takeover' buyers' were' already' the' owners' of' the' property' but' the' same' property' was'
of'the'amortization),'the'Galang'Spouses'were'then'asking'for'the'title'of'the'land' mortgaged'to'NHA.'However,'the'Spouses'violated'the'stipulation'by'selling'the'
back.'' property'even'before'the'same'was'released'from'mortgage.''
' '
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'
Now,' what' did' NHA' do?' Basically,' NHA' was' asking' for' the' rescission' of' the'
contract.'Was'NHA'entitled'to'this'right?'The'Supreme'Court'said'YES,'because'
of' a' substantial' breach.' But' how' can' there' be' substantial' breach' when' the'
spouses' fully' paid' the' price' and' they' were' paying' their' mortgage' obligations?'
Take'note'that'a'substantial"breach"—"as"shown"in"this"case"—"need"not"refer"to"
the"nonfpayment"of"the"price;'it'could'refer'to'an'essential'term'or'condition'in'
the'contract.''
' case,'transportation"from"Point"A"to"Point"B,"in"Business"Class.'The'airline'did'
Remember,' the' cause' of' breach' here' was' the' violation' of' the' stipulation,' which'
was' an' essential' requirement' of' the' NHA.' Why?' What' was' the' business' of' the'
NHA?'They'provide'housing'[for'the'less'fortunate].'Thus,'the'stipulation'was'to'
protect' the' properties' from' other' entrepreneurs' who' would' like' to' take'
advantage'of'the'low'prices'of'the'houses.'NHA,'as'much'as'possible,'wanted'to'
preserve' the' properties' in' the' hands' of' their' beneficiaries' and' away' from'
commercial' purposes.' Ordinarily,' this' will' not' make' sense' in' a' private'
transaction.' But' this' is' NHA,' the' one' providing' for' housing' to' underprivileged'
families.' It' is' similar' to' what' you' have' in' Agrarian' Reform' laws.' If' you’re' a'
beneficiary'of'an'agrarian'reform'program,'you'are'prohibited'from'encumbering'
or' disposing' property' within' a' certain' period.' With' this' context,' the' Supreme'
Court'thus,'granted'the'action'for'resolution.''
' Now,' what' was' the' liability?' What' was' the' remedy' being' sought' or' granted?'
CATHAY"PACIFIC"V."VASQUEZ"
Violation'of'the'object'of'the'contract'is'substantial'breach'
The' Spouses' Vasquez' were' flying' back' to' Manila' from' Hong' Kong' in' Business'
Class,' together' with' their' guests.' However,' because' they' were' members' of' the'
Marco' Polo' Club' (thus,' they' enjoy' certain' privileges),' Cathay' Pacific' informed'
them' that' seats' in' First' Class' opened' and' they' were' being' upgraded' there.' The'
Vazquezes'refused,'since'they'were'with'friends'and'they'did'not'want'to'leave'
them'behind.'Now,'why'were'they'filing'for'a'breach"of"contract"of"carriage?'
' airline.'There'was'also'no'bad'faith'or'malice.'Bad'faith,'under'the'law,'may'also'
Let’s' simplify:' what' you' have' here' was' a' contract' of' carriage.' The' airline' was'
supposed'to'transport'the'passengers'via'Business'Class'—'the'Vasquezes,'with'
their'guests.'The'Househelp'was'in'Economy'Class.'Now,'on'their'return'trip,'the'
Spouses'were'upgraded'to'First'Class.'What’s'wrong'with'that?'According'to'the'
Vasquezes,' they' do' not' want' to' be' separated' from' their' guests' because' they'
thought' it' would' be' shameful' and' embarrassing' to' leave' their' friend' behind.' It'
was'also'stated'by'the'Vasquezes'that'they'wanted'to'talk'business'during'their'
flight'back'to'Manila.''
'
SUBSTANTIAL'BREACH'
Why"is"there"a"breach?"The'service,'remember,'is'to'transport'them'from'Point'A'
to' Point' B,' in' Business' Class.' The"form"of"their"agreement"is"that"they"will"be"
transported"in"Business"Class.'The'Supreme'Court'stated'that'the'privilege'can'
be'waived'and'that'since'the'airline'did'not'even'consult'the'Spouses'with'regard'
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to' upgrading,' this' constitutes' breach' of' contract.' There" was" a" breach," not"
because" they" did" not" agree," but" because" of" the" airline" was" insisting" on" a"
different"something"that"was"not"the"original"stipulation"in"the"agreement."
'
VIOLATION'OF'THE'OBJECT'
Go' back' to' the' requisites' of' a' contract.' The' object' of' the' contract' was' violated.'
The'object'of'the'contract'is'the'prestation'of'an'obligation'—'specifically'in'this'
not' do' the' original' stipulation' in' their' agreement.' There' is' breach' because' the'
mandated'prestation'is'exactly'this'—'transport'through'Business'Class,'no'more'
no' less.' If' there' is' deviation' from' that' mandated' prestation,' there' will' be' a'
breach.'Later'on,'you'will'learn'that'the'creditor'cannot'be'compelled'to'receive'
an' object' more' valuable' than' the' stated' prestation.' The' same' rule' applies' here.'
There' must' be' identity" of" payment,' which' means' that' the' prestation' must' be'
performed'exactly'as'was'required'under'the'contract.'If'it'is'Economy,'it'should'
be' Economy.' So,' if' you' want' a' straightforward' answer,' here' it' is:' there" is" a"
breach" because" the" airline" failed" to" perform" the" required" prestation," as"
stipulated"by"contract.''
'
NOMINAL'DAMAGES'ONLY'
Damages,' because' the' other' remedies' are' no' longer' physically' possible.' You'
cannot'undo'what'has'already'been'done.'Unless'you'can'time'travel,'you'cannot'
undo'the'trip.'This'is'an'example'wherein'the'entitlement'was'only'damages'of'
what'kind?'Nominal.'Nominal'damages'mean'consuelo$de$bobo.'You'won,'so'you'
get' a' small' amount.' The' Spouses' were' not' able' to' claim' moral' damages,' which'
could'have'been'greater,'because'there'was'no"fraud"(or"malice,"or"bad"faith)"on"
the"part"of"Cathay"Pacific.'Fraud'was'just'alleged'by'the'Vasquezes,'but'in'truth,'
and' as' ruled' by' the' SC,' there' was' no' insidious' machination' devised' by' the'
mean'gross'negligence.4'But'there'was'none'of'those'in'this'case,'according'to'the'
Court,' because' as' they' explained,' overbooking' is' allowed' up' to' a' certain'
percentage' —' 10%.' This' is' a' real' and' accepted' airline' policy.' Moreover,' they'
were' actually' insisting' an' upgraded;' there' were' acting' in' accordance' with'
relevant'rules'and'regulations.'[The'“privilege”'offered'to'their'Marco'Polo'Club'
members]'was'part'of'their'PR.'It'just'so'happened'that'it'meant'not'being'able'to'
perform' what' was' originally' stipulated' in' their' contract' of' carriage' with' the'
Spouses'Vasquez.'
'''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' '
4 '' Negligence' was' discussed' in' passing,' but' will' be' further' discussed' later' on.' Here,' JSP' simply'
mentioned'that'there'were'two'kinds'of'negligence:'(1)'simple,'and'(2)'gross.'Gross'negligence'
refers'to'the'wanton'disregard'of'relevant'standards'of'care.''
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"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
THURSDAY,'06'NOVEMBER'2014'
'

"

REVIEW' Discussion'on'negligence'
You'have'to'understand'that'in'an'obligation,'there'is'a'juridical'relation'between' Notes/questions:'
two' parties' –' the' creditor,' and' the' debtor.' The' creditor,' again,' has' the' right' to' • How'did'the'accidental'shooting'happen?'Was'it'described'in'the'case'–'
demand'performance'of'a'particular'prestation'from'the'debtor,'and'should'the' how'the'accidental'shooting'happened?'
debtor' fail' to' perform' the' mandated' prestation,' the' debtor' will' be' liable' for' • Is'there'a'contract'here?'What'was'the'contract?'What'was'it'about?'
certain'reliefs'which'the'creditor'has'under'the'law.' o The' school' provides' education,' and' in' exchange,' Saludaga'
' paid' fees,' right?' And' as' part' of' the' education' services,'
FUNDAMENTAL'REMEDIES' according' to' the' Court,' the' school' must' provide' a' safe"
So' last' time' we' discussed:' what' are' these' remedies?' The' fundamental' or' basic' environment"for"learning.'
remedies'are:' o So,'the'contract'with'Saludaga'—'or'the'students'—'requires'
1. Specific"performance,"with"or"without"damages" the' school' to' provide' educational' services' in' exchange' for'
o What' is' specific' performance?' It' means' the' requirement' that' fees.''
the'debtor'performs'the'required'prestation'' o Part' of' the' services,' the' Court' said,' is' the' obligation' of' the'
o If' it’s' a' sale,' that' means' that' the' seller' will' be' required' to' school' to' provide' a' safe' environment.' You' could' not' learn' if'
convey'the'property,'that'subject'of'the'contract'of'sale' you’re' constantly' harassed,' right?' [So,$ you$ could$ sue$ Ateneo$
2. Resolution,"with"or"without"damages" because$the$teachers$are$constantly$harassing$you$during$recitation.$
o It'is'the'cancellation'of'the'juridical'tie'in'an'obligation' Can$you$do$that?$Because$you$are$being$harassed$during$recitation?$
o It’s'as'if'there'was'no'obligation'' Meaning$ this$ is$ not$ a$ safe$ environment?$ NO,$ YOU$ COULD$
o The' basis' of' this' is' Article"1191,' which' we' will' discuss' more' NOT!]'
in'detail'later'on'' • So,'going'back'to'the'case,'what"was"the"problem"here?''
3. Claim"for"damages" o The' school' has' to' provide' a' safe' environment' and' FEU' did'
' that.'Among'the'measures'was'the'engagement'of'the'services'
Of' course,' there' are' other' remedies' under' the' law.' What' I’m' giving' you' right' of'a'security'agency.'Shouldn’t'that'be'enough?'
now' are' basic' remedies' in' an' obligation.' These' are' the' usual' remedies' that' a' o According'to'the'Court,'what'did'due'diligence'comprise'of?'
creditor'will'have'in'case'of'breach'of'an'obligation'by'the'debtor.'' o Where' will' we' find' the' standards' for' due' diligence' in' this'
' case?'In'what'law?'
Now,' when' can' a' creditor' claim' damages?' The' law' provides' that' the' creditor' " There' is' such' a' thing' as' a' law' governing' security'
shall'be'entitled'to'claim'damages'when'the'debtor'is'(i)'negligent'or'at'fault,'(ii)' agencies,' and' there’s' a' requirement' for' security'
guilty'of'fraud,'(iii)'in'legal'delay'or'default,'or'(iv)'in'any'other'way'contravenes' guards.' There’s' a' list:' educational,' psychological,'
the'tenor'of'the'obligation.'' etc.''
' o So,' what' should' the' school' do,' according' to' the' Supreme'
Court?'
'

FOUR"CAUSES"OF"BREACH"[and'consequently,'bases'for'claims'for'damages]:"
1. Negligence" " There' must' be' an' independent' verification' by' the'
2. Fraud" school' of' compliance' by' the' agency' with' the' legal'
3. Delay"or"default" requirements' for' the' security' guards' provided' in'
4. Any"other"contravention"of"the"tenor"of"the"obligation" school.''
'
o Why' should' the' school' be' liable' for' the' acts' of' the' security'
"
guard?'Was'his'mere'presence'in'the'school'make'the'school'
CASES"[ARTS.'1171?1173]"
liable?'
NEGLIGENCE'
SALUDAGA"V."FEU""
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" It' is' because' the' security' guard' was' actually' an'
agent' of' the' school.' He' was' hired' by' the' school'
therefore,'any'act'of'that'agent'should'be'attributed'
to'the'school.'And'in'this'case,'the'school'was'even'
negligent'in'verifying'the'compliance'by'the'security'
guard'with'the'relevant'legal'requirements.'''
o Thus,' the' school' was' held' liable' based' on' what?'
NEGLIGENCE'
o What'was'the'liability?'
" Actual'and'other'damages'
o How' about' the' agency?' Was' the' agency' held' liable?' What'
was'the'liability'of'the'agency?'
" Actually,' the' principal' liability' here' was' on' the'
agency.' However,' the' school' was' the' contracting'
party' with' respect' to' this' contract' (education)'
therefore,' the' school' should' pay' Saludaga,' and' the'
agency,' having' a' contract' with' the' school,' should'
pay'the'school.''
• [Was$Saludaga$good?$Why?$Who$could$have$been$sued?$
o He$was$good$because$he$sued$the$school$and$not$the$security$guard.$
If$you$ever$litigate,$whether$you’re$the$lawyer,$or$you’re$the$client,$
you$go$after$what$kind$of$defendant?$The$one$with$deep$pockets,$the$
one$who$would$pay,$unless$it’s$all$based$on$principle.]$$
' '
MERALCO"V."RAMOY"'
Discussion'on'negligence'
Notes/questions:'
• There'was'a'service'contract.'What'did'the'service'contract'require?'
o There’s' a' contract' between' MERALCO' and' the' consumer.'
MERALCO' should' provide' electric' service,' while' consumer'
should'pay'the'corresponding'fee.''
• What'was'the'role'of'NPC'here?'
• What'happened?'
o MERALCO'stopped'the'service'at'the'instance'of'the'NPC.''
• What'was'the'basis'of'MERALCO'acting'for'NPC?'Did'it'act'based'on'a'
mere'letter'from'the'NPC?'
o MERALCO'relied'on'the'decision'by'the'Court.''
o Was' it' wrong' for' MERALCO' to' rely' on' the' decision' of' the'
Court?' When' you' say' [that' the' decision' is]' final' and'
executory,'what'do'you'mean?'
• Was'MERALCO'guilty'of'breach'of'contract'here?'What'was'the'basis'
of'the'breach?'
o NEGLIGENCE"
o What'was'the'negligent'act'of'MERALCO?'
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" The' answer' to' that' would' have' been' the' matter' of'
the' decision' not' being' final' and' executory.' Because'
if' MERALCO' were' [sic]' final' and' executor' decision'
of' the' relevant' court,' then' MERALCO' would' have'
been' acting' pursuant' to' a' judicial' order' –' a' valid'
judicial'order.'But'the'decision'was'not'yet'final'and'
executory.'What'does'that'mean?'Meaning,'perhaps'
the' case' is' still' subject' to' appeal,' or' there' are' still'
things'to'be'done'before'it'could'be'implemented'by'
the'court.''
" So,' when' MERALCO' acted' based' on' a' mere' say?so'
by'NPC'and'based'on'that'decision,'which'was'not'
yet' final' and' executory,' it' was' negligent.' It' did' not'
check' whether' it' could' indeed' act' based' on' that'
decision.''
• What'was'the'degree'of'care'required'of'MERALCO?'
o This' is' an' instance' wherein' an' entity,' a' public' utility,' is'
required"to"exercise"a"greater"degree"of"care.' So,' it’s' beyond'
the'usual'due'diligence.''
'
COMPARING'SALUDAGA'AND'MERALCO'
In' these' two' cases,' you' have' a' situation' wherein' the' debtor' breached' the'
obligation'based'on'negligence.''
CASE"OF"SALUDAGA" CASE"OF"MERALCO"
' '
In' the' case' of' Saludaga,' the' school' On' the' other' hand,' in' the' case' of'
was'supposed'a'safe'environment'for' MERALCO,'MERALCO'was'supposed'
learning.'It'breached'that'by'getting'a' to' provide' services,' or' power,' as' per'
security' guard' that’s' not' meant' to' contract.'MERALCO'failed'to'do'so'by'
keep' the' students' safe.' The' cutting' off' the' services' based' on' a'
negligence' consisted' in' failing' to' decision,' which' was' not' yet' final' and'
verify' whether' the' security' guard' executory' [sic].' That' constituted' the'
met' the' requirements' under' the' law.' negligence.''
The' school' relied' solely' on' the' '
representation'of'the'security'agency.' '
'
'
In' both' instances,' you' have' a' breach' of' an' obligation' based' on' negligence.'
Therefore,'there'was'a'consequent'liability'for'damages.'
'
FRAUD"
What'do'you'mean'by'fraud?'[What$words$can$you$think$of?$Malice?$Bad$faith?]'
'
"
ILLUSTRATION"1:"INCIDENTAL"FRAUD"
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Let’s' say' you' have' a' seller' and' you' have' a' buyer.' The' seller' is' supposed' to'
deliver'a'car,'[and]'the'buyer'[is'supposed'to]'pay'the'price.'The'buyer'paid'
the'price,'and'seller'sold'the'car'to'X'(a'different'party).'Therefore,'seller'did'
not' perform.' Instead,' of' conveying,' seller' sold' and' conveyed' the' car' to'
another' party.' [Buyer' paid' on' Day' 1,' while' seller' conveyed' the' car' to' a'
different'person'on'Day'2.]'Do'you'have'fraud'here?''
'
1. The' first' example' I' gave' you' is' an' example' of' fraud' resulting' from' a'
breach'of'an'existing'obligation.'That'is'called'INCIDENTAL"FRAUD'
or'FRAUD"IN"PERFORMANCE.'You'may'have'encountered'the'latin'
term'“dolo'incidente,'”'[or]'incidental'fraud.''
o So' there’s' a' contract.' However,' in' the' performace' of' the'
required'prestation,'the'debtor'committed'fraud,'in'this'case,'
selling'the'car'to'a'third'party'rather'than'complying'with'the'

'
"
mandate'of'the'contract.''
ILLUSTRATION"2:"CAUSAL"FRAUD"
2. In' the' second' case,' the' seller' made' a' misrepresentation' to' [sic]' the'
Now,' let’s' say,' forget' about' the' guy,' X.' Seller' sold' the' car' to' B.' Upon' the'
buyer'into'entering'into'the'contract.'That'is'also'fraud.'But'aside'from'
representation'by'the'seller'that'it'was'a'completely'vintage'care'of'a'certain'
claim'for'damages,'that'would'entitle'the'buyer'to'an'annulment'of'the'
model' with' original' parts.' S' (seller)' was' a' collector.' Based' on' that'
contract' because' the' fraud' involved' here' is' what' we' call' CAUSAL"
representation,' B' agreed' to' buy' the' car' and' pay' the' price.' Would' that'
FRAUD' or' “dolo' causante.”' What' does' that' mean?' It’s' the' fraud' that'
constitute'fraud?'''
induced'the'buyer'to'enter'into'the'contract.'It'is'the'fraud'vitiating'the'
'
consent'of'the'buyer'to'the'contract.''
Again,'seller,'a'car'collector,'told'B:'“I'have'this…'vintage'car'with'complete'
'
original' parts.' I’m' selling' it' to' you.”' B,' based' on' that' representation,' and'
So,' what' does' Article' 1170' refer' to?' It' refers' ONLY' to' FRAUD" IN"
knowing'the'reputation'of'seller'as'a'car'collector,'bought'the'car'and'paid'the'
PERFORMANCE.' We' will' deal' with' causal' fraud' when' we' deal' later' with'
price.' It' turned' out' [that]' the' car' was' made' recently' by' a' Chinese'
voidable'contracts.''
manufacturer.''
' '
' Again,'Article'1170'refers'to'incidental'fraud'or'fraud'in'performance,'in'which'
You' now' have' two' instances' of' fraud.' One' (Illustration' A)' was' a' sale' to' case,' if' it' is' committed' by' a' debtor,' in' breach' of' an' obligation,' then' the' debtor'
somebody' else' AFTER' committing' in' a' contract' to' enter' into' a' contract' of' sale,' will' be' liable' at' the' very' least,' for' damages.' However,' if' the' fraud' was' the'
and' [in]' the' other' one' (Illustration' B),' there' was' misrepresentation' by' the' seller' inducement'for'a'party'to'enter'into'a'contract,'that’s'what'you'call'dolo'causante'
with' respect' to' the' specs' of' the' car.' Now,' they' are' both' instances' of' fraud.' Is' or'causal'fraud,'in'which'case,'the'remedy'of'the'aggrieved'party'will'be'to'annul'
there'a'difference?' the'contract'based'on'vitiated'consent.'Is'it'clear?'
' '
[Again],' we' have' CASE' 1,' with' the' sale' to' the' third' party' after' entering' into' a' ON'PROHIBITION'AGAINST'WAIVER'FOR'FUTURE'FRAUD''
contract' of' sale' and' then,' [in' CASE' 2],' misrepresentation' leading' to' the' buyer’s' Let’s'go'back'to'the'first'example.'Here,'we’re'dealing'with'fraud'in'performance.''
agreement'to'the'contract'of'sale.'Are'they'the'same?' '
1. In"CASE"1"(Illustration"A):"'
"

ILLUSTRATION"1.A"
What' would' be' the' remedy' for' the' buyer?' The' return' of' the' payment'
Buyer'and'seller'entered'into'the'contract'on'Day'1.'It'was'a'contract'of'sale.'
would'amount'to'what'remedy?'RESOLUTION!'And'what'else?'What'
Seller' shall' convey' to' B' on' a' later' date' of' course,' and' Buyer' would' pay' the'
else' can' the' buyer' ask' for' aside' from' the' return' of' the' money?' There'
price.' Buyer' paid' already' the' price,' but' seller' instead,' conveyed' and'
was' fraud' therefore,' there' is,' at' the' very' least,' an' entitlement' for'
transferred' possession' of' the' property' to' X.' So' we' will' assume' that' this' is'
damages.' Remember' ARTICLE' 1170,' the' basis' for' the' claim' for'
fraudulent.' However,' in' the' contract,' the' parties' agreed' that' the' seller' shall'
damages.''
not'be'liable'should'the'seller'decide'to'sell'the'property'to'anyone'other'than'
2. In"CASE"2"(Illustration"B):"'
the' buyer.' Will' that' absolve' the' seller' from' any' liability?' Again,' the'
We'have'misrepresentation'—'leading'the'buyer'to'agree'to'a'contract'
stipulation' in' the' contract' states' that' the' seller' may' sell' the' car' to' anyone'
of' sale.' Would' there' be' a' liability' for' damages?' YES.' Aside' from' that,'
other' than' the' buyer' and' the' seller' will' not' have' any' liability' to' the' buyer,'
would'there'be'any'other'remedy?''
except'maybe'return'whatever'has'been'received.'Will'that'be'a'shield'of'the'
'
seller'for'any'liability'for'selling'the'car'to'a'third'party?''
So,'fraud'is'a'source'of'breach'of'an'obligation.'But'you'have'to'distinguish'the' '

kind'of'fraud.'' '

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Such'an'agreement'is'void'because'there'can'be'no'waiver'from'liability'against'
future'fraud.'That’s'an'example'of'a'waiver'of'an'action'based'on'future'fraud.'
The' provision' of' the' Civil' Code' specifically' states' that' a' party' cannot' waive' a'
right'of'action'based'on'future'fraud.'That'waiver'will'be'void.'Why?'Why'does'
the'law'prohibit'that'stipulation?'So'if'I'ask'you,'is'it'because'of'justice?'Fairness?'
Or' undue' removal' of' juridical' tie?' What' will' be' your' answer?' (Justice,$ sir.)'
Justice?'WRONG!'''
' '
The'law'is'not'interested'in'fairness.'The'law'is'consistent'with'the'definition'of'
an' obligation.' An' essential' element' of' the' obligation' is' a' juridical' tie.' It' is' what'
element' of' the' obligation?' What’s' a' juridical' tie?' What' does' it' do' to' the'
obligation?' It’s" the" element" of" the" obligation" that" compels" performance." As' I'
explained' last' meeting,' if' you' compare' this' to' a' natural' obligation,' that' will' be'
the'difference.'A'natural'obligation'does'not'have'a'juridical'tie.''
' valid?' (Yes,$ sir,$ because$ the$ object$ can$ still$ be$ delivered.)' What' if' it' was'
I’m' asking,' in' general,' what' is' a' juridical' tie?' The' juridical' tie' is' any' of' the'
sources'of'an'obligation'(law,'contract,'quasi?contract,'quasi?delict,'those'arising'
from' crime).' So,' the' law' prohibits' a' waiver' of' an' action' based' on' future' fraud'
because'it'negates"the"juridical"tie.'In'effect,'there'will'be'no'obligation.'It’s'as'if'
the' seller' can' sell' if' the' seller' wants' to' do' so.' That' cannot' be' done,' that’s' why'
there'is'that'prohibition.''
'
ON'PROVING'FRAUD'AND'NEGLIGENCE'
Now,' how' do' you' prove' fraud?' “Fraud' is' a' state' of' mind”' –' what' does' that'
mean?'Why'is'it'a'mental'state?'How'do'you'prove'something'that'is'only'in'the'
mind?'[You'prove'it]'through'the'actions'of'the'relevant'party.''
'
On' the' other' hand,' how' do' you' prove' negligence?' Where' do' you' get' the'
standards?'Is'there'always'a'standard?'(For$instance,$in$the$previous$case$about$the$
security$guard,$there$are$certain$laws$to$be$observed.$Hence,$if$it$has$been$proven$that$the$
school$ did$ not$ comply$ with$ the$ standards$ stated$ in$ the$ law,$ then$ that$ constitutes$
negligence.)'How'about'in'the'case'of'MERALCO,'what'was'the'standard'there?'
(For$MERALCO,$since$it$is$a$public$utility,$the$standard$is$UTMOST$CARE.)'
'
So,' between' fraud' and' negligence,' what' is' easier' to' prove?' [The' answer' is]'
negligence' because' it’s' just' like' math.' You' have' a' formula.' You' have' a' set' of'
standards;'when'you'do'not'comply'with'the'standards,'then'there'is'negligence'
–'like'in'driving,'you'have'the'speed'limit,'traffic'rules,'[and]'traffic'lights.'If'you'
do'not'follow'them,'then'there'is'negligence.'
'
So'fraud'is'more'difficult'but'practically'more'useful.'Why?'Because'it’s'easier'to'
manipulate:' you' make' a' claim' for' fraud,' you' just' arrange' your' facts' and'
statements' in' such' a' way' that' you' can' possibly' convince' the' court' that' there' is'
fraud.' Besides,' sometimes' your' [sic]' is' not' merely' for' the' purpose' of' winning.'
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But,'for'what'purpose?'Sometimes,'you'have'to'make'a'case'for'the'initiation'of'
the' [sic]' action' –' not' really' for' winning,' but' for' leverage.' You' sue' so' somehow'
you' could' force' the' other' party' to' go' to' the' negotiating' table,' talk' to' you,' and'
discuss' some' for' of' settlement.' So' fraud,' in' that' sense,' could' be' more' useful'
because'if'you'show'negligence,'the'other'party'can'just'say,'“No,'we'complied'
with'this.”'But'in'fraud,'there'would'be,'most'likely,'a'judicial'determination'of'
[its]'existence.''
SIMPLE"v."GROSS"NEGLIGENCE"
Now,'let’s'go'back'to'the'issue'of'negligence.'Let’s'go'to'[the'following]'contract:'
'
"
ILLUSTRATION"3:"CAR"SCRATCHES"
In' this' contract,' the' parties' agree' that' the' seller' shall' not' be' liable' to' any'
scratches'or'[sic]'that'may'occur'prior'to'the'delivery'of'the'car.'Would'that'be'
deliberately' done?' So' the' car' used' to' be' blue,' then' with' the' scratches,' it'
became' electric' blue.' What' if' the' seller' adorned' the' car' entirely' with'
scratches,' would' that' be' valid?' (Sir,$ if$ it$ has$ been$ rendered$ impossible$ to$ deliver$
the$ prestation$ then,$ it$ is$ void.$ But$ then,$ if$ the$ breach$ was$ not$ substantial,$ then$ the$
stipulation$in$the$contract$can$still$be$still$be$held$valid.)''
'
'
Let’s' make' a' distinction' then.' The' stipulation' provides' that' should' the' car' bear'
scratches'and'other'minor'dents'prior'to'delivery,'the'seller'would'not'be'liable,'
provided'that'the'seller'did'not'deliberately'do'those'things.'Would'that'be'valid?'
(Yes,$sir.)'
'
Let’s'remove'the'proviso'(“provided,'that'the'seller'did'not'deliberately'cause'the'
scratches'or'dents”).'Would'that'be'valid?'(No,$sir.$It$will$be$void$because$fraud$will$
become$a$possibility$because$there$will$be$deliberate$intention,$and$thus,$if$there$is$such$a$
stipulation,$it$will$amount$to$a$waiver$for$liability$against$future$fraud.)'
'
What'if'instead,'they'provide'that'the'seller,'prior'to'delivery,'would'use'the'car'
in'stunts,'and'should'there'be'any'destruction'of'the'property'during'the'stunts,'
seller'shall'not'be'liable'for'such'destruction?'(That$would$be$void$sir,$because$if$ever$
there$were$destruction,$then$it$would$be$impossible$for$the$seller$to$deliver$the$object.)''
'
What' if' it' was' destruction' without' deliberate' intent?' $Would' that' be' valid?' (No$
sir,$because$even$if$there$was$no$deliberate$intent,$it$would$still$be$tantamount$to$gross$
negligence.)'Why'would'there'be'gross'negligence?'(Because$sir,$even$if$there$was$no$
intention$to$destroy$the$car,$the$fact$that$the$seller$used$the$car$for$stunts,$knowing$that$it$
will$be$sold$to$the$buyer,$amounts$to$negligence.)'What’s'wrong'with'that'stipulation'
then?' It’s' like' saying' that' the' seller' cannot' be' liable' for' acts' of' negligence.' You'
just' told' me' earlier' that' negligent' acts' of' the' seller' resulting' to' scratches' would'
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not'prevent'the'conveyance'of'the'car.'You'said'that'was'fine,'right?'What’s'the' '
difference'then?'(Gross$negligence,$sir,$is$also$tantamount$to$bad$faith.)' MAKING'A'JUDICIAL'DEMAND'
' [On' the' other' hand],' how' do' you' make' a' judicial" demand?' Who' makes' the'
Gross' negligence' means' bad' faith,' and' bad' faith' means' fraud.' What' is' your' demand?' The' creditor' makes' the' demand.' So,' how' can' the' creditor' make' a'
statutory'basis?'Without'even'citing'the'law,'why'is'gross'negligence'tantamount' judicial'demand?'He'files'a'collection"case.'That'will'be'the'[form'of]'demand;'it'
to'fraud,'say,'in'this'example?'Remember'the'statute.'Why'is'there'a'prohibition' is'a'complaint'for'collection'of'a'sum'of'money.''
against' a' waiver' of' an' action' based' on' fraud?' Because"it"removes"the"juridical" '
tie.' Go' back' now' to' the' question.' Why' is' gross' negligence,' in' our' example,' Why' is' the' law' so' big' on' this' default?' Why' is' demand' necessary' for' default?'
tantamount' to' fraud?' The" substitution" likewise" negates" the" juridical" tie." It" What'is'the'consequence'if'there’s'legal'delay?''
renders" the" obligation" illusory" because" the" seller" can" practically" do" anything" • Let'us'assume'that'there'was'no'real'“non?payment”'but'just'delay.'In'
and"would"be"immune"from"any"liability." the' [abovementioned]' example,' what’s' the' consequence' here?' Lender'
" makes'a'demand'(Day'1),'confirmed'by'borrower,'lender'sues'(Day'2),'
Hence,'we'have'the'statutory'basis'in'Article"1173.'There'is'a'cross?reference'[in' what’s'the'consequence?'
that' article]' that' when' you' say' negligence' attended' by' bad" faith,' it' means' • Okay,' so' the' lender' can' avail' the' remedy' of' specific' performance:'
actually,' gross' negligence.' Jurisprudence' has' stated' that' gross' negligence' is' collection.'What'else?'Damages.''
tantamount' to' bad' faith,' and' bad' faith' equals' fraud' therefore,' [sic]' state' policy.' • Thus,'what’s'the'relevance'of'the'delay?'(Sir,$the$consequence$may$be$seen$
The' underlying' reason' is' if' you' waive' an' action' based' on' future' fraud' or' gross' as$a$penalty.)'
negligence,' there' is' actually' a' negation' of' the' juridical' tie.' It’s' as' if' there' is' no' o The' penalty' will' be' [reckoned]' from' when?' Day' 1' (extra?
obligation,' since' juridical' tie,' as' we' have' explained,' is' that' element' of' the' judicial' demand),' Day' 2' (collection' case),' or' Day' 3'
obligation' compelling' performance' of' the' mandated' prestation.' Again,' the' (judgment)?' Okay,' the" extrafjudicial" demand" will" be" the"
juridical'tie'is'based'on'the'sources'of'an'obligation.'' reckoning" of" the" computation" for" damages" because" it" was"
' the" starting" point" of" the" delay.' [And' as' we' already' know],'
LEGAL"DELAY"OR"DEFAULT"(–1:11:18)" delay' or' default' is' one' of' the' bases' for' claiming' damages,'
Let’s' now' go' to' delay.' What' is' meant' by' delay?' (Sir,$ legal$ delay$ occurs$ when$ the$ together'with'fraud'and'negligence.''
obligation$ has$ become$ demandable$ and$ the$ debtor$ does$ not$ perform,$ and$ afterward,$ the$ '
creditor$either$judicially$or$extra2judicially$makes$a$demand.)'How'does'it'happen?'
'

GENERAL"RULE"REGARDING"DEFAULT"
' With' or' without' the' date' of' performance,' a' demand' has' to' be' made' by' the'
"

ILLUSTRATION"4:"" creditor'on'the'debtor'for'performance'of'the'required'prestation.'A'demand"
Let’s'say,'we'have'a'borrower'and'a'lender.'Lender'is'obliged'to'pay'a'certain' is" needed" to" place" a" debtor" in" default.' Also,' the' demand' should' be' made'
sum.' He' pays' on' a' promissory' note' to' lender' on' X' date.' X' date' arrives,' but' when'the'obligation'is'already'due,'demandable,'and'determinate'–'meaning,'
borrower'does'not'pay.'Is'borrower'in'default?'(Not$yet.)'' liquidated.'
' '

' '
How'do'you'make'a'demand'extrafjudicially?'For'instance,'the'obligation'is'due' In'our'example,'lender'has'to'make'a'demand'on'B'to'pay'the'amount'due'on'X'
now,' what' will' the' lender' say' in' the' letter?' Let’s' say' it’s' P1' million,' due' on' X' date.'If'L'does'not'make'that'demand,'then'there'will'be'no'default.'It'means'that'
date.'How'will'you'phrase'it?'Why'should'you'use'the'word,'“demand”?'What'is' borrower'will'not'be'liable'for'damages.'So,'let’s'say'one'year'after'X'date,'lender'
any'other'term'that'you'may'use?'Can'you'say,'“May'I'request'payment…?”' demands'payment'and'borrower'pays'immediately,'then'there'is'no'liability'for'
• Extra?judicial'demand'can'be'in'a'form'of'a'demand'letter.'As'much'as' damages,' because' there' is' no" default" yet,' since' upon' receipt' of' demand,'
possible,' you' use' that' phrase' –' “demanding' payment.”' Don’t' use,' borrower'performs.'
“request;”' don’t' try' to' be' polite.' There’s' no' need' to' be' polite' in' a' '
demand'letter.'You'have'to'be'categorical'in'requiring'payment'because' EXCEPTIONS"(–1:11:18)'
the' court' may' consider' it' not' as' a' demand,' in' which' case,' the' '
consequence' will' be' ' [as' if' there' was' no' default,' since' no' demand' has'
'

CASES"WHEN"DEMAND"IS"NOT"NECESSARY:'
been'made;'debtor'then,'cannot'be'liable'for'damages].' 1. Parties'expressly"stipulate'in'the'contract'

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2. Law'says'so' deadline' set' will' mean' penalties' in' the' form' of'
3. Time"is"of"the"essence" interests'or'surcharges]'
3. When'time"is"of"the"essence'in'the'performance'of'the'obligation''
'

"
1. When' the" parties" stipulate' [in' the' contract]' to' dispense' with' the' o Example:' contract' with' a' catering' service' for' a' wedding'
necessity'of'the'demand'' reception'[or'any'event'actually]'
o Let’s' say' in' the' [previous[' example,' the' amount' should' be' '
paid'on'X'date.'How'do'you'make'it'automatic?'How'do'you' CASES"[ART.'169]"
stipulate'that'demand'is'not'necessary?' REQUISITES"OF"DEFAULT'
' PANTALEON"V."AMERICAN"EXPRESS"
o "
Notes/questions:'
SAMPLE"STIPULATION"1:"
• I’ll' tell' you' the' story.' The' wife' shopped.' Pantaleon' paid' by' card.' The'
“Borrower' shall' pay' [amount]' on' X' date' without' need' of' any' notice' or'
credit' card' company' took' a' while' –' about' an' hour' –' to' give' an'
demand.”'
' approval.'Because'of'the'delay,'the'Pantaleons'boarded'the'bus'late,'so'
' all'the'passengers'were'angry,'cursing'these'Asians'who'did'not'know'
o Is'there'any'other'way'of'formulating'an'agreement'wherein' the'right'time'and'so'forth.'So,'Pantaleon'was'embarrassed.''
demand'is'dispensed'with'by'the'parties?'You'have'to'link'it' • Upon' returning' to' Manila,' he' sent' a' letter' to' the' credit' card' company'
with' what' delay' triggers.' What' does' default' trigger?' asking' for' an' apology.' AMEX' di' not' apologize' therefore,' he' filed' a'
Damages.'That'is'based'on'law.'What'else?'INTEREST.' claim'for'damages.'In'the'trial'court,'Pantaleon'won.'In'the'CA,'he'lost.'
' In' the' SC,' he' won' at' first.' Remember,' this' is' a' decision' based' on' a'
"

motion' for' reconsideration.' That' is' rare.' This" is" a" reversal" at" the"
o

SAMPLE"STIPULATION"2:"
“Borrower' shall' pay' the' amount' due' on' X' date.' Should' the' borrower' fail' to' Supreme"Court"level.''
pay'on'X'date,'borrower'shall'be'liable'to'pay'interest'of'2%'per'month'from'X' • The' claim' of' Pantaleon' was' that' AMEX' defaulted.' But' is' there' a'
date'up'to'full'payment.”' default?'No,'according'to'the'Court,'[there'are'requisites'before'one'can'
declare' default].' Without' even' reading' Pantaleon,' we' already' know'
'

'
what'these'requisites'are.''
o How' do' we' know' that' there' is' default?' Because' that' interest'
'
will'amount'to'a'penalty;'an'accessory'undertaking'triggered' '

by'default.'So,'you'can'readily'infer'that'there'is'an'additional' REQUISITES"OF"DEFAULT:'(—35:53)'
obligation' arising' due' to' the' default.' So,' non?payment' on' X' 1. There'is'liquidated"and"demandable'obligation'
date'is'tantamount'to'automatic'default'because'there'will'be' 2. A'demand'has'been'made'
an'attribution'of'interest'on'the'amount'due.'' 3. Failure'of'debtor'to'act'on'the'demand'
'

2. When'the'law"says"so'
o Examples:''
" Payment' of' taxes:' generally' for' taxes,' there' are' due'
dates,' and' the' law' provides' that' due' date.' There' is'
no'need'for'the'government'to'make'a'demand.'The'
next' time' the' government' makes' a' demand,' it' will'
be' an' assessment' together' with' penalties' and'
surcharges.'''
" Statutory' contributions' for' employees' (i.e.' SSS,'
PhilHealth,'PAG?IBIG)'
" Other'special'laws'like'the'Corporation'Code'[where'
failure' to' do' what' is' required' on' or' before' the'
'
• Given'[the'requisites],'was'there'default'in'this'case?'No,'because'there'
was'NO"OBLIGATION"(absence'of'the'first'requisite).''
• Why'was'there'no'obligation?'
o There'was'only'an'offer.'
o You' have' to' understand' that' in' credit' card' transactions,' we'
actually' have' three' contracts:' between' (i)' the' credit' card'
company' and' the' customer' [or' credit' card' holder];' (ii)' the'
customer'and'the'merchant;'and'the'(iii)'the'merchant'and'the'
credit' card' company.' Basically,' the' credit' card' company'
grants' you' a' credit' affinity' [sic]' meaning,' the' credit' card'
company' will' approve' the' transaction' on' your' behalf' and' in'
return,'you'will'pay'the'credit'card'company.''

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o So,' in' this' case,' was' there' no' obligation?' None.' There' was'
delay,' but' there' was' a' justifiable' basis.' In' fact,' the' Court'
faulted' Pantaleon' because' he' wouldn’t' leave.' Knowing' full'
well'of'the'delay,'he'insisted'on'waiting.''
• Let’s'say'today,'this'happened,'would'it'be'reasonable?'See,'then,'it'was'
seen' as' an' exercise' of' due' diligence' on' the' part' of' the' bank.' If' this'
happened' now,' the' time' that' took' AMEX' to' verify' would' not' be'
reasonable' anymore' [because' the' bank' sends' you' a' text' message' to'
verify,'even'before'you'get'the'receipt'of'the'transaction].'''
' In' Barzaga,' what' exactly' did' he' tell' the' store' clerk?' Was' there' a' statement'
TIMES"IS"OF"THE"ESSENCE'
BARZAGA"V."CA"
Notes/questions:'
• What' did' Barzaga' tell' the' store' clerk?' Did' he' tell' them' that' the' wife'
died,' that' the' wife' has' a' wish,' and' he' had' to' bury' the' wife' before'
December' 25?' No,' nothing.' There' was' just' a' statement' signifying' a'
delivery'on'a'particular'day.''
• He'made'a'follow?up'the'next'day.'But'long'story'cut'short:'there'was'
never'a'delivery.''
• Was'time'of'the'essence'in'this'case?'What'was'the'obligation,'anyway?'
There'was'an'obligation'to'deliver.'There'was'a'contract'to'supply'the'
materials' in' exchange' of' a' price.' There' was' payment' of' the' price,' so'
now' the' question' is:' was' time' of' the' essence?' Yes,' according' to' the'
Court.' Why' was' time' of' the' essence' in' the' performance' of' the'
obligation?'
o Was' the' desire' to' bury' the' wife' before' Christmas' made'
known'to'the'store'owner?'(No.)'
' Again,' the' general' rule' is' that' demand' must' be' done' to' place' a' debtor' in'
LORENZO"SHIPPING"CORPORATION"V."BJ"MARTHEL""
Notes/questions:'
• Lorenzo'needed'the'cylinders'for'the'fixing'of'its'shipping'vessel.'From'
the' perspective' of' Lorenzo,' time' was' of' the' essence' because' at' that'
time,' the' vessel' was' in' the' dry' dock,' and' everyday' was' an' additional'
cost' for' them' (because' they' have' to' pay' the' fees' in' the' dock).' Hence,'
they' needed' the' cylinders' on' a' specific' date' for' the' repair' to' be'
completed.''
• What' happened' next?' There' was' no' delivery' on' Lorenzo’s' expected'
period' rather,' way' after' the' contemplated' period.' Was' there' an'
acceptance?'Yes,'but'it'was'subject'to'verification.''
• The'question'before'the'Court'was:'“Was"the"obligation"a"‘timefisfoff
thefessencef"kind?”'
o In'the'end,'they'ruled'that'it'was'not,'because'Lorenzo'did'not'
convey'the'situation'of'repair'to'BJ'Marthel.'
'
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COMPARING'BARZAGA'AND'LORENZO'(–16:48)'
Let' us' now' synthesize' the' two' cases.' For' Lorenzo,' as' well' as' for' Barzaga,' the"
essential"obligation"was"the"delivery.'
'
In'Lorenzo,'why'was'it'ruled'that'the'time?is?of?the?essence'rule'does'not'apply?'
Let'us'say'that'Lorenzo'specified'that'delivery'should'be'made'on'a'specific'date,'
would'that'make'it'an'obligation'of'“time'is'of'the'essence”'kind?'(No,$sir.$Lorenzo$
should$have$told$the$other$company$the$reasons$why$it$was$needed$on$the$date$specified.)'
'
regarding' the' purpose?' There' was' none.' He' only' stated' the' date' and' time,' the'
place'(cemetery),'and'the'fact"that"the"construction"workers"were"waiting.'''
'
How' about' in' Lorenzo?' There' was' no' such' thing.' So' for' an' obligation' to' be' of'
“time' is' of' the' essence”' kind,' what' should' be' done?' There' should' be'
information,'and'there'should'be'agreement'by'the'debtor'that'there'should'be'
exact' performance.' In' the' case' of' Lorenzo,' there' were' indications' of' dates' but'
never' was' there' mention' of' the' dry' docking' of' the' vessel,' or' the' need' for' the'
cylinders'on'a'specific'period.'[All'there'was]'was'an'assumption'on'the'part'of'
Lorenzo.''
'
But' in' the' case' of' Barzaga,' there' was' also' no' mention' of' the' need' to' bury' the'
dead' before' Christmas,' right?' (Yes$ sir,$ but$ there$ was$ a$ mention$ about$ the$ workers$
waiting$for$the$materials.)'How'could'the'mention'of'the'workers'then,'result'to'a'
“time'is'of'the'essence”'obligation?''
'
'
HOW"A"CASE"FALLS"UNDER"THE"TIMEfISfOFfTHEfESSENCE"EXCEPTION"
default.' Now,' there' are' exceptions,' and' one' of' which' is' when' time$ is$ of$ the$
essence.'In'this'regard,'you'have'to'remember'the'rule'in'Lorenzo.'Lorenzo'is'
good'in'instructing'you.'For"something"to"be"a"“time"is"of"the"essence”"kind"
of" exception," information" should" flow" from" the" creditor" to" the" debtor" and"
the" debtor" should" agree" that" there" should" be" exact" performance" of" the"
prestation"as"mandated"by"the"obligation."There"must"be"information.'
'
'
In' Barzaga,' do' you' have' the' information' necessary?' Apparently,' the' Supreme'
Court'believes'so.'Why?'I’ll'tell'you'what'Barzaga'told'the'store.'He'said,'“You'
have' to' deliver,' at' this' time,' at' this' place,' in' the' cemetery,' because' workers' are'
waiting.”' What' could' you' gather' from' that' information?' Why' did' Barzaga'
assume' that' the' store' agreed' to' the' exact' performance' of' the' prestation?' If' you'
just' state' the' date' and' time,' that' is' NOT' a' “time' is' of' the' essence”' kind' of'
obligation,'you'then,'will'still'have'to'follow'the'general'rule'that'demand'must'
be'made.'So'let’s'go'back,'what'could'you'gather'from'the'information'provided'
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by' Barzaga?' [You' would' assume' that]' the' workers' do' not' live' there!' They' may' '
not'wait'there!'Nobody'will'receive'your'materials'if'you'deliver'the'next'day!'By' Specifying'the'time'and'date'alone'does'not'make'the'obligation'automatically'a'
just' telling' you' that' the' workers' are' there,' if' you' are' a' reasonable' person' with' “time'is'of'the'essence”'kind,'notwithstanding'the'examples'in'your'textbook.'''
some'level'of'comprehension,'you'should'understand'that'these'workers'would' '
be' working' only' for' a' specific' period' (maybe,' unitl' 5' or' 6pm),' so' you' have' to'
o "

ILLUSTRATION"6:"THE"BIRHDAY"CAKE"(—02:41)"
deliver'the'materials.' What' if' it' is' a' wedding' cake?' Or' a' birthday' cake?' You' don’t' have' to' tell'
' anymore,'because'in'a'birthday'cake,'you'have'the'date'of'the'birthday,'right?'
With' that' information,' and' with' the' acceptance' of' the' requirement' of' Barzaga,' Unless'your'cake'can'last'for'another'year,'then'probably'that'will'not'make'it'
somehow'the'Supreme'Court'correctly'ruled'that'time'was'of'the'essence'in'the' a'“time'is'of'the'essence”'kind.'
performance'of'the'obligation.'' '

'
'
Let’s' say' that' the' delivery' place' was' the' house' of' Barzaga,' will' you' have' the'
same'inference?'No.'It'would'have'been'different'if'Barzaga'ordered'the'delivery'
of' the' materials' at' his' house,' on' X' date,' at' a' specific' time.' You' would' have' to'
follow' the' general' rule,' still.' Even' if' there' were' added' information' –' “workers'
are'waiting”'–'it'would'not'have'mattered'because'you'may'have'additional'or'
materials' in' your' residence.' Hence,' demand' will' still' be' necessary.' But' the'
peculiarity' of' the' requirement' of' Barzaga' should' have' led' the' store' owner' to'
infer'and'understand'that'time'was'of'the'essence.''
'
So,' the' Court' was' saying,' “You' accepted' the' requirement' of' exact' performance'
by' Barzaga.”' Somehow,' that' was' clarified' in' Lorenzo.' In' Lorenzo,' it' said' that'
there'must'be'conveyance'of'information'and'requirement'and'acceptance.''
'
OTHER'EXAMPLES:'TIME'IS'OF'THE'ESSENCE'
Let'us'now'go'to'other'examples.''
'
o "

ILLUSTRATION"5:"THE"WEDDING"DRESS"(–06:04)"
Let'us'say,'that'you'are'getting'married.'So,'you'got'a'designer'to'make'you'a'
wedding' dress.' You' said' to' the' designer,' “Please' deliver' the' wedding' dress'
by'December'31,”'because'that'is'your'wedding'day.'You'want'to'go'out'with'
a'bang.'On'December'31'however,'there'was'no'delivery.'Remember'that'the'
wedding' is' on' December' 31' evening,' so' you' required' the' deliver' on'
December'31'in'the'morning.'Would'there'be'an'automatic'default?'
'

'
What'will'be'required'to'make'it'a'“time'is'of'the'essence'kind”?'Discuss'the'rule.'
If' you' were' the' bride,' what' will' you' tell' the' designer?' “You' have'to' deliver' on'
December' 31,' at' this' time,' at' this' place,' because' I’m' getting' married' on' the'
evening'of'the'same'day.”'That’s'the'requirement.'It'is'NOT"important'that'you'
state'that'it'is'needed'on'that'day.'What'is'crucial'is'that'there'is'AGREEMENT'
and'INFORMATION'on'the'part'of'the'debtor.'So,'if'the'debtor'is'informed,'and'
the' debtor' agreed,' then' [there' could' be' automatic' default' in' case' of' non?
performance].'

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'
"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
TUESDAY,'11'NOVEMBER'2014'
'

'

REVIEW" demand.' However,' if' there' was' demand' then' seller' could' have' just'
" repurchased'the'property'from'Land'Bank.'
'
'

CASES"WHEN"DEMAND"IS"NOT"NECESSARY:'
1. Parties'expressly'stipulate'in'the'contract;' Seller'can'repurchase'and'comply'with'this'obligation.'However,'there'was'no'
2. When'the'law'so'provides;' demand.' Therefore,' seller' was' unaware' whether' there’s' a' forthcoming' need'
3. Time'is'of'the'essence;'AND' to'fulfill'the'prestation.'
'

4. WHEN"DEMAND"WOULD"BE"USELESS' '
'

' The$question$is:$What$is$meant$by$demand$being$useless?'
CASES"[ARTS."1169]"
ALMOCERA"V."ONG"
Case'about'DELAY'when'demand'is'useless'
Notes/Questions:$
• In'this'case,'Johnny'Ong'was'entitled'to'a'townhouse'unit.'There'was'a'
Contract' to' Sell' and' you' have' a' seller' (Almocera)' selling' townhouse'
units' to' buyer' (Ong).' In' exchange,' buyer' would' pay' X' amount.' The'
obligation'of'the'buyer'regarding'the'payment'of'the'price'is'the'down'
payment'and'the'balance'which'was'payable'when'the'unit'is'delivered'
to' him.' However,' there' was' a' foreclosure' of' a' mortgage' on' the'
townhouse'units'by'Land'Bank."
• The' seller' was' supposed' to' complete' and' convey' the' unit' within' a' 6?
"
MEGAWORLD"V."TANSECO"
Case'about'DELAY'without'need'of'demand'because'demand'is'USELESS"
Notes/Questions:$
• In'this'case,'there'is'a'Contract'to'Sell.'The'seller'is'Megaworld'and'the'
buyer'is'Tanseco.'What'was'being'sold'was'a'condominium'unit'for'16'
million.' It' was' payable' as' follows:' a' 30%' downpayment' less' the'
reservation' fee,' a' 30?month' installment,' and' the' balance' of' 2.5' million'
payable'within'7'days'from'receipt'of'a'notice'of'turnover."
• The'condominium'unit'was'to'be'delivered'by'October'31,'1998'with'an'
additional'grace'period'of'6'months."
'
'

month'period'and'upon'delivery'the'balance'would'be'due.'That’s'the'
very'nature'of'a'Contract$to$Sell—you'pay'the'amount'and'there'would'
be'the'delivery'of'the'property'by'way'of'a'Contract'of'Sale'or'a'Deed'
of'Absolute'Sale.'
• There' was' no' conveyance' of' the' property' after' six' months' and' the'
seller'was'already'in'default'even'if'there'was'no'demand'by'the'buyer'
to'convey.'In'this'case,'demand"was"not"necessary."'
• Demand"was"useless."Why?'Due'to'the'foreclosure'of'the'mortgage'on'
the' unit' by' Land' Bank' making' the' obligation' impossible' to' perform.'
Impossible' means' it' could' not' be' done' at' all,' because' the' unit' was'
foreclosed' by' Land' Bank,' and' therefore,' the' townhouse' unit' was'
auctioned' off' by' Land' Bank.' So,' that' rendered' it' impossible' for' the'
seller'to'convey'and'demand'is'deemed'to'be'useless.'
WHAT"IS"A"GRACE"PERIOD?"'
A'grace'period'is'a'period'that'will'incur'after'the'failure'of'performance'by'
the'debtor'from'the'due'date.'
'
IS"DEMAND"NECESSARY"FOR"A"GRACE"PERIOD"TO"KICK"IN?"
This'can'be'inferred'from'the'ruling'in'the'case'of'Pantaleon.'A'grace'period'is'
not'an'obligation.'It'is'a'right.'The'rule'on'necessity'of'demand'is'important'
only'with'respect'to'obligations.'A'grace'period'is'a'right,'therefore,'a'demand'
is'not'necessary'to'make'it'effective.'It'becomes'effective'as'a'matter'of'course'
being'a'benefit'of'the'debtor.'So,'let’s'say'the'due'date'arrives'and'there'is'no'
fulfillment' of' the' prestation,' then' the' grace' period' will' be' automatically'
triggered.'
'

"
' • Did'Tanseco'pay'the'downpayment?'Yes.'"
o "

ILLUSTRATION"1:"IS"IT"REALLY"IMPOSSIBLE"FOR"SELLER"TO"PERFORM?"
In' this' case' of' Almocera,' if' B' made' the' demand' on' S,' S' could' have'
repurchased' or' redeemed' the' property' from' Land' Bank.' So' it’s' not' really'
impossible.' It' still' could' be' done.' So' why' was' it' useless?' Let’s' say' the'
redemption' price' is' X' amount.' Seller' could' just' pay' it,' but' there' was' no'
• Did'Tanseco'pay'the'installments?'Yes"
• So,'Tanseco'fully'paid?'No,'except'for'the'balance'that'was'due'within'7'
days'upon'receipt'of'notice'of'turnover."
• After' three' years,' Megaworld' sent' a' notice' of' turnover' to' Tanseco.'
Thus,' delivery' happened' only' three' years' after.' After' receiving' the'

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'

notice,' Tanseco' replied' that' he' was' cancelling' the' contract' between'
Megaworld' for' failure' of' Megaworld' to' deliver' it' within' the' period'
stipulated' in' the' contract.' Tanseco' filed' a' complain' with' the' HLURB'
and'the'HLURB'decided'the'case'in'favor'of'Megaworld."
o However,'the'Supreme'Court'ruled'in'favor'of'Tanseco'saying'
that'Megaworld'incurred'delay'even'though'Tanseco'did'not'
demand' because' demand' was' useless." Even" if" Tanseco"
• Comparing' Illustration' 3' to' the' case' of' Almocera,' it' will' not' happen'
with'the'latter'because'it'will'take'some'time.'Although'it'is'technically'
possible,'it'still'cannot'be'done'immediately'after'receipt'of'the'demand.'
• In' fact,' in' Almocera,' it' was' an' act' of' fraud' as' found' by' the' Supreme'
Court.'
'
o "

ILLUSTRATION"4:""ANOTHER"EXAMPLE"WHEN"DEMAND"IS"USELESS"
demanded"it"within"the"period,"Megaworld"won’t"be"able"to" In'a'Contract'of'Sale'or'a'Contract'to'Sell,'the'seller'conveys'the'property'to'
fulfill"the"obligation"because"it"was"still"in"construction." another'party.'This'constitutes'a'negation'of'the'prestation.'The'seller'would'
• Therefore,'is$impossibility$the$test$for$when$demand$is$deemed$useless?" not'be'in'a'position'to'convey'on'the'given'due'date.'Even'if'we'say'that'there'
' is'repurchasing,'that'would'not'apply.'
o "

ILLUSTRATION"2:"IMPOSSIBILITY"IN"THE"CASE"OF"MEGAWORLD"
'

The' provision' is' that' “demand' is' useless' when' the' obligor' has' rendered' it'
beyond'his'power'to'perform”.'
' •
In' the' case' of' Megaworld,' let’s' say' you' have' a' 40?storey' condominium' and'
Megaworld' only' built' up' to' 25' floors.' There' is' now' way' that' Megaworld,'
upon' receipt' of' the' demand' and' even' after' the' lapse' of' the' grace' period,'
would'be'able'to'construct.'It’s'useless.'That'is'the'finding'of'the'SC.'Even'if'
Tanseco' made' the' demand' after' the' grace' period,' Megaworld' could' have'
constructed' the' condominium.' In' fact,' Megaworld' only' finished' the' condo'
after'3'years.'So'it'was'impossible'for'Megaworld'to'perform.'
'
'
When' you' say' demand' being' useless,' the' debtor' would' not' be' able' to' perform'
the'prestation'IMMEDIATELY'upon'receipt'of'the'demand.''
When'we'say'immediately,'we’re'assuming'it’s'the'DUE'DATE'and'the'
prestation'is'LIQUIDATED'and'DEMANDABLE,'as'ruled'in'the'case'of'
Pantaleon.'
'
DEFAULT'[?27:43]'
Default'or'mora'is'a'basis'of'breach'of'an'obligation.'The'law'uses'the'term'delay,'
but' not' every' delay' in' the' performance' of' an' obligation' means' legal' delay' or'
default.''

' '
COMPARING'ILLUSTRATIONS$1'AND'2$ Ordinarily,' default' occurs' when' the' obligation' is' due' and' demandable.' And'
What$is$the$definition,$then,$of$when$demand$is$deemed$useless?$$ upon'receipt'of'a'demand'from'the'creditor,'the'debtor'does'not'perform.'
• Does'that'mean'that'impossibility'is'the'test?' '
In' the' case' of' Almocera,' it’s' not' impossible' because' there' is' the'
'

• GENERAL"RULE:"
possibility' that' S' could' have' repurchased' or' redeemed' the' unit' from' Creditor"must"make"a"demand.$The'creditor'must'make'a'demand'to'put'the'
Land'Bank.'However,'the'Supreme'Court'said'demand'is'useless.' debtor' in' default.' Generally,' there' is' no' form' required.' It' can' be' written' or'
' verbal.$
'

Definition"of"when'demand'is'useless—$
'

"
It' means' that' when' the' creditor' makes' a' demand' on' the' debtor,' the' debtor' There'are'certain'laws'requiring'a'specific'form'on'demand.'But'the'general'rule'
can'immediately'perform'the'prestation'upon'the'receipt'of'the'demand'from' is'that'there'is'no'form.'It'can'be'judicial'or'extra?judicial.'
the'creditor.' '
'

" Judicial"demand'is'done'by'filing'a'case'in'court.'
'
o "

ILLUSTRATION"3:"DEMAND"IS"USELESS"IN"A"MONETARY"OBLIGATION"
I' owe' you' Php100,000' and' you' made' a' demand' on' me.' ! Even' if' you' know'
that'I'am'I'have'no'money'at'all,'you'still'have'to'make'a'demand'because'it’s'
possible' for' me' to' immediately' borrow' from' someone' and' pay' you' upon'
receipt'the'demand.'
'
'
Extrafjudicial"demand"is'done'by'sending'a'demand'letter.'
• What$do$you$state$in$the$demand$letter?$
o Example:' “This' is' to' demand' the' performance' of' the'
prestation.”'It'should'not'be'a'mere'request.$
• In'one'case,'there'was'a'mention'of'a'follow?up.'That'is'not'appropriate.'
The'Court'did'not'consider'the'term'follow?up'or'request'as'a'demand.'

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So,'to'be'on'the'safe'side,'you'say:'“This'is'to'demand$the'rendering'of' • Example:' Debtor' shall' pay' on' due' date,' and' if' debtor' fails' to' pay' on'
the'prestation.”' due'date,'debtor'shall'pay'the'penalty'of'1%'per'month'on'the'amount'
' due'until'full'payment.''
Now'the'default'we’re'dealing'with'right'now'is'DEFAULT'ON'THE'PART'OF' '
THE'DEBTOR.'Because'there'can'also'be'default'on'part'of'the'creditor,'or'mora' (2) When"the"law"provides"
accipiendi.'' • Examples:'tax'laws'imposing'deadlines'for'filing'of'taxes'as'well'as'
' filing'of'returns,'or'rules'&'regulations'imposing'deadlines'for'filing'
Or' it' can' be' default' on' both' the' debtor' and' the' creditor,' on' the' side' of' both' reports'of'corporations'with'the'SEC,'or'deadlines'for'remittances'of'
parties'in'cases'of'reciprocal'obligations,'which'is'compensatio'morae'or'mutual' certain'funds'like'PAGIBIG'or'SSS'
default.' '
' • There'is'no'need'for'these'gov’t'agencies'to'make'a'demand'from'the'
debtor.'Debtor'has'to'pay'on'due'date,'otherwise'the'debtor'will'be'in'
'

KINDS"OF"DEFAULT:"
1. Mora'Solvendi'(default'on'the'part'of'the'debtor)' automatic'default'and'the'consequence'will'be'that'there'will'be'
2. Mora'Accipiendi'(default'on'part'of'the'creditor)' penalties,'interests'and'other'surcharges.''
3. Compensatio'Morae'(mutual'default)' "
'
(3) Time"is"of"the"essence""
'
• You'have'to'understand'it’s'not'the'object'or'the'prestation'that'makes'
For'us'to'have'a'default'with'respect'to'debts,'what'is'important'is'that—'
the'obligation'a'time'is'of'the'essence'kind.'What'is'crucial'is:'there'is'a'
(1) There"is"an"obligation"that"is"liquidated"and"demandable"
debtor' and' a' creditor.' Debtor' conveys' that' it' is' of' the' essence.' And'
• What'do'you'mean'by'‘liquidated’?'It'is'determined.''
there'has'to'be'agreement'by'the'debtor.'
• Let’s' say' it’s' a' note' obligation.' How' can' you' demand' for' exact'
• We'gather'that'in'the'case'of'Barzaga.'It'was'sufficient'for'the'credit'to'
fulfillment' if' the' amount' is' not' determined?' There' will' simply' be' a'
impress' upon' the' store' owner' that' creditor' needed' the' supplies' on' a'
determination'by'a'third'party.'In'that'case'it’s'merely'demandable'but'
certain' date' as' of' a' certain' time' because' workers' were' waiting' at' the'
it’s'not'liquidated.'Hence,'there'is'no'way'that'the'debtor'may'be'able'
cemetery.'The'information'conveyed'on'the'debtor'was'sufficient'to'rest'
to' comply' immediately.' So,' the' requirement' under' the' law' is' that' the'
upon' the' debtor' that' there' should' be' exact' fulfillment' and' the' debtor'
obligation'must'be'demandable'and'liquidated.'
accepted' the' order' upon' those' terms.' The' Court' said' that' time' was' of'
'
the'essence.''
(2) Debtor" delays" in" the" performance" after" receipt" of" the" extrajudicial" or"
• As' I' explained' last' time,' if' you' are' a' reasonable' person,' you' ought' to'
judicial"demand"from"the"creditor."
know' that' you' could' not' deliver' the' next' day' because' the' workers'
• In'which'case'you'have'default'or'legal'delay.'
would' no' longer' be' there.' That' was' different' in' the' case' of' Lorenzo$
'
shipping.''
As' I' explained' earlier,' default' is' relevant' only' with' respect' to' obligations.' So,'
• In' Lorenzo:' Yes,' time' was' of' the' essence' from' the' point' of' view' of' the'
when'you’re'dealing'with'a'right,'there'is'no'default.'There'is'no'need'to'make'a'
debtor.' The' vessel' owner' placed' the' vessel' on' dry' dock' for' repair.' So'
demand'to'make'a'right'effective'(i.e.'grace'periods).''
the'vessel'owner'was'incurring'costs'and'the'vessel'owner'wanted'the'
'
cylinders' to' be' delivered' as' contemplated' for' the' repairs' to' stop' the'
SUMMARY:" EXCEPTIONS" TO" THE" GENERAL" RULE" ON" NECESSITY" OF"
accrual'of'costs.'However,'in'the'case'of'Lorenzo,'that'information'never'
DEMAND"TO"PLACE"A"DEBTOR"IN"DEFAULT"[?32:30]"
reached'the'supplier.'So'the'supplier'only'knew'that'there'was'a'date'of'
(1) When"the"parties"so"stipulate"
deliver' but' the' creditor?buyer' did' not' impress' upon' the' supplier' that'
• Example:' Debtor' shall' pay' on' due' date' without' need' of' notice' or'
the' cylinders' should' be' delivered' on' X' date' because' on' X' date' the'
demand'from'the'creditor'
vessel'would'be'on'dry'dock'for'repair.'Therefore,'if'you'don’t'deliver'
• Short' of' that' express' stipulation,' you' can' also' stipulate' the'
on'X'date'then'delivery'would'be'useless.''
consequences'if'there'is'no'payment'on'due'date.'In'which'case,'there'is'
• For'an'obligation'to'be'time$is$of$the$essence$kind,'it'is'not'the'object'that'
an' inference' that' there' is' an' automatic' default' notwithstanding' the'
counts'but'it'is'the'flow'of'information'from'the'creditor'to'the'debtor.'
absence'of'demand.'

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And' the' acceptance' by' the' debtor' of' that' characterization' of' the' RECIPROCAL"OBLIGATIONS"
obligation'that'time'is'of'the'essence'in'its'performance.'' SOLAR"HARVEST"INC."V."DAVAO"CORRUGATED"[?45:40]"
' Case'about'recission'despite'lack'of'demand"
(4) When"demand"is"useless" Notes/Questions:$
• As'I'explained'using'the'cases'of'Almocera$and'Megaworld—' • The' claim' of' Davao' was' the' boxes' were' made' but' Solar' did' not' pick'
o Demand'is'useless'when'the'debtor'upon'receipt'of'a'demand' them'up.'The'price'was'made'but'there'was'no'delivery.'The'issue'here'
by' the' creditor' will' not' be' in' a' position' to' immediately' was'whether'it'should'be'picked'up'by'Solar.'The'Supreme'Court'ruled'
perform'the'mandated'prestation.'' that'Davao'was'never'in'default.'
o In'the'case'of'Megaworld,'it'was'easy'because'the'building'had' '
yet' to' be' constructed.' It' was' privy' in' the' other' case' of' the'
'

townhouse' unit' but' that' was' also' an' example' of' demand'
being' useless.' Because' by' allowing' the' property' to' be'
acquired' by' another' party,' somehow,' the' seller' rendered' it'
impossible'for'the'seller'to'comply'with'the'obligation'on'the'
given'due'date,'even'if'there'was'a'demand,'the'seller'would'
not' be' in' a' position' to' immediately' perform' the' required'
prestation.'
WHAT"IS"A"RECIPROCAL"OBLIGATION?'
In' a' reciprocal' obligation,' both' parties' are' sellers' and' buyers,' debtors' and'
creditors' at' the' same' time.' The' seller' is' the' debtor' with' respect' to' the'
conveyance'of'the'property'and'buyer'is'the'creditor.'On'the'other'hand,'with'
respect' to' the' payment' of' the' price,' buyer' is' the' debtor' and' seller' is' the'
creditor.' Each' party' has' a' prestation' to' be' performed' in' exchange' for' the'
other.'
'

"
o What' is' immediate?' It’s' due' date,' there' is' a' demand,' and'
• In' reciprocal' obligations,' default' by' one' party' begins' the' moment' the'
debtor'has'to'comply.'
other' party' performs' the' prestation' incumbent' upon' that' party.'
• What'if'it’s'just'one'day?'Maybe'that'will'be'considered'only'as'a'light'
Conversely,' if' one' party' is' not' ready,' willing' and' able' to' perform' the'
breach' but' it' will' still' be' a' breach' nevertheless.' So' there' will' still' be'
prestation'incumbent'upon'that'party,'the'other'party'would'not'be'in'
consequences'maybe'in'nominal'damages.'
default."
• Of'course,'from'a'practical'perspective,'let’s'say'I’ll'execute'the'Deed'of'
'
Sale'tomorrow'because'it’s'already'5:00pm'and'the'staff'is'gone.'Then' o "

it’s' only' reasonable' to' say' that' it’s' okay' to' execute' it' tomorrow' and' it'
will'most'likely'not'be'considered'as'a'breach.''
• If' the' property' was' sold' to' another' party' by' Land' Bank,' would' it' still'
be' possible' for' S' to' redeem?' You' will' learn' later' on' that' in' cases' of'
foreclosure,' there' is' a' one?year' period,' generally,' to' redeem,' meaning'
they'acquire'the'property'from'the'foreclosing'bank.'Assuming'that'the'
foreclosing'bank'is'the'winning'bidder.'If'it’s'a'third'party,'yes'you'can'
still'have'from'that'third'party'within'that'period.'But,'after'that'period,'
it’s'upon'the'discretion'of'the'winning'bidder'whether'to'reconvey'the'
property.'
Can' the' fact' that,' for' example,' a' seller' intentionally' sold' something' to'
ILLUSTRATION"5:"""
You'have'a'Contract'of'Sale.'You'have'a'Seller'and'a'Buyer.'Seller'will'convey'
the' property' and' in' exchange,' buyer' will' pay' the' price.' If' we' have' this'
situation'and'without'saying'anything'more,'when'should'performance'of'the'
prestation'be'done?'Simulatneously.'
'
So,' on' Day' 1:' Seller' should' convey' the' property' and' Buyer' should' pay' the'
price.' That’s' the' general' rule.' So,' if' you' don’t' have' any' special' provision' in'
the' contract,' it' means' the' prestations' to' be' performed' by' the' parties' in' a'
reciprocal'obligation'would'be'performed'simultaneously.'
'

• '
another'party'be'a'reason'for'a'demand'being'useless?'Yes,'in'fact'that' • If'you'don’t'have'any'special'provision'in'the'contract'or'obligation,'the'
is'a'classic'place.'In'this'case,'it'was'involuntary.'But'if'it'was'deliberate,' performance'should'be'simultaneous.''
there'is'more'reason'to'say'that'demand'is'useless.' • So,'in'our'example,'the'conveyance'of'the'property'and'payment'of'the'
• So'let’s'say'that'I’m'the'seller.'I'entered'into'this'contract'and'the'next' price'should'both'be'done'on'Day'1.'
day'I'sold'the'property'to'somebody'else.'Demand'would'be'useless'in' • If'the'price'is'paid'on'Day'1'and'the'seller'was'unable'to'convey,'will$the$
that'case.' seller$be$in$default?''
' o Yes,' automatically' based' on' that' rule,' because' the' obligation'
" requires'simultaneous'performance.'
"
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o Therefore,' when' buyer' was' ready,' willing' and' able' to' '
perform' but' the' seller' was' not,' the' seller' is' automatically' in' What' is' the' remedy?' How' can' you' pay' somebody' who' refuses' to' accept' the'
default'and'demand'is'no'longer'necessary.' payment?'How'can'the'buyer'complete'the'transaction?''
' '
Let’s' say' you' have' here:' Seller' conveys' the' property.' Buyer' paid' the' price.' But'
'

GENERAL"RULE:'
Demand"is"not"necessary"in"reciprocal"obligations."One'party'automatically' there'is'refusal'on'aprt'of'the'seller'to'accept.'We'will'assume'that'the'refusal'is'
defaults' the' moment' the' other' party' is' ready,' willing,' and' able' to' perform' unjustified'and'that'there'is'no'legal'basis'for'the'seller'to'refuse.'Because'there'
their'required'prestation." are'legal'grounds'for'seller'to'refuse'payment'(i.e.'there'is'incomplete'payment,'
'
therefore'the'seller'can'refuse),'but'in'this'case'we'can'assume'it’s'full'payment'
"
and'there'is'no'reason'for'the'seller'to'refuse.''
• That' rule' does' not' apply' if' you' have' this' situation:' when" you" have"
'
successive"performance"of"the"prestation.'
What" is" the" remedy" of" the" debtor?' The' debtor' cannot' have' the' remedies' of'
'
o " specific' performance,' resolution,' or' damages,' like' in' an' ordinary' obligation.'
ILLUSTRATION"6:""" Because'here,'B'is'really'the'debtor'and'not'the'creditor'who'is'entitled'to'those'
The'parties'agreed'that'seller'would'convey'the'property'on'Day'1,'and'buyer' remedies.'So'what'can'he'do?'B'wants'to'complete'the'transaction,'what'can'he'
would'be'obligated'only'to'pay'the'price'on'Day'2.' do?''
' '
On' Day' 1,' seller' conveyed' the' property' to' buyer.' On' Day' 2,' there' was' non? Later' on' you' will' learn' there' is' an' action' called'consignation.' This' is' a' form' of'
payment' of' the' price.' Would' buyer' be' in' default?' No,' we' don’t' apply' that' payment.'If'seller'refuses'to'accept'the'price'and'buy'can'go'to'court'and'file'an'
rule' on' reciprocal' obligations.' That' rule' will' only' apply' if' you' have' action' for' consignation.' Meaning,' he' will' say' that' seller,' without' justification,'
simultaneous'performance'in'reciprocal'obligations.'That'rule'is'inapplicable' refuses'to'accept'the'price'and'after'giving'notice'of'this'action,'seller'still'refuses'
if' you' have' successive' performance' of' the' required' prestations,' like' in' this' to'accept'the'price.'The'buyer'can'now'deposit'the'payment'in'court,'if'approved'
illustration.' by'the'Court,'that'will'be'tantamount'to'payment.''
'

' '
• Therefore,'in'the'illustration'above,'Seller'should'have'made'a'demand' However,'if'the'buyer'keeps'the'price,'what’s'the'legal'consequence?''
on' B' on' Day' 2' for' the' payment' of' the' price.' Only' upon' making' that' '
demand'would'B'be'in'default.' Our' situation' is' there' is' tender' of' payment.' Tender' of' payment' is' when' you'
• That' was' the' ruling' in' the' case' of' Solar.' But' in' Solar,' it' was' reversed.' show' payment' to' seller' but' seller' refuses.' If' the' buyer' keeps' the' price,' will' the'
The'payment'of'the'price'was'first,'and'the'delivery'of'the'boxes'came' buyer' have' any' liability?' Let’s' say' there' is' eventually' a' litigation' between' the'
second.'There'was'payment'of'the'price,'no'demand,'and'there'was'no' parties,'will'buyer'still'be'obliged'to'pay'the'price?''
delivery.'' '
• The' Supreme' Court' said' that' the' rule' applies' only' to' reciprocal' Eventually,'the'seller'says'I'want'to'get'the'payment'now.'Is'buyer'still'obliged'to'
obligations' requiring' simultaneous' performance' of' the' mandated' pay'the'price?'Yes.'Because'mere'tender'of'payment'is'not'payment.'There'must'
prestations,' but' not' in' successive' performance' of' the' required' be'actual'payment.'Will'buyer'be'liable'to'pay'interest'by'way'of'damages?''
prestations.' '
' Let’s'say'the'contract'provided'in'case'of'non?payment,'there'will'be'interest'and'
WHAT"IS"MORA"ACCIPIENDI?'[?1:03:00]" penalty'for'default.''
Default$on$the$part$of$the$creditor$ '
$ First' question,' is' buyer' liable' to' pay' interest' by' way' of' damages' because' buyer'
Seller' defaults' in' the' receipt' of' the' price.' Seller,' upon' receiving' tender' of' paid'late'notwithstanding'the'fact'that'is'was'due'to'the'fault'of'the'seller?'
payment,'meaning'buyer'shows'seller'the'money'and'the'seller'refuses'to'accept' '
it,'that’s'mora"accipiendi.'' Example:' Buyer' tendered' payment' of' 1' million,' seller' refuses.' After' one' year,'
' seller' says' that' he' wants' to' get' the' money' now.' The' contract' provided' for'
What’s'the'consequence'of'mora'accipiendi?'It'amounts'to'a'breach.''
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Prepared'by:' ' ' ' ' ' ' ' '
TRISHA'ALYANNA'AH''[1F'2014?2015]'//'11'NOV'2014' ' '
'
payment'of'interest'of'0.5%'per'month'based'on'the'unpaid'price'and'penalty'of'
20%'of'amount.''
• Is$buyer$supposed$to$pay$interest?'Interest"will"be"due."'
o Why?' Because' the' buyer' continued' to' hold' on' to' the' money'
and' presumably' use' the' money' in' the' meantime.' But' you’d'
say'that’s'the'fault'of'the'seller.'The'seller'could'have'accepted'
and' prevented' the' accrual' of' interest.' But' the' buyer' had' a'
remedy'in'this'instance.'The'remedy'is'consignment'with'the'
court'to'complete'the'payment.'So,'by'deciding'to'hold'on'to'
the' money,' the' buyer' will' be' liable' to' pay' the' interest' in' the'
meantime.'Because'interest'is'not'based'on'default,'but'based'
on'usage'in'the'meantime'of'the'money.''
o What' really' happens' here' is' that' it’s' really' not$ paying.' It’s'
really' the' fault' of' the' seller.' But' seller' later' on' changes' his'
mind'and'makes'a'demand'for'the'payment'of'B'for'the'price.'
Then,' at' that' point,' B' will' be' in' default.' That’s' why' the'
remedy'is'for'B'to'deposit'the'money'in'court'to'prevent'that'
from'happening.'
• Is$buyer$supposed$to$pay$penalty?$Penalty"is"not"due.'
o Penalty' is' not' due' because' there' is' no' legal' basis' for' that'
penalty' to' accrue' because' it' is' based' on' the' default' of' the'
buyer.'The'one'who'is'in'default'here'is'not'the'buyer,'but'the'
seller'for'refusing'to'accept'payment.'
' the"damages.''
o "
ILLUSTRATION"7:"'[?1:20:40]"
Let’s' say' it’s' actually' buyer' paying' the' price' first' and' then,' seller' conveying'
the' car.' Buyer' pays' the' price.' Seller' accepted.' Buyer' was' conveyed' the' car.'
Buyer' refused' without' justification.' Mora' accipiendi.' Buyer' is' the' creditor'
with'respect'to'the'conveyance'to'the'car'and'refused'to'accept.'
' Why$is$that$the$rule?$
' •
• Question'now'based'on'Illustration'5:'What$will$be$the$liability$of$S$or$B$with$
respect$to$the$car?$$
• Remember'this'is'a'sale.'The'car'should’ve'been'conveyed'to'B'but'B'refused'
to'accept.'So'in'the'meantime,'S'retained'possession'of'the'car.'To'complete'
the' payment,' meaning' the' conveyance' of' the' car.' Later' you’ll' learn' that'
payment' means' performance' of' the' prestation' and' not' just' payment' of'
money.'Let’s'say'seller'wants'to'complete'the'conveyance.'What'can'he'do?'
He'can'do'the'same'thing.'Consign'the'car'through'the'court.'$
• But'let’s'say'instead'of'taking'that'action,'seller'kept'the'property.'What'will'
happen?'Let’s'say'the'property'is'lost.'Who'will'be'liable?'If'only'B'accepted'
the'delivery,'then'the'loss'would'not'have'happened.'$
• Later'on,'you’ll'learn'that'conveyance'is'the'one'that'completes'the'transfer'
of'the'ownership.'It'is'done'in'a'public'document.'$
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' ' ' ' ' ''' '''''''''''''''''Compiled'by:''
' '''''''''''''''''''''TERESA'KRISTEL'BANTA'[1F'2014?2015]'
o In'which'case,'the'execution'of'the'public'document'is'tantamount'
to' delivery.' So' there' could' be' transfer' of' ownership,'
notwithstanding' that' there' is' delay' in' the' actual' and' physical'
transfer'of'possession.$
• Let’s' assume' that' seller' was' in' possession.' We' don’t' have' any' other'
information' who' caused' the' loss.' We' only' know' that' S' retained' the' car.'
Who’s'at'fault'with'respect'to'the'loss'or'damage?$
o S."Why?$Because'S'is'the'one'in'control.'So'if'something'happens,'
the'law'assumes'that'S'is'the'one'at'fault.'
o It'will'be'incumbent'upon'S'to'show'that'it’s'not'through'his'fault.'
The'question'now'is'the'degree'of'fault'of'S.'If'it’s'a'force'majeure,'
then'no'problem,'then'it'could'be'for'the'account'of'B,'the'one'who'
refused'acceptance'upon'delivery.'
• Let’s'say'it’s'due'to'the'negligence'of'S.'Who$will$now$bear$the$loss$or$damages?'
We'have'to'make'a'distinction:'
o If' it’s' simple" negligence" resulting' in' damage' to' the' car,' who'
should'bear'the'loss?''
o If'it’s'gross"negligence'and'there'is'bad"faith,'who'should'bear'the'
loss?'
'
'
HERE"IS"THE"RULE:'[?1:28:30]$
The'rule'is'if'it’s'lost'through'the'fault'or'negligence'of'the'seller,'or'even'if'it’s'
through'a'fortuitous'event,'it'will'be'for'the'account'of'the'buyer.'B"will"bear"
'
However,'if'it’s'based'on'gross$negligence$or$bad$faith'of'the'seller,'then'S"will"
be"liable."
'
"
If'it’s'a'fortuitous'event,'why'should'B'still'bear'the'loss?'Because'B'is'in'
default'as'a'creditor,'therefore'any'loss'due'to'a'fortuitous'event'would'
be'shouldered'by'B.'
• If' S' is' negligent,' who' should' bear' the' loss?' B.' Why?' Because' if' B'
occasioned' that' instance' by' refusing' to' accept' the' car.' If' B' had' only'
accepted'the'car,'then'S'would'not'have'retained'possession'and'would'
not'be'in'a'position'of'that'negligent'act'or'fault.'
o It'changes'if'it’s'GROSS'NEGLIGENCE.'Why?'
o Because'the'general'rule'is'that'any'loss'or'damage'to'the'car'
will'be'for'the'account'of'B,'the'creditor'in'default,'regardless'
of' the' cause' of' that' loss' or' damage;' unless' it' is' gross'
negligence'or'bad'faith,'on'the'part'of'the'debtor'or'the'seller'
in'our'example.''
Prepared'by:' ' ' ' ' ' ' ' '
TRISHA'ALYANNA'AH''[1F'2014?2015]'//'11'NOV'2014' ' '
'
• Why$is$that$an$exception?'We'have'to'take'a'short'historical'journey'a'few'
meetings'ago.'
o We'explained'gross'negligence'or'bad'faith'on'the'account'of'
S' wherein' if' you' allow' that,' S' will' now' be' in' a' position' to'
negate' the' juridical' tie.' It’s' as' if' there' is' no' obligation' on' the'
part' of' S.' So' ordinary' or' simple' negligence' may' leave' S' free'
from'any'liability.'
o But' when' it' comes' to' gross' negligence' or' bad' faith,' that’s' a'
different'thing.'Because'the'law'would'not'have'contemplated'
that' situation' wherein' the' debtor' would' not' have' any'
obligation' at' all.' So,' the' extense' of' the' risk' assumed' by' B'
excludes'the'gross'negligence'of'the'seller.'
' have'what'you'call'a'certificate$of$title.'
COMPENSATIO"MORAE"
CORTES"VS"CA"&"VILLA"ESPERANZA"DEVELOPMENT"CORP"[f1:33:43]"
Case'about'delay'of'both'parties'or'Compensatio'Morae'
Notes/Questions:$
• What'was'the'contract'here?'A'Contract'of'Sale.'
• What'was'the'obligation'of'the'seller'(Cortes)?'To'convey'the'property.''
o How'should'the'seller'convey'the'property?'Through'a'Deed'
of'Sale'and'Transfer'Certificate'of'Title.'
o So,' the' contract' mandated' the' seller' to' deliver' two'
documents?'One,'a"Deed"of"Absolute"Sale.'
" Are' there' any' other' peculiar' requirements?' The'
Deed'of'Absolute'Sale'should'be'notarized.'
• What$do$you$mean$by$‘notarized’$in$this$case?$You'see,'there'are'different'
notarizations.'
' or'compensation$morae—'
'
KINDS"OF"NOTARIZATIONS:"
1. Jurat:' a' jurat' is' an' affirmation' under' oath' that' the' statements'
contained'in'the'affidavit'or'some'document'are'correct$
2. Acknowledgment:'is'an'affirmation'or'an'acknowledgement'by'the'
contracting'parties'that'they'voluntarily'and'willingly'executed'the'
contract'or'document.$
'
"
• A'jurat'is'only'a'statement'of'correctness'of'the'statements'contained'in'
the'document.'
• An' acknowledgement,' on' the' other' hand,' is' what' you' see' in' deeds' or'
contracts'(i.e.'a'Deed'of'Absolute'Sale).'It'is'the'acknowledgment'of'the'
parties,'they'are'affirming'that'it'is'their'contract.'
• Hence,'in'a'Deed'of'Absolite'Sale,'you'have'an'acknowledgment.'That’s'
the'notarization'here.'
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' '''''''''''''''''''''TERESA'KRISTEL'BANTA'[1F'2014?2015]'
o The' parties' appeared' before' a' notary' public' and' confirmed'
under' oath' that' they' voluntarily' and' willingly' executed' the'
contract.'
• That’s'the'first'document'required:'a'notarized'Deed'of'Absolute'Sale.'
• What’s$the$second$document?'A'Transfer'Certificate'of'Title.'
o First,'what’s'important'is'that'it’s'a'Certificate'of'Title.'It’s'an'
evidence'of'ownership'of'a'land.'
o Second,'why$is$it$‘transfer’?'Because'the'first'one'is'the'Original'
Certificate'of'Title.'
" All'subsequent'ones'are'called'a'Transfer'Certificate'
of'Title.'
o When' you' have' a' parcel' of' land' that’s' registered,' you' will'
" One' will' be' in' the' Register' of' Deeds' and' you' will'
have'an'Owner’s$Duplicate$Original.'That’s'what'you'
keep.'
• That’s' what’s' required' in' this' case.' Why' do' you' need' those' two'
documents?' Because' if' you’re' a' buyer' and' you' want' to' register' the'
property' in' your' name,' the' Register' of' Deeds' will' require' you' to'
present'the'Owner’s$Duplicate$Original$of'the'Transfer'Certificate'of'Title'
plus'the'Deed'of'Conveyance'or'the'Deed'of'Absolute'Sale.''
• On'the'other'hand,'the'buyer'should'do'what?'Payment'of'the'price.'
o Did'the'buyer'pay'the'price?'No.''
• So,'the'buyer'did'not'pay'the'price'because'the'seller'did'not'give'the'
required'documents.''
o So,'who'was'in'default?'Both'of'them.'
• This'is'an'example'of'mutual$default$by$the$parties$in$a$reciprocal$obligation'
Both'parties'are'in'default'and'the'default'of'one'cancels'out'
o
the'default'of'the'other'
o If' the' default' results' in' the' same' damage,' then' they' would'
just'cancel'each'other.'
'
o "
ILLUSTRATION"8:""EXAMPLE"OF"MUTUAL"DEFAULT"[?1:42:14]"
You' have' a' borrower' and' a' lender.' Lender' is' supposed' to' extend' a' loan' of,'
let’s'say'10'million.'In'exchange,'borrower'would'pay'principal'and'interest.'
Borrower' secured' this' with' a' real' estate' mortgage' on' a' lot' with' a' market'
value'of'20'million.''
'
There' is' a' reciprocal' obligation' in' this' contract.' The' creditor,' with' respect' to'
the' release' of' the' loan,' is' the' borrower.' The' borrower,' on' the' other' hand,' is'
the'debtor'with'respect'to'the'payment'of'the'loan.''
'
Prepared'by:' ' ' ' ' ' ' ' ' ' ' ' ' ' ''' '''''''''''''''''Compiled'by:''
TRISHA'ALYANNA'AH''[1F'2014?2015]'//'11'NOV'2014' ' ' ' '''''''''''''''''''''TERESA'KRISTEL'BANTA'[1F'2014?2015]'
'

Let’s' say,' the' loan,' the' lender' released' 50%' through' a' check,' which' was' of'the'injury'resulting'to'the'creditor'
received' by' the' borrower.' However,' there' was' 100%' mortgage.' And' there’s'
'

"
also'default'here'due'to'failure'to'pay'certain'amortizations.' TANGUILIG"V."COURT"OF"APPEALS"
'

' Notes/Questions:$
• You'have'here'an'example'of'default'on'both'parties.'Lender'defaulted' • Tanguilig,' a' developer,' proposed' to' Vicente' Herce' to' construct' a'
on'its'obligation'to'release'100%'of'the'loan,'so'there'will'be'default'up' windmill' system.' So,' there' was' a' contractor' obligated' to' construct' a'
to' 50%.' On' the' other' hand,' borrower' failed' to' pay' certain' windmill.' In' exchange,' the' owner' would' pay' the' total' price' of'
amortizations.'So'there'will'also'be'default.'' Php60,000' in' three' trenches.' The' owner' paid' the' initial' payment' of'
• What'the'Court'would'do'here'would'be'to'offset$the$consequences$of$one$ P30,000'and'the'next'installment'P15,000'but'did'not'pay'the'last'trench'
party’s$default$to$the$consequence$of$the$other’s$default.' because'the'windmill'did'not'work.$
o If'they'wee'of'equal'amounts,'then'nobody'would'be'liable'to' • The'claim'of'the'contractor'with'regard'to'the'failure'of'the'windmill'to'
anyone.' function'was'that'it'was'due'to'a'fortuitous'event.$
o If,' for' example,' the' borrower' will' exceed' the' liability' of' the' • The'Court'held'that'it"was"not"a"fortuitous"event.'$
lender,'then'there'will'be'residual'liability'on'one'part.' o In'fact,'there'was'a'discussion'in'the'case'whether'there'was'a'
' weather'disturbance,'like'a'typhoon,'and'there'was'none.'The'
only'claim'was'strong'winds$
'

GENERAL"RULE:""
If' there' is' mutual' default,' there' will' be' offsetting.$ The' default' of' one' cancels' o The' Supreme' Court’s' explanation' was' simple.' The' windmill'
the'default'of'the'other." was' brand' new.' The' claim' was' that' it' did' not' work' due' to'
'
strong'winds.'Being'a'windmill,'it'should'be'able'to'withstand'
"
strong' winds' because' that' is' essential' to' the' operation' of' a'
• In'one'case,'the'Supreme'Court'said:'Considering'the'lender'defaulted'
windmill.''
in' 50%' of' the' release' of' the' loan,' this' mortgage' is' effective' only' up' to'
o That'could'not'have'been'an'instance'of'force'majeure.'Based'
50%.''
on'the'performance'of'the'brand'new'windmill,'the'Supreme'
o This' is' another' illustration' of' the' consequence' of' mutual'
Court'inferred'fault'on'the'part'of'the'contractor.'
default.''
• Therefore,'the'owner'was'not'liable'to'pay'the'remaining'balance.'Why?'
o There'was'100%'compliance'of'the'mortgage'but'the'Supreme'
o There'was'default'on'part'of'the'contractor.'
Court'said'it'would'only'be'effective'up'to'50%.'
o Remember' the' rule:' If' there' is' default' by' one' party' in' a'
o Take' note:' Ordinarily,' a' mortgage' is' indivisible.' Meaning,' as'
reciprocal' obligation,' the' other' party' will' not' be' obligated' to'
long' as' the' obligation' is' outstanding,' regardless' of'
perform.'So'there'was'an'excuse'on'the'part'of'the'owner'not'
percentage,' the' entire' mortgage' will' remain.' This' is'
to'pay'the'remaining'balance.'
exceptional'because'of'the'mutual'default'of'the'parties.'
'
" The' Court' said' there' should' also' be' an' adjustment'
NAKPIL"&"SONS"V."COURT"OF"APPEALS"
of'the'effectivity'of'the'mortgage.'
Notes/Questions:$
• So,' the' case' of' Cortes' and' this' example' are' illustrations' of' default' of'
• The' Philippine' Bar' Association' (PBA)' hired' United' Construction' to'
both'parties'in'a'reciprocal'obligation'
construct' a' building.' In' turn,' United' Construction' hired' Nakpil' as' the'
'
architects.'$
ART."1174"—"FORTUITOUS"EVENTS"[?1:46:07]'
o The' architect' and' the' contractor' were' respectively' obligated'
'
' to'design'a'building'and'construct'it.'Architect'would'design'
REQUISITES"OF"A"FORTUITOUS"EVENT:"" and'Contractor'would'build.'In'exchange,'PBA'would'pay'the'
1. It'must'be'independent'of'the'will'of'the'debtor;" price.$
2. It'must'be'either'unforeseeable'or'unavoidable;' • The' building' was' constructed' in' Intramuros' and' there' was' an'
3. The'occurrence'must'render'it'impossible'for'the'debtor'to'fulfill'his' earthquake.' The' building' in' question' sustained' major' damage—its'
obligation'in'a'normal'manner;'and' front'columns'buckled,'causing'the'building'to'tilt'forward.$
4. The' obligor' must' be' free' from' any' participation' in' the' aggravation'
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TRISHA'ALYANNA'AH''[1F'2014?2015]'//'11'NOV'2014' ' '
'
• Ordinarily,' the' earthquake' would' be' considered' as' force' majeure.' But$
legally,'for'you'to'say'that'it'is'force'majeure,'there'must'be'concurrence'
of'all'the'requirements—$
o First,'it'must'be'an'event'independent'the'will'of'the'debtor.$
o Second,' it' renders' impossible' the' performance' of' the'
obligation.$
o Third,'it'is'unforeseeable'or'unavoidable.'$
o And'finally,'there'is'no'participation'by'debtor'in'the'injury'or'
damage'caused'to'the'creditor.$
• Ordinarily,'the'earthquake'would'have'qualified'as'a'fortuitous'event.'
The' first' three' (3)' requisites' of' a' fortuitous' event' in' this' case' were'
present,'but'there'was'failure'to'comply'with'the'4th'requirement.$
o There' was' negligence' on' part' of' the' architect' and' the'
contractor'in'the'damage'caused—$
" The'architect'made'faulty'designs.'$
" The' contractor' deviated' even' from' the' faulty'
designs.$
o Examples'of'the'faulty'designs—$
" Down' spouts' inserted' in' the' pillars' compromised'
the'strength'of'the'pillars$
" Design' of' the' sun?baffles' caused' the' tilting' of' the'
building'during'the'earthquake$
o The'Court,'in'this'case,'showed'in'detail'using'expert'opinion'
and'evaluation'why'there'was'a'faulty'design'and'why'there'
was'a'faulty'construction.$
• In'the'end,'the'SC'said'the'concurring'fault'or'negligence'of'both'parties'
humanized'the'fortuitous'event—$
o The'fortuitous'event'was'humanized'because'there'was'fault'
or'negligence'or'some'other'breach'on'the'part'of'the'architect'
and'the'contractor.$
• Hypothetically,'what'if'the'architect'made'an'excellent'design'and'the'
contractor'deviated?'Would'the'architect'be'liable?$
o Yes,' the' architect' would' still' be' liable.' The" architect' should'
ensure' compliance' with' the' design.' So,' if' there' is' deviation,'
the' architect' would' be' liable' for' failing' to' detect' such'
deviation'and'report'it'to'the'owner.'$
• In' this' case,' the' Court' said' that' both' architect' and' contractor' were'
liable.'$
o What'was'the'nature'of'their'liability?'Solidary.$
o They' were' not' parties' to' the' same' contract—one' for' design'
and'one'for'construction.'Why$was$their$liability$solidary?$
" The' basis' for' the' solidary' liability' was' the'
negligence' of' both' parties.' It' was' a' TORT'
LIABILITY.$
' 28"
' ' ' ' ' ''' '''''''''''''''''Compiled'by:''
' '''''''''''''''''''''TERESA'KRISTEL'BANTA'[1F'2014?2015]'
" A'tort'liability'is'not'based'on'contract,'but'based'on'
quasi?delict.' And' a' liability' based' on' quasi?delict' is'
solidary.'$
" Later' on,' you’ll' learn' why.' Because' it' is' very'
difficult' to' allocate' the' fault' of' one' party' as' against'
the'other.'So'as'far'as'the'creditor'is'considered,'they'
are'both'liable'for'the'entire'amount.$
$
ACEfAGRO"V."COURT"OF"APPEALS"&"COSMOS"BOTTLING"
Notes/Questions:$
• The'case'is'premised'on'a'fortuitous'event,'the'fire.'There'was'a'service'
contract' wherein' the' contractor' would' render' bottle?cleaning' services'
and'the'owner'would'pay'a'fee.'The'contract'was'supposed'to'last'for'a'
definite'period.''
• During' the' period,' there' was' a' fire,' which' was' determined' to' be' a'
fortuitous'event.''
• What' was' the' consequence' of' the' fire?' Because' of' the' fire,' Ace' Agro'
had'to'stop'their'services.'The'effect'of'the'fortuitous'event'in'this'case'
suspended'the'performance'of'the'obligations'of'each'party.'There'was'
an'interruption'of'the'period.'
o Due' to' the' fire,' Ace' Agro' wanted' to' extend' their' existing'
contract'by'seven'months,'which'is'the'period'corresponding'
to'the'interruption'due'to'the'force'majeure,'to'compensate'for'
the'interruption.'
• The' Supreme' Court' said,' the' consequence' of' a' force' majeure' or' a'
fortuitous' event' is' that' to' exempt' the' parties' from' their' respective'
obligations—'
o So,'during'this'period,'neither'party'would'have'any'liability.'
The' contractor' would' not' be' liable' for' failing' to' render' their'
services,' neither' would' the' owner' be' liable' to' pay' the' fee'
during' this' period.' That’s' the' consequence' of' the' fortuitous'
event.'
• The' Supreme' Court' said,' a" fortuitous" event" does" not" automatically"
extend"the"period.'
o In'this'case,'this'interruption'would'not'necessitate'or'entitle'
the'contractor'to'an'extension.''
o It’s' just' a' reiteration' on' the' general' rule' of' the' effect' of' a'
fortuitous' event:' it' exempts' the' parties' from' liability' for'
failure' to' perform' their' respective' obligations' due' to' the'
fortuitous'event.'
'
COMPARING'ACE2AGRO'AND'TANGUILIG$
Let’s' say,' in' this' case,' the' contract' provided' that' the' windmill' should' be'
constructed'in'360'days.'There'was'a'fortuitous'event'that'lasted'for'100'days.'All'
Prepared'by:' ' ' ' ' ' ' ' ' ' ' ' ' ' ''' '''''''''''''''''Compiled'by:''
TRISHA'ALYANNA'AH''[1F'2014?2015]'//'11'NOV'2014' ' ' ' '''''''''''''''''''''TERESA'KRISTEL'BANTA'[1F'2014?2015]'
'

four'requisites'of'a'fortuitous'event'are'present.'Should$there$be$an$extension?$Yes,"
there"should"be"an"extension.$
$
Why$ should$ there$ be$ an$ extension,$ notwithstanding$ Ace2Agro?' (Distinguish' this'
illustration'from'the'ruling'in'Ace?Agro)'
• First,'what'is'the'prestation'in'Tanguilig?'The'delivery'of'a'completed'
windmill.''
• What'is'the'prestation'in'Ace?Agro?'The'bottle?cleaning'services.''
o When$do$you$complete$this$cleaning$service?'Per'bottle!'
• In'contrast'to'that,'when'do'you'complete'the'prestation'in'Tanguilig?'
You'only'complete'it'one'time,'only'once.'
'
Hence,' from' there' you' can' gather' that' the' parties' agreed' for' the' contractor' to'
have'the'entire'usage'of'the'period.'That'period'corresponded'to'the'completed'
windmill.'
'
If'you’re'going'to'distinguish'or'opt'out'of'that'Ace2Agro$case,'this'is'the'way'to'
do'it.'You'say'it’s'different'because:'
• There'is'only'one"prestation;'and''
• The'period'was'given'for'the'completion'of'that'single'prestation.''
'
So,'in'effect,'when'there'was'an'interruption,'the'parties'had'implicitly'agreed'for'
an'extension'because'the'contractor'should'have'the'full'benefit'of'the'period.''
'
That’s$how$you$distinguish.' This' is' an' example' of' how' to' opt?out' of' the' Ace2Agro'
ruling.'Of'course,'the'best'way'is'to'stipulate'it'in'the'contract.'
• Example:' “Any' fortuitous' event' will' extend' the' period' of' the' contract'
to'compensate'for'the'period'or'duration'of'the'force'majeure.”'
• They' may' also' add' that' if' it' lasted' for' a' certain' number' of' days,' the'
contract'may'be'cancelled.'
'

' 29"
Prepared'by:' ' ' ' ' ' ' ' ' ' ' ' ' ' '''' '''''''''''''''''' ''Edited'by:'
RAFFY'BELLO'&'KJ'ESGUERRA'[1F'2014?2015]'//'13'NOV'2014' ' ' ' '''''''''''''''''''''''''''''''''''''T.'BANTA'&'K.'ONGTENCO''
' '
"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
THURSDAY,'13'NOVEMBER'2014'
'

'

CONTINUATION'OF'ARTICLE'1174' impossibility.'Or'let’s'say,'you'may'not'have'the'money'to'pay,'hence,'it'will'
ART."1174"—"FORTUITOUS"EVENT" be'difficult'for'you'to'perform'the'obligation.'It’s'still'not'a'fortuitous'event.'It'
There'are'four'elements'for'a'case'to'be'considered'a'fortuitous"event.'' must'render'you'impossible'to'perform'the'obligation.'
' '

' '
FORTUITOUS"EVENT"REQUISITES:" "

ILLUSTRATION"2:"CONSTRUCTION"DURING"A"TYPHOON"
4. Independent'of'the'will'of'the'debtor;'
What’s'an'example'of'an'impossible'performance?'A'likely'example'would'be'
5. Unforeseeable'OR'unavoidable;'
the'construction'of'a'high'priced'building'during'a'strong'typhoon.''There'is'
6. Must' render' the' performance' of' the' obligation' IMPOSSIBLE' to'
no'way'your'workers'can'continue'construction'during'the'FE'or'typhoon.'
comply'in'a'normal'manner;'and' '

7. Debtor' must' be' free' from' any' participation' or' contribution' in' '
aggravation' of' the' damage' or' prejudice' caused' by' the' fortuitous' DEBTOR' MUST' BE' FREE' FROM' ANY' PARTICIPATION' OR' CONTRIBUTION'
event' IN' AGGRAVATION' OF' THE' DAMAGE' OR' PREJUDICE' CAUSED' BY' THE'
'

FORTUITOUS'EVENT'
'
See$NAKPIL"&"SONS"V."CA"
When'we'speak'of'a'fortuitous'event'(force$majeure),'we'are'referring'to'that'event'
This' one' is' very' important.' You' can' gather' this' from' the' case' of' NAKPIL.'
that'exempts'the'debtor'from'liability'of'non?performance'of'an'obligation'due'to'
NAKPIL' is' a' very' good' example' to' see' the' operation' of' these' elements.' There'
a'fortuitous'event'or'force'majeure.'Let’s'discuss'the'requisites'in'turn.'
was'an'earthquake,'right?'Ordinarily'this'earthquake'will'qualify'as'a'fortuitous'
'
event.'You'have'all'the'requisites:'
INDEPENDENT'OF'THE'WILL'OF'THE'DEBTOR'
1. Independent'of'the'debtor’s'will'—'the'debtor'could'not'have'cause'the'
This' simply' means' that' the' FE' occurs' without' the' participation' of' the' debtor.'
earthquake'
You'cannot'attribute'the'occurrence'of'the'FE'to'the'debtor’s'will.''
2. Unforeseeable' or' unavoidable' —' you' cannot' prevent' the' earthquake,'
'
even'if'you'have'anticipated'it''
UNFORESEEABLE'OR'UNAVOIDABLE/INEVITABLE'
3. Render'it'impossible'to'perform'the'obligation'
Take'note'that'we’re'using'the'word,'“OR,”'and'not'“and.”'It'can'be'foreseen'but'
'
inevitable,'and'it'will'still'qualify'as'a'FE.'Hence,'the'only'requirement'is'that'the'
However,'in'the'case'of'NAKPIL,'the'4th'element'was'missing.'The'debtors'were'
event' should' be' EITHER' of' unforeseeable' or' unavoidable.' This' means' that' the'
at' fault.' Both' were' negligent.' The' architect' was' negligent' in' light' of' the' faulty'
debtor'could'not'have'prevented'the'occurrence'of'the'FE'even'by'exercising'the'
design'of'the'building.''The'contractor'was'negligent'due'to'the'deviations'from'
relevant'required'degree'of'care'or'diligence.'
the' already' faulty' design' (which' made' it' worse).' The' court' said' that' with' the'
'
absence'of'the'4th'element,'the'event'no'longer'qualified'as'a'FE.'The'participation'
MUST'RENDER'IMPOSSIBLE'THE'PERFORMANCE'OF'THE'OBLIGATION'
of'the'debtors'to'the'damage'has'humanized'the'FE,'and'therefore,'can'no'longer'
This'could'also'mean'that'the'event'has'rendered'it'impossible"for"the"debtor"to"
exempt'the'debtors'from'liability.''
comply" with" the" obligation" in" a" normal" manner.' Take' note' that' the' FE' must'
'
render'the'performance'IMPOSSIBLE,'which'means'that'the'obligation'cannot'be'
Technically'when'you'refer'to'a'fortuitous'event,'you'do'not'automatically'refer'
performed.' If' the' event' merely' rendered' the' performance' difficult,' it' will' not'
to' calamities.' Always' remember' this' 4th' element.' In' this' case,' when' the' debtor'
constitute'a'fortuitous'event.''
was'in'default'at'the'time'of'the'FE,'the'debtor'was'still'liable'because'there'was'
'
" concurring'fault'or'breach'on'his'part.'FE'also'cannot'be'used'as'a'defense'when'
ILLUSTRATION"1:"CHANGE"IN"EXCHANGE"RATE" the' debtor' is' guilty' of' fraud' or' concurring' negligence,' which' somehow'
[For]'example,'you'are'going'to'pay'your'obligation'in'U.S.'Dollars.'Suddenly,' contributed'to'the'damage.''
there'is'spike'of'the'foreign'exchange'rate:'from'$1'='P44.00'to'$1'='P60.00.'For' '
you'to'pay'now,'you'will'need'more'pesos.'Will'the'spike'constitute'a'FE?'No,' '
because' there' is' only' mere' difficulty' to' comply' with' the' obligation,' not' an'
' 30"
Prepared'by:' ' ' ' ' ' ' ' '
RAFFY'BELLO'&'KJ'ESGUERRA'[1F'2014?2015]'//'13'NOV'2014' ' '
' '
EFFECTS"OF"A"FORTUITOUS"EVENT"
See$ACEfAGRO"V."CA"
Now,'let’s'discuss'the'effects'of'a'fortuitous'event.'
' extended'by'such'term'corresponding'to'the'period'of'interruption.”'
Let’s'say'you'have'a'debtor.'Debtor'rendered'service'to'the'creditor.'Creditor'will'
pay'a'fee.''This'is'for'specified'period,'or'a'fixed'term'—'1'year,'for'instance.'This'
was'the'set?up'in'the'case'of'Ace?Agro.'Wherein'the'creditor'shall'pay'a'fee'for'
the'debtor’s'services.''The'service'was'a'continuing'service:'cleaning'services'for'
bottles' and' shells.' However,' during' the' term' of' the' contract' a' fortuitous' event'
occurred'(around'the'months'of'July?Aug).'Now,'that'FE'was'an'interruption"to"
the"contract.''
'
'
We' explained' last' time' that' fortuitous" events" only" relieve" the" parties" from"
liability" due" to" nonfperformance" of" an" obligation" and" do" not" mean" an"
extension"of"a"fixed"period"or"term"in"a"contract.'
'
' interruption'and'that'interruption'—'meaning,'the'running'of'the'period'—'is'
So'during'this'period'(referring'to'the'interruption),'the'creditor'cannot'force'the'
debtor' to' perform' the' mandated' service.' 'The"FE"rendered"the"debtor"immune"
from"liability.' In' the' same' manner,' the' debtor' cannot' force' the' creditor' to' pay,'
even' if' the' debtor' wanted' to' render' the' service' in' the' period' when' the' FE'
occurred.' ' Take' note' that' the' decision' of' the' SC' is' premised' on' the' existence' of'
the' FE' —' there' was' no' longer' a' question' with' regard' to' the' existence' of' all' the'
elements.'For'purposes'of'Ace?Agro'the'existence'of'the'FE'was'assumed.'Thus,'
the'Court'said'the'effect'of'the'FE'is'to'relieve'the'party'from'any'liability'during'
the'subsistence'of'the'FE.'However,'it'does'not'extend'the'contract'to'compensate'
for' the' “interrupted' period.”' Extension' of' the' period' is' not' the' consequence' of'
any'FE'unless'it'can'be'gathered'from'the'contract'of'the'parties'that'there'should'
be'a'full'period'given.'
' Alternative'discussion'on'fortuitous'events'
Q:" Is" it" possible" to" argue" for" the" other" side" —" that" the" contractor" should" be"
given"an"extension?"
A:' Yes.' In' the' case' of' Agro,' it' is' possible' for' one' party' to' argue' that' the'
agreement' was' to' afford' the' contractor' the' full' period' —' let’s' say' one' year.'
The' basis' of' such' claim' would' be' the' intent' of' the' parties.' Last' time,'
somebody'asked'if'this'answer'is'jurisprudence.'It'is'not;'but'I'am'telling'you'
now'that'I'am'sure'that'this'is'the'correct'answer.'If'you'are'asked'about'the'
same' situation,' you' follow' Ace?Agro' [the' general' rule,' meaning,' no'
extension].'But'if'I'give'you'Ace?Agro'and'I'want'you'to'argue'on'the'other'
side,' then' you' can' explore' this' discussion.' The' reason' of' the' exercise' is' for'
you'to'learn'how'to'distinguish'your'case'from'jurisprudence.''
'
Let' me' give' you' an' example' of' a' provision,' normally' stated' in' a' construction'
agreement:'
' 31"
' ' ' ' ' '''' '''''''''''''''''' ''Edited'by:'
' '''''''''''''''''''''''''''''''''''''T.'BANTA'&'K.'ONGTENCO''
'
"
SAMPLE"STIPULATION"1"
“In' case' of' a' fortuitous' event,' the' contract' period' shall' be' automatically'
'
'
That'is'a'clear'stipulation.'What'if'there'is'only'a'stipulation'stating'that,'“the'FE'
shall' suspend' the' effectivity' of' the' contract”?' Is' it' not' the' clause' in' Ace' Agro?'
The'clause'of'the'contract'provided'that'in'case'of'FE,'the'effects'of'the'contract'
would'be'suspended.'''
'
Q:""What"will"now"be"the"ruling:"AcefAgro"or"contrary"discussion?"
A:'' As' I' said,' the' contrary' discussion' is' possible.' The' clause' as' an' evidence'
stating' that' the' contract' shall' be' suspended' may' be' found' in' jurisprudence.'
Of' course,' one' can' present' other' evidences.' One' can' have' testimonies.' In'
effect' the' meaning' of' suspension' can' confirm' to' mean' that' there' will' be' an'
also'covered'by'the'suspension.''
'
In'fact,'I'was'confronted'with'the'same'case.'I'was'lawyering'for'a'party'arguing'
against'Ace?Agro.'Of'course,'I'know'Ace'Agro.'I'could'have'rolled'over'and'told'
my' client' that,' “NO!' YOU' CANNOT' WIN,' that' is' Ace' Agro.”' But,' there' is'
another' way;' you' show' the' INTENTION.' There' was' a' suspension' and' an'
agreement,' which' was' very' vague.' So,' in' litigation,' we' had' to' explain' that' the'
meaning'of'the'clause'was'to'suspend'the'running'of'the'period.'It'never'reached'
even' the' CA' because' the' parties' decided' to' settle.' But,' it' would' have' been'
decided'based'on'our'discussion'contra'Ace?Agro.'
'
TANGUILIG"V."CA5"
Now,'let’s'discuss'the'case'of'the'windmill.'In'Tanguilig,'the'set?up'was'that'the'
contractor' would' build' a' windmill' and' then' deliver' the' completed' windmill' to'
the'owner.'That'is'what'you'call'a'turnover'contract'—'you'complete'a'building,'
and'then'turn'it'over'when'it'is'ready'for'operations.''
'
In'this'case'as'well,'there'was'a'period'and'a'contract.'Remember'that'there'are'
decisions' that,' if' the' intention' of' the' parties' were' to' afford' the' full' period,'
regardless' of' whether' or' not' it' is' stated' in' the' contract,' the' intent' would' be'
controlling.''
'
'''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' '
5 'Tanguilig$facts'weren’t'discussed'as'much,'but'tackled'side?by?side'with'Agro.''
Prepared'by:' ' ' ' ' ' ' ' ' ' ' ' ' ' '''' '''''''''''''''''' ''Edited'by:'
RAFFY'BELLO'&'KJ'ESGUERRA'[1F'2014?2015]'//'13'NOV'2014' ' ' ' '''''''''''''''''''''''''''''''''''''T.'BANTA'&'K.'ONGTENCO''
' '

If'you'have'a'clause'with'the'intent'to'suspend'the'contract'in'case'a'fortuitous' Mondragon' already' discounted' the' crisis,' which' means' that' borrower' already'
event'occurs,'this'is'how'the'SC'will'interpret'it:'if'the'FE'happened'on'the'100th' assumed'its'risks.'The'Court'said'that'it'could'not'be'considered'as'an'exemption'
day,'you'will'begin'counting'on'the'101st'day'only$after$the'FE.' under'FEs'because'there'was'an'assumption'of'risk.'This'means'that'the'debtor"
' will"still"be"held"liable"notwithstanding"the"possible"existence"of"a"fortuitous"
EXCEPTIONS"TO"THE"FORTUITOUS"EVENT"DEFENSE" event.''
MONDRAGON"LEISURE"V."CA" '
Assumption'of'risk'
"

The' debtor' shall' still" be" held" liable' notwithstanding' the' existence' of' a'
In'the'case'of'Mondragon,'borrower'loaned'from'the'bank'(lender).'Clearly,'the' fortuitous'event'in'the'following'cases:'
transaction'was'a'loan.'The'loan'is'exchanged'by'payment.'Hence,'it'is'a'bilateral' 1. The'law'so'provides;'
agreement' or' a' reciprocal" obligation.' Lender' agreed' to' extend' the' loand' to' 2. There'exists'an'express"stipulation'between'the'contracting'parties;''
Mondragon,'and'Mondragon'agreed'to'pay'the'following:'interest,'principal,'and' 3. There'is'an'assumption"of"risk'
other'undertakings.'The'contract'was'concluded'around'1997.'' '

'
The'borrower'was'a'real'estate'company,'a'developer.'At'that'time,'the'interest'
rate'of'U.S.'dollars'was'lower'than'the'peso?denominated'loan.'So,'for'example,'if'
you' are' borrowing' in' pesos,' the' rate' would' be' 2?digits' (i.e.' P10.00,' P11.00,'
P12.00),' and' the' dollars' were' around' 5?6%' since' it' was' booming' at' the' time.'
Now,'there'was'this'practice'that'developer'companies'would'borrow'in'dollars.'
Let’s'illustrate:'
'
'
ILLUSTRATION"3:"MONDRAGON"CASE"
Real'Estate'Company'borrowed'P100M.'Let’s'assume,'for'our'discussion,'that'
the'exchange'rate'at'that'time'was'$1'='P25.00.'This'means'that'if'you'borrow'
in'pesos,'your'interest'cost'per'year'will'be'—'if'the'interest'was,'for'example,'
12%'—'P12M'a'year'on'the'P100M.'If'you'are'borrowing'in'U.S.'dollars,'and'
assuming'a'constant'exchange'rate,'your'interest'cost'will'only'be'half.'Let’s'
say' that' the' interest' rate' in' dollar?denominated' loans' is' 6%.' Rather' than'
paying' P12M' interest' rate,' you' are' now' paying' P6M;' that' means' huge'
savings.''
' '
'
Let’s'discuss'these'exceptions'in'turn.'
'
1. LAW"SO"PROVIDES"
Q:" What"laws"that"will"make"a"debtor"liable"even"if"there"is"a"fortuitous"event?"
A:'' Delay'(Art.'1165):'“If'the'obligor'delays,'or'has'promised'to'deliver'the'same'
thing'to'two'or'more'persons'who'do'not'have'the'same'interest,'he'shall'be'
responsible'for'any'fortuitous'event'until'he'has'effected'delivery.”'Although'
I' think' this' is'TECHNICALLY"NOT"an' exception.' Why?' It’s' because' the' 4th'
element'is'already'missing.'Hence,'even'if'there'was'no'law,'the'debtor'will'
still'be'liable'and'cannot'avail'of'the'benefits'of'the'FE.''
'
Q:" If" the" debtor" were" guilty" of" breach," default," or" negligence," would" he" be"
liable"if"a"fortuitous"event"occurs?'
A:'' Well,'technically,'it'is'not'an'exception'because'there'is'a'law'providing'that'
if'you'are'guilty'of'breach,'default'and'negligence,'the'borrower/debtor'shall'
be'liable.''
'

ILLUSTRATION"4:"CONVICTED"FELON""
Mondragon'borrowed'in'1997,'and'the'exchange'rate'deteriorated.'From'$1'='
Let’s' say,' a' felon' has' been' convicted.' As' we' know,' aside' from' criminal'
P25,' it' became' $1' =' P46.' What' happens' now?' You' are' now' paying' a' lower'
liability,' there' is' also' civil' liability' or' compensation' to' the' victim' attached'
interest' rate,' but' for' you' to' come' up' with' payment' of' both' principal' and'
(Art.'100'of'the'RPC).'This'felon'in'our'example'was'convicted'of'the'crime'of'
interest,'you"would"have"to"raise"almost"double"the"amount"in"pesos.''
'
' theft.'The'Court'will'now'order'the'return'of'the'stolen'thing.'Let'us'say,'that'
' prior' to' the' return/delivery,' the' stolen' thing' was' lost' due' to' a' fortuitous'
Remember' that' these' real' estate' companies' are' earning' in' pesos;' they' only' event.''
convert' in' dollars' afterwards.' That' was' the' problem' here.' Because' of' the'
'
'

'
economic'deterioration,'Mondragon'claimed'a'fortuitous'event.''
Q:" Given"ILLUSTRATION"4,"will"there"be"an"exception"of"liability?"
'
A:'' No,' because' the' law' so' provides' that' proceeds' from' a' crime' shall' not'
The' Court' ruled' a' simple' answer:' Mondragon' was' wrong' because' there' was' a'
extinguish'liability'even'if'a'fortuitous'event'occurs.''
missing' requirement.' The' 2nd' requisite' was' absent' —' that$ the$ event$ must$ be$
'
unforeseeable$ or$ unavoidable.' At' that' time,' the' borrower' got' the' loan' from' the'
Q:" That’s" one" of" the" reasons." What" is" another" underlying" reason" why" the"
lender' during' the' onset' of' the' financial' crisis' in' 1997.' The' SC' said' that'
debtor"is"still"liable?"
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' '

A:' It’s'because'you'are'supposed'to'penalize'the'offender.'If'you'have'that'room' '

(of'opportunity'in'which'the'offender'will'not'be'liable),'it'will'be'contrary'to'
'

the'rule;'you'are'in'effect'rewarding'the'offender.'It'is'not'even'about'justice.'
It'is'about'the'obligation'of'the'offender'to'return'the'stolen'thing,'whatever'
happens.''
' created'that'risk,'because'if'you'did'not'create'that'power'plant'and'operated'
Another' example' would' be' a' commodatum.' A' commodatum' means' the'
borrowing' of' something' with' the' obligation' to' return' the' exact' same' thing'
without' any' consideration' or' payment.' In' short,' you' are' borrowing' for' free.' In'
such'case,'the'borrower'will'be'liable'to'the'loss'of'the'thing'notwithstanding'the'
ILLUSTRATION"6:"NUCLEAR"MELTDOWN"
Another' example' could' be' a' nuclear' meltdown.' You' built' a' nuclear' power'
plant'and'operated'it.'Afterwards,'a'meltdown'happened.'Let’s'assume'there'
was'no'fault'on'your'part.'I'can'argue'based'on'assumption'of'risk'that'you'
it,'there'would'have'been'no'meltdown'in'the'first'place.'In'such'a'case,'you'
can' still' be' held' liable' even' if' you' claim' that' you' performed' the' necessary'
requirement'of'due'diligence.''
'
'

occurrence'of'a'fortuitous'event.'This'is'from'a'law'stating'that'when'there'is'an' '
'

occurrence' of' a' calamity' and' you' did' not' prioritize' the' borrowed' thing,' you'
(debtor/borrower)'will'be'liable.'This'is'a'true'exception.'Why?'It’s'because'there'
is'no'fault'present'and'it'just'so'happened'that'you'prioritized'your'own'things'
than'the'borrowed'ones.'In'this'case,'the'law'says'that'you"must"pay"the"owner"
of"the"cost"of"the"lost"borrowed"things.'
' return.' The' pipeline' that' leaked,' it' turned' out,' was' the' responsibility' of' a'
2. STIPULATION"OF"THE"PARTIES"
For' this' exception,' the' parties' agreed' that' a' liability' would' still' exist.' They'
already'factored'out'the'FE,'such'as'financial'crises.'What'is'a'perfect'example'of'
ILLUSTRATION"7:"OIL"LEAK"IN"MAGALLANES"
Several' years'back,'they'found'oil'under'the'Magallanes'bridge'going'to'the'
South.'They'discovered'that'it'was'caused'by'a'leak'from'one'of'the'pipelines'
there.'The'leak'then'seeped'into'the'nearby'condominiums.'Hence,'a'resident'
can' no' longer' live' there,' and' it' took' almost' over' a' year' for' the' resident' to'
certain'company.'There'was'then'a'claim'of'assumption$of$risk.'Of'course,'the'
company'claimed'the'existence'of'a'fortuitous'event,'but'just'by'building'the'
pipeline,'a'risk'was'likewise'created.'The'company'should'be'liable.''
'

this?' Insurance.' Many' textbooks' would' say' that' it' falls' under' “assumption$ of$
'

'
risk,”' but' no' —' because' the' FE' is' the' very' basis' of' the' insurance.' You' hold' the' GOING'BACK'TO'THE'CASE'OF'MONDRAGON$
insurance' company' liable.' For' example,' during' Ondoy,' a' lot' of' people' did' not' Let'us'go'back'to'the'Mondragon'case.'Mondragon’s'claim'was'that'the'financial'
have'a'comprehensive'insurance'covering'acts'of'God.'Those'who'had'insurance' crisis' should' be' considered' a' FE.' The' Court' ruled' against' it' and' said' that' the'
were' paid' notwithstanding' that' Ondoy' would' qualify' as' a' fortuitous' event.' If' argument' cannot' stand' because' they' borrowed' the' money' when' the' financial'
flood' destroyed' a' car,' the' insurance' company' shall' pay' the' owner,' precisely' crisis'was'already'present.''
because'there'had'already'been'a'prior'agreement'in'a'form'of'a'contract.'' '
' '

3. ASSUMPTION"OF"RISK" ILLUSTRATION"8:"FINANCIAL"CRISIS"BEFORE"LOAN"
Let' us' change' the' facts' now.' Let’s' say,' the' borrower' did' the' transaction'
As'I'said,'most'textbooks'will'give'“insurance”'as'an'example'here,'but'I'do'not'
around' 1994,' before' the' financial' crisis.' Mondragon' borrowed' P50M' with' a'
think' that’s' a' good' example' because' an' insurance' contract' is' already' under' the'
term' of' 10' years.' The' interest' exchange' rate' was' at' 5%' per' annum,' and' 12%'
agreement'of'the'parties'that'one'will'pay'the'other'in'case'of'a'FE.''
' interest'rate'if'in'Philippine'Peso.'By'the'time'19997'arrived,'borrower'can'no'
So'what'can'we'illustrate'as'a'good'example'of'assumption'of'risk?' longer'pay'the'loan'because'Mondragon'will'need'twice'the'original'amount'
he'borrowed.''
' '
'

'
'

ILLUSTRATION"5:"TRANSPORTATION"OF"DYNAMITES"
When'one'agrees'to'transport'dynamites,'he'or'she'accepts'a'built?in'risk'that'
there'might'be'an'explosion.'Hence,'if'an'explosion'does'happen,'the'debtor'
cannot' claim' the' benefits' of' a' FE' even' if' the' debtor' did' not' participate' or'
contribute'to'the'explosion'of'the'dynamite.'The'mere'fact'that'you'are'in'that'
business'means'that'you'already'created'a'risk.'Your'very'activity'created'the'
risk.'If'the'risk'happens,'you'cannot'avail'of'FE'as'a'defense.'''
'
'
Q:""What"if"borrower"entered"into"the"loan"contract"before'the"financial"crisis?"
Would"that"constitute"a"FE?"
A:'' Actually,'all'elements'of'the'FE'are'present;'hence'it'should'qualify'as'a'F.E.'
Still,'the'SC'said'that'—'and'this'is'their'consistent'ruling'—'a'financial'crisis'
cannot'be'considered'a'fortuitous'event,'even'if'it'is'very'extreme.'Why?'It’s'
because,' according' to' the' Court,' the' parties' are' already' deemed' to' factor'

these'contingencies'in.''
' '
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' '

Q:""What" will" be" the" effect" if" the" SC" considers" financial" crises" as" fortuitous" monthly'payment).''
events?"
'
'

'
A:'' That'means'you'will'only'be'shifting'the'loss'from'one'party'to'the'other.'You'
Q:""Is"1%"per"month"a"high"interest"rate?"
are'not'even'solving'the'problem.'As'contracting'parties,'the'SC'assumes'that'
A:'' Right'now,'it'is,'because'it'will'constitute'12%'annually.'The'acceptable'legal'
you' should' have' prepared' for' possible' contingencies,' and' therefore' should'
interest'right'now'is'6%'annually.''
bear' the' loss.' If' the' Court' ruled' otherwise,' all' similarly' situated' borrowers'
'
will' all' claim' financial' crisis' as' a' fortuitous' event' and' it' will' only' create'
Q:""Let’s"change"the"situation"to"2%"per"month"—"will"that"be"a"valid"interest"
problems'more'than'the'one'you'solved.''
rate?"
'
A:'' It' will' depend.' Right' now,' as' I’ve' mentioned,' we' do' not' have' a' ceiling.'
REBUS'SIC'STANTIBUS'
Hence,'the'party'can'agree'at'any'interest'rate'and'it'will'simply'be'subjected'
Remember,' you' can' never' make' a' financial' crisis' a' fortuitous' event' unless' you'
to' judicial' review.' The' Court' may' come' in' and' change' it' to' a' lower' interest'
could' confine' the' decision' or' the' ruling' between' the' parties' in' your' case.' How'
rate.'
will'you'do'it?''
'
'
Now,'all'you'have'to'know'is'whether'or'not'the'interest'rates'you'are'stipulating'
Later' on,' you' will' know' that' there' is' a' law' that' we' have' adopted' from'
are' reasonable.' Based' on' jurisprudence,' 1?2%' per' month' is' considered' a'
international'law'—'the'principle$of$rebus'sic'stantibus.'This'means'that'when'the'
reasonable' interest' rate.' However,' interest' at' 3%' is' already' considered'
situation' of' the' parties' changed' drastically' beyond' the' contemplation' of' the'
unconscionable'and'thus,'you'may'lose'during'the'litigation.''
contracting'parties,'a'court'may'release'one'party'to'the'contract'and'the'effect'of'
'
such'ruling'will'bind'them'only.'This'is'the'only'shot'you'have,'and'you'cannot'
Q:""How"will"you"validate"an"unconscionable"interest"rate?"
do'it'any'other'way.''
A:'' What' you' have' to' show' is' that' the' contracting' parties' truly' negotiated;'
'
meaning,'they'know'fully'well'the'terms'and'conditions'of'the'contract.'For'
Q:""Can"it"not"be"said"that"the"bank"also"acquired"the"risk"by"entering"into"the"
example:' the' borrower' corporation' asks' the' lender' for' a' term' sheet.' A' term'
contract"in"1997"because"the"financial"crisis"was"already"present"when"they"
sheet' is' where' you' can' see' all' the' stipulations' (e.g.' terms' and' conditions' of'
granted'the"loan?"
the' contract).' The' borrower' reads' the' term' sheet' with' the' aid' of' its' council,'
A:' Yes,'that’s'true.'In'fact,'banks'and'lenders'always'assume'the'default'risk'that'
financial'advisers,'and'lawyers.'Then,'the'borrower'signs'the'contract.''Now,'
the' borrowers' may' not' be' able' to' pay' them' back.' However,' what' we' are'
the' lender' can' argue' that' this' is' a' contract' where' both' parties' thoroughly'
talking'about'is'a'different'kind'of'risk.'Plus,'banks'always'have'a'recourse'or'
negotiated.' It' is' a' studied' contract' with' both' parties' knew' full' well' of' the'
relief.'They'can'always'go'after'all'your'properties'or'exhaust'all'your'assets.'
terms' and' conditions.' If' you' prove' that' successfully,' the' Court' will' respect'
In' Mondragon,' the' bank' actually' went' after' Mimosa' (one' of' the' properties).'
the'contract.'
Borrowers'like'Mondragon'on'the'other'hand,'do'not'have'the'same'recourse'
'
or'relief.''
Q:""What"will"be"your"basis"in"validating"an"unconscionable"interest"rate?"
'
A:' Article'1159'—'that'the'contract'is'the'law'between'the'parties'and'should'be'
ART."1175"—"USURY"LAW"
complied'with'in'good'faith'(obligatory'force'of'the'contract).'Later'on,'you'
Right' now,' there' is' no' ceiling' in' stipulating' interest' rates.' However,' you' must'
will'learn'that'the'parties'may'stipulate'anything'as'long'as'it'is'not'contrary'
remember' that' your' interest' stipulations' may' always' be' subjected' to' judicial'
to'law,'morals,'public'policy,'or'public'order.'You'may'also'argue'that'Courts'
scrutiny.' If' the' Court' sees' the' interest' as' unconscionable,' it' is' within' their' right'
must'not'meddle'in'private'transactions.'But'of'course,'that'is'easier'said'than'
and'authority'to'reduce'the'same.'
done.''
'
' "
ILLUSTRATION"9:"" ART."1176"—"PRESUMPTIONS"WITH"RESPECT"TO"PAYMENT"
Borrower' entered' into' a' loan' contract' and' borrowed' P100M' from' lender.'' Now,' with' respect' to' payments,' the' law' establishes' certain' presumptions.' Of'
Borrower'agreed'to'pay'principal'+'1%'per'month'interest.'It'will'be'a'balloon' course,'these'are'rebuttable'one'evidence'to'the'contrary'is'shown.''
interest'for'5'years,'which'means'that'at'the'end'of'5'years,'the'borrower'will' 1. The" receipt" of" the" principal" by" the" creditor" shall" give" rise" to" the"
pay' the' whole' amount' and' interest' (there' will' no' longer' be' annual' nor' presumption"that"said"interest"has"been"paid."

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' '

o Default' rule:' you' borrow' from' someone' then,' you' pay' the' "
interest'first'before'the'principal"
"

REQUIREMENTS"OF"ACCION"PAULIANA:"
o Thus,' if' there' is' a' receipt' issued' for' the' payment' of' the' 1. Creditor,'who'is'the'plaintiff,'should'have'credit'before'a'rescissible'
principal,' there' will' be' a' presumption' that' the' interest' has' contract;'
been'paid'as'well" 2. Debtor'executed'all'his'properties'in'favor'of'creditor;'
2. The" issuance" of" a" receipt" of" the" later" installment" shall" likewise" give" 3. There'is'no'other'remedy;'
the"presumption"that"prior"installments"have"been"paid.""" 4. The'transaction'of'the'debtor'to'a'3rd'person'is'fraudulent'
' 5. The'3rd'prayer'is'not'a'buyer'in'good'faith'
'

ILLUSTRATION"10:""
'
'

'
For' example,' let’s' assume' that' the' principal' is' P100M,' while' the' interest' is' '

P15M.' It' is' a' balloon' payment.' The' lender' issued' receipt' for' the' principal.' ILLUSTRATION" 11:" GOING" AFTER" BORROWER’S" RECEIVABLES" FROM" A" THIRD"
With'that,'there'will'be'an'assumption'that'the'interest'was'paid.'' PARTY"
'
'

'
Q:""But" what" if" the" interest" has" not" been" paid?" Can" lender" go" after" the"
borrower,"when"the"lender"already"issued"receipt"for"the"principal?''
A:' It'depends.'If'the'lender'issued'a'receipt'by'mistake,'the'lender'can'demand'
payment.'But,'if"the"lender"issued"a"receipt"knowing"fully"well"that"there"is"
Let'us'say,'borrower'has'a'liability'of'P10M.'Borrower'has'zero'cash'on'hand,'
but' he' has' a' receivable' from' X' worth' P20M.' Can" lender" go" after" the"
receivables"of"the"borrower"from"X?"YES,'because'receivables'are'still'assets'
of' borrower.' Lender' can' exercise' the' right' of' the' debtor' to' pay' his' debt' by'
acquiring'the'receivables'of'debtor'from'X.'''
'
'

still" nonfpayment" of" interest,' the' lender' cannot' go' after' the' borrower' for' '
payment' of' the' interest' because' the' receipt' will' be' tantamount' to' a' waiver.' RESOLUTION"v."RESCISSION'
Remember'the'rule:'when'a'creditor'accepts'incomplete'payment'as'if'it'were' '
'

a'full'payment,'then'that'will'be'tantamount'to'a'waiver.'It'may'be'disputable' ILLUSTRATION"12:""COMPARING"RESOLUTION"&"RESCISSION"
presumption,'but'when'a'creditor'is'completely'aware'of'the'non?payment'of' 12.A"—"CONTRACT"OF"SALE"
interest'or'later'installment,'it'will'be'seen'as'a'waiver'of'his'right'to'claim'the' Let'us'assume'that'S'entered'into'Contract'of'Sale.'S'sold'his'property'to'B'for'
interests'and/or'prior'installments.'' a'price.'B'incurred'default.'S'can'therefore'sue'B'for'resolution.'Hence,'there'
' will'be'cancellation'of'the'obligation.''
Q:""What"are"the"requisites"of"a"waiver?" '
A:'' The' most' important' one' is' that' there' is' an' intention" or" knowledge' on' the' 12.B"—"LOAN"CONTRACT"
part'of'the'creditor'to'waive'or'relinquish'such'right.' Day' 1:' Creditor' entered' into' a' loan' agreement' with' Debtor.' Debtor' was'
' obliged'to'pay'the'principal'+'interest'on'Day'3.''
Q:" What"assets"can"you"execute"to"pay"the"liability"of"the"obligation?" '
A:' All' of' borrower’s' assets' may' be' executed,' except' those' exempted' from' Day'2:'However,'on'day'2,'Debtor'conveyed'his'only'asset'to'X'for'a'nominal'
execution' (e.g.' family' home,' library' of' lawyer,' those' allotted' for' support,' amount.' The' only' asset' of' D' amounted' to' P20M' and' he' sold' it' for' around'
etc.).' P5M.''
' '
ART."1177"—"ACCION"SUBROGATORIA"v."ACCION"PAULIANA" Let' us' assume' that' the' transaction' between' D' and' X' was' fraudulent' in' the'
" sense'that'it'placed'the'property'beyond'the'reach'of'the'creditor.'It'was'real,'
ACCION"SUBROGATORIA" ACCION"PAULIANA" because' there' was' an' exchange' of' prestation,' even' though' it' was' only' for' a'
nominal'amount.'This'is'opposed'to'a'simulated'sale'wherein'the'transaction'
' '

This'is'an'action'by'the'lender/creditor' This' also' means' rescission,' a'

to' collect' payments' by' exercising' the' subsidiary' remedy,' which' means' between'parties'is'only'for'show.''
right'of'the'borrower/debtor.' that' there' is' no' other' remedy' that' '
'

can' be' enforced,' or' the' debtor' no' Day'3:'Assets'now'of'Debtor'is'zero,'and'debtor'has'already'squandered'away'

longer' has' assets' from' which' the' the'payment'he'received'from'X'(P5M).'In'short,'on'Day'3,'debtor'defaults.'
'
'

liability'may'be'executed.' '
'

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Q:" For"ILLUSTRATION"12.B,"what"will"now"be"the"remedy"of"the"creditor?" Q:""Sir,"what"if"(explains'ILLUSTRATION'13),"can"Creditor"go"after"Y?"

A:' His'remedy'will'be'accion"pauliana.'Ordinarily,'creditor'can'only'go'after'all' A:'' No.'
the'assets'of'the'debtor.'However,'under'the'law,'the'creditor'can'go'after'the' "
assets'sold'to'X,'when"the"transaction"is"fraudulent"or"with"the"intention"to" Q:" (Still'referring'to'ILLUSTRATION'13)'Can"C"go"after"X?"
defraud"the"creditor.'' A:' Unlikely,'unless'there'is'a'separate'action'not'based'on'rescission'—'let’s'say,'
' simple' fraud,' where' there' was' connivance' between' Z' and' X' for' the' first'
RESOLUTION" RESCISSION" transaction.'
Points'of'comparison'
[Art.'1191]' [Art.'1381]' "
TRANSMISSIBLE'RIGHTS'
" "

Principal' or' retaliatory' Subsidiary' remedy;'

remedy;' resorted' to' the' “last' resort,”' or' Now,' finally,' when' rights' are' transmissible,' all' rights' based' on' the' contract' are'
MAIN" when' there' is' a' when' creditor' cannot' transmissible,'unless'there’s'a'law'or'stipulation'on'the'contrary.'
DISTINCTIONS" substantial$ breach$ of$ collect' from' debtor' '
contract$ because' of' fraudulent' OBLIGATIONS"
schemes' What'are'obligations?"
'
'
' '
Completely' cancels' the' Granted' only' to' the' "

ILLUSTRATION"14:"PURE"OBLIGATION"
contract;' “as' if' it' never' extent' necessary' to'
Let’s'say'you'have'a'loan'contract:'
EFFECT" happened”'(just$like$a$bad$ obtain'payment' '

breakup,$ according$ to$

Raffy)' '
'
'
' '

Substantial'breach' Lesion' or' economic' Given'ILLUSTRATION"14—'

prejudice;' there' must' Q:" When"should"borrower"pay"the"loan?"
BASIS" be' a' specific' law' A:' Payable'on'demand'
recognizing' such' '
damage' Q:""What"kind"of"obligation"do"we"call"that?"
'

A:' Pure'obligation'
" "

Mutual" restitution" for" Mutual" restitution' as'

both" parties;' buyer' well,' however,' the' '
should' return' the' creditor$ will' not' return' Q:""What"is"a"pure"obligation?"
CONSEQUENCE" property' and' anything' because' the' A:'' An'obligation'not'subject'to'a'condition'or'a'term.'
compensate' for' the' creditor'did'not'receive' '
damage' caused' because' anything' This' example' ordinarily' may' be' characterized' as' a' pure' obligation.' So,' without'
of'non?payment' saying'anything'more,'it'means'that'the'amount'will'be'demandable'anytime.'It’s'
'

not' subject' to' a' condition' or' a' term,' payable' upon' demand.' Ordinarily,' in' the'
'
absence' of' a' payment' date,' the' court' will' just' state' that' it’s' a' pure' obligation,'
Now,'if'there'is'X,'a'buyer'in'good'faith,'there’s'no'way'you'could'rescind.'
there’s'no'term'or'condition.'
'
" '
ILLUSTRATION"13"(Q):" CASES"[ARTS.'1179'AND'1181]'
DE"LEON"V."ONG"
Fulfillment'of'condition'was'prevented'
(Recited)$Sir,'in'this'case,'the'parties'stipulated'that'De'Leon'would'sell'to'Ong'a'
property'for'P1M.'In'the'Contract'of'Sale,'it'was'stipulated'that'there'would'be'a'
" downpayment'of'P400k.'For'the'rest,'Ong'will'assume'the'mortgage'of'De'Leon.'
Given:'Creditor'can'go'after'X,'but'X'also'has'no$assets.'
'
Ong'was'able'to'pay'the'downpayment'only'to'learn'later'on'that'De'Leon'sold'

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' '

the' property' to' a' third' party,' Viloria.' Ong' then' claimed' that' she’s' the' rightful' 2. Resolution,'or'
owner'but'De'Leon'argued'that'their'contract'was'subject'to'a'condition'that'did' 3. Damages'
not'happen:'the'approval'of'the'mortgage'by'the'bank.' '
' In'a'Contract'of'Sale,'non?payment'is'a'resolutory'condition.'
Held:' This' is' a' Contract' of' Sale.' The' ownership" was" transferred" upon" initial" '
payment.' In' relation' to' the' said' condition,' the' Court' said' that' if' there' is' a'
"

RESOLUTORY"CONDITION"
condition' and' the' seller' prevented' its' fulfillment,' then' the' condition' is' deemed' A' suspensive' condition' is' a' future' and' uncertain' event,' the' happening' of'
fulfilled.' which'extinguishes"the'obligation.'
' '

'
REYES"V."TUPARAN"
COMPARING'DE$LEON'AND'REYES'
P805k'considered'a'substantial'amount'(no'breach)'
These' two' cases' illustrate' the' difference' of' the' two' conditions.' You' can' have' a'
Reyes' was' the' owner' of' a' residential' and' commercial' lot' in' Valenzuela.' She'
pure' obligation,' neither' subject' to' a' term' nor' a' condition.' Or,' you' can' have' an'
decided' to' build' a' 3?storey' commercial' building' in' the' said' lot.' She' operated' a'
obligation'subject'to'a'term'or'a'condition.''
drug' store' and' cosmetic' store' in' that' building.' Tuparan' was' a' tenant' in' the'
'
commercial' building.' The' two' developed' a' friendship.' Reyes' obtained' a' loan.'
If'you'compare'a'Contract'of'Sale'and'a'Contract'to'Sell:'
Tuparan' offered' to' assist' her' in' paying' the' loan.' They' made' a' contract' stating'
• In' a' Contract' to' Sell,' there’s' no' obligation' yet.' This' means' that' full'
that'if'Reyes'did'not'find'a'buyer'(of'the'building)'for'P6M,'Tuparan'will'assume'
payment' of' the' price' will' give' rise' to' the' obligation' of' the' seller' to'
the'obligation'and'will'pay'around'P4M.'Reyes'is'alleging'that'Tuparan'made'a'
convey'title.'So,'it’s'a'suspensive'condition.''
payment'only'amounting'to'P2M,'and'left'a'balance'of'around'P805k.'Reyes'then'
• [As' opposed' to' a' COS,' where' the' obligation' already' exists.' It' is' only'
wanted'to'resolve'the'contract.''
extinguished'when'non?payment'happens.]'
'
'
Held:' There' was' a' Contract" to" Sell.' The' Supreme' Court' then' said' that' Reyes’s'
WHEN'OBLIGATION'IS'EXTINGUISHED'IN'A'CONTRACT'TO'SELL'
demand" for" rescission" of" the" contract" could" not" take" place.' Tuparan' already'
Let’s'say,'full'payment'should'be'made'within'6'months,'but'buyer'paid'only'the'
paid'a'substantial'amount,'leaving'only'a'balance'of'P805k.'It'did'not'constitute'a'
DP' and' failed' to' pay' in' full' within' the' stipulated' period.' What' happens' to' the'
substantial'breach'of'contract.''
CTS?'The"CTS"is"extinguished"(Art.'1184).'
'
" '
CONTRACT"OF"SALE"VS."CONTRACT"TO"SELL" "

ARTICLE" 1184.' If' the' suspensive' condition' does' not' happen' within' a' given'
1. Contract"to"Sell:'conveyance$only$upon$full$payment$of$the$price$
period,' as' agreed' upon' by' the' parties,' the' obligation' will' be' deemed'
2. Contract"of"Sale:'immediate$transfer$of$title;$payment$may$happen$later$
'
extinguished.'
' '

'
CONTRACT'TO'SELL'
Given'the'situation'contemplated'in'Art.'1184'then,'there’s'no'more'CTS.'That’s'
Q:""What’s"the"obligation"in"a"Contract"to"Sell?"
why'when'you'read'decisions'saying'there’s'no'obligation,'it’s'because'the'entire'
A:'' The'Seller'has'the'obligation'to'convey'the'property'upon"full"payment.'Full$
contract'is'extinguished.'
payment$is$the$suspensive$condition.'
'
'
" On' the' other' hand,' if' it’s' a' COS,' there’s' already' a' conveyance.' There’s' an'
SUSPENSIVE"CONDITION" obligation'to'perform.'So'when'the'resolutory'condition'happens,'then'that'will'
A' suspensive' condition' is' a' future' and' uncertain' event,' the' happening' of' be' a' basis' to' undo' the' transaction.' There' can' be' a' resolution,' or' if' the' parties'
which'gives"rise"to"an"obligation.' stipulated'on'the'consequence,'there'can'be'automatic'cancellation'of'the'contract'
'

' upon'failure'to'pay'the'price.'
CONTRACT'OF'SALE' '
Again,' in' a' CONTRACT"OF"SALE,' if' there' is' non?payment,' we' go' back' to' the' CONDITION"
general'rule,'which'means'that'seller'has'3'REMEDIES:' A' condition' is' a' future' and' uncertain' event' upon' which' an' obligation' or'
1. Specific'performance' contractual'provision'depends."
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' What’s' the' difference' between' the' first' example' and' the' second' example'
Is'death'a'condition?'NO.'It'is'a'period,'because'it’s'certain'to'happen.' (ILLUSTRATION"15"V."16)?'So'you'have'to'make'a'distinction:'
' • If'it’s'a'positive"impossible"condition,'something'that'should'be'done'
CONDITION" TERM/PERIOD" and' it’s' impossible,' legally' or' physically,' and' an' obligation' depends'
upon'it,'then'there’s'no"obligation.''
' '

Future'and'uncertain' Future'and'certain"
"
o Both' the' condition' and' the' obligation' will' be' void,' just' like'
'
the'first'example.''
GREAT"ASIAN"V."CA"
• If' it’s' a' negative" impossible" condition,' like' in' the' second' example,'
This' is' a' case' regarding' discounting' line.' There’s' a' credit' facility.' Lender' will'
there'is'a'valid'obligation.'You'just'disregard'the'condition.'
extend' a' loan.' Borrower' will' likely' collect' postdated' checks,' not' immediately'
'
convertible' to' cash.' So,' the' borrower' will' give' checks' and' then' the' lender' will'
FULFILLMENT'OF'CONDITION'
release' proceeds' less' a' certain' amount,' which' will' then' be' the' discount' for' the'
When' do' we' reckon' the' fulfillment' of' a' condition?' If' there' is' a' suspensive'
counterpart'of'payments.'For'example,'you'have'P100k'worth'of'check,'you'will'
condition'that'should'occur'within'a'certain'period,'and'it'does'not'happen,'or'it'
receive'less'than'P100k,'depending'on'the'interest'rate'contemplated.'
is' clear' that' it' will' never' happen,' the' obligation' will' be' extinguished.' That' is' a'
'
typical' CTS' setting.' Non?payment' of' the' price' within' a' given' period' will'
So' here,' Great' Asia' gave' certain' checks' to' lender.' When' lender' tried' to' encash'
extinguish'the'CTS.'
the' checks,' only' 2' out' of' 15' were' honored.' So,' in' effect,' the' obligation' of' the'
'
borrower' to' pay' the' amount' of' around' P1M' was' not' fulfilled.' Normally,' the'
What' if' it’s' a' NEGATIVE" SUSPENSIVE" CONDITION?' How' do' you' reckon'
drawer,'the'one'who'issued'the'check,'has'the'obligation'to'pay'the'check'when'
fulfillment?''
it' bounces.' So,' why' was' the' borrower' held' liable' in' this' case?' It’s' because' in' a'
'
stipulation'in'the'contract,'it'was'provided'that'“in'case'the'checks'drawn'were' "

dishonored,'Great'Asian'will'assume'the'responsibility.”' ILLUSTRATION"17:"NEGATIVE"SUSPENSIVE"CONDITION"
' I'will'pay'you'P100k'if'after'graduation,'you'will'not'work'for'a'law'firm'for'a'
How' do' you' characterize' that' clause,' then?' It' contains' a' suspensive' condition.' year.'When'should'I'pay'you?'When'will'I'have'the'obligation'to'pay'you?''
'

What' does' it' suspend?' It' suspends' the' obligation' of' the' borrower' to' assume' '
responsibility'to'pay'the'amount'of'check'in'case'of'dishonor.'' Q:""Do"I"have"an"obligation"after"graduation?"
' A:'' NO,'because'it'is'still'possible'to'fulfill'the'condition.'
IMPOSSIBLE'CONDITIONS' '
Impossible'conditions'are'those'that'are'legally'and"physically'impossible.' So,'when'will'the'obligation'arise?'Two'instances:'
' 1. After'one'year,'and'the'creditor'did'not'work'for'a'law'firm;'or''
"

2. If'it'will'never'happen'(let’s'say,'there’s'no'possible'way'you'can'work'
ILLUSTRATION"15:"LEGALLY"IMPOSSIBLE"OBLIGATIONS"
for'a'law'firm)'
Let’s' say,' we' have' a' contract:' I' will' pay' you' P100k' if' you' assassinate' the'
'
person'across'you.'Do'we'have'a'valid'obligation?'NO.'Because'the'condition' "

is'impossible.' ILLUSTRATION"18:"NONfCOMPETE"
I' will' give' you' X' amount' or' you' will' have' a' penalty' if' you' work' for' a'
'

'
competitor'within'a'certain'period.'OR:'within'one'year'from'the'termination'
What' is' impossible' in' this' case' —' the' condition' or' the' obligation?' Most' likely,'
of' your' services,' you' shall' not' work' for' a' competing' firm.' In' our' previous'
both'the'condition'and'the'obligation'will'be'void.'
example,'an'obligation'will'arise,'but'in'the'real'world,'a'liability'will'arise'if'
'
"
you'violate'the'non?compete'clause.'
ILLUSTRATION"16:"OBLIGATIONS"NOT"TO"DO"AN"IMPOSSIBLE"THING" '

"
What'if'I'say,'“I'will'pay'you'P100k'if'you'do"not'assassinate'him?”'Is'there'
CONSTRUCTIVE"FULFILLMENT"OF"AN"OBLIGATION"
an'obligation?'THERE"IS.'
'
There' is' constructive$ fulfillment$ of$ an$ obligation' when' the' debtor' prevents' the'
' fulfillment'of'the'condition.'Let’s'have'an'example.'
'
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Buyer'pays'the'price'in'six'months.'This'is'not'a'CTS;'there’s'conveyance.'But'
"

ILLUSTRATION"19:"COS"WITH"ASSUMPTION"OF"MORTGAGE"
You' have' a' COS' with' assumption' of' mortgage.' This' was' the' condition.' It' the'conveyance'will'be'effective'only'when'there’s'full'payment.'This'contract'
should'be'fulfilled'for'the'transaction'to'push'through.'So,'the'debtor'was'the' was'entered'into'on'Day'1.'On'Day'3,'there’s'full'payment.''
seller.' The' seller' is' the' one' obliged' to' convey' the' property' to' the' buyer.' But' '
the' conveyance' is' conditioned' upon' the' assumption' of' the' mortgage' Q:"Who’s"the"owner"of"the"property"on"Day"1?"
obligation.' In' order' for' the' buyer' to' assume' the' obligation,' it' should' be' A:'The'BUYER.''
'

outstanding.' But' seller' paid' the' mortgage.' Therefore,' there’s' no' more'
mortgage' obligation.' So,' the' buyer' will' not' be' in' a' position' to' fulfill' the'
condition'for'this'obligation.'That’s'constructive'fulfillment:'when'the'debtor'
voluntarily'prevents'the'fulfillment'of'the'condition.'
'
'
You' have' to' understand' how' the' suspensive' condition' works.' There' is' this'
fiction' of' law' created.' If' the' condition' happens' later,' it" retroacts" to" the" date" of"
the" constitution" of" the" obligation.' If' you' have' this' scenario' wherein' there’s'

" conveyance' subject' to' payment' of' the' price,' and' if' the' price' is' paid,' there' is'
"
conveyance' as' of' Day' 1.' In' fact,' one' of' your' cases' mentioned' that' scenario,'
ILLUSTRATION"20:"CONSTRUCTIVE"FULFILLMENT"
' wherein' payment' was' made' in' full' subsequently.' Because' there' was' already'
transfer'of'possession,'the'Court'said'that'as'of'that'day,'there'was'conveyance'of'
ownership.'So,'that'fiction'of'law'[is]'the'reckoning'of'the'effect'of'the'suspensive'
condition.''
' '
' '
As' we' can' see,' A' is' the' debtor' here.' How' will' constructive' fulfillment' "

Take" note:' this' rule' on' retroactivity' only' applies' in' an' obligation' to' give' a'
happen?'If'A'destroys'the'car,'for'instance.''
determinate'thing.''
' '

20.A"—"NEGLIGENCE"AS"CONSTRUCTIVE"FULFILLMENT" '
Let’s' say' A' was' driving' the' car' along' Rockwell' Drive' negligently.' It' was' What’s'the'purpose'of'that?'
raining' and' there' was' low' visibility.' A' struck' another' vehicle,' not' knowing' '
"

that' it' was' X’s' car.' It' was' an' accident' but' A' was' negligent.' WILL" THAT" ILLUSTRATION"22:"MORTGAGE"
AMOUNT" TO" CONSTRUCIVE" FULFILLMENT?" YES.' It' need' not' be' Let’s'say,'you'have'a'mortgage.'You'can'mortgage'property'only'if'you’re'the'
deliberate.'' absolute' owner,' meaning,' you’re' the' beneficial' and' legal' owner.' Let’s' say,'
you' have' a' Sale' on' Day' 1.' Seller' sells' the' property' to' Buyer,' but' the'
"

"
"
conveyance'is'subject'to'a'suspensive'condition.'Who’s'the'owner'as'of'Day'1?'
Remember:' Art.' 1186' uses' the' word' “voluntary.”' Voluntary" act" does" not"
The' Seller.' On' Day' 2,' Buyer' mortgages' the' property' to' X' to' secure' another'
mean"willful"or"malicious."It"only"means"that"there"is"a"degree"of"freedom"
obligation.'
in"doing"it.'Negligent'act'is'voluntary.'Otherwise,'the'law'should'have'used' '

the'words'“with'intent,”'or'“maliciously.”' '
'
If'you'look'at'ILLUSTRATION"22,'that'is'void'because'as'of'Day'2,'he’s'not'yet'the'
'
owner.' Let’s' assume' that' it' was' a' registered' land.' Then' Day' 3,' there’s' full'
FULFILLMENT'OF'THE'SUSPENSIVE'CONDITION'
payment.'This'payment'retroacts'to'Day'1.'So'as'of'Day'1,'Buyer'is'the'owner'by'
When'do'we'reckon'the'occurrence'of'a'suspensive'condition?'
fiction' of' law.' So,' if" you" follow" that" fiction" of" law,' then,' as" of" Day" 2," B" can"
'
" validly"mortgage.''
ILLUSTRATION"21:"OCCURRENCE"OF"A"SUSPENSIVE"CONDITION" "
'

Q:" How" do" you" reconcile" the" legal" fiction" with" the" doctrine" that" “delivery"
transfers"ownership?”"
A:' No,'it’s'not'a'doctrine.'There'are'two'ways'to'transfer'ownership.'
' '
"

We'have'a'conditional'DOS.'Seller'sells'a'property'to'Buyer,'provided'that'full' TWO"WAYS"TO"TRANSFER"OWNERSHIP:'
payment' will' be' in' six' months.' So' the' Seller' conveys' property,' provided' 1. Actual'delivery'—'by'actual'transfer'or'physical'possession;'or'

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2. Constructive'delivery'—'you'execute'a'notarized'document'
'

'
' So,' let’s' say,' in' our' example:' it’s' a' notarized' sale' because' if' you' don’t' have'
that,'even'with'the'transfer'of'possession,'Seller'will'remain'the'owner.'So,'it'
won’t'matter'really.'Now,'even'if'it’s'a'private'document'and'there’s'transfer'
of' possession,' if' there’s' payment,' then' that' will' amount' to' conveyance' of'
ownership,'not'just'mere'possession'by'fiction'of'law.'
'
Q:""Sir," for" example," some" falling" debris" fell" upon" a" passing" pedestrian," and"
then" the" payment" was" made" three" days" later." Is" Buyer" liable" to" the" said"
quasifdelict?"
A:'' NO.'It'will'be'the'Seller’s'liability.'Otherwise,'the'Seller'will'be'passing'on'the'
fault.' We' are' dealing' here' with' ownership,' not' with' liability.' The' reason' is'
this:'the'liability'arises'not'from'the'property,'but'from'the'fault'of'the'one'in'
control' at' that' time' —' and' the' one' in' control' at' that' time' will' be' the' Seller.

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"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
TUESDAY,'18'NOVEMBER'2014'
'

"

CONTINUATION'OF'ARTICLES'1187=1189' ILLUSTRATION"3:"NOTARIZED"DEED"="DELIVERY"
ART."1187"–"1189"—"CONDITIONAL"OBLIGATIONS" "

Let’s'begin'with'some'examples.''
"
"
"
ILLUSTRATION"1:"CONTRACT"OF"SALE"
'

Now,' before' the' happening' of' the' suspensive' condition' on' Day' 3,' the'
OWNERSHIP"WITHOUT"SUSPENSIVE"SONDITION"
" following'happened'on'Day'2:'the'seller'sold'the'same'bike'to'X.'This'time'it’s'
in'a'notarized'deed.'It’s'an'absolute'sale'and'it’s'in'a'notarized'document.''
'
' Later' on,' you’ll' learn' in' your' Sales,' that' if' it’s' in' a' notarized' document'
Day'1:''Seller'sells'a'bike.'Buyer'pays'the'price.'' without' any' special' qualifications,' and' unless' there' is' a' contrary' defect,' this"
'

' will"be"tantamount"to"delivery.'
Regarding'ILLUSTRATION"1:'as'of'day'1'who'will'be'owner?'The'buyer'will'be'the' '
owner'because'it'was'already'sold.'Let’s'change'the'scenario:' On'Day'2,'there'was'a'notarized'deed'whereby'S'sold'the'bike'to'X'and'X'paid'
' the' price.' We' will' assume' they' are' both' buyers' in' good' faith,' or' innocent'
purchasers'for'value.'
"

ILLUSTRATION"2:"CONTRACT"OF"SALE"
''
OWNERSHIP"WITH"A"SUSPENSIVE"SONDITION"
"
As'of'day'2,'who’s'the'owner?'X.'
'

"
'

A' notarized' document' without' any' special' qualifications,' unless' there' is' a'
contrary'defect,"will"be"tantamount"to"delivery.'
'

Seller'sold'the'bike'to'buyer.'There’s'payment'of'the'price.' '
'

"
Following'the'fiction'of'law'in'ILLUSTRATION"3:'if'there’s'payment'on'Day'3,'the'
reckoning' of' this' payment' will' be' as' of' Day' 1.' So' as' of' Day' 1,' there' is' already'
' fulfillment' of' the' suspensive' condition' (payment' of' price),' in' which' case,' there'
This'time,'it’s'subject'to'a'suspensive'condition.'The'suspensive'condition'is:' was"already"conveyance"as"of"Day"1.'So'who'will'have'a'better'right?'By'fiction,'
buyer'should'fully'pay'the'price'as'of'Day'3.'So'here’s'the'payment.'' it’s'possible'for'B'to'defeat'this'title'of'X'[bit'without'certainty].6'However,'if'you'
remove' the' notarized' deed,' it' will' be' certain' that' B"will"have"a"better"right"by"
'

'
In' the' ILLUSTRATION" 2' scenario:' as' of' Day' 1,' who’s' the' owner?' It’s" the" seller" legal"fiction.'I'think'you'will'gather'this'from'the'case'of'Tuparan.'
because" there’s" no" conveyance" yet." Conveyance" is" subject" to" a" suspensive" '
condition.'' CASES"[ARTS.'1179'AND'1181]"
' REYES"V."TUPARAN"
Even'if'we'assume'that'there’s'delivery,'and'the'Seller'transfers'possession'to'B,' In' the' case' of' Tuparan,' there' was' a' discussion' by' the' Supreme' Court' of' the'
the' contract' still' stipulates' that' the' conveyance' of' title' will' happen' only' upon' following'scenario:'
fulfillment'of'the'suspensive'condition:'complete'payment'of'the'price.' • Day' 1:' there' was' a' conditional" sale" (sale' was' subject' to' a' suspensive'
' condition)'
'

Fulfillment' of' the' condition' in' an' obligation' to' give' with' a' suspensive'
'''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' '
condition'shall"retroact"to"the"day"of"the"constitution"of"the"obligation.' 6 '' In' Tolentino’s' Commentary,' if' the' third' person' is' a' buyer' in' good' faith,' and' there' has' been'
'

' delivery,' the' happening' of' the' suspensive' condition' will' NOT" serve' to' defeat' the' right' of'
"
ownership'of'the'third'party'(see'p.'165,'¶1).'
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• Day'3:'there'was'a'completion'of'the'suspensive'condition' 3.
' 4.
Given'those'facts,'the'Supreme'Court'said'that'the'transfer'of'possession'was'as'
of'Day'1.'The'completion'of'the'suspensive'condition'on'Day'3'amounted'to'an'
automatic'transfer'of'ownership'[that'retroacts'to]'Day'1,'the'constitution'of'the'
date'of'obligation.'
'
With'respect'to'fruits,'there'is'no'retroactive'effect.'
In'obligations'to'do'or'not'to'do,'there'is'no'default'rule;'the'courts'
will'decide.'Hence,'if'you'want'to'establish'rules'on'the'retroactive'
effect' of' the' fulfillment' of' the' suspensive' condition' you' have' to'
stipulate'by'contract.'

"
' PERIOD"V."CONDITION"
'

Delivery'transfers'ownership'or'real'rights'over'the'thing.' Let’s' give' another' example:' there’s' conveyance' prior' to' the' fulfillment' of' the'
'

" condition.' S' will' be' owner,' while' B' will' only' have' an' inchoate" right' on' the'
"
transaction'because'the'suspensive'condition'may'or'may'not'be'fulfilled.'That'is'
ILLUSTRATION"4:"LEGAL"FICTION"AS"TO"FRUITS"AND"INTERESTS"
how'we'will'distinguish'it'from'a'period.'
Now,' let’s' say' that' instead' of' a' bike,' it’s' a' parcel' of' land:' an' orchard.' It’s'
'
unregistered'but'there’s'conveyance'and'it’s'a'subject'to'suspensive'condition,' "

same'terms.' Period"is"certain"to"happen,"condition"may"or"may"not"happen."
'

' '
Land'has'food'on'Day'2,'Let’s'say'it'is'harvest.' Therefore,'B'only'has'a'contingent'right'—'contingent'upon'the'fulfillment'of'the'
' suspensive'condition.'It'does'not'mean'that'B'doesn’t'have'any'right'at'all;'B'has'
If'you'apply'the'legal'fiction,'it'will'go'back'to'Day'1'right?' rights'to'preserve'his'entitlements'under'the'contact'of'conditional'sale.'
So'as'of'Day'1,'B'is'the'owner.'If'B'is'the'owner'as'of'Day'1,'should'B'get'the' '
fruits?' Under' Article' 1187,' the' legal' fiction' ONLY"applies' to' ownership' and' RIGHTS"PRIOR"TO"FULFILLMENT"OF"CONDITION""
does'not'apply'to'the'fruits.'' "
'
"

" ILLUSTRATION"5:"RIGHTS"PRIOR"TO"FULFILLMENT"OF"CONDITION"
The'parties'don’t'have'to'account'for'fruits'or'interest'received'in'the'meantime" 5.A"—"PROTECTING"YOUR"RIGHT"
that' is' prior' to' the' fulfillment' of' the' suspensive' condition." Why?' For' Let’s'say'that'on'Day'2,'S'attempts'to'sell'the'same'property'to'X.'What'can'B'
convenience.'Otherwise,'parties'would'have'to'account'how'much'each'of'them' do?'He'can'take'extra?judicial'action'to'protect'his'contractual'rights.'How?'
received' prior' to' the' fulfillment' of' the' suspensive' condition,' and' there' will' be' 1. B'can'write'to'X,'saying,'“I'have'a'live'contract'with'S,'so'you'cannot'
offsetting.' transact'with'S.”'What'will'be'the'use'of'that'letter?'It'will'make'X'a'
' buyer'in'bad'faith.'So'if'X'transacts'with'S,'B'can'say,'“You'cannot.'S'
and'I'have'a'valid'contract.'You'cannot'buy'this'property.“''
"

To'make'things'easy,'the'law'says'the"retroactive"effect"of"the"fulfillment"of"
the"suspensive"condition"shall"not"apply"to"the"fruits.' 2. Or,' B' can' file' an' action' against' S' to' comply' with' the' terms' and'
'
conditions'of'the'contract,'possibly'including'third'parties'who'may'
"
be'dealing'with'S.'
Now,'if'it’s'an'obligation'to'do'or'not'to'do,'the'courts'will'determine'the'effect'of'
"
fulfillment'of'suspensive'condition.'To'what'extent?'If'the'same'rules'will'apply,'
5.B"—"NO"OBLIGATION"UNTIL"CONDITION"ARISES"
it'will'be'up'to'the'court."If'you'are'a'party'of'an'obligation'to'do'or'not'to'do'and'
Now'what'if'it’s'the'other'way'around?'Let’s'say,'B'has'an'obligation'to'pay'
you' want' to' control' the' consequences' of' the' fulfillment' of' the' suspensive'
but' it' is' subject' to' a' suspensive' condition.' This' means' that' prior' to' the'
condition'you'have'to'stipulate"it.'If'not,'the'courts'will'come'in'and'decide'the'
fulfillment'of'that'condition'there'is'no'obligation'on'the'part'of'B'to'pay'the'
matter'based'on'the'seeming'agreement'of'the'parties."
price.'
'
" '
Again,'take'note'of'the'following'distinctions:'' 5.C"—"PAYMENT"BY"MISTAKE'
1. If'it’s'an'obligation'to'give,'you'have'a'default'rule'on'the'retroactive' Let’s' say,' B' nevertheless' pays' the' price.' What' will' be' the' consequence?' It'
effect'of'the'fulfillment'of'the'suspensive'condition.' would'depend.'We'can'have'three'scenarios:'
2. With' respect' to' ownership,' it' is' reconcilable' based' on' the' 1. If'payment'was'by'mistake,'B'can'recover.'
constitution'of'the'obligation.' 2. If'B'paid'knowing'full'well'that'the'condition'has'not'been'fulfilled,'
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intending'to'scratch'the'condition,'he'will'have'no'right'to'recover.' 2. The'obligation'to'give'is'subject"to"a"suspensive"condition,'and''
The'conditional'obligation'has'become'a'pure'obligation.''' 3. Loss,"improvement,"or"deterioration"happened'at'a'time'when'the'
3. If'the'obligation'was'paid'in'advance'on'the'premise'that'there'will' suspensive'condition'has'not'yet'arisen.'
be' fulfillment' of' the' condition' and' yet,' the' condition' was' not'
'

'
fulfilled,'then'B'can'recover.' So'you'have'the'rules'here.'These'are'simple'rules.'Long'provision'but'simple:'
'

' "
Q:" With" respect" to" interest" rates:" if" B" paid" S" the" price," and" the" condition" did" RULES"WITH"RESPECT"TO"LOSS"DETERIORATION"OR"IMPROVEMENT"OF"A"THING"
not"happen,"will"B"be"held"liable"for"interest?' SUBJECT"TO"AN"OBLIGATION"TO"GIVE:"
A:' Normally,' interest' will' be' in' the' form' of' damages.' So,' for' damages' to' arise,' 1. If'the'thing'is'lost'without'the'fault'of'the'debtor,'the'obligation'shall'
you'have'to'go'back'to'our'basic'rule.'When'will'damages'be'due?'If'there'is' be'extinguished"
negligence,' delay,' fraud,' or' some' other' contravention' of' the' tenor' of' the' 2. If' the' thing' is' lost' through' the' fault' of' the' debtor,' then' he' shall' be'
obligation,'then'damages'may'be'collected.' obliged'to'pay'for'damages"
' ' o It' is' understood' that' the' thing' is' lost' when' it' perishes' or'
' Let’s' say,' you' make' B' pay' and' make' B' believe' that' the' condition' has' been' goes'out'of'commerce'or'disappears'in'such'a'way'that'its'
fulfilled,' then' there' may' be' recovery' of' damages.' It' is' also' possible' that' B' existence'is'unknown'or'it'cannot'be'recovered"
becomes' aware' of' his' right' to' recover' and' B' will' demand' for' recovery' of' 3. If' the' thing' deteriorates' without' the' fault' of' the' debtor,' the'
damages.'' impairment'is'to'be'borne'by'the'creditor'
' 4. If'it'deteriorates'through'the'fault'of'the'debtor,'you'go'back'to'the'
Q:" If" there’s" bad" faith," can" S" argue" that" with" respect" to" Art." 1187" —" since" default' rules' and' the' creditor' may' choose' among' the' remedies:'
suspensive"condition"has"now"arisen—"the"effect"is"retroactive?' resolution,'specific'performance,'or'damages'
A:' B'has'to'recover'before'fulfillment'of'the'suspensive'condition'because'if'the' 5. If'the'thing'is'improved'by'its'nature,'or'by'time,'the'improvement'
suspensive' condition' has' already' been' fulfilled,' then' the' exercise' becomes' shall'inure'to'the'benefit'of'the'creditor'
useless:' the' obligation' already' exists.' I’m' looking' at' it' generally.' If' there’s' 6. If'it'is'improved'at'the'expense'of'the'debtor,'he'shall'have'no'other'
already' fulfillment' of' the' obligation,' then' there’s' nothing' more' to' recover,' right'than'that'granted'to'the'usufructuary'
unless' you' have' a' case' similar' to' Cathay' whereby' there' was' nevertheless' o In' other' words,' benefit' is' for' the' creditor,' but' at' the'
fault'and'you'can'still'get'nominal'damages,'at'least.' expense' of' the' debtor;' debtor' may' then' be' entitled' to' use'
' the'same'property'by'way'of'usufruct'
Q:" Sir,"can"you"give"an"actual"example"in"which"the"debtor"can"no"longer"get"
'

"
back" the" money" and" the" damages?" Would" that" be" tantamount" to" unjust" Q:" Sir,"what"if"you"sell"a"house,"and"then"50%"of"it"got"burned"down?"Would"
enrichment?"' you" consider" that" as" deterioration?" Can" you" say" that" the" damage" was"
A:' I’ll' give' you' a' case:' the' payment' subject' to' acquisition' of' a' right' of' way.' It' substantial?"
will'be'done'by'the'party.'The'party'can'say,'“I’m'waiving'that.'I’m'paying' A:' So,' there’s' a' contract' of' sale,' and' there’s' a' property,' but' the' payment' of' the'
whether'or'not'I'acquire'the'right'of'way.”'That'will'be'waiver.'" price' is' subject' to' a' suspensive' condition.' However,' prior' to' the' fulfillment'
' (Day'3),'50%'of'the'house'got'damages'on'Day'2.''My'answer'depends'on'a'
ARTICLE" 1189" —" RULES" WITH" RESPECT" TO" LOSS," DETERIORATION," OR" case?to?case'basis.'If'the'house'was'burned'down'to'an'extent'that'it'renders'
IMPROVEMENT"OF"A"THING"SUBJECT"TO"AN"OBLIGATION"TO"GIVE" the' property' useless,' then' that' can' be' considered' as' total' loss' —' not' just'
" deterioration' —' in' which' case,' you' will' apply' the' rule' on' losses.' Now,'
So'this'rule'applies'if'you'have'an'obligation'give'a'determinate"thing'(because'if' whoever'has'fault'is'liable'for'damages.'If'the'fire'was'due'to'FE,'then'there'
it’s' a' generic' thing,' it' will' be' difficult' to' contemplate' the' cause' of' damage' until' will'exemption'of'liability.''
delivery'or'when'the'thing'has'been'delivered'or'identified).'' '
' Q:" What"if"it’s"mixed,"sir?"Fault"is"only"partly"caused"by"debtor.""
"

Article"1189"applies"only"if:'
1. There'is'an'obligation'to'give'a'determinate"thing;'

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A:'' As'long'as'there'is'concurring'fault,'there'will'be'liability.'Let’s'take'the'case' sole'will'of'the'debtor.'The'debtor'is'the'seller'with'respect'to'the'conveyance'of'

of'a'fortuitous'event.'If'it'is'with'participatory'fault'or'negligence,'then'the'FE' the'car.'
defense'to'claim'exemption'from'liability'can'no'longer'be'claimed.'' '
' The'seller'will'sell'whenever'he'wants'to.'What'happens?'The'obligation"is"void;"
Q:" What"if"you"argue"based"on"proximate"cause?" it’s" not" just" the" condition.' The' whole' obligation' is' void.' Why?' In' this' case,'
A:' If'you'are'going'to'argue'based'on'proximate'cause,'you'can'possibly'say'that' there’s' no' compulsion' on' the' part' of' the' seller' to' sell.' You' do' not' have' that'
the'damage'was'all'caused'by'the'FE.'In'my'sense,'the'better'rule'is'this:'if'the' element' of' the' obligation.' The' fact' that' there' is' no' juridical' tie,' that' element'
party'has'concurring'fault,'that'party'is'liable.'You'cannot'say'that'there'was' mandating'the'seller'to'perform,'makes'it'void.''
a' cause' beyond' your' control,' which' then' produced' the' loss' up' to' 8%.' I' am' '
not'aware'of'such'thing'as'allocation'of'liability.''
'

A'purely'potestative'suspensive'condition,'dependent'on'the'sole'will'of'the'
' ' debtor,' is' void" for" negating" the" juridical" tie;' there' is' no' compulsion' on' the'
CLASSIFICATION"OF"CONDITIONS" part'of'the'debtor,'for'example,'to'sell'the'car.'
' '

" '
TWO"KINDS"OF"CONDITIONS:" RIGHT'OF'FIRST'REFUSAL:'VALID'
1. Suspensive'condition'—'gives'rise'to'an'obligation' Let’s'say,'a'contract'provided'that'Seller'will$sell$the$car$first$to$B'for'P500,000,'in"
2. Resolutory'obligation'—'extinguishes'an'obligation.'' case"S"decides"to"sell.'There'is'still'a'suspensive'condition.'It'is'still'potestative.'
'

' Is' it' valid?' This" time," this" obligation" is" valid." This' is' typically' what' you' will'
THREE"CATEGORIES"OF"CONDITIONS:" encounter'in'a'right"of"first"refusal.'
1. Potestative"condition'—'dependent'on'the'will'of'one'of'the' '
contracting'parties'(i.e.'a'condition'fulfilled'based'on'control'of' What’s'the'right'of'first'refusal?'
certain'party)' '
2. Casual"condition'–'condition'not'based'on'the'will'of'either'part' For'example,'I'have'a'contract.'The'contract'provides' that'if'I'sell'my'property,'
(may'be'based'on'chance'or'acts'of'3rd'party)'' you'will'have'first'crack.'I'have'to'sell'it'to'you'first.'If'you'do'not'exercise'that'
3. Mixed"condition'–'Condition'based'on'both.'Based'on'will'of' right,'I'will'sell'it'to'somebody'else.'That'is'the'right'of'first'refusal.$
contracting'parties'and'other'facts'or'circumstances.' '
' '

' The' holder' of' the' right' of' first' refusal' shall' receive' the' offer' first' and' has' a'
Remember,'(1)'a'potestative'condition'depends'on'the'will'of'one'of'the'parties.' choice'to'pass'upon'the'offer'or'not.'The'right'of'first'refusal'is$valid.'
'

So,'you'have'a'condition'depending'upon'whoever'determines'fulfillment.'It'can' '
be' on' the' part' of' the' debtor' or' the' creditor.' ' Conditions' can' also' be' (2)' casual,' "

ILLUSTRATION"7:"PREfTERMINATION"OF"LEASE"CONTRACT"
which'depends'on'a'third'party'or'chance,'or'(3)'mixed'—'a'combination'of'the'
POTESTATIVE"RESOLUTORY"CONDITION"
previous'two.''
Let’s' have' another' example.' There' is' an' owner' and' a' lessee.' They' enter' a'
'
" Contract'of'Lease.'The'term'of'the'contract'is'one'year.'However,'the'contract'
ILLUSTRATION"6:"PURELY"POTESTATIVE"SUSPENSIVE"CONDITION" stipulates' that' owner' may' pre?terminate' by' 30?day' prior' notice.' Will' that' be'
What'if,'I'say'that'I'will'sell'to'you'my'car'with'license'plate'number'ABC'234' valid?'
for'500k'when"I"want"to.'Do'you'have'an'obligation?' '

'
'
' The' pre?termination' clause' in' the' example' is' a' resolutory' condition' in' effect'
In' ILLUSTRATION" 6,' you' have' Seller' and' Buyer' to' sell' a' definite' car.' There' is' a' because' the' owner' may' or' may' not' give' it.' Yes,' it' is' VALID,' because' from' the'
contract' signed' by' both' parties.' Stipulation' went' like' this;' S' shall' sell' the' get?go,' you' already' have' an' obligation.' The' owner' (debtor' with' respect' to' the'
property'to'B,'when$S$wants$to.'Do'you'have'an'obligation?'No.' leasing' of' the' house)' simply' determines' when' the' contract' will' end.' Given' that'
' situation,'there'is'no"negation"of"the"juridical"tie.'All'that'will'happen'is'that'the'
There’s' no' obligation' because' what' you' have' here' is' an' obligation' to' convey' owner'will'decide'whether'or'not'he'or'she'will'terminate'the'contract'earlier.'
subject'to'a'suspensive'condition'that'is'purely'potestative'or'dependent'on'the' '

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RIGHT'OF'FIRST'REFUSAL'v.'PURELY'POTESTATIVE'CONDITION' CASES"[ART.'1182]"
The' distinction' between' the' right" of" first" refusal' and' a' purely' potestative' CATUNGAL"V."RODRIGUEZ"
condition,'is'this:'in'the'former,'there'will'be'a'trigger"for"the"obligation,'while' In' this' case,' the' final' payment' is' subject' to' the' acquisition' of' the' right' of' way.'
the'same'is'absent'on'the'latter.'' There'was'a'contract'of'sale:'Seller'conveys'property,'Buyer'pays'the'price.'There'
' would' be' downpayment,' and' there' would' be' final' payment.' Buyer' has' already'
In'ILLUSTRATION"6,'you'will'never'know'when'the'seller'decides'to'sell.'It’s'all'in' given'downpayment.''Again,'final"payment"is"subject"to"a"resolutory"condition,"
the'seller’s'mind.'With'situations'concerning'the'right$of$first$refusal,'there'will'be' which"is"the"aquisition"of"right"of"way.'This'means'that'buyer'qua'debtor'will'
a' trigger' or' an' indication' on' the' intent' of' the' seller' of' his' decision' to' sell.' How' pay'the'final'payment'only'upon'aquisition'of'the'right'of'way.'
will'you'know?'' '
' The'question'is:'$is$this$a$potestative$reolutory$condition$dependent$solely$on$the$will$of$
Seller'shops'for'buyers.'He'or'she'makes'an'offer'to'X.'B'can'now'force'seller'to' the$ debtor?$ Whatys' the' obligation' weyre' dealing' with?' Itys' the' portion' of' the'
recognize'the'first'of'right'refusal.'That’s'the'difference.'Yes,'it’s'still'potestative' payment,'which'is'to'pay'the'balance.'The'payment'of'the'balance'is'contingent'
because'seller'will'still'determine'when'to'sell,'but'the'moment'the'seller'makes'a' upon'the'aquisition'of'right'of'way.'Therefore,'it'is'not'a'potestative'condition;'it'
determination'—'which'will'be'manifested'or'known'to'the'other'party'—'then,' is'a'mixed"condition'because'it'is'[not'only]'within'the'power'of'B.'Itys'a'mixed'
the'obligation'will'arise.'' condition.'''
' '
TERM'v.'CONDITION'
"

ILLUSTRATION"8:"RIGHT"OF"FIRST"REFUSAL"
For' example,' I' have' a' supplier' using' property' to' supply' products:' fresh' Letys'say,'itys'not'mixed'—'that'itys'a'purely'potestative'condition.'Buyer'will'pay'
produce.' Normally,' you' insert' the' following' clause:' “Should' the' owner' and'buyer'has'the'money.'Valid?'Yes.'Why?'Ity's'a'term.'When'you'agree'to'pay'
decide' to' sell,' the' owner' shall' first' sell' the' property' to' X,' the' holder' of' the' zwhen'able,z'it'is'a'term,'not'a'condition.'Letys'say,'buyer'will'pay'if'buyer'is'zable'
right'of'first'refusal.”' to'construct.z'Itys'short'of'saying'that'buyer'will'pay'if'buyer'wants'to,'and'that'is'
'
invalid.'You'cannot'do'that.'
'
'
That'is'a'potestative'condition'but'that'is'valid'because'there'is'a'juridical'tie;'the'
Now,'what'if'the'case'is:'Buyer'will'pay'if'buyer'commences'negotiations'for'the'
only'question'is'when'will'the'obligation'arise.'Plus,'there'is'always'an'objective'
aquisition' of' the' right' of' way.' Valid?' No?' Why' not?' Because' thereys' no'
test' to' determine' when' the' obligation' will' arise:' when' seller' starts' to' shop' for'
compulsion?' Thatys' a' different' thing.' Seller' will' be' at' the' mercy' of' the' buyer.'
buyers.'
There'is'no'obligatory'force'in'the'payment'of'this'balance.'
'
'
POTESTATIVE'&'RESOLUTORY'SUSPENSIVE'CONDITIONS'[—36:00]'
RIGHT'TO'UNILATERALLY'RESCIND'CONTRACT'
Again,'an'obligation'that'is'subject'to'a'potestative'condition'is'dependent'on'the'
In' the' case' of' Catungal,' another' issue' of' the' case' was' that' there' was' a' right' to'
sole' will' of' the' creditor.' What' happens' to' the' obligation?' Valid?' Why' valid?'
rescind' unilaterally' from' B.' Letys' say' B' has' the' right' to' rescind' the' contract' as'
There'is'still'an'obligation.'There'is'only'a'question'of'whether'the'creditor'will'
debtor.' Do' you' have' a' valid' contract?' You' have' to' go' back' to' the' earlier'
enforce'it.''
discussion.'In'that'setting,'the'Court'said'you'have'to'take'that'right'to'rescind'in'
'
' the'context'of'the'entire'transaction.'In'the'case,'that'right'will'be'exercised'only'
A' potestative' suspensive' condition' can' still' constitute' a' valid' obligation;' it’s' if"B"could"not"get"the"right"of"way.'But'even'to'that'explanation,'it'will'just'be'a'
just'that'the'creditor'is'not'asking'for'performance'yet.'' resolutory'condition,'an'option'to'cancel'the'contract.''
'

' '
Now,'what'if'it’s'a'resolutory"suspensive"condition?'' Q:""Sir,"for"example,"in"this"case,"the"downpayment"was"80%"of"the"total"price"
' and"there"was"no"conveyance"of"the"property"yet."There"was"also"a"purely"
Generally,'it'will'still'be'valid.'Again,'designation'goes'back'to'the'element'of'an' potestative" final" condition" upon" final" payment." Wouldn’t" the" Court"
obligation.'You'have'an'obligation'if'itys'subject'to'a'resolutory'condition,'right?' consider"it"as"unjust"enrichment"on"the"part"of"S,"and"would"that"mean"that"
Itys'an'obligation'that'arises'immediately;'it'will'simply'be'extinguished'upon' B"has"to"pay"within"a"reasonable"amount"of"time?"
fulfillment'of'the'resolutory'condition.'' A:' No.'The'Court'fixes'the'time'to'pay'only"if"the"parties"contemplated"a"term.'
' If'it'is'a'condition,'the'Court'CANNOT"fix'the'period'because'it'may'or'may'
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not' happen.' In' your' situation,' you' have' a' contract' to' sell.' Buyer' paid' 80%' not'agree'in'a'specific'condition,'they'will'just'say,'“as'will'be'agreed'upon'in'
and' Buyer' will' pay' the' balance' upon' accomplishment' of' a' suspensive' a'separate'contract.”'
condition'that'was'dependent'on'the'sole'will'of'the'buyer.'Seller'was'still'the' '
owner…' wait,$ your$ example$ really$ doesn’t$ make$ sense.' Can$ buyer$ complain?' No,' That" mutual" agreement" clause" is" not" a" purely" potestative" condition"
because' the' buyer' is' the' one' controlling' the' fulfillment' of' the' suspensive' dependent" on" the" sole" will" of" one" of" the" parties.' However,' this' case' was'
condition.' What' the' condition' only' suspends' is' the' existence' of' this' decided' as' something' dependent' on' the' sole' will' of' the' parties' because' of'
obligation.'There’s'a'contract'and'there’s'a'payment'—'that'should'be'fine.'I' certain'peculiar'facts:'an'owner'acting'through'an'officer'already'recognized'
don’t'even'see'litigation'in'that'case.'' the' need' for' an' adjustment.' There' was' in' fact' a' recommendation' by' the'
' officer.'Without'that,'it'could'have'gone'the'other'way.''
DEL"CASTILLO"(VDA."DE"MISTICA)"V."NAGUIAT' '
The'case'was'about'a'contract'of'sale.'There'was'initial'payment,'and'then'there' In' the' contracts' I' make,' I' always' state' this:' “There' shall' be' no' adjustment'
was'a'remaining'balance.'The'provision'went'like'this:'“Should'the'the'buyer'fail' unless' we' agree.”' So' if' there' is' a' conditional' clause,' itys' like' a' possible'
to' pay' the' balance,' there' will' be' interest.z' Seller' was' saying' this' is' a' purely' concession' on' the' contractor.' However,' the' Court' construed' the' mutual'
potestative' condition' dependent' on' the' sole' will' of' the' debtor.' Court' ruled' agreement'clause'as'a'purely'potestative'condition'because'the'owner'had'the'
otherwise.'There'is'an'obligation.'What'the'contract'provided'was:'“Should'there' incentive'to'just'agree'to'prevent'an'escalation'of'the'price.'But,'the'peculiar'
be'no'payment'within'the'stipulated'period,'interest'would'begin'to'accrue.”' fact'in'that'case'was'the'recognition'of'the'agent'of'the'owner'of'the'need'to'
' make'an'adjustment.'
Whatys'the'remedy'of'the'seller?'Seller'should'make'a'demand,'in'which'case,'the'
'

'
seller'will'place'the'buyer'in'default'and'then'you'will'have'remedies.'But'at'this' RUSTAN"PULP"V."IAC'
point,'buyer'was'paying'the'interest,'which'means'he'was'not'in'breahc,'so'seller' This'one'is'interesting.'The'case'went'like'this:'thereys'a'paper'mill'company'and'
could'not'resolve.'Buyer'was'actually'paying'as'per'contract.'Thus,'the'court'said' a' supplier.' Paper' mill' had' several' suppliers.' Among' which' is' this' particular'
the'payment'was'not'dependent'on'the'sole'will'of'the'debtor.' supplier.' Paper' Mill' Company' and' Supplier' enter' into' a' Supply' Contract.' The'
' agreement' was' that' buyer' would' supply' raw' materials' to' paper' mill' and' in'
"

ILLUSTRATION"9:"ADJUSTMENTS"SUBJECT"TO"AGREEMENT"OF"PARTIES"
Letys'say,'you'have'a'contract'where'the'owner'wanted'to'construct'a'building'
on' a' piece' of' property.' He' entered' into' a' construction' agreement' with' a'
contractor.'Contractor'would'construct'a'building'completely'in'exchange'of'a'
price.'Price'should'be'paid'in'accordance'with'a'schedule'and'there'would'be'
no'adjustments.'There'will'be'no'adjustment'unless'there'was'a'change'in'the'
prices' of' materials' affecting' the' total' cause' of' the' building' and' unless' there'
was'mutual'agreement'of'the'parties.''
' Therefore,'the'condition'was'VOID.''
Now,' there' was' a' change' in' prices' of' materials' during' the' construction'
period.'Contractor'then'notified'owner'and'they'had'discussions.'Owner'said'
that'we'should'have'an'adjustment:'70%'increase'of'the'price.''
' obligation.' It' could' have' said' the' obligation' of' the' supplier' to' recognize' the'
Here’s' the' question:' was" this" clause" a" potestative" suspensive" condition"
dependent" on" the" sole" will" of" one" of" the" parties?' IT" IS.' The' clause'
specifically' stated' that' there' will' be' an' adjustment' of' the' price' based' on' the'
change'of'the'prices'of'materials'and'upon'mutual'agreement'of'the'parties.'Is'
it'a'potestative'suspensive'condition?'Yes.'Why?'Because"all"the"other"party"
needs"to"do"was"to"disagree"and"there"will"be"no"adjustment.'Donit$take$it$as$
the$general$rule.'This'is'a'clause'you'will'find'in'a'lot'of'contracts.'If'parties'do'
exchange,' paper' mill' would' pay' the' price.' However,' there' was' this' provision:'
“When' raw' material' supplies' is' sufficient,' paper' mill' can' stop' delivering'
supplies.”'Paper'mill'shall'have'the'right'to'stop'delivery'of'raw'materials'when'
the'supply'shall'have'become'sufficient.''
'
Here’s' the' question:' is' this' a' purely' potestative' condition' dependent' solely' on'
the'will'of'one'of'the'parties?'Supreme'Court'said'that'this'is'a'purely'potestative'
suspensive' condition' dependent' solely' on' the' will' of' paper' mill' qua' debtor.'
'
But,' Supreme" Court" got" it" wrong…" again.' This' one' is' a' tricky' case.' First,' the'
application'of'the'rule'is'wrong'because'the'Supreme'Court'did'not'identify'the'
validity' of' this' contract.' That' should' have' been' the' one' nullified' —' faulty'
decision?making.'You'will'find'this'in'a'number'of'cases'where'the'SC'will'rule'
for'the'existence'of'a'purely'potestative'suspensive'condition,'and'therefore,'it’s'
not'operative.'But'the'rule,'as'you'remember,'explicitly'states'that'the"obligation"
shall" be" void" and" not" just" the" condition.' SC' should' have' used' a' different'
ground:'mutuality"of"contracts.''
'

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' '

There’s' another' problem' in' this' case.' Is' this' really' a' purely' potestative'
suspensive'condition?'How'do'you'make'it'otherwise?'What'you'could'show'is'a'
standard.' Whatys' an' objective' standard?' Measure.' Paper' mill' has' a' production'
capacity.' It' can' only' produce' so' much' in' a' given' period.' Therefore,' there' is' a'
possible' objective' standard.' Itys' not' a' purely' potestative' condition.' Itys'
measurable.' It' may' be' dependent' on' the' will' of' the' paper' mill,' but' on" the"
capacity"of"the"paper"mill'and'other'factors,'and'not'just'on'the'decision'of'the'
debtor.' Supreme' Court' should' have' said:' there' is' no' compliance' with' the'
requirement'of'the'provision.'That'was'the'decision'of'the'CA.''
' nothing.' What' happens' to' the' obligation?' Obligation' will' be' extinguished.' So,'
'
'
TACIT'RESOLUTORY'CONDITION'
Every"reciprocal"obligation"has"this"implied"or"tacit"resolutory"condition.'What'
is'this'resolutory'condition?'It’s'the'substantial'breach'by'one'party,'which'shall'
entitle'the'other'party'to'resolve'the'contract.'Again,'for'this'to'apply,'there"must"
be"a"valid"reciprocal"obligation.'Just'like'the'remedy'of'specific'performance,'if'
there'is'a'void'obligation,'the'remedy'will'be'irrelevant.'Remember'that'case'of'
Ayala?' There’s' nothing' to' be' performed' because' there' was' no' obligation' yet.'
Conversely,'if'itys'resolution'and'thereys'no'obligation'in'a'contract'to'sell,'thereys'
resolution'will'be'relevant'only'if'there’s'an'obligation.''

Remember'the'GENERAL"RULE:'If'it’s'a'purely$potestative$condition$dependent$
on$ the$ sole$ will$ of$ the$ debtor,' the' obligation" is" void' and' there' should' be' no" '
obligation.'' In'a'contract'to'sell,'seller'will'convey'to'sell.'Conveyance'is'upon'full'payment.'
'
That' means' that' the' obligation' to' convey' will' arise' only' upon' fulfillment' of'
'
payment.' This' is' a' suspensive' condition.' This' payment' will' have' to' happen'
ART."1191"—"RIGHT"TO"RESCIND"[1:10:52]"
within'a'period.'Usually'there'is'an'amortization'period.'If'there'is'no'payment'
Let’s' now' go' to' Article' 1191.' It' provides' the' remedy' of' rescission' or' what' we'
yet,' the' buyer' —' or' neither' party,' for' that' matter' —' could' force' conveyance'
term'as'RESOLUTION.''
because'there'is'nothing'yet'to'enforce.'If'thereys'no'payment'of'the'price,'there'is'
'
' no' point' in' resolving.' The' answer' will' be' in' Art.' 1184.' Because' there' was' no'
The' power' to' rescind' obligations' is' implied' in' reciprocal' ones.' The' moment' payment'within'the'given'period,'the'obligation'will'be'extinguished.''
you'have'a'reciprocal'obligation,'you'have'the'remedy'of'a'resolution.'' '
'

' FILING'THE'ACTION'FOR'RESOLUTION'
RECIPROCAL'OBLIGATIONS' Who'can'file'the'action'for'resolution?'Only'the'injured'party'can'do'so,'as'you'
What'is'a'reciprocal'obligation?' can' gather' from' Art.' 1191.' Who" is" the" injured" party?' If' the' buyer' is' ready,"
' willing,"and"able' to' perform' his' prestation' under' the' contract,' and' the' seller' is'
not,'the'buyer'would'appear'to'be'the'injured'party.''
'

A' reciprocal" obligation" is' an' obligation" that" arises" from" the" same" cause" in"
'
which" each" party" is" a" debtor" and" creditor" of" the" other,' such' that' the'
Letys'say,'you'have'a'contract'of'sale.'The'performance'of'the'prestation''shall'be'
obligation'of'one'is'dependent'on'the'obligation'of'the'other.''
'
simultaneous.'On'the'day'of'performance,'seller'was'not'able'to'convey'property.'
' Will'the'buyer'be'the'inured'party?'You'have'to'determine'if'the'buyer'is'ready,'
As'a'rule,'they'are'to'be'performed'simultaneously.'Reciprocal'obligations'are' willing'and'able'to'pay'the'price.'If'he'is'not,'then'he'cannot'be'the'injured'party.''
just'one'obligation'from'the"same"cause.'' '
' '

"
The' rule' is' this:' if' S' is' in' default,' B' will' not' be' in' default,' but' he' can' be' the'
ILLUSTRATION"10:"RECIPROCAL"OBLIGATION" injured'party'if'B'is'already'ready,'willing,'and'able'to'perform'his'obligation.''
Let’s'have'a'typical'example:'a'Contract'of'Sale.'You'have'a'seller'and'a'buyer.' '

'
Seller'sells'property'to'buyer.'Buyer'pays'the'price.'Seller'is'the'debtor,'while'
Just' to' repeat,' if' you' have' an' obligation,' especially' a' reciprocal' obligation,' you'
buyer' is' the' creditor.' On' the' other' hand,' with' respect' to' the' payment' of' the'
always' have' that' default' set' of' remedies.' An' aggrieved' party' can' only' choose'
price,' seller' is' the' creditor' and' the' buyer' is' the' debtor.' You' have' reciprocal'
one.' If' the' injured' party' already' resolution,' he' or' she' cannot' later' on' opt' for'
obligation' here.' Seller' will' perform' the' prestation' —'conveyance' of' the'
specific' performance.' However,' itys' different' if' he' or' she' chose' specific'
property'—'while'buyer'is'expected'to'pay'the'price.'It’s'reciprocal.'As'a'rule,'
performance' first,' because' in' case' specific' performance' is' no' longer' possible,'
the'fulfillment'will'happen'simultaneously.''
'
resolution'may'be'an'alternative.'
' '
'

Remember,'for'Art.'1191'to'be'triggered,'there'must'be'a'reciprocal'obligation.''
'

'
Remember'this:'resolution"should"be"invoked"judicially.''
'

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' '

'
The' aggrieved' party' has' to' do' it' judicially.' But' there' is' an' EXCEPTION:' when"
parties" expressly" agree" on" extrajudicial" resolution.' This' is' based' on'
jurisprudence.' If' you' look' at' the' law,' itys' not' even' clear.' Even' if' there' is'
extrajudicial'resolution,'there'should'be'a'court'action'filed.'If'there'is'agreement'
on' extrajudicial' resolution,' buyer' can' do' it' by' mere' notice' pursuant' to' the'
stipulation.' However,' that' will' always' be' up' for' judicial' review' or' challenge.'
Why?'Because'there'will'be'no'basis'at'all'for'resolution.''
'
Q:""Sir,"let’s"say"there"has"been"an"extrajudicial"demand"on"the"part"of"one"of"
the"parties,"and"so"the"other"party"complies,"but"later"on"decides"that"there"
were" some" injustices" in" the" deal." Can" the" latter" later" on" go" to" Court" and"
assert"that"he"performed"his"obligation"by"mistake?"
A:'' The'remedies'(of'resolution'or'specific'performance)'are'only'available'when'
there' has' been' default,' or' when' one' of' the' parties' failed' to' perform' the'
prestation' while' the' other' was' ready,' willing,' and' able' to' do' so.' The' mere'
non?performance'is'sufficient'to'a'claim'of'remedy.'

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' '
"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
THURSDAY,'20'NOVEMBER'2014'
'

"

REMEDY"OF"RESOLUTION" So,'the'question'is:'if"there"was"no"acknowledgement,"could"UP"extrafjudicially"
" resolve?"NO.''
'
'

ART."1191"—"The$power$to$rescind$obligations$is$implied$in$reciprocal$ones,$in$case$ '

one$of$the$obligors$should$not$comply$with$what$is$incumbent$upon$him.$ If'there'is'no'express'stipulation,'you'go'by'the'default'rule.'There'should'be'
$ judicial'invocation'of'the'remedy'of'resolution.$
The$ injured$ party$ may$ choose$ between$ the$ fulfillment$ and$ the$ rescission7$ of$ the$
'

'
obligation,$with$the$payment$of$damages$in$either$case.$He$may$also$seek$rescission,$ TAN"V."CA"
even$after$he$has$chosen$fulfillment,$if$the$latter$should$become$impossible.$ What' kind' of' contract' is' this?' Contract' of' Sale' between' Tan' and' Singson.' Just'
$ take'note,'when"it"is"an"earnest"money,"it"is"a"downpayment."It"is"an"indication"
The$ court$ shall$ decree$ the$ rescission$ claimed,$ unless$ there$ be$ just$ cause$ authorizing$ that" there" is" a" contract" of" sale." Earnest" money" is" part" of" the" price." It" indicates"
the$fixing$of$a$period.$$ conveyance"of"title.''
'

' '
CASES"[ART.'1190?1192]" What'was'the'condition?'The'200K'should'be'used'to'cancel'the'mortgage.'This'
UP"V."DE"LOS"ANGELES" [the'land]'is'subject'to'a'mortgage,'it’s'an'encumbrance.''
No'notice'means'no'valid'extra=judicial'resolution' '
There' were' 2' agreements' –' the' original' agreement' whereby' UP' allowed' What' is' mortgage?' [Hi,' Jan' “Ateng' Kinikilig”' de' Luis' #]' Apparently,' the'
ALUMCO' to' log' in' a' certain' land' given' to' UP.' In' exchange,' UP' would' receive' Singsons' borrowed' from' the' bank' so' they' have' a' loan' payable.' To' ensure' the'
royalties.'ALUMCO'defaulted'in'the'payment'of'the'fees'and,'as'a'compromise,' payment'of'the'obligation,'it'is'secured'by'a'real'estate'mortgage'constituted'on'
ALUMCO' executed' an' acknowledgment' whereby' it' undertook' to' comply' with' the' property.' What' is' a' real' estate' mortage?' It’s' a' contract' where' when' there' is'
the' obligation.' And' that' acknowledgment' included' a' clause.' The' clause' in' the' default'in'the'principal'obligation,'the'creditor'can'foreclose,'in'this'case,'sell,''the'
second'agreement'stated'that,'in'case'ALUMCO'defaulted'again,'UP'can'rescind$ property,'and'apply'the'proceeds'in'the'payment'of'the'loan.'That’s'why'it'is'a'
without$ need$ of$ judical$ declaration.' Don’t' say' “automatically”.' The' language' is' security.'This'is'the'principal'obligation.'This'is'the'accessory'undertaking.'Now,'
important.'''' why' was' there' a' need' [the' mortgage]' for' it' to' be' removed?' This' is' an'
encumbrance,'a'lien'in'the'property.'Because,'if'the'property'is'sold'to'Tan,'this'
What' is' the' nature' of' the' contract' between' UP' and' ALUMCO?' What' kind' of' encumbrance'will'be'carried'over.'That’s'why'there’s'an'obligation'for'Singson'to'
obligation' is' this?' There' was' an' exchange' of' prestation' so' it’s' a' reciprocal' remove'the'encumbrance.''
obligation.' '
' Tan'sued'to'resolve'the'contract.'What'Tan'wanted'was'refund'of'the'200K.'Tan'
was'hoping'to'get'the'200K'but'Singson'did'not'want'to'return'the'money.'
'

Note:' In' Art.' 1191,' in' cases' of' reciprocal' obligations,' injured" parties"
automatically" have" the" right" to" rescind.' You' have' a' tacit' resolutory' '
'

condition.$ SC'said'Tan'could'not'extrajudicially'resolve'the'contract'and'get'the'money'
'

' back' because' there' was' no' stipulation' authorizing' extrajudicial' resolution' of'
In'this'case,'what'is'the'tacit'resolutory'condition?'The'default'by'ALUMCO,'the' the'contract'in'case'of'breach.'Besides,'the'Court'said'there'was'no'substantial'
subtantial' breach' by' ALUMCO.' So,' in' this' case,' there' was' a' breach.' By' way' of' breach'because'Singson'was'able'to'deliver'the'obligation.'Resolution"under"
compromise,' there' was' an' acknowledgement' by' ALUMCO.' And' in' that' Article" 1191" is" a" principal" action." It’s" a" retaliatory" remedy" based" on" the"
acknowledgement,' there' was' a' clause' that' should' ALUMCO' default' again,' UP' substantial"breach.$
'

could' rescind,' meaning' resolve' the' contract,' even' without' resorting' to' judicial' '
action.' In'this'case,'there'was'substantial'compliance'by'Singson,'and,'as'it'turned'out,'
' it’s'Tan'that'was'in'default.'

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' invoke" the" remedy" judicially.' An' action' should' be' filed' to' resolve' the'
EDS"MANUFACTURING"CV."HEALTHCHECK" contract.$
What'is'the'service?'Health'and'medical'insurance.'In'exchange,'EDS'will'pay'the'
'

'
premiums.' Coverage' was' for' the' employers' of' EDS.' So' in' exchange' for' the' That'was'stated'in'the'case'of'EDS'Manufacturing.'In'EDS,'it'said'there'that'there'
insurance'and'corresponding'medical'services,'EDS'paid'the'premiums'to'Health' was' no' stipulation,' nothing.' Therefore,' you' go' by' the' default' rule:' JUDICIAL'
Check.' The' insurance' cards' issued' by' Health' Check' were' dishonored' by' RESOLUTION.''
hospitals.'EDS'wanted'to'rescind'the'contract.'They'sent'a'letter'to'HCI'that'they'
want'to'rescind'the'contract.'HCI'agreed'but'under'the'condition'that'the'cards' Did'you'read'EDS'together'with'the'concurring'opinion?'That’s'why'I'assigned'
must'be'returned.'But'the'cards'were'not'returned.' EDS.'Because'in'EDS'Manufacturing,'if'you'look'at'the'main'opinion…if'I'will'be'
' the' one' writing,' it’s' not' that' sophisticated' in' terms' of' the' ramifications' of' the'
Was' there' a' breach' by' Health' Check?' Yes,' because' Health' Check' failed' to' remedy'of'resolution.'In'ALUMCO,'was'there'a'statement'saying'that'resolution,'
provide' the' health' care' coverage' and' services' as' per' contract.' Was' the' breach' even' without' stipulation,' could' be' resorted' to' extra?judicially?' Was' there' an'
substantial?'Yes.' opinion' in' the' case' saying' that' just' by' going' by' Article' 1191,' extra?judicial'
' resolution' should' be' available?' Is' there?' What" did" SC" say" in" UP?" The" remedy"
'

What' do' we' mean' by' substantial" breach?' It' is' the' non?performance' of' a'
material' undertaking' in' the' contract' or' the' principal' consideration' of' the'
other'party'for'entering'the'contract.$
'
under"1191,"resolution,"should"be"available"judicially"or"extrafjudicially.'There'
was' a' portion' there' that' you' most' probably' read' that' one' (referring' to' the'
Spanish' text).' In' the' case,' citing' the' origin' of' Art.' 1191,' referred' to' Spanish'
jurisprudence.'In"effect,"they"were"saying"that"it"could"be"done"extrafjudicially,"

'
Here,'there'was'substantial'breach.'Health'Check'committed'substantial'breach.'
So,'there'should'have'been'resolution,'right?'NO!'The'rescission'should'be'raised'
judicially'and'in'this'case,'EDS'merely'sent'a'letter'to'HCI.'So,'there'was'no'valid'
rescission.''
'
So,'if'we'take'these'three'cases,'we'could'gather'that'the'remedy'of'resolution'is'
implied'in'a'reciprocal'obligation,'like'this'ALUMCO'contract'–'logging'rights'in'
exchange' for' royalties,' and' in' EDS,' health' insurance' covergae' in' exchange' for'
premiums.'So'there'is'an'exchange'of'prestation'and'here,'you'have'a'contract'of'
sale,'property'is'sold'in'exchange'for'a'price.'And'the'resolution'should'be'based'
on'a'substantial'breach.'What'is'substantal'breach?'The'principal'prestation'that’s'
supposed'to'be'the'exchange'for'the'prestation'by'the'other'party,'the'principal'
consideration' of' one' party' in' entering' into' a' contract' or' an' obligation.' So' you'
have'here'in'the'case'of'ALUMCO'—'non?payment'of'the'fee.'In'this'contract'of'
EDS,'yes'there'was'discontinuance'of'the'health'insurance'coverage'but,'in'fact,'
there'was'no'substantial'breach.''
' CO"V."CUSTODIO"
Now,'how'should'the'remedy'be'invoked?''If'you'look'at'Tan'and'UP,'you'can'
gather' the' default' rule.' If' you' look' at' 1191,' it' does' not' say' that' it' should' be'
invoked'judicially.'Because,'I'think,'the'confusion'arose'from'xxx'there’s'a'clause'
there' that' it' should' be' judicially' decreed.' Nevertheless,' jurisprudence' says' that'
the'default'rule'is'the'one'enunciated'in'Tan.'
' through' a' letter' and' Custodio' still' did' not' pay.' What' did' seller' do?' The' seller'
'
According'to'jurisprudence'(see$Tan'case),'if"there"is"no"express"stipulation"in"
the" contract" authorizing" extrafjudicial" resolution," then" you" will" have" to"
' 50"
notwithstanding" the" absence" of" a" stipulation.' That' should' have' been' the'
interpretation.' Don’t" get" it" wrong." Understand" that" as" jurisprudence" stands"
right" now," resolution" by" default" should" be" done" judicially" unless" there" is" an"
express"stipulation"for"extrafjudicial"resolution.""
Now,'in'that'case'of'UP,'there'was'mention'of'Spanish'jurisprudence'relating'the'
same' provision' and' the' court' said' that' it' could' be' done' extra?judicially' even'
without' stipulation.' But' that' is' more' of' an' obiter.' Why?' Because,' in' the' case' of'
UP,' there' was' indeed' a' stipulation.' But' take' note:' there' is' authority' to' the'
contrary.' And' if' you' read' EDS' concurring' opinion,' it' was' mentioned' again.' So'
there' is' hope' that' we' could' have' the' reversal' of' the' default' rule.' Instead' of'
judicial' resolution,' it' would' be' extrajudicial' resolution' because' there' was'
mention'by'Leonen,'a'new'appointee.'And'he'will'be'there'for'around'20'years'so'
maybe'he’ll'be'in'the'position'to'resurrect'the'old'rule.'But'right'now,'it'is'judicial'
resolution'by'default.'
'
What' kind' of' contract' is' it?' Contract' of' Sale.' Remember' what' I' said' before:' if'
there’s'an'earnest"money,'then'that"should"be"an"indication"that"it"is"a"contract"
of"sale.'So,'let’s'assume'that'it'is'really'earnest'money.'In'this'case,'there'was'an'
initial' payment.' The' balance' should' be' paid.' Was' there' payment?' Chronologic'
order.' Custodio' did' not' pay.' Is' there' default?' ' Yes,' because' there' was' demand'
demanded' payment' and' said' that' upon' tender,' they' will' consider' this' contract'
cancelled.''And'they'characterized'this'contract'as'what?'Sellers'characterized'the'
contract' as' an' option.' That’s' for' a' later' discussion' but' for' our' purposes," an"
Prepared'by:' ' ' ' ' ' ' ' '
APRIL'JOY'GUIANG'[1F'2014?2015]'//'20'NOV'2014' ' '
' '
option" is" a" right" to" buy" a" property" under" certain" terms" and" conditions." The"
only"thing"left"for"the"holder"of"the"right"is"to"exercise"it,"meaning,"to"accept"it.'
So'here,'there'was'a'notice'of'cancellation.'Before'demanding'for'the'return'of'the'
earnest' money,' what' did' Custodio' want?' So' Custodio' sent' a' notice.' What' was'
the'notice?'So'the'buyer'sent'a'notice'saying'that'they'are'ready,'willing,'and'able'
to'pay'the'full'price.'And'then,'of'course,'the'sellers'maintained'that'there'was'no'
more' contract' so' the' Custodio’s' sought' to' resolve' the' contract.' Was' there' a'
stipulation' for' extra?judicial' resolution?' None.' So' the' buyer' sued' to' resolve' the'
contract.''
' does'not'exist.$
So'again,'I'will'give'you'the'sequence.'So'there'was'a'contract'on'Day'1.'This'was'
characterized'by'the'Supreme'Court'as'a'contract'of'sale'–'a'sale'of'the'property'
by'the'seller'to'the'buyer'for'a'certain'price'pursuant'to'a'certain'schedule.'The'
buyer'did'not'pay'as'per'schedule.'There'was'a'demand.'There'was'no'payment.'
So' therefore,' there' was' default' on' the' part' of' the' buyer.' After' that,' there' was' a'
notice'of'cancellation'of'the'contract,'which'was'characterized'as'by'the'seller'as'
an'option.'And'consequently,'the'buyer'sent'a'notice'that'they'are'ready,'willing,'
and'able'to'pay'the'price.'When'seller'did'not'accede'to'the'demand'of'the'buyer'
for'the'conveyance'of'the'property,'buyer'sued.'Was'the'resolution'by'the'buyer'
proper?'Yes.'You'look'at'the'sequence'of'events.'Who'was'in'default?'The'court'
here' said' the' resolution' was' proper,' because" buyer" was" already" in" default.'
There'was'already'a'substantial'breach.'Remember'the'rule.'
' '
'
If' you’re' a' party' who' was' not' ready,' willing,' and' able,' you' cannot' be'
considered'the'injured'party'entitled'to'the'remedy'of'resolution.$
'
'
How'could'the'SC'justify'the'resolution'by'a'party'who'was'actually'in'default?'
There'was'no'doubt'that'Custodio'was'in'default.'Was'the'resolution'proper?'To'
understand'this'case,'you'would'have'to'go'back'to'our'earlier'discussion'on'Tan'
and' UP.' Of' course,' I' assigned' EDS' because' it’s' a' bad' material' that' we' can'
discuss.' But' nevertheless,' it' was' good' because' there' was' a' concurring' opinion.'
Again,'sequence.'Who'was'in'default?'Buyer.'To'make'sense'of'this'case,'at'this'
point,'what'did'the'sellers'do?'The'sellers'sent'a'notice'of'cancellation.'The'sellers'
wrongly'characterized'the'contract'and'even'if'they'did'correctly'characterize'the'
contract,' they' sent' a' notice.' Then,' you' go' by' the' default' rule.' If' it' was' a'
cancellation,' it' should' have' been' done' judicially' according' to' Tan' v.' CA.' So,'
wrong'remedy.'Because"it"was"a"wrong"remedy,"the"buyer"who"was"originally"
in"default"was"able"to"rehabilitate"herself"and"became"a"ready,"willing"and"able"
buyer" with" its" notice." On' Day' 5,' when' this' notice' was' given,' seller' was' not'
willing'to'convey'the'property,'thus,'seller'became'the'one'in'default.'So'at'that'
point,'buyer'was'entitled'to'sue'for'resolution.'Understood?'That’s'the'reason'for'
the' ruling.' So,' that’s' correct' going' by' the' default' rule.' There' must' be' mutual'
' 51"
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restitution'with'resolution.'In'this'case,'they'even'cited'the'wrong'article.'Instead'
of'Article'1190,'it'cited'1385,'which'is'the'wrong'provision.'
'
PALAY"V."CLAVE"
This'was'a'contract'to'sell.'There’s'a'clause'–'automatic'cancellation'without'need'
of' notice.' From' the' perspective' of' the' seller,' the' contract' was' cancelled.' First'
question:'Was'it'really'a'contract'to'sell?'Yes.'
'
'
Can' you' resolve' a' contract' to' sell?' No.' You' cannot' resolve' something' that'
'
'
Here,' there' was' an' automatic' cancellation' clause.' So,' was' it' valid?' No.' Notice'
still' had' to' be' given.' Why' is' there' a' need' to' give' notice?' It' was' necessary' for'
what'purpose?'
'
'
The'court'said'the'seller'should"give"notice'of'cancellation'to'the'buyer.'Why?'
Based' on' jurisprudence,' you' can' have' extrajudicial' resolution' by' express'
stipulation.' If' you' have' extrajudicial' resolution,' it' is' only' provisional.' It' is'
subject' to' judicial' challenge.' That’s' why' the' notice' is' important' to' give' the'
other' party' in' a' reciprocal' obligation' a' chance' to' question' the' basis' of' the'
rescission'or'the'resolution.$
'
So'if'there'is'no'proper'resolution,'let’s'say'the'buyer,'in'this'case,'should'go'to'
court.' Without' the' notice,' the' buyer' will' not' have' the' information' to' make' that'
decision'whether'to'go'to'court.'So'the'notice'should'be'necessary.'So'that’s'the'
statement'here'of'the'SC.'So'if'you'have'this'clause,'this'could'not'be'because'it'
would'deprive'the'buyer'the'information'that'would'enable'the'buyer'to'decide'
whether'to'challenge'the'resolution.'So,'there'should'be'notice.''
'
But'I'want'an'automatic'resolution.'How'do'you'do'it?'I'want'a'resolution'that'
will'be'valid'even'without'judicial'notice.'How'will'you'phrase'the'provision'[in'
such' a' way' that]' the' provision' will' have' the' chance' of' surviving' the' Palay' v.'
Clave'ruling?'Remember'the'underlying'reason'that'there'should'be'information.'
That’s' the' thing' you' have' to' address.' You' have' to' place' the' other' party' in' a'
position' to' know' that' that' there' would' be' a' cancellation,' no' doubt' about' it.'
That’s' how' the' phrasing' should' b' —' that' there' would' be' information' if' the'
contingency' happens,' automatically.' How' will' you' phrase' it?' One,' you' have' to'
address'the'default.'So'you'should'place'there:'
'
“Payment" shall" be" made" upon" the" expiration" of" the" grace" period."
Should"there"be"no"payment,"[contract"will"be"cancelled]"automatically"
without"need"of"notice.”'
'
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What'would'be'the'consequence?'“The"contract"shall"be"automatically"cancelled"
unless"the"seller"exercises"the"option"to"give"the"buyer"an"extra"period"within"
which"to"pay.”'How'is'that'different?'Because'if'you'are'the'buyer,'you'have'to'
know' that' when' you' do' not' pay' within' the' set' period,' automatically,' you’re' in'
default.'And'when'you'do'not'pay,'there'will'be'cancellation.'The'only'out'is'if'
the' seller' exercises' the' option' to' extend' the' period,' or' something' to' that' effect.'
What’s'important'is'based"on"the"provision"alone,"if"you’re"a"literate"buyer,"you"
ought" to" know" that" after" nonfpayment" before" the" set" deadline," there" will" be"
automatic"cancellation.'It’s'possible.'Unlike'here,'what’s'the'clause'exactly?'“The'
seller'shall'have'the'right'to'declare'this'contract'cancelled”.'You’re'supposed'to'
declare'it'without'communicating'it'to'the'party.'So'there’s'no'way'that'the'other'
party'would'know.'So,'that’s'how'you'can'possibly'address'that'issue'on'notice.'
But'of'course,'the'easier'thing'to'do'is'to'give'notice.'But'it’s'not'really'simple.'It’s'
a' transaction.' You' have' to' have' it' notarized.' It’s' an' additional' cost' which' you'
would' want' reduce.' And' anyway,' you' can' do' this' because' the' other' party' has'
the'burden'of'suing.'
'
Q:""Does"this"apply"to"cases"where"there"is"partial"performance?""
A:' The only issue there is there an obligation to return? Which can be addressed by
inserting a forfeiture clause or simply by complying with the legal provision. If
you’re buying a property from a real estate developer, you comply with the
requirements, you pay for 2 years and then you meet a certain threshold, you are
legally entitled to a refund even if there is automatic cancellation and even if there is
a forfeiture clause. That’s something that can also be addressed contractually (i.e.
what should be returned).
' installments' amounting' to' 12M,' defaulted.' How' could' that' be?' The' buyer'
COMPARING'CANNU'AND'REYES$
There'are'2'cases'here:'Cannu"and"Reyes.'We’ll'not'go'through'them'again.'Just'
take'note'of'our'previous'discussions.'In'Cannu,'there'was'a'formula'wherein'the'
SC' opined' what' should' constitute' substantial' breach' in' a' contract' of' sale.'
Supreme'Court'said'that'assuming'the'price'was'X,'there'was'substantial'breach'
because'the'non?payment'amounted'to'around'18%.'So'in'that'case,'although'it'
was' obiter' because' the' property' was' delivered,' SC' said' it' was' 18%.' And' then,'
there'was'Reyes$v.$Tuparan.'
' part'of'the'term.'Maybe,'last'3'or'4'years.'So,'if'there’s'payment'of'12M,'would'
CASE"OF"CANNU" CASE"OF"REYES"
' '
Failure' to' pay' the' price' by' 18%' is' SC'said'failure"to"pay"19%"of"the"price"
substantial'breach.' is"not"substantial"breach'and'the'party'
should'be'given'the'time'to'comply.''
'
' compare' principal' against' principal.' So' if' the' principal' payment' is,' let’s' say'
' out'of'12M'is'only'5M,'apparently,'that’s'substantial'breach.'Or'even'if'it'was'
Take'note.'Remember'the'rule.'You'can'only'resolve'based'on'substantial'breach.'
What'is'substantial'breach?'The'principal'prestation'or'undertaking'which'is'in'
exchange' for' the' principal' prestation' or' undertaking' by' the' other' party.' So' if'
there'is'failure'to'comply'with'the'prestation,'the'other'party'can'resolve.'
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'
'
The" resolution" should" be" based" on" a" substantial" breach.' If' it' is' not'
substantial,'it'is'just'casual'breach.'And'what'could'happen?'There'is'a'case.'
The'court'will'give'the'other'party'a'chance'to'comply'within'a'given'period.'
If' the' other' party' fails' to' comply' within' the' given' period,' then' it' becomes'
substantial'breach.$
'
'
So,' it' doesn’t' mean' that' if' it' is' a' slight' breach,' the' defaulting' party' is' free' from'
any' liability.' There' will' still' be' a' liability.' The' court' will' only' afford' that'
defaulting' party' a' period' within' which' comply,' unless' the' creditor' waives' that'
default' by,' let’s' say,' acceptance' of' substantial' compliance' or' acceptance' of' an'
incomplete'payment'as'if'it'were'complete.''
'
So,' what' do' you' follow' now?' I' like' Cannu,' althought' it' was' obiter,' because'
somehow' Cannu' provided' a' threshold:' 18%' =' substantial' breach.' Then' came'
Reyes'v.'Tuparan'saying'that'19%'was'only'a'slight'breach.'I"think"18%"should"
be" substantial.' [But' I' think' there' are' still' things' to' compar.' Let’s' have' an'
example.]'
'
"
ILLUSTRATION"1:"COMPUTATION"FOR"SUBSTANTIAL"BREACH"
Let’s' say,' it’s' a' contract' of' sale' of' a' house' and' lot' for' 10M.' So,' there’s'
downpayment'plus'installments'for'a'period'of'10'years.'The'installments,'of'
course,' will' be' with' interest.' Let’s' say,' the' buyer,' after' paying' several'
paid' 12M' but' there’s' default?' Because,' there' was' interest.' Let’s' say' you’re'
borrowing' from' a' bank.' 10' M.' Right' now' the' current' interest' rate,' around'
20M,' which' is' twice' the' amount.' So' here,' you’re' paying' more' interest' from'
day'1'and'there'will'be'more'principal'as'of'the'last'year.''
'
So'in'the'first'year,'most'likely,'the'principal'payment'will'not'even'be'around'
1'M.'All'your'payments'here'will'be'interest.'Because'there’s'a'fixed'schedule.'
If'you'look'at'the'fixed'schedule,'the'principal'payments'happen'at'the'latter'
that' be' substantial' breach?' There’s' non?payment' of' the' installments' after'
paying'12M,'would'there'be'substantial'breach?''
'
You' would' have' to' analyze' the' component' of' this' 12M.' You' would' have' to'
6M,' it' is' still' substantial' breach.' And' going' by' Cannu,' even' if' you' pay' 8M,'
there’s'a'remaining'principal'of'2M,'you'will'still'be'considered'in'substantial'
breach.''
'
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' '

Unless' you' go' by' Reyes' v.' Tuparan.' And' this' is' the' only' way' I' can' justify' EFFECTS"
Reyes'v.'Tuparan.'Let’s'say,'there’s'a'principal'payment'left'of'1.9M'[so,'this' RESOLUTION" RESCISSION"
is'19%'of'10M]'because'our'base'is'10M.'But'the'total'payment,'as'of'this'date,' under$Article$1191$ under$Article$1381$
let’s'say'18.1M'was'already'paid.'There’s'a'good'chance'Supreme'Court'will'
' '

Resolution' [Art.' 1191]' completely' When' there’s' rescission,' because' it’s'

say'that'18.1'total'amount'paid...'In'fact,'sometimes,'the'SC'just'considers'the' (but' not' automatically)' cancels' the' supposed' to' compensate' the' effect' of'
total' amount,' without' considering' whether' it’s' principal' or' interest.' So,' this' reciprocal' obligation,' as' if' there’s' no' the'lesion'or'economic'prejudice,'it'will'
one,'likely,'will'only'be'considered'as'casual'breach'in'which'case'the'party'in' obligation.' This' is' because' resolution' be'granted'only'to'the'extent'necessary'
default' will' be' given' a' period' within' which' to' pay.' Of' course,' if' there’s' no' destroys' the' juridical' tie.' Remember,' to' compensate' for' the' damage' caused'
payment,'then'that'would'be'substantial'breach.'' when' resolution' happens,' it’s' as' if' to' the' creditor.' So,' there' could' be'
'

' there'was'no'contract'or'obligation.' partial'rescission'under'Art.'1381'up.''

' ' '

If'you’re'analyzing'substantial'breach'in'the'context'of'a'contract'of'sale,'you' '
have'to'compare'the'principal'against'the'principal.$ So,'let’s'say,'the'contract'involves'pieces'of'jewelry'worth'P1M'and'the'payment'
'

' needed' for' the' creditor' was' only' P500K,' the' contract' will' only' be' rescinded' to'
Q:" Will"earnest"money"be"counted"as"part"of"the"total"price?" that'extent.'
A:' Yes,'because'it'was'downpayment.' '
'

' In'both'resolution'and'rescission,'there'should'be'mutual'restitution,'meaning'
SHORT"REVIEW:"RESOLUTION"v."RESCISSION" a' party' should' return' what' that' party' has' received' from' the' other' less' the'
Let’s' just' have' a' short' review' about' the' distinction' between' resolution' and' claim'for'damages.''
rescission,' because' as' you' can' gather' from' jurisprudence,' even' the' SC' gets' '
confused' between' rescission' and' resolution.' And,' as' explained' in' the' cases,' it’s' The' important' thing' to' remember' is' the' statutory" basis" for" the" mutual"
due'to'the'use'of'the'same'term,'which'is'really'funny'because'if'you'know'the' restitution'for'resolution'under'Art.'1191'is'Art.'1190.'The'statutory'basis'for'
meaning'of'the'term,'it'doesn’t'matter'what'you'call'it.'You'just'have'to'know'the' mutual'restitution'for'rescission'is'under'Art.'1385.$
meaning'always.'
'

'
' And' because' they' are' both' restitution,' SC' confuses' 1385' with' 1190' as' you' can'
RESOLUTION" RESCISSION" gather'from'the'decisions.'So'you’ll'know'if'you'have'a'sophisticated'justice,'that'
under$Article$1191$ under$Article$1381$ justice' will' correctly' cite' the' legal' provision.' You' cannot' cite' resolution' under'
' '

Resolution' is' a' principal' and' a'
retaliatory' remedy.' It’s' a' remedy'
based' on' the' substantial' breach' by'
the' other' party' in' a' reciprocal'
obligation.'
'
It’s' a' subsidiary' remedy,' meaning' all'
remedies' against' the' remedies' of' the'
debtor'should'be'exhausted'first'before'
the' creditor' can' resort' to' rescission.'
And' rescission' is' based' on' lesion' or'
economic' prejudice' as" characterized"
Art.'1191'and'then'say'restitution'under'Art.'1385.'It'should'be'Art.'1190.'
'
CONTINUATION'OF'ARTICLES'1190=1192'
SURIA"V."IAC"
So,'there'was'a'contract'of'sale'—'a'reciprocal'obligation.'In'this'case,'the'seller'
sold'a'parcel'of'land.'In'exchange,'the'buyer'paid'the'price.'The'price'should'be'

by"law'to'be'a'basis'for'rescission.'' paid' how?' It' should' be' paid' in' this' manner:' installments.' Instead' of' paying' by'
cash,' the' buyer' executed' a' mortgage' of' the' same' property,' same' land.'
'

'
An' example' of' a' lesion' is' the' fraud' perpetrated' against' the' debtor' through' the' Understand'that'before'you'can'mortgage'a'property,'you'should'be'the'absolute'
conveyance'of'the'property'by'the'debtor'to'another'party.'That'is'recognized'by' owner.'There'was'conveyance'of'title'so'buyer'could,'indeed,'mortgage.'And'as'I'
law'as'an'economic'prejudice,'which'can'be'a'ground'for'rescission.'' explained'earlier,'the'mortgage'is'a'security'arrangement'to'make'sure'that'there'
' will' be' payment' of' this' installment.' So,' in' case' of' default,' the' buyer' could' go'
Not" all" economic" prejudice" can" be" considered" as" a" ground" for" rescission." The" after'the'mortgage,'sell,'and'then'apply'the'proceeds'as'payment'of'the'amount'
law"should"state"that"it"is"a"ground."If"you"don’t"have"that"law,"then,"that"will" due.' So,' buyer' defaulted.' We' will' assume' it' is' substantial' breach.' So,' therefore,'
not"be"a"basis"for"rescission." seller'sued'for'the'resolution'of'the'contract.'According'to'the'court,'the'remedy'
' should' have' been' foreclosure,' instead' of' filing' for' resolution.' Does' that' make'
sense?' You' have' to' 2' contracts' here:' the' contract' of' sale' wherein' the' seller' sold'
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the'property'and'buyer'paid'the'price.'Under'that'COS,'there'was'non?payment'
of'the'price;'there'was'default.'So,'there’s'substantial'breach.''
' '
So,'why'not'have'resolution'as'a'remedy?'Because"the"contract"has"already"been"
consummated.'A'contract'has'3'stages.''
1. Negotiation'—'where'the'parties'haggle'for'terms'and'conditions.''
2. Perfection' —' the' stage' where' the' parties' agree' on' the' terms' and'
conditions.'Here,'the'contract'of'sale'was'not'yet'fulfilled'because'there'
was'non?payment.''
3. Consummation'
o So' here,' contract' of' sale' was,' just' like' marriage,'
consummated.' There' was' consummation.' What' was'
consummation?' SC' said' the' mortgage' took' the' place' of' cash'
payment.'But'as'I'explained,'the'mortgage'is'only'a'security.'
In' case' of' non?payment,' you' go' after' the' security.' It' is' not' a'
form'of'payment.'So,'it'does'not'make'sense.''
'
I’ll'explain'it'to'you.'Why'did'I'assign'of'this'case?'What’s'the'relevance'of'this'
case' to' our' discussion?' Now,' what’s' the' rule' that' you' can' formulate' based' on'
Suria?' I’ll' give' you' a' clue.' We' are' discussing' now' the' remedy' of' resolution.' So'
what’s' the' rule' now' that' you' can' gather' from' Suria?' When' there' is' a' breach' or'
default'by'a'party,'you'have'a'set'of'remedies.'One'of'which'is'resolution.'In'this'
case,'it'will'teach'you'that'if'you'have'this'set?up,'resolution'as'a'remedy'will'not'
be' available' because' of' this' mortgage.' And,' the' SC' said' that' it' is' not' available'
because' the' mortgage' took' the' place' of' cash' payment.' So' by' mortgaging' the'
property,' the' SC' is,' in' effect,' saying' the' buyer' effectively' paid' the' price' in' full.'
How' did' that' happen?' To' understand' that,' you' have' to' insert' another'
transaction' here.' In' effect,' between' the' mortgage' and' the' sale,' there' was' a' loan'
granted'by'the'seller'to'the'buyer.'And'the'buyer'is'obliged'to'pay'the'loan.'This'
is' the' one' secured' by' the' mortgage.' So' where' did' the' cash' payment' happen?'
When' the' seller,' by' agreeing' to' a' payment' in' installment,' the' seller' effectively'
allowed,'no,'extended'the'buyer'a'loan.'That'loan'was'used'to'pay'fully'the'price.'
So'what'was'being'amortized'was'only'the'loan'outstanding'and'that'loan'was'
the' one' secured' by' the' mortgage.' That' was' not' the' explanation' of' the' Supreme'
Court.' I' am' just' trying' to' make' sense' of' it' for' you.' Why' the' SC' said' was' cash'
payment'because'the'mortgage'was'not'payment.'So'what'was'the'significance'of'
the' mortgage?' There' must' be' some' loan' transaction' given' by' the' seller' to' the'
buyer.''The'payment'of'this'loan'is'the'one'being'secured'by'this'mortgage.'Only'
in'that'context'can'we'say'that'there'was'consummation'of'the'COS.''
' extrajudicial'resolution.'
What’s' consummation?' When' all' the' transactions' contemplated' under' the'
contract' has' been' fulfilled.' So' here' there' was' already' conveyance' of' property,'
which' allowed' the' buyer' to' mortgage' and' there' was' full' payment' of' the' price'
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through'this'loan'and'mortgage'transaction.'Of'course'this'was'not'discussed'in'
the'case'of'Suria.'
'
In' Suria,' we' learned' that' resolution' will' not' be' available' as' a' remedy' if' you'
have'a'contract'of'sale'whereby'the'payment'is'in'installments'and'is'secured'
by' a' real' estate' mortgage' on' a' property' sold.' The' remedy' should' have' been'
foreclosure.$
'
'
CHUA"V."VICTORIO"
There’s'a'contract'of'lease.'You'have'a'lessor,'the'owner'of'the'property,'allowing'
a'lessee'to'use'the'property'in'exchange'for'a'specified'rental.'In'case'of'a'breach'
by'the'lessee,'what'is'the'remedy'of'the'lessor?'Ejectment.'But,'ordinarily,'what'
are'the'available'remedies,'based'on'what'we'have'discussed'so'far?'The'lessor'
should' sue' for' specific' performance' and/or' damages.' Or' resolution.' Because'
there’s' no' stipulation' in' the' contract' of' lease,' resolution' should' be' done'
judicially.' So' lessor,' in' the' absence' of' an' express' agreement' allowing' for'
extrajudicial'resolution,'should'invoke'the'resolution'judicially.'That’s'the'default'
rule.' But,' what’s' the' ruling' here?' What' was' done' here' was' extrajudicial'
resolution'with'the'demand'to'vacate'the'property.'
'
'
If" it" is" a" lease" contract," the" default" rule" is" extrajudicial" resolution,' even' if'
there'is'no'agreement'for'extrajudicial'resolution.'Why?''Based'in'the'Rules'of'
Court,' a' lessor,' in' case' of' breach,' can' sue' for' ejectment.' A' pre?requisite' of'
ejectment' is' a' demand' by' the' lessor' for' the' lessee' to' vacate' the' property,'
together' with' the' resolution.' Therefore,' that' demand' presumes' an'
extrajudicial' resolution' including' a' demand' for' the' lessee' to' vacate' the'
property.$
'
'
So' again,' I' will' explain.' Supreme' Court' said,' if' this' is' just' an' ordinary' contract'
and'there'is'no'express'agreement'for'extrajudicial'resolution,'the'lessor'should'
sue' for' resoultion.' It’s' different' if' it' is' a' contract' of' lease.' Even' if' there' is' no'
agreement' for' extrajudicial' resolution,' by' default,' the' lessor' is' entitled' to' extra?
judicially'resolve'the'contract.'Why?'It’s'because'the'resolution,'together'with'the'
demand' to' vacate' the' property,' is' a' pre?requisite' for' the' filing' of' an' ejectment'
case.' If' you' take' that' provision' on' lease' from' the' Civil' Code' together' with' that'
provision' of' the' Rules' of' Court' on' ejectment,' you' will' arrive' at' that' conclusion'
that'as'a'necessary'requirement'of'an'ejectment'case,'there'must'be'extrajudicial'
resolution.' So' the' default' rule' here' if' it' is' a' contract' of' lease,' it' is' reverse.' It’s'
'
UY"V."CA"
In'this'case,'there'was'a'sale.'Actually,'the'parties'that'were'involved'here'were'
not'really'the'one'who'sold.'They'were'just'agents.'But'nevertheless,'let’s'discuss'
Prepared'by:' ' ' ' ' ' ' ' ' ' ' ' ' '''' '''''''''''''''''' '''''''''''''''''Compiled'by:'
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' '

if' the' case' was' brought' by' the' appropriate' property.' There' was' a' sale,' right?'
NHA' bought' property' from' the' seller' in' exchange' for' the' price.' And' it' turned'
out'that'the'land'was'not'suitable'for'residential'development.'Was'it'stipulated'
in' the' contract' that' it' should' be' suitable' for' a' residential' development?' It' was'
not,' right?' So' how' could' that' be?' When' this' land' was' not' suitable,' what' did'
NHA'do?'What'happened'to'the'contract?''
' because'that'would'entail'litigation'costs.'So,'what'could'be'done?'Based'on'this'
The' Court' said,' because' the' land' was' not' suitable,' NHA' wanted' to' rescind' the'
contract.' Did' NHA' rescind?' Was' there' a' breach?' There' was' no' breach.' Seller'
conveyed' the' land.' There' was' no' warranty' with' respect' to' the' use' of' the'
P100M'claim,'that'will'be'2M.'And'then'you'wil'have'to'get'a'lawyer.'So'by'just'
commencing' a' P100M' claim,' you' will' be' spending' around' 3M.' You' would' not'
want'to'have'that'especially'if'you’re'not'recovering'anything.'
'
Let’s'say'there'was'no'payment'made'yet.'But'you'want'to'opt'out'of'the'contract'
because' the' land' turned' to' be' unsuitable.' What' do' you' do?' You' don’t' resolve'
case'of'Uy,'you'can'send'a'notice'of'cancellation.'
'
'

REMEDY"OF"CANCELLATION"
property.' So?' A' contract' only' has' 3' requisites:' cause,' object,' and' the' consent' of' Cancellation'is'not'resolution.'Therefore,'it'is'not'covered'by'that'default'rule'
the'parties'with'respect'to'the'cause'and'the'object.'They'did'agree'on'the'cause' that'it'should'be'done'judicially.'So'you'can'send'a'notice'of'cancellation'that'
and'the'object.'' says,' because' of' the' frustration' of' the' purpose' of' the' contract,' you' want' to'
' cancel' the' contract,' and' there' would' be' no' rule' requiring' cancellation' to' be'
SC'explained'that,'ordinarily,'when'you'have'a'contract,'the'parties'only'have'to' done'judicially.$
agree'on'2'things'at'the'minimum,'the'cost'and'the'object.'So'here,'the'price'or' '

'
consideration' was' paid' and' the' seller' conveyed' the' land.' Then,' there' is'
That’s' the' relevance' of' Uy.' It' gives' you' an' alternative' when' you' don’t' want' to'
fulfillment'with'of'the'required'prestation.'So'there'was'no'breach.'There'was'no'
sue' but' you' want' to' set' aside' the' contract.' So' you' can' use' this' remedy' of'
point'on'resolving'the'contract.'However,'in'this'case,'NHA"had"a"motive."This"
cancellation.'You'can'do'it'only'by'means'of'notice.'Of'course,'you'have'to'show'
motive"is"material"to"the"case.''
that' there' was' negation' or' frustration' of' the' cause.' So,' that’s' the' remedy' of'
'
cancellation.''
What' was' the' motive' of' NHA?' To' build' houses,' because,' obviously,' it' is' the'
National'Housing'Authority.'So,'seller'knew'and,'in'fact,'ought'to'know'that'the'
This" is" the" problem" in" the" default" rule" of" judicial" resolution.' I’ll' give' you' an'
land' would' be' used' for' housing' development' projects.' So,' this"motive"was"the"
example,' taking' the' case' of,' for' example,' the' case' of' Custodio' and' the' other'
principal"reason"for"NHA"to"enter"into"this"contract.'That’s'why'in'this'case,'the'
cases.'
court' said,' ordinarily,' motive' is' irrelevant' to' a' contract.' It’s' an' extraneous'
'
consideration.'However,'if'the'motive'pre?determines'the'cause,'NHA'would'not' "

have'bought'the'property'if'the'property'were'known'to'NHA'as'unsuitable'for' ILLUSTRATION"2:"THE"PROBLEM"WITH"JUDICIAL"RESOLUTIONS"
its'development'projects.'' For'example,'you'have'a'joint'venture,'which'is'now'impractical'tax?wise.'So,'
' you' have' an' owner,' you' have' a' developer.' The' parties' will' contribute' land,'
So" the" motive" prefdetermined" the" cause.' Therefore' when' this' motive' was' funds,' and' resources' for' the' project.' They' entered' into' a' joint' venture'
frustrated,'the'cause'for'NHA'was'also'negated.'So'if'there'was'no'cause,'there’s' agreement.' Owner' will' contribute' the' land.' Developer' will' develop' the'
no'contract'because'you'are'missing'an'element.'There’s'what'you'call'a'negation" property'using'developer’s'funds'and'resources.''
of" the" cause.' So,' in' this' case,' NHA" was" not" rescinding" but" was" cancelling" the" '
contract."" Let’s' assume' there' was' no' conveyance' yet' of' the' land' of' the' joint' venture.'
' There' was' no' work' done' yet.' But,' it' turns' out,' developer' is' no' position' to'
Remedy"of"cancellation:Let’s'say,'you'have'this'contract'of'sale.'You'want'to'opt' develop'and'they'forgot'to'insert'the'alternative'clause'in'the'agreement.'So,'
out.' You’re' the' seller.' What' do' you' do?' There’s' no' special' stipulation' in' the' what’s'the'default'rule'now?'Owner'wants'to'sue'for'resolution'or'for'specific'
contract.'You'think'this'was'a'breach.'If'you'want'an'opt'out,'what'do'you'do?' performance.''
The'default'rule'is'judicial'resolution.'You'have'to'sue'to'resolve.'' '
' But,' owner' here,' when' the' developer' was' no' longer' able' to' develop' the'
And' why' will' you' be' averse' to' suing?' Initiatory' cause.' Even' if' you' have' a' property,'found'X'who'was'ready,'willing'and'able'to'develop'the'property.''
meritorious' case,' you' will' have' to' shoulder' the' cost' of' commencing' litigation.' '
What' are' the' costs?' ' Filing' fees' will' be' around' 2%' of' your' claim.' If' you' have' a' What’s'the'problem?'Co'v.'CA'is'the'problem.'If'owner'does'not'resolve'the'

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contract'judicially,'it'can'happen'that'this'owner'will'have'this'joint'venture'
with'X.''
' same' time,' you' are' enforcing' the' contract' because' you' are' relying' on' a'
Let’s'say'they’re'proceeding'with'the'project'and'somehow,'the'developer'has'
been'rehabilitated.'The'developer'was'able'to'raise'funds'for'its'projects'and'
now' sent' the' owner' a' demand' that' owner' should' comply' with' the' joint'
venture'agreement.'In'this'case,'who'do'you'think'will'win?'If'you'apply'Co'
v.' CA,' the' developer' will' win,' because' at' that' point,' there' was' no' valid'
resolution.'Remember'our'premise'that'instead'of'resolving'judicially,'owner'
entered'only'a'joint'venture'with'X'and'sent'only'a'notice'to'developer.'That'
is' invalid' in' Co' v.' CA.' And' you' will' ask,' why' will' owner' not' sue?' Because'
suing' is' problematic.' Aside' from' the' cost,' it' will' take' you' around' 5' years'
minimum' to' get' a' final' and' executory' decision.' By' that' time,' x' may' not' be'
interested.'So,'you'gamble.'
'
This'is'an'example'of'why'the'default'rule'does'not'work'in'this'instance.'The'
owner,' the' agreed' party,' is' the' one' penalized.' It’s' ready' to' comply' with' its'
obligation,'and'when'the'other'party'is'unable'to'comply'with'his'obligation,'
owner' is' prevented' from' entering' into' another' transaction.' So' that’s' the'
problem' with' the' default' rule.' In' this' case,' the' default' rule' should' be'
extrajudicial' resolution.' Anyway,' neither' party' will' be' recovering' from' the'
property.' If' you' are' recovering' a' property' from' the' other' party,' necessarily,'
you' will' need' court' intervention' unless' the' other' party' is' willing' to' return'
what' was' received' from' the' party.' That’s' the' instance' when' you' will' need'
court'intervention.'So,'this'illustrates'to'you'the'possible'flaw'in'that'default'
rule' of' judicial' resolution.' It' shifts' the' burden' to' the' aggrieved' party.' The'
aggrieved'party'will'be'the'one'shouldering'the'cost'and'the'losses.''
' case,'what'was'the'remedy'exercised?'Termination.'How'about'the'penalty'here?'
Possible'solution:'Insert'an'arbitration'clause.'But'here,'the'premise'was'there'
was'no'stipulation'at'all.'
'
'
PRYCE"V."PAGCOR"
What' was' the' contractual' obligation' at' issue' here?' There' was' a' lease' contract.'
Somehow,' the' contract' was' discontinued' because' of' policy' and' PR' issues.' So,'
Pryce'wanted'what'from'PAGCOR?'They'wanted'rentals'for'the'unexpired'term'
of' the' contract.' PAGCOR' did' not' want' to' pay.' Apparently,' PAGCOR' was' not'
fulfilling' its' obligation.' It' just' wanted' to' discontinue' the' lease.' Aside' from'
termination,'what'was'the'right'of'Pryce'under'the'contract?'They'had'the'right'
over' the' rentals' for' the' remaining' term.' So,' was' Pryce' entitled' to' both'
termination'and'the'rentals?'The'remedy'exercised'here'was'termination.'
'
'
REMEDY"OF"TERMINATION"
What’s'the'basic'difference'between'termination'and'resolution'according'to'
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the'court?'In'resolution,'you'set'aside'or'cancel'the'obligation'or'the'contract.'
There’s' no' more' juridical' tie.' In' termination,' you' end' the' contract' but' at' the'
contractual'provision'(the'termination'clause).$
'
'
Termination'in'this'case'is'based'on'the'contract.'There'is'a'termination'clause'—'
the' right' of' the' parties' to' terminate' based' on' breach.' So,' if' there’s' termination'
pursuant'to'the'contract,'the'party'terminating'the'contract'is'actually'enforcing'
the' contract' because' you' are' relying' on' the' termination' clause.' So,' unlike' in'
resolution' where' you' are' considering' the' contract' as' if' it' never' existed,' in'
termination,' you’re' relying' on' a' contractual' provision' and' somehow' enforcing'
that'provision.'So,'when'you'resolve,'what'would'be'the'consequence?'
'
'
When' you' resolve' a' contract,' what' is' a' possible' adverse' effect' on' the' one'
resolving' the' contract?' You' have' to' be' careful.' When' you' resolve,' you' set'
aside'the'contract.'Therefore,'if'you'wanted'to'use'the'forfeiture'clause'or'the'
penalty' clause' in' the' contract,' you' cannot' get' those' because' it’s' as' if' the'
contract'did'not'exist.$
'
'
That’s' why' you' have' to' use' the' termination' clause.' If' you' want' to' avail' of' the'
benefit'of'the'penalty'clause'or'the'forfeiture'clause'in'the'contract,'you'terminate'
and'then'you'say'xxx'Well,'there’s'a'provision'normally,'which'says'that'a'party,'
in' case' of' breach' by' the' other,' may' terminate' the' contract' by' mere' notice' and'
forfeit'whatever'payments'has'been'made'by'the'defaulting'party.'So,'that’s'the'
difference.'So'if'you'want'to'rely'on'it'and'then'your'remedy'is'resolution,'you'
cannot'[rely'on'the'clause],'because'you'are'setting'aside'the'contract.'So'in'this'
How'did'the'court'resolve'the'issue'on'penalty?'Here,'the'SC'said'that'there'was'
indeed' a' valid' penalty' clause' that' in' case' of' breach' or' termination,' the' lessor'
should' be' entitled' to' the' future' rentals.' But,' what' did' the' Court' do?' They'
modified'the'penalty'clause.'
'
'
UNCONSCIONABLE"PENALTY"CLAUSE"
If' the' court' finds' the' penalty' clause' unconscionable,' they' can' reduce' the'
penalty'but'they'cannot'remove'it'altogether.$
'
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' '
"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
TUESDAY,'25'NOVEMBER'2014'
'

"

REVIEW:"RESOLUTION"
We’re' winding' up' the' matter' of' the' remedy' of' resolution.' As' a' summary,'
resolution' is' a' remedy' automatically' available' in' a' reciprocal' obligation.' We'
define' the' reciprocal' obligation' as' an' obligation' whereby' a' party' performs' a'
prestation'in'exchange'for'the'prestation'to'be'performed'by'the'other.''
Who'can'avail'the'remedy'of'resolution?'
• An'injured'party'–'someone'who'is'ready,'willing'and'able'to'perform'
his'prestation'under'the'reciprocal'obligation'
o If'both'parties'somehow'committed'an'infraction'then'neither'
will'be'entitled'to'the'remedy'of'resolution.'In'fact,'there'will'
be'no'default'
o If'in'a'reciprocal'obligation'and'neither'party'is'in'a'position'
to'perform'the'mandated'prestation'then'neither'of'them'will'
be'in'default'
' could' not' be' fulfilled.' So,$ the$ Supreme$ Court$ said$ that$ the$ motive$ ordinarily$ is$
'
and'it'should'have'been'done'judicially'due'to'the'failure'to'correctly'invoke'the'
remedy' of' resolution.' The' party' originally' in' default' was' rehabilitated' and'
thereby'was'able'to'file'the'resolution'instead.'
'
Now'if'you'have'that'problem,'somehow'if'you'omitted'the'provision'there'are'
other'maneuvers'that'you'could'do.'Let’s'review'the'cases.'
'
REVIEW:"Uy'v.'CA"
CANCELLATION'INSTEAD'OF'RESOLUTION'
You' could' characterize' your' action' as' cancellation.' Meaning' there' is' a' negation'
in'the'cause'of'the'contract'thereby'when'you'cancel,'you’re'not'availing'of'the'
remedy'of'resolution.'You’re'just'saying'there’s'a'missing'element'in'the'contract'
due'to'the'negation'of'the'cause.'In'Uy'v'CA,'NHA'purchased'a'property'on'the'
premise' that' the' property' would' be' suitable' for' residential' development,' the'
other'party,'the'seller'was'aware'of'that'fact'and'it'turned'out'that'that'purpose'
extraneous$ to$ a$ contract$ but$ considering$ that$ the$ motive$ predetermined$ the$ cause,$ the$

GENERAL"RULE'
If'resolution'will'be'availed,'it'should'be'availed'judicially." very$ consideration$ why$ NHA$ entered$ into$ the$ contract,$ the$ frustration$ of$ the$ motive$
" frustrated$or$negated$the$cause$–$termed$by$the$Supreme$Court$as$cancellation.$$
EXCEPTIONS' $
1. Stipulated'in'the'contract;$ When' you' do' cancellation,' the' default' rule' under' 1191' on' resolution' will' not'
2. Lease'contracts'(where'the'default'rule'is:'extra?judicial'resolution)$ apply.'It'is'a'different'remedy.'
'
'
'
REVIEW:"Suria'v.'IAC"
It'is'important'that'if'you'will'have'a'remedy'for'resolution,'you'have'to'stipulate'
WHEN'RESOLUTION'IS'NOT'PROPER'
in'the'contract'or'in'any'other'document'that'the'resolution'may'be'availed'of'by'
There' was' a' sale' of' a' property' in' installments,' the' payment' of' the' installments'
party' extra?judicially.' Otherwise,' you' follow' the' default' rule.' Of' course,' you’ve'
was' secured' by' a' mortgage' of' the' property' sold' and' when' there' was' a' default,'
seen' cases' wherein' the' Supreme' Court,' like' in' the' case' of' UP' and' in' the'
the' Court' said' the' remedy' was' not' resolution' but' foreclosure' because' with' the'
concurring' opinion' in' Eds' Manufacturing.' The' Supreme' Court' somehow'
mortgage,'there'was'deemed'a'consummation'or'cash'payment'of'the'purchase'
indicated' that' if' you' look' at' the' provision,' Article' 1191,' there' is' really' nothing'
price.'
there'indicating'that'resolution'should'be'invoked'judicially.'What’s'clear'before'
'
us'is'that'resolution'may'be'invoked'extra?judicially'but'always'subject'to'judicial'
Of' course,' you' also' have' to' remember' the' case' of' lease' contracts.' In' lease'
review.'Nevertheless,'as'things'stand'now,'the'general'rule'is'that'if'there'is'no'
contracts,'the'default'rule'is'extrajudicial'resolution.'It'is'implied'if'you'take'into'
express' stipulation' by' the' parties' then' resolution' should' be' done' judicially.'
consideration'the'relevant'Civil'Code'provisions'on'lease'as'well'as'the'Rules'of'
We’ve'seen'the'import'of'this'rule'in'the'case'of'Co'v'CA.'
Court'on'ejectment'because'if'you'could'eject,'a'lessor'must'send'a'demand'for'
'
the' lessee' to' vacate' the' property' thereby' implicitly' authorizing' extrajudicial'
REVIEW:"Co'v.'CA"
resolution.' In' fact,' that’s' the' reason' there’s' really' no' basis' in' law' to' say' that'
A'party'who'was'originally'in'default'became'the'injured'party'because'the'other'
judicial' resolution' should' be' the' default' rule' because' when' the' law' wants' an'
party'did'not'invoke'the'remedy'of'resolution'properly/correctly.'In'that'case,'the'
action'to'be'filed'or'a'particular'action'to'be'done,'to'pursue'a'legal'remedy,'the'
other' party' merely' sent' a' letter' wrongly' characterizing' the' contract' and'
law'provides'a'form'required:'
cancelling'it.'The'Supreme'Court'said'that'resolution'should'not'have'been'done'
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YANA'ABELLAR'&'LESLIE'MENDOZA'[1F'2014?2015]'//'25'NOV'2014' ' ' ' ''''''''''''''''TERESA'KRISTEL'BANTA'[1F'2014?2015]'''
' '

In'the'case'of'Sales,'you'will'encounter'there'when'you'cancel'a'sale'of'
"

• ILLUSTRATION"1:"MUTUAL"RESTITUTION"
real'property,'the'demand'should'be'by'notarial'demand' Let’s' have' a' Contract' of' Sale.' Seller' conveyed' property,' and' Buyer' paid' the'
• In' the' case' of' a' lease,' if' the' law' was' minded' it' could' have' stated' it' price.' Let’s' say,' this' [payment]' is' only' 50%' fulfilled' and' then' there' was' a'
should'be'judicial'resolution' breach.'If'Seller'invoked'resolution'judicially'and'got'a'judicial'resolution:'
' • Property'would'be'returned'by'the'Buyer,'and'Seller'should'return'
But'anyway,'as'I’ve'said,'you'follow'the'default'rule'as'in'Tan'v'CA.'' the' amount' received' less' damages,' because' the' one' in' breach' was'
' the'Buyer'
RESOLUTION'v.'TERMINATION' It' was' in' this' context' that' the' case' of' Solid$ Homes' was' decided,' but' it' was'
Take'note'also'of'the'difference"between"resolution"and"termination.'When'you' reversed'in'Solid$Homes.''
have'termination,'there'is'recognition'of'the'contract.'Only'thing'is'the'effectivity' '

'
of' the' contract' is' cut' short.' When' you' have' resolution,' you' undo' the' entire'
REVIEW:"Solid'Homes'v.'Tan"
obligation.' It’s' as' if' it' never' existed' by' legal' fiction.' Now,' in' termination,'
A' property' developer' sold' property' to' buyer,' a' lot' in' some' project.' Among' the'
therefore'if'you'avail'of'the'remedy'of'resolution'as'provided'in'the'contract,'you'
obligations'of'the'seller'was'the'provision'of'certain'facilities,'which'the'seller'did'
are'actually'enforcing'the'contract.'So,'when'you'wrongly'resolve'a'contract,'you'
not'provide,'thus'there'was'a'breach.'Would'that'be'substantial?'Yes,'because'it’s'
cannot'avail'of'the'remedies'under'a'contract.'Let’s'say'in'the'contract'there'is'a'
one'of'the'prime'considerations'why'the'buyer'bought'a'property'in'that'project'
clause'for'payment'of'penalty.'There'was'default'by'one'party'so'the'aggrieved'
and' the' buyer' already' paid' the' price.' Eventually,' there' was' a' resolution' of' the'
party' filed' an' action' for' resolution' based' on' substantial' breach.' What’s' the'
contract.'So'what'would'happen?'Mutual'restitution.'Property'should'go'back'to'
consequence' of' the' resolution,' it' will' cancel' the' contract.' So' if' the' contract' is'
seller'and'seller'should'return'the'price'plus'interest.'
cancelled,'that'aggrieved'party'cannot'say,'“I'want'to'enforce'the'penalty'clause”'
'
because'the'contract'is'set'aside.'In'which'case,'the'remedy'should'be'termination'
What’s' the' problem' in' the' case' of' Solid' Homes?' Litigation' was' done' after' 20'
as' may' have' been' provided' in' the' contract' or' specific' performance.' That’s' the'
years' so' the' property' in' the' meantime,' already' appreciated' in' value.' However,'
consequence'and'for'that,'you'have'to'be'clever.'In'fact,'you'do'away'with'this'
the'price'together'with'the'interest'is'fixed'because'it’s'an'amount.'There'was'an'
problem' of' judicial' resolution' and' other' issues' of' resolution' by' inserting' in' a'
upside' here' so,' there' is' no' parity' now' with' what' is' being' returned' not'
contract'a'termination'clause.'
withstanding' the' ground' of' interest.' The' interest' is' supposedly' for' the'
'
compensation' or' interest' by' way' of' damages.' Because' ordinarily,' if' they’re' just'
Termination"Clause'
returning' due' to' the' fulfillment' of' something' agreed' upon' in' a' resolutory'
You' state' there' the' grounds' for' termination' of' the' contract,' basically' based' on'
condition'agreed'upon,'they'could'just'return'property'and'the'price'because'the'
breach.' Based' on' breach,' if' there’s' a' breach' by' one' party,' the' other' party' can'
rental'for'the'use'of'the'property'and'the'interest'would'just'be'offset'but'in'this'
immediately' terminate' the' contract' by' mere' written' notice.' That’s' the' usual'
case,'seller'is'the'one'in'breach'so'there'is'a'requirement'for'payment'of'interest.'
provision.' Sometimes,' they' even' insert' there' if' you' want' to' be' in' an'
So,'in'this'case,'the'Court'said'there'should'be'mutual'restitution,'however,'there'
advantageous' position,' you' place' there' that' “one$party$may$terminate$the$contract$
should' be' an' adjustment.' What' should' be' returned' is' not' the' price' but' the' fair'
with$or$without$cause,$at$any$time$by$just$giving$prior$written$notice$of$x$period.”''
value' of' the' property.' The' Supreme' Court' invoking' its' equity' jurisdiction'
'
changed' the' rule.' Instead' of' just' returning' what' was' received' from' the' other'
Is' that' valid?' So' you’re' a' party' to' a' contract' and' the' contract' allows' you' to'
party,' SC' said' you' get' the' property' back' but' you' return' the' fair' value' of' the'
terminate' it' at' anytime' by' just' giving' written' notice.' Is' there' any' problem' with'
property'not'just'the'price.'So,'SC'did'not'apply'the'usual'mutual'restitution'rule.'
that'provision?'There'is'no'problem'because'it'does'not'destroy'the'juridical'tie.'
Of' course,' it’s' understandable' because' instead' of' penalizing' the' one' in' default,'
It’s' there.' It' is' akin' to' a' resolutory$condition$dependent$on$the$sole$will$of$the$debtor.'
they'would'be'rewarding'it'by'way'of'mutual'restitution'but'SC'didn’t'have'to'
Hence,'what'is'actually'being'determined'by'one'party'is'when'the'contract'will'
invoke'its'equity'jurisdiction'in'this'case'and'they'could'have'arrived'at'the'same'
end'but'not'when'it'will'come'into'existence.''
result' following' the' same' exchange.' Price' and' property' returned' could' also'
'
arrive'with'the'same'result'and'it'would'still'be'fair.'How?'Just'add'damages.'
MUTUAL'RESTITUTION'
'
If' there' is' resolution,' the' consequence' can' be' explained' when' we' compared'
That’s' why' the' result' of' Solid' Homes' is' acceptable' but' somehow' it' twisted' the'
resolution'with'the'remedy'of'rescission'is'mutual'restitution.'
rule.' It' could' have' applied' the' same' rule;' still,' mutual' restitution' and' the'
'
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YANA'ABELLAR'&'LESLIE'MENDOZA'[1F'2014?2015]'//'25'NOV'2014' ' ' ' ''''''''''''''''TERESA'KRISTEL'BANTA'[1F'2014?2015]'''
' '

disparity' in' the' value' of' the' property' and' the' price' to' be' returned' would' be' '
covered' by' way' of' damages' and' the' result' would' be' simply' the' same.' The'
'

Now,' if' the' court' cannot" determine' who' first' incurred' a' violation' to' the'
Supreme' Court' would' not' have' had' to' distort' the' application' of' the' mutual' obligation,'the'obligation'would'be'extinguished.$
restitution'' '

'
'
Assuming' it’s' predictable' and' let’s' say' you’re' the' seller' and' you’re' both' in'
[Comment]'JSP:'You$know$there$are$certain$legal$terms$that$are$awkwardly$formulated.$
breach' and' you' know' who' violated' the' contract' first.' If' you’re' the' seller' and'
In$Consti,$there’s$the$void$for$vagueness$and$the$overbreadth$doctrine.$And$then$there’s$
you’re' calculating' that' after' all' is' said' and' done,' you' will' likely' lose' and' pay'
the$facial$challenge.$How$could$they$formulate$that,$facial$challenge?$It$has$nothing$to$do$
more'so'if'there’s'an'offsetting,'you'will'pay'extra.'So'you’re'the'seller,'you'can'
with$ your$ dermatological$ care.$ It’s$ shorthand$ for$ challenge$ on$ its$ face$ thus,$ facial$
predict'and'thus'you'can'confuse'the'court'because'the'rule'is'if'the'court'cannot'
challenge.$ That’s$ how,$ you,$ aspiring$ lawyers,$ that’s$ how$ you$ speak$ which$ I$ don’t$
determine'who'the'first'infractor'is,'the'obligation'shall'be'extinguished'and'each'
understand$and$I$thought$it’s$a$locally$contrived$English$term$and$it’s$of$US$origin.$And$
party' will' bear' his' or' her' own' damages.' So' that' rule' gives' an' incentive' to' the'
in$ ObliCon,$ we$ have$ that$ same$ thing$ and$ I$ think$ we$ use$ that$ often.$ There’s$ beneficial$
party' who' thinks' he' will' be' paying' more' after' litigation' notwithstanding' the'
reimbursement$because$of$course$since$they’re$reimbursements,$they’re$beneficial.$That’s$
offsetting'to'somehow'make'sure'the'court'will'not'know'who'the'first'infractor'
the$ language$ of$ lawyers.$ That’s$ why$ if$ you’re$ reading$ SCRA,$ be$ careful,$ especially$
is.'Legal?'You'just'don’t'volunteer'information.'You’re'not'lying,'you'just'don’t'
somehow$ before$ you$ enter$ the$ law$ school,$ you$ have$ somehow$ okay$ English;$ after$ law$
say' who' the' first' infractor' is.' As' much' as' possible,' you' do' not' volunteer'
school,$most$likely,$your$English$will$be$as$convoluted$as$the$SCRA.'
information.' So' in' that' case,' you' will' achieve' the' objective' of' cancelling' the'
'
contract.'
Anyway,'as'we'said,'the'basis'for'mutual'restitution'in'resolution'is'Article'1190.'
'
1190' provides' the' consequence' of' the' occurrence' of' a' resolutory' condition.' In'
OBLIGATIONS"WITH"A"PERIOD"
reciprocal' obligation,' subject' to' a' resolutory' condition,' fruits' and' interests' may'
What'is'a'term?'
be'compensated.''Just'like'in'suspensive'condition'where'you'have'a'resolutory'
'
condition,'the'relevant'party'can'take'the'appropriate'action'to'protect'his'or'her' '

interest' in' case' the' resolutory' condition' appears.' Just' like' in' suspensive' A'term'is'a'period"of"time"that"suspends"the"demandability"(suspensive)'or'
condition,'in'obligations'to'do'and'not'to'do,'the'Court'can'determine'the'effect' determines"the"extinction"(resolutory)'of"an"obligation.$
'

of'the'extinction'of'the'obligation.' '
'
'

'
REQUISITES"OF"A"TERM:"
ART."1192"—"WHEN"BOTH"PARTIES"ARE"IN"DEFAULT" 1. In'the'future'
In'case'both'parties'have'committed'a'breach'of'the'obligation,'the'liability'of' 2. Certain'to'happen'(meaning,'it'can,'and'will'happen)'
the' first' infractor' shall' be' equitably' tempered' by' the' courts.' If' it' cannot' be'
'

'
determined'which'of'the'parties'first'violated'the'contract,'the'same'shall'be'
When' we' speak' of' certainty,' we’re' not' speaking' of' when' exactly' the' event' will'
deemed'extinguished,'and'each'shall'bear'his'own'damages.$
' happen'but'that'surely,'the'event'will'arise.'
' '
Now,' if' you' have' a' reciprocal' obligation' and' the' Seller' is' not' in' the' position' to'
"

ILLUSTRATION"2:"DEATH"
perform,' the' Buyer' will' never' be' in' default.' If' the' Buyer' is' in' the' position' to'
If' I' say,' “I' will' pay' you' P100k' upon' the' death' of' X,”' that' is' certain.' What' is'
perform' the' required' prestation' (while' Seller' is' not),' Buyer' can' avail' of' the'
uncertain'is'when'it'will'happen.''
relevant'legal'remedies.'
'
'
Let’s' say,' I' change' it' to,' “I' will' pay' you' P100k' upon' the' resurrection' of' X.”'
What' if' both' committed' breach?' If' both' are' in' default,' then' you' have' an'
That’s' not' a' term' because' that’s' impossible,' correct?' (Yes$ sir,$ that’s$ an$
offsetting"of"liabilities.'However,'let’s'say,'litigation'is'predictable.'Both'parties'
impossible$condition.)' Oh,' an' impossible' condition' —' so' you' mean,' there’s' no'
committed'a'breach.'Normally,'there'would'be'offsetting,'but'remember:'
life'after'death?'I'just'changed'your'entire'religious'belief.'
'
'
'
If'the'court'can'determine'who'the'first'infractor'was,'the'court'will'be'the'one' [Joke]'How'about'this:'“I'will'pay'you'P1M'upon'the'second'coming?'(Possible,$
to'apply'offsetting.'$ sir.)' I’m' not' referring' to' the' person' ah,' which' —' especially' if' it’s' a' young'
'

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YANA'ABELLAR'&'LESLIE'MENDOZA'[1F'2014?2015]'//'25'NOV'2014' ' ' ' ''''''''''''''''TERESA'KRISTEL'BANTA'[1F'2014?2015]'''
' '

person'—'will'most'likely'to'happen.' debtor,' then' the' occurrence' of' fortuitous' event' will' have' the' effect' of'
' extending' the' relevant' period' but' that’s' by' agreement' or' intention' of' the'
The'point'is:'the'event'must'be'certain"to"happen.' parties.'
' '

' '
CASES"[ART.'1193?1197]" Rules' on' loss,' deterioration' or' improvement' are' all' the' same' with' respect' to'
RADIOWEALTH"FINANCE"COMPANY"V."DEL"ROSARIO" suspensive'term;'they’re'also'the'same'with'the'rules'on'suspensive'conditions'as'
The' parties' entered' into' a' loan' service' by' executing' a' promissory' note.' In' their' well' as' payment' prior' to' the' arrival' of' the' suspensive' term.' Our' discussions'
promissory' note,' there' was' no' date' stipulated' but' only' says' that' it' is' payable' would'likewise'apply.'
within' 12' months.' The' spouses' Del' Rosario' paid' through' checks' but' the' bank' '
dishonored' the' checks.' Radiowealth' demanded' for' payment' and' the' spouses'
"

ILLUSTRATION"4:"OBLIGATIONS"WITH"A"TERM"(SAMPLES)"
refused' to' do' so' thus' Radiowealth' filed' an' action' for' collection' of' money' plus' 4.1" —" PAYMENT" BEFORE" A" TERM" IS" NOT" POSSIBLE" AND" NOT" DEMANDABLE"
damages.' RTC' dismissed' it' for' lack' of' evidence' because' there' was' no' sufficient' BECAUSE"PERIOD"IS"FOR"BOTH"CREDITOR"AND"DEBTOR"
proof' that' the' transaction' happened.' CA' –' spouses' admitted' that' they' were' “You'shall'pay'P100k'after'1'year'with'interest,'at'the'rate'of'1%'per'month.”'
actually'indebted.'Issue'is'whether'or'not'the'obligation'to'pay'the'amount'was' '
due' and' demandable.' Court' ruled' that' it' was' demandable' because' the' act' of' 4.2"—"FOR"THE"BENEFIT"OF"THE"DEBTOR"
leaving' a' blank' space' in' the' promissory' note,' alongside' the' intention' and' “The'debtor'may'pay'on'or'before'December'31,'2014.”'
manifest' act' of' the' parties,' show' that' there' was' actually' a' date' intended.' The' “The'debtor'may'pre?pay'before'December'31,'2014'without'a'penalty.“'
intention' was' evident' because' there' was' an' acceleration' clause' and' a' late' '
payment'penalty.'It'was'also'stipulated'that'there'was'a'twelve?month?rule'and' 4.3"—"FOR"THE"BENEFIT"OF"THE"CREDITOR"
the' acts' of' actually' paying' the' checks' —' thus,' there' was' knowledge' that' the' “The'debtor'shall'pay'on'or'before'demand'of'the'Creditor.”'
obligation'was'demandable.' '

'
' '

"

GENERAL"RULE"
ILLUSTRATION"3:"COMPARING"OBLIGATIONS"
If'there'is'a'term,'the'presumption'is'that'the'term'is"for"the"benefit"of"both"
3.1"—"SUSPENSIVE"TERM"
parties.'
“I’ll'pay'you'P100k'on'December'31,'2014.”'
'
'
EXCEPTION'
3.2"—"CONDITION"
The' general' rule' will' not' apply' if' the' tenor' or' circumstances' of' the' case'
“I'will'pay'you'P100k'as'soon'as'you'sell'my'car.”'This'is'a'condition'because'
indicate'otherwise.$
it'may'or'may'not'happen.'' '

' '
3.3"—"RESOLUTORY"TERM" ART."1197"—"WHEN"COURTS"CAN"FIX"THE"PERIOD"
“I' will' give' you' an' option' to' buy' my' condominium' unit' for' P1M' until' MACASAET"V."MACASAET"
December'31'of'this'year.”' In'the'case'of'Macasaet,'the'petitioners'are'the'son'and'the'wife'of'the'son'of'the'
' respondents.' Respondents' say' that' they' entered' into' a' verbal' lease' agreement'
3.4"—"FORTUITOUS"EVENT' over'2'parcels'of'land'for'their'construction'business'and'residence'and'pay'500'
Let’s' say' we' have' a' 30?year' contract' and' during' that' contract' a' fortuitous' pesos'as'rent.'When'the'parents'filed'an'ejectment'suit,'the'petitioners'said'there'
event'happens.'What'happens'to'the'term?'In'Ace?Agro,'the'fortuitous'event' was'no'existence'of'such'agreement'because'the'son'was'technically'the'owner'of'
only' exempts' the' parties' from' liability' for' nonperformance' due' to' the' that'land'because'it’s'an'advance'inheritance'from'the'parents.'MTC'decided'in'
fortuitous' event.' Supreme' Court' said' the' occurrence' of' a' fortuitous' event' favor' of' the' parents' saying' the' son' and' the' wife' were' only' bound' by' mere'
during'a'term'does'not'extend'the'term.'The'duration'of'the'fortuitous'event' tolerance' of' the' parents' wherein' there' is' an' implied' premise' to' vacate' the' land'
will'not'be'added'to'the'term'unless'the'parties'agreed'otherwise.'If'from'the' should'the'parents'demand'so.'RTC'and'affirmed'the'decision'but'both'said'the'
set?up,'you'can'infer'that'an'agreement'of'the'party'that'there'was'indeed'an' son'and'the'wife'were'entitled'to'the'improvements'of'the'building.'SC'ruled'in'
intention' to' grant' the' entire' term' in' favor' of' a' certain' party,' let’s' say' the' favor' of' the' parents' saying' that' the' mere' tolerance' was' a' RESOLUTORY'

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' '

CONDITION' such' that' the' dissipation' of' affection' terminates' the' verbal' lease' In'relation'to'ILLUSTRATION"5:'Yes,'there'was'payment.'So,'why'is'there'a'need'to'
agreement.'Court'could'not'fix'a'period'because'there'was'no'intention'of'having' remove' the' benefit' of' the' term?' The' borrower' is' obliged' only' to' pay' the' loan,'
a'period.' let’s' say,' after' 10' year' then' borrower' becomes' insolvent,' so' why?' There’s' no'
' default'here.'There’s'no'breach.'Let’s'say'a'friend'of'B'continues'to'pay'whatever'
So,"in"this"case,"[the"obligation]"was"not"subject"to"a"term,"but"it"was"subject"to" may' be' due' under' the' loan' contract.' Why' is' there' a' need?' Why' does' the' law'
a" resolutory" condition." What" was" the" resolutory" condition?" The" Court" ruled" deprive'the'debtor'of'the'benefit'of'the'period?''
that"love'and'affection'was"a"resolutory"condition"in"this"case"—"the"obligation" '
would"be"extinguished"if"the"love"dissipates."" If' you' have' this' scenario,' borrower' most' likely' has' liabilities' to' other' creditors.'
" So,'we'have'4'creditors'of'B.'On'the'5th'year,'B'is'already'insolvent.'Assets'are'less'
The'dissipation'of'the'love'should'be'a'term'because'it'will'certainly'happen'and' than' the' liabilities.' The' liabilities' included' payables' to' creditor' 1,' 2' and' 3.' Why'
it’s'not'forever.'I'have'science'on'my'side'(talks$about$an'experiment$of$3$couples$and$ should'there'be'a'deprivation'of'the'benefit'of'the'period'upon'insolvency?'
the$dissipation$of$a$certain$chemical$that$makes$you$warm$and$fuzzy).'But'in'this'case,' '
the'court'was'of'the'belief'that'love'may'be'forever,'or'may'or'may'not'be'lost,' Let’s'say'assets'are'only'worth'P50M.'Each'creditor'is'entitled'to'let’s'say,'P20M.'
thus'a'resolutory'condition.''' So,' both' the' liability' will' be' P50M' as' opposed' to' P70M.' Let’s' assume' that' the'
" other'one'is'10.'Definitely'he’s'insolvent.'Why'should'there'be'an'acceleration'of'
ACCELERATION'CLAUSE' the'demandability'of'the'obligation?''
Now,' an" acceleration" clause" provides' that' in" case" a" party" defaults," the" entire" '
obligation"becomes"due.'Let’s'say,'it’s'a'loan'payable'in'installments,'there'will'
'

be' a' clause' there' that' in' case' you' fail' to' pay' on' due' date' or' you' violated' the'
contract'somehow,'the'entire'obligation'becomes'due'and'demandable.'You'lose'
the' benefit' of' the' term' and' there' will' be' immediate' demandability' of' the' entire'
obligation."
When' insolvency' occurs,' these' creditors' may' likely' go' after' all"the"assets' of'
the'borrower,'so'everything'will'be'wiped'out.'Given'that,'the"law"accelerates"
the" demandability" of" the" obligation" so" the" lender" will" be" on" the" same"
position"as"the"other"creditors.$
'

'
"
The'lender'can'now'enforce'the'claim'so'that'the'lender,'because'these'creditors'
ART." 1198" —" WHEN" THE" DEBTOR" LOSES" EVERY" RIGHT" TO" MAKE" USE"
will'be'struggling'after'the'remaining'assets,'so'if'the'period'will'remain,'lender'
OF"THE"PERIOD"
will'get'nothing'after'10'years.'Of'course'in'our'example,'there'was'servicing'but'
"
' these' are' minimal' amounts' compared' to' the' amounts' of' the' obligation' of' the'
The' provision' stated' 5' instances,' but' to' simplify:' debtor' loses' the' benefit' of' debtor.' So' that’s' the' reason' why' there' is' anacceleration.' Remember' this' one'
the'period'the'moment'the'debtor:' because'this'will'be'relevant'later'on,'with'the'rescissible'payments.''
1. Defaults;' '
2. Becomes'insolvent;'or' '

In'Art.'1197,'there'are'2"CASES"WHEN"A"COURT"CAN"FIX"A"PERIOD:"
3. Attempts'to'abscon'
'
1. When'the'nature'of'the'circumstances'of'the'obligation'stipulate'the'
' period'intended'by'the'parties;'or'
Insolvency' is' when' assets' are' less' than' liabilities.' The' court' does' not' need' to' 2. When'the'term'depends'on'the'sole'will'of'the'debtor'
declare'the'insolvency'of'the'debtor'for'Article'1198'to'apply.' '
' In' either' case,' the' court' can' intervene.' The' court' however,' can' only' fix' the'
"

ILLUSTRATION"5:"INSOLVENT"DEBTOR' period,'not"other"terms"and"conditions"of"the"contract.'
Let’s'say'you'have'a'loan'contract.'You'have'a'lender'and'a'borrower.'Lender'
'

extended' P10M' loan' payable' (principal' and' interest)' within' 10' years,' lump'
sum' payment.' On' the' 5th' year,' borrower' becomes' insolvent' and' we' will'
assume' for' this' example' that' borrower' continues' to' service' the' loan' or' pays'
accruing' payables.' Why' is' there' a' need' to' remove' the' benefit' of' the' term'
when'the'borrower'is'only'obliged'to'pay'in'10'years?'
'
'
COMPARING'RADIOWEALTH$AND'MACASAET'
In' the' case' of' Radiowealth,' the' parties' left' blank' the' due' date' of' the' first'
installment.'The'court'said'that'you'have'to'understand'that'in'the'context'of'the'
transaction.' If' you' look' at' the' document,' it' does' not' mean' that' the' parties'
intended'a'period'but'failed'to'do'so.'In'fact'there'are'provisions'about'the'when'

' the'payment'should'be'made'and'the'consequences'of'nonpayment'as'stated'in'
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' '

certain'clauses'of'the'contract.'What'kind'of'clause?'Acceleration'clause'and'late' saying'there.'Like'“wife'should'be'submissive”'or'“women'are'dirty'during'their'
penalty'clause' period,'etc.”'
' '
Let’s' take' the' case' of' Macasaet.' In' Macasaet,' the' court' said' that' the' parties' did' Anyway,'give'me'an'answer'now.'If'they'want'to'develop'a'business,'it'should'
not' intend' a' period.' In' the' case' of' Radiowealth,' I' want' you' to' argue' that' the' be'at'least'3'years.'Therefore,'the'parents'should'have'known'that'the'use'of'the'
parties'actually'intended'a'period'and'the'result'should'be'different'—'that'the' lots'should'be'for'the'same'period.'There'was'an'intended'period'but'somehow,'
term' is' intended' and' the' court' should' have' fixed' a' period.' Same' facts' so' don’t' they'failed'to'state'it'in'the'contract.'You'have'now'a'basis'and'the'court'can'have'
change'the'facts.'But,'let’s'assume'that'there'are'already'improvements'in'the'lot.' the' authority' to' fix' a' term' by' using' this' aspect' of' the' transaction.' So' there’s' an'
So,'it’s'a'completely'usable'property'after'turnover.'What'will'you'use'to'indicate' intended' period' but' the' parties' failed' to' stipulate.' It’s' the' same' facts' but' you'
that'the'parties'really'intended'to'use'a'period?' have'a'better'chance'of'saying'that'there’s'an'intended'period'rather'than'using'
' an'argument'saying'that'scientifically,'love'fades.'Legally,'you'may'win.'So'let’s'''
In' the' meantime,' while' you’re' thinking,' we' have' this' promissory' note:' “The" go'back,'what’s'your'answer?'
borrower"promises"to"pay"100"million"on"_______"to"X.”' '
' What' will' you' use' to' prove' that' there’s' an' intended' term?' Don’t' put' a' date.'
In' a' normal' case,' the' Supreme' Court' will' consider' this' as' transaction' payable' You’re' already' on' litigation' so' you’re' saying' now' that' the' parties' intended' a'
upon'demand.'It'is'neither'subject'to'a'term'or'a'condition.'How'will'you'argue' term.'What'else'will'you'use?"Just"like"that"example"of"Macasaet,"you"will"use"
that'the'parties'intended'a'term?'The'normal'rule'is'payable'upon'demand'if'it’s' an" AMOUNT.' What' about' the' amount?' What' will' you' show?' What' will' you'
worded'like'this.' show' about' the' amount' to' indicate' that' there' was' an' intended' term' but' the'
' parties'failed'to'stipulate?'
Going'back'to'this'(Macasaet),'what'can'you'use?'What'is'the'lot'for?'Residences.' '
So,' you' may' use' it,' but' focus' on' the' construction' business.' This' is' a' newly' You"have"to"show"the"purpose"of"the"loan."Why"was"it"granted?"If"it’s"granted"
married'couple'starting'a'business.'What'can'you'gather?'The'wife'is'pregnant'so' for" a" purpose," there" must" be" an" accompanying" period" to" accomplish" that"
there'will'be'what?'Money,'construction'business,'new'venture,'lease…'so?'What' purpose"especially"since"it’s"a"huge"amount."
will' you' use' the' construction' business' of' a' newly' married' couple' for?' In' the' "
context' of' the' family,' if' the' land' was' given,' what' is' it?' (Gratuitous?)' No,' stop.'
"

ILLUSTRATION"6:"NO"STIPULATION"ON"PAYMENT"DATE'
There'is'payment'but'this'(land)'was'given'for'this'(construction'business).'So,'if' In'one'example,'there'was'a'problem.'There’s'a'loan'contract,'the'parties'are'
you’re' starting,' what' do' you' need' aside' from' capital?' You' need' to' grow' this' granted' a' 1' billion' loan' to' a' borrower' to' finance' operations.' The' parties' did'
business,' right?' ' So' you' need' TIME.' You' need' a' PERIOD' for' this' business.' not' stipulate' the' payment' date.' Is' the' obligation' payable' on' demand?' The'
There’s' a' period' for' it' to' be' developed' which' should' have' been' known' to' the' answer,' it’s' not' because' of' the' huge' amount' involved' in' the' purpose.' The'
parents.'From'there,'what'should'be'your'argument?'' parties' intended' a' period' that' they' should' be' used' for' operations.' If' it’s'
' payable' upon' demand,' it' would' negate' the' obligation' of' the' contract' of' the'
Focus'on'the'children'—'the'son'and'the'wife.'' parties.' So' that’s' how' you' address' the' issue' of' intention.' You' could' look' at'
' the'purpose'of'the'parties'and'the'amount'involved'and'other'considerations.'
[Comment]' JSP:' Most' likely' the' wife' caused' all' these' problems.' Again,' it’s' the' Clear?'
woman.'That’s'not'a'judgment,'that’s'a'fact.'Most'likely,'the'in?laws'did'not'like' '

'
the'woman.'Don’t'worry,'because'lawyers'in'the'next'decade,'in'the'Philippines'
HOW'THE'COURT'FIXES'A'PERIOD'
at' least,' will' mostly' be' women,' if' you' will' pass' the' bar,' or' if' you' will' pass' this'
How'should'the'courts'fix'a'period?'(Sir,$it$must$be$dependent$on$the$intention$of$the$
class.'That’s'a'fair'warning.'Go'ahead.'The'construction'business'will'need'time'
parties.)'Yes,'because'the'parties'supposedly'intended'to'have'a'period,'therefore'
to'develop.'Let’s'say'three'years.''
the'court'should'fix'a'period'after'determining'such'intent.''
'
'
[Comment]' JSP:' Love' is' kind.' Love' is' patient.' What’s' that?' The' letter' of' Paul.'
JSP:" If"the"court"fixes"a"period"for"the"performance"of"the"obligation,"can"the"
What?'Love'fades.'Oh'by'the'way,'if'you’re'getting'married,'don’t'quote'from'the'
court"change"it?"
letter'of'Paul,'quote'from'Leviticus.'In'Leviticus,'you’ll'find'the'most'backward'
A:'' No,'because'the'law'says'so,'sir.'

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' '

' So'(referring'to'ILLUSTRATION"7),'if'there’s'an'alternative'obligation,'you'will'still'
JSP:" Can"the"parties"change"it?" have' a' valid' obligation.' Why?' It’s' because' you' have' at' least' 2' valid' prestations'
A:'' Yes,'sir,'by'effectively'entering'into'another'contract.' (P100M'and'ring).'The"illegal"prestations"(man"and"shabu)"will"not"nullify"the"
' alternative"obligation.'
JSP:" I"thought"the"law"provided"that"it"cannot"be"changed?"Isn’t"it"that"the"law" '
said"that"once"fixed"by"the"court,"the"period"can"no"longer"be"changed"by"
'

What’s'important'in'the'alternative'obligation'is'that'there'should'be'2'valid'
them?"Who’s"“them?”" prestations.' If' it’s' a' facultative' obligation,' the' nullity' of' the' principal'
A:'' The'courts,'sir.' obligation'will'void'the'entire'obligation.$
' '

'
JSP:" We" know" that" because" of" rules" in" grammar" —" pronoun" and" antecedent.'
ALTERNATIVE'OBLIGATION'AND'LIABILITY'OF'DEBTOR'
When"you"identify"a"pronoun,"you"identify"it"with"the"closest"noun."The"
In'an'alternative'obligation,'the'debtor'has'the'right'to'choose'the'prestation'to'be'
closest"noun"in"that"provision"was"the"“court,”"but"can"the"parties"really"
performed'unless'it’s'given'to'the'creditor.''
change"the"term?"
'
A:' Here’s' the' answer:' Yes,' by' entering' into' a' new' contract,' and' that' can' be' "

novation.'In'fact,'what’s'usually'done'by'the'parties'after'judgment'is'that' ILLUSTRATION"8:"DAMAGED"PRESTATION'
they'enter'into'another'contract,'and'that’s'fine.''' Let’s'say,'we'have'an'alternative'obligation.'Instead'of'a'ring,'it'will'be'a'bike.'
' So,'you'have'a'valid'alternative'obligation.'So,'the'debtor'is'required'to'either'
KINDS"OF"OBLIGATIONS" deliver'a'bike,'a'ring,'a'man'or'shabu.'There'are'only'2'valid'prestations.'The'
' bike' was' destroyed' through' the' fault' of' A.' The' ring' is' destroyed' through' a'
'

Obligations' may' be' classified' depending' on' the' number' of' objects' or'
prestations.'These'are'the'following:'
1. Conjunctive'—'when'all'prestations'are'required'
2. Alternatice' —' when' there' are' multiple' prestations' involved' which'
are'all'principal,'and'the'lender'can'perform'ONLY"ONE"of"them'
fortuitous' event' —' it' was' dropped' in' [sic].' There’s' destruction' so' there’s'
fortuitous'event.'Does'the'debtor'have'a'liability'to'the'creditor?'
'
In'the'bike’s'case:'yes,'because'there’s'fault.''
In'the'ring'case:'no,'because'it'was'destroyed'by'FE'
'

3. Facultative' —' when' there' are' multiple' prestations,' but' some' are' '
classified"as"principals"and"some"are"subsidiary' Remember' that' in' an' alternative' obligation,' the' debtor' is' required' to' perform'
only' one' prestation.' The' default' rule' is' that' in' performing' that' prestation,' the'
'

'
debtor'will'choose.''
Only'the'debtor'has'the'right'to'choose'the'prestation'in'facultative'obligations.'
'
The' creditor' may' be' given' this' right' in' alternative' obligations' but' only' if' it’s'
In'the'case'of'ILLUSTRATION"8:'
stipulated'by'the'parties.'
• The'bike'was'destroyed'through'the'fault'of'the'debtor.'What'happens'
'
" to' the' obligation?' It' becomes' a' simple' obligation.' There’s' only' one'
ILLUSTRATION"7:"ALTERNATIVE"V."FACULTATIVE' legally'and'physically'possible'prestation.'
Let’s'say'you'have'a'contract.'Debtor'will'either'pay:' • Meanwhile,'the'ring'was'lost'through'a'fortuitous'event.'What'happens'
• P100M' then?'The'obligation'is'extinguished.''
• A'ring' o So,' why' should' there' be' a' liability?' This' is' not' concurrent'
• A'man' with' the' bike’s' destruction' but' by' choosing' to' destroy' the'
• Or'shabu$' bike,' whether' willingly' or' not,' in' effect,' the' debtor' made' a'
Now,' the' debtor' can' deliver' any' of' these' things' to' you.' What' kind' of' choice' to' just' deliver' the' ring.' When' the' ring' was' destroyed'
obligation'is'that?'Alternative.' by'a'fortuitous'event,'the'obligations'was'extinguished.'Clear?'
'
How'do'you'make'it'facultative?'Have'a'principal'—'the'man.'Do'you'have'a' Q:" Sir,"what"if"it’s"vice"versa?"
valid'obligation'in'alternative?'Yes.'In'facultative?'No.'Why'invalid?' A:' If' it’s' different,' then' there' will' be' liability' since' the' bike' would' be' the' last'
Because'it’s'invalid'to'deliver'a'man.' remaining'prestation,'the'damage'of'which'was'the'debtor’s'fault.''
'

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' '

' reimburse.' What' did' SC' say?' The' Court' pointed' out' that' there’s' a' loan'
partnership,' which' means' that' there' should' be' an' inclined' sharing' of' losses.'
'

Take' note' that' the' debtor' can' only' choose' one' that' is' legally' and' physically'
possible.'Moreover,'if'the'debtor'chooses,'it'has'to'choose'an'entire'prestation,'
not'a'part'of'one'prestation'and'a'part'of'another'prestation.$
'
'
JSP:" What" if" the" creditor" has" a" right" of" choice" and" the" creditor" does" not"
What'happens'to'the'JVA'then'—'the'part'of'the'agreement'that'all'cash'should'
be' paid' by' Gotesco?' SC' did' not' just' say' apply' the' rules' on' partnership' rather'
than'the'JV'contract,'which'is'a'little'tricky'for'the'court.'
'
"

choose?"What"do"you"do"if"you’re"the"debtor?"Or"if"the"debtor"can"choose"
the" prestation" to" be" performed" in" an" obligation" and" he" did" not" choose?"
What"will"you"do?"
A:' You' wait.' Why?' Because' love' is' patient?' No!' It’s' because' you' cannot' do'
anything.'You'have'an'obligation'to'perform'but'it'cannot'be'due'because'
the'other'(responsible)'party'has'not'chosen'yet.''
' contracting' parties' are' one' with' X.' They' are' not' debtors.' Before" there" is" a"
CASES"[ARTS.'1207?1222]"
JOINT"AND"SOLIDARY"OBLIGATIONS"
ILLUSTRATION"9:"'
Now,' let’s' say' you' have' 3' parties:' A,' B' and' C.' A' borrowed' from' S' some'
money,' a' loan.' The' proceeds' were' partly' received' by' B' and' B' signed' and'
received'for'the'loan.'There'was'default'on'the'payment.'X'also'received'parts'
of' the' proceeds' then' there’s' default.' So' there' are' 3' parties' –' A,' B,' C.' Should'
they' be' liable?' Shouldn’t' they' be' jointly' liable?' NO.' The' fact' is' that' the'
joint" or" solidary" obligation," there" should" be" a" concurrence" of" debtors" and"
creditors.'Here,'there'is'only'1'debtor'and'1'creditor.'
'

MARSMAN"V."PHILIPPINE"GEOANALYTICS" !
The' parties' in' this' case' had' a' Joint' Venture' Agreement.' They' hired' PGI.' So,' "

ILLUSTRATION"10:"JOINT"OBLIGATION'
what’s' the' service?' They' had' tests' to' determine' if' they' could' build' a'
Loan'Contract'
condominium' or' they' should' do' certain' preparatory' works' like' bore' piling…'
A' ' C'
you' see' those' big' pillars' hammered' in' the' grounds?' They’re' used' as' the'
B' ' D'
foundation' for' the' building.' That’s' one' thing' that' the' contractors' will' do.' They' '

will'actually'render'this'service'and'in'exchange,'there'will'be'payment'of'fees.'
So,' in' their' joint' venture' agreement,' Marsman' and' Gotesco' agreed' that' all' the'
expenses'for'the'building'will'be'shouldered'by'Gotesco.'Gotesco’s'contribution'
was'cash.''
' They' are' joint' debtors' and' creditors' because' there' are' no' special'
Long'story'short,'PGI'was'able'to'do'the'service'but'there'was'no'payment'of'the'
fees'so'PGI'sold'both.'Correct?'Who’s'liable?'The'court'said'that'both'of'them'are'
jointly'liable.'Why?'The'court'said'that'this'contract'never'bound'PGI.'PGI'is'not'
a'party'to'the'contract.'The'contract'was'binding'only'between'the'parties.'So'in'
this' case,' it’s' as' if' both' parties' contracted' PGI' so' the' contract' involves' Gotesco'
and'Marsman.'So,'who'should'pay?'The'court'said'both'of'them'—'jointly.'That'
means'they'should'pay'together'—'50?50.'
! '
GENERAL"RULE"
An' obligation' is' presumed' joint' unless' the' parties' or' the' law' provides'
C' and' D' extended' a' P1M' loan' to' A' and' B.' They' are' supposed' to' pay' the'
amount'on'due'date:'X'day.'X'day'arrives,'how'much'should'A'pay'C?'How'
much'should'A'pay?'P500,000.'
'
circumstances,' which' means' that' each' will' be' liable' to' pay' P500,000.' This'
amount' is' not' payable' to' just' one' because' they' are' joint' creditors.' Each' will'
receive'250'each'so'if'there'will'be'payment'by'A,'it'should'be'250'to'C'and'
250'to'D.'In'reality,'in'a'joint'obligation,'owes'P500,000'to'C'and'D'so'they'will'
have'to'share'in'that'amount'equally'in'the'absence'of'proof'to'the'contrary.''
'
On'X'date,'C'made'a'demand'but'A'failed'to'pay.'Is'there'default'with'respect'
to'the'entire'obligation?'So,'A'is'in'default'to'C'only,'while'B'is'not'in'default'
because' there’s' no' demand.' Although' there’s' demand' on' A,' there' is' a'
separation.'
'

'
otherwise' or' the' nature' of' the' obligation' requires' solidarity' so' they' were' '

jointly'liable.$ GENERAL"RULE"
'

If'there’s'a'joint'obligation,'any'act'of'a'creditor'or'a'debtor'will'only'affect'the'
'
debtor'and'creditor'privy'to'such'act.'$
So' without' anything' special' in' the' obligation' and' you' have' 2' parties,' those' '

debtors' will' be' liable' jointly' which' means' that' they' will' pay' their' own' share.' '
There' was' also' a' claim' that' should' Marsman' pay' 50%,' Gotesco' should' For'example,'a'demand'made'by'C'on'A,'only'A'will'be'in'default'with'respect'to'
the'amount'payable'to'C'which'is'P250,000.'In'relation'to'B'who'did'not'receive'a'
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' '

demand'and'D'who'did'not'make'a'demand,'B'will'not'be'in'default'in'relation'
to'either'C'or'D.'A'will'not'be'in'default'in'relation'to'D.'This'demand'will'only'
benefit' C' and' will' affect' A' as' a' party' in' default.' In' the' same' manner,' if' this'
demand'is'made'on'the'last'day'—'when$you$have$a$loan$obligation$in$a$contract,$the$
period$ to$ collect$ is$ within$ 10$ years$ —$ of' the' 10?year' period,' that' demand' will'
interrupt' the' prescriptive' period' but' only' in' relation' to' A' because' it’s' a' joint'
obligation.' Therefore,' the' act' of' C' will' only' benefit' C' and' will' only' affect' the'
debtor'who'received'the'demand.'Clear?'
' !
"
If' it’s' solidary,' use' “solidarily”' or' “jointly' and' severally.”' [Personally],' I’m'
inclined'to'use'“solidarily”'because'in'some'jurisdictions,'the'“joint'and'several”'
are'also'considered'joint'sometimes.'It’s'better'to'be'safe'so'use'either'“solidary”'
or'“joint.”'The'safest'thing'to'do'is'to'use'the'language'of'the'law.'
'
In' the' promissory' note,' there' is' a' use' of' such' terms' indicating' solidarity' by'
agreement'of'the'parties.'If'we’re'going'to'remove'that'clause,'will'Gonzales'still'
be'liable'solidarily?'(Yes.)"

ILLUSTRATION"11:"INSOLVENCY"IN"JOINT"OBLIGATIONS'
'

There'are'only'3"INSTANCES'when'solidarity'can'exist:'
B'is'insolvent.'What'happens'to'the'obligation'of'B?'Who'will'pay?'Can'C'and' 1. By'law;'
D' collect' from' A?' (No$ sir,$ because$ they$ are$ only$ liable$ for$ their$ share.)' Yes,' and' 2. By'contract;'
because' this' is' a' peculiar' case,' that' can' only' affect' B' and' not' A.' it' will' only' 3. By'nature'
affect'C'and'D'but'not'A.' '

' '
' If' we' remove' the' stipulation' of' the' contract,' then' it’s' by' law.' Under' the'
GONZALES"V."PCIB" Negotiable' Instruments' Law,' an' accommodation' party' will' be' solidarily' liable'
Accommodation'party' because'he'signs'as'maker'or'drawer'of'the'check.'
In'this'case,'we'have'a'lender,'a'loan,'and'payment.'Gonzales'was'the'one'who' '
borrowed.'Who'signed'the'promissory'note?' '

GENERAL"RULE"
'
If'there'is'an'obligation'involving'many'parties,'they'are'presumed'to'be'joint.'
The' borrower' spouses' Panlilio' signed' and' spouses' Gonzales' were' the' co?
Thus,'there'will'be'joint'debtors'and'joint'creditors.'''
borrowers.'But,'the'proceeds'of'P1.8M'only'benefitted'the'spouses'Panlilio.'The'
'
monthly'interests'were'paid'by'the'spouses'Panlilio,'and'then'they'defaulted,'so'
EXCEPTION"
PCIB'allegedly'called'the'attention'of'spouses'Gonzales.'Subsequently,'Gonzales'
For' there' to' be' solidarity,' either' between' or' among' the' debtors' or' creditors,'
issued'checks'from'his'credit'line'to'a'man'named'Manson,'however'the'checks'
there' must' be' a' law' mandating' solidarity' or' there' is' an' agreement' by' the'
are' dishonored.' PCIB' said' that' it' was' because' of' the' loan' so' they' had' to' freeze'
parties'requiring'solidarity'or'the'nature'of'the'obligation'requires'solidarity.'
the'foreign'currency'deposit'of'Gonzales.'The'latter'now'claims'that'he’s'not'the'
Without'those,'there'will'be'no'solidary'obligation.'
one' who' benefitted' from' the' P1.8M' loan' so' he' must' not' be' held' liable.' The' SC' '

said'that'Gonzales'was'an'accommodation"party.'There'are'3'requisites'and'one' '
is' that' a' party' signs' an' instrument' and' he' does' not' receive' a' value' thereof' Use' “solidarily”' or' “jointly' and' severally”' or' you' may' also' use' “individually'
because'it’s'for'the'purpose'of'another'person.'' liable”'or'“each'debtor'shall'be'liable.”'You'can'use'those'but'the'safest'is'to'use'
' of'the'language'law.'Remember,'your'clients'should'sign'not'as'solidary'debtors.'
The"SC"said"that"as"an"accommodation"party,"he"is"solidarily"liable." For'example'a'person'is'asked'to'sign'on'behalf'of'a'corporation,'what'will'be'the'
' consequence?' The' person' who' is' only' supposed' to' be' a' representative' will' be'
JSP:"" What"do"you"mean"solidary?" liable' and' worse,' it' can' be' a' solidary' liability' depending' on' the' wording' of' the'
A:' In'the'promissory'note,'there'was'a'provision'that'said'that'Gonzales'will' document.'Be'careful'when'you'sign.'
be'jointly'and'severally'liable.' '
' What'are'other'liabilities?''
So' the' terms,' “jointly' and' severally' liable”' indicate' solidarity.' There' are' other' • Under'Sec.'31'of'the'Corporation'Code,'a'director'who'is'guilty'of'bad'
terms'but'to'be'at'the'safe'side,'what'will'you'use?'Either'you'don’t'say'anything' faith'or'negligence'will'be'solidarily'liable'with'the'other'directors'who'
or'you'say'“jointly.”'' approved'the'same'act.'That’s'why'in'labor'cases,'ordinary'ones'will'be'
' filed'against'the'employer'and'the'lawyer'will'be'from'the'corporation.'
The' liability' will' stop' in' the' corporation.' However,' if' a' director' or'

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' '

officer' is' guilty' of' bad' faith' or' approved' unlawful' acts,' like' creating' a'
scheme' for' the' unlawful' termination' of' employees,' then' that' director'
will'be'solidary'liable.'It’s'by'law'because'of'the'Corporation'Code.'
'
Let’s'say'you'have'this'equation:'Debtor'1,'Debtor'2,'and'Debtor'3'owe'a'certain'
amount' to' a' creditor' in' a' loan' transaction.' They' defaulted' so' C' sued' them.'
Without"saying"anything,"the"debtors"will"be"jointly"liable.'So,'if'you'see'that'in'
the'exam,'the'answer'is"joint"without"any"special"circumstance.'
'
"

ILLUSTRATION"12:"DEATH"DURING"THE"PROCEEDING'
Let’s'say,'in'a'contract,'in'case'of'litigation,'the'liability'will'be'solidarily.'We'
will' assume' that' D1,' D2,' and' D3' are' solidarily' liable.' So,' from' whom' can' C'
make'a'demand?'From'any'one'of'them'or'from'all'of'them.'
'
However,'during'litigation,'D1'died.'Under'the'rules'of'court,'if'a'person'dies'
during' a' proceeding,' the' case' shall' be' filed' in' the' settlement' of' estate'
proceedings.'So,'D2'and'D3'said'you'could'not'claim'because'you'have'to'file'
the' case' in' the' settlement' of' estate' proceedings' because' it’s' provided' by' the'
court.'C'says'he'can'proceed'with'the'case.'What'should'be'the'rule?'
'

'
'

GENERAL"RULE"
If' one' of' the' solidary' debtors' dies' during' the' proceeding,' the' CREDITOR"
CAN" CONTINUE" with' the' case' notwithstanding' that' particular' Rule' of'
Court'because'it’s'a'solidary'obligation."
'

'
C' can' choose' among' D1,' D2,' or' D3,' or' all' of' them.' If' D1' should' be' dropped'
because' of' his' death,' D2' and' D3' will' be' retained' as' solidary' debtors.' C' has' the'
choice'between'filing'the'case'in'the'settlement'of'estate'proceedings'or'go'after'
D2' and' D3.' Besides,' the' law' about' the' rules' of' court' is' a' procedural' law.' The'
substantive'provisions'of'the'civil'code'should'be'dealt'with.'

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' '
"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
THURSDAY,'27'NOVEMBER'2014'
'

'

CONTINUATION'OF'ARTICLES'1207=1222'
JOINT"OBLIGATIONS"[0:01]" 2. The'law"provides'solidarity;'or'
In' joint' obligations,' the' debtor' will' be' liable' only' to' his' or' her' part' of' the' 3. The'nature"of"the"obligation'requires'solidarity'
obligation.' At' the' same' time,' a' joint' creditor' will' only' be' entitled' to' his' or' her'
'

'
part'of'the'payment'or'credit.'An'act'of'a'party'will'only'affect'the'party'privy'to' REVIEW:"Gonzalez'v.'PCIB'"
such'act.'[When'talking'about]'parties'to'an'obligation'—'let’s'say'you'have'joint' In' the' Gonzales' case,' you' will' see' there' the' two' bases' for' solidarity' to' arise.' In'
debtors' and' joint' creditors' —' an' act' of' the' debtor' or' creditor' will' benefit' or' that'case,'the'obligation'was'solidary'because'in'the'promissory'note,'the'parties'
prejudice'the'parties'who'are'privy'to'that'action.' agreed'to'be'solidarily'liable'by'using'the'term'“jointly"and"severally.”'The"use"
' of" the" phrase" “jointly" and" severally”" in" relation" to" the" payment" of" the"
If"you"have"joint"debtors,"and"the"creditor"made"a"demand"only"on"one"debtor," obligation"indicates"solidarity.'The'terms'used'to'indicate'solidarity'will'be:'
who" will" be" in" default?" [The' one' in' default' will]' only' [be]' the' debtor' who' • “jointly'and'severally;”''
received'the'demand'because'of'the'separation'of'each'debtor'in'matters'relating' • “severally;”''
to'the'performance'of'the'obligation.' • “solidarily;”'and''
' • “individually.”''
"
"

ILLUSTRATION" 1:" JOINT" DEBTORS" AND" CREDITORS" WILL" ONLY" BENEFIT" OR"
PREJUDICE"THOSE"WHO"ARE"PRIVY"TO"SUCH"ACTIONS"
A' and' B' borrowed' 1' million' and' they' agreed' to' pay' on' due' date.' Without'
saying'more,'this"obligation"will"be"considered"joint.'In'which'case,'on'due'
date,'A'and'B'will'be'equally'liable'to'pay'the'1'million'meaning,'they'will'be'
liable' to' pay' 50%' each' unless' there' is' an' indication' of' the' contrary' on' the'
sharing.''
' liable'as'a'principal'debtor'for'the'entire'amount.'Therefore,'that'party'will'be'a'
In'the'same'manner,'if'the'creditor'makes'a'demand'on'A,'A'is'bound'only'to'
pay'half'and'only'A'will'be'in'default'because'they'are'the'only'parties'privy'
to'such'act.''
' LAFARGE"CEMENT"v."CONTINENTAL"CEMENT"
Let’s'say,'we'have'[other]'party'—'2'creditors'(C'and'D).'Without'any'special'
provision'in'the'contract,'in'the'nature'of'the'obligation,'or'any'relevant'law,'
both'debtors'and'creditors'will'be'joint'debtors'and'creditors,'[which'means]'
that'C'and'D'will'be'entitled'to'only'half'of'the'payment'to'be'collected'each'
from'A'and'B.'So'on'due'date,'A'should'pay'25%'to'C'and'another'25%'to'B.'
C' cannot' collect' the' entire' 50%' from' A.' That' would' make' it' a' solidary'
obligation'on'the'part'of'the'debtor.'Being'a'joint'creditor,'C'can'collect'50%'of'
the'total'to'be'collected'half'each'from'the'2'debtors.''
'
'
'
To' be' on' the' safe' side' you' always' use' “solidarily”' and' then' if' you' want' to' be'
explicit' on' the' default' you' say,' “joint.”' In' the' case' of' Gonzales,' there' was'
solidarity'because'a'party'acted'as'an'accommodation'party.'An'accommodation"
party' under' the' law' is' solidarily' liable' based' on' the' Negotiable" Instruments"
Law.' Even' if' that' party' will' not' receive' the' proceeds' of' a' loan,' for' example,'
which'was'the'basis'of'the'issuance'of'a'promissory'note,'that'party'will'[still]'be'
solidary'debtor.'
'
CASES"[ARTS.'1207?1222]"
Nature'of'the'obligation'requiring'solidarity'
In'the'case'of'Lafarge,'itys'a'complaint'filed'against'a'corporation'and'2'officers.'
The' case' dealt' with' procedural' rules' but' in' the' course' of' the' case,' there' was' a'
discussion' of' the' nature' of' the' claim' against' the' officers.' The' claim' against' the'
officers'was'based'on'a'tort'or'a'quasifdelict.''
'
What' was' the' obligation?' There' was' an' action' in' bad' faith' by' the' officers' in' [I'
think]'an'attachment'or'other'actions'related'to'the'dispute'between'the'parties.'
That' claim,' therefore,' being' based' on' bad' faith' or' fraud,' will' be' a' solidary'

' liability.''
SOLIDARY"OBLIGATIONS"[4:15]' '
" Why'solidary?'Although'itys'really'based'on'law,'itys'an'example'of'the'nature'of'
"

When"will"you"have"solidarity:" the' obligation' requiring' solidarity.' Why?' Because' if' youyre' claiming' from'
1. The'parties"stipulate'solidarity;' different' parties' based' on' tort,' it' will' be' very' difficult' from' the' claimant' to'

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' '

apportion' the' liability' among' the' perpetrators' of' the' tort/tortfeasors.' The" law" '
requires" solidarity" so" the" claimant" can" go" after" a" tortfeasor" and" the" matter" of" Under'the'MOA,'shareholder'2,'corporation'2,'and'the'bank'would'cause'the'
accounting"will"be"among"the"tortfeasors." foreclosure' of' the' mortgage' so' that' the' assets' of' corporation' 1' mortgaged' to'
' the' bank' would' end' up' with' corporation' 3,' also" owned" by" shareholder" 2.'
The'action'was'based'on'tort.'This'is'a'tort'claim,'therefore'Lafarge'can'go'after' After' that,' shareholder' 2' refused' to' pay' the' price.' The' transaction'
CCC,'Lim,'or'Mariano.'In'fact'the'Court'recognized'it'by'saying'that'if'the'theory' contemplated'was'implemented'and'the'assets'are'gone.''
was' that' Lafargeys' claim' was' a' tort' claim,' therefore' the' parties' should' be' held' '
solidarily'liable'in'case'of'a'successful'case'against'them.''Then'CCC,'technically,' So'now,'shareholder'1'sued'shareholder'2,'corporation'2,'and'the'bank.'Will"
can' file' a' motion' to' dismiss' on' behalf' of' all.' The' only' problem' was' some' shareholder"1"have"a"cause"of"action"against"the"bank,"corporation"2,"and"the"
procedural'thing.'CCC'filed'the'motion'to'dismiss'on'behalf'of'Lim'and'Mariano,' shareholder" 2?' Based' on' the' sketch,' none.' However,' in' a' similar' case,' the'
not'for'all'of'them.'But'the'court'was'saying,'this'being'a'tort'claim,'Lafarge'can' Court'said,'shareholder'1'has'a'cause'of'action'because'this'constituted"fraud'
go'after'all'of'them.'In'that'case,'if'thatys'the'action,'any'one'of'them'may'act'on' against'shareholder'1.''
behalf' of' the' other.' Thatys' the' nature' of' the' obligation' as' explained' by' the' case.' '
Because'it'is'a'tort'claim,'you'cannot'say'that'the'prejudice'resulting'to'Lafarge' Why?' Because' this' transaction' would' render' shareholder' 1’s' share' in'
was'25%'caused'by'Mariano,'25%'caused'by'Lim,'50%'by'CCC.'That'is'not'for'the' corporation'1'valueless.'Remember'after'implementation'of'this,'all'assets'of'
claimant' to' prove.' The' claimant' only' has' to' prove' that' there' were' joint' the'corporation'will'be'gone'so'assets'will'be'zero,'therefore'the'shares'will'be'
tortfeasors,'theyyre'liable'because'of'an'act'of'bad'faith'letys'say'negligence,'then' zero.' Thatys' the' reason' why' shareholder' 2' did' not' want' to' pay' the' price.' So'
they'will'all'be'liable.'' with' that' characterization,' shareholder' 1' could' go' after' shareholder' 2,'
' corporation' 2,' and' the' bank,' and' they" will" be" solidarily" liable" because" itvs"
So' letys' say,' hypothetically,' Lafarge' won,' and' thereys' a' payable' of' 100M,' the' based" on" fraud.' Just' like' tort,' it' will' be' very' difficult' to' allocate' who'
entire' 100M' will' be' payable' to' Lafarge' by' any' one' of' them.' However,' the' perpetrated' the' most' fraud.' So' as' long' as' shareholder' 1' is' able' to' establish'
accounting'of'this'will'happen'at'the'level'of'CCC,'Lim,'Mariano,'depending'on' fraud,' shareholder' 1' can' claim' on' anyone' or' all' of' them.' The' obligation' will'
who'really'was'at'fault.''' be'solidary;'itys'based'on'quasi?delict.''
' '
Clear?' Of' course' thatys' a' complicated' theory.' But' in' that' case' the' court' said'
'
"

ILLUSTRATION"2:"FRAUD"—"SOLIDARY"LIABILITY"
yes,'there'was'indeed'a'fraud'against'shareholder'1.'
Letys'say'you'have'a'shareholder'of'a'corporation.'Corporation'has'assets.'You' '
'

have'shareholder"1'and'shareholder"2.'' '
• On' day' 1:' the' two' parties' entered' into' a' share' purchase' deal.' Q:""Sir,"do"reimbursement"of"cofdebtors"happen"in"a"judicial"proceeding?"What"
Shareholder' 1' will' convey' all' the' shares' of' shareholder' 1' to' if"a"cofdebtor"does"not"want"to"reimburse?"
shareholder'2'in'exchange'for'a'price.'' A:' Yes,' just' like' in' the' case' of' Marsman,' the' only' problem' was' there' was' a'
' different' ruling.' Actually,' there' was' an' order' based' on' a' joint' obligation.'
Let’s'say,'at'the'same'time,'shareholder'2'[has'assets'in]'another'corporation' There'was'an'order'for'one'party'to'reimburse'the'other.'But'that'can'be'done'
with,'letys'say,'borrowed'from'a'bank.'' if'thereys'a'case'—'letys'say,'corporation'sued,'corporation'won,'C'paid.'In'the'
• On'day'2:'the'bank'extended'a'loan'and'shareholder'2'is'supposed' same' proceeding,' C' can' ask' there' will' be' claim' by' C' against' the' other'
to'pay'principal'and'interest.'To'secure'payment'of'the'loan,'among' solidary'debtors'and'the'court'can'order.'
others,' there' was' a' real' estate' mortgage' including' assets' of' '
corporation'1.'This'is'transaction'subsequent'(Day'2).'' BOSTON"V."CA"
• On'day'3:'Eventually,'this'shareholder'2,'the'corporation'2,'and'the' If' you' have' a' creditor' and' you' have' 2' debtors' (Debtor' 1' and' Debtor' 2).' They'
bank'agreed'on,'let’s'say,'Day'3'to'enter'into'a'MOA.'' signed'a'contract'—'joint'and'several'signature.'Letys'say'theyyre'paying'P100M.'
' They' defaulted,' creditors' sued' both' of' them,' one' died' (D1).' Creditor' has' an'
MOA:' they' agreed' that' the' bank' would' foreclose' the' mortgage' —' meaning,' option' either' to' go' after' D2' or' to' go' after' D1' following' the' rules' of' court' on'
the'corporation'would'default,'the'bank'would'foreclose'the'mortgage,'and'in' settlement' of' estate.' Itys' the' prerogative' of' the' creditor' because' the' creditor,'
the'end'then,'convey'his'assets'to'another'corporation:'corporation"3.'' under'the'law,'has'the'right'to'go'either'after'one'or'all'of'the'solidary'debtors.'

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Although' the' rules' of' court' mandate' that' in' case' of' death' of' a' respondent,' the' Q:" Sir,"is"the"assumption"always"50f50?""
claims' should' be' filed' in' the' settlement' of' estate,' the' court' said' thatys' a' A:' Yes,'unless'there'are'some'other'details'because'if'there'is'none,'default'rule'
procedural'rule'and'the'rule'of'the'Civil'Code'on'solidary'liability'should'prevail' will'be'50?50.'
—'in'which'case,'creditor'can'choose'who'to'sue.' "
' Q:" Sir,"can"you"argue"that"the"condonation"was"only"given"to"A?"
A:' The' condonation' benefits' all,' thatys' why' you' have' to' do' it' separately' if' you'
"
"

ILLUSTRATION" 3:" SOLIDARITY" MAY" EXIST" EVEN" IF" THE" PARTIES" ARE"
want' one' party' to' get' it.' And' even' assuming' A' would' get' that' benefit,' that'
DIFFERENTLY"BOUND"
would'only'be'relevant'at'the'time'of'accounting'between'the'2'debtors,'but'
3.A"—"CORPORATION"WITH"TWO"BUSINESSES"
with'respect'to'the'collection'by'C'and'D,'the'entire'obligation'is'deemed'to'
Letys'say'thereys'a'corporation.'The'corporation'has'2'businesses'—'soda'and'
be'reduced'to'80.''
candy.'Theyyre'not'apps,'theyyre'really'soda'and'candy.'There'was'an'offer'by'
'
2'businesses'(Entities'A'and'B).'They'offered'to'buy'the'separate'businesses.''
Q:""There" was" a" question" in" the" book:" wA" or" B" will" pay" 1Mw" is" that" joint" or"
Under'the'contract,'the'soda'business'will'go'to'A'and'the'candy'business'will'
solidary?"
go' to' B.' However,' there' will' be' payment' of' X' price.' Under' the' contract,' A'
A:'' “Or”'means'solidary.'
would'have'a'number'of'obligations'and'corporation'would'have'a'number'of'
'
obligations' with' respect' to' the' soda' business' (in' relation' to' A)' and' with'
ACTIVE"AND"PASSIVE"SOLIDARITY"
respect'to'the'candy'business'—'B.''
Solidarity'may'be'on'the'side'of'the'debtors,'on'the'side'of'the'creditors,'or'both.'
'
You'can'have'active,'passive'or'mixed'solidarity.''
However,'for'the'payment'of'the'price,'the'parties'(A'and'B)'agreed'to'jointly'
'
and' severally' pay' the' price.' Can' that' happen?' Yes,' because' the' Civil' Code'
ACTIVE'SOLIDARITY'
provides' that' there' can' be' solidary' liability' even' if' the' terms' and' conditions'
'
with' respect' to' the' debtors' be' different.' So' here,' although' these' are' really' '

separate' sales' by' virtue' of' these' undertakings,' A' and' B' could' be' solidarily' For'active'solidarity:'
liable' notwithstanding' the' separate' sale' of' the' assets' or' the' business.' • Each'creditor'can'demand'performance"
Solidarity'may'exist'even'if'the'parties'are'differently'bound.' • C1,'C2,'or'both'of'them'can'collect'the'entire'obligation"
'

' '
3.B"—AGREEMENT"TO"SOLIDARILY"PAY' For'example:'One'debtor'and'2'creditors.'Creditor'1'and/or'Creditor'2'can'collect'
A'and'B'borrowed'from'C'and'D'100k.'A'and'B'agreed'to'be'solidarily'pay'the' the'entire'obligation'from'D.'D'is'liable'to'pay'1M.'There'is'active'solidarity.''
obligation.'A'promised'to'pay'on'Dec.'31,'2014'and'B'upon'demand.'So'A'has' '
the' benefit' of' a' period,' B' does' not' have' the' benefit' of' a' period.' D,' after' the'
"

transaction,'condoned'(waived)'part'of'the'loan'—'20k'in'favor'of'A.'C'makes'
a'demand'of'payment'from'B,'how'much'should'be'paid?'100?'40?'80?'100'is'
wrong' because' there' was' condonation,' there' will' be' a' reduction' of' the'
obligation.' For' 80,' most' likely' youyre' justified' because' the' obligation' is'
payable'upon'demand'on'B'but'that'will'negate'the'term'in'favor'of'A.'Thatys'
RULES"BETWEEN"DEBTORS"&"CREDITORS"(ACTIVE"SOLIDARITY):"
1. Debtor'can'pay'any'creditor.'
2. If'thereys'a'demand,'payment'should'be'to'demanding'creditor.'
3. Each'creditor'can'extinguish'the'obligation'by'any'possible'means.''
4. Mutual'agency:'each'creditor'represents'the'other.'
'

'
why'it'should'be'40.'Why?'Itys'as'if'theyyre'both'liable'50'each.''
1. Debtor"can"pay"any"creditor.""
'
On'due'date,'D'can'either'pay'C1,'C2,'or'both'of'them.'The'premise'is'each'
However,'the'condonation'reduced'the'obligation'to'80'therefore'the'sharing'
creditor' is' the' agent' or' representative' of' the' other.' Each' of' them' can' act' on'
will' be' 40' each.' So' B' could' only' be' forced' to' pay' his' share,' otherwise,' if' C'
behalf'of'the'other.'So'when'D'pays'C1,'he'is'actually'paying'both.'Or'when'
could'collect'from'B'the'entire'amount,'then'itys'as'if'thereys'no'agreement'on'
D'pays'C2,'same'thing,'because'of'solidarity'on'the'part'of'the'creditors."
the'term.'Everything'should'be'given'effect.'Only'40k'could'be'collected'prior'
'
to'December'31.'Statutory'basis?'Itys'a'solidary'obligation'but'the'parties'may'
2. If"therevs"a"demand,"payment"should"be"to"demanding"creditor.""
be'bound'differently.''
'
C1' on' due' date' made' a' demand' on' D,' D' cannot' pay' C2,' D' has' to' pay' C1.'
' Why?'Same'premise,'C1'is'acting'on'behalf'of'both'solidary'creditors.'
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' '

What'if'have'both'demanded'payment?'The'first'who'made'the'demand'will' 3. Prejudicial"Act"—"reimburse"other"creditors"
be'the'first'to'be'paid.' C1'has'a'payable'of'1M.'On'due'date,'C1'said'to'D'we'just'offset.'What'you'
' have' here' is' compensation' ?' an' offsetting' of' equal' monetary' liability.' Thatys'
You'have'2'debtors.'C1'made'a'demand'on'the'first'debtor.'The'2nd'debtor,' for' the' benefit' of' C1' but' thereys' a' prejudice' to' C2' and' C3.' As' between' the'
unaware'of'the'notice,'can'still'pay'anyone.'" creditors'and'D,'the'offsetting'wil'be'valid.'The'reckoning'will'be'among'the'
' creditors.' C1' now' has' to' reimburse' C2' and' C3' their' share' presumably' 1/3'
3. Each"creditor"can"extinguish"the"obligation"by"any"possible"means."" each'because'itys'a'prejudicial'act.''"
Mutual'agency:'each'creditor'represents'the'other.' '
' 4. Collecting"creditor"has"to"account"
C1' can' condone' the' entire' obligation.' Or' letys' say' thereys' a' separate' If'C1'collects'the'1M,'creditor'has'to'account'and'release'the'respective'shares'
transaction,' C2' has' a' payable' to' D.' On' due' date,' C2' can' say' you' just' offset' of'C2'and'C3."
your' payable' from' this.' Can' that' be' done?' Yes,' even' if' this' is' only' for' the' '
benefit'of'creditor'2.'In'the'same'manner,'if'the'debtor'has'any'claim'against' PASSIVE'SOLIDARITY'
anyone,'that'claim'may'be'offset'against'the'liability'to'these'creditors.' Example:' You' have' Debtor' 1,' Debtor' 2' and' you' have' creditor.' Theyyre' liable' to'
' pay'1M.'This'is'passive'solidarity.'
Letys'say'D'sued'C1.'Thereys'a'judgment'in'favor'of'D.'C2'made'a'demand'on' '
D.' D' will' not' be' liable' because' the' judgment' obtained' by' D' against' C1' will'
"

RULES"BETWEEN"DEBTORS"&"CREDITORS"(PASSIVE"SOLIDARITY):"
also' bind' C2,' unless' itys' based' on' a' personal' matter' or' matters' strictly' 1. Each'or'all'debtors'shall'be'liable'to'the'creditor'
involving'only'C1." 2. Mutual'representation'or'agency'
' '

"
'
RULES"AMONG"CREDITORS"(ACTIVE"SOLIDARITY):" 1. Each"or"all"debtors"shall"be"liable"to"the"creditor"
1. Mutual'representation/agency' Creditor'on'due'date'can'demand'payment'on'D1,'D2,'from'both'of'them,'or'
2. Assignment'cannot'be'made'without'consent'of'other'creditors' D1'first'thereys'no'payment'from'D2,'whatever'combination'it'will'be'up'to'C'
3. Prejudicial'Act'—'reimburse'other'creditors' regardless'of'what'happens.'So'as'long'as'thereys'no'payment,'C'can'go'after'
4. Collecting'creditor'has'to'account' any'or'both'debtors.'"
'

' '
1. Mutual"Representation/Agency' 2. Mutual"representation"or"agency"
Any' creditor' can' do' an' act' beneficial' or' even' prejudicial' to' the' others' in' This'means'that'the'act'of'one'debtor'binds'other'debtors.'
dealing'with'the'debtors.'' '
' Creditor' 1' made' a' demand' on' D1,' D1' did' not' pay.' Both' will' be' in' default'
A'creditor'can'remit'the'entire'obligation'to'the'prejudice'of'C2'and'C3.' even'if'D2'is'ready,'willing'and'able'or'could'have'paid'the'amount'on'due'
' date.''
C1'made'a'demand'on'D;'therefore,'D'will'be'in'default.'D'will'be'in'default' '
with' respect' to' all' creditors.' In' the' same' manner,' C1ys' demand' will' trigger' Instead' of' money,' itys' a' car' to' be' delivered.' Theyyre' solidarily' liable.' D1'
the'prescriptive'period'for'the'collection'of'the'loan.'' destroyed' the' car' through' his' fault.' There' will' be' monetary' liability.' C' can'
' collect' the' amount' corresponding' to' the' car' from' D2,' D1' or' both'
2. Assignment"cannot"be"made"without"consent"of"other"creditors" notwithstanding'that'only'D1'was'at'fault.''
C1'wants'to'assign'his'interest'to'C4.'This'cannot'be'done'unilaterally'by'C1.' '
The'other'solidary'creditors'should'consent.'' Letys'say'itys'a'car,'C'already'paid'the'price.'Thereys'no'delivery.'They'will'be'
' liable' for' value' of' the' car' (X' amount)' plus' damages' (Y' amount).' Damages'
This' is' based' on' personal' or' fiduciary' relation' among' creditors.' If' itys' to' based'on'the'fault'of'D1.'C'can'collect'the'entire'amount'from'D1,'D2.'C'can'
another'solidary'creditor,'you'donyt'need'the'consent'of'the'other'creditors.'" collect' X' and' Y' from' D2' notwithstanding' that' this' award' for' damages'
'

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resulted'from'the'act'of'D1'because'of'the'solidarity.'Who'will'shoulder'that'
burden?'That'will'happen'when'thereys'accounting'between'debtors.'
' document' it' not'as'a'remission.' The'moment' you' say'whether'itys' partial' or'
Thereys' a' suit' filed' by' C' against' D1' and' D2.' Anyone' of' them' can' raise' the'
defense' inherent' to' the' obligation' personal' to' D1' or' personal' to' D2.' C' sued'
D1.'D1'can'claim'in'a'separate'transaction'that'C1'has'a'payable'to'D1.'D1'can'
claim'that'thereys'offsetting'by'operation'of'law.'Itys'a'defense'personal'to'D1.'
Or'it'can'be'a'defense'personal'to'D2.'When'there'is'a'term'that'restricts'the'
payment' by' the' other' solidary' debtor.' That' will' be' a' payment' pertaining' to'
the'share'of'D2."
' 900k' ?' D1' will' return' 300k,' D2' will' return' 300k,' D3' will' shoulder' the'
"
RULES"BETWEEN"DEBTORS"(PASSIVE"SOLIDARITY):"
1. If'a'debtor'pays,'other'debtors'should'reimburse.'
2. No'reimbursement'if'thereys'remission.'
'
'
1. If"a"debtor"pays,"other"debtors"should"reimburse."
Debtor' pays' 1M.' There' should' be' reimbursement' by' D2' and' D3' of' their'
respective'shares.'If'D3'is'insolvent,'assets'are'less'than'liabilities.'Therefore'
D3' cannot' pay' the' share,' the' other' solvent' debtors' will' equally' share' the'
burden.'In'this'case,'D1'and'D2'will'pay'1/3'each'and'share'half'of'the'share'
of'D3.'Thatys'peculiar'in'solidary'obligations.''
There' will' be' no' reimbursement' if' D' paid' an' obligation' that' should' not' be'
paid.'Letys'say'D'paid,'the'obligation'has'already'prescribed,'he'could'not'get'
reimbursement.' In' a' separate' transaction,' C' has' a' payable' of' 1M' to' D1.' D1'
caused' offsetting.' In' this' case,' D2' used' his' own' receivable' from' C' to' pay,'
there'should'also'be'reimbursement.'
"
2. No"reimbursement"if"therevs"remission.'
What'if'there'is'a'remission'in'favor'of'a'debtor?'The'law'provides'if'a'debtor'
obtains'a'remission'of'the'obligation,'he'cannot'get'reimbursement.'If'C'said'
D1,'forget'about'the'entire'1M,'can'D1'get'reimbursment?'Based'on'the'law,'
D1'cannot'get.'Thatys'why'if'C'wants'D1'to'get'the'exclusive'benefit,'it'should'
not'be'couched'as'a'remission.'What'are'the'alternative'ways?'C'can'say'Iym'
giving'you'special'power'of'attorney'and'you'can'collect'from'the'others.'Or'I'
can'collect'from'the'others'and'I'can'tell'them'that'they'can'give'the'amount'
to'you.'Because'the'moment'you'say'itys'a'remission'or'a'condonation,'thereys'
no'right'to'reimbursement'all'will'share'in'the'benefit.'Itys'important'that'if'C'
wants' to' give' the' benefit' to' D1' only,' it' must' be' structured' not' as' a'
condonation'or'remission.'C1'can'collect'and'tell'the'paying'debtor'to'remit'
the' amount' to' D1.' Or' C1' can' just' get' the' money,' collect' from' D2' or' C1' can'
acknowledge'receipt'of'payment'from'D1'without'D1'actually'paying.'Or'C1'
can' collect' from' D3' and' give' the' amount' to' D1.' But' the' moment' itys'
categorized'as'a'remission,'there'can'be'no'right'to'reimbursement.''
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'
My' sense' is' that' if' itys' a' remission' for' the' benefit' of' one,' the' safest' way' is'
complete'that'will'be'for'the'benefit'of'all.'That'matter'will'be'relevant'only'
when'youyre'accounting'the'liabilities'of'the'debtors.''
'
Obligation' is' to' deliver' a' car,' D1' destroyed' the' car,' they' were' liable' to' pay'
value' plus' damages.' C' collected' the' entire' amount' from' D.' 900k' value,'
damages'100k.'Come'reimbursement'time,'D3'could'collect'1/3'of'this'value'
from' each' because' they' are' solidarily' liable' barring' any' special' condition.'
remaining'300k.'The'award'for'damages'will'be'shouldered'alone'by'D1.'In'
fact,'D1'can'be'liable'to'D2'and'D3'for'the'consequences'of'the'cancellation'of'
the'deal.'So'on'top'of'that'thereys'a'possible'claim'by'D2'and'D3'against'D1.'
Although'thereys'mutual'agency'among'the'debtors'in'relation'to'the'creditor,'
come'reimbursement'time,'only'the'debtor'at'fault'will'be'liable'for'damages.''
'
You'have'2'solidary'debtors'liable'to'pay'1M'to'creditor;'this'is'due'Dec'31.'
Before'December'31,'D2'becomes'insolvent,'will'that'deprive'him'the'benefit'
of'the'period?'Iyd'say'yes.'Creditor'has'the'option'to'treat'it'as'an'obligation'
of'D2.'What'can'D1'do'if'D1'wants'to'preserve'the'term?'Give'a'security.'
"
ART."1223f1225"—"DIVISIBLE"AND"INDIVISIBLE"OBLIGATIONS""
Obligations' are' classified' as' divisible' and' indivisible' depending' on' whether'
obligations'will'be'performed'completely'or'in'parts.'When'we'speak'of'divisible'
or' indivisible' obligations,' it' does' not' necessarily' mean' that' the' object' is'
indivisible.'It'can'be'divisible'but'the'obligation'will'still'be'indivisible.'
'
"
ILLUSTRATION"4:"GENERAL"RULE""—"INDIVISIBLE"
Debtor'owes'creditor'1M'payable'on'November'27'without'need'of'any'notice'
or'demand.'Debtor'paid'P500k;'can'debtor'do'that?'In'this'example,'this'will'
be' an' indivisible' obligation.' Payment' should' be' complete' on' November' 27.'
Thatys'the'general'rule.'
'
'
"
GENERAL"RULE'
An' obligation' should' be' performed' completely.' Thatys' the' rule' of'
INTEGRITY"OF"PAYMENT.'
'
'
Of'course'it'can'be'divisible'—'payable'in'installments.'Letys'say,'payable'on'12'
equal'monthly'installments'then'that'will'be'a'divisible'obligation.''
'
"
INDIVISIBLE" OBLIGATION:' when' the' prestation' cannot' be' performed' in'
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' '

parts,' either' because' of' the' nature' of' the' thing' (e.g.' deliver' a' car)' or' by' '
agreement'of'the'parties.'
"

' '
Purpose"of"a"penalty"clause:"
' 1. It'serves'as'liquidated'damages'
Of'course,'the'parties'can'agree'otherwise'or'the'law'can'provide'otherwise,'but' 2. To'ensure/compel'performance'
'

in' those' instances,' it' assumes' that' the' object' is' divisible.' If' the' object' is' not' '
divisible,'then'performance'in'part'will'not'be'possible.'' 1. It"serves"as"liquidated"damages."
' Compensation' for' the' breach' or' prejudice' caused' to' the' creditor.' So' instead'
"

ILLUSTRATION"5:"JOINT"INDIVISIBLE"OBLIGATION"
Letys'say'itys'an'obligation'to'deliver'a'car,'it'will'be'indivisible.'D1'and'D2'are'
obliged'to'deliver'a'specific'car'to'C'on'the'given'date.'It'cannot'be'performed'
in'parts'because'of'the'nature'of'the'thing.'Whatys'the'relationship'of'D1'and'
D2?'Are'they'solidary'or'joint?''
' because'this'will'be'deemed'liquidated'damages.'"
Theyyre'still'joint.'It'doesnyt'matter'if'itys'indivisible,'default'rule'is'it'will'be'a'
joint' obligation.' Because' itys' an' indivisible' joint' obligation,' C' on' due' date'
should'demand'on'both'of'them.'What'if'D'does'not'cooperate?'Letys'say'D1'
is'supposed'to'bring'the'engine.'So'itys'not'possible'to'deliver'the'car,'so'there'
will'be'default'and'there'will'be'liability'for'damages.'D1'and'D2'will'share'in'
the' payment' of' the' value' of' the' car.' But' the' award' for' damages' due' to' the'
default'of'D1'will'be'D1ys'liability'alone.'
'
of' the' creditor' proving' that' amount' in' court,' there' will' be' an' immediate'
valuation'of'the'prejudice.'
'
A' sued' X.' A' can' recover' the' price' and' 20%' of' the' price' by' way' of' penalty.'
Thereys'no'need'for'A'to'prove'that'there'was'indeed'a'damage'to'this'extent'
'
2. To"ensure/compel"performance"
When' youyre' creating' a' penalty,' it' has' to' be' of' such' magnitude' that' it' will'
force'compliance'because'it'may'work'against'you'if'the'penalty'is'wrongly'
done.''
'
In' a' sale' of' a' car' —' penal' clause:' return' of' the' price' and' 20%' of' price.' This'
penalty'will'work'only'if'X'cannot'sell'the'car'for'more'than'120%.'Because'if'

'
ART."1226f1230"—"OBLIGATIONS"WITH"A"PENAL"CLAUSE"[1:28:25]" X'can'sell'the'car'for'130%'of'the'price,'there'will'be'an'additional'gain'for'X.'
' X'will'be'limited'only'to'the'payment'of'the'price'and'the'penalty.'Remember'
"
the'penalty,'as'a'rule,'will'be'the'complete'entitlement'of'the'creditor'due'to'
OBLIGATIONS" WITH" A" PENAL" CLAUSE:' There' is' an' additional'
the'breach.''
undertaking' by' the' debtor' to' perform' an' extra' prestation.' There' is' an'
'
assumption'of'greater'liability'in'case'the'penal'clause'will'be'triggered.'
' The'penalty'works'as'a'disincentive.''
' '
"

ILLUSTRATION"6:"
6.A"—"SALE"
X' sold' a' Car' to' A,' A' should' pay' the' price.' X' conveyed' the' car,' thereys' no'
payment' of' the' price,' under' the' contract' in' case' of' default,' A' should' return'
the'car'plus'a'penalty'equal'to'20%'of'the'price.'Thereys'a'reverse,'X'did'not'
convey'the'car'and'thereys'a'payment'of'the'price,'the'penalty'is'return'of'the'
If' you' look' at' the' nature' of' the' penalty,' the' penalty' is' an' additional'
undertaking' or' prestation.' Itys' an' ACCESSORY" OBLIGATION' to' the'
principal' obligation.' Therefore,' whatever' happens' to' the' penalty' will' not'
affect' the' principal' obligation.' Itys' different' if' the' principal' obligation' is' the'
one'that'is'invalid.'"
'
"

price'plus'20%'of'the'price." GENERAL"RULE"
' If' the' principal' is' void' or' unenforceable' then' the' accessory' undertaking'
6.B"—"LOAN" (penalty)'will'also'be'void.'
Or'you'have'a'loan'transaction.'Normally'in'a'loan'transaction,'you'have'the'
'

'
borrower'paying'principal'and'interest.'10M'to'be'paid'on'due'date'but'in'the' "

meantime,' there' will' be' interest' of' 1%' per' month.' In' case' of' default' on'
payment'on'interest'due,'there'will'be'an'acceleration'by'contract'so'the'entire'
obligation'will'become'due'and'there'will'be'a'penalty.'There'will'be'payment'
of'1%'per'month'on'all'amounts'due'?'principal'and'interest.''
'
EXCEPTIONS:"
1. Penalty'is'triggered'by'the'nullity'of'the'obligation.'
2. When' the' penalty' is' undertaken' by' a' third' person' precisely' for' an'
obligation' which' is' unenforceable,' voidable,' or' natural,' in' which'

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case' it' assumes' the' form' of' guarantee' which' is' valid' under' Article' Thatys' why' itys' very' important' for' you' to' know' the' default' rules.' You' donyt'
2052.7' advice'your'opponent.'"
'
'

' '

1. Penalty"is"triggered"by"the"nullity"of"the"obligation." As'a'rule,'a'penalty'substitutes'all'damages'in'case'of'breach.'
'

A' entered' into' a' contract' with' the' government' and' thereys' a' clause:' should' '
this'contract'be'invalidated'for'any'reason'whatsoever,'the'government'shall' "

EXCEPTIONS:"
pay' X' amount.' This' is' the' penalty' clause' triggered' by' the' invalidity' of' the'
1. Parties'agreed'otherwise'
obligation' itself.' The' penalty' will' survive' the' nullity' of' the' principal'
o “The'penalty'shall'be'in'addition'to'any'and'all'rights'and'
obligation."
remedies' of' the' creditor' under' the' contract' or' under'
'
relavant'laws.”'
2. When'the'penalty'is'undertaken'by'a'third'person'precisely'for'an'obligation'
2. Debtor'defaulted'in'the'payment'of'the'penalty.'
which' is' unenforceable,' voidable,' or' natural,' in' which' case' it' assumes' the'
o A'sued'X,'A'won'and'is'entitled'to'the'penalty,'X'does'not'
form'of'guarantee'which'is'valid'under'Article'2052.8''
pay.'A'can'collect'extra.'Why?'Because'X'defaulted'in'the'
'
payment'of'the'penalty'so'that'will'be'damages'for'failure'
KINDS'OF'PENALTY'
to'pay'the'penalty.'
'
" 3. Debtor'is'guilty'of'fraud'in'the'non?fulfillment'of'the'obligation'
THERE"ARE"TWO"KINDS"OF"PENALTY:" o Why'is'that'an'exception?'Because'fraud'will'be'a'separate'
1. Subsidiary/'Alternative' basis'for'claiming'against'the'debtor.'It'is'a'separate'cause'
2. Joint/'Cumulative' of' action' so' there' will' be' a' claim' for' additional' damages.'
'

' Of'course'fraud'is'very'difficult'to'prove.'
'

1. Subsidiary/"Alternative" '
Penalty'replaces'the'obligation'in'case'of'non?performance.'' Is'the'penalty'always'valid?'Well,'itys'an'agreement'of'the'parties'so'generally,'it'
' should' be' respected' following' the' autonomy' of' contract.' Parties' are' free' to'
When'thereys'a'penalty,'the'option'is'always'on'the'creditor'unless'there'is'a' stipulate'anything'as'long'as'itys'not'contrary'to'law'and'relevant'policies.'
contrary'agreement'by'the'parties.'So'the'creditor'can'either'sue'for'specific' ''
perfomance' if' possible,' or' ask' for' payment' of' the' penalty.' The' defaulting' WHEN'THE'COURTS'CAN'REDUCE'PENALTY'
debtor'cannot'say'zI'will'just'pay'the'penalty.z'Itys'always'at'the'option'of'the' '
creditor.' "

THE"COURTS"CAN"REDUCE"THE"PENALTY"IN"2"INSTANCES:"
"
1. When'there'is'partial"or"irregular"performance.'
2. Joint/"Cumulative"
o The' court' should' determine' whether' the' penalty' is'
It'is'in'addition'to'the'principal'obligation.''
intended'as'a'means'or'reparation'or'compensation.''
'
o Why?' Because' if' itys' supposed' to' be' for' reparation,' then'
As'a'rule,'a'penalty'is'only'subsidiary'or'alternative.'If'you'provide'a'penalty'
the' penalty' should' be' reduced' based' on' the' extent' of' the'
clause,'the'creditor'generally'cannot'ask'for'extra'(additional'damages).'This'
performance.'So'if'thereys'performance'up'to'90%'then'you'
will' be' the' compensation' for' all' consequences' of' the' breach.' Thatys' why' if'
have' to' adjust' the' penalty' accordingly.' If' it' is' purely'
you'have'a'penalty'clause'and'youyre'the'creditor,'you'always'have'another'
punitive,'the'court'should'recognize'it.''
clause.'That'clause'will'be:'nIn$addition$to$any$and$all$rights$and$remedies$under$
o The' court' can' still' reduce' even' if' it' is' meant' as'
the$contract$or$under$relevant$laws.z'Otherwise,'if'you'donyt'have'that,'you'will'
punishment.''
be'limited'to'the'penalty.'If'youyre'the'creditor,'you'have'that'clause,'it'youyre'
o Under' what' circumstance?' If' it' is' unconscionable' or'
the' debtor,' make' sure' that' there' is' no' addition' so' there' will' be' a' limitation.'
iniquitous.'
'''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' ' 2. Penalty'is'unconscionable"or"iniquitous.'
'

7' This'was'not'discussed'by'JSP;'got'it'from'Tolentino.' '

8'' Again,'not'discussed. '
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CASES"[ARTS.'1226?1230]"
FILINVEST"V."CA"
A'contractor'is'doing'the'work'for'Filinvest.'It'is'almost'completed'—'95%.'But'
thereys' a' penalty' of' P15k' per' day' of' delay.' The' court' found' that' itys' iniquitous.'
What'is'the'usual'penalty?'1/10'of'1%'of'the'contract'price'for'every'day'of'delay.'
Thatys'standard.''
'
If'you'have'a'100M'contract,'how'much'do'you'pay?'P100k'a'day.''
'
In' government' contracts,' you' have' a' cap,' it' will' provide' there:' “not' exceeding'
10%' of' the' contract' price.”' In' the' contracts' I' do,' there' is' no' cap.' That' will' be'
unconscionable'—'yes,'but'itys'the'burden'of'the'other'party'to'challenge'it'in'an'
appropriate'case.'You'just'put'the'maximum'penalty.'In'case'of'a'challenge'to'the'
validity' of' the' penalty,' the' court' can' only' reduce,' the' court' cannot' remove' the'
penalty'altogether'and'the'burden'will'not'be'on'you.''
'
Q:""Sir,"the"court"can"never"remove"any"penalty?"Even"if"itvs"really,"really,"really"
unconscionable?"
A:' Yes,' because' the' unconscionability' relates' only' to' the' amount,' not' to' the'
penalty' itself.' If' the' penalty' is' void' because' itys' contrary' to' some' public'
policy,'then'itys'a'different'matter'altogether.'
'
When' you' see' “iniquitous,”' “unconscionable,”' or' “Weyre' invoking' our' equity'
jurisdiction,”'then'youyre'in'trouble,'meaning'there'should'be'a'reduction.'Make'
your' penalty' defensible' in' case' of' litigation.' Can' you' guard' against' the' courtys'
intrusion?'[Because]'thereys'nothing'you'can'do'about'it'[—'the'Court'may'always'
intervene].

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"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
TUESDAY,'02'DECEMBER'2014'
'

"

REVIEW:"OBLIGATIONS"WITH"A"PENAL"CLAUSE" from' a' bank' and' then' paid' the' mortgage' with' the' same' property' subject' to'
The'last'time'we'were'discussing'obligations'with'a'penal'clause.'We'discussed' the'mortgage'of'MLTC'xxx'
the' penalty' has' two' functions:' (1)' liquidated" damages' from' the' clause' that' it' SP:'From'what'bank?'
depends' to' the' necessity' for' the' parties' to' prove' the' actual' prejudice' caused' to' S:' PNB,'sir.'
the'aggrieved'party'or'it'can'be'a'mechanism'to'(2)'ensure"performance.'It’s'to' SP:'What'was'the'transaction?'
compel'performance'—'like'the'incentive'for'the'debtor'to'perform'—'otherwise,' S:' Loan'sir.'
there'will'be'an'additional'liability.' SP:'What'was'the'requirement'of'the'PNB?'
' S:' It'was'secured'by'a'mortgage,'sir.''
So'if'it’s'intended'as'liquidated'damages:'it’s'either'punitive'or'compensatory.'If' SP:'What'was'secured'by'the'mortgage?'
it’s' compensatory—it’s' a' form' of' reparation.' The' court' will' surely' reduce' it' S:' The' loan…' and' the' mortgage,' the' same' property' was' subject' to' both' loan'
depending' on' the' level' of' the' performance' of' the' obligation.' If' it’s' purely' transactions'in'MLTC'and'PNB.'
punitive—the' court' will' strictly' act' against' the' performance' of' the' penalty.' SP:'Yes..'so'who'imposed'the'condition?'
Which'is'really'what'we’re'discussing'last'time;'the'parties'placed'that'penalty'to' S:' PNB'sir.'
ensure' performance.' Of' course,' the' penalty' is' triggered,' likely' the' one' to' be' SP:'PNB?'What'was'the'condition'of'PNB?'How'could'impose'a'condition'to'the'
subject'to'the'penalty'will'not'agree,'this'will'form'a'window'wherein'the'court' other'lender?'
will' come' in' and' then' decide' if' the' penalty' is' to' be' reduced' depending' on' the' S:' Sir,'because'the'Go'Cinco'spouses'secured'a'loan'to'PNB'to'pay'MLTC.'
performance'or'whether'if'it'is'unreasonable'or'unconscionable.'' SP:'So'this'is'a'LOAN'TAKE?OUT.'The'loan'in'this'will'be'applied'to'pay'out'the'
' loan'in'the'other'transaction.'So'what'was'the'requirement'by'PNB?'
As' I' said,' when' you' have' a' penalty,' you’ve' seen' a' certain' contract' you’ll' place' "
there,'the'penalty'let’s'say—in'case'of'breach,'there'will'be'a'fixed'amount,'let’s' Why'would'PNB'want'to'cancel'the'mortgage'in'the'previous'transaction?'
say'X'percent'of'the'total'amount'due'and'the'same'time'there'will'be'an'award' '
for' penalties—most' of' the' clauses' they' are' dated.' Nevertheless,' what' is' the' If' mortgage' 1' was' still' in' effect,' what' will' that' be?$ It$ says$ in$ mortgages,$ you$ can$
point?' As' I' mentioned' last' time' when' you' fix' a' penalty' MAKE' SURE' THAT' have$as$many$mortgages$as$many$as$possible.$It’s'possible,'as'long'as'the'debtor'will'
THERE' IS' A' BREACH' because" it" can" work" the" other" way" it" can" give" an" accept."
incentive" for" default.' If' you' have' a' penalty—fixes' the' total' cost,' unless' the' '
parties'agreed'otherwise,'will'be'the'entire'entitlement'of'the'aggrieved'party.'So'
"

let’s' say,' the' penalty,' together' with' all' amounts' due,' will' still' be' lower' to' the'
prevailing'interest'rate'in'the'market—the"cost"of"money.'The'debtor'who'needs'
the'same'amount'of'money'would'rather'default'than'pay'because'of'paying'and'
borrowing' from' another' entity' would' increase' the' cost.' So' you' have' to' balance'
the' penalty' in' such' a' way' that' you' can' insure' performance.' Of' course,' the' best'
thing'to'do'is'TO'ADD'THAT'SPECIAL'CLAUSE.'
" subsisting,' that' will' be' superior' to' any' lien' that' PNB' may' have' to' the'
CASES"[1231?1233,'1244,'1246?1248,'&'1251]"
PAYMENT"
GO"CINCO"V."CA"
ILLUSTRATION"1:"LOAN"TAKEfOUT"
There'was'this'1st'contract'and'then'we'have'the'2nd'contract.'Lender'extended'
a' loan,' of' course' there' is' an' obligation' to' pay' principal' +' interest' (P+i).'
Payment' of' the' loan' was' secured' by' a' Real' estate' mortgage' (REM).' This'
should' be' paid,' to' pay' this' obligation,' borrower' obtained' a' loan' from' PNB.'
The' purpose' is' the' take?out' of' loan' number' 1.' However,' PNB' required' that'
the' mortgage' for' the' first' loan' to' be' discharged.' Why?' Because' if' it' will' be'
property,' in' this' case,' the' second' mortgage.' What' was' the' nature' of' that'
condition?'Suspensive;'it'suspends'the'release'of'the'mortgage.'
'

'
S:'' [Recitation]' Go' Cinco' obtained' a' loan' of' P700000' from' the' MLTC.' It' was' '

evident' in' the' promissory' note' and' was' secured' by' a' mortgage' with' one' of' Now'aside'from'the'discharge'of'the'mortgage,'what'else'does'PNB'requires?'
the'properties'of'Go'Cinco'in'Leyte.'It'was'provided'in'the'promissory'note' What' was' given' by' the' borrower' to' the' lender?' That’s' a' scheme.' There’s" a"
that'it'is'with'x'interest.'To'pay'the'loan,'the'Go'Cincos'secured'another'loan' loan" takefout" to" take" this" loan" and" discharge" the" mortgage." However," the"

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requirement"for"the"release"was"the"cancellation"of"the"first"mortgage.' TENDER'OF'PAYMENT'
'
'

' '

The' lender' was' given' a' document' (SPA)' to' collect' the' proceeds.' Now,' the' Tender"of"payment"means'an'offer'to'pay.''
'

proceeds'are'really'payable'to'the'borrower.'The'bank'will'pay'the'borrower;'the'
'

borrower'will'pay'the'lender.''
'
" with'the'requirements.'Will'that'be'tender'of'payment?'YES,'because'there'is'an'
ILLUSTRATION"2:"LOAN"TAKEfOUT"(SHORTCUT"PROCESS)"
To' shortcut' process—the' borrower' who' granted' the' lender' a' SPA' to' collect'
the'proceeds.'How'it'works'really'in'practice,'for'the'loan'take?out,'what'will'
PNB'will'issue'is'a'letter'of'guarantee.'The'PNB'will'say'that'“we'undertake'
the'to'pay'whatever'obligation'provided'that'these'condition'are'fulfilled.”'So'
there'is'already'an'undertaking,'say'a'release'of'the'mortgage,'then'there'will'
be'payment.'
'
'
So,'a'letter:'let’s'say,'we’re'ready'to'pay,'you'can'get'it'from'PNB'and'just'comply'
ability'to'pay.'Maasin'just'needs'to'sign'the'deed.'
'
What' was' the' ruling' of' the' Court?' Was' there' tender' of' payment' or' something'
akin'to'a'tender'of'payment'[in'this'case]?'
'
So,' what' is' tender' of' payment?' Let’s' say' you' owe' me' P100K.' How' will' you'
tender' payment?' I’ll' hand' you' 100K' cash.' If' you' just' place' your' hands' in' your'

' pocket'and'you'say,'“I’m'paying'you'now.”'The'handing'over'of'money'—'will'
But" in" this" case," PNB" wanted" the" lender" to" sign" a" deed" of" discharge" of" the" that' be' tender' of' payment?' So,' was' there' tender' of' payment' in' this' case?' Was'
mortgage."" money'shown?'No.'So'the'court'said'was'there'a'tender'of'payment?''
" '
S:'' But' the' lender' refused' to' sign' the' document.' So' as' result,' the' PNB' has' not' Actually'if'you'look'at'this'case—there'was'really'NO"TENDER"OF"PAYMENT.'
released'the'proceeds.'And'then'MLTC'ordered'for'the'foreclosure'of'the'said' Because'if'you’re'the'debtor'you'have'to'hand'over'the'payment,'short'of'that'is'
property.' not' a' tender' of' payment.' So' if' you' give' a' notice,' letter' or' an' undertaking,' that'
SP:'So,'lender'did'not'get'the'loan'proceeds?'Because'the'lender'refused'to'sign' will'not'be'a'tender'of'payment.'However,'it’s'peculiar'in'this'case'because'cash'
the'deed'of'cancellation.'Was'the'lender'in'mora$accipendi?' will' readily' be' available' if" only' the' lender' signs' that' document,' but' the' lender'
S:' Yes.'' unjustifiably' refused.' So,' the' court' said' that' IT' IS' EQUIVALENT' TO' TENDER'
SP:'Why?' OF'PAYMENT.''
S:' Because'the'lender'unjustly'refused'to'accept'the'proceeds'of'the'loan.' '
'

SP:'Was'there'tender'of'payment?'How'was'tender'of'payment?'
'

[Generally],'tender"of"payment"happens'when'you'show'the'money.''
S:' No.'Not'yet'sir.' '
'

SP:'Not' yet?' What?' Is' there' tender' of' payment?' How' did' the' court' explain?' So' '
'

the' action' was' filed' by' the' borrower' against' the' lender' to' compel' the'
discharge'of'the'mortgage'and'the'signing'of'that'deed'of'discharge.'How'did'
the'court'addressed'that'issue?'So'was'borrower'entitled'to'the'remedy'to'the'
relief'asked'for?'What'was'the'decision?'
S:' Court'said'PNB'should'release'the'proceeds'to'Maasin.'
SP:'Without'any'deed'of'discharge?'
S:' There'should'be.'
SP:'There'should'be.'What’s'the'order?'
S:' That'the'President'of'Maasin'to'sign'the'release'of'the'mortgage'and'for'the'
PNB'to'give'the'proceeds…'
SP:'The'lender'was'ordered'to'accept'the'payment'and'discharge'the'mortgage.'
How'did'the'court'arrive'at'this'conclusion?'For'there'to'be'a'discharge'of'the'
mortgage,'there'must'be'a'payment'of'the'loan'obligation.'Is'there'a'payment'
of'the'loan'obligation?'Was'there'a'payment?'
'
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If'you'don’t'show'the'money,'there'will'be'no'tender'of'payment.'Let’s'consider'
this' the' offer' of' a' loan' takeout,' as' equivalent' to' tender' of' payment.' Was' there'
payment'in'fact?'But'there'is'an'unjustifiable'refusal'to'accept'the'payment,'will'
that'be'considered'as'constructive'payment?'If'there’s'such'a'thing,'THERE’S'NO'
CONTRUCTIVE'PAYMENT.'
'
CONSIGNMENT'
So,' the' unjustifiable' refusal' plus' payment' —' should' that' be' considered'
substantial"compliance?'NO.'
'
WHY?' Consignment." Who' should' consign?' B' should' consign' but' consignment'
cannot' be' done' because' the' release' was' subject' to' a' suspensive' condition' (the'
discharge'of'the'mortgage),'which'is'really'a'chicken'and'egg'thing.'Which'came'
first?'So'what'should'be'done'in'this'case'according'to'the'court?'
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' '

Court' said—there' was' no' tender' of' payment' but' there' was' an' equivalent' of' the$ award$ some$ form$ of$ relief$ or$ damages.' Can' that' just' be' awarded' by' way' of'
tender' of' payment.' To' complete' the' payment' there' should' have' been' damages?"Let’s"say"by"abuse'of'rights"or"mora'accipiendi.'But'the'Court'said'that'
consignation.''' the'borrower'should'be'free'from'the'payment'of'the'outstanding'amount'from'
' the'day'of'the'unjust'refusal'took'place.'Again,'the'reason'for'that'the'borrower'
You' see,' these' guys,' they’re' just' too' careful' because' really' PNB' paid' the' loan,' still'has'the'control'of'the'use'of'the'money.'So'you'still'have'the'cost'of'using'the'
released' the' loan,' so' automatically' the' mortgage' would' be' cancelled' and' there' money'and'the'cost'is'interest.'
should'be'a'surrender'of'title.'PNB'just'wanted'that'“No,'we'would'not'release' '
unless' we' get' the' discharge”' and' the' same' time' the' lender' was' saying,' “We' INTEGRITY"OF"PAYMENT$ IDENTITY"OF"PAYMENT$
would'not'discharge'unless'we'get'the'payment”'so'who'should'move'first?'
' '

Full,' or' complete,' compliance' of' the' Delivery' of' the' mandated' or' exact"
' obligation' prestation' due;' see$ case' of' Cathay$
The'Court'said'that'it'was'unjustifiable'on'the'part'of'the'lender.'Anyway,'this'is' ' Pacific:'
an'undertaking'by'PNB.'So'in'reality,'what'you'do'is'you'get'a'letter'of'guarantee' DEFAULT" RULE:' Obligations' are' Identity' of' payment' was' shown' in'
from'the'bank'to'pay'the'obligation'and'there'will'be'a'set'of'requirements.'This' indivisible.' the' case' of' Cathay' wherein' the'
was'not'shown.'Another'problem'was'that'the'borrower'was'not'clear.'There'was' '

couple' there,' they' are' entitled' to'

no'agreement'—'at'least'in'principle'—'on'how'to'proceed.'The'lender'was'being' business' class' and' they' were'
too'cautious'because'it'was'unjustifiably'refused'because'if'it’s'signed'the'lender' bumped'up'to'first'class.'That’s'still'a'
will'get'the'loan'proceeds'in'full'payment'of'the'loan'obligation.' breach'because'that'was'not'the'exact'
' prestation'mandated'by'the'contract.'
ART."1232"—"WHAT"IS"PAYMENT?" From'that'you'can'gather'that'even'if'
Payment'means'mandated'prestation'under'the'obligation.' the' prestation' to' perform' is' more'
' valuable' the' creditor' is' not' duty?
"

ILLUSTRATION"3:"ACCRUAL"OF"INTEREST" bound' to' accept' that' more' valuable'

Let’s' say' this' happened' on' day' 3.' This' was' the' date' the' loan' was' available' prestation.'
from'PNB'and'lender'refused'to'get'the'proceeds'because'the'lender'refused'
'

"
to' sign' the' required' documents.' Would' interest' be' due?' Would' interest' '

REQUISITES"OF"A"VALID"PAYMENT:'
continue' to' accrue' in' this' loan?' I’m' asking' what' the' court' said.' In' this' case,'
1. Integrity'of'payment'(payment'must'be'complete)'
the'Court'said'that'the'accrual'of'interest'should'stop'form'the'day'there'was'
2. Identity'of'payment'(exact'performance'of'the'obligation)'
an'unjust'refusal.'' '
'

' '
This"is"not"the"correct"application"of"the"law."Interest'should'continue'to'run' Let’s'say'you'have'a'loan'obligation,'like'this'one:'P100k.'Where'should'you'pay?''
because'the'principal'obligation'remains'outstanding.'That’s'the'basis'for'the' '
payment' of' interest.' Remember' the' cases' I' think' they' mentioned' before.' If' S:' It'should'be'in'the'domicile'of'the'debtor.''
there' is' unjustifiable' refusal' and' there' is' tender' of' payment,' would' the' SP:''What’s'domicile?'Well'you'can'take'it'as'place'of'residence.'The'default'rule'
obligation' still' remain?' Yes' the' obligation' will' remain' because' there' was' no' if' it’s' a' monetary' obligation,' the' payment' should' be' at' the' domicile' of' the'
payment.'How'do'you'complete'payment?'You'consign'the'payment'in'court.' debtor.'Who'pays'the'cost?'The'collection?'
Would'interest'continue'to'accrue,'prior'to'consignation?'Yes'because'there'is' S:' The'debtor,'for'extrajudicial'expenses.''
NO'PAYMENT'YET.'The'principal'obligation'remains'outstanding.' SP:'How'about'the'collection?'
'

' S:' The'creditor.''

How'about'the'penalty?'The"penalty"remains"outstanding"because"the"penalty" SP:'The'creditor'will'shoulder'the'cost.'
is"based"on"default"and"breach.'' '
"

' ILLUSTRATION"4:"PAYMENT"/"DELIVERY"
However," in" this" case" the" Court" said," no" interest" from" the" time" there" was" What' if' there' was' a' sale' of' car' in' day' 1.' On' day' 2,' the' delivery.' The' buyer'
unjust"enrichment.'It’s'WRONG!'I$think$what$the$Court$was$capturing$is$the$basis$of$ resides'in'city'X,'the'seller'in'city'Y.'So'four'choices,'the'sale'of'a'determinate'

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car'with'license'place'of'123.'On'the'date'of'delivery,'where'should'delivery'
be' made?' X' city,' Y' city,' where' the' car' was' on' the' date' of' the' delivery' or'
where'the'car'was'in'the'date'of'the'sale?'There'was'no'stipulation.'
' '
Remember' the' rule,' if" it" is" an" obligation" to" give" a" determinate" thing," the"
payment"should"be"made"at"the"place"where"the"obligation"was"constituted'
so$ where$ the$ object$ was$ at$ the$ date$ of$ the$ execution$ of$ the$ sale.' So" if" you" want"
another" place," you" have" to" stipulate.' We' are' barring' of' course,' acts' of' bad'
faith.' If' it’s' any' other' obligation,' the' payment' should' be' at' the' place' of'
domicile' of' the' debtor' that' is' why' the' creditor' sends' a' collector' a' long' time'
ago.''
' and"yet"they"still"accepted"the"rentals"without"any"objection"or"reservation.'So$
But'now,'there'is'no'such'practice'because'of'you'look'at'your'billing'there'is'
usually'a'statement'there:''“you'have'to'pay'in'an'authorized'collecting'bank'
or'in'a'designated'seller'or'to'the'office'of'the'creditor”'by'stipulation.'If'there'
is'no'stipulation,'generally'the'creditor'sends'a'collector'and'that'will'be'the'
cost' of' the' creditor.' Again' if' there' is' bad' faith' on' the' part' of' the' debtor' to'
evade'performance,'there'will'be'liability'for'the'damages.'
'
' "
MIAA"V."DING"VELAYO"
S:'' [Recitation]'In'this'case'sir,'the'MIAA,'which'was'then'the'Civil'Aeronautics'
Administration' contracted' a' lease' with' SALEM.' It' was' stipulated' there' that'
there' would' be' a' 25' years' of' lease' and' a' renewable' period' for' 25' years.'
Subsequently,' the' same' property' was' conveyed' to' Velayo.' The' contract'
between' MIAA' and' Velayo' Sports' Complex' stated' that' they' agreed' that'
Velayo'would'build'public'centers'and'sports'complexes'within'the'area.'The'
year' 1991,' Velayo' sports' complex' that' was' the' year' 25' they' wrote' to' MIAA'
telling'them'for'their'intention'to'renew'the'contract'of'lease.'Before'that'sir,'
there'had'been'AO,'which'says'that'there'would'be'an'increase'in'the'rentals.'
But'Velayo'refused'and'they'continue'to'pay'their'rentals.''
SP:'Based'on'what?'What'did'the'contract'provide?'
S:' That'it'was'up'to'the'lessee'to'renew.'
SP:'So,'there'is'an'option'to'renew'by'the'lessee.''
S:' So' the' lessee' did' not' want' to' pay' the' new' rate.' So' the' lessor' did' not' want'
them'to'renew.'
SP:'On'what'ground?'To'resist'the'renewal'what'was'the'ground'of'the'lessor?'
S:' There' was' an' irregularity,' because' it' was' stipulated' there' must' be' a'
construction'of'the'improvements.'
SP:'Was' there' a' construction' of' the' improvements?' There' was' none.' So' what’s'
irregular'about'that?'There’s'none.'So'how'could'that'be'irregular?'
S:' MIAA'still'accepted'the'rentals.'
SP:'The'acceptance'of'the'rentals,'amounted'to'what?'
S:' The'acceptance'amounted'to'a'waiver,'that'the'obligation'is'deemed'fulfilled.'
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SP:'What' do' you' call' that' fulfillment?' Why' would' that' amount' to' a' waiver?' So'
during'the'term'of'the'lease,'lessor'accepted'payments'to'the'lease.'Was'the'
acceptance'a'waiver?'Was'the'receipt'of'the'payment'a'waiver?'
'
REQUISITES"OF"A"WAIVER:'
1. Existence'of'a'valid'right;'and'
2. Information'from'the'parties'
'
'
'
The'payment'was'the'basis'of'the'waiver.'Information'on'what'that'amounted'to'
a'waiver?'The"creditors"knew"full"well"that"there"were"no"improvements"made"
the$Court$considered$that$a$waiver.$$
$
You' have' to' make' a' distinction—sometimes' there' will' just' be' a' receipt' of'
payment,'the'receipt'of'payment'cannot'be'equated'as'the'acceptance'that'would'
amount'to'a'waiver.'For'there'to'be'a'waiver,'there'must'be'information.'In'this'
case,'lessor'knew'that'there'were'no'improvements'made.'
'
ILLUSTRATION"5:"ACCEPTANCE"AND"RECEIPT"
I’ll'give'you'an'example,'there'was'this'old'case'where'the'creditor'issued'a'
receipt'for'an'incomplete'payment'and'the'receipt'stated:'received'the'amount'
of' the' incomplete' payment' in' accordance' with' the' contract.' SC' said' that'
amounted'to'a'waiver'because'the'language'used'in'the'receipt'indicated'that'
there' is' knowledge' of' the' incomplete' payment' nevertheless' the' incomplete'
payment'was'accepted'as'if'it'were'a'complete'payment'of'the'prestation'due.'
'
'
SC'somehow'discussed'this'—'that'it’s'really'an'option"to"renew."The'Court'said'
that" it" violated" the" mutuality" of" contracts," which" is" akin" of" the" potestative"
suspensive" condition" that" is" dependent" on" the" sole" will" of" the" debtor.' The'
lessee'would'be'the'one'to'decide'whether'there'should'be'a'renewal.'What'did'
SC'say?'
'
S:'' SC'said'that'it'was'subject'to'the'approval'of'the'lessor'to'renew'the'contract.'
SP:'Remember'the'contract'is'there'is'an'option'to'renew'by'the'lessee'by'giving'a'
notice.'There'was'no'participation'of'the'lessor.'So'why'was'it'valid?'
S:' SC' said' that' there' was' mutuality' of' the' contracts' because' parties' agreed' on'
the'option.'
SP:'Later' on,' you' will' learn' that' an' option' is' a' continuing' offer' to' enter' into' a'
contract.' So' this' option' is' like' the' offer' of' the' lessor' to' enter' into' a' lease'
contract' with' the' lessee.' So' the' thing' left' for' the' lessee' is' to' accept' and' it' is'
done'by'the'exercise'of'the'option.'In'fact'in'this'case,'they'were'not'clear'of'
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' '

the' option' so' the' court' explained' that' would' not' stop' the' exercise' of' the'
option'you'just'follow'the'exact'terms'of'the'original'contract.'
' must'be'technical'and'must'not'affect'the'object'of'the'obligation.'
Q:""Would"you"consider"an"option"as"a"right?"
A:' It’s'a'right,'which'may'or'may'not'be'exercised'by'the'buyer/lessee.'
' there' was' no' performance' of' the' service.' But' the' procurement' of' the' loan,'
CASES"[1231?1233,'1244,'1246?1248,'&'1251]"
IHC"V."JOAQUIN"
S:'' [Recitation]'In'this'case,'there'was'an'agreement'between'IHC'and'Suarez'to'
secure' a' foreign' loan' in' order' to' construct' the' hotel.' Phases' 1?6' were'
approved' by' IHC' and' Joaquin,' and' Suarez' narrowed' down' the' foreign'
financiers' to' Barnes.' During' the' negotiations' with' Barnes,' IHC' entered' into'
another'negotiation'with'Weston.''
SP:'Barnes'was'what?'
S:' Was'the'owner'of'a'foreign'company.'
SP:'Barnes'was'the'first'foreign'funder.'
S:' Yes,' sir.' And' then' during' the' negotiations' with' Barnes,' they' entered' into'
another' negotiation' with' another' company,' Weston.' What' happened' was,'
with'the'first'financier'Barnes,'didn’t'work'out'so'DBP'cancelled'the'loan'of'
the'agreement'to'finance.'
SP:'I'thought'the'loan'came'from'the'foreign'funder?'
S:' DBP' cancelled' the' release' of' the' funds' for' the' hotel.' So,' the' consultants'
recommended'another'foreign'financier,'Weston.''
SP:'So' what’s' the' dispute' here?' What' was' supposed' to' be' the' payment' of' the'
obligation?'
S:' The'payment'that'Joaquin'wanted'here'was'shares'of'stocks.'
SP:'So'they'will'pay'by'shares'of'the'company'plus?'
S:' P33,000.'
SP:'That’s'it?'Just'shares?'And'they'were'given'shares.'
S:' The'shares'were'cancelled.'
SP:'But'was'eventually'cancelled'when'the'deed'fell'through.''
S:'' So'they'filed'a'case'against'IHC'because'they'wanted'their'shares'back.'The'
issue' in' the' case' is' whether' or' not' partial' fulfillment' deemed' the' obligation'
fulfilled.'
' pay?''
The'court'held'that'it'did'not,'because'for'a'partial'fulfilment'to'be'deemed'the'
obligation' fulfilled' there' are' requisites:' (1)' Joaquin' and' Suarez' must' admit' that'
there'has'been'a'breach'of'the'obligation;'(2)'the'omission'must'be'technical'and'
must'not'affect'the'object'or'damage'the'obligation.'
' "
SP:'The'legal'basis'used'here'was'substantial'fulfillment/compliance.'SC'said'that'
S:'' Because' the' obtaining' of' the' foreign' loan,' which' was' the' object' of' the'
obligation' was' not' fulfilled' and' for' the'Article' 1234' for' to' apply,' the' breach'
SP:'I' think' what' the' court' meant' by' technical,' it' means' insignificant' or'
inconsequential.'The'end'game'of'this'contract—there'was'no'financing—so'
how'did'the'court'characterize'it?'IHC'actually'prevented'the'foreign'funding'
from' materializing.' Initially,' the' Court' said' there' was' no' constructive'
fulfillment' of' the' condition.' Why' did' the' consultant' entitled' to' damages?'
What'was'the'reasoning'of'the'court?'
S:' The' consultants' were' entitled' because' IHC' prevented' the' foreign' loan' to'
happen'because'they'went'into'another'agreement'with'Weston.''
SP:'Did'IHC'prevent'the'foreign'funding?'
S:' No,'they'did'not.'
SP:'They' did' not' so' there' was' no' constructive' fulfilment.' Because' there' was' a'
mixed$ condition—a$ mixed$ condition$ dependent$ on$ partly$ on$ the$ will$ of$ the$ parties$
and$partly$on$third$party.'
'
The' court' recognized' that' the' obligation' to' pay' the' fees' of' the' consultants' was'
subject' to' a' suspensive" condition.' The' court' said' that' there' was' suspensive'
condition—there' was' a' foreign' funding' then' the' fee' should' be' due.' The'
argument' was' that' there' was' a' constructive' fulfillment,' but' the' court' said' that'
there' was' no' constructive' fulfillment' of' the' condition' because' IHC' did' not'
prevent'the'foreign'funding.''
'
The"court"also"said"that"there"was"no"substantial"fulfillment"because"the"very"
object"of"the"obligation"was"not"fulfilled"which"is"the"foreign"funding,'without'
the'foreign'funding'there’s'nothing;'there'is'no'benefit'to'IHC.'The'SC'said'IHC’s'
arguments'were'meritorious'in'those'two'counts.'However,'IHC'should'still'pay'
the' consultants' because' the' obligation' is' subject' to' a' mixed' condition—
dependent' on' the' will' of' the' consultants' and' of' the' same' time' the' will' of' the'
funders—so'if'the'funders'refused'then'there'is'no'fulfillment'but'the'consultants'
exerted'an'effort'on'the'part'of'the'consultant.'The'court'lost'sight'to'what'fact?'
There'was'no'fulfillment'of'the'obligation,'so'how'come'there'is'an'obligation'to'
'
QUANTUM'MERUIT'
In'fact,'that'segment'about'mixed'condition'shall'be'omitted'altogether'and'went'
onto'the'discussion'of'quantum$meruit.'What’s"quantum'meruit?"
'

Quantum" meruit' is' like' equitable' compensation' to' the' work' done.' It’s' a'
there'could'be'no'substantial'compliance'in'this'case'because?' proportional'compensation'of'the'actual'work'done.'
'
'

'

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SP:'So'if'you'look'at'this'case,'when'the'court'mentioned'that'the'arguments'of'
IHC' were' meritorious,' it' suddenly' reversed' that' ruling' when' it' said' that'
there' was' constructive' fulfillment' of' the' obligation.' There' was' something'
wrong,'I'think'the'court'could'have'conceded'in'the'discussion'of—based'on'
the'intention'of'the'parties—that'it'is'a'requirement'to'give'something'to'the'
consultants.' In' the' absence' of' a' clear' stipulation' you' apply' the' quantum'
meruit'rule.'So'there'was'payment,'how'much'was'paid?'
S:' About'a'hundred'thousand'pesos,'sir.'
SP:'How' long' was' the' case' decided?' More' than' a' decade?' Anyway,' you' won'
somehow.'It’s'useless.''
' Q:""Sir,"can"there"be"a"situation"where"the"principle"of"quantum'meruit'cannot"
Remember'the'rule'of'payment:'there'must'be'COMPLETE'PAYMENT.'General'
rule:' the' obligation' is' INDIVISIBLE.' Performance' must' be' COMPLETE.' So' in'
monetary'obligations,'on'due'date,'the'entire'amount'should'be'paid,'there'could'
be'no'payment'in'installments'unless'the'parties'agreed'otherwise.'
' agreement,'they'can'use'the'corresponding'payment'that'should'be'given'for'the'
'
2. Waiver"of"an"irregular"or"incomplete"performance"
There' must' be' complete' information.' The' one' waiving' should' have'
knowledge' of' the' incompleteness' or' irregularity' of' the' performance.'
Otherwise,' it' will' not' constitute' as' a' waiver.' That' is' why' the' SC'
distinguished' between' acceptance' under' Article' 1235' and' the' receipt.'
Acceptance' under' Article' 1235' means' having' knowledge' of' the'
incompleteness' of' the' performance.' Mere' receipt' of' payment' does' not'
mean'that'there'is'awareness'of'the'incompleteness.'
apply?"
A:" No.'Actually,'the'SC'can'do'it'by'invoking'its'equity'jurisdiction.""
'
So,'if'there’s'really'work'done,'there'should'be'compensation.'In'the'absence'of'
performed' work.' For' work' performed' pursuant' to' a' contract—there' will' be'

Again,'the'default'rule'is'this:'an'obligation'is'indivisible,'because'of'the'rule'
that'payment'should'be'complete.' payment' on' a' quantum$ meruit' basis.' For' properly' executed' work,' there' will' be'
'
'
payment'made.'In'fact'in'this'case,'there'were'9'items'that'should'be'performed.'
' When'you'do'a'contract,'you'want'to'safeguard'your'rights—for'every'work'you'
EXCEPTIONS'TO'THE'RULE'ON'INTEGRITY'OF'PAYMENT' accomplish'in'each'phase'you'will'have'a'fee'and'a'premium'fee'for'completing'
However'there'are'certain'exceptions'to'the'rule'of'integrity'of'payment:'' the'transaction.'That’s'schedule'of'payment,'that’s'the'problem'of'the'consultants'
' in'this'case'and'the'problem'also'of'IHC.'They'did'not'clearly'stipulate'on'how'
'

EXCEPTIONS:" the'fee'should'be'paid'and'on'what'basis.'If'you’re'the'one'working'for'IHC'what'
1. Debtor’s'substantial'performance'in'good'faith' would'you'state'there?'I'would'just'state,'“If'there'is'no'delivery'of'this'foreign'
2. Waiver'of'an'irregular'or'incomplete'performance'by'creditor' funding,'no'payment'shall'be'due.”'If,'on'the'other'hand,'you’re'the'consultant,'
what' would' you' do?' You' price' each' item,' like' a' contractor' in' a' construction'
'
'

'
agreement.9''
1. The"debtor’s"substantial"performance"in"good"faith"of"the"obligation"
'
That' was' supposed' to' be' shown' in' the' case' of' IHC' but' there' was' no'
Another'requirement'of'payment'is'with'respect'to'the'one'who'should'perform'
substantial' compliance.' The' SC' explained' substantial' compliance' that'
the'prestation.'
there' must' be' performance' of' the' very' objective' purpose' of' the'
contract.' If' there' is' no' performance' of' the' main' prestation' of' the' "

ILLUSTRATION"6:"REFUSAL"TO"ACCEPT"PAYMENT"
obligation'then'you'cannot'claim'substantial'compliance.'You'can'take' So' let’s' say' you' have' a' Loan' Obligation:' you' have' a' lender' who' extended' a'
this' in' relation' to' our' discussion' of' substantial' and' slight' breach.' If' loan' (P10M)' to' borrower.' On' due' date,' borrower' should' pay' P10M' plus'
there' is' slight' breach,' there' is' implicitly' substantial' compliance' but' interest.' On' due' date,' borrower' should' pay.' Let’s' say' X' offers' to' pay.' Is'
there'is'still'a'breach'but'there'can'be'no'resolution.'What'would'be'the' Lender'duty?bound'to'accept?'No,'because'the'general'rule'it’s'the'borrower'
consequence?' Claim' for' nominal' damages' for' example' and' the' who'should'pay.''
"
obligation' to' fulfil' the' remaining' part' of' the' obligation.' So' in' case' of'
Why' would' you' refuse,' if' you' were' the' lender,' to' accept' the' P10M' plus' the'
substantial'breach,'the'debtor'will'still'be'liable'for'the'slight'deviation'
but'the'law'will'consider'it'fulfilment'of'the'mandated'prestation.'' '''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' '
" 9 '' SP' then' related' this' to' being' a' lawyer' and' charging' the' client' in' every' stage' which' is' first' the'
acceptance'fee.'
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accrued'interest?'It'doesn’t'make'sense'right?'It’s'money,'it'doesn’t'matter'if' course'there'can'be'an'instance'where'X'is'paying'out'of'the'kindness'of'his'
it’s' dirty' or' came' from' a' dirty' place.' Why' is' there' an' instance' that' you' will' heart' where' there' is' no' expectation' of' reimbursement—that' will' be' a'
refuse'cash?' donation.'Later'on'you’ll'learn'that'a'donation'requires'a'formality.'
' '
Well,'they'might'be'proceeds'from'a'crime.'That’s'the'legitimate'reason'why'
'

we'refuse'payment'made'by'a'third'party.'What’s'money'laundering'scheme?'
Say' this' guy' is' a' drug' dealer.' He' will' make' it' appear' that' there' is' a' loan' to'
borrower' via' this' payment' scheme.' Then' the' time' comes,' he' will' pay,' and'
then'it'becomes'legitimate'and'becomes'a'loan'transaction.'
The" donation" must" be" in" writing" and" the" acceptance" must" be" in" writing.'
Therefore," if" it’s" not" in" writing," it’s" void.' But' with' respect' to' payment$ by$ a$
third$party$notwithstanding$the$failure$to$comply$to$the$formalities$the$payment$shall$
be$valid$as$against$the$creditor.'
'
'

'
'
'
' CASES"[ARTS.'1236?1243]'
If'it’s'the'debtor'who'should'pay,'in'our'example,'the"payment"will"be"valid" CARANDANG"V."DE"GUZMAN"
if"the"debtor"has"the"capacity"to"alienate"his"property.'Or'even'if"it’s"a"third" S:'' [Recitation]' Basically,' De' Guzman' and' Carandang' are' stockholders' of' a'
party"who"pays,"he"must"have"the"capacity"to"alienate"his"property"subject" company' that' deals' with' radio' broadcasting.' The' capital' of' their' company'
to"certain"exceptions.' increased…'
'

SP:'What’s'the'company?'What’s'the'nature?'
'

'
Let’s' say,' X' pays' on' due' date.' It' will' be' optional' for' the' part' of' the' lender' to' S:' Broadcasting.' De' Guzman' paid' in' behalf' of' the' Carandang' spouses.' So' De'
accept'payment.'If'lender"accepts:"the"obligation"is"extinguished,'because'there' Guzman'is'now'claiming'for'the'portion'that'he'paid'for'from'the'Carandang'
is'payment'nonetheless.'' spouses.' But' the' spouses' were' claiming' that' there' was' an' agreement' that'
' Carandang' offered' his' technical' expertise' instead' of' paying.' However,' the'
The'question'here'is'this:'will'borrower'have'the'liability'to'X?'The'answer'here' Court'here'ruled'on'the'side'of'De'Guzman.'So'the'Court'said'when'a'third'
is'ordinary,'B'has'to'reimburse'or'indemnify'X'so,'reimbursement.'The'extent'of' party'pays'there'should'be'reimbursement.'
reimbursement' will' depend' on' whether' B' has' knowledge" or" consent.' If' B' SP:'So'there’s'reimbursement.'I'thought'there'was'no'payment?'
consented' to' the' payment,' B' will' pay' the' amount' COMPLETELY' paid' by' X.' S:' No,' sir.' De' Guzman' paid' on' behalf' of' the' spouses,' so' the' spouses' should'
However,'if'B'objected'to'the'payment,'X'will'be'entitled'only'to'the'extent'of'the' reimburse'De'Guzman.'If'you'were'a'third'party'why'would'you'pay'another'
benefit'of'B.'If'B'partially'paid'the'obligation,'and'the'outstanding'amount'is'only' party’s'obligation?'Would'there'be'a'legal'upside'to'it?'
P9M,' X' could' only' be' entitled' up' to' P9M.' What' will' happen' to' the' P6M?' It’s' S:' None.'
overpayment,' or' solutio$ indebiti.' X' will' have' the' burden' of' recovering' the' SP:'Aside'from'reimbursement,'is'there'anything'extra'that'you'can'get?'
overpayment'to'L.'' '
' So,' we' have' the' lender' (L)' and' a' borrower' (B),' and' a' Loan' Obligation' to' pay'
Let’s'say:'Before'paying,'X'notified'B'that'“I'will'pay'your'loan'obligation'to'L”.' principal' plus' interest' secured' by' REM.' X' pays' for' the' payment.' Let’s' assume'
On'day'4,'X'paid,'without'getting'any'replies'from'B.'X'paid'P15M'and'the'actual' that'there'will'be'complete'reimbursement'because'B'has'not'yet'paid'the'loan.'B'
obligation'is'P9M.'How'much'should'B'pay'to'X?'There’s'no'approval.'What'was' has' no' defenses.' There' will' be' a' complete' reimbursement.' Will' there' be' an'
the' law' require,' how' it’s' worded?' The' choices' are' ithout' knowledge' or' against' upside'for'X?'
the' will.' There' is' notice' so' there' is' knowledge;' it' will' be' incumbent' upon' B' to' '
object.' Non?objection' means' implied' consent.' ' If' there' is' notice,' reimbursement' S:'' Yes,'sir.'X'will'have'the'right'of'the'land'secured'by'the'REM.'
should' be' to' the' extent' of' the' payment.' The' underlying' reason' for' that,' B' SP:'So,'X'paid'the'loan.'X'can'now'get'the'land?'How?'Without'suing,'can'X'get'
received'the'notice'and'B'is'in'the'position'to'prevent'overpayment.'The'burden' the'land?'NO.'There’s'no'way'that'X'can'get'some'kind'of'entitlement'of'the'
now'will'be'on'B'to'recover'the'overpayment'to'L.' mortgage'property.''
' S:' X'will'be'able'to'acquire'the'rights'of'the'creditor;'only'if'the'debtor'consents.'
Q:""For" example," sir:" you" gave" a" notice" via" text" message." For" some" reason," the" SP:'So,' there' will' be' an' upside:' SUBROGATION.' When' you' say' subrogation,' it'
borrower"did"not"receive"the"notice." means'a'third'party'will'acquire'the'rights'of'creditor.'So'if'X'sent'a'notice'to'
A:' A'text'message'is'a'good'notice.'Was'there'really'a'notice'received?'It'is'the' B'and'B'did'not'respond,'X'will'be'entitled'to'be'subrogated'in'the'rights'of'
receiving'not'the'sending.'It'is'not'a'question'of'law'but'a'question'of'fact.'Of' the' lender.' In' which' case,' X' will' be' the' mortgagee' and' lender' at' the' same'

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time.' So' there' are' times' that' a' third' party' may' be' interested' in' the' loan' SP:'So'what’s'the'rule'of'payment?''The'first'rule,'the'debtor'should'be'the'one'to'
obligation' of' another' party' because' of' that' upside.' Subrogation' will' not' pay.' Second,' the' creditor' should' be' paid' (or' a' person' authorized' by' him,'
happen'if'B'objects'to'the'payment'there'will'be'an'entitlement'to'the'extend' transferee'or'the'successor).'
to'the'benefit'of'B.' '
"
'

Q:" Sir," concerning" partial" payments." Will" there" still" be" subrogation" to" that"
extent?"
A:' Partial' payments.' There' will' be' subrogation' to' the' extent' [of' partial'
Generally,' the' payment' should' be' made' to' the' creditor.' It' is' paid' to' a' party'
not'related'at'all'or'not'authorized;'it'would'be'an'invalid'payment.'As'a'rule,'
but'with'exceptions.'So'in'this'case,'it'was'made'to"the"wrong"party.'
'
'

payments];'they'will'be'co?creditors.'Let’s'say'X'paid'50%'with'the'approval' '
of'B.'X'can'be'subrogated;'they'will'be'co?creditors.' SP:'Why'did'this'happen?'What’s'your'guess?'
' S:' Obviously,'there'is'an'anomaly.'
REPUBLIC"V."DE"GUZMAN" '
S:'' [Recitation]' In' the' case' of' Republic,' PNPES' had' a' plan' to' build' a' Apparently,' there' are' two' contractors.' So' you' have' a' contractor' who' was'
condominium' so' they' contacted' De' Guzman' as' the' supplier' of' construction' supposed' to' receive' payment,' which' was' somehow' ended' up' in' another'
materials' that' amounted' P2.2M.' Then' De' Guzman' sent' a' demand' letter' to' contractor.' Then' there' is' litigation' to' collect' the' payment' given' to' the' wrong'
collect' payment.' However,' PNPES' said' that' they' already' gave' a' check' as' party.' This' is' a' government' supply' contract.' You' have' to' understand' that' for'
payment.' It' was' also' evidenced' that' De' Guzman' accepted' payment' by' a' there' to' be' a' supply' contract,' there' will' be' a' bidding' and' then' there' is' winner.'
certain' receipt.' However' sir,' De' Guzman' said' that' she' did' not' receive' That'winner'should'be'paying'the'right'amount—Goldilock’s$principle$(Just$right!).'
anything.'So'she'sent'another'demand'letter.' '
SP:'Payment'to'who?' So,' I' guess' what' happened' here' was' that' these' contractors' usually' have' this'
S:' It'was'paid'to'Montaguz'Builders.'There'was'an'admission'of'the'facts.'So'De' agreement' to' take' turns' on' the' payment.' So,' I' guess' there' was' an' anomaly'
Guzman'and'PNP,'that'De'Guzman'had'delivered'the'construction'materials.' wherein' the' other' group' ended' up' collecting' the' payment,' which' is' why' De'
The'court'ruled'that'it'was'NOT'PAID'TO'THE'RIGHT'PERSON.' Guzman'sued.'There’s$an$alternative—cheaper$and$riskier—go$to$the$OMB.'
SP:'Who'was'the'debtor?'
S:' PNP'was'the'debtor.'
SP:'Creditor?'
S:' De'Guzman.'
SP:'How'was'the'payment'made?'
S:' Check,'sir.'Check'was'paid'to,'according'to'PNP,'MGM.'Apparently'sir,'the'
check' was' received' by' another' contractor' of' a' different' company' named'
Cruz.''
SP:'So' the' story' went' like' this:' here' was' an' obligation' due' to' De' Guzman.' So'
PNP'made'a'check'payable'to'supposedly'MGM'but'the'check'ended'up'with'
another' contractor,' Cruz,' who' was' a' representative' of' another' contractor.'
Why,'what'do'you'think?'
S:' Sir,' I' think' there' was' something' wrong.' Because' De' Guzman' narrated' that'
when'she'went'to'the'finance'center,'she'had'a'receipt'of'another'company.'
SP:'What’s'the'relationship'between'De'Guzman'and'MGM?'
S:' De'Guzman'was'the'proprietress'of'MGM'and'another'company'(Montaguz).'
The' receipt' she' had' when' she' went' to' the' finance' center' was' for' the' other'
company'but'that'receipt'was'lost.'Also'sir,'in'this'case,'PNP'was'supposed'
to'have'an'administration'to'the'construction'of'the'condominium…'

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"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
THURSDAY,'04'DECEMBER'2014'
'

"

REVIEW:"PAYMENT" Refresher:10$the$ respondents$ in$ the$ case$ of$ Cathay$ were$ automatically$ upgraded$ from$
EXTINGUISHING'AN'OBLIGATION' business$ class$ to$ first$ class$ because$ they$ were$ members$ of$ the$ Elite$ Club.$ However$ the$
The'Civil'Code'provides'different'modes'of'extinguishing'an'obligation.'Article' respondents$ did$ not$ want$ this$ upgrade$ because$ they$ would$ have$ to$ be$ separated$ from$
1231'provides'such'modes:' their$ guests$ who$ still$ had$ to$ stay$ in$ the$ business$ class.$ Even$ if$ the$ change$ in$ the$
1. Compensation' obligation$ will$ benefit$ the$ creditor$ (and$ in$ this$ case,$ it$ will$ immensely$ benefit$ the$
2. Consignation' respondents),$there$is$a$violation$of$the$identity$of$the$prestation.'
3. Dation'in'payment' '
4. Novation'
"

ILLUSTRATION"1:"INTEGRITY"AND"IDENTITY"OF"PAYMENT11 "
' The' agent' was' supposed' to' sell' the' two' rings;' and' in' case' he' doesn’t,' there'
Take' note' that' this' enumeration' is" NOT" exclusive.' There' are' other' modes' of' should'be'a'return'and/or'payment'of'the'price.'The'agent'was'able'to'sell'one'
extinguishing'an'obligation'outside'of'the'matters'enumerated'in'Article'1231.'' ring' to' X.' After' a' certain' period,' the' agent' should' return' it' or' pay' the' price.'
' With' respect' to' the' return,' the' agent' offered' another' ring,' which' is' more'
What’s' an' example' of' a' mode' that' is' not' there?' Waiver.' Waiver' is' not' in' the' valuable'than'the'original.'With'respect'to'the'payment,'the'agent'offered'two'
enumeration,' but' if' you' waive' your' right' to' an' obligation,' then' that' is' tranches' (tranches' are' like' installments).' This' case' will' illustrate' to' you' the'
tantamount'to'extinguishing'the'obligation.' violation'on'the'rules'of'identity'and'integrity'of'payment.'The'return'offered'
' by' the' agent' violates' the' identity' of' payment;' the' payment' offered' by' the'
We' discussed' payment' last' time.' When' we' speak' of' payment,' we' refer' to' the' agent' violates' identity' of' payment.' You' cannot' force' the' creditor' to' accept'
performance' of' the' prestation.' Payment,' under' the' law,' does' not' only' refer' to' anything'different'from'the'prestation'due.'
fulfillment' of' a' monetary' obligation.' It' includes' any' other' performance' of' a' '

'
prestation.''
EXCEPTIONS'TO'THE'RULE'OF'INTEGRITY'
'
'
REVIEW:"Go'Cinco'v.'CA" '

We' can' gather' this' from' the' case' of' Go$ Cinco.$ In' this' case,' the' Court' explained' We'discussed'TWO"EXCEPTIONS"to'the'rule'of'integrity'of'payment:'
what'payment'means.'When'you'say'payment,'you'have'to'fulfill'the'prestation' 1. Substantial'compliance;'and'
required.'If'it’s'a'monetary'obligation,'you'have'to'pay'the'amount'due.'It’s'not' 2. Waiver'
'

enough' that' you' tender' payment' because' tender' of' payment' is' not' payment.'
'

'
There'must'be'an'acceptance.'If'there'is'a'refusal'(of'the'creditor),'you'conclude' 1. Substantial"compliance"
the'payment'by'consignation.' Payment' is' valid' even' when' there' is' an' irregularity' in' the' fulfillment' of' the'
' obligation' provided' the' irregularity' does' not' affect' the' very' essence' of' the'
We'also'discusses'the'two'rules'of'a'valid'payment:' obligation.' However,' the' erring' debtor' (debtor' that' committed' the' minor'
1. Integrity'(complete)' infraction,)' shall' be' held' liable' for' damages.' You' have' to' relate' this' to' our'
2. Identity'(exact'prestation)' discussion'of'substantial'breach'and'slight'breach.''
' "
'

Again,'remember'the'rules'on'integrity'and'identity'of'payment."For'identity'
of'payment,'it'must'be'the'exact'prestation'due;'no'more,'no'less.'If'there'is'a'
deviation'from'the'prestation,'the'creditor'can'insist'performance'of'the'exact'
prestation'due.'This'is'what'we'saw'in'the'case'of'Cathay.'
'
'
If' there' were' a' minor' deviation' from' the' prestation,' then' that' would' be' a'
slight' breach.' In' which' case' damages' will' be' due' but' the' debtor' will' be'
allowed' to' perform' the' prestation,' or' he' will' be' considered' to' have'
performed'the'obligation.'

' '''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' '

10 ' This'was'not'discussed'by'JSP'anymore.''
11 ''This'was'discussed'in'comparison'with'Cathay,'re:'identity'and'integrity'of'payment.'
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' Shareholder' 2' not' only' paid' for' his' own' shares,' but' also' for' the' share' of'
2. Waiver"
For' there' to' be' a' valid' waiver,' the' one' who' makes' the' waiver' must' have'
knowledge' or' information' on' the' matter' that' is' being' waived.' You' have' to'
distinguish'when'a'creditor'is'accepting'payment'with'full'awareness'that'it'
is'incomplete.'In'that'case,'that'will'be'considered'a'waiver.''
" In'the'same'manner,'the'debtor'should'pay'the'creditor.'If'the'debtor'should'pay'
You' have' to' distinguish' between' an' acceptance' and' a' receipt.' So' let’s' say'
there'is'a'receipt,'“Received'x'amount.”'That'may'be'equivocal.'So'for'good'
measure,' the' creditor' states,' “Received' x' amount' in' partial' payment' for…”'
Which' means' the' creditor' makes' a' reservation' for' the' full' payment.' The'
worst' a' creditor' can' do' is' state,' “Received' x' amount' in' fulfillment' of' a'
contract,”'because'that'will'be'considered'a'waiver.'It'shows'that'the'creditor'
knows'it'is'incomplete'but'still'accepted'it'as'if'it'were'the'full'payment.'
' note,' who' shall' receive' payment?' Of' course' the' creditor' or' another' person'
On'the'matter'of'who'should'pay'and'who'should'be'paid.'As'a'general'rule,'it'
should'be'the'debtor'who'should'pay.'Of'course,'a'third'party'may'pay'in'behalf'
of'the'debtor.'The'consequence'will'pertain'to'the'indemnity'by'the'debtor'to'the'
creditor.' The' matter' will' turn' on' whether' or' not' the' debtor' has' knowledge' or'
consented'to'the'payment'by'the'third'party.'If'there'is'at'least'knowledge'by'the'
debtor'that'payment'was'made'by'the'third'party,'then'the'consequence'would'
be'a'complete'reimbursement'of'the'third'party.'There'will'also'be'subrogation.'
What'is'subrogation?'It'is'when'the'third'party,'by'paying'the'creditor,'with'the'
knowledge'or'consent'of'the'debtor,'will'acquire'the'right'of'the'creditor.''
'
So' in' our' example' last' time,' a' third' party' pays' an' obligation' secured' by' a'
mortgage.'Aside'from'paying'the'creditor,'the'third'party'also'acquires'the'rights'
of'the'creditor'pursuant'to'the'security'arrangement'of'the'mortgage.''
' '
Now' if' there' is' no' notice' or' payment' was' made' by' third' party' without' the'
consent' or' against' the' will' of' the' debtor,' then' the' reimbursement' of' the' third'
party'will'only'be'to'the'extent'of'the'benefit.'What'do'you'mean'by'benefit?'It'
means'what'the'creditor'could'have'collected'from'the'debtor;'or'what'the'debtor'
was'obliged'to'pay'the'creditor.'Let’s'say'the'third'party'pays'1'million,'but'the'
payment'due'was'only'500,000'because'there'was'partial'payment'before'or'there'
was'offsetting,'then'the'reimbursement'will'only'be'to'the'extent'of'the'benefit.'
'
"
ILLUSTRATION"2:"NO"NOTICE"BY"THIRD"PARTY"TO"DEBTOR"
In' this' case,' there' were' two' shareholders.' Shareholder' 1' and' Shareholder' 2'
established' a' corporation.' Now,' when' you' establish' a' corporation' you'
subscribe' to' shares.' The' corporation' will' issue' you' shares' and' in' exchange'
you' pay' the' subscription' price.' Who' is' the' debtor' here?' The' creditor' is' the'
corporation'with'respect'to'the'payment'of'the'subscription'price.'In'this'case,'
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Shareholder'1.'This'is'a'third'party'payment'in'which'case'Shareholder'1'has'
to' pay' Shareholder' 2.' The' minimum' payment' is' with' respect' to' the' benefit'
received.' But' in' this' case,' there' was' knowledge' by' Shareholder' 1' of' the'
payment'made'by'Shareholder'2,'so'there'should'be'complete'reimbursement.'
'
'
the'wrong'party,'then'there'is'no'valid'payment.'The'debtor'would'be'required'
to' pay' again.' This' rule' of' paying' the' right' person' was' shown' in' the' case' of'
Carandang.''
'
There'is'another'case,'the'one'about'the'PNP'supplier.'There'was'payment'to'the'
wrong'party'when'the'amount'was'paid'to'another'contractor'who'was'not'the'
creditor' or' was' never' authorized' by' the' creditor' to' receive' the' payment.' Take'
authorized'by'the'creditor'to'receive'payment,'like'an'agent.'Of'course'if'it’s'an'
agent,' the' agent' must' have' the' proper' authorization.' You' will' take' this' up' in'
Agency.'
'
ON'WHERE'SHOULD'PAYMENT'BE'MADE'AND'RECEIVED'
Where"should"you"pay?"
'
'
The'default'rule'will'depend'on'what'kind'of'obligation'you'are'dealing'with.'
If' it’s' a' monetary' obligation,' the' default' rule' will' be' the' domicile' of' the'
debtor.'So'if'you’re'the'creditor'it'is'in'your'best'interest'to'stipulate'the'place'
of'payment.'Or'if'it’s'an'obligation'to'give'a'determinate'thing,'then'you'have'
to'know'where'the'thing'is'or'was'during'the'time'of'the'constitution'of'the'
obligation.'
'
'
PAYMENT"TO"CREDITOR"
Let’s'take'an'example.'
'
"
ILLUSTRATION"3:"PAYMENT"TO"WRONG"PARTY;"BURDEN"OF"RECOVERY"
Let’s'say'you'have'a'lender'and'a'borrower.'Lender'extended'a'Php10'million'
loan' to' the' borrower' on' Day' 1' and' payable' on' Day' 2.' Payment' includes'
principal'plus'interest,'6%'per'annum.'The'term'is'for'1'year.'Question,'let’s'
say' the' period' is' not' yet' over,' can' lender' demand' payment' from' borrower?'
No,'because'there'is'a'term.'The'term'is'for'the'benefit'of'both'parties.'On'Day'
2,'borrower'did'not'pay,'is'borrower'on'default?'Not'yet,'because'there'is'no'
demand.' On' due' date,' following' the' rule,' borrower' should' pay' lender.' If'
borrower'pays'X'who'is'a'third'party,'as'in'the'case'of'PNB,'there'would'be'
no'valid'payment'because'there'is'no'collection'at'all;'unless'X'is'an'agent'of'
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the' lender.' This' results' to' a' wrong' payment.' So' if' you' think' about' it,' why'
does'not'the'lender'just'go'after'X'to'collect'the'payment?'Of'course'that'is'the'
option'of'the'lender.'He'can'either'go'after'the'borrower'or'the'third'party'to'
collect' the' payment' due.' As' a' matter' of' lending,' the' lender' can' go' after' the'
borrower'again'telling'the'latter'to'pay'again.'So'the'burden'of'recovering'the'
wrong'payment'would'be'on'the'borrower.'The'lender'cannot'be'compelled'
to'go'after'the'one'who'received'the'wrong'payment'(X)'because'the'burden'is'
on' the' borrower.' The' lender' can' only' go' after' X' if' the' lender' cannot' get'
anything' from' the' borrower;' pursuant' to' what' kind' of' action?' Accion$
subrogatoria.' The' lender' is' collecting' in' behalf' of' B.' Of' course' you' can' also'
create'the'theory'that'the'amount'collected'is'really'due'the'lender.'
'
course'if'a'debtor'pays,'the'debtor'has'to'make'sure'there'are'no'restrictions'
to'payment.'Aside'from'incapacity'of'the'creditor,'a'restriction'exists'if'there'
is'an'injunction'by'the'court,'or'when'there'is'a'garnishment.'A'garnishment'
is' like' an' attachment,' restricting' the' one' holding' the' funds' to' disburse' the'
funds,'unless'ordered'by'the'court.'
'
LEGAL"TENDER"AND"VALID"TENDER"OF"PAYMENT"
[Group$Recitation]'
SP:'So' we' go' back' to' the' earlier' illustration,' let’s' say' the' lender?creditor' is' now'
capacitated' to' receive' payment.' Now,' on' due' date,' can' borrower' pay' in'
Euros?'
S:' If'it’s'stipulated.'

'
Q:""Is"there"a"prescription"period"wherein"the"other"party"can"collect"from"the" SP:'I'am'not'sure'if'it’s'stipulated,'I'don’t'know.'
debtor?" S:' Then'no,'Sir.'
A:' Yes,'10'years'according'to'law,'from'the'time'there'is'refusal'to'pay.' SP:'Why,'what'is'the'rule'if'it’s'not'stipulated?'
' S:' Because'the'rule'is'you'have'to'pay'in'Philippine'pesos.'
What'if'at'the'time'of'payment,'B'paid'to'L'but'L'is'insane?'General'rule'is'that' SP:'asks'the'others:'Do'you'agree?'
payment'will'not'be'valid'because'he'is'not'capacitated'to'receive'payment.'With' S:' The'currency'which'is'legal'tender'in'the'Philippines.''
insanity,' lender' will' not' be' in' that' capacitated' position.' Of' course,' it' can' be' a' SP:'What'is'legal'tender?'
minor'or'some'other'person'with'legal'incapacity'to'accept'payment.'What'is'the' S:' The'action'of'rendering'payment.'
consequence' of' giving' payment' to' an' incapacitated' person?' Generally' invalid,' SP:'No'that’s'tender'of'payment.'What'is'legal'tender?'
except'to'the'extent'the'lender'retains'the'payment.' S:' Sir' according' to' Tolentino…' it' is' the' valid' form' of' payment' accepted' in' a'
' jurisdiction.' For' example' in' the' Philippines,' legal' tender' is' in' Philippine'
"
pesos.''
ILLUSTRATION"4:"BENEFIT"OF"PAYMENT"TO"INCAPACITATED"PERSON"
SP:'So'when'you'pay'50'pesos,'that’s'legal'tender?''
So'let’s'say'Php10.6'million'was'paid'to'an'incapacitated'creditor'5.6'million'
S:' No'Sir,'it'depends'because'there'are'certain'limitations.''
retained'and'the'other'5'million'spent'for'food.'The'payment'will'be'valid'if'
SP:'What'certain'limitations?'
the'money'spent'benefited'the'creditor.'In'this'case,'spending'the'money'for'
S:' Sir,'the'Central'Bank'issued'a'Circular'stating'that'you'can’t'pay'beyond'1000'
food,' is' it' valid?' It' will' depend.' Benefit' means' the' judicious' use' of' the'
pesos'using'1'peso,'5'peso,'or'10'peso'coins;'and'not'beyond'100'pesos'if'you'
payment.'So'there'will'be'benefit'if'it'is'used'for'food,'shelter,'clothing.'
' are'using'25'centavos.'
' SP:'So'from'there,'legal'tender'is'what?'
Q:" What" if" the" borrower" paid" the" lender" without" knowing" the" lender" was" S:' Legal'tender'is'the'approved'means'of'payment.''
insane?"" SP:'Payment'in'cash'is'payment'in'legal'tender,'true'or'false?'
A:' It'will'be'a'matter'of'fact.'It'doesn’t'matter'if'borrower'paid'in'good'faith'or'in' S:' True.'
bad'faith'because'whether'or'not'borrower'is'in'good'faith'the'lender'is'still' SP:'False!' She' (Banta)' just' told' you' the' rule.' For' payment' in' cash,' there' is' a'
insane.'' limitation.'For'denominations'of?'
" S:' 1'peso,'5'peso,'and'10'peso,'you'can'only'pay'up'to'1000'pesos.''
Q:" To"make"a"valid"payment"to"an"insane"person,"could"you"just"consign"it"to" SP:''For'lower'denominations'
court?" S:' Up'to'100.'
A:' Yes,'in'fact'that'is'what'you'should'do.'' SP:'So'going'back'to'legal'tender,'legal'tender'is.'
' S:' The'approved'legal'way'of'payment.'
Q:" Do"the"rules"on"payment"during"lucid"intervals"apply?" SP:'With' respect' to' Philippine' monetary' obligations,' legal' tender' is' Philippine'
A:' Yes.'But'if'the'debtor'knows'that'the'creditor'is'insane,'what'should'he'do?' currency' up' to' amount' considered' as' legal' tender.' For' example,' borrower'
He' does' not' pay.' He' should' pay' when' somebody' makes' the' demand.' Of' pays'P10.6'million'in'5?peso'coins,'can'lender'refuse?''
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S:' Yes.'' SP:'BSP'Circular'

SP:'Why?'
S:' Because'it'is'not'legal'tender.'
SP:'What'is'the'reason'behind'that?'
S:' Because'the'BSP'issued'a'Circular…'
SP:'But'it’s'coins,'it’s'still'money.''
S:' Because'you'will'be'harassing?'
SP:'Harassing?'How'can'you'harass'the'lender?'Let’s'say'B'paid'in'10?peso'coins'
10.6'billion,'what’s'the'problem'there?''
S:' At'first'look,'I'am'not'sure'if'the'payment'is'exactly'10.6'billion'pesos.''
SP:'You'count.'You'can'count.'But'it'will'be'very'difficult'for'you'to'count'even'if'
you'have'that'coin'counter.'It’s'difficult'for'both'parties.'Like'for'the'debtor,'
how' will' you' tender' those' coins,' you' just' dump' it' outside' the' creditor’s'
house?'It’s'very'cumbersome.''
' SP:'Why?'
SP:'How' about' on' due' date' borrower' pays' through' a' check,' drawn' against' the'
account'of'the'borrower'with'a'universal'bank?'Let’s'say'BDO.''
S:' The'lender'can'refuse'the'payment.'
SP:'Why?'
S:' Because'we'have'Republic'Act'7653'that'states'that'checks,'manager’s'checks'
or'personal'checks'can'be'refused'by'the'payee'because'it'is'not'legal'tender.''
SP:'It'does'not'have'legal'tender'power.''
' SP:'Where'do'the'funds'allotted'for'the'check'go?'
SP:'What'is'a'manager’s'check.'
S:' You' ask' a' manager' to' give' you' a' check' which' is' immediately' debited' from'
your'account.''
SP:'So' the' bank' issues' the' check,' debited' from' the' payor’s' account,' let’s' say'
savings.'With'that,'the'manager’s'check'will'be'funded.'The'manager’s'check'
will'be'payable'to'
S:' To'the'lender.''
SP:'A'manager’s'check'is?'
S:' A'funded'check'drawn'against'the'account'of'the'borrower.''
SP:'Manager’s' check' is' the' same' as' a' cashier’s' check.' It’s' a' check' drawn' by' the'
bank' against' itself.' What' you' do' with' the' manager’s' check' depends' on' the'
signatory.' You' actually' buy' a' manager’s' check.' So' for' example,' a' borrower'
goes' to' a' bank' and' applies' for' a' manager’s' check,' the' bank' will' ask' the'
borrower'to'pay'the'value'of'the'manager’s'check'plus'the'service'fees.'That'
check'will'be'drawn'against'the'account'of'the'bank.'So'it’s'an'obligation'of'
the' bank,' it’s' not' an' obligation' of' the' borrower.' Because' if' it’s' just' a' check'
drawn'against'the'account'of'the'borrower,'and'the'borrower'does'not'have'
funds,' the' bank' will' not' pay.' On' the' other' hand' if' it’s' issued' by' the' bank,'
there'is'that'degree'of'certainty'of'payment,'unless'the'bank'closes.'Is'it'legal'
tender?'
S:' No,'Sir'because'in'the'BSP'Circular…'
' 86"
S:' No'Sir,'I'mean'in'the'RA…'in'the'RA'(7653),'manager’s'check,'cashier’s'check'
or'any'other'check'will'not'be'considered'as'a'valid'legal'tender.''
SP:'What’s'your'answer?'
S:' No'Sir,'because'of'Section'60'of'the'same'RA.'
SP:'Which'states?'
S:' That'anything'aside'from'Philippine'monetary…'
SP:'Because'it'depends.'Depends'on'what'
S:' There'are'two'views'according'to'jurisprudence.'
SP:'Give'me'one'case."
CASES"[ARTS.'1249]'
NEW"PACIFIC"V."SENERIS""
S:' [Recitation]' The' case' of' New' Pacific.' The' Court' in' New' Pacific' states' that' a'
manager’s'check'is'legal'tender'because'it’s'as'good'as'cash.'
S:' Because'in'a'manager’s'check'you'are'sure'that'there'are'funds'
S:' Because'it'is'as'if'the'cash'was'deposited'to'the'account'of'the'lender.''
SP:'The'funds'were'earmarked'for'the'lender.'Anybody'work'in'a'bank?'
S:'' Sir'me,'before,'as'a'teller.'
SP:'So'when'there'is'a'manager’s'check'purchased,'what'happens?'
S:' So'first'Sir,'you'apply'for'a'manager’s'check,'then'it'will'be'drawn'against'the'
account'of'the'depositor.''
S:' It'will'go'to'the'account'of'the'bank.''
SP:'Is'there'a'setup'of'a'temporary'account'so'that'the'funds'will'be'allotted'there'
S:' No'Sir'the'depositor'must'have'an'account'in'the'bank.''
SP:'I'know,'we’re'done'with'that.'I'mean'if'the'payee'has'no'account'in'the'bank;'
or' let’s' say' the' payee' has' an' account,' will' the' money' be' immediately'
deposited'to'his'account'even'if'the'check'is'not'yet'deposited?''
S:' Sir'it'will'be'automatically'deducted'from'the'depositor’s'account.'
SP:'Yes,'yes'I'know'that.'Let’s'say'you'bought'a'manager’s'check'for'10.6'billion'
debited'from'here,'plus'service'fees.'This'check'for'10.6,'under'whose'name'
would' it' be' placed' in' the' bank?' Will' it' be' placed' under' the' name' of' the'
lender?'Accountant?'
S:' It'will'be'restricted'Sir.''
SP:'Meaning' the' bank' cannot' touch' the' money.' Anyway,' what’s' the' other'
authority'that'it’s'legal'tender,'aside'from'jurisprudence?''
S:'Sir'there'was'another'case'but'this'time'the'Court'said'it'was'not'legal'tender.''
SP:'It’s' actually' just' the' law' but' okay' you' want' to' recite' the' case,' what’s' that'
case?'
'
TIBAJIA"V."CA"
S:' [Recitation]'Supreme'Court'said'that'the'checks'issued'by'the'debtor'are'not'
legal'tender.'
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SP:'These'cases'(New'Pacific'and'Tibajia)'are'the'two'conflicting'views'on'checks' longer' be' encashed.' Our' premise' is' the' check' could' be' encashed' if' lender'
as' legal' tender.' Of' course' a' personal' check' is' definitely' not' legal' tender.' only' presented' it' within' the' six?month' period.' But' lender' presented' it' too'
However' you' have' cases' where' a' manager’s' check' or' cashier’s' check' was' late,'beyond'the'six?month'period.'Is'this'an'impairment?'
considered'legal'tender,'or'as'if'deemed'cash'payment.'The'reason'for'that'is' S:' Yes,'Sir.'
according'to'the'Court,'in'the'case'of'New'Pacific,'there'was'earmarking.'But' SP:'Therefore,'would'there'still'be'an'obligation?''
in'reality,'this'is'just'an'entry;'it’s'a'record.'As'you'said,'it’s'restricted'but'it’s' S:' There' would' still' be' an' obligation;' the' borrower' would' still' be' liable' for'
still'the'money'of'the'bank.'It’s'not'even'credited'in'the'name'of'the'debtor;' damages.''
there' is' a' payable' by' the' bank' but' it’s' not' in' the' name' of' the' lender.' So' the' SP:'I’ll' read' to' you' the' rule' (Article' 1249,' par.' 2).' The' delivery' of' promissory'
ruling' in' New' Pacific' is' the' earmarking' which' made' it' valid.' But' there' are' notes,' checks…' shall' produce' the' effect' of' payment' only' when' they' have'
other'cases'wherein'the'Court'considered'payment'by'manager’s'check'valid,' been' cashed' or' when' through' the' fault' of' the' creditor' they' have' been'
considering'business'practice.' impaired.'There'was'no'encashment'here.'Is'there'impairment.'
' S:' Yes,'Sir.''
In'those'cases'normally'you'involve'preservation'of'a'right.'So'by'tendering'the' SP:'How'can'there'be'impairment?'When'would'impairment'happen?'You'have'
check' the' Court' will' consider' the' paying' party' preserves' the' relevant' right.' So' to'remember'our'premise,'that'the'check'could'have'been'cashed'if'only'the'
there’s'an'authority'for'that.'' lender'presented'it'within'the'six?month'period.''
' S:' But'Sir'the'borrower'could'just'present'another'check.''
On'the'other'hand,'you'have'an'authority'that'it’s'not'legal'tender.'What’s'your' SP:'I'know'that'but'I’m'asking,'is'there'impairment'here?'
first'authority?'We'have'that'law,'Section'60.'It’s'very'clear,'checks'do'not'have' S:' No'Sir.'
legal'tender'power'and'acceptance'shall'be'at'the'option'of'the'creditor.'And'then' SP:'Why?'
we' have' that' other' case' (Tibajia).' So' what' do' you' do?' It' depends' on' the' S:' Because' technically' the' check' was' valid,' and' it’s' only' after' the' six?month'
authority.'But'if'you'go'by'the'law,'checks'do'not'have'legal'tender'power.'That’s' period'that'it'was'invalid.''
why' when' you' want' to' pay' by' manager’s' check,' you' simplest' thing' to' do' is' to' SP:'Yes,'and'whose'fault'was'that?'
stipulate.' You' don’t' just' say' it’s' a' manager’s' check,' you' say' manager’s' check' S:' The'lender’s.''
drawn'or'issued'by'the'top'five'universal'banks,'or'by'metro'only'banks'because' SP:'The'lender.'So,'why'do'you'now'penalize'the'borrower?'
if'it’s'a'check'issued'by'banks'in'the'provinces,'it’s'not'really'credible.'So'if'you’re' S:' Because' Sir' the' obligation' is' to' pay' the' lender.' Technically' there' was' no'
the'creditor'that'is'what'you'put'in'your'contract.'' payment'and'the'borrower'still'owes'the'lender.''
' SP:'So' there' was' actually' no' payment.' How' can' you' impair' this' check?' When'
Let’s'say'borrower'paid'a'check'on'due'date.'It’s'a'personal'check.'It’s'accepted' would'impairment'happen?'In'case'of'a'check,'when'will'that'happen?'Can'
on' due' date' by' the' lender.' That’s' fine' because' it’s' at' the' option' of' the' lender.' you' think' of' an' instance' where' there' was' impairment' and' borrower' cannot'
Lender'deposited'the'check'after'a'year.'What'will'happen'to'the'check?' go'after'the'lender?''
' S:' Sir'if'you'deposited'the'check'but'the'bank'is'already'closed.''
S:' It'will'not'be'recognized'because'checks'only'have'a'validity'of'6'months.' SP:'So'what'will'happen,'who'will'have'the'burden?'
SP:'After' 6' months' it' will' become' a' stale' check.' So' due' to' the' neglect' of' the' S:' The'borrower.'
lender,' the' check' became' stale' meaning' the' bank' will' not' anymore' pay' it,' SP:'If'you’re'saying'that'then'there'would'still'be'no'impairment.'Borrower'could'
even'if'you'present'it.'Now,'is'borrower'still'liable'to'pay?'Notwithstanding' just'issue'another'check.'Borrower'bought'a'manager’s'check'from'the'bank,'
that'the'by'this'time'is'the'lender’s.'The'account'of'the'borrower'was'already' gave'it'to'the'lender,'lender'did'not'encash'it.'The'bank'closed.'Where'is'the'
closed,' and' that' was' his' only' money.' So' now' he' doesn’t' have' any' money.' impairment?' Lender' could' demand' from' the' borrower' another' payment.'
Borrower' is' saying' to' the' lender' that' if' lender' only' deposited' the' check' Will' that' be' impairment?' No,' because' there' was' no' damage' done' to' the'
during'the'six'month'period'there'will'be'funds.'If'borrower'proves'that'there' borrower.' The' impairment' will' happen' if' the' bank' closed.' Then' the' issue'
are'indeed'funds'during'that'period,'will'he'still'be'liable?'' now' would' be,' who' would' bear' the' burden' of' going' after' the' money?'
S:' Yes.' Borrower' or' lender?' This' one' would' be' a' case' of' impairment.' Because'
SP:'But'it’s'the'fault'of'the'lender.'The'law'provides.'What'is'the'provision'of'the' borrower'can'say'if'the'lender'encashed'it'on'time,'then'they'would'not'have'
law?'Only'when'they'are'encashed;'or'when'through'the'fault'of'the'creditor' difficulty'of'lining'up.'What’s'the'difference?'The'funds'for'the'check'could'
they' have' been' impaired.' Won’t' this' be' impairment?' The' check' could' no'
' 87"
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no' longer' be' recovered,' whether' by' the' borrower' or' lender' in' that' case' of' '
insolvency.' CITIBANK"V."SABENIANO"
' SP:'I' want' the' whole' case.' This' is' an' important' case.' It’s' not' just' about' the'
Q:" Sir," in" the" case" of" New" Pacific," the" Court" said" that" the" check" has" legal" extraordinary'inflation.''
tender"power."So"the"bank"has"to"pay"the"creditor"the"amount"in"the"check." S:' Sabeniano'had'accounts'with'Citibank'Manila'and'Citibank'Geneva.'And'she'
But"with"respect"to"Article"1236,"won’t"this"be"a"payment"by"a"third"person?" also'has'a'money'market'placement'with'another'entity.'So'Sabeniano'loans'
Because" according" to" Art." 1236," a" creditor" cannot" be" bound" to" accept" to' pay' in' Citibank' Manila.' Client' was' debtor,' Citibank' Manila' was' creditor.'
payment"by"a"third"person,"in"this"case"the"third"person"is"the"bank."" And' then' for' Citibank' Geneva,' it' was' the' debtor' while' the' client' was' the'
A:' In'the'case'of'New'Pacific,'the'Court'did'not'consider'it'as'payment'by'a'third' creditor.'It'was'some'sort'of'placement,'the'client'extended'loans'to'Citibank'
person' because' it' was' deemed' as' cash.' It' does' not' matter' who' is' giving' it,' Geneva.' What' happened' was' that' the' client' defaulted' in' its' obligation' with'
whether'it’s'the'bank'or'not.'' Citibank' Manila.' So' Citibank' Manila' got' funds' from' the' client’s' account' in'
' Citibank'Geneva.''
Q:""But"is"it"still"like"paying"a"debt,"Sir?" S:' It'an'offsetting'of'the'client’s'accounts'with'Citibank.'Client'said'she'was'not'
A:' By' applying' for' the' manager’s' check,' the' borrower' is' assigning' his' right' to' informed'nor'did'she'give'her'consent'to'the'offsetting'so'she'filed'a'case'in'
collect'from'the'bank.'Well'it’s'not'really'assignment,'it’s'more'like'buying'a' court.' Citibank' said' that' the' Citibanks' all' over' the' world' are' just' the' same'
certain'commitment'from'the'bank'to'give'money'to'the'lender.'It’s'not'really' entity.''
payment' by' a' third' party;' the' bank' is' paying' its' obligation' pursuant' to' the' SP:'Which'is'really'the'case.'When'you'have'a'corporation,'the'branches'of'that'
manager’s' check.' And' who' are' the' parties' to' the' manager’s' check?' It’s' the' corporation' are' considered' the' same' entity.' They' belong' to' one' juridical'
payee'and'the'bank.'That’s'also'the'reason'why'the'Court'said'in'New'Pacific' personality'with'different'branches'and'offices,'so'there'is'only'one'Citibank.'
that'a'check'is'legal'tender;'because'it’s'now'an'obligation'of'the'bank'and'the' .''
bank'earmarked'the'funds,'which'really'does'not'happen.'As'a'rule,'you'have' S:' But' that’s' what' Citibank' said,' however' in' the' Philippines' we' have' laws,'
to'pay'in'cash,'legal'tender.'' which'stipulate'that'if'the'main'offices'abroad—'
' SP:'Why'is'it'important'to'distinguish'that'Citibank'Manila'and'Citibank'Geneva'
Q:" Sir"just"to"clarify,"if"the"bank"closes,"there"is"impairment"of"the"check?" are'different'entities?'
A:' I’d' say' there' would' be' impairment' of' the' check' through' the' fault' of' the' S:' Because'in'this'case,'the'relationship'between'Citibank'Manila'and'the'client'
lender,' in' which' case' there' is' deemed' payment' of' the' obligation;' it’s' like' is'that'Citibank'was'the'creditor'and'client'was'debtor.'However'in'Citibank'
there'is'an'encashment.'The'burden'is'on'the'lender'to'recover'from'the'bank' Geneva,'it'was'the'debtor'and'client'was'creditor.''
by'participating'in'the'relevant'proceedings.'' SP:'So'why'is'there'a'need'to'determine'that'they'are'the'same'entity?'
" S:' Because'our'legal'tender'is'in'Philippine'peso'
Q:"By"issuing"the"manager’s"check"would"there"be"a"substitution"between"the" S:' Because'if'it’s'considered'the'same,'it'will'be'like'it’s'the'other'party—'
debtor"and"the"bank"wherein"the"bank"now"becomes"the"new"debtor?"" SP:'So?'
A:' When' a' bank' issues' a' manager’s' check' the' bank' will' only' pay' according' to' S:' Because'Sir'if'they'are'one'and'the'same,'they'could'just'be'the'debtor'or'just'
the' tenor' of' that' manager’s' check.' The' bank' does' not' know' the' underlying' the'creditor,'but'in'this'case'they'are'different.'
consent' or' the' underlying' transactions;' what' it' is' for.' Whether' it’s' payment' SP:'Because' it' deals' with' offsetting,' or' compensation.' For' there' to' be' offsetting,'
for' a' loan' or' any' other' debt,' it' does' not' matter' to' the' bank.' It’s' up' to' the' there'should'be'at'least'two'transactions,'wherein'the'parties'are'debtors'and'
borrower'to'make'sure'it’s'a'valid'transaction.'' creditors'of'each'other.'If'you'consider'them'as'one,'there'could'be'offsetting.'
' That’s'the'very'issue'here.'And'the'Supreme'Court'said'that?'
' Actually,'when'the'borrower'applies'for'a'manager’s'check,'there'is'actually'a' S:' Citibank'cannot'do'that'because'they'are'not'one'and'the'same.'
contract' between' the' borrower' and' the' bank;' the' borrower' is' to' buy' the' SP:'Ordinarily,'if'you'have'a'corporation,'that'corporation'will'be'considered'as'
manager’s'check'and'the'bank'is'to'issue'it.'' one' entity' regardless' of' the' many' branches' it' may' have' in' different'
' jurisdictions.'In'fact'you'can'go'to'the'SEC'and'establish'a'branch.'That’s'the'
' But' when' there' is' already' issuance' of' the' manager’s' check,' there' will' be' general'rule,'the'branch'is'not'different'from'the'parent.'But'in'this'case'the'
another' contract.' That' contract' has' a' stipulation' of' payment' in' favor' of' a' Supreme'Court'said'
third'party,'in'this'case'the'lender.' S:' That'they'are'not'one'and'the'same.'
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SP:'Why?'
S:' First,'they'relied'on'the'laws'in'the'Philippines.''
SP:'So' under' our' law,' the' branches' of' a' foreign' bank' in' the' Philippines' are'
considered' separate.' Why?' What' is' the' purpose' for' that?' It’s' for' the'
protection'of'the'local'depositors.'If'the'assets'of'these'branches'are'mingled'
with'the'parent,'then'the'assets'may'be'used'to'satisfy'liabilities'made'outside'
of' the' Philippines.' There' will' be' a' detriment' to' the' local' depositors' of' the'
branches'of'the'bank.'For'this'purpose,'for'collection,'these'two'branches'will'
be'considered'separate.'This'is'a'peculiar'rule;'remember'this:'for'purposes'of'
offsetting,'they'are'not'the'same'parties.''
' 1. There' should' be' a' proclamation' by' the' BSP' thar' there' is'
EXTRAORDINARY'INFLATION'
Now,'what'about'the'extraordinary'inflation?'[1:28:15]'
' 3. The' parties' stipulate' that' they' recognize' the' effect' of' extraordinary'
S:'' Sir,'because'in'this'case'the'rule?'
SP:'When'was'the'obligation'incurred?'Give'me'a'decade.'
S:' 1970s.'
SP:'Who'was'asking'for'the'application'of'the'rule'on'extraordinary'inflation?'
S:' Citibank.'
SP:'To'consider'or'not'to'consider'the'extraordinary'inflation?'
S:' Citibank' wanted' the' Court' to' rule' on' the' value' of' the' money' before' the'
original—'
SP:'Citibank' wanted' what?' Without' talking' about' inflation' Citibank' wanted'
what?'
S:' Sir' because' the' dollar' rate' went' up.' So' what' they' were' asking' was' the'
exchange'rate'when'they'applied'for'the'original—'
SP:'How'much'was'the'amount'of'the'loan?'
S:' 2'million'pesos.'
SP:'So'Citibank'wanted'what?'
S:' Since'the'court'said'that'offsetting'was'invalid,'Citibank'has'to'give'bank'the'
dollars'to'the'client.''
SP:'So'what’s'the'fuss'about'extraordinary'inflation'there?'
S:' Sir,' because' the' general' rule' for' extraordinary' inflation' is' that' you' have' to'
apply' the' rate' before' the' inflation.' In' this' case,' Citibank' was' applying' for'
that.'They'wanted'the'court'to'rule'that'there'was'an'extraordinary'inflation.'
But'the'Court'was'saying'that'there'was'no'extraordinary'inflation.'Because'
the'trial'took'a'decade?'
SP:'Let’s' say' that' the' bank' has' to' return' $100,000' plus' interest.' What' is' the'
problem'there?'
S:' The'problem'is'that'they'have'to'return'the'money.'
SP:'Let’s'say'they'did'the'offsetting'happened'in'1990'and'they'have'to'return'the'
money'in'2005.''
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S:' Sir,'because'in'1990'the'exchange'rate'between'peso'and'dollar'was'25'pesos'='
1' dollar.' And' then' in' 2005,' after' the' Asian' Financial' Crisis' and' all,' the'
exchange'rate'changed'to'45'pesos.'So'Citibank'Manila'will'have'to'pay'more.''
SP:'In' short,' Citibank' Manila' said' that' there' should' be' an' adjustment.' Because'
instead'of'following'25'to'1,'they'would'have'to'pay'double,'45'to'1.'Supreme'
Court'said?'
S:' Supreme' Court' said' there' was' no' extraordinary' inflation,' since' there' are'
requisites'for'that—'
'
'
There'are'THREE"REQUISITES"FOR"EXTRAORDINARY"INFLATION:'
extraordinary'inflation'or'deflation;'
2. There'should'be'a'contractual'relation'between'the'two'parties;'
inflation'or'deflation.'
'
'
'
SP:'What’s'the'German'experience?'
S:' It' happened' in' Germany' where' the' decrease' in' the' purchasing' power' was'
happening' drastically' by' the' minute.' When' the' employees' received' their'
salary' they' immediately' had' to' give' it' to' their' wives' to' purchase'
commodities.''
SP:'By'the'way,'what’s'inflation?''
S:' Inflation'happens'when'there'is'a'decrease'in'purchasing'power.'
SP:'How'do'you'measure'inflation?''
S:' By' the' Consumer' Price' Index,' Sir.' The' power' of' the' buyer' to' purchase' a'
basket'of'goods'given'the'money'he'has.''
SP:'So'there’s'this'consumer'price'index.'It'measures'what'the'Peso'can'purchase'
at' a' given' time.' So' that’s' inflation.' Deflation?' A' lot' of' supply' and' less'
demand,' so' the' peso' can' buy' more.' For' extraordinary' inflation' then,' there'
has' to' be' a' standard.' What’s' the' standard?' The' standard' is' the' German'
experience.' Aside' from' the' three' requisites' mentioned,' the' only' standard'
cited' by' the' Supreme' Court' is' the' German' experience.' If' you' look' at' it,' it’s'
very'difficult'to'work'on'that'standard.''
'
What'were'the'instances'you'can'invoke'as'situations'of'extraordinary'inflation?'
The' aftermath' of' the' Aquino' assassination.' In' that' case,' there' were' no' foreign'
reserves.'We’re'pretending'we'have'dollars'we'do'not'have.'Investors'were'going'
out' of' the' country.' It' was' very' difficult' to' purchase' goods.' But' the' Supreme'
Court'said'it'is'NOT'an'example'of'an'extraordinary'inflation.''
'
How'about'the'Asian'Financial'Crisis?'From'1'to'26'it'became'1'to'46.'It’s'not'an'
extraordinary'inflation.'Because'there'was'a'proof'from'NEDA'that'the'inflation'
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' '
rate'did'not'even'go'over'100%.'Even'if'it'reaches'100%,'it’s'not'an'extraordinary'
inflation'based'on'the'example'given'by'the'Court'(German'experience).''
' '
Remember' our' discussion' of' a' financial' crisis' as' a' fortuitous' event.' If' you'
consider'this'as'an'extraordinary'inflation,'well'let’s'assume'this'is'an'indication'
of' extraordinary' inflation.' But' for' our' purpose,' what' will' happen?' Let’s'
determine' the' present' value' of' money.' Where’s' our' economist' again?' What' is'
present'value?'
' '
Let’s'say'you'have'1,000'pesos'today.'It’s'more'valuable'than'1,000'pesos'in'the'
future.' Why?' Because' your' 1,000,' after' 1' year,' assuming' an' interest' rate' of' 6%,'
will'be'1,060.'The'rule'is'same'amount'in'the'future'is'less'valuable'same'amount'
now'(I'think'he'is'saying'that'the'amount'now'is'less'valuable).'So'if'you'are'the'
creditor,' you' want' this' readjusted' based' on' the' intrinsic' value.' On' the' other'
hand,'the'debtor'can'say'no'you'only'want'1'is'to'26.'But'in'whatever'case,'if'you'
apply'Article'1250,'the'burden'will'be'shouldered'by'one'party.'In'our'scenario'of'
the'Asian'Financial'Crisis,'instead'of'the'debtor'shouldering'the'burden,'it'will'be'
the' creditor.' If' it’s' an' extraordinary' inflation,' the' creditor' will' say' that' the'
contract'does'not'reflect'the'current'exchange'rate,'he'will'ask'for'an'adjustment.'
Art.'1250'just'provides'a'shifting'of'the'burden'from'one'party'to'the'other;'from'
debtor'to'creditor.'So'1250'is'pretty'much'a'dead'law.'The'standard'is'very'high'
and'it'will'create'a'lot'of'problems.'
'
SP:'Besides,'the'Court'said'in'the'Citibank'case'is'really'a'rule'of'equity.'What’s'
the'relevance'of'that?''
S:' It’s'related'to'the'doctrine'of'unclean'hands.'Citibank'did'not'come'to'court'
with' clean' hands' because' the' offsetting' was' invalid.' They' cannot' say' that'
they'made'it'in'good'faith.'
SP:'Yes,' in' fact' the' Court' said' that' there' could' be' a' manufactured' document.'
Citibank'was'not'a'party'in'good'faith.''
'
EQUITABLE"V."NG"
There' was' another' case' similar' to' this,' Equitable.' Just' a' note' on' this' Equitable'
case.' There' was' a' discussion' on' the' escalation' clause.' An' escalation' clause' is' a'
stipulation'in'a'contract'whereby'the'lender'or'the'creditor'can'adjust'the'interest'
rate;'an'upward'adjustment.'For'it'to'be'valid,'the'law'requires'that'it'must'have'
a' corresponding' de?escalation' clause.' At' the' same' time,' the' escalation' clause'
must' be' a' mutual' agreement.' It' should' not' be' a' unilateral' imposition' on' one'
party.' In' this' case,' the' Court' pronounced' the' adjustment' as' a' unilateral'
imposition' because' Equitable' can' make' adjustments' to' the' interest' rate' at' any'
time.'It’s'an'unbridled'grant'of'authority.'Of'course'you'can'say'they'agreed'on'it'
but' the' Supreme' Court' nevertheless' said' that' the' stipulation' negates' the'
mutuality' of' contracts.' Again,' this' rule' on' mutuality' of' contracts' is' akin' to' the'
potestative' suspensive' condition' dependent' on' the' sole' will' of' the' debtor,'
' 90"
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wherein' only' one' party' can' determine' when' there' will' be' an' obligation' or' a'
greater'obligation.
APPLICATION"OF"PAYMENTS"
Let’s'go'to'application'of'payments.''
'
'
Application'of'payment'is'when'a'debtor'has'several'obligations'to'a'creditor.'
'
'
"
ILLUSTRATION"5:""
So'let’s'say'the'debtor'has'Obligations'1,'2'and'3.'Obligation'1'is'Php1million'
payable' upon' demand;' Obligation' 2' is' Php2million' with' interest' of' 1%' per'
month'due'December'31;'Obligation'3'is'Php3million'with'interest'of'2%'per'
month'on'or'before'December'31.''
'
'
Articles' 1252' to' 1254' provide' rules' on' the' application' of' payment.' So' what' are'
the'rules?'There'are'three'rules.'
'
'
THREE"RULES"ON"APPLICATION"OF"PAYMENT:'
1. The"debtor"has"the"right"to"choose."
If' the' debtor' pays,' the' debtor' can' designate' what' obligation' he' or'
she' assigns' his' or' her' payment.' Under' our' example,' let’s' say' the'
debtor'is'ready'to'pay'Php1million.'Can'he'apply'it'to'Obligation'3?'
No.'Obligation'3'has'a'period,'however'we'must'remember'the'rule'
on'integrity'of'payment.'Payment'must'be'complete.'So"we"see"here"
that"the"right"of"the"debtor"to"apply"the"payment"must"be"without"
prejudice" to" the" right" of" the" creditor.' In' this' case,' right' to'
completeness'of'payment.'So'debtor'can'only'apply'the'payment'to'
Obligation'1.'
'
2. If"the"debtor"does"not"choose"at"the"time"of"payment,"the"creditor"
has"the"option"to"apply"it,"with"the"consent"of"the"debtor."
How' will' the' creditor' do' that?' Let’s' say' debtor' now' tendered'
P2.5M.' He' did' not' specify' what' obligation' will' be' paid.' So' the'
creditor' can' apply.' If' you' are' the' creditor,' how' will' you' apply' the'
payment?' Obligation' 1' and' Obligation' 2' are' preferred;' O1' has' no'
interest' rate,' O2' has' lower' interest' rate.' How' will' the' creditor' get'
the' consent' of' the' debtor?' Creditor' can' issue' a' receipt' stating' that'
the' payment' is' made' in' full' on' O1' and' in' partial' payment' on' O2.'
Interest'is'paid'first,'and'then'partial'payment'of'the'principal.'
'
[In$ this$ scenario,$ if$ you$ are$ the$ debtor,$ you$ have$ to$ specify$ on$ how$ you$ apply$ the$
payment]'
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' '

' characterize' dacion' en' pago?' (Lika$ a$ novation,$ sir.)' Yes,' because' there' is' a'
3. By"operation"of"law." change'of'object.'But'the'law'says,'this'payment'in'kinds'is'actually'a'sale.'The'
Now' what' if' both' debtor' and' creditor' do' not' do' anything?' The' rules' on' sale' will' automatically' apply.' Warranties' will' apply.' In' this' case,'
application' of' payments' shall' be' by' operation' of' law.' What' will' there'is'a'sale'of'real'property.'For'a'sale'of'real'property'to'be'enforceable,'it'
happen?'You'always'pay'the'interest'first.'It’s'the'general'rule;'that’s' has'to'be'in'writing.'
why' you' have' that' presumption' that' if' you' pay' the' principal,'
'

'
accrued' interest' is' already' paid.' If' that' rule' is' inapplicable,' then' LUZON"DEVELOPMENT"V."ENRIQUEZ"
payment'is'applied'to'the'most'onerous'obligation.'What'is'the'most' SP:'What'happened'to'the'mortgage?''
onerous'obligation'here?'Obligation'3." S:' Developer'defaulted.'But'rather'than'foreclosing'the'property,'developer'said'
'

' that' it' will' assign' its' rights' to' the' property' in' favor' of' the' bank.' So' it’s' a'
Q:""Sir,"regarding"the"rules"on"the"most"onerous"obligation,"what"if"at"the"start" dacion' en' pago.' But' the' buyer,' not' knowing' there' was' this' dacion' en' pago'
the" obligation" is" not" onerous" but" because" of" an" escalation" clause" the" between' the' bank' and' the' developer,' filed' a' case' in' HLURB' to' enforce' the'
obligation" becomes" onerous," can" the" debtor" change" the" application" of" contract'to'sell.'The'Court'said'that'the'mortgage'between'the'bank'and'the'
payment?"" developer'is'invalid.'It'was'invalid'because'there'was'no'clearance'obtained'
A:' The' burden' will' be' reckoned' at' the' time' of' the' application' of' the' payment.' from'the'HLURB.'
Here' you' pay' the' interest' first,' then' you' pay' the' principal' of' the' most' '
onerous'obligation.' You'have'to'understand'PD'957.'It'is'for'the'protection'of'buyers'of'subdivision'
' lot' and' condominium' units.' You' have' to' understand' that' in' real' property'
Q:"But"Sir"won’t"the"application"to"another"obligation,"like"different"from"the" projects,'the'developer'will'need'money.'It'will'go'to'the'bank'to'apply'for'a'loan.'
one"with"interest,"tantamount"to"a"partial"payment"only" Of'course'the'bank'will'want'a'security'from'the'developer.'What'do'you'think'
A:' Yes'but'the'creditor'accepted.'But'this'is'only'when'the'rule'followed'is'the' the'security'will'be?'The'developer'will'mortgage'the'lots,'or'the'saleable'lots'in'a'
one' by' operation' of' law.' When' you' receive' an' incomplete' payment,' you' project.' But' before' the' developer' can' mortgage' the' saleable' lots,' the' developer'
either'refuse'or'apply'it'to'the'way'you'want.'' has'to'get'an'approval'from'the'HLURB.'In'this'case,'the'mortgage'was'invalid'
' because'there'was'no'clearance.'
Q:""Sir"if"you"apply"the"payments,"even"if"the"one"with"the"interest"is"the"less" '
onerous," you" still" apply" the" payment" to" that" obligation" first," regardless" if" But' we’re' more' interested' in' the' dacion' en' pago.' The' developer,' instead' of'
the"one"without"interest"is"more"onerous?"" allowing'the'bank'to'foreclose'the'properties,'the'developer'went'for'a'dacion'en'
A:' Yes,'payment'of'interest'always'goes'first'before'the'principal.' pago.' As' a' result,' the' buyer' was' deprived' of' the' sale' of' the' lot.' Could' the'
' developer'still'sell'notwithstanding'the'contract'to'sell?'
ART."1245"—"DACION"EN"PAGO"[2:04:01]' '
[Group$Recitation]' S:' Yes,'because'it’s'a'contract'to'sell.'Ownership'is'still'with'the'developer.'
' SP:'Yes,'however'the'Supreme'Court'also'said'that'the'contract'should'have'been'
SP:'What'is'dacion'en'pago?' annotated' on' the' relevant' titles,' which' was' not' done' in' this' case.' Because'
S:' Dation' in' payment.' Art.' 1245' describes' dacion' en' pago' as' payment' of' your' there'was'no'annotation,'it'was'not'recognized'by'the'bank.'The'annotation'
obligation'in'another'form,'or'a'replacement'of'your'former'obligation.' was' supposed' to' bind' other' parties' to' respect' the' contract' to' sell.' So,' what'
SP:'What'kind'of'obligation'is'the'former'obligation?'When'will'dacion'en'pago' did'the'court'say'about'that?'Should'the'CTS'bind'the'bank,'considering'that'
happen?' there'was'no'annotation?'
S:' A' monetary' obligation' Sir.' Dacion' en' pago' will' happen' when' you' assign' a' '
property'to'another'person'in'favor'of'a'loan'or'debt.' Supreme' Court' said' that' the' bank' is' bound,' notwithstanding' the' absence' of'
' annotation;' because' as' a' bank,' it' should' have' exercised' a' greater' degree' of'
diligence'in'knowing'the'circumstances'of'the'transaction.'Now,'if'the'property'
'

When'you'have'dacion'en'pago,'let’s'say'you'have'a'loan.'Debtor,'has'to'pay'
a'loan'obligation'of'P1M,'to'creditor.'Instead'of'paying'with'cash,'this'will'be' was'given'to'the'buyer,'the'bank'will'be'dispossessed.'Can'the'bank'go'after'the'
replaced' by' conveyance' of' a' condominium' unit.' How' does' the' law' developer'for'remedy?'Supreme'Court'said'that'it’s'a'dacion'en'pago.'As'a'rule,'

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' '

the' dacion' en' pago' extinguishes' the' obligation' to' the' extent' of' the' value' of' the'
property' as' agreed' upon' by' the' parties' or' as' may' be' determined' in' an'
appropriate'proceeding.'And'because'it’s'a'sale,'the'issue'was'should'bank'have'
a' recourse' against' the' developer?' Remember' in' a' sale,' there' is' an' implied'
warranty'against'eviction.'With'the'enforcement'of'the'CTS'against'the'bank,'in'
effect' the' bank' was' dispossessed' of' the' lot.' The' bank' should' have' a' recourse'
against' the' developer,' right?' But' Supreme' Court' said' no' because' the' contract'
between' the' bank' and' the' developer' did' not' have' a' reservation' in' favor' of' the'
bank.'It'accepted'the'dacion'en'pago'as'complete'payment.'And'considering'that'
the'bank'new'of'the'CTS'between'the'buyer'and'the'developer,'SC'said'the'bank'
assumed'the'possible'risk'of'dispossession.'In'the'end,'the'bank'was'penalized.'
It’s' a' very' good' explanation' why' the' bank' should' shoulder' the' loss;' because'
everything' could' have' been' avoided' if' the' bank' only' exercised' extraordinary'
diligence.''
'
Again,'you'have'to'remember'that'as'a'rule,'a'dacion'en'pago'will'extinguish'an'
obligation'only'to'the'extent'of'the'value'of'the'property'given'by'way'of'dacion'
as' agreed' upon' by' the' parties,' or' as' determined' in' an' appropriate' proceeding.'
The' SC' said' there' was' acceptance' of' the' lots' by' way' of' dacion' as' complete'
payment' of' obligation.' There' was' also' waiver' of' the' right' of' implied' warranty'
against'eviction'because'of'the'bank’s'failure'to'exercise'due'diligence.'

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' '
"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
THURSDAY,'11'DECEMBER'2014'
'

"

CONTINUATION'OF'ARTICLE'1245' '
ART."1245"—"DACION"EN"PAGO" "

ILLUSTRATION"2:""(SAME"FACTS"AS"ILLUSTRATION"1)"
'
"
"
1. They'entered'the'contract'on'Day'3,''
ILLUSTRATION"1:"" 2. Delivery'is'to'be'made'on'Day'4.''
Let’s'say'debtor'owes'P5M'to'creditor.'Debtor'defaults'and'offers,'in"lieu"of" 3. Delivery'was'not'made'on'Day'4,'but'instead'delivery'was'made'on'
this,'to'convey'property'to'creditor.'Creditor'accepts'and'they'enter'a'contract' Day'5.''
whereby'debtor'conveyed'property'in'payment'of'the'obligation.'We'further' '
assume'that'this'land'has'growing'crops.'' Upon'delivery,'the'debtor'harvested'the'crops.'Is'that'valid?''
' Can'debtor'validly'harvest'the'crops'prior'to'delivery?''
'

What'is'this'contract?'It’s'a'dacion'en'pago.'Now'the'first'issue'you'have'to' '
determine'is'to"what"extent"is"the"obligation"extinguished.'Let’s'say'these'are' First,' what' is' the' obligation' here?' A' dacion' is' what' kind' of' prestation?' It’s" an"
the'facts'mentioned'in'the'contract.'Will'there'be'a'valid'dacion'en'pago?' obligation"to"give."It’s'covered'by'a'TCT,'it’s'an'obligation'to'give'a'determinate'
'

' thing.' If' it’s' an' obligation' to' give' a' determinate' thing,' debtor' has' to' give'
In' a' contract' you' need' consent' of' the' parties,' object,' and' cause.' You' have' the' accessions'meaning'the'growing'crops'(Article'1166).'
object' and' consent.' Do' you' have' the' cause,' meaning' the' price?' There' was' no' '
agreement'on'the'price'right?'Will'there'be'a'valid'dacion?' Now'let’s'say'delivery'was'supposed'to'be'made'on'day'4,'it'wasn’t'made'on'day'
' 4.'Who'will'have'the'right'over'the'crops?'The"creditor.''
If'you'look'at'jurisprudence,'it'states'that'a'DP"shall"extinguish"an"obligation"to" '
the"extent"of"the"value"of"the"property"as"agreed"upon"by"the"parties"or"as"may" What' kind' of' right?' There"will"only"be"a"personal"right.' What' does' it' mean' to'
be" proven," unless" the" parties" agree" on" total" extinguishment" either" implied" or" have' personal' right?' The' creditor' will' have' a' right' against' the' debtor' for' the'
expressly.' So' in' this' case,' there' will' be' a' valid' dacion' even' if' there' is' no' growing' crops,' BUT' it' will' not' be' a' real' right.' What’s' a' real' right?' It' means'
stipulation'of'the'price.'' ownership.'Creditor'will'not'have'ownership'until'delivery'whether'constructive'
' or'actual.'
First,' it' can' appear' that' in' the' contract' that' parties' intended' that' conveyance' '
would' completely' extinguish' the' obligation,' in' which' case' there' is' no' point' Now'remember'that.''I'just'related'DP'with'an'obligation'to'give'a'determinate'
discussing'the'value.'But'let’s'assume'it’s'not'clear'whether'there’s'an'agreement' thing.''
to'completely'extinguish'the'obligation.'' '
' Now'what’s'the'context'of'a'dacion?'When'do'you'do'a'DP?'''
"

Will' there' be' a' valid' DP' absent' a' stipulation' on' the' value' of' the' property' to' be'
"
"

conveyed?'' ILLUSTRATION"3:""CONTEXT"OF"A"DACION"
' Let’s'say'a'creditor'is'trying'to'collect'something'from'the'debtor,'and'debtor'
'
cannot' pay.' Debtor' will' normally' offer' a' DP' to' entice' the' creditor' to' accept'
If'you'go'by'jurispridence,'there'are'TWO"WAYS"TO"DETERMINE"VALUE:'
payment' immediately' and' at' a' discount.' So' possibly' that' will' work' in' the'
1. By'stipulation'of'parties;'
favor' of' debtor.' Normally,' it’s' done' in' the' context' of' a' proceeding' whereby'
2. As'may'be'proven'
' creditors'are'claiming'against'a'debtor'and,'as'part'of'a'settlement,'debtor'will'
' offer'to'convey'by'DP'certain'properties.'
So' the' fact' that' the' parties' on' a' dacion,' meaning' debtor' conveys' property' in'
'

'
payment'of'5M'obligation,'there'can'be'a'valid'dacion'to'the'extent'of'the'value'
Q:" Why" would" a" creditor" allow" such" a" discount" if" he" can" just" attach" the"
of' the' property' as' may' be' proved.' Who' may' prove' it?' Maybe' the' debtor' and'
properties?"
affirmed'by'the'Court.'

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A:' Let’s'say'there’s'an'insolvency'proceeding'under'the'Financial'Rehabilitation' adjustment.'In'that'manner,'you'will'not'be'restricted'by'jurisprudence'defining'

and' Insolvency' Act.' Debtor' filed' a' petition' for' voluntary' insolvency' with' a' EI'based'on'Germany.'There'is'now'a'standard.'If'the'standard'exists,'there'will'
prayer' for' rehabilitation.' During' this' period,' normally' what' properties' will' be'an'adjustment'on'the'value'of'payment'to'be'made'by'debtor.'That’s'what'I’m'
be'tied'up'in'litigation?'And'that'litigation'will'take'5'years'at'least.'During' saying.'But'it'has'to'be'clear'in'the'contract.'If'the'inflation'rate'is'this,'you'will'
that'period'creditor'will'tire'out,'they'would'rather'get'payment'at'a'discount' have' adjustment.' Sometimes' the' reference' is' not' the' inflation' rate,' but' the'
immediately'and'even'if'not'cash,'but'property.'And'it'happened,'based'on' exchange' rate.' If' exchange' rate' reaches' X' USD:' Y' Peso,' there' will' be' a'
experience,' creditors' do' accept' after' seeing' it' will' take' a' long' while' before' corresponding'adjustment.'
they'would'get'any'payment'at'all.' "
' Art."1255"—"CESSION"[19:20]'
Q:" Yes,"but"dacion"also"occurs"even"if"you’re"not"insolvent?" [Recitation]'
A:' Yes.'But'I’m'just'giving'you'an'example'of'under'what'context'it'will'happen.' SP:'What'is'Cession?'
As'a'debtor,'it'can'be'used'as'an'incentive'to'the'creditor'to'give'concessions' S:' Cession' is' a' way' to' extinguish' an' obligation' whereby' debtor' assigns' one' of'
to'the'debtor.'It'can'be'outside'an'insolvency'proceeding.'Let’s'say'debtor'has' his' properties' to' a' creditor' in' order' for' the' latter' to' administer' the' same' to'
no' cash' and' says' to' creditor' “I’ll$ pay$ you$ now.”' Of' course,' as' a' creditor' you' satisfy'a'debt.'
can' always' reject.' You' have' the' option' of' suing' and' then' execute' on' the' SP:'So'it’s'the'same'as'a'dacion?'
property.' You' will' reach' the' same' result,' but' it' will' take' a' longer' time.' S:' No'sir.'In'DP,'ownership'is'transferred.'In'cession,'there'is'only'assignment'
Because'if'you'sue,'you'go'to'trial,'litigation,'get'a'judgement,'appeals,'and'so' of'possession'and'administration.'
on,' then' you' execute' the' property.' That' is' assuming' that' property' is' still' SP:'What' will' the' creditor' have' under' a' cession:' possession' or' administration?'
available.'A'DP'gives'you'an'outright'exit'or'payment.' Selling'is'an'act'of'ownership.'
' S:' But'sir'In'this'case,'debtor'assigned'his'right'to'the'creditor.'
ART."1250"—"EXTRAORDINARY"INFLATION"[10:47]' SP:'Then'that’s'a'sale.'The'assignment'is'like'a'sale.'
Remember'1250'extraordinary'inflation?'It’s"pretty"much"a"dead"law"because"the" S:' Can'I'differentiate?'In'DP,'unless'there'is'a'stipulation,'the'thing'substituted'
standard"is"very"high.'A'party'can'barely'prove'or'hurdle'the'requirement,'that’s' for'the'sum'of'money'is'considered'a'payment'in'full'of'the'obligation,'while'
jurisprudence.'But'let’s'say'you’re'a'creditor,'you'anticipate'that'there'will'be'a' in'cession,'the'general'rule'is'the'proceeds'of'the'sale'can'only'extinguish'to'
decrease'in'the'value'of'the'peso.'What'will'you'do'now?'1250'is'dead'but'you' the'extent'of'the'amount'that'the'creditor'obtains'from'the'disposition'of'the'
want'to'use'it.'Is'there'a'way'of'addressing'it'contractually?'' property.'
' SP:'So'what'is'cession'then'based'on'the'distinction'you'made?'
By'the'way,'if'you’re'lending'from'a'bank'or'making'a'money?market'placement' S:' Generally,'cession,'unless'otherwise'stipulated,'does'not'totally'extinguish'an'
or'a'time'deposit,'there'is'always'that'waiver.'You’re'waiving'your'right'under' obligation'because'the'general'rule'is'when'the'proceeds'are'not'equal'to'the'
1250' because' you’re' the' one' lending.' But' if' it’s' the' bank' or' any' other' lender' amount'of'the'obligation…'
wanting'to'use'the'benefit'of'1250,'how'can'they'have'the'benefit?'Isn’t'it'possible' SP:'So'what'is'cession'then?'What’s'the'essence/nature/purpose?'
to'solve'it'contractually?' S:' When'the'debtor'is'insolvent'or'has'no'means'of'paying.'
' SP:'Is'that'a'requirement,'insolvency?'
Q:""Can’t"they"just"enter"into"another"contract…?" S:' Yes.'
SP:'No,'I'want'it'addressed'that'there'will'be'an'adjustment'on'the'value'based' SP:'I’ll'read'you'1255,'(reads)'there'is'no'mention'of'insolvency.'
on'the'contract.'There’s'an'inflation'and'you'want'an'adjustment.'You'have' S:' Cession' is' a' mode' of' extinguishing' an' obligation' wherein' debtor' assigns' to'
to' analyze,' what’s' the' problem' with' 1250?' The' definition' is' the' problem.' the'creditor'the'administration/possession'of'his'properties'so'that'latter'may'
That’s'what'you'address.'How'do'you'address'it'now?' dispose'of'same'to'satisfy'a'debt.'
' SP:'There’s' something' wrong' with' your' answer' because' the' debtor' grants'
[Class:$Make$your$own$standard.$Put$it$in$the$contract,$make$your$own$definition.]' possession/administration' and' the' latter' part' you' mentioned' disposition,'
' which'is'an'act'of'ownership,'not'administration.'Which'is'which'now?'
How' will' you' define' it?' What’s' the' measure?' Consumer' Price' Index.' Let’s' say' S:' In'cession'ownership'does'not'transfer.'
you’re'using'the'CPI.'Extraordinary'inflation'shall'be'X%.'The'moment'it'reaches' SP:'Well' in' possession,' ownership' does' not' transfer.' In' administration,'
X%'inflation'per'annum,'that'is'your'EI.'In'that'case,'there'will'be'a'formula'for' ownership'does'not'transfer.'So'what’s'the'basis'for'the'disposition'then?'
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' discharge' from' your' liabilities' regardless' of' the' result' of' the' liquidation' of' the'
assets'given'in'the'proceeding.'
'

CESSION"[from$the$word$cede$or$to$surrender]"
A'debtor'cedes'all'assets'to'the'creditors'and'authorizes'them'to'liquidate'the' ''
assets' and' convert' them' into' cash' by' selling' them' by' public' or' private' sale.' In' cession,' let’s' say' the' creditors' don’t' agree' to' a' complete' extinction,' the'
Afterwards,' the' proceeds' are' applied' as' payment' of' the' obligation.' Unless' obligations'will'only'be'partially'paid.'An'individual'??'I'say'individual'because'a'
there'is'an'agreement'to'the'contrary,'the'obligation'will'be'extinguished'only' juridical' person' cannot' get' a' discharge' based' on' the' FRIA' –' will' be' better' off'
to'the'extent'of'the'liquidated'or'sold'assets.' filing' a' petition' for' discharge' for' all' of' his/her' liabilities' under' the' FRIA.' The'
' structure'will'be'the'same:'debtor"will"cede"all"assets,"but"the"end"result"will"be"
(The' law' provides' multiple' creditors,' but' in' reality,' it' could' be' one' creditor' a" clean" slate," a" complete" extinction" of" all" obligations" and" liabilities" of" the"
and'it'will'be'the'same'nature'of'cession).' debtor.' That’s' why' cession' is' a' rarely' used' method' of' extinguishing' an'
'
obligation.'It’s'not'a'good'framework.'If'you'want'to'cede'all'your'assets,'might'
'
" as'well'do'it'pursuant'to'FRIA.''
ILLUSTRATION"4:"" '
So'the'debtor'owes'these'creditors'different'obligations:'' Besides' if' you' look' at' this' (ILLUSTRATION" 4),' instead' of' 1M,' let’s' multiply' [the'
1. 1M'(to'creditor'1),'2M'(to'creditor'2),'3M'(to'creditor'3).' credits]'to'100M,'200M,'300M'for'a'total'of'600M.'You'have'assets'worth'400M.'
2. Debtor’s'assets'are'worth'4M.'' Will' you' cede' your' assets?' No,' because' 400M' will' go' a' long' way.' You' allocate'
3. After'selling,'creditors'realize'the'proceeds'as'4M.'' 10%'of'that'to'litigation'and'you'can'hold'on'to'your'assets'for'around'10'years.'
'

' So' there' is' no' point' in' giving' up' all' your' resources' whether' you’re' getting'
The' proceeds' after' deducting' costs' will' be' applied' in' payment' of' these' concessions'from'creditors.'
obligations.' Therefore' the' total' obligation' payable' to' creditors' will' be' reduced' "
only'to'the'extent'of'4M'less'costs.'There'will'be'an'outstanding'liability'of'2M+.' ART."1256f1261"—"CONSIGNATION"[38:05]'
That’s'cession.' FAR"EAST"BANK"V."DIAZ"REALTY"
' "
DACION'v.'CESSION' Pacific' extended' a' loan' to' Diaz' for' P720k,' secured' by' a' Real' Estate' Mortgage'
' (REM).'That'property'security'was'being'leased'by'Diaz'to'Allied.'Per'agreement,'
DACION" CESSION" the' rentals' of' Allied' would' be' paid' directly' to' Pacific' to' discharge' the' loan'
obligation.'Pacific'closed'and'this'particular'contract/asset'was'transferred'to'Far'
' '

In' dacion,' ownership' transfers' from'
debtor'to'creditor.'It’s'actually'a'sale.'
'
In' cession,' it’s' only' an' authorization'
East' Bank.' Is' it' a' different' entity?' SC' ruled' that' it' was' the' same' entity' actually'
to' dispose.' The' property' is' ceded'
because'FEB'bought'the'assets'of'Pacific.''
with' the' right' to' apply' the' net'

'
proceeds' in' payment' of' the'
Diaz' went' to' the' office' of' Far' East' Bank' and' found' out' the' obligation' due' was'
obligations'to'the'creditors.'
'
around'1.4'million.'Diaz'paid'by'check.'FEB'told'Diaz'to'deposit'it'in'an'account.'
' Most' likely' it’s' not' an' account' of' FEB.' And' then' later' said' to' deposit' it' in' a'
As' I' said,' the' law' defines' it' as' a' surrender' of' assets' by' the' debtor' to' several' money?market'placement.''
creditors.' It' can' be' done' as' one' transaction' only.' Debtor' can' say,' creditor' 1' sell' '
my' property,' apply' the' proceeds,' the' obligation' will' be' extinguished' as' agreed' SP:'The'payment'by'check,'was'that'a'valid'tender'of'payment?'General'rule?'
upon'or'to'the'extent'of'the'proceeds.' S:' General'rule'is'that'checks'are'not'valid'tender'of'payment.'
' SP:'Because'it’s'not'legal'tender.'But'why'was'it'valid'in'this'case?'
Now,' cession' is' a' way' of' extinguishing' an' obligation." It’s" an" inefficient" way" S:' In'this'case,'FEB'accepted'the'check'and'there'was'cash.'
because" the" debtor" parts" with" all" resources" but" does" not" get" any" concession." SP:'Not' really.' There' was' only' directive' for' Diaz' to' deposit' in' an' account' who'
The'minimum'concession'is'extinguishing'of'the'entire'liability'of'the'debtor.'So' later'placed'it'in'a'money?market'placement.'
if'you’re'a'debtor,'what'is'your'best'recourse?'File'an'action'for'insolvency'under' S:' There'was'also'a'receipt'that'that'amount'was'for'the'obligation'of'Diaz.'So'
the' Financial' Rehabilitation' and' Insolvency' Act' (FRIA),' and' you' can' get' a' the'Court'held'that'that'was'made'it'a'valid'tender'of'payment.'

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SP:'What' are' the' requirements' of' a' valid' tender' of' payment?' The' Court' said' respect'to'interest,'the'issue'should’ve'been'whether'there'was'payment'or'not.'If'
there'must'be'a'fusion'of'what?' there' was' payment,' interest' should' no' longer' accrue.' If' tender' of' payment' was'
S:' The'debtor'must'be'willing'and'capable'to'pay.'' only'tender,'there'should'also'be'interest'following'the'ruling'in'State'Investment'
SP:'In'a'fancier'language,'the'Court'said'that'debtor'must'be'ready,'willing,'and' Banks.'
able'to'pay'the'obligation.'That’s'a'valid'tender'of'payment.'Debtor'must'be' '
able'to'show'that'readiness,'willingness,'and'ability'to'pay.' STATE"INVESTMENT"HOUSE"V."CA"[58:25]'
" '
I' think' I’ve' mentioned' before,' when' you' say' tender' of' payment' what' do' you'
"

ILLUSTRATION"5:""
actually' do?' You' have' to' show' the' actual' payment.' Here,' the' payment' should' There'were'2'borrowers'and'2'lenders.'There'were'2'transactions.'
have'been'legal'tender.'However,'there'was'a'waiver"of"that"requirement"by"the" • Transaction''1'(unsecured)'
fact"of"accepting"the"check"payment.'And'it'was'valid'in'what'sense?'Why'did' 1. Lender'extended'a'loan,'and''
the' Court' consider' it' a' valid' tender' of' payment,' aside' from' the' fact' that' it' was' 2. There'was'an'obligation'to'pay.''
accepted?' There' were' two' things:' it' was' placed' in' a' deposit' and' later' in' the' 3. This'is'unsecured.'
money?market'placement.' '
' • Transaction''2'(secured)'
In' effect,' the" funds" were" at" the" disposition" of" the" bank.' The' bank' controlled' 1. Lender'extended'another'loan,'and''
where'the'funds'would'be'placed'in'the'meantime.'What'did'the'Court'do'with' 2. There'was'an'obligation'to'pay.''
that'20%'interest'after'tender'of'payment?'The'Court'reduced'the'interest'rate,'in' 3. Secured'by'a'pledge'(shares'of'stocks)'
lieu'of'the'tender'of'payment,'from'20%'to'12%.'Is'that'valid?' '

"
'
A' pledge' is' the' delivery' of' personal' property' by' way' of' security.' What' were'
S:' Yes,'the'Court'has'the'authority'to'reduce'interest'rates'if'it'feels'it’s'too'high.'
pledged'were'shares'of'stocks.'Eventually,'borrower'was'ready,'willing,'and'able'
SP:'It’s' not' like' a' penalty.' The' court' can' only' reduce' it' if' it’s' unconscionable' or'
to'pay'the'loan'and'wanted'to'discharge'the'pledge.'Remember'the'moment'you'
too' high.' That' was' not' the' reason' given' by' the' Court.' Well' the' Court' did'
discharged' the' principal' obligation,' the' accessory' undertaking' (security/pledge)'
indeed' reduce' the' interest' rate.' What' was' the' ruling?' Interest' could' be'
shall'also'be'extinguished.'Lender'refuses'the'discharge.'Lender'maintained'that'
reduced'after'tender'of'payment.'Could'that'be'done?'
the'pledge'also'secured'[Transaction'1].'SC'said'only'one'transaction'was'secured'
'
by' the' pledge.' So' when' the' borrower' tendered' payment,' borrower' pre?empted'
I’ll'give'you'a'reference,'State'Investment'House.'Again'you'have'to'understand.'
the'application'of'interest.'
Tender'of'payment'is'like'let’s'say'I’m'paying'for'the'services'of'a'butler.'(Sir'is'
'
holding'a'paper'to'represent'cash)'This'is'tender'of'payment.'If'he'accepts,'that’s'
Let’s'go'back.'Let’s'say'it’s'a'loan.'The'obligation'is'to'pay'principal'plus'interest,'
payment.'If'he'doesn’t,'I’ve'only'made'a'tender'of'payment.'Therefore,'tender'of'
and'penalty.'The'penalty'is'based'on'default.'That’s'the'general'rule.'In'this'case,'
payment,'what'does'it'do?'What’s'the'only'effect'of'tender'of'payment?'As'you'
when' borrower' tendered' payment,' but' lender' refuses' to' accept' payment,' there'
can'gather'from'State'Investment'House,'what'does'it'prevent?'
was'no'default'to'trigger'the'penalty.''
'
'
S:' It' prevents' penalty.' It' prevents' the' debtor' from' incurring' additional'
However," borrower" continued" possession" of" payment." There" was" no"
damages.'
consignation." In" which" case," the" obligation" was" not" yet" extinguished.'
SP:'Yes'I'know.'Because…the'tender'of'payment'PREVENTS'DEFAULT,'which'is'
Therefore,'the'principal'should'be'paid'as'well'as'the'interest.'Reason'behind'that'
the'basis'of'the'imposition'of'a'penalty.''
is,'in'the'meantime,'borrower'had'use'of'the'funds.'If'borrower'wanted'to'stop'
'
accrual' of' the' interest,' borrower' should' have' consigned.' Again,' tender' of'
This'case'of'Diaz'shows'you'what'it'means'to'tender'payment.'Ordinarily,'tender'
payment' is' not' payment.' To' complete' it,' if' refused' by' creditor,' there' should' be'
of' payment' requires' you' to' pay' a' monetary' obligation' in' Philippine' currency,'
consignation.'
which' is' legal' tender.' That' was' dispensed' with' in' this' case' because' creditor'
'
waived' the' requirement.' Nevertheless,' there' was' payment' by' check,' accepted'
SP:'Let’s'say'you'owe'him'P100k'due'today.'You'tendered'payment'to'him,'and'
and' controlled' by' FEB.' FEB' accepted' because' they' were' placed' in' a' position' to'
he'refused.'How'will'you'consign?'
determine' how' the' funds' must' be' disposed' of.' So' that’s' the' payment.' With'
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S:' First,'I'have'to'give'a'notice,'then'go'to'court'and'file'a'case.' S:' There'is'no'debt'due.'

SP:'Yes!'You'file'a'case.'Can'you'go'to'Justice'Singh'and'say,'“Justice,$can$you$hold$
on$to$my$payment?”' No.' Consignation' is' a' court' action.' It’s' not' just' going' to'
court' and' depositing' your' money' in' court.' It’s' one' of' the' legal' actions' that'
can'be'taken'by'a'debtor'to'complete'payment.'
' default.' Tender' of' payment' does' not' become' payment' unless' accepted' by' the'
HEIRS"OF"BACUS"V."CA"[01:04:30]'
There' was' a' lease' contract' wherein' Bacus' leased' properties' to' Duray.' The'
contract'contained'an'option'to'buy'clause.''Under'said'option,'the'lessee'had'the'
exclusive' and' irrevocable' right' to' buy' 2,000' square' meters' (at' P200' per' square'
meter)' of' the' property' within' five' years' from' a' year' after' the' effectivity' of' the'
contract.'Within'the'period'of'5'years,'lessee'informed'the'Heirs'of'Bacus'that'he'
was'willing'and'ready'to'purchase'the'property.'
' That' will' happen' when' the' parties,' according' to' the' court,' execute' the' Deed' of'
SP:'How' [did' he' inform' the' heirs]?' What' did' the' lessee' say' to' the' heirs' of' the'
lessor?'
S:' I'am'willing'to'buy'the'property'and'sent'a'notice'as'a'sign'of'willingness'to'
buy'the'property'and'that'he'is'exercising'his'option.'
SP:'So'notice'of'exercise'of'option.'Upon'receipt'of'the'notice,'the'heirs'refused'to'
honor' the' exercise' of' the' option.' This' notice' was' accompanied' by' a' bank'
certificate'stating'that?'The'lessee'has'what?'
S:' The'lessee'had'a'loan'ready'for'P700k.'
SP:'The' lessee' had' a' credit' facility' from' the' bank' of' a' certain' amount.' The' fact'
here' was' the' notice' was' given' within' the' 5' year' period,' but' there' was' no'
payment.' Was' there' tender' of' payment?' ' Would' this' amount' to' a' tender' of'
payment?'
S:' No.'Heirs'were'saying'that'if'lessee'wanted'to'buy'the'property,'he'had'to'do'
it'within'the'5'years.'Since'he'only'sent'a'notice'within'the'5'years…''
SP:'The'notice'then'was'what'according'to'the'Court?'
S:' The' notice,' coupled' with' the' suit' filed' against' the' lessors,' was' attributed' as'
intent'to'exercise'the'option.'
SP:'But'there'was'no'tender'of'payment?'
S:' The'court'said'that'since'it'was'only'an'option'to'buy,'exercising'such'option'
would' lead' to' a' reciprocal' obligation' wherein' actual' payment' would' come'
simultaneously'with'conveyance'of'property.'
SP:'And'what'would'be'this'reciprocal'obligation?'
SP:'Well'when'you'have'option'to'buy,'you'will'have'to'pay'the'price.'That'is'a'
debt.'
'
You'have'to'understand'that'normally'a'tender'of'payment'is'required'to'prevent'
creditor'or'followed'up'by'consignation.'In'this'case,'the'lessor'granted'an'option'
to'lessee.'This'option'is'actually'a'continuing'offer'to'sell'the'property.'Why'was'
it'a'continuing'offer?'The'offer'was'to'sell'the'property'within'5'years'at'a'certain'
price.' So' at' any' time' within' the' option' 5?year' period,' the' lessee' could' give' the'
notice.'As'soon'as'the'lessee'gives'the'notice'as'an'exercise'of'the'option'in'this'
case,'the'lessee'is'not'yet'obliged'to'pay'the'price.''
'
Sale.' Then,' there' will' be' a' reciprocal' obligation,' conveyance' of' the' property' in'
exchange'for'the'payment.'That’s'the'reason'why'the'lessee'protected'its'option'
by'giving'the'notice'within'the'given'period.'It'was'unnecessary'for'the'lessee'to'
pay'the'price'or'even'tender'payment'because'payment'will'be'relevant'only'at'
the' stage' when' the' parties' execute' the' proper' conveyance' deed' to' formalize' or'
complete'the'exercise'of'the'option.'
'
DALTON"V."FGR"REALTY"[01:18:24]'
Dalton'owns'parcels'of'land'in'Cebu'being'leased'to'respondents.'Lessor'refused'
to'accept'payment.'Therefore,'lessee'filed'an'action'for'consignation.'
'
SP:'How'was'[consignation]'done?'
S:' Notice'was'not'given'to'lessor'when'they'consigned'the'payment.'
SP:'When'they'consigned,'what'does'that'mean?'
S:' When'they'filed'the'complaint.'
SP:'[The'notices'were'given]'before'or'after?'
S:' Before.'
SP:'How'about'after?'Was'it'necessary?'Why?'
S:' Yes.'For'the'lessor'to'know'that'payment'was'actually'tendered'in'a'sense'by'
consignation.''
'
'

Tender"of"payment"becomes"payment"when:"
S:' A' sale.' In' which' case,' actual' payment' would' come' simultaneously' with' 1. It'is'accepted;''
conveyance'of'property.' 2. There'is'consignation,'if'the'tender'is'refused.'
SP:'So' SC' said' that' the' notice' was' sufficient' because?' Why' was' tender' of' '

'
payment'unnecessary?'
You' have' to' remember' that.' When' there' is' tender' of' payment' and' there' is'
S:' Because' it' was' only' an' option.' The' option' required' that' he' showed'
refusal,'what'do'you'have?'You'don’t'have'default,'but'you'have'mora$accipiendi.'
willingness'to'exercise'it'for'it'to'be'fulfilled.'It’s'not'an'obligation'to'pay.'
When' the' refusal' is' not' justified' or' refusal' of' the' creditor' to' accept' valid'
SP:'For' there' to' be' tender' of' payment,' it’s' not' enough,' there' should' be' actual'
payment.'So'here,'why'was'there'no'need'for'tender'of'payment?'
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payment,' you' have' mora$ accipiendi.' When' there' is' refusal,' you' file' an' act' of' REQUISITES"OF"CONSIGNATION"[01:28:30]'
consignation.'If'approved'by'the'court,'the'consignation'may'be'payment.'' As' we’ve' said,' tender' of' payment' does' not' extinguish' an' obligation.' If' there' is'
' unjust' refusal' by' the' creditor' to' accept' payment,' there' must' be' consignation.'
So" the" first" rule" is" consignation" does" not" extinguish" the" obligation," it" only" Remember'the'requisites'of'a'valid'consignation.'It'requires'the'debtor'to'comply'
prevents"default"by"the"debtor.'However,'in'certain'instances,'consignation'may' with'all'the'legal'requirements.''
be' sufficient' not' to' discharge' an' obligation' but' to' preserve' a' right' or' privilege.' '
We'have'that'in'our'former'cases.'
'

REQUISITES"OF"VALID"CONSIGNATION"(ART."1256f1261):"
' 1. There'must'be'a'debt'due.'
LEGASPI"V."CA' 2. Consignation,'either'because:'
Legaspi'sold'two'lots'to'Salcedo.'It’s'a'sale'transaction.'The'sale'included'a'right' a. Creditor'unjustly'refuses'tender'of'payment'or;'
to'repurchase'within'a'5'year'period.'It’s'a'sale'whereby'the'seller'sold'property' b. For'some'reason,'payment'can’t'be'made'(1256)'
to' buyer' but' seller' had' right' to' repurchase' within' 5' year' period.' Before' the' 3. There'must'be'a'first'or'prior'notice.'
expiration' of' the' period,' one' day' before,' seller' tendered' payment' of' the' 4. The' action/complaint' for' consignation' together' with' deposit' of'
repurchase' price.' Would' that' be' sufficient' to' preserve' the' right?' SC' said' that' payment'in'court.'
would'be'enough.'Tender"of"payment"within"the"period"would"be"sufficient"to" 5. After'deposit,'there'must'be'second'or'subsequent'notice.'
preserve"the"right"to"repurchase"as"per"contract.'In'fact,'consignation'even'if'not' 6. Court'decision'(just'an'extra)'
done'within'the'5'year'period'or'even'done'after'would'not'be'material.'What’s' '

'
crucial'would'be'the'tender'of'payment'within'the'repurchase'period.'
1. There"must"be"a"debt"due."
'
It' must' be' an' obligation.' That’s' why' in' cases' where' there' is' preservation' of'
That'was'also'stated'in'the'case'of'HULGANZA"V."CA:'
rights,' it’s' not' a' debt.' So' a' follow?through' with' consignation' was' not'
In'Hulganza,'there'was'no'tender'of'payment'even'within'the'period'to'redeem'a'
necessary.'If'what'was'involved'is'not'obligation,'but'exercising'of'privileges,'
property' pursuant' to' Public' Land' Act.' Under' that' law,' if' a' recipient' under' the'
there'is'also'no'need'of'consignation.'
PLA'disposes'of'property,'there'is'a'period'within'which'to'redeem.'Within'that'
'
period,'instead'of'tender'of'payment,'what'the'person'entitled'to'redeem'did'was'
Ex:' the' case' of' State' Investment' House.' There' was' a' loan' obligation'
to' file' an' action' in' court.' So' there' was' no' tender' of' payment' unlike' the' case' in'
outstanding'to'be'paid.'There'was'tender'of'payment'that'would'have'been'
Legazpi.''There'was'instead'an'action'to'compel'the'owner'to'allow'redemption.'
completed'as'payment'by'way'of'consignation."
SC'said'that'action'was'enough'to'preserve'the'right'to'redeem'even'if'there'was'
'
no'tender'of'payment.'Tender"of"payment"was"not"even"needed."In"fact,"it"was"
2. Consignation"
not" essential.' So' in' that' case,' SC' said' tender' of' payment' was' not' necessary,'
a. Creditor"unjustly"refuses"tender"of"payment"
judicial' action' took' the' place' of' tender' of' payment' to' exercise' right' to' redeem.'
You' give' tender' of' payment' so' the' creditor' will' have' the' chance' to'
This'is'an'instance'where'judicial'action'was'meant'preserve'a'right'or'privilege.'
accept.'If'there’s'acceptance,'there'would'be'payment.'Tender'is'only'
It'was'not'meant'to'extinguish'an'obligation.''
an'indication'that'the'debtor'is'ready,'willing,'and'able'to'pay,'but'the'
'
creditor'has'to'accept.''
Then'came'that'case'of'BACUS"V."CA:"
b. For"some"reason,"payment"can’t"be"made.""
Bacus’' notice' was' sufficient' to' preserve' the' option' because' SC' explained' that'
o Consignation' can’t' be' made' directly' because' creditor" is"
what'you'have'in'an'option'contract'was'a'continuing'offer.'When'there'was'an'
unknown" or" creditor" does" not" appear" at" the" place" of"
exercise'of'option'by'giving'notice,'there'was'an'acceptance.'At'that'point,'there'
payment.'The'reason'is'you'can’t'possibly'tender'payment.'"
was' no' need' to' pay' yet.' Payment' will' happen' when' the' parties' actually' do' the'
o Creditor"is"incapacitated.'Remember'the'rule,'if'you'pay'to'
conveyance' by' executing' the' Deed' of' Absolute' Sale.' Notice' was' sufficient' to'
an' incapacitated' creditor,' the' debtor' may' be' asked' to' pay'
preserve'the'right'under'the'option'contact.''
again.' Payment' will' be' valid' to' the' extent' only' that' the'
'
payment' was' retained' by' creditor' or' to' the' extent' that'
So' those' cases' illustrate' instances' when' tender' of' payment' or' some' other' acts'
creditor'benefited'from'the'payment.'"
may'be'sufficient'to'preserve'a'right.'
"
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' '

o There" are" conflicting" claims.' You' will' not' know' who' to'
tender'to.'You'file'an'action'called'an'interpleader.'You'file'
an' action,' and' you' let' the' parties' duke' it' out' in' court' to'
establish'who'shall'be'entitled'to'payment.'"
o When" the" title" of" the" obligation" is" lost.' It' means' that' the'
document'that'is'the'basis'for'collecting'an'obligation.'Let’s'
say'it’s'a'Promissory'Note'payable'to'bearer.'Then'you'have'
to'allow'the'court'to'make'a'determination'to'who'shall'be'
entitled'to'payment.'"
o When" creditor" refuses" to" give" a" receipt.' It’s' not' an'
exception' because' it' assumes' there' was' tender' of' payment'
and' there' was' refusal.' It' can' only' be' an' exception' when,'
way' ahead' of' the' due' date,' creditor' says' “I$ will$ not$ give$ a$
receipt.$I$want$it$off$books.”'If'you'look'at'this,'it’s'not'really'an'
exception'because'it'assumes'tender'of'payment'and'refusal."
' expense,' the' law' gives' creditor' the' opportunity' to' stop' the' accrual' of'
3. There"must"be"a"first"or"prior"notice."
The'debtor'should'give'notice'to'creditor'that'debtor'will'consign'payment'in'
court.'Prior'to'filing'an'action,'this'gives'the'creditor'another'opportunity'to'
accept' the' payment.' What' could' be' this' first' notice?' It' could' be' a' letter' of'
compliance' by' the' debtor' with' the' requisites' of' a' valid' consignation.' Why' is'
there'a'requirement'for'strict'compliance?'
'
S:' It’s'important'because'of'the'cost'of'the'complaint.'
SP:'What’s'the'underlying'reason'for'the'strict'compliance'with'the'requisites'of'a'
valid'consignation?'
S:' For' them' to' know' who' will' bear' the' cost' of' consignation.' Because' in' every'
step,'creditor'can'always'accept'the'payment.'
SP:'There' are' 3' chances' actually:' tender' of' payment,' first' notice,' and' anytime'
after'deposit.''It’s'related'to'the'cost.'Who'shoulders'the'cost'of'valid'consign?'''
S:' Creditor,'sir.'
SP:'The'creditor'pays'the'cost'of'a'valid'consignation.'So'if'the'court'validates'the'
consignation,'creditor'shall'pay'the'cost.'That’s'the'reason'why'law'requires'
strict' compliance' to' allow' the' creditor' to' stop' the' accrual' of' the' cost' at'
different'stages'of'the'consignation'process.'Being'the'one'responsible'to'pay'
expenses.'Of'course'the'cases'never'explain'this.'It'just'says'there'should'be'
strict'compliance'because'the'law'says'so.'
'
"

ILLUSTRATION"6:""
counsel.' There' are' 2' possible' scenarios:' refusal' or' acceptance.' If' there' is' Let’s'say:'
refusal'…' 1. There'is'P10M'loan'obligation;'
' 2. With'0.5%'interest'per'month'and;'
4. The"action/complaint"for"consignation"together"with"deposit"of"payment"in" 3. Penalty'of'20%'the'total'amount'due.'
court." '
If'there'is'refusal,'then'that’s'the'only'time'debtor'should'deposit'amount'or' Debtor'tendered'payment,'would'penalty'be'due?'
property'due'in'court.' '

'
'
S:'' No' because' debtor' tendered' payment.' There' would' be' mora$ accipiendi,' no'
5. After"deposit,"there"must"be"2nd"or"subsequent"notice."
default'on'the'part'of'debtor.'
Again' there' can' be' acceptance' by' the' creditor,' in' which' case' the' obligation'
SP:'Interest,'when'will'it'stop?'
will'be'extinguished'or'refusal.'This'second'notice'could'be'a'court'order'or'
S:' It' will' stop' at' step' 4' because' the' money' was' not' in' the' possession' of' the'
manifestation'by'one'part'that'payment'is'already'deposited'in'court.'If'there'
debtor.'
is'still'refusal…'
SP:'That’s' the' practical' reason,' the' legal' reason' is?' The' effect' of' a' valid'
"
consignation'is'reckoned'as'of'the'date'of'the'actual'deposit'or'consignment'
6. Afterwards,"there"will"be"a"court"decision"(valid/invalid"consignation)"
of'the'payment.''
If'consignation'is'deemed'valid,'the'effect'will'be'reckoned'as'of'no.'4,'not'of'
'
the'date'of'approval'by'the'court.'It’s'at'the'time'the'property'was'placed'at' "

the'disposal'or'control'of'the'court.'Because'at'that'point,'debtor'lost'control' ILLUSTRATION"7:""
or'use'of'the'property'consigned." But' let’s' say' this' is' the' scenario,' the' debtor' saw' a' business' opportunity'
' requiring'the'same'amount:'
These" 5" requisites" are" mandatory." If" you’re" the" debtor" you" can’t" claim" 1. A'P10M'loan'obligation;'
substantial" compliance.' Based' on' the' case' of' Dalton,' which' summarizes' 2. With'2%'interest'per'month'and;'
previous'jurisprudence,'it'said'requirements'are'mandatory.'There'must'be'strict' 3. Penalty'of'20%'the'total'amount'due.'
'

'
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MIKE'UY'[1F'2014?2015]'//'11'DEC'2014' ' '
' '
SP:'If'you’re'the'debtor,'what'will'you'do?'
S:'' I’ll'just'withdraw'the'amount'deposited'(instead'of'the'loan)'before'the'court'
validates'the'consignation'and'before'the'creditor'accepts'the'payment.'
SP:'Why'will'you'do'it?'
S:' Because'it'has'smaller'interest'(Illustration'1).'You’ll'save'on'interest'cost.'
SP:'How'about'the'penalty?'Should'you'be'worried'about'the'penalty?'
S:' There'will'be'no'penalty'because'you'have'already'tendered'payment.'There'
will'be'mora$accipiendi.'
SP:'Yes.' Here' if' you' have' consignation,' it’s' possible' for' debtor' to' withdraw' the'
amount'consigned'at'any'time'prior'to'approval'or'acceptance'by'creditor.'So'
if'you’re'the'creditor,'you'see'this'but'you'have'certain'issues,'you'think'you'
have'other'claims'against'the'debtor,'what'will'you'do?'
S:' You'can'accept'it'and'reserve'the'right'to'question'the'validity.'
SP:'Under'what'authority?'
S:' Article…'
SP:'There' is' no' article' right?' So' what’s' your' authority' then?' Your' authority' is'
Dalton,'jurisprudence.'What'does'Dalton'tell'you?'
S:' In' Dalton,' the' creditor' accepted' pay' but' they' reserved' the' right' to' question'
the'validity'of'consign.''
SP:'What'was'the'challenge?'
S:' There'were'no'notices'given.'
SP:'Take' note' of' that' case.' Dalton' summarized' all' the' rules' with' respect' to'
consignation.''
" There' will' be' an' issue' with' respect' to' due' date.' Why?' These' are' payments'
'
IMPORTANT"RULES"OF"CONSIGNATION"(DALTON):"
1. There'should'be'strict'compliance'as'mandated'by'law.''
2. There'should'be'qualified'acceptance'by'creditor.'
3. If'you’re'the'creditor,'you'can'accept'and'just'make'you'reservation.''
a. That'will'prevent'the'debtor'from'withdrawing'the'
payment'consigned.'
4. So' if' there' is' a' challenge' and' it’s' not' a' valid' consignation,' let’s' say'
there' is' a' lack' of' notice' or' partial' payment' only,' then' the' creditor'
will' not' be' liable' the' cost' and' there' will' be' a' right' to' collect'
whatever'should'be'paid'by'debtor.'
'
"
Q:" If" you" accept" with" reservation" based" on" the" notice" alone," won’t" that" be"
equivalent"to"a"waiver?"
A:' No.'Most'likely'this'reservation'will'only'happen'after'the'filing'of'the'action.'
Because' if' you' give' the' first' notice' only' (and' creditor' accepts' with'
reservation),'what'do'you'think'will'be'the'reaction'of'the'debtor?'Debtor'will'
just' consign.' He' is' not' getting' an' effective' payment,' because' you' are' still'
reserving'your'right'to'claim'against'me.''
'
' 100"
' ' ' ' '''' '''''''''''''''''' '''''''''''''''''Compiled'by:'
' ''''''''''''''''TERESA'KRISTEL'BANTA'[1F'2014?2015]'''
Q:" What"if"said"notice"did"not"reach"the"party?"
A:' Then' there' is' no' notice.' There' should' be' information.' If' there' is' no'
information,' how' can' there' be' a' notice?' It’s' something' to' be' established' in'
Court."
"
Q:" When" the" creditor" is" unknown," and" you" make" a" consignation," where" do"
you"send"the"notice?"
A:' You'send'it'based'on'the'last'known'address'by'registered'mail.'
"
Q:" My" question" now" is," we’re" dealing" with" payments" accruing" monthly" like"
rentals"or"amortizations."How"should"you"consign?"
A:' First'you'have'to'give'tender'of'payment'to'the'lessor.'
'
Q:" Let’s" say" for" three" months," creditor" refused" to" accept" monthly" payments."
You" file" the" action" and" follow" the" process." Then" during" litigation," there"
were"payments"accruing."What"will"you"do?"
A:' The'payments'accrued'can'be'consigned.'
'
So'the'payments'from'the'4th'month'onward'you'just'consigned?'Could'you'pay'
completely' or' give' entire' amount' in' court?' What' will' be' an' issue?' What’s' the'
problem'there?'Under'what'circumstances'can'debtor'consign'the'entire'amount'
(monthly'payments'accruing'every'month)?'
'
accruing'on'several'payment'dates'='it’s'an'obligation'subject'to'a'period.'If'it’s'
subject'to'a'period,'the'first'thing'you'have'to'determine'is'who'has'the'benefit'of'
the'period.'(Both'parties)'Can'there'be'pre?payment?'
'
You'cannot'do'a'wholesale'payment.'You'have'to'follow'the'schedule.'How'will'
you' do' it' then?' If' you' follow' jurisprudence,' for' each' and' every' accruing'
payment,' the' debtor' must' comply' with' each' step.' That’s' why' it’s' cumbersome.'
So'what'do'you'do,'is'there'a'way?'
'
I' think' there' was' one' case' cited' in' Dalton,' Soco' v.' Militante,' there' were' several'
amounts'due.'The'court'said'for'each'payment,'at'the'very'least,'you'have'to'do'
first'notice,'consignment,'and'second'notice.'
'
Is'there'a'way'out'or'to'shortcut'the'process?'You'get'a'court'directive!'If'they’ll'
allow'you'to'consign'the'full'payment,'then'good.'But'most'likely,'they’ll'make'
you'go'through'all'the'process.'
'
Q:" Sir"can’t"you"just"say"that"I"will"make"an"account"to"deposit"the"payments?"
A:' Based'on'jurisprudence,'that'cannot'be.'At'the'very'least,'there'should'be'first'
notice,' second' notice' and' consignment.' Costly' I' know.' That’s' why' if' you'
Prepared'by:' ' ' ' ' ' ' ' ' ' ' ' ' '''' '''''''''''''''''' '''''''''''''''''Compiled'by:'
MIKE'UY'[1F'2014?2015]'//'11'DEC'2014' ' ' ' ''''''''''''''''TERESA'KRISTEL'BANTA'[1F'2014?2015]'''
' '

want' to' cut' costs,' maybe' you' can' ask' the' Court' for' a' directive' to' give' you' obligation'will'be'extinguished.'The'debtor'or'creditor'may'go'after'the'cause'of'
protection.' the' loss.' Let’s' say' seller' is' selling' a' car' to' buyer,' then,' the' car' is' destroyed.'
' Obligation' is' extinguished' due' to' no' fault' of' either' party.' But' let’s' say' the' one'
Actually'the'normal'case'where'you’ll'encounter'consignation'is'the'interpleader,' who' caused' the' loss,' 3rd' party,' may' be' held' liable' by' either' for' the' failure' of'
wherein' two' parties' have' conflicting' claims' over' the' payment.' That’s' the' usual' transaction.'There'will'liability'for'damages.''
case.'You'have'rare'instances'where'debtor'consigns'payment'in'court.'Normally' '
if'there'is'refusal,'there'is'no'penalty,'you'just'continue'to'pay'interest.' In' this' connection,' we' have' to' recall' the' provision' on' fortuitous' events.' When'
" will'debtor'be'liable'notwithstanding'the'occurrence'of'FE?'Assuming'there'is'no'
ARTS."1262f1269"—"LOSS"OF"THE"THING"DUE"[02:11:00]' concurring' fault' or' negligence' on' the' part' of' the' debtor.' The' exceptions' are' by'
' stipulation'of'the'parties,'law,'or'assumption'of'risk.''
'
'

Loss"of"the"thing"due"or"object"of"the"obligation"refers'to'the'impossibility'of'
performing'the'obligation'after'the'creation'of'obligation." Now'of'course'even'if'loss'is'thru'FE,'obligation'will'remain'if'the'object'lost'is'
'
the'proceeds'of'crime.'You'don’t'want'to'reward'the'culprit'by'giving'the'benefit'
'
of'a'fortuitous'event.'That’s'loss.'
Take'note'it'should'be'after.'If'the'object'is'impossible'to'be'performed'at'the'time'
of'the'constitution'of'the'obligation,'you'do'not'have'an'obligation.'Because'the'
requirement' of' a' valid' obligation' is' that' there' must' be' a' valid' object.' A' valid'
object' is' one' that' is' legally' and' physically' possible' to' be' performed.' So' don’t'
think'of'lost'as'being'gone.'It'can'be'legally'or'physically'impossible.''
'
'

Loss" in" obligations" to" give" a" determinate" thing" (Art." 1262)" means' that" the"
thing"perishes,"disappears"or"goes"out"of"commerce."
'

'
Let’s' say' a' car' is' lost' through' a' fortuitous' event,' that’s' loss.' Let’s' say' use' of'
marijuana' is' decriminalized' because' everybody' has' glaucoma,' and' then' you'
entered' into' that' contract' for' the' sale' of' mariuana,' there' is' a' valid' contract.'
Subsequently,' there' is' legislation' banning' it,' then' it' becomes' impossible.' The'
obligation'will'also'be'extinguished.'
'
If' it’s' a' determinate' thing,' loss' will' be' relevant.' If' it’s' generic,' loss' will' not' be'
relevant'unless'the'entire'class'is'gone'(Art.'1263).'
'
Take'note,'loss'of'the'object'extinguishes'the'obligation'only'if'the'debtor'is'not'at'
fault'and'not'in'default.'So'this'will'remind'you'of'the'rule'on'fortuitous'event.'If'
the'debtor'has'contributed'fault'or'negligence,'then'the'debtor'will'be'liable.'Let’s'
say'the'loss'is'due'to'the'fault'of'the'debtor,'the'debtor'will'be'liable'for'damages.''
'
If' let’s' say' the' object' of' the' obligation' is' lost,' who' is' at' fault?' There' is' a'
presumption' that' the' person' in' possession' is' at' fault,' the' debtor.' The' law'
assumes'that'the'debtor'acted'negligently.'That'presumption'will'not'occur'if'the'
lost'happened'in'Samar'during'Hagupit'or'a'calamity.'The'burden'will'now'shift'
to'the'creditor.'If'it’s'a'loss'that'happened'not'in'the'context'of'a'calamity,'the'law'
presumes'fault'on'the'part'of'the'debtor,'and'the'debtor'will'have'to'prove'that'
the' loss' happened' outside' the' control' of' the' debtor.' Of' course' if' there' is' a' loss,'
' 101"
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' '
"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
TUESDAY,'16'DECEMBER'2014'
'

If' it' is' a' fortuitous' event,' the' FE' causes' IMPOSSIBILITY' OF'
"

ARTS."1262f1269"—"LOSS"OF"THE"THING"DUE" •
NAGA"TELEPHONE"V."CA" PERFORMANCE.' In' Article' 1267,' the' change' in' circumstance' only'
FACTS:' There' was' a' telephone' company' and' an' electric' company.' The' electric' results'in'EXTREME'DIFFICULTY'in'performing'the'obligation.''
company' had' poles' that' [were' necessary' for]' the' operation' of' the' telephone' • In'both'instances,'the'Debtor'should'NOT'have'any'participation.'
company,' so' [they' entered' into' a' contract]' whereby' the' telephone' company' '
would' use' the' poles' of' the' electric' company' and' in' exchange' the' telephone' The'Court'held'that:'
company'would'give'the'electric'company'[10'landline'units].' • The' case' speaks' of' a' SERVICE,' but' the' law' considers' any'
' obligation/prestation.'Therefore,'service'is'not'confined'to'an'obligation'
As' time' passed' by,' there' were' more' subscribers' of' the' telephone' services' and' to'[give].'It'can'be'any'prestation.'
there' were' more' cables' strung' on' the' poles.' [Thus,]' there' was' more' burden' on' • There'must'be'a'change'of'circumstance.'Thus,'there'should'have'been'
the' electric' company' and' yet' they' were' getting' the' same' amount' of' landline' a'release'of'the'Debtor.'
[units].' • REFORMATION'WAS'NOT'APPLICABLE.$'
' '
"

What' did' the' telephone' company' want?' The' action' pursued' by' the' electric' REQUISITES"FOR"ART."1267"TO"APPLY:"
company'was'for'REFORMATION'[of'the'contract].' 1. The'event'could'not'be'foreseen'at'the'execution'of'the'contract;'
' 2. It' makes' the' performance' EXTREMELY' DIFFICULT,' but' not'
impossible;'
"

REFORMATION"
Reformation'of'a'contract'is'an'action'whereby'one'party'wants'the'Court'to' 3. The'event'must'not'be'due'to'the'act'of'the'parties;'and'
express'the'true'agreement'of'the'parties.' 4. The'contract'is'for'a'future'prestation'[any'prestation]'
'
'

' '
HELD:"" Note:'Compare'the'cases'on:'
The' Court' said' that' there' was' an' exit' possibility' [or' option]' of' the' electric' 1. Financial'crisis'as'a'fortuitous'event;'
company:'REBUS'SIC'STANTIBUS." 2. Article'1250'[extraordinary'inflation/deflation];'
' 3. Article' 1267' [doctrine' of' rebus$ sic$ standibus/doctrine' of' unforeseen'
"
events]'
REBUS"SIC"STANTIBUS'
'
When'you'enter'into'a'contract,'there'are'circumstances'that'you'enter'into...' "

If' there' is' a" change" of" circumstance," which" makes" it" extremely" difficult" to" Only"Art."1267"can"be"confined"to"a"given"transaction"in"a"contract."Financial"
perform" the" obligation,' [the' party]' may' be' released' by' filing' the' proper' crisis" as" a" fortuitous" event" and" the" provision" on" extraordinary"
Court'action.'' inflation/deflation" require" high" standards" and" will" become" precedent"
' setting.'Naga'Telephone'v.'CA'is'the'only'case'where'Art.'1267'succeeded.'
'

Article' 1267' may' be' invoked' because' it' is' premised' on' a' change' of' "
circumstance.' PNCC"v."CA"
"

' This' case' involed' a' lease$ contract' for' the' use' of' a' rock?crushing' project' entered'
How' is' rebus$ sic$ stantibus' different' from' Article' 1174' [doctrine' of' fortuitous' into'at'around'the'time'of'the'EDSA'Revolution.'
events]?' '
• The' main' difference' is' that' Article' 1267' is' premised' on' the' change' of' PNCC' invoked' two' articles' to' support' its' action,' both' of' which' did' not' find'
circumstance'that'the'parties'will'have'to'undertake'at'the'[institution]' application'in'the'case'at'bar:'
of' the' contract,' and' that' change' of' circumstance' resulted' in' the' 1. Article' 1266:' The' debtor,' in' an' obligation"to"do,' shall' also' be' released'
EXTREME'DIFFICULTY'in'performing'the'obligation.' when"the"prestation"becomes"physically"or"legally"impossible'

' 102"
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ELLA'TRIAS'&'JILL'GANDINGCO'[1F'2014?2015]'//'16'DEC'2014' ' ' ' ''''''''''''''''' ''''''''''''''''' '''''KRISTINE'ONGTENCO'''
' '

2. Article'1267:'When'a'change"of"circumstance'renders'it'extremely' 2. Facultative:'Unilateral'option'by'one'of'the'parties"
difficult'to'perform'an'obligation;'a'requisite'of'this'article'embodied'in' 3. Judicial:'Compensation'by'order'of'the'Court"
the'doctrine'of'rebus'sic'stantibus'is'[that]'there'must'be'a'change'of' 4. Conventional/Voluntary:" By' mutual/bilateral' agreement' of' the'
circumstance'but'the'parties'did'not'contemplate'or'foresee.' parties'for'offsetting."
'
"

"
HELD:"" "

REQUISITES"OF"LEGAL"COMPENSATION:"
Although'Article'1267'may'be'invoked,'it'cannot"be"applied'because'when'they'
1. The'parties'are'principal"creditors"and"debtors"of"each"other'
entered' into' the' contract,' the" crisis" already" existed.' They' entered' into' the'
o There'are'two"transactions'with'the'same"parties'
contract' after' the' assassination' of' Aquino' and' one' can' assume' that' the' parties'
o Different' from' reciprocal" obligations' [i.e.' they' are' not'
were'well'aware'of'the'country’s'political'climate.'The'parties'already"took"note"
simultaneous]'
of"the"crisis"when"they"entered"into"the"contract.'The'kind'of'permit'issued'was'
2. Both'debts'consist'in'a'sum'of'money,'or'of'things'of'the'same'kind'
an'industrial"clearance.'The'Court'justified'its'decision'using'estoppel.'
and'quality'
'
"
3. That'the'two'debts'are'due'
On"the"difficulty"of"successfully"invoking"Article"1267:" 4. That'the'debts'are'liquidated"and"demandable'
It'would'be'very'difficult'to'invoke'Art.'1267'and'succeed'because$it$effectively$ o Liquidated:'determinable'
negates$ the$ contract,$ which$ is$ the$ law$ between$ the$ parties.' Therefore,' it$ should$ be$ 5. That' no" retention" or" controversy' is' commenced' by' a' third' person'
sparingly$allowed.' over'the'debts'
'

"
'

"
ARTS."1270f1274:"CONDONATION"OR"REMISSION"OF"THE"DEBT" MONDRAGON"v."SOLA"
" This' case' involved' a' services' contract.' Peculiarity' of' this' case:' Sola' provided$ a$
"

CONDONATION" bodega.$$
• Gratuitous' abandonment' by' the' Creditor' of' his' right' against' the' $
Debtor'(De'Leon'Commentary)' Would$this$be$an$obligation$to$do?$Mondragon'did'not'pay'the'rental'fees.'"
• A"party"renouncing"entitlement"in"favor"of"the"Debtor"(San'Pedro)' "
" FACTS:'There'were'two'transactions'between'the'parties:"
Condonation"may"be"express"or"implied."Express"condonations"must'follow' 1. The'first'was'a'bodega'leasing'transaction."
the'law/formalities'of/on'donations'[must'be'in'writing,'waiver,'etc.]"
'

"
ARTS."1275f1277"—"CONFUSION"OR"MERGER"OF"RIGHTS"
" '
" Sola' provided' a' bodega' for' Mondragon;' Mondragon,' in' exchange,' paid' a'
MERGER' means' the' meeting' in' one' person' of' the' qualities' of' the' Creditor' certain'fee—service'fee'or'commission'for'transaction'or'a'kind'of'rental'for'
and'the'Debtor'with'regard'to'the'same'obligation.'(De'Leon'Commentary)" the'use'of'the'facilities.'Payable'in'MONEY'with'a'fixed'schedule.'
'

" '
ARTS."1278f1290:"COMPENSATION" In'this'case,'Mondragon'is'a'creditor'and'debtor.'
" '
2. The'second'was'a'transaction'involving'Sola’s'wife.'
"

COMPENSATION" is' a' mode' of' extinguishing' an' obligation' whereby' one'
obligation'offsets'the'other.'
"

"
"

KINDS"OF"COMPENSATION:" '
Sola’s'wife'owed'Mondragon'for'certain'amounts'for'another'service'contract.'
1. Legal:' Takes' place' by' operation' of' law,' when' all' the' requisites' are'
'
present."
Given'these'set'of'facts,'could"there"be"a"valid"compensation?'
' 103"
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ELLA'TRIAS'&'JILL'GANDINGCO'[1F'2014?2015]'//'16'DEC'2014' ' ' ' ''''''''''''''''' ''''''''''''''''' '''''KRISTINE'ONGTENCO'''
' '

' There$was$justification$for$Insular’s$claim$that$it$acted$as$a$conduit.'There'are'certain'
HELD:' regulations'limiting'the'exposure'of'one'another.'In'this'case,'what$was$being$offset$
1. The' court' held' that' this' case' lacked$ a$ requisite$ required$ for$ legal$ [compensated]?'The"transactions"between"Capital"One"and"PDB.'
compensation:'that'there'be'the'same'parties'who'are'principally'bound' $
to'each'other.'However,' HELD:''
2. There'was'an'undertaking'by'Sola'to'be'liable'for'the'obligation'of'the' Insular'was'not"acting"as"a"mere"conduit.'The'Court'used'the'following'to'justify'
wife.'In'addition,' this'holding:'
3. There' was' complete' compliance' with' all' other' requisites,' which' 1. The'existence'of'[credible]'documentation'with'Insular'as'the'principal'
justified'the"Court"deciding"to"allow"this"compensation.' party;'
' 2. Compliance'with'the'requisites'for'legal'compensation;'
'
"

REMEMBER"the"case"of"Citibank:'
• Invoke' BOILERPLATE"provision' stating' that:' “Lender$can$assign$at$ In'this'case,'Insular$lost,'having'to'collect'from'PDB.'
any$time$without$asking$for$the$consent$of$the$Borrower/Debtor”$ '
• [So,]'Citibank'Manila'could'have'assigned'[the'money'placement]'to' FIRST"UNITED"V."BAYANIHAN"
Citibank'Geneva'and'the'latter'could'have'done'offsetting$ Petitioner'First'United'ordered'dump'trucks'from'respondent'Bayanihan.'These'
o Citibank'Geneva'would'have'been'Debtor'and'Creditor'at' two'parties'had'a'history'of'good'business'relationships,'where'the'latter'would'
the'same'time$ service'and'repair'the'purchased'units'of'First'United.'Bayanihan'also'practiced'
$
liberality'on'First'United’s'manner'of'payment.'
'
INSULAR"V."CAPITAL"
'
"

What"is"a"TREASURY"BILL?' '
A'treasury'bill'[T?Bill]'is'an'indebtedness"of"the"Government."It"is"a"form"of" First'United'ordered'two'more'trucks'from'the'respondent'[a'transit'mixer'and'a'
borrowing" from" the" public;' at' the' same' time,' it' is' an$ instrument$ for$ mover],' which' respondent' Bayanihan' delivered' on' the' same' date.' FUCC' paid'
[ensuring/controlling]$the$flow$of$money.$ partly'in'cash'and'partly'in'postdated'checks.'
$
$

'
A' T?Bill' is' “short' term,”' meaning' it' has' terms' of' less$ than$ a$ year,' along' these'
tenors:' '
'
• 91'days' Upon'presentment'of'the'checks'for'payment,'Bayanihan'discovered'that'FUCC'
• 182'days' ordered$ the$ payments$ stopped.' Bayanihan' demanded' that' FUCC' pay' their'
• 364'days' obligation'in'full,'only'for'FUCC'to'state'that'they'were'withholding'the'checks'
' because' one" of" the" dump" trucks" from" the" first" transaction" [Transaction" A" on"
If' the' treasury' instrument' is' for' more' than' one' year,' it' is' called' a' bond.' In' diagram]"broke.'
treasury'securities,'there'is'really'no'exchange,'but'a'mere'borrowing$and$lending.' '
' Bayanihan'commenced'a'collection"case'against'respondents''
In" this" case," there" are" three" parties:" Insular," Capital" One," and" Planters" '
Development" Bank" (PDB).' Insular' paid$ the$ price$ to$ PDB.' Insular' claimed' that' it' The' issue' of' this' case' involved' whether" or" not" they" can" validly" offset" the"
only'acted'as'a"conduit,'meaning'it$only$passed$through$Insular,$but$the$real$parties$ payment"of"the"truck"because"of"claim"the"expenses"incurred"from"the"repairs"
were$Capital$One$and$Planters.'To'prove'this,'Insular'presented:' on"defective"trucks"delivered.'
1. A'confirmation'of'purchase,'wherein'it'only'received'a'service"fee;' '
2. For'every'transaction,'there'will'be'a'CoS'(Confirmation'of'Sale)'/'CoP' The'requisite'on'issue'in'this'case'is'the'liquidation$or$determination'of'the'amount'
(Confirmation'of'Purchase).' due.'In'this'case,'the'Court'held'that'the"amount"is"liquidated.'
$ '

' 104"
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ELLA'TRIAS'&'JILL'GANDINGCO'[1F'2014?2015]'//'16'DEC'2014' ' ' ' ''''''''''''''''' ''''''''''''''''' '''''KRISTINE'ONGTENCO'''
' '

So'Bayanihan'sold'trucks'to'First'United.'First'United'should'pay'the'price'and' The' requirement' of' legal' compensation' relevant' to' this' case:' there" must" be" an"
Bayanihan'wanted'to'collect'the'payment'of'the'price.'When'the'complaint'was' amount" due.' In' this' case,' a' tax" is" not" a" debt.' It' is' an' exercise' of' sovereign'
filed,'what'did'First'United'do?$ capacity.'
' '
We'have'a'seller,'we'have'a'buyer.'Sale.'Price'unpaid.'Seller'sued'to'collect'the' Nevertheless,'the$government$won$in$this$case.'The'Supreme'Court'held'that'there'
price.'There'was'a'complaint'filed.'After'receiving'the'complaint,'what'did'buyer' can' be' no' offsetting' but' what' the' SC' did' was' to' resolve' all' the' issues' together.''
do?'How'could'the'offsetting'happen?'Buyer'[Bayanihan]'filed'a'counterclaim.$ The' taxpayer' actually' owed' the' government' a' huge' amount' so' there' can' be' no'
Buyer'said'“Seller,'you'owe'me'X'amount'because'I'spent'for'the'repairs'of'the' refund' on' his' part.' What' actually' happened' was' an" enforcement" of" the" law.'
truck.”'During'that'time'of'the'case,'the'price'was'determined'at'Php71,000.$ What'is'mandated'by'law'is,'before"you"can"get"a"refund,"you"have"to"satisfy"all"
' tax"requirements.""
HELD:'' • This' case' is' actually' very' similar' to' the' Insular' case' in' term' of' legal'
The' Supreme' Court' said' that' there" was" already" determination" of" the" lower" arguments.'
courts"of"the"price.'So'the'amount'was'already'liquidated'and'due'at'P71,000'and' • In'this'case,'yes'there'can'be'no'offsetting'but'that’s'what'the'CTA'did.'
this'could'be'offset'already'against'the'X'amount.$ They'said'no'refund.'The'SC'said'that'the'claim'for'refund'was'closely'
' linked' to' the' deficiency' of' tax' liability' but' there' still' can' be' no' refund'
All'the'requisites'are'present.'The'only'issue'here'is,'was'there'a'liquidated'other' done'nevertheless.''
debt?'Or'is'there'another'debt'that'is'liquidated?'$ '
' Let’s'take'an'example:'
If' it' were' only' a' claim,' meaning' unproven' and' not' established' in' another' '
proceeding,' there' can' be' no' offsetting' because:' first,' there' is' no' debt' (only' a'
"

ILLUSTRATION"1:"TAX,"AS"OPPOSED"TO"DEBT"
claim)'and'second,'even'if'there'is'a'debt,'it'is'unliquidated.'In$this$case,$there$was$
already$a$determination$of$the$amount;$therefore$the$amount$is$effectively$liquidated$and$
compensation$can$occur.$
' '
"
We' have' here,' national' government' and' X.' The' national' government'
LIQUIDATED"DEBT" expropriates' a' property' by' eminent' domain' which' is' the' property' of' X'
Under'this'requisite,'there'can'be'an'offsetting'if:' therefore'there'should'be'just'compensation.''
1. There'is'a'debt;'and'
2. If'the'debt'is'liquidated'[determinable].'
' '
Let’s' say' X' owed' the' LGU' governing' over' the' expropriated' property' for'
If'the'amount'is'established'in'another'proceeding,'then'the'debt'is'liquidated.'
' property' taxes.' The' amount' is' liquidated' and' determined.' X' is' claiming'
' offsetting.'Should'that'be'allowed?''
UNITED"AIRLINES"V."CIR"
Let’s'call'an'accountant.'Explain'to'us'a'disallowance'of'tax'refund.'Why'did'the'
court'deny'the'refund'being'sought'for'in'this'case?$ '
• Because'the'CTA'found'that'there'was'actually'a'deficiency'of'taxes'at' No.' Because' X' owes' LGU' tax' and' not' a' debt.' Besides,' national' government'
an'amount'of'P31'million.'' and'local'government'are'different'parties.'
'

• CTA'said,'therefore,'that'if'you'owe'the'government'more'than'what' '
you'paid,'you’re'not'entitled'to'a'refund.' LAO"V."SPECIAL"PLANS"
• That'was'being'questioned'by'United'Airlines'because'the'CTA'said' Requisite'in'legal'compensation'relevant'to'this'case:'that$the$debt$be$liquidated$and$
that'you'cannot'get'a'refund'because'you'owe'the'government'more.' demandable.$
United'Airlines'in'this'case'said'that'what'the'CTA'actually'did'is'an' '
offsetting.'But'United'Airlines'said'you'cannot'do'offsetting'with'taxes'
because'a'tax'is'not'a'debt.'

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' '

Were' able' to' establish' that' there' was' indeed' a' debt?' No,$ they$ were$ not$ able$ to$ 1. Deposit'
present$any$evidence$that$showed$that$they$actually$used$such$amount$for$the$reparations$ 2. Commodatum'
of$the$warehouse.$ 3. Claim'for'support'due'by'gratuitous'title'
Take' note' of' that' requirement' of' legal' compensation' requires' 2' things:' that' is' "
liquidated'and'it'is'demandable.'' Article"1288:"
' 1. Civil'liability'arising'from'a'penal'offense'
If'it’s'just'a'claim'or'an'assertion'without'establishing'it'with'the'court,'then'it’s'
'

'
just'claim,'it’s'not'a'debt.'Therefore,'it’s'not'demandable.' "

ILLUSTRATION"3:"DEPOSIT"AND"COMPENSATION"
'
"
'
LIQUIDATED"AND"DEMANDABLE" Now'let’s'say,'you'have'X'and'Y.'There'are'2'transactions.'Y'owe'X'P10M.'In'
Demandable:" If' a' debt' is' only' a' claim,' one' must' prove' it' in' court' or' in' a' another' transaction,' X' has' P10M' commemorative' bills' to' Y' which' X' has' to'
proper'proceeding'that'there'is,'in'fact,'a'liability'binding'both'parties." return'to'Y'upon'demand.'Can'there'be'compensation?''
" • No,' because' you' cannot' have' compensation' when' the' other'
Liquidated:" If' the' debt' is' demandable,' it' should' be' liquidated.' Meaning,' it' transaction'is'a'deposit.''
should'be'fixed.' • Deposit'is'in'same'sense'of'safe'keeping.''
"

" • Depositatry' cannot' offset' the' object' deposited' with' a' loan'
In' this' case,' the' amount' or' expenses' was' not' supported' by' any' evidence' that' obligation.''
would'help'the'courts'determine'the'amount'actually'used." • But'can'Y'invoke'offsetting'by'legal'compensation?''
" o Yes'because'Y'has'the'benefit'of'this'transaction.''
UNITED"PLANTERS"V."CA" o Anytime,' Y' can' just' say' “Just' forget' about' the'
What'was'being'offset'in'this'case:'the'operational'loans'due'(United'Planters'to' commemorative'bills'I'asked'you'to'keep.'That'will'be'my'
PNB)'and'the'security'sold'to'an'auction'(PNB'to'ATP)' payment'for'the'money'I'owed'you'instead.”'
' o Y'is'waiving'the'deposit'and'this'is'valid'compensation.'
ATP'and'United'Planters'agreed$to$offset'so'there'was'conventional"compensation'
'

$
so'offsetting'can'take'place.'Since'PNB'transferred'all'its'rights'to'ATP.' The'same'is'true'with'commodatum."
' '
"

ILLUSTRATION"2:"LEGAL"COMPENSATION,"AGENTS,"AND"GUARANTORS"
"

ILLUSTRATION"4:"COMMODATUM"AND"COMPENSATION"
If'A'acts'as'an'agent'of'Z,'there'can'be'no'legal'compensation'because'A'is'not' Let’s' say' you' borrowed' Q’s' car.' In' a' separate' transaction,' Q' owes' you'
a'party'between'X'and'Z.' delivery'of'a'car'of'the'same'model.''
(A) If'S'acts'as'a'surety'and'he'is'a'part'of'a'separate'transaction,'can' • There'can'be'no'offsetting'because'one'is'a'loan,'one'is'commodatum'
legal'compensation'take'place?' just'like'a'deposit.'
o No,'because'he'is'not'a'principal'of'the'debt.'He'is'only' '

'
like'a'guarantor.' "

(B) Why'can'S'not'compel'X'to'receive'his'payment'as'compensation' ILLUSTRATION"5:"SUPPORT"AND"COMPENSATION"

considering'there'is'no'delay'yet'and'the'debt'is'not'yet'due?' X'owes'Y'P10'million.'Y'owes'X'P10'million'but'for'support.'On'due'date'of'
o Because' it' would' be' equivalent' to' a' payment' by' a' third' support,' you' cannot' waive' a' loan' and' offset' in' order' that' the' loan' will' be'
party'(S).' extinguished' because' support' is' of' a' nature' that' aids' in' providing' means' to'
live.' It" is" necessary" and" the" Civil" Code" excludes" it" from" those" kinds" of"
'

'
transaction"to"assure"that"the"support"will"be"rightfully"given.'
ARTS."1287f1288"—"OBLIGATIONS"THAT"CANNOT"BE"COMPENSATED"
'
'
"
But'if'X'invokes'it,'facultative"compensation"can"apply'since'the'benefit'is'in'
OBLIGATIONS"THAT"CANNOT"BE"COMPENSATED:" his'favor.'X'can'waive'his'right'to'receive'legal'support'in'order'to'satisfy'his'
Article"1287:" loan'to'Y.'
'

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' '

'
Civil"liability"in"a"penal"offense"is"not"subject"of"compensation"either"except"if"
the"injured"party"wishes"to"offset"his"liability"with"the"offender"by"waiving"his"
right"of"damages,"then"that"is"allowed"since"the"transaction"is"in"his"favor.' In'
this' case,' the' injured' party' has' the' benefit' of' the' transaction' and' can' invoke'
compensation.'
'
"

SUPPORT"IN"ARREARS"
Support' in' arrears' is' support' that' has' already$ accrued,' but' not$ used$ up$ or$
collected.'
"

'
"

ILLUSTRATION"6:"FACULTATIVE"COMPENSATION"
Example:$if'the'obligation'is'subject'to'a'term,'the'one'with'the'benefit'of'the'
period' can' waive' it' and' say' “let’s' just' offset.”' This' is' called' facultative"
compensation."
"

'
Recap'of'all'the'requirements'for'legal"compensation'to'take'place.'There'are'5:'
'
"

REQUISITES"OF"LEGAL"COMPENSATION:"
1. The'parties'are'principal"creditors"and"debtors"of"each"other'
2. Both'debts'consist'in'a'sum'of'money,'or'of'things'of'the'same'kind'
and'quality'
3. That'the'two'debts'are'due'to'be'offset'
• Tax'is'not'a'debt.'It'is'an'obligation'to'the'government.'
4. That'the'debts'are'liquidated"and"demandable'
• Claim$ is$ not$ a$ debt.' It' is' a' different' matter' to' assert' an'
entitlement'as'against'one'that'is'already'established.'
5. No"retention"or"conveyance"by"a"third"party."
'

'
"

Remember:" Legal' compensation' (Art.' 1279)' arises' as' a' matter' of' course' but'
somebody' has' to' invoke' it.' If' nobody' invokes' it,' then' there' is' as' if' no' legal'
compensation.'Somebody'has'to'invoke'it'in'a'proper'case.'
"

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' '
"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
THURSDAY,'18'DECEMBER'2014'
'

"

ART."1278f1279"—"COMPENSATION" litigation' or' proceeding' restricting' a' disposition' of' any' of' the' debts' or'
Let’s'wrap'up'compensation.'Remember'in'compensation'you'need'at'least'two' obligations.'
obligations' or' contracts,' whereby' the' parties' are' principally' bound' as' debtors' "
and'creditors'of'each'other.'Here’s'our'example:' CASES"[ART.'1278?1290]'
' UNITED"PLANTERS"V."CA"
'
"

ILLUSTRATION"1:" "

Two'transactions:' ILLUSTRATION"2:""LOAN"TRANSACTION"(PLANTERS"CASE)"
1) A'owes'B'an'amount' 1. PNB'extended'a'loan'to'United'Planters.'
2) B'owes'A'another'amount.'' 2. United' Planters' had' a' deposit' with' PNB' subject' to' a' holdout'
agreement' (i.e.' the' deposit' acts' as' a' security' by' contract.' At' any'
'

'
The' first' thing' you' check' if' it’s' legal' compensation.' You' should' have' the' same' time,' the' bank' could' use' the' deposit' funds' to' pay' the' loan'
parties' and' they' should' be' acting' in' the' same' capacity.' They' should' be' both' obligation.)'
'

creditors' of' each' other,' except' when' you' have' that' situation' of' Citibank.' It’s' a' '
peculiar' situation' where' a' branch' of' a' corporation' is' deemed' different' from' Now'what'happened'was'this'contract'(1)'was'assigned'to'APT.'APT'became'the'
another'branch'for'purposes'of'offsetting.' creditor,' however' the' second' transaction' (2)' remained' with' PNB.' So' ordinarily,'
' offsetting' was' fine' because' the' parties' were' the' same.' But' it' was' subsequently'
And'then'you'check'for'the'compliance'of'all'other'requirements.'' assigned' to' APT,' so' could' APT' ask' for' compensation?' This' (1)' was' assigned' to'
' APT' but' not' this' (2).' It' was' by' virtue' of' a' contract.' This' contract' included' a'
provision'allowing'the'offsetting'of'any'liability'arising'from'the'loan'transaction'
"

ART."1279"—"REQUIREMENTS"FOR"COMPENSATION:"
1. Principal'creditors'and'debtors'of'each'other' from'offsetting'against'the'funds'in'the'deposit'account.''
2. Debts'consist'of'money'or'the'same'kind'of'things' '
3. Two'debts'are'due' PEREZ"V."CA'
4. Liquidated'and'Demandable' Perez' v.' CA' you' have' to' remember.' There' was' an' entity,' which' issued' several'
5. There'is'no'retention'or'controversy' purchased'and'sold'financial'instruments,'typically'negotiable'promissory'notes.'
'
The'primary'reason'why'compensation'could'not'be'had'was'they'had'different'
'
returns,'so'the'being'due'requirement'was'not'fulfilled.'
If' you' have' a' situation' wherein' one' obligation' has' a' legal' or' contractual'
'
restriction,'there'can'be'no'offsetting.' "

' ILLUSTRATION"3:"
What‘s'a'legal"or"contractual"restriction?' Day"1—"
' a. A'issued'promissory'note'to'B'payable'on'Day'2.'
Say,'it’s'an'obligation'to'pay'support,'or'it’s'subject'to'a'condition'or'a'term,'in' b. B'issued'promissory'note'to'A'payable'on'Day'2.'
which' case' there' would' be' no' legal' compensation.' However' whoever' has' the' '
benefit' of' that' restriction' may' opt' for' compensation' by' way' of' facultative' Day"3—"
compensation.'So'let’s'say'this'is'a'civil'liability'arising'from'a'criminal'offense,'B' c. B'negotiates'note'(from'1)'to'Z'$
$

will'have'the'option'to'claim'offsetting'but'not'A,'the'offender.' '
' If' you' have' this' situation:' A' is' the' debtor' here' (see$ ILLUSTRATION" 3a),' on' the'
So,'remember'when'you'have'offsetting,'it'can'be'complete'or'it'can'be'partial.'Of' other' hand' B' is' the' debtor' here' (see$ ILLUSTRATION" 3b).' Now' on' Day' 2,' could'
course' I' explain' here' the' concept' of' retention' or' a' controversy.' It’s' really' a' there' be' compensation?' As' of' day' 2,' both' notes' would' be' due.' So' technically'

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there'should'be'compensation'by'operation'of'law.'It’s'just'a'matter'of'one'party' subsequent' assignments.' Clear?' That’s' the' simple' thing' you' should' learn' from'
invoking'it.' Perez'v'CA.'Court'applied'consent'of'assignment'from'nature'of'transaction'and'
' underlying'instruments'
As' of' day' 2' the' liability' of' B' under' (see$ILLUSTRATION" 3b)' may' be' offset' under' '
liability'A'under'(1).'But'let’s'say'instead'of'doing'an'offsetting,'B'negotiated'the'
"

EXCEPTION"[See$Perez"v."CA'ruling]:"
note'to'Z'(see$ILLUSTRATION"3c).' The' Court' applied' consent' of' assignment' from' nature' of' transaction' and'
' underlying' instruments.' In' dealing' with' financial' instruments,' parties' ought'
So' when' Z' collected' from' A,' A' raised' the' matter' of' legal' compensation.' A' said' to' know' that' these' instruments' could' be' negotiated' or' traded.' There' was'
that'as'of'Day'2'there'was'an'offsetting.'If'we'assume'they’re'of'equal'value'there' implied'consent.'
must'be'no'liability'as'of'Day'2.'Legal'compensation'takes'effect'by'operation'of' '

'
law'as'a'matter'of'course.'It’s'just'a'question'of'a'party'invoking'it.'
KWONG"V."GARGANTOS"
'
"
'
ILLUSTRATION"4:" "

ILLUSTRATION"5:"
a. A'owes'B'1'Million'
Deed'of'Conditional'Sale:'
b. B'owes'A'1'million'
1. Kwong'sold'15'lots'to'Gargantos'for'$137k'dollars'
Both$(a)$and$(b)$are$due$and$all$requirements$for$compensation$are$present.$
Deed'of'Absolute'Sale:'
c. B'assigns'(a)'to'X$
'
2. Kwong'sold'11'of'the'15'lots'
' '
Now' in' the' case' of' Perez' the' court' explained.' In' this' situation' you' have' to' So'was'there'a'novation?'Yes.'What'kind?'Implied.'Why?'
remember' the' rule.' Let’s' say' we' have' (ILLUSTRATION" 4).' Now' if' B' assigns' this' '
(ILLUSTRATION" 4a)' to' X,' can' there' by' offsetting' still?' Will' the' assignment' take' "

What"is"novation?"Art."1291"
effect'against'A?'What'does'that'mean?'If'assignment'is'valid,'A'could'not'claim'
Either'a'change'of'the'parties'or'an'essential'term.'
offsetting' against' X.' Why?' Because' you' have' different' parties.' However,' what' '

the' code' provides' is' that' if' there' is' an' assignment,' this' will' be' effective' only' as' '
"

against'the'other'parties'if'there'was,'from'the'moment'of'notice'at'the'very'least,' For'there'to'be'a'novation'you'need:'
or' in' case' A' consents.' Of' course' A' can' consent' with' reservation' or' with' • An'old"valid"obligation;'and''
qualification.'So'if'this'was'day'3,'offsetting'happened'day'2,'and'then'on'day'3' • There' must' be' a' subsequent" valid" obligation' extinguishing' the'
there' was' notice' of' the' assignment.' A' can' invoke' still' the' offsetting' because' A' former'obligation'
did'not'consent'to'the'assignment.'So'A'can'claim'offsetting'that'happened'prior'
'

'
to'the'assignment.'So'the'issue'in'that'case'is'should'that'rule'apply?'
So' at' least' you' need' two' obligations.' Now' you' mention' in' the' object,' in' which'
'
" case'it'will'be'objective'novation'or'there'can'be'a'change'in'the'party,'in'which'
GENERAL"RULE:"(ART."1285)" case'it'is'considered'subjective'novation.''
If' there' is' an' assignment' this' will' be' effective' from' the' moment' of' notice' or' '
when'the'other'party'consents.' So,'this' case' was'about' objective"novation.' The'15' lots'were'changed' to' 11'lots'
'

' and'the'deed'of'conditional'sale'was'changed'to'a'deed'of'absolute'sale.'
If'that'rule'applies'then'offsetting'happened'as'of'day'2.'But'the'Supreme'Court' '
explained'that'when'the'parties'dealt'with'promissory'notes,'or'similar'financial' There'was'implied'novation'because'the'old'and'new'contracts'cannot'coexist'as'
instruments,'they'ought'to'know'that'these'instruments'pass'on'from'one'party' they'are'of'different'nature'and'provide'separate'and'distinct'obligations.'
to' another,' would' be' negotiated.' Therefore,' with' the' nature' of' the' instruments' '
there'was'an'implied'consent'to'subsequent'negation'or'transfers'of'instruments.' SALAZAR"V."JY"BROTHERS"[34:05]'
So' what' should' apply' is' that' there' was' pre' consent.' So' B,' had' consented' to' A'check'to'JY'as'payment'for'rice'but'the'check'was'not'honored.'Another'check'
negotiation'and'A'having'consented'to'subsequent'negotiations.'Neither'of'them' was' issued,' but' the' 2nd' check' also' bounced.' JY' Brothers' then' sued' for' estafa.'
could' claim' compensation' prior' to' a' transfer.' There' was' a' pre?approval' of' Salazar'claims'the'2nd'check,'since'accepted,'amounted'to'a'novation.'
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'
Why'was'novation'material'to'this'case?'What'is'the'consequence'of'novation?'
If' there' were' novation,' then' there' would' be' no' criminal' liability' for' the' person'
who'issued'the'1st'check.'There'would'be'no'basis'for'the'criminal'complaint.''
'
The"Supreme"Court"held"that"when"it"comes"to"criminal"liability"there"was"no"
novation" because" there" was" no" change" in" terms," or" in" object." How' did' court'
characterize'the'second'check?'The'2nd'check'did'not'novate'the'1st'check'because'
the'2nd'check'merely'confirmed'the'obligation'under'the'1st'check.'There'was'no'
incompatibility.'"
'
What'is'expromission?'As'compared'to'delegation?12 ''

'''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' '

12 ''JSP'no'longer'continued'the'discussion.'This'was'the'last'day'before'Christmas'break,'and'a'quiz'
day,'so'JSP’s'lecture'was'short.''
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"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
TUESDAY,'06'JANUARY'2015'
'

"

NOVATION" '
Last'time'we'were'discussing'novation,'and'we'stopped'with'the'case'of'Salazar.' Subjective'novation'can'also'be'a'change'in'creditor.'
' '
Novation'is'a'mode'of'extinguishing'an'obligation.'You'have'to'understand'how' ILLUSTRATION"2:"SUBJECTIVE"NOVATION"
novation'works.'
'
Novation'can'be'a'change'of'a'party'or'parties,'or'a'change'of'the'prestation'or'
the'principal'terms'of'the'obligation.''You'will'have'novation'by'extinguishing'an'
old' valid' obligation,' with' a' new' valid' obligation' and' the' new' valid' obligation'
extinguishes'or'substantially'modifies'the'terms'of'the'old'obligation.'When'you'
say,' “substantially' modifies,”' there’s' either' a' change' of' object,' which' is' called'
objective'novation,'or'a'change'in'the'subject,'which'is'called'subjective'novation.' "
' '
The' creditor' will' be' replaced' by' another' person,' C1' and' this' will' be' called'
"

ILLUSTRATION"1:"SUBJECTIVE"NOVATION"
subrogation.'In'subrogation,'consent'of'all'the'parties'–'the'debtor,'the'creditor,'
and' the' new' creditor' –' is' also' needed.' However,' it' is' possible' for' there' to' be' a'
change' of' a' creditor' without' effecting' novation,' meaning' subrogation' (C1'
acquiring' the' rights' of' C)' but' not' by' virtue' of' subrogation.' How' can' this' be'
done?'Through'assignment.'C'can'assign'all'his'rights'under'the'obligation'to'C1'
and' C1' will' be' the' creditor.' If' it' is' an' assignment,' there' is' no' need' to' get' the'
'
' consent'of'the'debtor'unlike'in'conventional'subrogation'wherein'the'consent'of'
' the'debtor'is'needed.'
Let’s' say' that' a' debtor' is' replaced' by' another' debtor.' Who' should' consent?' '
Generally,'if'it’s'novation,'all'parties'of'both'the'new'and'the'old'obligation'must' Conventional'subrogation'means'that'it'is'by'agreement'of'the'parties.'There'are'
consent.' In' this' example,' the' old' obligation' is' between' D' and' C,' and' the' new' instances' where' subrogation' takes' effect' by' operation' of' law,' which' is' called'
obligation'is'between'D1'and'C.'This'is'subjective'novation'–'there'is'a'change'in' legal'subrogation.'
debtor.' The' change' of' debtor' could' be' by' delegacion,' in' which' case' all' parties' '
must'consent'–'the'creditor,'the'old'debtor,'and'the'new'debtor.'It'can'also'be'by' This'is'just'a'background'of'novation.'
expromission,' a' third' party' substituting' the' debtor' with' the' consent' of' the' '
creditor,'and'in'this'case,'there'is'no'need'to'get'the'consent'of'the'debtor.' "
' "
EXPROMISSION" DELEGACION" "
' '

In' expromission,' the' initiative' from' In' delegcion,' the' debtor' offers' and' "
the' change' does' not' emanate' from' the' creditor' accepts' a' third' person' "
the' debtor' and' may' be' made' even' that' consents' to' the' substitution,' so' "
without' his' knowledge,' since' it' that' the' consent' of' these' three' are' "
consists' in' a' third' person' assuming' necessary.' "
the' obligation.' It' only' requires' the' "
consent' of' the' new' debtor' and' the' "
creditor.' "
'

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SUBROGATION"[7:23]" creditor?'C,'in'case'of'default'of'D'can'immediately'go'after'the'mortgage.'X'
As'I'have'said,'subrogation'can'either'be'conventional'or'legal.'' will'not'have'any'preference'with'respect'to'the'mortgaged'property.'C'will'
' have'a'lien'or'preferred'right'over'this'mortgage.'That'is'why'C'is'a'preferred'
There'are'three'instances'when'legal'subrogation'is'presumed.'' creditor.' Let’s' say' D' only' has' one' property,' the' mortgaged' property,' and' D'
1. There"is"legal"subrogation"presumed"if"a"creditor"pays"a"preferred"creditor," has'many'creditors,'who'will'have'first'grab?'C,'because'C'has'a'lien'over'the'
even"without"the"consent"or"knowledge"of"the"debtor."' property'and'thus'he'is'a'preferred'creditor.'So'if'X'pays'C,'even'if'D'objects'
Let’s'explain'that'one.' to'the'payment,'X'will'automatically'be'subrogated'to'the'rights'of'C.'That’s'
' the'first'instance'of'legal'subrogation.'
'
"

ILLUSTRATION"3:"THIRD"PARTY"PAYMENT"
2. If" X" is" not" a" creditor," and" he" pays" with" the" consent" or" knowledge" of" the"
debtor,"like"in"our"earlier"example"of"third"party"payment"(see"Illustration"
3)" it" will" be" incumbent" upon" D" to" object.' If' D' does' not' object,' it' is'
automatically' considered' as' consent' and' therefore,' X' will' be' subrogated' to'
the'rights'of'the'creditor.'
'
"
'
3. Finally,'let’s'say,'this'is'a'transaction.'D'owes'a'certain'amount'to'C'and'it'is'
'
secured'by'a'mortgage.'At'the'same'time,'S,'a'surety,'undertook'to'pay'C'in'
Remember' the' rule,' if' X' pays' creditor,' it' is' considered' as' third?party'
case'D'defaults.'So'you'have'two'security'arrangements'–'the'mortgage'and'
payment.' Will' X' acquire' the' rights' of' the' creditor?' The' answer' will' depend'
the'surety'undertaking.'The'surety'is'like'a'guarantee'but'the'only'condition'
on'whether'D'has'knowledge'or'has'consented'to'the'payment'made'by'X.'If'
is'if'D'defaults,'automatically'S'should'pay'C.'The'only'requirement'for'the'
D'had'knowledge'and'did'not'object,'X'will'be'subrogated'to'the'rights'of'the'
obligation'of'surety'to'kick'in'is'the'default'of'D.'Now'let’s'say,'on'due'date'
creditor.' If' D' consented,' more' so' will' X' be' subrogated' to' the' rights' of' the'
D'does'not'pay,'S'pays,'what'will'happen?'S'will'now'acquire'the'rights'of'C'
creditor.' But' in' other' cases' wherein' D,' for' example,' objects' to' the' payment,'
by'way'of'legal'subrogation.'In'this'case,'there'is'no'need'to'get'the'consent'
there'will'be'no'subrogation.'X'will'only'be'entitled'to'reimbursement'to'the'
of'D.''
extent' that' the' payment' benefitted' D.' If' it' is' secured' by' a' real' estate'
'
mortgage,'X'will'be'entitled'only'to'reimbursement'but'will'not'be'acquiring' "

the'rights'of'the'creditor'as'a'mortgagee.' ILLUSTRATION"5:"SURETY"
'
'

ILLUSTRATION"4:"PAYMENT"TO"A"PREFERRED"CREDITOR"

"
"
'
What' is' the' reason?' S' is' a' party' interested' in' the' fulfillment' of' the' obligation.'
" What'is'the'interest?'If'the'obligation'is'extinguished,'the'surety'undertaking'will'
'
also' be' extinguished.' With' the' payment' of' S,' S' will' now' be' the' creditor' and'
In' legal' subrogation,' if' X' pays' C' there' will' be' automatic' subrogation,'
either'S'can'collect'the'obligation'or'foreclose'the'mortgage.'
however' the' requirement' of' law' is' that' X' should' be' a' creditor' who' pays' a'
'
preferred'creditor'even'without'the'knowledge'or'consent'of'the'debtor.'
Q:""Can" C" choose" to" foreclose" the" mortgage" instead" of" collecting" the" payment"
'
from"S?"
For'example,'in'this'case,'D'has'a'payable'to'X,'at'the'same'time,'D'owes'C'a'
SP:'No.'If'it’s'a'mortgage,'C'on'due'date'can'only'collect.'It'is'only'upon'default'
certain' amount.' However,' C' has' a' security' –' D' mortgaged' a' property' to'
that' C' can' go' after' the' mortgage.' If' D' is' willing' to' pay,' C' cannot' insist' on'
secure'payment'of'the'obligation.'In'this'case,'X'will'be'an'unsecured'creditor'
foreclosing'the'mortgage.'The'surety'will'be'triggered'if'D'defaults,'and'only'
and'C'will'be'a'secured'or'preferred'creditor.'What'do'we'mean'by'preferred'
upon'S’s'default'can'C'go'after'the'mortgage.'
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' debtor' to' the' creditor' as' an' accepted' equivalent' of' the' performance' of' the'
SOLIDARY'DEBTORS'[7:38]' obligation.'
"
'

"
'
ILLUSTRATION"6:"SOLIDARY"DEBTORS" If'thenovation'is'short'of'being'categorical,'the'only'time'it'will'be'considered'as'
an' implied' novation' is' when' they' are' utterly' incompatible' –' they' cannot' stand'
together.''
'
In' the' case' of' Salazar,' there' was' a' check' that' bounced' and' then' another' check'
'
" was' issued.' Would' the' second' check' be' incompatible' with' the' first' check?' The'
' Supreme'Court'said'no.'In'fact'the'second'check'confirmed'the'obligation'under'
Let’s'say'you'have'solidary'debtors.'C'can'collect'from'any'one'or'both'of'them.' the'first'check.'So'there'is'no'extinction'of'the'obligation.'
Let’s'assume'that'the'obligation'is'secured'by'a'mortgage'by'D1.'D1'secured'his' '
own' property' to' secure' the' obligation.' So' on' due' date,' D2' pays' and' the' Here'is'an'example'where'there'will'be'utter'incompatibility.''
obligation' is' thus' extinguished.' Question' now,' will' D2' be' subrogated' to' the' '
rights'of'C?'Will'D2'now'be'considered'a'party'interested'in'the'fulfillment'of'the'
"

ILLUSTRATION"7:""INCOMPATIBLE"CONTRACTS"
obligation?'
'
There' are' two' views.' There' are' those' who' say' that' a' solidary' debtor' is' a' party'
interested'in'the'fulfillment'of'the'obligation.'Therefore'if'a'solidary'debtor'pays'
the' obligation,' that' solidary' debtor' acquires' the' right' of' the' creditor' by' way' of'
legal' subrogation.' My' sense' is,' it’s' not' because' if' it’s' a' solidary' obligation.' The'
'
civil' law' provision' on' solidary' obligations' clearly' provided' the' rights' of' a' '
solidary'debtor'who'pays'the'obligation.'What'is'the'entitlement'of'that'solidary' Let’s'say'the'parties'originally'entered'into'a'contract'wherein'D'will'allow'C'to'
debtor?'Only'reimbursement.'There'is'no'right'to'subrogation.' use'a'property'for'a'fee.'This'is'what'you'call'a'lease.'If'they'enter'into'another'
' contract'whereby'D'will'convey'the'title'of'the'property'for'a'price.'Will'there'be'
Of' course' some' commentators' say' that' considering' the' provisions' on' novation' incompatibility?'So'the'first'contract'is'a'lease,'and'the'second'is'a'sale.'Will'there'
taken'together'with'the'provisions'of'solidary'obligations,'there'is'a'right'to'legal' be'incompatibility?'It'depends.''
subrogation.' If' you' take' this' example,' it' will' make' sense' to' prevent' legal' '
subrogation.'Why?'Because'D2'by'paying'C'will'now'have'a'right'to'go'after'the' The' contracts' can' stand' together' if' let’s' say' the' title' will' only' pass' after' some'
mortgage.' Let’s' assume' that' the' mortgage' completely' secures' the' entire' time'–'lease'to'purchase.'So'before'that,'the'lease'will'subsist.'However,'if'there'is'
obligation.'So'if'D'2'is'allowed'to'be'subrogated'to'the'rights'of'the'creditor'and'if' absolute' conveyance,' then' there' can' be' no' lease' and' the' two' contracts' will' be'
D1'does'not'pay,'in'effect,'D2'will'be'able'to'collect'the'entire'obligation'from'D1.' incompatible.'
Here,'D2'will'not'only'get'reimbursement,'but'an'extra'based'on'the'value'of'the' '
mortgage.' '
' '
DACION"EN"PAGO" '
How' do' you' novate' an' obligation?' Among' the' modes' of' payment,' novation' is' '
the' most' difficult' to' effect.' If' you' want' novation' as' a' mode' of' extinguishing' an' '
obligation,'you'do'it'by'express'novation.'The'parties'should'expressly'agree'that' '
the'new'obligation'extinguishes'the'old'obligation.'Dacion'en'pago'is'an'example' '
of'an'express'novation.' '
' '
"

Dacion$en$pago'is'the'delivery'and'transmission'of'ownership'of'a'thing'by'the' '

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' '

CASES"[ART.'1291?1304]' According'to'the'Court,'even'if'there'are'changes,'it'does'not'automatically'result'
PNB"V."SORIANO"[7:56]' to'implied'novation.'The'incompatibility'must'be'in'the'essential'elements'of'the'
' obligation'–'the'prestation.''
"
"

ILLUSTRATION"8:""
IMPLIED"NOVATION"[8:00]"
There' is' this' old' case,' which' somehow' shows' to' you' the' difficulty' of' proving'
implied'novation."
'
"

ILLUSTRATION"9:"

"
"
Lisam' is' a' motor' vehicle' dealer'and'PNB'extended'to'them'a'credit'line'facility'
amounting' to' P30' M.' A' credit' line' facility' is' a' fancy' way' of' saying' a' loan.' For'
every'credit'line,'Lisam,'through'Soriano,'issue'trust'receipts.'
'
How' does' a' credit' line' work?' It' works' like' this.' A' supplier,' X,' will' provide'
vehicles'to'Lisam.'Lisam'could'not'pay,'so'Lisam'will'get'money'from'the'credit'
'
line'and'that'will'be'the'payment'to'X.'There'will'now'be'a'payable'by'Lisam'to'
'
PNB.'In'exchange,'as'security,'Lisam'will'issue'trust'receipts.'
Lender'extends'a'loan'to'borrower.'B'is'a'growing'business,'like'ShoeMart'(SM).'
'
B'used'the'loan'for'his'operations'so'because'of'the'loan,'he'has'an'obligation'to'
What'is'a'trust'receipt?'It'is'a'document'saying'that'Lisam'holds'the'vehicles'in'
pay.'To'secure'this,'there'is'a'chattel'mortgage,'a'mortgage'of'personal'property.'
trust' for' and' on' behalf' of' PNB.' PNB' is' considered' as' the' owner,' and' if' Lisam'
In' chattel' mortgage,' there' is' a' mortgage' of' personal' property' but' there' is' no'
sells'the'vehicles,'the'proceeds'will'go'to'PNB'to'pay'the'loan.'The'essence'of'the'
transfer'of'possession,'so'B'continues'to'possess'the'mortgaged'property.''
trust'receipt'is'that'Lisam'received'the'vehicles'which'are'considered'owned'by'
'
PNB,' and' the' proceeds' should' be' remitted' to' PNB.' If' Lisam' sells' the' vehicles'
B'defaulted'in'the'payment'of'the'loan,'so'L'can'go'after'the'mortgaged'property.'
without' giving' the' profit' to' PNB,' then' Lisam' is' committing' a' crime' similar' to'
But'B'needs'this'property,'and'if'there'will'be'a'foreclosure,'it'will'paralyze'the'
estafa' because' it' received' property' trust' with' the' obligation' to' return' or' remit'
operations' of' B.' So' B’s' company' has' a' shareholder.' The' SH' entered' into' a'
them'to'PNB.''
compromise'with'L,'that'L'will'not'foreclose'the'mortgage'and'SH'will'throw'in'
'
another'property'as'REM.'This'REM'is'another'security.'Let’s'assume'there’s'no'
PNB'filed'51'counts'of'estafa'against'Soriano.'Soriano'said'that'there'is'implied'
payment,'and'borrower'defaulted.'The'question'now'is,'did'the'REM'extinguish'
novation' because' there' was' a' change' from' Credit' Line' Facility' to' an' Omnibus'
the'Chattel'Mortgage?'Is'it'an'implied'novation?'
Line.' An' Omnibus' Line' is' a' combination' of' several' credit' lines.' Because' of' this'
'
change,'she'says'that'she'cannot'be'held'liable.'The'Court'ruled'that'there'is'no'
No.' The' REM' is' just' an' additional' security,' and' is' not' inconsistent' with' the'
implied' novation' because' the' change' is' only' a' change' of' term' or' manner' of'
Chattel' Mortgage.' It’s' the' same.' These' contracts' were' meant' to' secure' the'
payment.''
payment'of'the'obligation.'
'
'
In' this' case,' there' was' no' express' novation.' The' parties' did' not' agree' that' the'
Now,' I' want' you' to' argue' otherwise' –' that' there' is' novation.' How' will' that'
Omnibus'Line'would'substitute'the'Credit'Line'Facility.'Still,'there'is'no'implied'
happen?' You' can' argue' the' manner' of' novation.' You' can' use' express' novation'
novation'because'for'there'to'be'implied'novation,'the'law'requires'that'there'is'
(there' can' be' express' novation' even' if' the' agreement' is' not' in' writing).' How?'
utter' incompatibility' and' in' this' case,' there' is' no' utter' incompatibility.' In' this'
You'can'say'that'there'was'intention'between'the'parties'to'substitute'the'Chattel'
case,'there'is'only'a'change'in'manner'of'payment.'
Mortgage' with' the' REM' and' the' Chattel' Mortgage' will' be' discharged.' You' can'
'

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' '

also'argue'incompatibility'of'the'purpose'–'that'the'purpose'of'the'REM'is'really' MILLA"V."PEOPLE"[8:20]'
to'free'up'the'Chattel'Mortgage.'' Milla'pretended'to'be'a'real'estate'agent'and'sold'real'estate'in'Makati.'However,'
' it' was' found' out' that' the' TCTs' given' to' the' buyers' were' falsified.' The' buyers'
Let’s'have'another'case.' asked' Milla' to' give' back' the' money.' He' issued' a' check,' however,' the' check'
' bounced.' Milla' later' on' issued' another' check.' An' estafa' case' was' filed' against'
him.'
"

ILLUSTRATION"10:"
'
Milla’s'contention'is'that'the'issuance'of'the'checks'was'a'novation'and'thus,'he'
cannot' be' held' liable' anymore.' SC' said' that' novation' is' not' a' way' of'
extinguishing' criminal' liability.' The' issuance' of' a' check' can' never' extinguish'
criminal'liability.'It'can'extinguish'possibly'the'civil'liability,'but'not'the'criminal'
'
liability.'The'Court'said'here'that'the'moment'you'commit'a'crime,'you'couldn’t'
'
novate'it'just'by'issuing'a'check.'The'crime'was'already'committed.'Even'if'the'
Let’s'say'S'is'a'dealer'in'cars.'Seller'sold'a'car'to'B.'So'B'has'an'obligation'to'pay'
payment' was' made' prior' to' the' filing' of' the' criminal' complaint,' the' criminal'
the'price.'This'is'a'Contract'of'Sale.'So'B'secures'this'with'a'Chattel'Mortgage'–'
liability' still' remains.' The' SC' is' saying' that' the' moment' all' the' elements' of' a'
he'mortgaged'the'same'car.'So'this'price'will'be'paid'in'installments.'S'assigned'
crime'are'present,'there'is'already'criminal'liability.'Novation'cannot'extinguish'
or'transferred'his'rights'under'the'contract,'both'the'sale'as'well'as'the'mortgage,'
that'criminal'liability.''
to' S1.' Does' B' need' to' consent?' No,' because' in' assignment,' there' is' no' need' for'
'
consent.' However' if' it' is' conventional' subrogation,' there' is' a' requirement' of'
LECAROS"V."GATMAITAN"[8:30]'
consent.'
"
' "

Now'B'sold'the'car'to'B1.'Let’s'say'you'have'36'installments.'From'1?18,'it'was'B' ILLUSTRATION"11:""LECAROS"CASE"
who'paid.'After'the'18th'month,'B'sold'the'car'to'B1.'Can'that'be'done?'Can'you'
sell'the'mortgage'property?'Yes.'But'it'will'be'subject'to'the'mortgage,'assuming'
the'mortgage'is'registered.'From'the'19th'month,'B1'started'to'remit'payments'to'
S1' and' S1' received' the' payments' and' issued' receipts.' Eventually,' however,' B1'
defaults.' Can' S1' go' after' B?' The' issue' is' whether' or' not' there' is' subjective' "
novation'–'if'there'is'a'change'in'debtor.'The'manner?'Implied,'because'there'is' "
no'agreement.' Licaros' placed' money' in' Anglo?Asean' Bank' and' in' turn,' Licaros' will' receive'
' payment'plus'returns.'But'the'bank'was'no'longer'able'to'pay'despite'demands.''
Of' course' S1' can' always' go' after' the' mortgage,' but' there' is' also' an' option' to' '
collect.'If'S1'opts'to'collect,'can'he'go'after'B?'' Licaros' entered' into' a' MOA' with' Gatmaitan.' The' MOA' stipulated' that'
' Gatmaitan'will'pay'Licaros,'and'it'is'Gatmaitan'who'will'get'the'money'from'the'
According'to'case'law,'there'is'no'novation'but'S1'can'go'after'B.'SC'stated'that' Bank.'Why'did'Gatmaitan'offer'this'kind'of'deal?'Gatmaitan'is'a'fixer.'However,'
there'is'only'an'addition'of'debtor,'so'both'B'and'B1'are'both'liable.'' Gatmaitan,' after' several' demands' from' the' Bank' also' was' not' able' to' get' the'
' payment.'Because'of'this,'Gatmaitan'did'not'anymore'pay'Licaros.''
I'don’t’'agree.'If'there'is'no'novation,'B1'is'paying'as'a'3rd'party.'So'if'the'Court' '
will'say'that'there'is'no'novation,'S1'will'only'have'one'option,'to'collect'from'B' Licaros' demanded' payment' from' Gatmaitan' on' the' theory' that' Gatmaitan' is'
since'B1'is'a'third'party.'' obligated'to'pay'him'pursuant'to'the'MOA.'The'issue'in'this'case'is'whether'or'
' not' Licaros' can' collect' from' Gatmaitan.' The' SC' said' no' because' there' is'
But'the'Court'in'that'case'said'that'there'is'only'an'addition'of'a'debtor'so'they' conventional' subrogation,' which' requires' the' consent' of' all' the' parties' as'
are' both' liable' under' the' contract' –' jointly'liable.'But'that'is'not'the'problem,'if' distinguished' from' assignment' wherein' the' consent' of' the' Bank' is' not' needed.'
there'is'no'novation,'B1'will'be'a'stranger,'then'B1'will'have'no'obligation'to'S1.' Moreover,' there' is' subrogation' because' in' their' agreement,' Gatmaitan' will' be'
' acquiring'the'rights'of'Licaros,'so'there'is'a'change'in'creditor.'

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' Exception' to' this' rule' is' seen' in' the' case' of' real' contracts' wherein' the'
How'did'the'court'characterize'this'as'conventional'subrogation?'There'are'two' contract'is'only'perfected'upon'delivery.'
reasons:' '
1. In' the' agreement,' there' was' a' requirement' of' the' consent' of' all' the' Ex.'Loan'contracts'
parties,' specifically' the' bank' because' there' was' a' space' for' the' "
signature'of'the'bank.''
"

ILLUSTRATION"12:"PERFECTION"UPON"DELIVERY"
2. There'was'an'intention'that'the'bank'will'be'a'party'in'the'agreement'in'
one'of'the'whereas'clauses.'
'
CONTRACTS"[8:45]""
"Let’s'now'go'to'Contracts."
'
ELEMENTS"OF"CONTRACT" ELEMENTS"OF"AN"OBLIGATION" "
' '
On'Day'1,'L'entered'into'a'loan'contract'with'B.'L'will'lend'an'amount'to'B,'
1. Consent'of'the'contracting' 1. Juridical'tie'
and' in' turn,' B' will' pay' the' principal' plus' interest' pursuant' to' a' given'
parties' 2. Parties'(Subject'and'Object)'
schedule.' On' Day' 2,' L' released' the' loan' contract' to' B.' The' loan' contract' is'
2. Object' 3. Prestation''
perfected'on'Day'2,'the'day'the'loan'proceeds'was'released'because'a'loan'is'
3. Cause'or'consideration'
areal'contract'wherein'there'must'be'delivery'before'the'contract'is'perfected.'
'
'
How'do'the'elements'of'a'contract'relate'to'the'elements'of'an'obligation?' Does' that' mean' there' is' no' contract' on' Day' 1?' There' is' a' contract.' It' is' a'
' contract'to'lend.'But'the'loan'contract'itself'is'only'perfected'on'Day'2.'Take'
The'parties'under'an'obligation'–'the'debtor'and'creditor'–'will'be'covered'by'the' note'of'that.'It'doesn’t'mean'that'because'the'loan'contract'is'perfected'on'Day'
consent' of' the' parties.' The' juridical' tie,' which' is' the' element' that' binds' the'
2,'there'is'no'contract'as'of'Day'1.'
parties,'is'the'contract'itself,'as'the'source'of'the'obligation.'The'prestation'covers'
'
both'the'object'and'the'cause.' What' are' other' examples' of' real' contracts?' A' pledge' is' a' real' contract.' The'
' pledge' will' be' perfected' only' upon' delivery' of' the' thing' pledged' to' the'
STAGES"OF"A"CONTRACT"[8:55]""
relevant'party.'
' "

"
'
STAGES"OF"A"CONTRACT"
3. Consummation'–'fulfillment'or'performance'of'the'terms'agreed'upon'
1. Negotiation'
'
2. Perfection' How' do' you' enter' into' a' contract?' For' example,' you' want' to' buy' that' building'
3. Consummation' next'to'powerplant,'how'will'you'do'it?'First,'you'make'a'letter'of'intent'that'you'
'

" want'to'buy'the'building.'A'letter'of'intent'is'a'letter'whereby'one'party'makes'
What'are'the'stages'of'a'contract?' an' offer' for' example,' to' buy' a' property' or' business.' In' that' letter,' there' will' be'
1. Negotiation'–'when'the'parties'discuss'the'terms'of'the'contract;'when' terms'and'conditions.'Be'careful'when'you'make'that'letter'of'intent,'because'the'
the'parties'haggle'on'the'terms' moment'you'stipulate,'minimum,'the'cause'and'the'object,'meaning'the'property'
' and' the' price,' without' any' qualification,' what' can' possibly' happen?' The' other'
2. Perfection'–'the'meeting'of'the'minds' party'can'already'accept'because'there'is'already'a'contract.'
As'a'rule,'there'will'be'perfection'of'the'contract'when'the'parties'agree' Again,' if' you' don’t' want' to' be' bound,' don’t' make' a' complete' offer.' What’s' a'
at' least' on' the' object' and' the' cause.' In' the' case' of' a' sale,' they' should' complete'offer?'It'is'an'offer'with'at'least'the'object'and'the'cause,'without'any'
agree'on'the'object'to'be'sold,'and'the'price.'The'moment'they'agree'on' qualifications.'So'the'moment'it'is'accepted,'you'have'a'contract.'
these,'there'will'be'a'perfected'contract.'' '
' As' I' have' said,' if' you' have' a' contract,' the' parties' can' stipulate' anything' in' the'
terms' and' conditions.' The' parties' can' control' the' transaction.' However,' if' the'
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parties'do'not'stipulate,'the'default'rules'will'kick'in.'So'the'moment'you'have'a'
'

ART."1308"—'The'contract'must'bind'both'contracting'parties;'its'validity'or'
contract' and' it' is' properly' characterized' –' let’s' say' it’s' a' sale,' a' lease' –' compliance'cannot'be'left'to'the'will'of'one'of'them.'
automatically'there'will'be'a'set'of'applicable'rules.'If'you'want'to'change'those' '

'
background' rules,' you' have' to' stipulate' otherwise,' the' default' rules' will' apply.'
You' can' gather' the' principle' of' mutuality' of' contracts' from' Article' 1308.' What'
Of'course,'there'are'certain'default'rules'that'cannot'be'changed'(ex.'Foreigners'
does'this'principle'remind'you'of?'Something'you'learned'in'the'past.'Mutuality'
cannot'own'land).''
of'contracts'means'that'the'contract'should'bind'both'parties.'This'should'remind'
'
you'of'the'rule'on'purely'potestative'suspensive'condition'dependent'on'the'sole'
DOH"V."HTMC"[9:07]'
would'of'the'debtor.''
DOH' entered' into' a' consultancy' agreement' with' HTMC.' HTMC' already'
'
completed' all' the' plans' and' the' documents.' However,' DOH' wanted' to' amend' '

the'consultancy'agreements,'requesting'to'change'the'project'cost.'But'there'was'
no' agreement' that' was' reached' regarding' the' amendments.' HTMC' filed' a' case'
with' the' CIAC.' DOH' is' now' saying' that' the' case' was' premature' but' the' Court'
said'that'this'action'was'based'on'their'previous'agreement'that'if'ever'there'will'
ART." 1182" —' When' the' fulfillment' of' the' condition' depends' upon' the' sole'
will'of'the'debtor,'the'conditional'obligation'shall'be'void.'If'it'depends'upon'
chance' or' upon' the' will' of' a' third' person,' the' obligation' shall' take' effect' in'
conformity'with'the'provisions'of'this'Code.'
'

be'arbitration,'CIAC'will'have'jurisdiction.' '
' What’s' the' rule?' If' the' condition' is' a' purely' potestative' suspensive' condition'
Is' this' a' valid' stipulation' even' though' it' is' divesting' the' courts' of' jurisdiction?' dependent'on'the'sole'will'of'the'debtor,'the'obligation'is'void.'But'in'the'cases'
Yes,'because'of'the'autonomy'of'contracts,'the'parties'can'stipulate'anything'that' we' discussed' before,' the' condition' was' void' but' not' the' obligation.' The' Court'
is'not'contrary'to'law'or'any'other'public'policy.'' did' not' identify' what' obligation' was' nullified' because' of' the' purely' potestative'
' suspensive' condition.' In' those' cases,' it' would' have' been' better' to' use' the'
In' this' case' there' was' an' arbitration' clause' saying' that' all' disputes' will' be' principle'of'mutuality.'
resolved' by' the' CIAC.' But' before' arbitration,' what' should' be' done' as' per'
contract?' As' an' intermediate' mode' of' settling' the' dispute,' the' dispute' should'
first' be' elevated' to' the' DOH' secretary' for' resolution.' In' this' case,' the' DOH'
secretary' did' not' respond' so' they' sent' it' to' the' CIAC.' The' Court' said' that' the'
action'was'not'premature'because'HTMC'appealed'to'the'DOH'secretary'several'
times'but'did'not'get'a'response.'So'how'would'you'characterize'the'inaction'of'
the' DOH' secretary?' You' have' to' remember' that' the' contract' shall' be' the' law'
between' the' parties' and' should' be' complied' with' in' good' faith.' So' in' this' case,'
DOH'did'not'follow'the'contract'in'good'faith.'In'fact'you'can'say'that'when'the'
DOH' secretary' did' not' respond,' he' was' preventing' HTMC' from' elevating' the'
dispute'to'CIAC.''
'
What'about'the'offer'for'amendments,'what'did'the'Court'say'about'that?'There'
was' no' agreement' on' the' amendments' so' the' first' contract' will' govern.' Was'
HTMC' duty?bound' to' accept' the' amendments?' No,' because' consent' is' also'
necessary,'and'if'HTMC'does'not'give'its'consent,'it'cannot'be'a'valid'contract.''
'
You'see'here'the'obligatory'force'of'a'contract.'When'parties'enter'into'a'contract,'
they'should'abide'by'it'in'good'faith.'So'the'DOH'secretary'should'have'acted'on'
the' matter.' In' the' same' manner,' when' parties' enter' into' a' contract,' one' party'
cannot'force'the'other'party'to'amend'the'contract.'Otherwise'it'will'violate'the'
principle'of'mutuality'of'contracts.''
'
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"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
THURSDAY,'08'JANUARY'2015'
'

"

ELEMENTS"OF"A"CONTRACT""
Last' week,' we' started' with' contracts.' In' a' contract' of' sale,' you' have' S,' a' seller'
who'sells'B,'a'buyer'who'pays'a'price.'Each'of'them'explains'the'elements'of'a'
contract.' First' part' is' parties’' consent,' consent' with' respect' to' object' and' cause.'
Depending'on'the'seller'or'the'buyer,'you'have'the'cause'and'the'object.'When'
you' have' a' contract,' the' minimum' is' you' have' an' agreement' on' the' object' and'
Fourth' is' the' relativity' of' contracts.' General' rule:' Contracts' take' effect' only'
between'parties,'their'assigns'and'heirs.'Consequently,'they'cannot,'as'a'general'
rule,'produce'any'effect'upon'third'persons,'in'conformity'with'the'principle'of'
res$inter$alios$acta$negue$nocet$prodest.$
$
"

ILLUSTRATION"1:"RELATIVITY"OF"CONTRACTS"
the'cause.'To'the'debtor,'When'you'have'that'agreement,'the'law'will'provide'the' There'is'a'clause'that'Y'cannot'sell'the'car'in'five'years.'Y'sold'it'to'Z'within'
details.' Unless' stipulated,' default' rules' will' kick' in.' You' will' get' these' default' the'period.'Can'X'go'after'Z?'
rules'from'the'law.'
'
Parties' can' also' stipulate' on' the' provisions.' There' are,' however,' certain'
provisions'that'they'cannot'stipulate'that'are'unlawful.'An'example'is'making'a' '
waiver'for'future'fraud.'Another'one'is'a'stipulation'on'a'foreigner'buying'a'lot' General'rule:'No,'X'cannot'go'after'Z.'Z'is'not'a'party'to'a'contract.'
'

in'the'Philippines.'Those'cannot'be'done.'' '
'
"

" PRINCIPLES"OF"A"CONTRACT:"
ELEMENTS"OF"A"CONTRACT:" 1. Obligatory"force"of"contracts'
1. Consent' Art.'1159.'Obligations$arising$from$contracts$have$the$force$of$law$between$
2. Cause' the$contracting$parties$and$should$be$complied$with$in$good$faith.'
3. Object' 2. Mutuality"
'

' Art.'1308.'The$contract$must$bind$both$contracting$parties;$its$validity$or$
PRINCIPLES"OF"A"CONTRACT" compliance$cannot$be$left$to$the$will$of$one$of$them.'
First' is" Art." 1159.' Obligations' arising' from' contracts' have' the' force' of' law' 3. Autonomy'
between'the'contracting'parties'and'should'be'complied'with'in'good'faith.'The' Art.'1306.'The$contracting$parties$may$establish$such$stipulations,$clauses,$
parties'can'stipulate'anything'in'the'contract.'These'stipulations'bind'them'in'the' terms$and$conditions$as$they$may$deem$convenient,$provided$they$are$not$
contract' and' are' the' law' between' the' parties.' The' parties' are' to' perform' their' contrary$to$law,$morals,$good$customs,$public$order,$or$public$policy.'
contractual'obligations'in'good'faith'even'if'that'is'not'stipulated.'Performance'in' 4. Relativity'
good'faith'is'read'into'the'contract.'It'is'a'rule'that'once'the'contract'is'perfected,' Art.'1311.'Contracts$take$effect$only$between$the$parties,$their$assigns$and$
the'parties'are'bound'to'fulfill'what'has'been'expressly'stipulated'and'to'fulfill'all' heirs,$ except$ in$ case$ where$ the$ rights$ and$ obligations$ arising$ from$ the$
the'consequences'thereof.'' contract$ are$ not$ transmissible$ by$ their$ nature,$ or$ by$ stipulation$ or$ by$
' provision$of$law.$The$heir$is$not$liable$beyond$the$value$of$the$property$he$
Second'is'the'mutuality'of'contracts.'The'contract'must'bind'both'parties.'This'is' received$from$the$decedent.'
'

reminiscent' of' a' purely' potestative' condition' dependent' on' the' sole' will' of' a' '
debtor'which'is'void.'This'destroys'the'juridical'tie.'' "
' "
Third' is' the' autonomy'of'contracts.' The' contracting' parties' may' establish' such' "
stipulations,' clauses,' terms,' and' conditions,' as' they' deem' convenient.' "
Stipulations,' however,' should' not' be' contrary' to' law,' morals,' good' customs,' "
public'order,'or'public'policy.'' "
' "
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CASES"[ARTS.'1305?1317]' SOLIDBANK"V."PERMANENT"HOMES"
GF"EQUITY"V."VALENZONA"" On'mutuality'
On'mutuality'
This' case' involved' a' SERVICE' CONTRACT' between' GF' Equity' and' Valenzona'
for'his'coaching'services.'
'
'
This'is'a'valid'case'because'there'is'a'notice'to'be'sent'to'the'other'party'and,'in'
case'of'denial,'there'is'an'illusory'opt?out'to'prepay'the'loan.'
'
' '
This' contract' had' a' peculiar' provision:' the' termination' was' based' on' its' sole' TIU"V."PLATINUM"PLANS""
opinion' determined' by' GF' Equity.' In' particular:' “GF' can' terminate' the' services' On'actuality'
of'Valenzona'if'he'fails'to'coach'effectively.”'What'is'wrong'with'this'clause?'GF' Non?involvement' is' valid' as' long' as' there' are' limitations' with' respect' to' time,'
is'the'only'party'to'determine'[what'“effectively”'means].' place,'and'trade.''
' '
How' to' make' this' clause' valid?' How' to' craft' a' new' one?' Include' a' clause' on' Non?compete'and'confidentiality'undertakings'are'also'valid.'
prior'notice.' '
"

' ILLUSTRATION"2:"RIGHT"OF"FIRST"REFUSAL"
“Terminate'[with'or'without'cause],'with'prior'notice.”' Remember'this'old'case:'
'
This' will' not' be' a' purely' potestative' condition,' because' there' is' a' resolutory'
condition.'
' '
(Note:$A$purely$potestative$condition$dependent$on$the$sole$will$of$the$debtor$is$VOID.$ There'is'a'clause'that'should'the'buyer'sell'the'property,'it'can'only'be'sold'to'
Instead$ of$ voiding$ the$ provision,$ include$ a$ prior$ notice$ clause$ to$ make$ it$ dependent$ on$ the'seller.'Is'it'valid?'No,'it'is'in'invalid'because'it'is'a'perpetual'restriction'on'
other$factors$outside$of$the$will$of$the$debtor,$and$therefore$valid.)$ the'right'of'disposition,'an'essential'aspect'of'the'right'of'ownership.'How'to'
' make'it'valid?'Make'it'a'right'of'first'refusal'or'attach'a'period.'
'

PNB"V."ROCAMORA" '
On'mutuality' NAPOCOR"V."PROVINCE"OF"QUEZON"
On'relativity'
BUILD,'OPERATE,'TRANSFER'AGREEMENT'
'
' Can' NPC' question' the' property' tax?' No,' NPC' is' not' privy' to' the' contract' of'
This' contract' contained' an' escalation$ clause.$ For' an' escalation' clause' to' be' valid,' Mirant'and'Quezon.'NPC'has'no'real'right'over'the'property'as'well.'
there'must'be'a'de?escalation'clause.''
"
Unilateral"increase"of"the"interest"rate"is"the"problem"in"the"contract.'The'lender'
is' given' unbridled" authority" to" increase" an" essential" term;' this' violates' the'
mutuality'of'contracts.'
'
'

When'there'is'no'obligation'to'reply,'silence'does'not'mean'consent.'
'

'
'
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"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
THURSDAY,'08'JANUARY'2015'
'

"

RECAP:"RESCISSIBLE"CONTRACTS" CASES"
You' have' this' contract,' let’s' say' you' have' the' seller,' selling' a' specific' property' GF"EQUITY"V."VALENZONA"
and'the'buyer'will'pay'the'price.'I'explained'to'you'the'essential"elements"of"the" This' case' involved' a' SERVICE' CONTRACT' between' GF' Equity,' Alaska' team'
contract.'First,'there'must'be'consent'of'the'parties.'' (obligation' to' give)' and' Valenzona' for' his' coaching' services' (obligation' to' do).'
' The' term' is' for' two' years.' In' here,' there' is' a' peculiar' provision,' GF' would'
Consent' to' what?' Consent$ to$ the$ two$ other$ elements:$ object$ and$ cause.' In' an' terminate' the' services' of' Valenzona' “if' the' coach,' in' the' sole' opinion' of' the'
agreement,'the'law'will'provide'the'details'with'regard'to'the'contract.' corporation,'fails'to'exhibit'sufficient'skill'or'competitive'ability.”'What'is'wrong'
' with'this?'Because'this'would'violate'the'mutuality'of'contracts'if'GF'alone'will'
For' example,' in' a' sale' of' a' property,' you' will' ask,' who' will' pay' the' taxes?' The' determine' when' the' contract' will' subsist.' What' if' the' provision' states:' “The'
default'rule'is'that'the'seller'will'pay'the'capital'gains'tax'while'the'documentary' corporation' may' terminate' the' contract' at' any' time' with' or' without' cause' by'
stamp' tax' will' be' paid' by' the' parties' to' the' contract' –' 50?50.' Who' will' pay' the' giving'Valenzona'a'ten?day'prior'notice.”'Will'this'be'valid?'Yes,'because'there'is'
registration'fees?'The'one'who'will'get'the'title.'You'can'get'these'things'from'the' still'an'obligation'but'it'can'be'terminated'in'time'(resolutory'condition).'There'is'
law' without' the' party' stipulating.' What' about' warranties?' For' example,' the' still'a'contract'BUT'it'may'be'terminated'at'any'time.''
warranty' of' the' seller' against' eviction.' So' if' ever' the' buyer' is' evicted' from' the' '
property,'the'seller'may'be'liable.''So'you'have'these'legal'provisions'kicking'in' Valenzona' could' have' characterized' himself' as' an' employee' but' instead' he'
just' because' these' parties' enter' into' a' contract.' Now' later' on' you' will' learn,' considered'himself'a'consultant.'Why?'Because'the'labor'code'states'that'a'labor'
because' it' is' a' sale' of' a' real' property,' it' should' be' in' writing.' When' the' parties' claim' should' be' filed' within' three$ years.' Valenzona' was' creative' as' he'
want'to'override'certain'rules,'the'parties'can'stipulate.'For'example,'the'capital' characterized'the'contract'as'a'consultancy'contract.'He'now'has'10'years'to'file'
gains' taxes' may' even' be' paid' by' the' buyer.' Of' course' there' are' certain' matters' the'case.'In'this'case,'he'only'filed'the'case'after'6'years.'GF'stated'that'the'action'
which' the' parties' cannot' stipulate.' An' example' is' there' can' be' no' waiver' of' is'barred'by'laches.'What'is'laches?'Laches"is"when"you"have"a"right"and"it"took"
future'fraud.'Or'the'party'can'buy'land'even'if'he'is'a'foreigner.'''' you" an" unreasonable" length" of" time" to" assert" or" claim" your" right.' ' Laches' is' a'
' rule'in'equity'wherein'a'party'was'negligent'in'asserting'his'rights'and'therefore'
Then'we'discussed'the'principles'involving'contract.'First'principle'we'discussed' barred'by'the'Court'in'doing'so.'But'the'Court'stated'that'he'had'10'years'to'file'
is' under' Article' 1159' or' the'obligatory'force'of'the'contract.' The' contract' is' the' the'case.'Laches$will$not$apply$because$there$is$a$period$within$which$the$action$may$be$
law'between'the'parties'and'must'be'complied'in'good'faith.'This'is'related'to'the' filed.''
other' principle' of' mutuality' of' contracts.' The' parties' can' stipulate' anything' but' "
the'moment'they'agree'on'the'terms'and'conditions'of'the'contract,'they'shall'be' PNB"V."ROCAMORA"
bound'by'those'terms.'There'must'be'compliance'in'good'faith.'Let’s'say'there'is' The' contract' between' the' parties' contained' an' escalation$ clause.$ What' is' an'
a'sale'of'a'car,'seller'delivered'the'car'as'per'the'contract'but'made'the'car'dirty' escalation'clause?'A'contracting'party'can'adjust'or'modify'the'rates'of'the'loan'
prior' to' delivery,' that’s' not' compliance' in' good' faith.' Or' the' seller' changes' within'the'limits'provided'by'law.'Is'an'escalation'clause'valid?'Yes,'as'long'as'
certain'parts'of'the'car'for'cheaper'ones.'That'would'be'acting'in'bad'faith.'Even' there' is' a' de?escalation' clause.' So' it’s' either' a' reduction' or' an' increase' of' the'
if' the' parties' did' not' stipulate,' there' must' be' compliance' in' good' faith.'' interest'rate.''
' '
Second,'we'discussed'mutuality'of'contracts,'it'should'remind'you'of'the'purely' The' Court' said' that' the' escalation' clause' in' this' case' violated' the' mutuality' of'
potestative' suspensive' condition' dependent' on' the' sole' will' of' the' debtor.' I' contracts' because' the' lender' was' given' unbridled' authority' to' increase' the'
explained'before'why'does'that'condition'invalidate'the'obligation'depending'on' interest' rate' and' the' interest' rate' in' a' loan' contract' is' an' essential' term' of' the'
it.' The' reason' is' that' it' destroys' the' juridical' tie' as' if' there’s' no' obligation.' contract.'In'here,'PNB'gave'notices,'however,'the'Court'stated'that'the'silence'or'
Because' the' debtor' will' decide' if' there' will' be' an' obligation.' The' law' provides' non?reply' of' the' parties,' does' not' mean' consent.' This' is' different' in' the' case'
that'in'that'case,'the'obligation'shall'be'void.'' where'a'third'party'pays'the'debt'of'the'debtor'and'wherein'that'debtor'does'not'
' reply,'that'means'implied'consent.'This'cannot'be'applied'in'this'case.''

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"
SOLIDBANK"V."PERMANENT"HOMES"
In'this'case,'the'contract'between'the'parties'also'contained'an'escalation'clause.'
But'there'was'also'a'de?escalation'clause.'The'bank'could'adjust'the'interest'rates'
periodically'based'on'the'prevailing'international'and'local'interest'rates'and'that'
there' should' be' notice' given' to' the' borrower.' If' they' do' not' agree' with' the'
interest' rates,' the' borrower' can' opt' to' pre?pay' the' loan' obligation.' Does' this'
violate'the'mutuality'of'contracts?'No.'The'Court'stated'that'Permanent'Homes'
has' the' option' to' disagree' with' the' adjustment' rate' through' the' pre?pay' option'
which' was' absent' in' the' case' of' PNB' v.' Rocamora.' This' option' is' actually' an'
illusory' opt' out.' Because' if' you' look' at' the' context' of' the' case,' the' borrower'
cannot'immediately'pay'the'loan'even'if'it'wanted'to'because'the'corporation'is'
not'yet'capable'to'pay.'But'this'is'jurisprudence.'This'is'typical'provision'you'will'
see'in'loan'contracts'especially'in'retail'loan'contracts'and'housing'loans.'
'
Let’s'say'we'provide'a'standard.'The'bank'can'adjust'the'rate'annually'based'on'
prevailing' economic' and' financial' conditions' taking' into' consideration' factors'
such' as' inflation' rate,' forex' rates,' reserve' requirements,' etc.' Will' this' be' valid?'
Yes.'In'this'case,'the'Court'stated'that'it'is'valid'because'there'is'a'basis'for'the'
increase' interest' rates' without' the' determination' of' either' party.' Another' thing'
vedthat'you'can'have'is'a'formula.'The'interest'rate'plus'a'constant'margin.''Let’s'
say' the' Treasury' bill' rate' (this' is' your' reference' rate' or' bench' mark)' is' 4%' and'
then'you'add'the'margin,'3%.''This'is'usually'done'in'loans'by'corporations.'This'
is' consistent' with' the' mutuality' of' contracts,' no' party' will' be' determining' the'
interest'rate.''
"
Q:" Is" it" possible" that" the" parties" will" choose" a" third" party" to" set" the" interest"
rate?"
A:'' Yes,' it' is' legally' possible.' But' no' party' will' enter' into' that' contract' because'
you'don’t'want'a'third'party'setting'the'interest'rate.''
'
What'is'autonomy'of'contracts?'The'parties'can'stipulate'anything'in'the'contract'
as' long' as' it' is' not' contrary' to' law.' Can' the' parties' agree' that' there' can' be' no'
prosecution'against'a'party'who'commits'a'crime?''No.'Because'it'is'contrary'to'
policy.' Remember' it' is' the' State' who' is' filing' the' case' against' the' person' who'
committed' the' crime.' Can' you' have' a' stipulation' by' the' spouses' wherein' only'
one'of'them'will'have'disciplinary'authority'over'the'children?'No.'Because'the'
law'states'that'both'parents'have'parental'authority.''So'what'are'the'limits'when'
it'comes'to'autonomy'of'contracts?'Laws.'But'you'have'to'know'all'the'relevant'
laws,' but' that' is' difficult.' Can' a' foreigner' be' a' mortgagee?' Yes,' but' the'
foreclosure'can'only'be'done'judicially'and'not'extra'judicially.'

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"

"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
TUESDAY,'13'JANUARY'2015'
'

"

REVIEW:"PRINCIPLE"OF"RELATIVITY"OF"CONTRACTS"[04:11]' '
'
"

'
ILLUSTRATION"2:"CONTRACTS"CREATING"REAL"RIGHTS"
GENERAL"RULE:" Example:'
Only'the'parties'to'the'contract'will'be'bound'by'it.'Only'they'have'the'rights' “Let’s' say' A' sold' a' property' to' B.' B' paid' the' price' (down' payment' and'
and'obligations'under'the'contract.'Only'they'can'invoke'the'provisions'of'the' installments).'B'secured'the'obligation'by'mortgaging'the'same'property.''
contract'(see$NPC$v.$Province$of$Quezon).'A'stranger'to'the'contract'cannot'be' '
bound'by'the'contract.'
'

'
"

ILLUSTRATION" 1:" STRANGER" ENTERS" AS" AN" AGENT" OF" A" CERTAIN" PARTY"
(PRINCIPLE"OF"RELATIVITY"OF"CONTRACTS"+"ART."1317)"" '
'
"
Ordinarily,' the' mortgage' will' be' binding' only' to' A' and' B' (Principle' of'
D'entered'into'a'contract'as'an'agent'of'C.'Will'C'be'bound?''
Relativity'of'Contracts)'.'
'
'
' However," under' the' law,' if' the' mortgage" is" registered' with' the' appropriate'
' registry'of'deeds'(requirement'contemplated'in'JSP’s'explanation'above),'the'
C'will'not'be'bound'by'the'contract'because'of'the'general'rule'on'relativity'of' mortgage"will"bind"even"third"parties.'
contracts,'UNLESS"D'is'authorized'by'C'or'he'has'by'law'a'right'to'represent' $
C.'(Art.'1317,'¶1)"' B'sold'the'property'to'C,'can'C'claim'that'the'mortgage'will'not'bind'him/her?'
" No.'Because'it'is'a'registered'mortgage.''
If'D'has'no'authority'or'any'legal'representation'to'represent'C'and'D'enters'
into' a' contract' on' behalf' of' C,' the' contract' will' be' unenforceable' against' C'
because' there' is' no' consent' of' C.' (Art.' 131,' ¶2)" C' will' not' be' bound' by' the'
contract'(Principle'of'Relativity'of'Contracts)."However,'D'will'have'a'liability'
pursuant'to'the'rules'of'agency.'
'

'
' Registered'Mortgage—binding$on$third$parties'
EXCEPTIONS"TO"THE"PRINCIPLE"OF"RELATIVITY"OF"CONTRACTS:"" "
1. Contracts'creating'real'rights'bind'third'persons'(Art.'1312)'' The" mortgage" will" follow" the" property" and" will" bind" anyone" who" will"
2. Protection' to' creditors' from' contracts' intended' to' defraud' them' possess"the"property."
(Art.'1313)'' "
3. Tortious'interference'(Art.'1314)' Or' let’s' say' B' has' a' creditor' X.' B' owes' X' a' certain' amount.' X' sued' B' and'
4. Stipulation' in' favor' of' a' third' party/Stipulation$ pour$ autrui$ (Art.' attached'the'property.'The'mortgage'will'still'bind'X'because'it'is'registered.'
1311,'¶2)' The"attachment"will"only"be"subordinate"to"the"mortgage.'So'if'there'will'be'
'

' a'foreclosure,'the'first'priority'will'be'the'amount'due'to'A'and'if'ever'there'is'
ART." 1312" —" CONTRACTS" CREATING" REAL" RIGHTS" BIND" THIRD" a'residual'value'it'will'go'to'X,'the'attaching'creditor.''
PERSONS" ''''''''''''''''''''''
There' are' certain' contracts,' which' bind' third' persons,' if' the' contract' complies' '
with'specific'legal'requirements.' '
' '

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ILLUSTRATION"3:"RESCISSIBLE"CONTRACTS"TO"PROTECT"A"CREDITOR"
For' example,' on' day' 1' a' creditor' extended' a' P10M' loan' to' debtor.' The' loan'
will'be'payable'with'interest'on'day'3.'But'on'day'2,'debtor'conveyed'his'only'
asset'to'X'in'exchange'for'a'nominal'sum'which'value'is'not'commensurate'to'
the'value'of'the'asset'conveyed.'(In'this'example,'the'only'asset'of'the'debtor'
is' worth' P20M' and' in' exchange' X' paid' him' a' sum' of' P5M' only.)' We' will'
assume' that' this' is' a' fraudulent' scheme,' the' purpose' of' the' debtor' in'
Another'example'of'a'contract'creating'real'rights:''
conveying'his'property'to'X'is'to'have'zero'(0)'assets'on'day'3'(date'when'his'
'
obligation'to'the'creditor'is'due).''
Lender'extended'a'loan'to'borrower.'Borrower'is'obliged'to'pay'principal'and'
'
interests' pursuant' to' a' given' schedule.' To' secure' payment' of' the' loan'
obligations,'borrower'constituted'a'pledge'of'certain'shares'of'stock.'Let’s'say'
the'pledge'are'stock'certificates'covering'1'million'shares.'When'you'pledge,'
you' have' a' pledge' contract' and' then' you' deliver' the' pledged' shares' to' the'
creditor.'In'case'the'borrower'defaults,'the'lender'can'foreclose'the'shares'by'
selling' them' to' a' public' auction' or' by' some' other' mode' of' disposition' as'
agreed' upon' by' the' parties' and' the' proceeds' will' be' applied' to' the' loan'
obligation' and' the' obligation' will' be' extinguished.' Now' let’s' say,' borrower' '
'
sold'the'shares'to'X.'Will'X'be'bound'by'the'pledge?''
Creditor' has' no' other' recourse' but' to' rescind' the' contract.' Remember' that'
rescission' (under' Article' 1383)' is' a' subsidiary' remedy' as' opposed' to'
resolution' (under' Article' 1191),' which' is' retaliatory.' Under' the' law,' the'
creditor'in'this'example'can'file'and'to'rescind'the'fraudulent'conveyance.'
'

'
'

Notarized'Pledge—binding$on$third$parties'
'
Ordinarily,'X,'if'in'good'faith,'was'unaware'of'the'pledge'despite'the'exercise'
of'due'diligence,'then'X'will'be'an'innocent'purchaser'of'value'and'hence'he'
will'be'protected.'HOWEVER,'if'the'pledge'is'in'a'particular'form'required'by'
WHY" IS" ARTICLE" 1313" AN" EXCEPTION" TO" THE" PRINCIPLE" OF"
RELATIVITY"OF"CONTRACTS?"[19:02]'
The' creditor' is' actually' a' third' party,' but' he' has' a' right' to' rescind' the'
fraudulent'scheme'against'him'to'the'extent'necessary'to'fulfill'the'obligation'
of' the' debtor' to' said' creditor.' The' creditor' is' a' third' party' acquiring' some'
right'in'relation'to'another'contract'intended'to'defraud'him.'
'

law'(notarized,"meaning"it"is"in"a"public"document),'the'pledge"will"still"be" '
binding"on"X"despite"his"lack"of"knowledge.' ART."1314"—"TORTIOUS"INTERFERENCE"[22:44]'
CASES"[ARTS.'1305?1317]'
'

'
'
GILCHRIST"V."CUDDY'
Contracts' that' do' not' comply' with' certain' legal' requirements' will' still' bind' Cuddy' is' the' owner' of' the' film' Zigomar' and' he' entered' into' a' contract' with'
third' parties,' if' the' third' party' has' knowledge' of' the' contract' creating' a' real' Gilchrist' in' which' the' latter' would' rent' the' film' for' 6' weeks' for' a' price' of' P150'
right.'Knowledge'is'sometimes'considered'tantamount'to'registration'or'any' per' week.' Espejo' (third' party)' induced' Cuddy' by' offering' a' price' of' P350' per'
specific'legal'requirement.' week'in'order'to'be'able'to'show'the'film'in'his'own'theater.'Cuddy'breached'his'
'

' contract'with'Gilchrist'by'giving'the'film'Zigomar'to'Espejo.'Gilchrist'then'sued'
ART." 1313—" CREDITORS" ARE" PROTECTED" IN" CASES" OF" CONTRACTS" both'Cuddy'and'Espejo.''
INTENDED"TO"DEFRAUD"THEM" "
A' contract' may' be' rescinded' (resolution$ under$ Article$ 1383,$ not$ Article$ 1191)' to' HELD:"""
protect'a'creditor.' There'are'two'schools'of'thought:''
' 1. Malice'is'required'for'tortious'interference'
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' '

2. Malice'is'not'required'' there' will' still' be' tortious' interference.' Malice' will' only' determine' the' extent' of'
' liability'for'damages.'
It' was' held' that' malice" is" not" required.' Even' if' a' third' party' induces' a' '
contracting' party' to' violate' his' contract' with' another,' for' his' personal' gain' LAGON"V."CA"[43:11]'
(which' is' deemed' not' malicious),' he' is' still' liable' for' tortious' interference.' The' Lagon,'through'an'intestate'court,'bought'two'parcels'of'land'from'the'estate'of'
only'question'is'the'basis'for'damages.' Bain' Tonina' Sepi." A' few' months' after' the' sale,' Lapuz' filed' a' complaint' for'
' damages' against' Lagon' because' Lapuz' allegedly' had' 4' lease' contracts' with' Bai'
Tonina'Sepi'over'the'lands'bought'by'Lagon.'Under'the'lease'contracts'between'
'

There' is' tortious' interference' notwithstanding' the' absence' of' malice' on' the'
part' of' a' third' party.' The' pursuance' of' one’s' financial' interest' is' not' a' Sepi'and'Lapuz,'the'latter'may'put'up'commercial'buildings'to'be'leased'to'new'
justification' for' tortious' interference.' Malice" is" not" an" element" of" tortious" tenants,' however' when' the' contract' ended,' the' buildings' had' yet' to' be'
interference."The'only'question'is'the'basis'for'damages.' completed.' Hence,' as' Lapuz' claimed,' the' lease' contracts' were' renewed.'
'
According' to' Lapuz,' the' administrator' of' the' property' advised' him' to' stop'
'
collecting'rentals'from'the'tenants'of'the'building'because'Lagon'already'owned'
SO"PING"BUN"V."CA"[34:24]'
the' property.' Lapuz' accused' Lagon' of' inducing' the' heirs' of' Sepi' to' sell' the'
Tek' Hua' Trading' Co.' entered' into' a' lease' contract' with' DCCSI' in' which' the'
property'to'the'latter,'thus'violating'the'renewed'contracts'of'lease'between'Sepi'
former'will'use'the'warehouse'of'the'latter'to'store'textiles'for'a'period'of'4'years.'
and'Lapuz.'On'the'other'hand,'Lagon'argued'that'he'verified'the'existence'of'the'
Under' the' contract,' if' at' the' end' of' the' term' the' lessee' (Tek' Hua)' stays' in' the'
lease'contracts'to'Atty.'Fajardo'who'showed'him'4'copies'unsigned'lease'renewal'
leased'warehouse,'the'lease'will'be'on'a'monthly'basis.'Tek'Hua'Trading'Co.'was'
contracts.' Lagon’s' personal' investigation' and' inquiry' also' did' not' reveal' any'
dissolved' and' one' of' its' founding' members,' So' Pek' Giok' died.' However,' the'
claim'or'encumbrance'on'the'subject'lands,'and'so'he'purchased'them.''
other'founding'members,'headed'by'Manuel'Tiong,'formed'Tek'Hua'Enterprises'
"
Co.' After' So' Pek' Giok’s' death,' his' grandson,' So' Ping' Bun' occupied' the'
HELD:'
warehouse'for'the'textiles'manufactured'by'his'company'Trendsetter'Marketing.'
Only'the'first'element'of'tortious'interference'was'present.'Lagon'was'not'aware'
Aggrieved,'Manuel'Tiong'and'the'rest'of'Tek'Hua'Enterprises,'wrote'a'letter'to'
of'the'existence'of'the'lease'contract'between'Lapuz'and'Sepi'despite'his'exercise'
So' Ping' Bun,' demanding' the' latter' to' vacate' the' warehouse' for' 14' days' since'
of'due'diligence'(verifying'the'existence'of'a'lease'contract).'
there'is'a'subsisting'contract'of'lease'between'Tek'Hua'and'DCCSI.'However,'So'
'
Ping' Bun' asked' DCCSI' to' execute' a' lease' agreement' between' his' company' '

(Trendsetter)'and'DCCSI.'The'latter'acceded'to'the'request'of'So'Ping'Bun,'thus' The'exercise'of'due'diligence'is'the'proof/justification'of'the'third'party’s'lack'
the'complaint'of'Tek'Hua'Enterprises.' of'knowledge'of'an'existing'contract.'The'third'party'cannot'just'say'that'he'
' has' no' knowledge' of' the' contract;' he' has' to' prove' that' he' exercised' the'
'
necessary' diligence' which' led' him' to' believe' that' there' are' no' contracts'
HELD:"
concerning'the'prestation.'
There' is' tortious' interference' in' this' case' because' its' requisites' are' present.' '

However,' financial' gain' on' the' part' of' the' third' party' is' now' a' '
justification/excuse'for'tortious'interference'because'in'the'pursuance'of'one’s' ON'JUSTIFICATION'OF'TORTIOUS'INTERFERENCE'IN'LAGON$
financial' gain—the' interference' is' not' malicious.' Malice' is' only' a' basis' for' This' case' carried' the' wrong' interpretation' of' the' ruling' in' Gilchrist.' The' court'
damages.' said,'if'assuming'there'was'interference,'if'the'third'party'is'only'advancing'his'
'
financial' interest,' he' is' not' to' be' regarded' as' an' officious' interferer' and' he' will'
'
' not' have' liability' for' damages.' But' the' court' should' have' stopped' in' the'
REQUISITES"OF"TORTIOUS"INTERFERENCE:"' discussion'of'the'absence'of'the'second'element'of'tortious'interference.'
1. Existence'of'valid'contract' '
2. The'third'party'has'knowledge'of'the'existing'contract' ON'DILUTION'OF'THE'GILCHRIST'RULING'
3. Unjustified'interference'by'the'third'party' If' you' look' at' these' cases,' somehow' there' is' a' dilution' of' Gilchrist.' Gilchrist'
'

' clearly' stated' that' malice' is' not' an' element' of' tortious' interference.' As' long' as'
In' this' case' it' is' as' if' there' is' no' tortious' interference.' But' what' the' Supreme' you' are' aware' of' an' existing' contract' and' you' induced' another' party' to' violate'
Court'is'discussing'here'was'the'issue'of'malice'—'that'even'if'there'is'no'malice,' his'contract,'you'will'be'liable,'unless'you'find'a'valid'justification.'And'based'on'

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' '

Gilchrist,' advancement' of' one’s' financial' interest' is' not' a' justification,' because'
when' you' interfere' with' a' contract' you' are' motivated' by' profit/any' incentive,'
unless'you'are'an'evil'person'who'just'wants'to'destroy'things.'So'if'you'follow'
these' cases,' when' one' claims' financial' interest' as' a' justification' for' the'
interference,'maybe'it'will'mitigate'the'liability'for'damages.'Actually,'from'my'
own'point'of'view,'that'should'not'be'because'when'we'deal'with'contracts'we'
inducement' by' the' third' party' is' a' tort.' Ordinarily,' only' the' contracting'
parties' are' held' liable' for' violating' the' provisions' of' the' contract.' Tortious'
interference' is' analogous' to' the' rights' of' the' creditor' to' rescind' a' contract'
intended' to' defraud' them?Art." 1313" Only' in' that' case,' the' third' party' (the'
creditor)'meddles'in'the'contract'because'of'a'right.'
'

'
are'always'motivated'by'financial'incentives.' STIPULATION" IN" FAVOR" OF" A" THIRD" PARTY" (Stipulation' pour' autrui)'
' [1:06:23]'
EXAMPLES" OF" JUSTIFICATION" FOR" INTERFERENCE" IN" A" CONTRACT" '
[53:49]'' '

REQUISITES" OF" STIPULATION" IN" FAVOR" OF" A" THIRD" PARTY" (see' Limitless' v.'
'
Quilala):"'
TAYAG"V."LACSON"[55:14]'
1. The'stipulation'in'favor'of'third'person'should'only'be'a'part,'not'
There'was'a'landowner'(Lacsons)'and'they'have'tenants'(Tiamson'et.'al).'Under'
the'whole,'of'the'contract;'
the'Comprehensive'Agrarian'Reform'Law,'the'tenants'will'be'getting'the'lands.'
2. The' contracting' parties' must' have' clearly' and' deliberately'
However,' the' tenants' should' keep' the' land' within' a' certain' period.' Then' here'
conferred' a' favor' in' upon' a' third' person,' not' a' mere' incidental'
comes' Tayag,' he' promised' to' pay' P50' per' square' meter' in' exchange' for' a'
benefit'or'interest;''
conveyance'of'the'land.'Tayag'wanted'to'get'the'rights'of'the'tenants'even'before'
3. The' favorable' stipulations' should' not' be' conditioned' or'
the'tenants'could'get'the'land.'There'was'a'directive'by'the'landowner'(Lacsons),'
compensated'by'any'kind'of'obligation'whatsoever;''
that'they'will'cause'the'disqualification'of'the'tenants'to'benefit'under'the'CARP'
4. The' third' person' must' have' communicated' his' acceptance' to' the'
if'the'tenants'will'proceed'with'the'contract'with'Tayag.''
obligor'before'its'revocation;''
'
5. Neither' of' the' contracting' parties' bear' the' legal' representation' or'
HELD:"
authorization'of'the'third'party.'
There' is' no' tortious' interference' on' the' part' of' the' Lacsons' because' it' merely' '

follows'the'CARP'since'the'contract'between'the'tenants'and'Tayag'violates'the' '
said'law.' LIMITLESS"V."QUILALA"[1:08:37]'
' There'was'a'contract'of'lease'between'lessor'(Church)'and'lessee'(Limitless)'for'
advertising'purposes'in'the'lessor’s'property'in'Guadalupe'(San'Carlos'Seminary'
'

The'threat'by'the'landowners'(Lacsons)'is'not'tortious'interference,'because'it'
and' Our' Lady' of' Guadalupe' Church)' in' exchange' of' rentals.' Astro,' another'
is'based'on'the'enforcement'of'a'law'(CARP).'The'landowner'was'saying,'“if'
advertising' company,' applied' to' the' lessor' (Church)' to' lease' a' part' of' its'
you'proceed'with'this,'it'will'be'illegal.”'If'that'would'be'the'action'of'a'third'
property.' The' lessor' referred' the' application' to' lessee' (Limitless)' and' the' lessee'
party,'that'is'not'tortious'interference.'So'that’s'an'example'of'a'justification.'
executed' a' Sublease' Agreement' with' Astro' (sublessee),' which' contains' a'
In' effect,' the' third' party' merely' prevents' another' from' consummating' an'
stipulation' that' the' payments' of' Astro' will' go' directly' to' the' lessor' (Church)' to'
unlawful'contract.'
'
augment'the'rentals'received'by'the'Church.'Lessor'(Church)'signed'the'Sublease'
' Agreement'as'a'witness.'Lessee'(Limitless)'defaulted'rental'payments'due'to'the'
Another'example,'when'a'third'party'says,'“If'you'proceed'with'that'contract,'I' lessor'(Church).''
will'sue'you'based'on'some'law'or'based'on'some'contract.”'This'is'not'tortious' '
interference'because'it'is'an'exercise'of'a'right.'That'will'be'a'justification.' Limitless'claims'that'the'rentals'paid'by'Astro'to'the'Church'should'be'credited'
' to' the' obligation' of' Limitless' by' virtue' of' the' Sublease' Agreement.' Lessor'
“Love'is'not'a'justification.”'–Atty.'Joseph'San'Pedro,'2015' (Church)' argued' that' the' stipulation' directing' the' payments' of' Astro' to' the'
' Church'is'a'stipulation$pour$autrui$in'its'favor.''
'

WHY" IS" TORTIOUS" INTERFERENCE" AN" EXCEPTION" TO" THE" '

PRINCIPLE"OF"RELATIVITY"OF"CONTRACTS?"[1:05:12]' The' counterargument' of' lessee' (Limitless)' was,' if' the' said' provision' is' in' the'
In' tortious' interference,' a' third' party' will' have' a' liability' in' relation' to' the' nature' of' a' stipulation$ pour$ autrui,$ then' the' Church' should' have' accepted' it' in'
contract.' The' basis' of' the' liability' is' tort,' a' quasi?delict' because' the'

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' '

writing'because'the'benefit'is'actually'a'donation'and'by'law'the'acceptance'of'a' contracting"party"exchanging"one"prestation"for"another.$
donation'must'be'in'writing.' 4. There" must" be" acceptance" prior" to" revocation" if" neither" the"
' contracting" parties" bear" legal" representation" or" authorization" of"
the"third"party.''
'

HELD:"'
The' stipulation' is' in' fact' a' stipulation$ pour$ autrui.' It' is' in' favor' of' the' third' In$fact$you$don’t$have$to$say$this,$of$course$it’s$there.$A$person$is$a$third$
party' to' the' Sublease' Agreement:' the' Church.' Although' the' benefit' of' the' party$if$it’s'represented'by'one'of'the'contracting'parties.'
'

Church'under'the'Sublease'Agreement'partook'a'nature'of'a'donation,'it'can' '
be' accepted' in' any' form' because' Art.' 1311' 2nd' par.' merely' requires' the' Q:""So"the"acceptance"can"be"implied"or"express?"
beneficiary'of'the'stipulation$pour$autrui$to'communicate'his'acceptance'to'the' SP:'Yes.'
obligor'before'the'revocation'of'the'stipulation.' '
'

' Q:" So"in"the"book…"there"is"implied"acceptance"when"third"party"performs"the"

This'rule'should'remind'you'of'the'rule'on'payment"by"a"third"party"without"the"
intention"to"be"reimbursed."It' is' a' donation' but' you' need' not' comply' with' the'
formalities'of'a'donation'and'the'payment'will'still'be'valid.''
' SP:'There'is'an'obligation'then'there'is'an'exchange'in'prestation'of'a'third'party.'
An'example'of'a'stipulation'favorable'to'the'third'party'aside'from'that'case'of'
the' church:' Let’s' say,' you' know' a' standby' merit' of' credit;' you’re' an' importer,'
you’re'buying'goods'from'X,'from'abroad.'X'will'sell'you'goods'in'exchange'to'
pay' the' price.' Normally,' X' will' not' sell' you' goods' based' on' your' mere' say?so'
that'you'will'pay.'Remember:'X'is'abroad,'X'will'not'go'here'to'collect.'So'X'will'
obligation"in"the"contract"but"one"of"the"requisites"here"is"that"there"can"be"
an" obligation" that" is" to" be" performed" by" the" third" party" (asking" about"
implied"acceptance).'
In' the' Limitless' case,' there’s' acceptance,' the' rentals' were' being' given' to' the'
church,' and' of' course,' the' church' has' no' choice' but' to' accept.' So' they'
accepted.'That'is'implied'acceptance'of'the'debtor'even'if'the'church'was'not'
a'party'privy'to'the'sublease.'
'
'

require' now' for' you' to' enter' into' some' credit' agreement,' with' a' bank' for' ART."1318:"ESSENTIAL"ELEMENTS"OF"A"CONTRACT:"
example,'and'the'bank'will'open'a'letter'of'credit.' 1. CONSENT"OF"THE"CONTRACTING"PARTIES'
' 2. to'the'OBJECT"'
Letter" of" credit' is' like' a' standby' loan,' a' loan' to' the' importer' and' whatever' the' 3. and'to'the'CAUSE"OR"CONSIDERATION'(law'and'jurisprudence'
proceeds'will'be'released'to'X'upon'presentation'of'certain'documents,'let’s'say' use'cause'and'consideration,'interchangeably)'
the'shipment'of'the'goods,'whether'to'the'bank'or'some'respondent'bank.'
'

'
' Consent'refers'to'the'other'two'elements.'So'who'issues'consent?'The'parties'to'
You'have'here'a'contract'between'the'importer'and'the'bank.'However,'you'have' the'contract,'and'that'is'the'basis'for'them'being'bound'to'the'contract.'How'do'
here' a' stipulation:' the' payment' of' the' proceeds' in' favor' of' X.' That' stipulation' you' give' consent?' In' the' case' of' Pelayo' v.' Perez,' normally' how' do' you' give'
partakes' of' a' stipulation' in' favor' of' a' third' party,' X.' X' is' a' stranger' and' yet' X' consent?'You'sign.'If'you'cannot'sign,'you'affix'your'thumb'mark.'It'is'express,"
acquires'a'right.'That’s'why'if'you’ll'look'at'the'requirements,'THERE'MUST"BE" in"writing.' How' about' a' nod?' Signals?' Depends' on' the' context.' But' ordinarily,'
AN" ACCEPTANCE" before" REVOCATION." So' before' acceptance,' the' parties' when'you'consent'to'a'contract,'you'sign.'Of'course'it'can'also'be'implied.'Let’s'
could'revoke'the'benefit'granted'to'the'third'party.' say'I’m'selling'my'Pilot'white'board'marker.'So'I'hand'this'to'him'he'accepts'and'
' pays' me,' that’s' consent.' By' paying' me,' he’s' accepting' the' offer' and' impliedly'
'

REQUIREMENTS"FOR"THERE"TO"A"STIPULATION"IN"FAVOR"OF"THE"THIRD"PARTY:""
1. The"stipulation"should"be"part,"not"the"whole"of"the"contract""
2. The" contracting" parties" must" have" clearly" and" deliberately"
conferred"a"favor"upon"the"third"person.'$
Normally$ a$ contract$ will$ redound$ to$ some$ benefit$ to$ a$ third$ party.$ That$
doesn’t$mean$that$incidental$benefit$is$a$stipulation$in$favor$of$that$party.$
That$party$cannot$enforce$or$accept$that$benefit.$
3. The" stipulation" should" not" be" conditioned" or" compensated" by"
any" kind" of" obligation" otherwise" that" is" not" third" party" but" a"
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consenting'to'the'contract.'
'
Now,'what’s'this'case'of'Pelayo?'It’s'about'sale?'What'did'you'learn'about'your'
Family' Code?' So' you’re' dealing' with' married" persons.' Who' should' consent'
[between' the' spouses]?' Spouses' would' own' a' property' then' sell' them,' who'
should' consent?' BOTH.' Why' both?' Because' it’s' the' default' rule' (ACP),' both' of'
them'owns'the'property.'If'only'one'consents,'it'is'void'–'A"SPECIAL"KIND"OF"
VOID.'Why?'Because'it"constitutes"a"continuing"offer."Because'at$any$time$one$of$
the$spouses$can$give$the$consent$and$the$contract$will$become$valid.'So'whenever'you'
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' '

get' married,' make' use' of' that' provision.' Whenever' you' incur' a' liability' or' a'
contract' and' it' will' likely' involve' your' conjugal' assets,' if' you' can' forget' your'
spouse'in'the'meantime'and'leave'him'or'her'out'of'the'deed'that'will'be'best'for'
you'because'in'case'there'is'a'need'of'(revocation/reinforcement)'of'contract'your'
spouse'can'say'that'contract'is'void'because'I'didn’t'consent.'I'will'only'be'valid'
to'the'extent'that'there'is'benefit'to'the'family.'
' offered'you'to'sell'the'pen,'for'20'but'you'said'18,'no'contract'because'you'made'
When'you’re'disposing'conjugal'properties,'you'have'to'get'the'consent'of'your'
spouse.' The' problem' is,' this' guy' a' big' businessman,' disposing' what' he' can'
consider' default' but' still' conjugal' assets.' So' being' a' lawyer,' you' say' you' have'
both' the' consent' and' the' other' party' said' that' you' cannot' dispose' this,' and' the'
property' is' nothing' much' really,' normally' they' will' proceed' if' it' is' a' sale' of'
there' some' qualifications,' say' subject' to' execution' of' a' mutually' acceptable'
contract' or' subject' to' agreement' of' other' terms' and' conditions.' That' means' the'
offer'is'not'complete,'it’s'qualified.''
'
Let’s'say'I'offer'to'sell'you'this'pen,'for'20'pesos,'you'accept'–'there’s'a'contract'
because' I' made' a' complete' offer,' doesn’t' matter' if' you' will' not' pay.' What' if' I'
a' counter?offer.' There' is' no' agreement' on' the' price.' No' contract' if' you' sell' the'
pen'for'20'but'X'wants'to'pay'25'because'it'can'your'offer'is'somehow'covered'by'
X’s'counter?offer'(SUBSET).'Unless'X'says'I’ll'buy'for'20'but'I’ll'also'give'you'5.''
'
'

If"you"have"a"complete"offer,"the"acceptance"must"be"received"by"the"owner."
shares' of' stocks.' But' if' you’re' dealing' with' land,' it’s' conjugal' asset.' You' cannot' Prior"to"the"receipt,"there"will"be"no"contract.'
register' the' sale' of' land' without' the' spousal' consent.' That’s' the' issue' here' in' '

'
Pelayo.' The' wife' asserted' that' there' was' no' consent.' Yes,' there' was' really' no'
Q:" So" if" the" offer" is" subset," the" counteroffer" as" a" subset," it’s" already" an"
consent' but' the' wife' signed' as' a' witness' and' the' Court' said' that' is' implied'
automatic"acceptance?"
consent.'You'were'aware,'you'allowed'the'transaction'to'proceed,'you'cannot'say'
SP:'What'I’m'saying'is'when'you'make'a'counter?offer,'by'increasing'the'price,'it'
that'you'didn’t'consent.'The'signing'as'a'witness'amounted'to'implied'consent.'
cannot'be'considered'the'counter?offer'wherein'you'will'apply'the'same'rule'
What' if' it’s' a' corporation?' How' should' corporation' consent?' You' will' need'
when'you'make'a'counter?offer'for'less'because'when'you'make'a'counter'to'
ordinarily'a'BOARD"RESOLUTION'approving'the'entry'of'the'corporation'into'
pay' more' you’re' actually' accepting' the' offer' and' giving' an' extra.'
the' contract' and' designating' the' authorized' representative.' But' normally' you'
Theoretically,'it'is'not'the'counter?offer'that'needs'to'be'accepted.'Unless'you'
will' have' a' SECRETARY" CERTIFICATE' that' will' state' that' the' board' of' the'
specify' in' your' counter?offer:' this' acceptance' will' be' valid' only' if' you’ll'
corporation' approved' the' contract' and' the' duly' authorized' representative.'
accept'the'extra.'Or'he'takes'pride'in'his'profession'and'not'taking'extra.''
However,' there' are' instances' wherein' you' will' also' require' stockholders’'
"
approval.' You' will' learn' that' if' it’s' a' disposition' of' substantially' (old)' assets,'
Q:" In"case"of"insolvency…'
shareholders' must' also' consent' ?' at' least' shareholders' representing' 2/3' of' the'
SP:'Different'thing.'If'he'pays'more,'then'there'is'a'preference'given'to'the'seller'
outstanding'stocks.''
as'a'creditor.'The'other'creditors'can'go'after'that'extra'and'say'that'that'extra'
'
should'be'part'among'the'assets'to'be'divided'to'the'creditors.'It’s'a'different'
Can' a' minor' consent' to' a' contract?' YES,' however' contract' may' be' regarded' as'
rule.'
voidable.'Generally,"individual,"18"years"of"age,"can"enter"into"contract."
'
"
Now,' in' order' to' produce' a' binding' contract,' the' offeree' should' inform' the'
In'relation'to'consent,'we'have'to'understand'the'concept'of'an'offer.'An"offer,"if"
offeror'of'the'acceptance'of'the'offer'–'that’s'how'you'write'a'contract.'Let’s'say'
accepted,"will"ripen"into"a"contract"if"the"offer"is"complete.'What'is'a'complete'
the'owner'made'an'offer'in'Day'1.'Day'3'was'the'acceptance.'However'on'Day'2'
offer?'Let’s'say'you'have'an'owner'of'a'land,'owner'made'an'offer'to'X,'the'offer'
there’s'withdrawal'of'the'offer.'We'will'assume'that'the'dates'are'the'same'dates'
provided' object' which' is' the' land' and' provided' a' fixed' price' and' there’s' no'
of' receipts.' Will' there' be' contract?' No' more' because' as' of' Day' 2' there' was' no'
qualification.' This' is' a' COMPLETE" OFFER.' Meaning,' if' X' upon' receiving' the'
more' offer.' For' example' Day' 2' instead' of' a' withdrawal,' X' became' insane' or'
offer,' conveys' his' acceptance,' you' have' now' an' agreement' –' the' parties'
suffered' a' legal' incapacity.' X' could' not' accept' and' create' a' contract' because' at'
consenting'to'the'other'two'elements'of'the'contract.'Now'we'have'now'a'valid'
this'point'the'owner'was'no'longer'in'the'position'to'consent.'The'offer'would'be'
contract'assumed'barring'any'special'legal'requirement.'That’s'why'be'careful'in'
deemed'withdrawn.'
making'an'offer.'If'you’re'making'an'offer'and'you'wanted'to'result'in'a'binding'
'
contract'upon'acceptance,'you'make'it'complete.'You'have'to'state'the'minimum,'
Q:" Is" it" necessary" that" the" offeror" confirm" that" he" or" she" receives" the"
a' specific' object,' and' the' stated' price' if' it' is' sale.' The' moment' you' have' that,'
acceptance"of"the"offer?"
acceptance'will'result'into'a'valid'contract.'On'the'other'hand'if'you'don’t'want'
SP:'No,'it'just'a'matter'of'proof.''
to' be' bound,' you' want' to' have' room' for' a' possible' change' of' mind,' you' state'
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' '

" Q:""Is"there"such"a"thing"like"a"fraudulent"withdrawal?"Let’s"say"in"the"case"of"
Q:" For"example,"I"am"the"offeree"and"I"sent"a"letter"saying"that"I"accepted"the" Builders," there" was" no" formal" agreement" between" Gilchrist" and" Cuddy" to"
offer"but"the"offeror"did"not"receive"the"letter.' rent"the"movie"and"then…"
SP:'A'matter'of'proof.'Let’s'say,'I'think'this'is'what'we'are'contemplating,'when' SP:'General'rule,'if'it’s'an'offer'and'it’s'not'supported'by'a'consideration,'it'can'
there'is'crisscrossing'of'offers'and'sellers.' be' withdrawn' anytime' as' long' as' there' is' no' acceptance.' For' example,' I'
' offered'to'sell'my'car'for'1'million,'you’re'not'acting'or'doing'anything,'the'
So'let’s'say,'A'and'B.'Day'1'offer,'sent'only.'Day'3'is'the'receipt'of'the'offer.'So' next'day'I'went'to'another'person'and'offered'my'car.'Will'I'be'liable'to'you?'
when'do'you'reckon'the'effectivity'of'the'offer?'DAY'3,'because'that’s'the'time'B' No'because'I'can'withdraw'the'offer'anytime.'It’s'a'different'matter'if'I'gave'a'
has'the'information.'B'can'respond'to'the'receipt.'Day'4'acceptance.'Acceptance' period,' “You' shall' have' one' week' to' decide.”' And' for' that' period' you' paid'
takes'effect'on'Day'5.'So'now'as'of'Day'5,'you'have'the'consent'of'the'parties'to' me' a' certain' amount,' say' 50' thousand,' now' I' can' be' liable' to' you' because' I'
the' contract.' The' problematic' part' will' be,' let’s' say' there’s' an' offer,' there' is' gave' you' a' period' in' which' you' can' decide' whether' you' will' exercise' the'
acceptance'in'Day'2,'(offer)'was'already'received'on'Day'2,'Day'2'there'was'an' option.''
acceptance' but' (in' transit),' Day' 3' there’s' a' withdrawal' of' the' offer' and' receipt' '
also,'Day'4'is'the'receipt'of'acceptance,'do'you'have'a'contract?'Now,'you'don’t' Q:" What"if"you’re"selling"a"property"and"then"you"are"advertising"it,"as"a"rule"
have' a' contract.' What"will"prevail"is"what"was"received"first."Withdrawal"was" that"advertisements"are"offers…"So"what"happens"if"you"receive"10"replies"
received" ahead" of" the" receipt" of" acceptance" notwithstanding" that" the" and"the"first"one"you"open"is"the"one…""
acceptance"was"given"early"on."So"here"you"have"NO"CONTRACT."" SP:'It’s'like'a'raffle.'Well'not'the'opening'is'the'receipt,'let’s'say'you'have'a'bulk'
" mail' and' you' open' them' in' the' same' day.' When' you' advertise' for' sale,'
There' was' an' offer:' B' received' an' offer,' made' an' acceptance,' email;' A' did' not' example'car'with'plate'123,'it’s'specific,'then'you'placed'the'price,'1'million,'
open'the'email,'there'was'a'withdrawal'or'revocation'of'the'offer.'Again'receipt.' somebody' calls' you' and' says' he’ll' buy' now' you' have' a' contract.' Because'
Day'4,'opening'of'the'email,'do'you'have'a'contract?'YES,'when'there’s'an'email' clearly'you'specify'there'the'two'requirements.'Of'course'if'it’s'not'a'specific'
to' you,' you' should' have' read' it.' It' is' presumed' that' you' read' the' email' in' due' car,' it’s' very' difficult.' That’s' why' you' don’t' see' an' offer,' you' just' see' there,'
course.' Otherwise' you' open' the' opportunity' for' fraud,' ex.' by' not' opening' the' car'model,'etc.'
email' (bad' faith).' And' besides,' you' can' unread' an' email' already' read.' So' what' '
should' control' is' the' date' of' receipt' and' in' this' case' you' have' to' show' that' the' When'you'have'a'complete'offer'and'you'receive'bulk'mails,'that’s'problematic'
email'in'due'course'that'should’ve'been'read.' because'most'likely'there'will'be'litigation.'What'will'be'the'action?'You'consign'
' the'thing'in'court.'
Q:""In" cases" where" the" receipt" of" acceptance," is" a" (fault)" or" negligence" due" to" '
fortuitous"event"on"the"part"of"the"courier"(LBC)?"
'

ACCEPTANCE"SHOULD"BE"MADE"WHILE"THERE"IS"STILL"AN"OFFER"
SP:'Then'there'is'no'receipt.'The'problem'is'when'there'is'delivery'but'there’s'no' or" the" OFFEROR" IS" STILL" IN" THE" POSITION" TO" MAKE" AN" OFFER,'
reading.'' meaning'the'offeror'still'has'legal'capacity'and'no'legal'impediment.'
" '

'
Q:" In"such"case,"can"you"claim"damages"for"failure"to"deliver?"
In'the'case'of'Villanueva,'there'was'an'offer'made'by'X'in'Day'1.'At'Day'2,'there'
SP:'You'can'claim'damages'from'the'courier'but'not'from'the'third'party.''
was'a'counter?offer.'Terms'of'the'offer'and'the'counter?offer'did'not'coincide'so'
"
there’s'no'contract.'For'this'to'be'a'contract,'it'should'be'accepted'by'X.'X'in'that'
Q:" Another"situation,"you"sent"the"acceptance"letter"but"the"offeror"didn’t"get"
case'learned'this'after'a'certain'period'of'time.'Upon'being'aware'of'the'counter?
back"to"you"for"some"reason…"
offer,' X' accepted.' But' between' Day' 2' and' Day' 4' something' happened' to' the'
SP:'It’s'fine,'you'have'a'contract.'It'gives'a'timeline.'Just'a'matter'of'proof'when'
bank.' Bank' was' placed' under' receivership.' Receivership' means' the' bank' could'
one'disowns.'
no'longer'act'through'its'board'of'directors."Anything"should"be"done"through"a"
"
court"order"or"through"the"receiver"duly"authorized"by"the"court.'So'the'bank'no'
Q:" So"you"just"assume"that"once"he"sent"the"letter,"the"offeror…"
longer'has'the'capacity'to'make'an'offer'and'enter'into'a'contract.'On'Day'3,'it’s'
SP:'Not'sent,'but'receipt.'
as' if' the' offer' was' withdrawn.' Notwithstanding' the' acceptance' by' X,' there' was'
'
nothing'more'to'accept'on'Day'3'because'of'the'lack'of'the'capacity'of'the'bank'to'

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' '

offer'and'consent'to'the'contract.'So'the'offer'becomes'ineffective'under'the'law' '
upon'the'death,'civil'interdiction,'insanity'of'insolvency'because'under'the'law,' '
under'those'circumstances,'a'party'will'not'have'complete'capacity'to'enter'in'a' '
contract.'If'the'person'is'insolvent'or'subject'of'receivership,'a'person'will'need'a' '
court' order' to' validly' enter' into' contract.' What' will' then' be' the' status' of' the' '
contract' under' that' circumstance?' Depends,' may' be' rescissible,' may' be' void.' If' '
the'offer'was'made'during'a'state'of'insanity,'it’s'accepted,'but'voidable'contract' '
due'to'vitiated'consent.' '
' '
Of'course'we'learn'in'the'case'of'PNB'vs.'Rocamora,'SILENCE"may"or"not"mean" '
consent.'You'have'to'consider'the'circumstance.' '
' '
When"will"silence"NOT"be"considered"as"a"valid"consent?" '
• When"there"is"no"obligation"to"respond.'(There$was$no$obligation$on$the$ '
part$of$the$borrower$to$reply$to$the$proposed$adjustment$in$the$interest$rate;$see$ '
PNB$vs.$Rocamora)'Absence'of'any'reply'does'not'translate'to'consent.'" '
' '
When"will"silence"be"considered"as"a"valid"consent?" '
• When"the"third"party"pays"a"creditor"with"information"to"the"debtor," '
the"debtor"should"object"otherwise"there"will"be"implied"consent.'The' '
silence' in' that' case' will' be' deemed' consent' to' the' payment' by' a' third' '
party.'Consent'by'silence'will'be'on'a'case'by'case'basis." '
" '
Q:" If" a" person" makes" an" offer" to" multiple" parties," is" it" just" a" risk" to" the" '
multiple"parties"to"accept?" '
SP:'Yes,' that’s' actually' what' you' do.' When' you’re' selling,' whether' or' not' you' '
make' a' complete' offer,' you' will' make' an' offer.' Can' offeror' be' liable?' No,' '
because'anytime'you'can'withdraw.'The'problem'is'when'there'is'acceptance.' '
That’s'why'when'you'make'multiple'complete'offers'to'several'parties,'there' '
may' be' multiple' sales.' Will' you' be' liable?' Yes,' for' selling' the' same' to' '
different'parties.'It'could'amount'to'fraud.'The'first'buyer,'the'first'to'accept,' '
will' be' entitled' to' the' property.' The' others' who' accept' it' can' sue' you' for' '
fraud.' Normally' when' you' do' that,' you’re' shopping' for' the' best' offer.' But' '
there’s'a'question'of'proof'who'accepted'first.' '
' '
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—MIDTERMS—"

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'
"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
TUESDAY,'03'FEBRUARY'2015'
'

COMPLETE"OFFER"" "

PURPOSE"OF"AN"OPTION'
This'is'related'to'the'element'of'consent.'An'offer'is'complete'when'it'has'all'the'
The'purpose'is'economic.'In'our'example'(Illustration'2),'the'downside'for'X'
requisites'of'a'contract'specifically'the'[these]'two:'object'and'cause.''
if'he'will'not'exercise'the'option'will'only'be'P10'million'(the'option'money).'
'
It' will' make' sense' for' X' to' exercise' the' option' at' P101,' at' break' even'
What' is' [then]' left' is' for' the' offeree' to' accept.' The' moment' there' is' acceptance,'
(assuming' no' cost).' The' P1' will' cover' the' option' money,' which' is' normally'
there'is'consent'of'the'contracting'parties,'and'the'requisites'are'complete."
not'part'of'the'price.'If'it'goes'up'to'110/per'share'and'X'exercises'the'option,'
'
" X'will'earn'P100'Million'because'he'will'be'buying'the'share'at'P100/per'share'
ILLUSTRATION"1:"EXAMPLE"OF"A"COMPLETE"OFFER" and' sell' it' at' the' prevailing' market' price' of' P110/per' share.' If' price' is' 90' per'
“I'offer'to'sell'my'car'to'X'with'Plate'No.'123'for'P500,000.”'' share,' it' will' not' make' sense' to' exercise' the' option' however' X’s' lost' is' only'
' limited'to'P10'million'(option'money)'compared'to'a'straight'sale.'Compared'
This'is'a'complete'offer'with'no'qualification,'no'reservation.'If'X'accepts,'we' to' a' straight' sale' wherein' X' will' have' to' immediately' have' to' shell' out' P100'
will'have'a'contract'with'all'the'requisites.' million,'X'can'be'assured'of'the'offer'at'the'same'price'but'limited'to'cashing'
'

' out' only' the' option' money.' If' you' want' to' limit' your' lost,' an' option' is' a'
OPTION" possibility.'An'option'works'to'manage'your'risk.'You'exercise'the'option'if'
An' option' contract' is' different' from' the' contract' of' sale' itself' where' the' owner' there'is'a'possible'gain.'Another'use'of'an'option'is'to'sell'the'option'contract.'
actually' conveys' the' shares.' An' option' contract' is' preparatory' to' the' contract' Let’s'say'you’re'a'real'estate'broker,'instead'of'earning'commission,'you'can'
itself.' It' is' similar' to' an' outstanding' offer.' Upon' acceptance,' you' will' have' the' sell'your'option'contract.''
'
other'contract'(contract'of'sale).'You'have'all'the'elements'in'an'option'contract:'
"
object,'consent,'cause,'and'you'also'have'the'consideration'for'the'option.''
CASES"
'
" SERRA"V."CA"
Note:'This'is'different'from'a'right'of'first'refusal.''' Consideration'distinct'from'the'price'
'

' In'this'case,'there'was'an'option'embedded'in'the'lease'contract.'The'lessee'can'
purchase'the'property'for'a'definite'price.'This'case'illustrated'the'purpose'of'the'
"

ILLUSTRATION"2:"TOPIC"(E.G."SIMULTANEOUS"DELIVERY/PAYMENT)"
Let’s'say,'an'owner'of'10'Million'San'Miguel'Shares'grants'X'an'option'to'buy.' consideration' as' distinct' from' the' price.' If' there' is' a' consideration' distinct' from'
the' price,' the' option' period' may' not' be' cut' short' or' the' offer' cannot' be'
X'can'buy'the'10'Million'shares'at'the'price'of'P100/per'share'(cause)'within'
withdrawn' during' the' option' period.' The' period' has' not' expired' before' it' is'
30' days' (option' period).' X' paid' owner' P10' Million' (option' money)' to' have'
withdrawn.''
this'option.'
' '
"

This' is' an' option' contract.' The' option' may' or' may' not' be' supported' by' a'
consideration' distinct' from' the' price.' But' in' our' example' there' is'
consideration' money' of' P10' Million.' When' there' is' an' option' money,' this'
period' (30' days)' cannot' be' ignored.' If' you' look' at' it,' the' owner' is' actually'
If" there" is" no" consideration" distinct" from" the" price," and" as" long" as" there" is"
no" acceptance" yet," the" one" who" makes" an" offer" may" withdraw" the" offer"
anytime." The' moment' there' is' acceptance,' you' will' have' a' valid' contract,'
[since]'all'the'requisites'are'complete.'
'

extending'a'complete'offer—with'an'object'and'cause.'All'that'is'left'is'for'X'
to'accept'by'exercising'the'option.'To'accept,'All'X'has'to'do'is'notify'owner'
within'the'30?day'period'and'the'deed'of'sale'will'follow'after.'In'an'option,'
there'is'no'need'for'a'tender'of'payment'as'that'will'be'done'at'the'execution'
of' the' deed' of' sale' what' is' important' is' the' acceptance' should' be' within' the'
period.''
'
'
The'issue'here'is'whether'there'was'a'consideration'distinct'from'the'price.'The'
Court'stated,'in'this'case,'that'there'was'a'consideration'distinct'from'the'price.'
In' this' case,' if' the' lessee' does' not' exercise' the' option,' he' will' forfeit' all' the'
improvements' on' the' property.' Here,' the' Court' said' that' the' improvements' on'
the'property'are'a'consideration'distinct'from'the'price'even'if'it'was'not'money.'

'
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'

With'this'consideration,'the'offeror'cannot'withdraw'the'offer'before'the'period' RFR,"there"can"be"an"action"for"specific"performance"where"you"are"compelling"
expires.' the"grantor"of"the"RFR"to"abide"by"the"contract.'
" '
BIBLE"BAPTIST"V."CA" JSP:' Ang' Yu' destroys' an' option' contract' as' an' instrument' for' financial'
No'consideration'distinct'from'price'' transactions.'[How?]'The'grantor'will'just'say'“sue'me'for'damages'when'prices'
In'this'case,'the'court'ruled'there'was'no'consideration'distinct'from'the'price.'In' double' up' (damages' are' less' compared' to' profit;' no' incentive).”' Equitorial$ is$
this'case,'the'lessee'paid'the'lessor'in'advance'some'amount'so'that'the'lessor'can' correct$ and$ economically$ efficient$ as$ it$ preserves$ the$ utility$ of$ an$ option$ contract.' Ang'
pay' off' a' debt.' The' reasoning' of' the' court' was' that' it' was' not' a' consideration' Yu'does'not'promote'stability'in'financial'markets.''
distinct'from'the'price'because'it'was'rental'payment.' "
' RIGHT'OF'FIRST'REFUSAL'
Conflict:' Lessee' would' not' have' agreed' to' pay' in' advance' were' it' not' for' that' In'a'right'of'first'refusal,'you'have'the'first'opportunity'in'case'the'owner'decides'
option.' SJP' says' this' case' is' WRONG.' In' this' case,' there' was' an' option' contract' to' sell.' What' you' have' here' is' a' simple' potestative' condition' dependent' on' the'
embedded' in' the' lease' contract.' It' would' be' safe' to' say' that' the' terms' and' sole' will' of' the' debtor.' It' will' be' triggered' when' the' intention' to' sell' is'
conditions'of'the'lease'contract'were'considerations'distinct'from'the'price'for'the' manifested.'How?'When'the'seller'starts'shopping'for'buyers.'
option.' "
"
"

ILLUSTRATION"3:"RIGHT"OF"FIRST"REFUSAL"
ANG"YU"V."CA" If'I'sell'my'house'to'a'third'party'who'knows'about'the'stipulation'of'the'right'
Ang'Yu'summarizes'rules'on'options'but'the'right'of'first'refusal'was'involved'in' of' first' refusal' to' another' and' still' induced' me' to' sell,' our' contract' will' be'
this'case.'The'rules'however,'are'similar'with'options.'If"there"is"an"option"and" rescissible'as'he'is'a'buyer'in'bad'faith.'He'is'also'liable'for'damages'based'on'
an"option"has"a"period"given,"the"option"may"be"withdrawn"anytime"as"long"as" tortious'interference.'
there"is"no"acceptance.' '
' If' I' sell' my' house' to' the' party' with' the' right' of' first' refusal' for' P100' million'
"

Will'there'be'liability'to'the'grantor?' and'he'declines,'he'lost'his'right'of'first'refusal.'After'that'offer,'I'must'sell'the'
GENERAL"RULE:'None,'unless'it'falls'under'the'abuse"of"right"doctrine.'' house' with' the' same' price,' terms' and' conditions' (cash/installment' etc.)' to'
' third' parties,' otherwise' I' must' give' the' new' offer' back' to' the' party' with' a'
If' there' is' a' consideration' distinct' from' the' price,' the' grantor' CANNOT" right'of'first'refusal.'
withdraw' the' option' unilaterally.' If' he' does,' there' can' only' be' a' claim' for' '
damages'and'no'right'to'specific'performance.'' There' is' no' need' for' a' consideration' distinct' of' the' price' for' a' right' of' first'
refusal'unlike'an'option'as'these'are'usually'embedded'in'the'contract.'
'

' "

In' this' case,' the' court' explained' the' 3' stages:' negotiation,' perfection,' and' "
consummation.'Court:'you'have'not'yet'reached'the'perfection'stage.'' Articles'1325?1326'deal'with'offers'in'the'form'of'ads.'The'operative'phrase'here'
' is' “unless' it' appears' otherwise,' these' ads' are' not' offers.”' If' an' ad' appears'
JSP:' [But' the]' Court' forgot' that' an' option' supported' by' a' consideration' is' a' complete'in'all'elements'of'an'offer,'you'cannot'construe'it'as'a'mere'invitation.'
separate'contract'and'can'be'enforced.'An'option'contract'has'all'the'requisites'of' Usually' the' phrase' “subject' to' certain' terms' and' conditions”' or' “the' owner' can'
a' contract.' [There' is]' no' need' for' a' consideration' distinct' from' the' price' for' a' reject' any' offer' at' any' time”' is' included' to' not' compel' the' acceptance' of' the'
right'of'first'refusal.' advertiser.''
" '
EQUITORIAL"V."MAYFAIR" Ads' for' bidders' are' simply' mere' proposals.' Lets' say' an' invitation' to' bid'
There'was'a'wrong'label;'it'should'have'been'a'right'of'first'refusal,'and'not'an' published'in'a'newspaper.'The'advertiser'is'not'bound'to'accept'any'offer'unless'
option.'The'right'of'first'refusal'was'embedded'in'a'lease'contract.'In'violation'of' the' contrary' appears.' If' your' objective' is' to' have' a' contract' once' there' is' a'
the'right'of'first'refusal,'the'lessors'sold'the'property'to'a'third'party.'The"court" response,'then'you'specify'the'terms'and'the'only'thing'left'is'acceptance.'If'you'
revisited"the"Ang"Yu"rule"and"modified"it"[JSP:'it'was'actually'a'reversal]."The" want' to' have' wiggle' room' then' you' state' there' “the' advertiser' can' reject' any'
Court"said"that"if"there"is"a"withdrawal"of"the"option"or"non"recognition"of"the" offer.”'

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" 2. Insane"persons"
PUBLIC'ESTATES"CASE" An'insane'person'can'enter'into'a'contract'through'a'duly'empowered'legal'
This' is' a' typical' government' ad.' When' the' government' wants' to' procure' representative'or'during'lucid'intervals.'
something,' they' are' required' to' undergo' a' bidding.' There' will' always' be' that' '
clause:' “The' government' reserves' the' right' to' reject' any' bid.”' In' this' case' there' 3. Deaf"mute"who"cannot"write"
were'bidders'saying'they'have'the'best'price'and'is'the'most'advantageous'to'the' An' illiterate' deaf' mute' that' enters' into' a' contract' will' have' a' voidable"
government.'But'there’s'that'reservation'clause'which'allows'rejection'of'any'bid,' contract.''
the'government'cannot'be'compelled'to'accept'any'bid.'' '
' JSP:'Can'you'learn'how'to'do'sign'language'without'learning'how'to'write?'
JSP:'However'there’s'nothing'that'can'stop'you'from'harassing'the'government.' My' reasoning' is,' if' you' understand' the' provisions' of' the' contract' without'
You'go'to'ombudsman'to'file'a'case,'no'filling'fee'needed.'You’ll'file'a'criminal' learning'how'to'written,'then'that'should'be'good'enough.'This'will'then'be'
case' and' you’re' approach' will' not' be' contractual.' However,' if' you' do' this' and' a'dated'provision.''
you’re'dealing'with'the'government'regularly,'you'will'not'get'contracts,'you’ll' '
be'blacklisted.'' 4. Impaired"mental"faculties"
' You' have' to' measure' the' intoxication' because' it' does' not' mean' that' all'
THE"ELEMENTS"OF"CONSENT" people'drinking'alcohol'will'have'a'voidable'contract.'Sometimes'it'depends'
" also'on'the'threshold,'people'can'drink'a'truck'of'beer'and'be'fine.'
'
"

The"following"cannot"enter"into"a"contract"(vice$of$consent2legal$incapacity):"
8. Minors;' 5. Under"hypnotic"spell"
9. Insane'persons;' When'they'adapted'this'rule,'there'was'no'science'yet'[behind'hypnoticism],'
10. Deaf'mute'who'cannot'write;' but'somehow,'science'catches'up'with'civil'law.''
11. Person' with' impaired' mental' facilities' or' legal' incapacity' (under' '
the'influence'of'drugs'or'intoxicated);' 6. Those"suffering"special"disqualifications"
12. Under'a'hypnotic'spell;'and' Special'disqualifications'include:"
13. Those'suffering'special'disqualifications' a. Persons'under'guardianship;"
'
b. Those'suffering'civil'interdiction;"
'
c. Entities'under'receivership;'or'"
1. Minors"
d. A'spouse'regarding'conjugal'property'(consent'of'one'not'enough)"
"
2. " "
GENERAL"RULE:'If'minors'enter'into'a'contract,'the'contract'will'have'a'vice' 4. "

GENERAL"RULE:'If'the'persons'identified'in'No.'6'enter'into'a'contract,'the'
of'consent'and'make'the'contract'voidable.''
3. ' contract' is' VOID,' unless' with' court' approval.' ' It' is' not' even' considered'
' voidable.''
A'minor'can'enter'into'a'contract'through'a'legal'representative.'If'a'minor'
5. '

'
will' sell' a' house' for' P10' million,' the' parents' cannot' just' act' as' a' guardian,'
VICES'OF'CONSENT'
they' must' get' court' approval.' There' was' a' rare' case' where' a' minor' was'
'
estopped.'He'lost'the'case'and'the'court'estopped'him.'' "

' The"vices"of"consent,"aside"from"legal"incapacity,"include:"
JSP:' In' my' opinion' a' minor' should' never' be' estopped,' as' you' do' not' have' 1. Mistake;"
any'legal'capacity.'There’s'no'way'your'representation'can'be'used'against' 2. Violence;"
you.'' 3. Intimidation;"
' 4. Fraud;"
Exception' for' minors:' when' buying' necessities' (reasonable' purchase' for' 5. Undue'Influence;"
'

medication,'food,'or'bank'account)" '
'
6. "

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REMEMBER:'These'vices'MUST'refer'to'consent.'If'the'mistake'affects'not'the' conclusion' that' the' contract' was' valid?' The' party' signed' deed' of' sale.' Then,' it'
consent,' but' some' other' part' of' the' contract,' then' the' contract' will' not' be' was'notarized.'It’s'now'a'public'document.''
voidable.'The"vice"should"VITIATE"THE"CONSENT." '
7. ' "

' There"are"two"kinds"of"notarizations:""
For'example,'if'there'is'a'mistake'on'the'contract'to'reflect'the'true'agreement'of' a. Jurat' —' is' a' sworn' statement.' Notary' will' say' it' was' sworn' before'
the' parties' then' it' will' not' make' the' contract' voidable' but' will' be' a' ground' for' him.''
reformation'of'the'contract.'' b. Acknowledgement' —' what' you' have' when' you' have' a' contract;' an'
' affirmation' that' the' parties' appeared' before' him' that' they'
REQUIREMENTS'OF'CONSENT' acknowledge'the'execution'of'contract.''
'

' '
"

CONSENT"SHOULD"BE:" What"is"required"when"you"have"document"notarized?'You'will'have'to'appear'
1. Informed' before.' This' is' the' import' of' notary.' If' they' appear,' there' is' a' presumption' of'
2. Free'or'Voluntary' regularity'of'contract.''
'
'

'
1. Informed" What"did"the"court"say"about"notarizing"in"this"case?"
Consent'is'informed'when'you'take'out'the'vices'of'mistake'and'fraud.'These' It' is' understandable' that' the' notary' public' could' not' recall.' If' you' are' a' notary'
assume' lack' of' information.' If' the' contracting' parties' are' informed' of' all' public,' you' will' see' there' at' the' bottom' of' document:' page' number,' book'
terms'and'conditions'of'a'contract'then'there'can'be'no'mistake'or'fraud.'' number,' etc.' ' Again,' therefore,' if' you' see' a' notary' public' with' ten' books,' it' is'
' impossible'to'recall,'that'is'why'the'court'said'it'is'understandable.''
For' example,' you’re' buying' a' BMW' X4.' If' somebody' sell' you' a' Lexus' and' '
you' buy' it,' you' cannot' claim' mistake' or' fraud' unless' you’re' illiterate.' You' Who"has"the"burden"of"proof?"
don’t' even' have' to' read,' you' will' see' it' in' the' letters' of' the' car:' BMW' X4' "
"

cannot'be'the'same'with'Lexus.'You'have'access'to'information.' GENERAL"RULE:'Whoever'alleges'vice'of'consent'has'the'burden'of'proof.''
" '
2. Voluntary" EXCEPTION:' If' the' other' party' alleges' fraud' or' mistake' and' that' party' is'
If'consent'is'free'or'voluntary,'you'do'away'with'violence,'intimidation'and' illiterate'or'does'not'understand'the'language'of'the'contract,'then'there'will'
undue' influence.' Ultimately,' the' vice' of' consent' is' a' judicial' question.' The' be'a'shift'on'the'burden'of'proof.''
'

courts' will' decide.' However' who' ever' claims' such' vice' of' consent' has' the' "
burden'of'proving'it'in'court.' In'this'case,'the'burden'was'on'the'one'claiming'the'vice'of'consent.'Of'course,'
' there'was'mention'of'the'party'being'sick'and'bed?ridden.'What'is'the'purpose'of'
Rule' of' evidence:' whoever' makes' affirmative' allegations' has' to' prove' it' by' this' condition' of' the' party?' Recall' that' the' rule' is,' again,' if' you' are' alleging' the'
relevant'pieces'of'evidence.'Now,'you'have'the'counterpart'rule.' vice'of'consent,'you'have'the'burden'of'proof,'by'alleging'the'condition'of'being'
' sick'and'bed'ridden.''
CASE"OF"JASON" '
There' was' a' property' that' petitioner' sold' to' respondents.' The' children' of' the' When"will"the"burden"of"proof"shift?""
spouses' were' saying' that' the' land' was' not' really' sold,' because' allegedly' when' "
mother' placed' her' thumb' mark,' she' was' already' dead.' The' children' had' the' "

burden'to'prove'won'the'thumb'mark'was'legitimate.'
'
Was"the"sale"completely"valid?'Yes,'because'the'children'were'not'able'to'prove'
that' she' was' indeed' very' weak' or' dead.' The' Court' said' that' thumb' mark' was'
The" burden" of" proof" SHIFTS" when" there" is" an" assertion" of" fraud" and"
mistake.' If' there' is' a' party' who' is' illiterate' asserts' fraud' and' mistake,' the'
burden' shifts.' The' other' party' who' supposedly' perpetrated' the' fraud' must'
prove'that'the'former'understood'the'contract.'"
'

affixed' properly.' But' what' was' something' that' triggered' the' court' to' reach' the' "

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Hence,'in'this'case,'that'was'the'purpose'of'saying'that'Claudia'was'sick:'so'that' Also,'there'is'an'irregularity'in'the'notarized'contract,'in'this'case.'Court'said'that'
the'burden'will'shift'to'the'other'party." there'could'be'no'reliance'on'that'notarization,'because'there'were'discrepancies'
' as'to'the'place'of'execution'of'document.''
CASE"OF"DELA'CRUZ" '
Dela' Cruz' was' alleging' that' her' nephew' tricked' her' to' enter' into' [entering' into' SUMMARY:"VICES"OF"CONSENT"
the]' contract' (vice' of' consent).' Dela' Cruz' was' claiming' that' she' could' not' read' "
and'was'illiterate.'However,'the'Court'said'no.'According'to'the'Court,'there'is'a' "

The"vices"of"consent"aside"from"legal"incapacity"are:"
proof'that'she'could'read;'in'the'complaint'itself,'it'was'stated'that'she'has'read'
1. MISTAKE'—'means'an'error'or'wrong'appreciation'of'an'element'
the'document.''
of'the'contract,'specifically'the'cause'or'the'object.'Cause'is'the'
'
essential'terms'and'condition'of'contract.'Only'material'mistake,'
Will'the'following'vitiate'consent?'
which'principally'moved'the'parties'to'enter'into'the'contract,'is'
• Claim$ of$ old$ age?' The' court' said' old' age' does' not' translate' to' inability' to'
considered.''
understand' the' contract.' Even' if' you' are' sick,' it' does' not' mean' that' you'
"
cannot'understand'a'contract.''
Bottom?line:' if' it' is' related' to' object' or' the' cause,' there' is' a' vice' of'
'
consent.'So,'under'the'law,'certain'mistakes'cannot'constitute'a'vice'
• Trickery?$Court'said'that'she'could'not'have'been'tricked.'Court'said'it'was'
of' consent,' like' a' mistake' in' valuation.' This' will' not' be' mistake'
like' a' game' that' she' could' have' spotted' the' difference' between' the' two'
because' it' is' all' in' your' mind.' In' the' same' manner,' when' you' are'
contracts.'$
dealing' with' motives,' if' it' is' not' part' of' the' contract' or' cannot' be'
'
determined,' there' is' no' vice' of' consent.' Jurisprudence' has' a' list' of'
In' this' case,' it' is' clear' that' the' burden' will' still' be' with' Dela' Cruz.' There' is' no'
these'matters.''
shift'of'burden'to'prove'vice'of'consent,'because'she'wasn’t'able'to'show'that'she'
'
was'illiterate'or'that'she'could'not'understand'the'language'of'the'contract.'Then'
Mistake'of'law'can'also'result'to'vitiated'consent.''
further,'the'court'said'that'it'as'notarized.'If"the"document"is"notarized,"there"is"
Requirements:''
a" presumption" that" the" parties" have" understood" the" contract," because" in" the"
a. Mutual'error'with'respect'to'legal'effect'of'the'contract'
notary"public,"parties"are"asked"if"they"have"understood"the"contract."'
b. The'error'frustrates'the'real'purpose'of'the'parties.''
"
'
CASE"OF"PARAGAS"
So,' the' parties' thought' they' were' entering' a' contract' of' mortgage,'
Exception'to'the'general'rule'
but' they' ended' up' with' a' contract' of' sale.' What' is' the' remedy' in'
What'is'the'difference'of'this'case'with'the'former?'The'status'of'the'contract'is'
this'case?'Reformation,'or'they'can'annul'the'contract.''
void.'Here,'the'person'had'liver'cirrhosis.'Remember'that'the'issue'is'the'same:'
'
vitiated' consent.' If' there' is' a' vice' of' consent,' the' contract' is' voidable.' What'
Take'note'when'you'claim'mistake,'mistake'presupposes'absence'of'
happened' here?' It' should' have' been' voidable,' but' why" was" it" DECLARED"
information,'so'a'person'can'claim'mistake'only'if'he'has'no'access'
VOID"in"this"case?'Court'said'there'was'no'consent'at'all'(because'of'the'severity'
to'information/'or'that'person'could'or'should'not'have'known'the'
of' his' disease;' he' had' hallucinations,' etc.),' regardless' of' the' signature' affixed'
true'facts.'If'a'person'is'in'a'position'to'know'the'true'statement'of'
therein.''
fact,' by' exercise' of' due' diligence,' there' is' an' inexcusable' mistake;'
'
you'cannot'claim'mistake'as'a'vice'of'consent.''
Take'note'that'vice'of'consent'may'be'so'intensive'that'there'is'no'consent'at'all.''
'
'
For'instance,'if'it'is'spelled,'B'M'W,'you'ought'to'know'because'it'is'
For'example:'if'there'is'a'newborn'baby,'and'you'affixed'the'thumb'mark,'there'
in'front'of'you;'there'is'no'way'you'could'claim'mistake.''
is'a'void'contract;'there'is'no'consent'at'all.'Needless'to'say,'this'case'of'Paragas'
'
is'exceptional'but'correct.''
Whoever' causes' mistake' can' be' liable' for' damages.' So' understand'
'
the'concept'of'mistake'with'the'requirement'of'due'diligence.''
'

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2. VIOLENCE' —' the' use' of' physical' force' and' it' should' be' cause' of'
consent'(strictly'speaking'it'is'placing'the'thumb'mark).'
'
3. INTIMIDATION" —" can' also' be' psychological,' moral,' or' physical'
that'results'to'vitiated'consent.''
Requirements:'
a. Intimidation' should' produce' well?rounded' evil' fear' and'
should' be' unlawful' (So$if$you$say,$I$will$sue$you,$this$is$not$
intimidation$but$an$exercise$of$a$right.)'
b. Imminent'and'grave'based'on'context'
c. Such' intimidation' must' be' against' the' person’s' property'
or' person,' or' the' person/property' of' his' spouse,'
ascendants,'or'descendants'
d. Intimidation' should' be' the' cause' of' consent;' the' one'
making'the'intimidation'should'be'in'the'position'to'do'so'
(Note$ that$ a$ third$ person$ may$ employ$ violence$ or$ intimidation$
vitiating$consent.)'
'
4. UNDUE" INFLUENCE" —' involves' moral' coercion,' which' may' be'
just' or' lawful.' This' is' how' you' distinguish' it' from' intimidation.'
Undue'influence'depends'on'context.''
'
Look'at'the'case'of'DBP.'A'borrower'had'a'restructuring'agreement'
with' DBP.' The' borrower' could' not' pay' the' loan' so' entered' into' a'
restructuring' agreement' with' DBP,' and' the' claim' was' there' was'
undue'influence,'based'on'financial'distress.'The'borrower'was'not'
in'the'position'to'pay,'and'so'was'forced'to'enter'into'that'contract.'
Court' said' that' financial' distress' is' not' undue' influence;' otherwise'
there' would' be' no' restructuring' agreement.' Usually' there' is'
restructuring'agreement,'when'the'party'cannot'pay'the'loan.''
'
Take' note' that' relationships' could' also' be' tantamount' to' undue'
influence' (like' moral' ascendancy)' to' trust' contracts' or' bank'
transactions;' these' will' be' annulled' due' to' vice' of' consent' arising'
from'undue'influence.''
'
5. FRAUD'—'to$be$discussed$next$meeting.''
"

'

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OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
THURSDAY,'05'FEBRUARY'2015'
'

REVIEW:"VICES"OF"CONSENT"—"FRAUD" '
Let’s'start'with'the'last'vice'of'consent:'fraud.'
"

ILLUSTRATION"1:"EXAMPLE"OF"CAUSAL"FRAUD"
' Let’s'say'I’m'an'expert'in'gems.'I'told'him'that'this'is'a'precious'something.'My'
Under' the' law,' fraud' refers' to' all' kinds' of' deception.' It' includes' insidious' precious.'
machinations'by'one'party'leading'another'party'to'error.' '
' Believing' my' representation' that' the' object' being' sold' is' ' titanium' laced' with'
The"deceit"must"be"serious.'What'does'that'mean?'Serious'that'it'is'the'cause'for' gold'pen,'he'bought'it.'Of'course,'we'will'assume'that'he’s'ignorant'and'that'he'
a' party' consenting' to' the' contract.' It' is' just' like' the' case' of' mistake.' In' mistake,' doesn’t'know'anything.'He'is'not'aware'of'the'facts,'he'could'not'have'known'
the' mistake' must' be' cause' for' the' giving' of' consent.' In' the' same' manner,' the' the'facts,'and'relied'on'my'representation.'So'he'consented'and'bought'this'pen'
fraud'should'be'the'cause'for'the'giving'of'consent.' for'100,000.''
' '
Earlier'in'this'class,'we'discussed'the'kinds'of'fraud.'When'we'were'discussing' That’s' an' example' of' causal' fraud' –' meaning,' were' it' not' for' my'
obligations,'we'discussed'the'basic'remedies.'We'discussed'specific'performance,' misrepresentation,'he'would'not'have'entered'into'the'contract.'
resolution,'and'damages.' '

"
' "

We' stated' that' there' are' two' kinds' of' fraud:' causal' fraud' and' incidental' fraud.' ILLUSTRATION"2:"MERE"BREACH"(AND"NOT"CAUSAL"FRAUD)"
Incidental' fraud' means' fraud' that' is' not' the' reason' for' a' party' to' enter' into' a' For'example,'I’m'selling'him'a'precious'gem,'and'he'paid'me'a'certain'price.'
contract.'It'can'be'fraud$in$performance,'meaning'there'is'already'a'contract,'but'in' '
the'performance'of'the'obligation,'a'fraud'has'been'committed.'Causal'fraud,'on' He’s' supposed' to' pay' me' the' price,' but' he' did' not' pay' because' he' wanted' to'
the'other'hand,'determines'or'causes'the'consent.' renege'on'his'obligation.'
' '
Causal'fraud'exists'prior'to,'or'simultaneous'with,'the'consent.'Incidental'fraud,' Would' that' amount' to' fraud?' Possibly,' but' not' causal' fraud,' because' there’s'
or' fraud' in' the' performance' of' the' obligation,' happens' after' or' somehow' already'a'contract'and'he’s'only'backing'out'of'the'deal.'
specifically' any' other' fraud' which' is' not' the' cause' of' consent' will' only' be' '
incidental'fraud.' Or'let’s'say'I’m'the'one'who'committed'the'fraud.'Before'delivering'the'gem'to'
' him,'I'sold'it'to'another.'So'that’s'a'double?sale.''
Why'the'difference?'If'it'is'only'incidental'fraud'or'fraud'in'performance,'there' '
will'only'be'an'entitlement'to'damages,'depending'on'the'extent'of'the'fraud.'On' That’s'another'example'of'fraud'in'performance'–'meaning'the'fraud'is'a'breach'
the' other' hand,' in' causal' fraud,' the' contract' will' be' deemed' voidable' and' the' of' the' obligation,' entitling' him' to' resolution,' or' specific' performance,' and/or'
party'can'ask'to'annul'the'contract'based'on'causal'fraud.' damages.'
"

' '
'
"

TWO"KINDS"OF"FRAUD:" It"must"be"causal"fraud"for"the"contract"to"be"rendered"voidable,"and"for"the"
1. Incidental"Fraud:'Fraud'that'is'not'the'reason'for'a'party'to'enter'into' fraud"to"be"a"vice"of"consent.""
a'contract.'Happens'after'consent.'It'can'be'a'fraud$in$performance.'
'

"
2. Causal" Fraud:' Determines' or' causes' the' consent.' Exists' prior' to,' or'
How'do'you'determine'if'the'fraud'is'a'vice'of'consent?'It'must'be'the'cause'of'
simultaneous'with,'the'consent.'
' the' consent' of' a' party.' Don’t' confuse' [this' with' a' scenario' where' there' is' a]'

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Contract'of'Sale,'[and]'B'does'not'pay'the'price.'Even'if'we'assume'that'that'act'is' Q:" In" the" case" of" pharmaceutical" [companies]," they" say" two" different" things."
fraudulent,'that'is'not'an'example'of'causal'fraud.' Toothpaste," for" example:" they" say" “optic" white”" in" their" marketing" and" it"
' says"your"teeth"can"get"whiter"in"just"one"week,"and"your"teeth"didn’t"get"
Of'course,'there'are'other'cases'of'fraud,'so'you'have'to'be'clear'on'what'part'of' whiter"in"one"week."Is"that"misrepresentation?"Is"that"fraud?"
the' contract' is' affected' by' the' fraud.' If' a' contract' is' in' fraud' of' creditors' –' A:'' It'depends.'Right'now,'we'don’t'give'much'attention'to'that,'but'I’ll'give'you'
remember'our'discussion'on'accion$pauliana'–'or'the'real'rescissible'contract,'the' a'better'example:'
contract' is' rescissible,' not' voidable,' because' it’s' not' related' to' consent,' but' '
because'the'fraud'is'related'to'a'wrongdoing'perpetrated'against'a'creditor.' ' In'the'US,'for'example,'if'you'represent'that'your'car'can'hit'a'certain'mileage'
' per'x'amount'of'gas'and'it'doesn’t,'it’s'possible'for'you'to'be'held'liable'for'
misrepresentation,' but' that’s' misrepresentation' in' advertising,' you' cannot'
"

REQUIREMENTS"FOR"FRAUD"TO"VITIATE"CONSENT:"
1. It' must' be' employed"by"a"contracting"party,' or' someone' acting"in" say'that'it'is'a'basis'for'annulling'the'contract,'unless'you'specify'there:'“I'am'
connivance"with,"or"to"concert"with,"the"contracting"party."" buying' your' toothpaste' because' it' will' make' your' teeth' white' as' driven'
If' it' is' done' by' a' third' party,' it' cannot' be' fraud' vitiating' consent.' snow.”'It'may'amount'to'breach.'It"may"be"a"basis"for"a"breach"of"contract,"
However,'it'may'result'in'a'case'of'mistake.'Let’s'say,'for'example,'a' but" not" a" case" for" voidability" of" a" contract" based" on" a" vice" of" consent,"
third' party' made' a' fraudulent' representation' without' the' unless"it’s"the"very"inducement"for"you"to"enter"into"the"contract.'Normally,'
involvement'of'either'party,'and'a'party'was'misled.'That'could'be'a' it’s' just' an' incidental' benefit:' when' you' buy' toothpaste,' it’s' not' to' whiten'
basis'of'mistake.' your'teeth.'
2. It'must'be'serious.' '
When'is'it'serious?'It'must'be'the'cause'of'getting'the'consent,'and' Q:""Sir," just" another" example:" The" Backstreet" Boys" are" coming" to" Manila." For"
3. It'must'result'in'damage"or"injury"to"the"aggrieved'party.'' example," I’m" a" big" fan," and" they" advertise" that" all" the" members" of" the"
'
Backstreet"Boys"are"coming,"so"I"buy"a"ticket,"I’m"excited,"I"wanted"to"see"
'
all"the"members,"but"I"come"to"the"concert"and"one"member"is"missing."So"
ART." 1340" —' The$ usual$ exaggerations$ in$ trade,$ when$ the$ other$ party$ had$ an$
will"the"contract"be"voidable"[because"of"that"fact]?'
opportunity$to$know$the$facts,$are$not$in$themselves$fraudulent.'"
A:' It’s'a'breach,'but'it’s'not'causal'fraud.'
'
" '
ILLUSTRATION" 3:" ACCESS" TO" THE" FACTS/OPPORTUNITY" TO" KNOW" IS" Q:" But"it’s"the"reason"why"I"bought"the"concert"ticket.'
NECESSARY"TO"ESTABLISH"CAUSAL"FRAUD" A:'' No,'it’s'the'reason'why'you'bought,'and'they'said'“they'will'appear.”'When'
Let’s'say'I'have'a'car,'and'I'sell'the'car'to'A.' the' time' comes,' one' did' not' appear.' That’s' a' breach.' It’s' the' same' case' as'
' when'we'enter'a'contract'of'sale,'I'promise'to'pay'on'due'date.'I'did'not'pay.'
I'told'him'I’m'a'dealer,'told'him:'“this'car'runs'so'fast,'it'can'hover.”' That'constitutes'a'breach.'Clear?'
' '
He' bought' the' car,' and' he' tried,' it' didn’t' hover,' and' so' he' said:' “it’s' a' Q:""Sir,"this"was"regarding"the"case"earlier"regarding"the"toothpaste."When"we"
misrepresentation.”' see" these" advertisements" on" TV," we" see" these" professionals," for" example"
' their"doctors,"etc."Won’t"that"be"under"the"exceptions,"since"they’re"experts"
Will'that'amount'to'fraud?'Unlikely,'especially'if'it’s'done'as'part'of'sales'talk.' in"that"field?'
Besides,' [think' about]' the' level' of' the' technology' right' now.' We' don’t' have' A:'' They' only' wear' lab' coats,' but' they’re' not' really' experts.' Let’s' say' some'
that' kind' yet,' mass?produced,' so' it' could' not' have' been' a' misleading' scientist' or' some' expert' appeared' and' said' “it' will' whiten' your' teeth' by' 7'
statement' or' a' misrepresentation.' He" has" access" to" the" facts," or" he" should" days”' you' can' say' that' it’s' the' only' reason' why' you' bought' toothpaste.'
have"known"the"facts." Possibly.' Why' don’t' you' try?' Your' complaint' there' should' be' more' of'
"

consumer$protection.'

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' diligence,"fraud'shall'not'be'available.""
I’ll'give'an'example:'I'go'to'DTI'to'claim.'
'

'
' "

ILLUSTRATION" 4:" " ACCESS" TO" THE" FACTS" NECESSARY" TO" ESTABLISH" CAUSAL"
My' brother' got' a' Montero.' The' Montero' ran' on' its' own.' It' was' midday,' it' was'
FRAUD"
parked.'My'brother'and'his'wife'switched'seats,'and'the'Montero'ran'on'its'own.'
Somebody,' let’s' say' X,' gave' a' lot' to' Y.' X' said' that' this' is' a' valuable' lot' in'
Long' story' short,' he' complained,' but' no' one' believed' him,' even' though' there'
Ayala' Alabang,' but' then' it' turned' out' that' it' was' outside' Ayala' Alabang'
were'a'number'of'incidents.'But'the'thing'is,'the'dealer'replaced'it'with'a'brand?
Village,'outside'the'fence.'
new' vehicle' –' so' something' must' be' wrong.' And' then' you' go' to' DTI.' Why' do'
'
you'go'to'DTI?'Because'there'are'no'costs,'unlike'if'you'file'in'court.'
Will' that' constitute' fraud?' Will' that' be' a' misrepresentation?' No,' because' Y'
'
could' have' conducted' an' ocular' inspection,' exercised' due' diligence,' and' Y'
'
would'have'known'that'it'was'outside'Ayala'Alabang.'That’s'like'in'the'case'
ART."1341"—'A$mere$expression$of$an$opinion$does$not$signify$fraud,$unless$made$by$an$
of'a'BMW'that'was'a'Lexus'or'whatever,'that'could'not'be'mistake.'
expert$and$the$other$party$has$relied$on$the$former’s$special$knowledge.$ '

" '
Mere" opinions" are" not" considered" basis" for" causal" fraud," unless" rendered" by" ART." 1346" —' An$ absolutely$ simulated$ or$ fictitious$ contract$ is$ void.$ A$ relative$
experts,'as'I'mentioned'earlier.' 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$
An'opinion'by'counsel'of'one'party'to'the'other'party'will'be'a'basis'for'fraud.'' their$real$agreement.$
' "
When'you'do'a'transaction,'one'of'the'conditions'for'closing'?'meaning'when'you' CASES"
decide'to'do'the'deal'?'there'will'be'a'requirement:'opinion'of'counsel.'It'will'be' MANILA"BANK"V."SILVERIO"
an'opinion'of'the'counsel'of'one'party'to'the'other'party.' JSP:'What'happened'in'this'case'of'Silverio?'
' '
If'that'opinion'turns'out'to'be'fraudulent,'that'can'serve'as'basis'for'annulment'of' They' found' out' that' the' document' number' of' the' Deed' of' Sale' pertained' to' an'
the'contract'based'on'fraud.' affidavit.'Why?'Because'you'do'not'need'to'submit'a'copy'of'an'affidavit,'so'it’s'
' easier'to'forge.'You'just'get'a'number'of'this'affidavit,'replace'this,'and'then'you'
Of' course,' there’s' another' remedy:' you' can' go' after' the' lawyer' for' malpractice,' place' there' a' different' document.' The' problem' here' was' that' the' affidavit' was'
for' committing' the' fraud,' but' that’s' not' going' to' get' you' anything.' You’re' also'submitted.'So'the'notary'was'very'religious'in'submitting'reports.'There'was'
fighting' somebody,' you' incur' the' cost,' and' you’re' going' against' someone' who' no' need' to' attach' affidavits,' really,' when' you' submit' reports,' but' at' that' time,'
does'not'incur'cost,'because'he/she'is'a'lawyer,'so'if'possible,'you'can'annul'the' there' was' a' submission' –' so' they" found" out" that" the" Deed" of" Sale" was"
contract' based' on' fraud,' in' that' case.' Or' any' professional,' for' that' matter,' who' antedated,'and'a'number'of'an'early'document'was'reused'for'that'Deed'of'Sale.'
rendered'an'opinion'based'on'that'transaction.'If'it'turns'out'the'opinion'is'fraud' That' was' an' indication' of' simulation.' The" purpose" was" to" make" sure" that" this"
or'a'misrepresentation,'then'that'can'be'the'basis'for'annulment'of'the'contract.' sale"would"prevent"the"attachment"or"an"enforcement"of"the"award"in"favor"of"
' the"bank."That’s'the'reason'for'the'scheme.'
"
'
TAKE" NOTE:" Just' like' mistake,' causal' fraud' as' basis' for' annulling' the'
If'you'look'at'that'scenario'between'the'borrower'and'the'buyer,'you'have'a'sale.'
contract' –' meaning,' as' a' vice' of' consent' –' can' be' claimed' only" if" the" party"
Purportedly,' borrower' sold' property' for' a' price.' Remember' our' discussion' on'
seeking"the"annulment"of"the"contract"does"not"have"access"to"the"facts."
accion$ pauliana.' How' is' this' different' from' accion$ pauliana?' Accion$ pauliana' is'
"
rescission'of'a'contract'in'fraud'of'creditors.'As'the'bank,'it'would'be'best'for'you'
If" that" party" could," or" should" have" known" the" facts" by" exercise" of" due"

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to' characterize' this' contract' as' an' absolutely' simulated' contract,' because' the' the' buyer' does' not' underpay;' otherwise,' you,' as' the' seller,' will' be' liable' for'
contract'would'be'void.'If'the'contract'is'void,'it'is'valid'but'rescissible.'' underpaying.'
' '
RESCISSIBLE"OR"VOID"CONTRACTS" What' you' have' here' is' a' relatively' simulated' contract:' there' was' a' real'
' agreement,'but'there'was'a'concealment'of'the'real'price.'
ADVANTAGES'OF'THE'ABSOLUTELY'SIMULATED'CONTRACT'THEORY' '
If' you' have' another' transaction' similar' to' this,' and' we' will' call' it' rescissible$ for$ CRUZ"V."BANCOM"FINANCE'
being$in$fraud$of$creditors,'it’s'absolutely'simulated'because'there’s'no'cause.'That’s' In' this' case,' the' decision' was' that' the' contracts' were' absolutely' simulated,'
why'it’s'void,'there’s'no'payment,'really.' because' the' only' purpose' was' to' facilitate' the' loan' transaction.' Moreover,'
' according'to'the'Court,'Norma'did'not'take'possession'of'the'property.'
In'rescissible'contracts,'there'will'be'nominal'payment,'but'there'will'be'badges' '
of'fraud,'indicating'that'this'is'a'scheme'meant'to'prevent'collection'by'the'bank.' The'question'now'is:'is'that'decision'correct?'
There’s'a'real'contract,'though'the'price'may'be'ridiculously'inadequate'and'the' '
parties'connived'to'place'the'property'beyond'the'reach'of'the'creditor.' Let’s' assume' that' the' contract' was' meant' to' facilitate' the' loan' transaction'
' between' Norma' and' Unionbank.' Would' that' make' the' contract' absolutely'
In' this' case,' a' void' (absolutely' simulated)' contract' is' preferred' because' in' simulated?'
rescissible' contracts,' the' party' seeking' rescission' should' establish" that" it" has" '
exhausted"all"other"remedies.'If'the'contract'is'void,'then'the'property'remained' MORTGAGE"AND"OWNERSHIP"
with'the'borrower.'You'only'have'to'go'after'the'borrower;'you'don’t'have'to'go' If'you'analyze'it'(and'later'on,'you’ll'learn'that)'if"you"mortgage"property,"you"
that'far.'You'don’t'even'need'that'other'requisite'that'there'is'no'other'remedy.' have"to"be"the"absolute"owner.'You'should'be'both'the'owner'on'record'and'the'
' beneficial' owner.' So' when' the' Cruzes' allowed' the' transfers' from' the' Cruzes' to'
Another' benefit' is' prescription,' because' in' rescissible' contracts,' it’s' four' years,' Candelaria,'form'Candelaria'to'Norma,'they'were,'in'fact,'agreeing'to'the'transfer'
while'void'contracts'can'be'assailed'anytime.'Remember'this;'this'has'a'practical' of'ownership'or'title'to'Norma,'so'Norma'could'mortgage,'because'if'they'did'not'
significance.' intend'to'be'bound,'then'Norma'could'not'mortgage'the'property.'
" '
HEIRS"OF"BALITE"V."LIM" NONPAYMENT' DOES' NOT' NEGATE' THE' EXISTENCE' OF' A' VALID'
JSP:'This'case'involved'a'relatively'simulated'contract'which'prejudiced'a'third' CONTRACT'
party:'the'government.' The'other'problem'was'that'even'if'what'happened'there'was'nonpayment,'that'
' would' not' negate' the' existence' of' a' valid' contract.' That' would' be' an' evidence'
A'relatively'simulated'contract'is'valid'unless'it'has'prejudiced'a'third'party,'or'it' only' of' breach,' unless' you' have' the' situation' in' Silverio,' wherein' common' to'
has'an'illicit'purpose.'What’s'the'purpose?'Tax'evasion.'It’s'a'criminal'purpose,' other' facts,' the' Court' determined' that' there' really' was' no' transaction.' It' only'
so'the'contract'should'be'void.'' happened'to'place'the'property'beyond'the'reach'of'the'creditor.'
' '
Under'the'tax'law,'however,'the'only'consequence'will'be'that'the'seller'is'liable' There' was' also' nothing' wrong' with' Norma' acting' in' possession,' because' there'
for' tax' evasion,' which' involves' payment' of' certain' penalties.' The' contract' will' was'already'a'sale.'Norma'could'not'take'possession,'because'Norma'did'not'pay'
still'be'valid.' the'full'price.'That'could'be'justified.'
' '
That’s'why'if'you'have'this'transaction'with'you'as'the'seller,'and'someone'tells' If'you'look'at'[this'case],'judging'by'the'purpose,'to'allow'Norma'to'mortgage,'
you'that'the'buyer'will'pay'all'taxes,'it'is'in'your'best'interest'to'make'sure'that' clearly' the' intention' was' a' transfer' of' title,' so' there' was' intent' to' be' bound' [by'

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the' contract].' The" only" question" was" how" to" facilitate" payment.' So' there’s' no' Q:""Can"that"be"an"exemption"to"the"rule"that"you"need"to"exercise"your"rights"
payment,'and'there’s'a'breach.' of" dominion" over" the" lot," since" in" this" case," the" right" cannot" be" exercised,"
' because"it’s"cofowned?"
BANKS' REQUIRE' AN' EXTRAORDINARY' DEGREE' OF' CARE' TO' BE' A:'' Well,'I’ll'give'you'an'example.'It’s'better'to'contextualize'it.'Let’s'say,'I'know'
CONSIDERED'AN'IPV' someone'who'bought'a'building.'There'were'eight'owners,'pro$indiviso.'So'he'
Unionbank'was'not'a'buyer'in'good'faith.'As'a'bank,'they'should'have'exerted' could'not'physically'occupy'[a'specific'part],'but'they'share'in'the'rentals,'for'
extraordinary' diligence.' It' was' not' enough' for' the' bank' to' check' the' title.' They' example.'That’s'control.'So'if'you’re'thinking'of'occupying,'the'first'thing'you'
should'have'conducted'ocular'inspections'of'the'property.' do' is' you' ask' for' a' partition.' You' could' be' excused,' in' that' case.' You' could'
' not'take'over,'because'you'do'not'know'what'your'particular'portion'is."
Remember'the'default'rule:'there'should'only'be'due'diligence.' '
' "
This' is' an' example' of' then' the' law' requires' a' greater' degree' of' diligence.' The' ART."1347"—' All$things$which$are$not$outside$the$commerce$of$men,$including$future$
bank' is' supposed' to' look' beyond' the' title.' This' is' why' banks' have' credit' things,$may$be$the$object$of$a$contract.$All$rights$which$are$not$intransmissible$may$also$
investigators,' appraisers,' etc.' The' bank' is' expected' to' exert' extra' effort' in' be$the$object$of$contracts.$
checking'on'whether'the'property'is'really'owned'or'could'be'mortgaged'by'the' $
borrower.' No$ contract$ may$ be$ entered$ into$ upon$ future$ inheritance$ except$ in$ cases$ expressly$
' authorized$by$law.$
" $
Q:""Sir," you" stated" that" the" general" rule" is" that" any" person" can" depend" on" the" All$services$which$are$not$contrary$to$law,$morals,$good$customs,$public$order$or$public$
face" of" the" title." Is" there" an" expected" degree" of" diligence" for" private" policy$may$likewise$be$the$object$of$a$contract.'
persons?" '
A:'' No.' Normally,' you' just' identify' the' property' by' the' title.' If' you' want' to' OBJECT"
confirm,'you'have'to'go'[and'conduct'an'ocular]." What' is' the' object?' The' object' is' the' thing' which' is' the' subject' matter' of' the'
" contract,'or'prestation.'The'object'is'the'subject'matter'of'the'contract.'Ordinarily,'
Q:""Sir,"regardless"of"where"I"am"in"the"world,"I"have"to"personally"[verify"the" if'you'look'at'it,'let’s'say'it’s'a'sale,'the'object'is'the'property'being'sold.'If'you'
title]?" look' at' it' closely,' the' object' could' be' the' cause' if' you' look' at' it' from' another'
A:'' Yes.'First'of'all,'you'cannot'sign'the'Deed'of'Sale,'so'[if'you’re'not'here,]'you' perspective.'In'the'context'of'a'contract,'a'contract'as'an'obligation,'the'object'is'
will' have' to' authorize' somebody,' and' that' somebody' should' be' doing' that' the'prestation.'Prestation"is"the"particular"conduct"of"the"debtor"to"give,"to"do,"
kind'of'thing'[referred'to'in'the'previous'question,'i.e.'confirmation'that'the' or"not"to"do."
property'on'title'is'the'same;'conducting'ocular'inspections,'etc.]." "
" ART."1348"—'Impossible$things$or$services$cannot$be$the$object$of$contracts.$$
Q:""Sir,"this"question"is"regarding"the"case"of"Balite,"regarding"the"sale"of"one" '
or"some"of"the"cofowners."In"this"case,"there"was"no"judicial"partition" yet," Just' a' review:' for' a' prestation' to' be' valid,' it' must' be' possible,' physically' and'
so"it"was"a"valid"sale"of"an"inchoate"right"with,"for"example,"the"share"of"the" juridically.' For' example:' can' you' sell' marijuana?' No,' it' is' unlawful.' What' kind'
consenting"parties."How"about"as"to"the"specific"location"–"the"buyer"can’t" impossibility?'Legal'impossibility.'
occupy"yet"the"lot?" '
A:'' The' interest' of' the' buyer' is' only' as' far' as' the' shares' that' he' purchased.' The' ART."1349"—' The$object$of$every$contract$must$be$determinate$as$to$its$kind.$The$fact$
buyer'owns'his'share'from'the'beginning." that$ the$ quantity$ is$ not$ determinate$ shall$ not$ be$ an$ obstacle$ to$ the$ existence$ of$ the$
" contract,$provided$it$is$possible$to$determine$the$same,$without$the$need$of$a$new$contract$
between$the$parties.$$

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$ Could'you'have'an'object'that’s'not'nonexistent'at'the'time'of'the'contract?'Let’s'
[The' prestation]' must' be' determinate,' or' determinable.' If' it' cannot' be' say'I'sell'something'I'do'not'have.'I'sell'to'you'a'house'and'lot'in'Bel?Air,'and'I'
determined,'it'is'not'a'valid'object.'Let’s'say'I’m'selling'property,'and'this'is'my' do'not'have'that'house'and'lot.'Can'I'sell?'
description'in'the'deed'of'sale:$ '
'
"

GENERAL"RULE:'You'can'have'the'sale'of'future'things.'
Ako$ay$may$parcel$ng$lupa$na$matatagpuan$sa$Purok$111$sa$Tugatog,$ EXCEPTION:'When'the'law'otherwise'provides,'such'as'in'future$inheritance,'
Orani,$Bataan$na$may$sukat$na$27x24$metro$kuwadrado,$ang$nasabing$ pledged/mortgaged$property,'and'donations.'
lupa$ ay$ may$ sakop$ na$ dalawang$ punong$ santol$ at$ isang$ punong$ "

'
mangga13' "

' ILLUSTRATION" 5:" " SALE" OF" FUTURE" INHERTITANCE" WHEN" SUCCESSION" HAS"
Translated,'the'object'of'the'contract'was'“a'parcel'of'land'located'in'Purok'111,' NOT"YET"OPENED/"HAS"ALREADY"OPENED"
Tugatog,'Orani,'Bataan,'with'an'area'of'27x24'square'meters,'offering'two'trees' Let’s'say'you'have'X.,'with'three'compulsory'heirs:'A,''B,'C.'C'enters'into'a'
of'santol,'and'one'mango'tree.”' contract' of' sale' with' Y' to' sell' his' interest' in' the' property' in' exchange' for' a'
' price.'
Will'you'have'a'valid'object?'Could'you'identify'the'object'without'going'beyond'
the'contract?'
'
The'Supreme'Court'said'that'the'object'was'determinate'because'you'know'the'
place,'the'area,'and'the'seller.'So'you'go'to'the'area,'ask'where'the'seller'is,'and'
then' you' have' two' markers,' unless' they' cut' the' trees.' The' Supreme' Court' said'
that'even'if'there'is'no'technical'description14,'the'description'in'the'case,'in'the'
context' of' the' case,' was' enough.' The' parties' could' identify' [the' property].' The'
Court'said'that'[the'object]'was'determinate.'' '
Valid?'VOID;'succession'has'not'yet'opened.'
'
"
Q:""Sir,"this"question"is"regarding"determinate"objects."In"the"case"of"Balite,"it"
was" about" a" pro' indiviso," so" it’s" not" judicially" partitioned" amongst"
themselves."So"why"is"that"a"valid"object?"
A:'' It' was' an' interest' in' the' property' that' was' being' sold.' If' it’s' inherited'
property,' let’s' say' 4' children' get' shares,' they' can' sell' without' the'
demarcation'or'the'definition'of'the'share'of'each."
"
Q:""So"even"if"one"died"eventually…" '
X'died,'but'the'lot'remained'in'the'name'of'X.'There'was'no'settlement'of'the'
A:'' That'can'be'done,'legally."
estate'yet.'Is'this'valid?'YES;'succession'has'opened.'
' '

'
'
Succession' opens' upon' the' death' of' X.' That’s' the' determination' when' future'
inheritance'is'reckoned.'When'there'is'death,'it'is'no'longer'“future'inheritance.”'
'''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' ' It'does'not'matter'that'there'is'no'actual'conveyance'of'title,'because'by'operation'
13
'Based'on'an'actual'case!'Carabeo$v.$Sps.$Norberto,'G.R.'No.'190823,'April'04,'2011.' of'law,'the'death'of'X'conveys'title'to'his'compulsory'heirs.'
14
'Technical'description:'geological'markings'of'the'property'

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' CAUSE"
Q:""Sir,"if,"in"your"example,"C"wants"to"sell,"does"he"need"the"consent"of"A"and" The' cause' of' the' contract' is' the" principal" or" essential" reason" or" consideration"
B?' leading"a"party"to"entering"into"a"contract.'In'the'context'of'an'obligation,'you’ll'
A:'' No.'C'can'sell.'' see' (as' I’ve' said)' that' the' cause' will' also' be' the' prestation.' Cause' is' oftentimes'
' referred'to'as'the'consideration.'
Another' example' wherein' a' future' object' cannot' be' sold:' you' cannot' donate' '
property'you'do'not'have.'For'example,'in'a'fundraising,'you'donate'one'million.' If' it' is' a' bilateral' contract,' or' a' reciprocal' obligation,' like' say,' we' have' a' buyer,'
You'do'not'have'that'one'million.'You'cannot'do'that.'You'cannot'donate'money' and' we' have' a' seller.' Seller' shall' convey' the' property' to' the' buyer' in' exchange'
you'do'not'have.'What'is'the'statutory'basis?'Family'Code?' for' the' payment' of' the' price,' these' are' naturally' the' causes' of' the' contract.' Of'
' course,'if'you'look'at'the'object,'it’s'the'property.'If'you'look'at'the'conveyance'of'
Another'example'is'you'cannot'mortgage'or'pledge'property'you'do'not'own.'In' the' property,' this' is' the' cause' for' the' buyer' to' enter' into' the' sale.' On' the' other'
that'pledge'or'mortgage,'the'mortgagor'or'pledger'should'be'the'absolute'owner.' hand,'the'price'is'the'consideration'for'the'seller'to'enter'into'the'sale.'So'it’s'not'
You'cannot'mortgage'or'pledge'future'property.' really' accurate' when' you' enter' into' a' contract' and' say' “the' cause' is' the' price.”'
' Yes,'that'is'true'from'the'perspective'of'the'seller,'but'from'the'perspective'of'the'
So' take' note,' just' to' clarify' this' future' inheritance' [topic].' Future" inheritance" buyer,'the'cause'for'entering'the'same'is'the'property.'
means"that"succession"has"not"yet"opened"–"which"means"that"the"person"from" '
whom"the"heirs"stand"to"inherit"has"not"yet"died.'The'object'should'form'part'of' You' can' see' this' in' Article' 1350,' the' definition' of' cause:' “[I]n' onerous' contracts'
the'inheritance.'If'it’s'something'else,'then'it'is'not'future'inheritance.'Why'is'that' the' cause' is' understood' to' be,' for' each' contracting' party,' the' prestation' or'
[sale'of'future'inheritance]'not'possible?'Because'there'is'only'an'inchoate'right' promise'of'a'thing'or'service'by'the'other,”'—'or,'in'short,'the"prestation"to"be"
there.'It'may'or'may'not'go'to'the'heir.'Of'course,'if'they'died,'then'surely,'but' performed"by"the"other"party.'
[before'that],'the"property"may"be"suspended"at"any"time.' '
' Of'course,'you'have'to'distinguish'motive'from'cause.''
'
"

REMEMBER:''
Future'inheritance'means'that'succession'has'not'yet'opened.'
The' period' of' reckoning' whether' or' not' succession' has' been' opened' is' the'
death'of'the'person'from'whom'the'heirs'stand'to'inherit,'regardless$of$whether$
or$not$there$is$actual$conveyance$of$title.'
"
'
There' was' a' question' before,' about' the' practice' of' traditional' Chinese' families,'
wherein' they' will' give' a' chunk' to' the' eldest' or' the' favored' one.' Let’s' say' it’s'
done,'wherein'the'one'who'will'get'the'biggest'chunk'said,'“I’m'going'to'sell'that'
For'example:'let’s'say'I'go'to'True'Value'to'buy'a'chainsaw.'I'paid'the'price,'and'
True' Value' sold' me' the' chainsaw,' came' here,' and' use' the' chainsaw' to' do' the'
chainsaw' massacre.' What' is' the' status' of' our' contract?' Valid.' Although' my'
motive' in' buying' the' chainsaw' is' to' massacre' some' people' here,' that' doesn’t'
affect'the'validity'of'the'contract.'The'motive'is'extraneous'to'the'transaction.'It'is'
not' known' to' True' Value' itself.' So' motive," as" a" rule," is" not" the" cause" of" a"
contract."It"does"not"affect"the"contract.'Motive'is'a'subjective'consideration.'
'
'

now.”' That’s' sale' of' future' inheritance.' Of' course,' later' on' you’ll' learn' that' the' GENERAL"RULE:'motive'is'not'the'cause'of'the'contract'and'is'a'subjective'
owner'can'do'a'partition'while'alive'of'the'property'among'the'heirs.'Later'on,' consideration.'
when'he'or'she'dies,'there'will'be'adjustment.' EXCEPTION:'when'the'motive'predetermines$the$cause.'
'

' '
ART." 1350" —' In$ onerous$ contracts$ the$ cause$ is$understood$ to$ be,$ for$ each$ contracting$ Sometimes,' it' is' only' known' to' one' party.' Let’s' say' I' want' to' buy' a' piece' of'
party,$the$prestation$or$promise$of$a$thing$or$service$by$the$other;$in$remuneratory$ones,$ property,'I'want'to'use'it'to'build'something.'If'I'don’t'realize'that'objective,'will'
the$service$or$benefit$which$is$remunerated;$and$in$contracts$of$pure$beneficence,$the$mere$ it'affect'the'contract?'No,'because'it'is'not'the'consideration.'
liberality$of$the$benefactor.' '

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CASES"
UY"V."CA"
In'the'case'of'Uy$wherein'the'Court'said'hypothetically,'assuming'that'the'seller'
was' the' one,' indeed,' questioning,' there' was,' as' stated' there:' “NHA' bought'
property'that'turned'out'to'be'unsuitable'for'real'estate'development.'The'Court' '
'
said' that' that' was' the' motive,' but' the' motive' predetermined' the' cause,' and'
Razon'sold'60%'shares'to'X,'et.'al.'Who'are'X,'et.'al.?'They'were'Romualdezes,'
therefore,'there'was'a'negation'of'the'cause'that'resulted'in'the'cancellation'of'the'
and' at' that' time,' they' were' the' presidential' brother?in?law.' So' they' had' this'
contract.'Note'that'there'is'something'peculiar'in'the'case:'the$motive$was$known$to$
transaction,'they'had'the'deed'of'assignment'of'shares,'and'in'exchange'there'
the$other$party.'The'seller'knew'that'the'NHA'was'purchasing'the'property'for'a'
was' payment' of' the' price,' and' because' of' that' deed' of' assignment,' they' got'
purpose:' development' of' a' housing' project.' When' that' purpose' was' frustrated,'
this' extension' contract.' There' was' a' presidential' relative,' and' so' it' was' very'
there'was'a'negation'of'the'cause.'The'motive'predetermined'the'cause,'meaning'
easy'to'get'the'renewal'of'the'contract.'
NHA' would' not' have' entered' into' the' contract' if' NHA' knew' that' the' property'
'
could'not'be'developed.''
'
Q:" Sir," could" it" be" raised" that" NHA" should" have" exercised" due" diligence" in"
knowing"[whether"the"property"was"suitable"for"a"housing"development]?"
A:' That' could' have' been' raised,' that' NHA' should' have' known.' Right' now,' '
before' they' buy,' they' have' to' do' some' tests.' But' yes,' that' could' have' been' The' question' now' was,' is' this' contract' valid?' Was' the' contract' between' ERI'
raised." and'PPA'valid?'How'about'the'deed'of'assignment'of'shares?'Was'this'valid?'
' '
That' is' why,' when' you' have' that' situation,' you' should' state' in' the' contract' the' Answer?' No.' Both' contracts' were' void.' The' extension' contract' was' void'
motive,' as' it' affects' the' cause' in' the' contract.' Therefore,' if' it' affects' the' motive,' because' it' was' contrary' to' law.' Why?' It’s' a' contract' with' a' presidential'
there'is'cancellation'of'the'contract.'In'the'case'of'Uy,'the'motive'predetermined' relative,'something'prohibited'by'law.'Of'course,'Romualdez'used'nominees.'
the'cause.' '
' How'about'the'Deed'of'Assignment'of'Shares?'That'contract'is'void,'because'
E."RAZON,"INC."V."PHILIPPINE"PORTS"AUTHORITY,"ET."AL." of'the'motive'predermining'the'cause.'The'motive'for'this'contract'was'to'get'
Let’s'take'this'case'of'Razon.'What'is'the'case'of'Razon?'' this'extension.'If'you'look'at'this'contract,'in$isolation,'the'contract'should'have'
' been' valid.' However,' the' parties' entered' into' the' contract' for' this' purpose.'
ILLUSTRATION"6:"RAZON"V."PPA" Therefore,'the'contract'was'void.'
'

There' was' this' company,' E.' Razon,' Inc.,' which' had' a' port' management'
contract'with'PPA,'so'they'handled'port'operations.'There'was'a'term,'a'fixed'
term.' It' was' expiring.' When' it' was' about' to' expire,' ERI' wanted' to' extend.'
Fixed'term;'therefore,'extension.''

'
ERI' could' not' get' the' extension' on' its' own,' so' there' was' a' scheme.' ERI' was'
owned'by'Razon,'100%.'That'is'contract'1.'
'

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' '
So' the' motive' example' was' at' the' renewal' level,' not' at' the' Deed' of'
Assignmnet' of' Shares' level.' At' this' level,' the' contract' was' void' for' being'
contrary' to' law.' So' if' you' look' at' this' case' of' E.' Razon,' this' case' involved' a'
criminal'act.'If'you'look'at'Uy$v.$CA,'you'look'at'two'civil'transactions.'In'both'
cases,'you'can'see'that'the'motive'was'considered'the'cause'because'first,'the'
parties'knew'the'motive'of'one'party'(or'both),'so'it'was'part'and'parcel'of'the'
contract.'I'think'that’s'what'you'have'to'determine:'IF'there'is'a'motive,'or'a'
special'consideration,'if'it'is'made'part'of'the'contract,'then'it'is'an'essential'
consideration'or'the'cause.'Take'note:'you'cannot'say'“just'a'motive.”'
'
' Who'has'the'burden'of'proving'the'existence'or'non?existence'of'a'contract?'
Q:""Sir,"does"layering"apply"for"this"concept?"
A:'' No.' You' have' to' find' the' ultimate' owner,' and' that' is' the' basis' for'
determining' if' there' is' a' violation' of' the' law,' like' let’s' say' right' now,if' you'
open'bank'accounts.'If'you’re'corporation'and'you’re'opening'a'foreign'bank'
account,' you' have' layers.' What' will' the' bank' do?' The' bank' will' ask' you:'
show'me'a'table'that'will'indicate'who'are'the'ultimate'beneficial'owners.'So'
you'have'a'layer,'and'it'says'“Corporation'1,'2,'3,”'and'it'will'state'there'“Mr.'
X.”'It'won’t'work.'
'
Q:""Sir," for" the" motive" to" predetermine" the" cause," is" it" necessary" for" the" other"
party"to"have"knowledge"of"the"motive?"
A:'' Yes,'because'if'the'other'party'is'unaware,'it'should'not'concern'them'[like'in'
the'earlier$True$Value$Chainsaw$Massacre'example]'
' 145"
' '
"
Q:""Sir,"how"different"is"that"from"the"cases"for"companies"wanting"to"own"or"
use"land"in"the"Philippines,"and—'
A:'' Layer'—'because'there’s'a'law'that'says'that'if'a'corporation'is'owned'by'60%'
Filipinos,' then' it' is' automatically' considered' a' Filipino' national.' You' don’t'
have' to' go' up.' So' the' moment' you' see' a' structure' with' 60%' Filipino,' they'
own' a' corporation.' The' rule' now' is' you' don’t' do' grandfathering' (meaning'
you'multiply'Filipino'ownership'to'get'“actual”'ownership).'Before,'that'was'
done.'It'may'be'done'again.'
"
Q:""With"regard"to"the"question"that"the"other"party"should"have"knowledge"of"
the"motive,"is"timing"material?"For"example,"knowledge"should"have"been"
on"or"before"the"perfection"of"the"contract."So"if"you"have"knowledge"of"the"
motive"subsequent"to"the"perfection,"you"can’t"apply"for"negation?"
A:'' No.' It’s' like' penalizing' one' party' because' you' are' not' able' to' realize' your'
objective,'which'was'not'made'part'of'the'contract.'
The'cause'should'be'lawful'and'existent.'The'requirement'that'it'be'legal'reflects'
the' boundaries' of' the' possible' stipulation' of' the' parties.' The' parties' have' the'
autonomy' to' enter' into' contracts,' they' have' the' freedom' to' stipulate,' but' the'
stipulation'should'not'be'contrary'to'law.'
'
If'it’s'not'existent,'then'it'may'be'a'void'contract,'possibly'absolutely'simulated'
contract,'just'like'that'case'of'Silverio.'Take'note:'the'cause'is'an'essential'element,'
if'it'is'not'there,'then'you'have'a'void'contract.'
'
'
ART." 1354" —' Although$ the$ cause$ is$ not$ stated$ in$ the$ contract,$ it$ is$ presumed$ that$ it$
exists$and$is$lawful,$unless$the$debtor$proves$the$contrary.'
'
ART."1355"—' Except$in$cases$specified$by$law,$lesion$or$inadequacy$of$cause$shall$not$
invalidate$a$contract,$unless$there$had$been$fraud,$mistake,$or$undue$influence.$
'
"
TAKE"NOTE"OF"THE"PROVISIONS"ABOVE."
The'law'presumes'the'existence'of'a'cause.'
The" party" who" alleges" the" absence" of" cause" has' the' burden' of' proof' of'
establishing'such'absence'of'a'cause.'
'
'
Prepared'by:'
KRISTINE'PAULINE'ONGTENCO'[1F'2014?2015]'//'05'FEB'2015' ' ' ' '
So'even'if'you'state'in'the'contract:'seller'hereby'sells'property'to'buyer,'period,' the' owner,' cannot' collect.' They' can' go' after' you' and' allege' that' your'
and'there'is'no'statement'of'the'price,'the'contract'is'VALID'because'the'rule'is' property'was'obtained'through'an'absolutely'simulated'contract."
there'is'a'presumed'valid'and'lawful'cause.'So'if'one'party'alleges'the'absence'of' "
cause,'that'party'has'the'burden'of'establishing'such'absence'of'the'cause,'which' " For'example,'there'was'a'case'before,'let’s'say:'X'was'confronted'with'a'civil'
was'done'in'the'case'of'Silverio.'How'was'it'proved'that'there'was'no'cause?'No' suit' for' damages' due' to' an' accident.' During' the' litigation,' X' conveyed' his'
price' was' paid.' There' was' no' recollection' of' the' payment' of' the' price.' The' only'property'to'somebody,'a'relative,'the'purpose'of'which'was'to'place'it'
notarization'was'off.'The'confluence'of'all'these'facts'proved'the'allegation'that' beyond' the' reach' of' the' Court.' The' Court' said' that' it' was' an' example' of'
there'was'an'absence'of'a'sufficient'and'lawful'cause.' absolute'simulation,'because'in'that'case,'there'was'an'established'absence'of'
' a'valid'consideration.'So'again:'if'the'cause'is'inadequate,'it'may'be'proof'of'
Of' course,' mere"allegation"that"there"is"no"cause"is"not"sufficient,"even"if"it"is" something' else,' like' proof' of' vitiated' consent,' or' rescissible' contract' when'
under"oath.''There'was'a'case'wherein'a'lawyer'claimed'that'there'was'no'cause' you'are'in'lesion'or'economic'prejudice,'or'of'course,'in'the'case'of'Silverio,'it'
in'a'contract.'The'Supreme'Court'said'that'it'was'not'enough.'You'should'have' could'be'proof'of'the'absence'of'the'cause.'
shown'something'more,'not'just'a'mere'statement'under'oath.'The'worst'part'is' "
that'the'Supreme'Court'said'that'as'a'lawyer,'he'should'have'known.'That'was' "
taken'against'the'lawyer.' "
' "
Take'the'case'of'the'relatively'simulated'contract:'There'is'a'statement'there'of'a' "
false'cause.'Doesn’t'matter,'as'long'as'the'parties'established'the'real'cause'with' "
the'real'price.'If'that'real'cause'is'valid'and'lawful,'then'you'have'a'cause'to'the' "
contrary.'Is'there'a'monetary'threshold'for'the'validity'of'a'cause?'Answer:'none.' "
The' law' does' not' provide' a' threshold' for' the' adequacy' or' inadequacy' of' the' "
cause.'Of'course,'a'declaration'for'the'establishment'of'an'adequate'cause'may'be' "
proof'of'a'fraudulent'scheme,'a'rescissible'contract'in'fraud'of'creditors,'or'it'may' "
be' indicative' of' a' donation,' or' in' the' case' of' Silverio,' it' can' be' an' indication' of' "
simulation.'So'the'law'does'not'consider'the'inadequacy'of'the'consideration'as' "
proof' of' the' absence' of' a' cause.' There' is' no' requirement' that' it' should' be' a' "
certain'threshold,'but'it'is'indicative'of'some'defect'of'the'contract.' "
' "
Q:""Sir,"can"the"Court"declare"such"alleged"simulated"sale"or"donation"as"void," "
Sir,"if,"for"example,"in"the"case"of"donation"between"parents"and"children?" "
Because" we’ve" encountered" numerous" cases" in" our" Persons" class" before" "
about" the" simulation" between" parents" and" children" just" to" evade" higher" "
tax—" "
A:'' Yes.'So'let’s'say,'your'parents,'they'do'not'want'you'to'pay'estate'taxes.'So' "
during'their'lifetime,'they'will'slowly'donate'their'title'you." "
" "
Q:" And"no"one"can"assail"the"validity"of"the"donation,"Sir?" "
A:'' No,' most' likely' the' BIR' will' just' go' after' you' and' say' that' you' should' pay' "
donor’s'tax,'unless'there'is'a'creditor.'The'creditor,'let’s'say,'the'creditors'of' "
"

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' ' ' ' '
"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
THURSDAY,'12'FEBRUARY'2015'
"

REFORMATION"
"

ILLUSTRATION"3:"LAW"REQUIRING"FORM"AS"PROOF"
The' general' rule' is' that' a' contract' is' consensual,' meaning' the' contract' does' not' An'express'trust'involving'real'property'cannot'be'proved'by'parol'evidence.'
require'a'specific'form'as'long'as'the'parties'agree'on'the'two'other'elements'of' It' means' that' you' need' something' in' writing' to' prove' the' existence' of' an'
the' contract' you' will' have' a' contract.' That' is' the' definition' of' a' consensual' express'trust'involving'real'property.''
contract.' The' parties' will' have' a' contract' the' moment' they' agree' on' the' object' '

'
and' the' cause.' However,' there' are' instances' when' a' specific' form' is' a' legal'
ART." 1358" —" CONTRACTS" THAT" MUST" APPEAR" IN" A" PUBLIC"
requirement' for' validity' enforceability' or' proof.' As' a' rule' there' is' no' required'
DOCUMENT"
form' there' will' be' a' contract' as' long' as' the' parties' agree' on' the' two' other'
CASES"
elements,' the' object' and' the' cause.' However,' there' are' certain' legal' provisions'
GONZALES"V."PEREZ"
requiring'form'for'validity,'enforceability'or'proof.'
So,'[in'this'case],'they'had'a'deed'of'sale.'It'is'in'writing'but'not'notarized.'It'if'is'
'
in'writing,'will'it'be'taken'out'of'the'coverage'of'the'Statute'of'Frauds?'What'is'
What' is' an' example' of' a' law' requiring' form' for' validity?' Donation.' Pre?nuptial'
the'statute'of'frauds?'Under'the'Statute'of'Frauds,'to'be'enforceable'it'should'be'
agreements.'For'prenups'there'is'a'required'form'and'the'form'is'a'requirement'
in' writing.' Does' the' statute' of' frauds' require' notarization?' No.' It' only' requires'
for'validity.'For'a'donation'to'be'valid'it'must'be'in'writing'and'the'acceptance'of'
that'it'be'in'writing'to'be'enforceable.''
the' donation' must' likewise' be' in' writing.' An' agreement' on' the' payment' of'
'
interest' should' be' in' writing' otherwise' it' shall' be' void.' These' are' examples' of'
It' is' sale' of' real' property.' There' is' a' deed' of' sale,' it' is' in' writing' so' it' is' in'
legal'provisions'requiring'for'form'for'validity.'
enforceable' under' the' Statute' of' Frauds,' but' it' is' not' notarized,' so' what' is' the'
'
consequence' of' the' failure' to' notarize' the' document?' There' was' reference' to'
Normally' the' test' of' validity' is' when' all' the' essential' elements' are' present.' The'
Article'1358'stating'that'“the'following'must'appear'in'a'public'document…”'and'
elements' being' consent' of' the' parties,' object' and' cause.' If' you' have' these'
you'learned'in'your'Statutory'Construction'that'“must”'is'mandatory'so'it'must'
elements' you' have' a' valid' contract' but' in' certain' instances' the' law' will' require'
be'followed.'Article'1358'was'not'followed'in'this'case,'what'is'the'status'of'the'
form'as'a'requirement'for'validity.'
deed'of'sale?'Is'it'only'voidable'because'it'did'not'follow'the'form'mandated'by'
'
" Article'1358?'Or'is'it'still'valid?''
ILLUSTRATION"1:"LAW"REQUIRING"FORM"FOR"ENFORCEABILITY" '
For'example:'There'is'an'executory'contract'for'the'sale'of'real'property.'It'is'a' The' Supreme' Court' said' it' is' valid' because' it' was' still' consensual' between' the'
contract' of' sale' involving' real' property.' If' it' is' not' partially' executed,' it' will' parties' because' notwithstanding' the' language' of' Article' 1358' the' ceiling'
still'be'implemented'or'executed'by'the'parties'and'that'should'be'in'writing.' mandatory' language' of' Article' 1358,' it' is' not' a' requirement' for' validity' or'
It'would'be'covered'by'the'statute'of'frauds.'' enforceability.'It'is'there'only'for'convenience.''
'

'' '
Why' is' it' a' provision' for' convenience?' Why' would' it' be' convenient' if' it' is'
"

ILLUSTRATION"2:"LAW"REQUIRING"FORM"FOR"ENFORCEABILITY"
For' certain' contracts' to' be' enforceable' against' third' parties,' the' law' requires'
certain' formal' requirements.' A' pledge' contract' would' be' to' be' enforceable'
against' third' parties' should' be' notarized.' A' mortgage' contract.' Real' estate'
mortgages' to' be' enforceable' against' third' parties' should' be' registered' with'
the'relevant'registry'of'deeds.'
'
notarized?'Both'private'and'public'documents'can'be'used'as'evidence.'The'only'
difference'is'that'if'it'is'a'public'document'it'can'be'readily'used'as'evidence'and'
you' don’t' have' to' authenticate' it.' Article' 1358' is' not' a' requirement' for' validity,'
enforceability'or'proof.'It'only'facilitates'the'transaction'between'the'parties.'
'

'

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' ' ' ' '

Now,'let’s'say'in'that'example'there'is'a'deed'of'sale'it'is'in'a'private'document' other' to' execute' the' written' agreement' or' stipulation' for' the' payment' of'
what'is'the'remedy'of'one'of'the'parties'who'wants'it'to'be'acknowledged'before' interest'based'on'Article'1357?'No.'1357'cannot'be'relied'upon'if'the'contract'
a'notary'public?'What'action'can'be'taken'by'one'party?' is'in'the'first'place'is'invalid'or'unenforceable'due'to'the'failure'to'observe'the'
' proper'form.''
Let’s' say' you' have' a' contract,' it' is' not' in' the' proper' form.' What' will' be' your' '
remedy' against' the' other' contracting' party?' The' remedy' under' Article' 1357' is' EMILIO"V."RAPAL"
that' a' party' can' compel' the' other' party' to' execute' the' proper' form.' Another' There'was'a'lessor'and'a'lessee.'Lessor'borrows'form'the'lessee.'They'agreed'that'
possible'remedy'is'you'can'ask'to'reform'the'contract.'' the'loan'will'be'paid'through'the'offsetting'of'the'accruing'monthly'rentals.''
' '
"

Reformation"is"when"the"contract"does"not"reflect"the"true"agreement"of"the" The' lessor' sued' for' reformation.' What' are' the' requisites' for' an' action' for'
parties." reformation?'There'should'be'a'valid'contract,'the'real'intention'of'the'parties'is'
' not' reflected' in' the' contract' because' of' four' possible' reasons,' fraud,' mistake,'
Under'the'Statute'of'Frauds,'sale'of'real'property'to'be'enforceable'should'be' accident'or'inequitable'conduct.'In'reformation,'the'mistake'or'fraud'resulted'in'
in' writing.' If' it' is' a' contract,' it' is' verbal' but' already' partially' executed,' it' is' the' failure' of' the' documentation' to' reflect' the' true' agreement.' That’s' why' you'
taken'out'of'the'statute'of'frauds.' have'to'be'careful'when'you’re'discussing'consent'and'the'vices'of'consent.'If'the'
fraud'or'mistake'relates'not'to'the'procurement'of'the'consent'it'will'not'result'to'
'

'
" the'vice'of'consent'and'will'not'render'the'contract'voidable.'It'can'be'something'
ILLUSTRATION"4" else.' In' this' case' there' is' fraud' but' the' fraud' did' not' result' to' the' failure' of' the'
Let'us'assume'that'we'have'a'contract'of'sale,'verbal'and'executory,'meaning' documentation' to' reflect' the' true' agreement' in' which' case' the' action' is'
neither' party' has' performed' any' of' the' mandated' prestations,' such' that' it' is' reformation'and'not'the'annulment'of'the'contract.'
covered' by' the.' Statute' of' Frauds.' Let’s' say' that' the' parties' are' A' and' B.' A' '
sues' B' for' B' to' execute' the' proper' form.' Can' B' be' compelled' to' execute' the' So' there' was' an' action' for' reformation,' was' reformation' available?' The' court'
proper'form'under'Article'1357?'No.'Don’t'be'misled'by'Article'1357.'' explained' that' the' petitioner' claiming' reformation' admitted' execution' of' the'
' contract' however' that' party' was' not' able' to' prove' the' fact' that' the' written'
Article'1357'is'available'only'if'you'have'a'valid'and'enforceable'contract.'If' contract' did' not' represent' that' true' agreement' of' the' parties.' Neither' was' there'
the'form'is'necessary'for'validity'or'enforceability,'you'cannot'rely'on'Article' proof'of'any'reasons'why'there'was'a'failure'to'express'the'true'agreement'of'the'
1357,'otherwise,'there'will'be'no'instance'where'you'will'have'a'contract'that' parties.'
is'unenforceable'because'of'the'failure'to'observe'the'proper'form.' "
' PCI"LEASING"V."TROJAN"
Again,'under'the'statute'of'frauds'to'be'enforceable'the'contract'should'be'in' It'is'not'a'financial'lease'but'a'loan'with'a'chattel'mortgage.'What'is'the'period'to'
writing,' it' is' verbal,' so' it' is' unenforceable.' If' it' is' unenforceable,' there' is' no' file'the'action'for'reformation?'10'years'from'the'date'the'other'party'refuses'to'
way' A' can' rely' on' Article' 1357' and' compel' B' to' execute' the' written' recognize'the'real'agreement.'So'when'the'other'party'refuses'to'comply'with'the'
instrument' because' the' written' instrument' is' a' requisite' for' enforceability.' true'agreement'then'the'right'of'action'accrues.'
The'fact'that'it'is'unenforceable,'A'could'not'even'sue.' "
'

'
"

ILLUSTRATION"5"
Let’s'say'we'have'an'agreement'on'interest.'The'parties'to'a'loan'contract,'the'
borrower'and'the'lender,'verbally'agreed'to'the'payment'of'interest'in'the'rate'
of' 1%' per' month.' A' requirement' for' the' validity' of' that' stipulation' is' that' it'
should'be'in'writing.'If'it'is'not'in'writing,'can'a'party'to'the'contract'force'the'
Reformation" is" a" remedy" of" a" party" to" make" a" written" contract" express" the"
true"intent"of"the"parties.""
"
It' requires' a' valid" contract" with" the" true" agreement," the" written" contract,"
which"does"not"express"the"true"intention"or"agreement"of"the"parties,"and"
the"reason"the"instrument"fails"to"express"the"true"intention"or"agreement"of"

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the"parties"is"due"to"mistake,"fraud,"inequitable"conduct"or"accident."" When' it' is' absolutely' impossible' to' settle' down' the' rules' established' in' the'
' articles,' the' interpretation' and' the' doubts' referred' to' in' the' incidental'
An'example'of'a'mistake'that'may'be'a'ground'for'reformation'is'when'there' circumstances' of' a' gratuitous' contract' (meaning,' it’s' gratuitous' and' it' is'
is'a'misconception'of'the'contract'or'when'there'is'mistake'as'to'the'effect'of' impossible'to'interpret),'how'should'the'interpretation'be'made?"
the'contract.' ''
'
"

In'a'contract,'you'are'giving'something'in'exchange'for'another'(if'you'are'not'
An'example'of'accident'is'autocorrect.' getting'something,'you'are'not'giving'up'something)'so'if'it'is'a:'
' 1. GRATUITOUS" CONTRACT:' interpretation' should' be' in' favor' of'
An' example' of' fraud' is' somebody' inserting' a' provision' in' the' contract' that' the'least'transmission'of'rights'
will'make'it'very'onerous'to'one'party.'This'is'not'fraud'in'getting'the'consent' 2. ONEROUS" CONTRACT:' interpretation' should' be' in' favor' of' the'
but'fraud'resulting'in'the'failure'of'the'contract'to'express'the'true'meaning'of' greatest'reciprocity'of'interest'
the'both'parties.'' '

'
'
If'the'ambiguity'refers'to'any'of'the'elements'of'the'contract,'you'don’t'have'to'
An'example'of'fraud'or'inequitable'conduct'is'a'contract'of'lease'where'in'the'
interpret."
contract,' the' lessee,' the' one' who' controlled' the' documentation,' inserted' a'
"
provision'that'at'the'end'of'the'lease'term,'the'lessee'had'the'right'to'purchase'
When" the" ambiguity" is" with" the" cause" or" object" of" the" contract" and" the"
the'property'and'the'purchase'price'shall'be'the'rental'payments'made'during'
ambiguity"cannot"be"resolved,"what"will"happen?"Contract'will'be'void.'Before'
the'rental'period.'
" assailing' the' validity' of' the' contract,' check' first' if' all' the' elements' are' there.' If'
' there'is'ambiguity'in'the'cause'or'the'object,'then'there'is'no'contract."
"

TWO"OPPOSING"RULES"IN"THE"INTERPRETATION"OF"CONTRACTS:" "
1. Words'and'terms'used'in'a'contract'should'be'used'in'their'general' RESCISSIBLE"CONTRACTS"
signification.' A'rescissible'contract'is'a'valid'contract'without'any'infirmity'or'defect'in'any'of'
2. On' the' other' hand,' terms' should' be' understood' in' their' technical' the'essential'elements.'All'the'essential'elements'are'present'(consent,'object'and'
signification.' cause).'However,'a'contract'becomes'rescissible'because'the'law'provides'that'it'
causes' a' lesion' or' economic' prejudice' to' a' party.' Thereby,' the' law' affords' the'
"

"
GENERAL'V.'SPECIFIC'PROVISION' injured' party' the' remedy' to' rescind' the' contract' notwithstanding' the' lack' of'
The'specific'provision'should'be'followed'unless'the'general'provision'contains' infirmity'in'any'of'the'essential'elements.''
another'specific'provision'applying'the'specific'provision.'' '
' RESOLUTION" RESCISSION"
' '

Look'at'these'rules.'You'can'manipulate'these'rules'to'suit'your'purposes'so'I'can' • Article'1191' • Article'1381'

argue'that'I'don’t'want'interpretation'of'the'contract'because'it'will'be'the'judge' • Principal' or' retaliatory' remedy?' • Subsidiary' remedy' –' before'
who'will'make'a'determination.' Remedy' of' the' aggrieved' party' creditor' can' rescind' a' contract'
' for'a'breach' he/she' must' have' exhausted' all'
Q:""How"do"we"construe"ambiguity"in"any"contract?" • Basis:'Substantial'Breach' remedies' and' properties' of' the'
A:'' It' shall' be' interpreted' AGAINST' the' one' who' caused' the' ambiguity.' • Effect:' Complete' cancellation' of' debtor.' If' there' is' another'
Whoever'has'the'control'or'who'could'have'avoided'the'obscurity'will'be'the' the'contract' remedy,' rescission' is' not'
one'disfavored.''" • Example:' Contract' of' Sale' available.'
" (Contract' between' buyer' and' • Basis:' Lesion' or' Economic'
ART."1378"—"IN"CASES"WHERE"DOUBTS"ARE"IMPOSSIBLE"TO"SETTLE" seller.' Seller' should' convey.' Prejudice'

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Buyer' should' pay' price.' Buyer' (Note:$ Not$ every$ economic$ • Contracts' involving' things' under' litigation' entered' into' without'
defaulted)' prejudice$ will$ render$ a$ contract$ permission'from'the'litigants'or'the'relevant'court'
' rescissible.$ $ A$ specific$ law$ must$ • Contracts'stipulated'by'the'law'that'can'be'subject'to'rescission'
' categorize$ the$ economic$ prejudice$ '
' as$ basis$ to$ render$ a$ contract$ UNDER"ART."1382:"
' rescissible$like$Article$1381)$ • Payments' made' in' insolvency' can' also' be' considered' rescissible'
' • Effect:' ' Rescission' as' may' be' under'certain'conditions.'
' necessary' for' the' creditor' to'
"

'
obtain' payment.' If' only' a' "

ILLUSTRATION"6:"PAYMENTS"MADE"IN"INSOLVENCY"
portion' of' the' contract' needs' to'
Creditor'extended'a'loan.'
be' rescinded' to' pay' the' loan,'
Day'1'—'Debtor'conveys'his'only'property'to'X'for'a'nominal'sum.'(Assume'
that' portion' of' the' contract'
it' is' a' fraudulent' scheme.' The' purpose' of' debtor' is' to' place' the' property'
alone'needs'to'be'rescinded.'
beyond'the'reach'of'creditor)'
"
Day'3'—Debtor'should'pay'the'creditor'but'defaulted.'Assets'of'Debtor'='0'
Example:'Creditor'extended'a'loan.'
Creditor'can'ask'for'the'rescission'of'the'contract'between'Debtor'and'X.'
On' Day' 1,' debtor' conveys' his' only'
'
property' to' X' for' a' nominal' sum.'
In'this'contract,'all'essential'elements'are'present.'The'parties'consented'to'the'
(Assume' it' is' a' fraudulent' scheme.'
object' and' the' cause' although' the' price' was' inadequate' and' there' was' a'
The'purpose'of'debtor'is'to'place'the'
fraudulent' scheme.' ' Notwithstanding' the' fraudulent' scheme,' you' have' a'
property' beyond' the' reach' of'
valid'contract.'The'essential'elements'are'there.'It'is'not'absolutely'simulated'
creditor)'
because' of' the' payment' of' the' nominal' sum.' Remember' the' case' of' Manila'
'
Bank.' That' is' why' I' made' a' distinction' between' an' absolutely' simulated'
On' Day' 3,' Debtor' should' pay' the'
contract'and'a'rescissible'contract'in'fraud'of'creditors.'This'contract'is'valid'
creditor' but' defaulted.' Debtor’s'
but' the' cause' of' the' contract' caused' an' economic' prejudice' to' Creditor.'
assets'equal''zero'(A=0).'
Creditor' is' entitled' to' rescind' the' contract.' What' is' the' economic' prejudice?'
'
The'inability'of'creditor'to'collect'payment'from'debtor'because'of'the'scheme'
Creditor'can'ask'for'the'rescission'of'
(conveyance'in'fraud'of'a'creditor).'
the'contract'between'Debtor'and'X.' '

'
'

' '

'

Take'note'that'the"basis"of"rescission"is"lesion"or"economic"prejudice.'Again,'
Both'of'them'will'require'MUTUAL"RESTITUTION.'
let' me' reiterate' that' not" every" economic" prejudice" will" render" a" contract"
Statutory'basis:'Art.'1190'(Resolution),'Art.'1385'(Rescission)'
rescissible.''
Note:$jurisprudence$usually$interchanges$the$statutory$basis.$
'
'
" For' example,' you' entered' into' a' contract' of' sale.' It' was' a' bad' bargain.' You'
"

EXAMPLES"OF"LESION"IN"ART."1381:" sold' a' property' at' a' huge' discount.' You' have' an' economic' prejudice' in' this'
• Contracts' entered' into' by' guardians' whenever' the' wards' they' example'but'it'will'not'render'the'contract'rescissible.'You'have'to'find'a'law'
represent' suffer' a' lesion' of' more' than' ¼' of' the' value' of' the' thing,' saying' that' the' economic' prejudice' you' experienced' can' render' a' contract'
which'is'the'object'of'the'contract" rescissible.'There'is'no'such'law'for'this'scenario.'We'have'discussed'that'an'
• Contracts'entered'into'by'representatives'of'absentees' inadequate' cause' or' consideration' will' not' render' the' contract' voidable' or'
• Contracts'in'fraud'of'creditors' void,' unless' there' is' an' infirmity' in' one' of' the' essential' elements' of' the'

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contract.' A:'' Lesion'would'be'based'on'the'time'the'parties'entered'into'the'contract.'This'

could'be'considered'a'bad'bargain'after'1'or'2'years.'You'have'to'judge'the'
'

'
"
value' of' the' property' based' on' what' the' value' was' when' the' contract' was'
ILLUSTRATION" 7:" CONTRACTS" ENTERED" INTO" BY" THE" LEGAL" REPRESENTATIVE"
entered'into'by'the'parties"
OF"A"WARD"OR"ABSENTEE"
"
Let'us'say'that'the'legal'representative'of'a'ward'enters'into'a'contract'of'sale'
CONTRACTS'INVOLVING'OBJECTS'UNDER'LITIGATION'
with' X.' (property' in' exchange' for' a' price)' The' fair' market' value' of' the'
This' contract' is' rescissible' if' entered' into' by' the' defendant' without' the'
property'is'10M.'Property'was'sold'only'for'5M.'There'is'a'lesion'of'more'than'
knowledge'and'approval'of'the'litigants'or'competent'judicial'authorities.'
¼'of'the'value.''
'
' "

Is"this"contract"rescissible?"
The' legal' representative' has' the' authority' to' act' in' behalf' of' the' ward'
pursuant' to' a' court' order.' Normally' in' this' type' of' transaction,' it' would'
require' court' approval.' ' If' you' don’t' get' a' court' approval,' it' is' NOT'
rescissible.'The'contract'is'VOID.'''
ILLUSTRATION"9:"CONTRACTS"INVOLVING"OBJECTS"UNDER"LITIGATION"
There' is' an' ongoing' litigation' between' A' and' B' over' ownership' of' a' certain'
property.'Defendant'B'sold'the'property'while'still'in'litigation.'That'contract'
will' be' rescissible' if' there' is' no' court' approval' or' if' the' other' party' does' not'
approve'of'the'sale.''
'

' '
If' it' is' approved' by' the' court,' then' it' is' valid.' Why?' There' is' a' presumption' In' properties' under' litigation,' whoever' acquires' the' property' may' be' bound' by'
that'the'court'protected'the'interest'of'the'ward'or'the'absentee.' the'judgment'of'the'case.'There'will'be'an'annotation'on'the'title'of'the'property.'
'
'

'
ON'THE'TYPES'OF'CONTRACTS'UNDER'ART.'1381'(Wards$and$absentees)$ If' you' have' other' remedies,' it' is' better' if' you' pursue' that' because' rescission' is'
We'are'only'dealing'with'contracts'involving'ACTS"OF"ADMINISTRATION.'If' subsidiary.'
it'is'a'disposition,'it'would'require'court'approval.'A'court?approved'contract'is' "
"

valid'unless'you'question'the'court'approval'itself.' ILLUSTRATION"10:"PAYMENTS"MADE"IN"A"STATE"OF"INSOLVENCY"
' For'example:'A'and'B'entered'into'a'loan'contract.'
Day'1'—'A'will'release'the'loan'to'B.''
"

ILLUSTRATION"8:"LEASE"ENTERED"INTO"BY"LEGAL"REPRESENTATIVE"
The'rental'per'annum'for'the'property'is'10M'but'it'was'only'rented'out'for' Day'3'—'B'will'pay'the'principal'and'interest.'
5M'by'the'legal'rep.'This'contract'is'RESCISSIBLE.' '
' On'Day'2,'A'become'insolvent.'Assets'have'become'less'than'liabilities.'When'
The'problem'when'you’re'dealing'with'the'first'two'items'under'Art.'1381'is' the' law' speaks' of' insolvency,' it' talks' about' practical" insolvency.' Assets' are'
knowing'the'value'of'the'property.'The'reckoning'of'the'lesion'is'based'upon' insufficient'to'cover'for'liabilities.''
the'value'of'the'property.'When'you'have'this'type'of'dispute,'the'tricky'part' '
is'knowing'the'value'of'the'property.'There'are'so'many'values'you'can'come' When'A'learned'of'the'insolvency,'he'made'a'demand'on'Day'2.'Upon'receipt'
up'with.'You'can'have'the'fair'market'value'etc.' of'the'demand,'there'was'payment.'Creditor'X'of'B'has'a'receivable'from'B.''
'
'
'
Can"X"assail"this"contract"as"rescissible?"
Q:""For" example," I" have" a" property" in" Alabang" Village." The" property" is"
''
estimated"to"have"a"value"of"10M."There"was"a"subsequent"development"in"
NO." THIS" CONTRACT" IS" NOT" RESCISSIBLE." The' law' provides' that'
the"area"so"the"value"of"the"property"rose"to"50M."But"I"have"a"lease"contract"
payments' made' in' a' state' of' insolvency' for' obligations' to' whose' fulfillment'
stating"that"the"rentals"would"only"amount"to"5M."Will"there"be"a"change"in"
could'not'be'compelled'at'the'time'of'the'payment'are'rescissible.''
the"contract"due"to"the"appreciation"of"the"property?"
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Could'B'be'compelled'to'pay'on'Day'2?'A'could'compel'B'to'pay.'When'you'
are'insolvent,'you'lose'the'benefit'of'the'term'so'there'will'be'an'acceleration'
of'the'payment.'On'day'2,'A'could'validly'demand'payment'from'B'so'this'is'
not'an'instance'when'payment'could'not'be'forced'or'compelled.'
'
respect'to'the'creditor.'
'
Issue:' But" what" if" it" was" done" that" way" to" defraud" the" creditor?'
There'is'no'jurisprudence'on'the'matter.'Let’s'say,'I'sold'the'property'
now,'then'when'I'don’t'have'anything'anymore'I'borrowed'from'the'

'
"
creditor.'That'scheme'really'defrauds'the'creditor'but'the'disposition'
ON"RESCISSIBLE"PAYMENTS:"
will'not'be'rescissible'because'the'creditor'became'a'creditor'after'the'
It'should'be'subjected'to'a'suspensive'condition.'If'it'is'a'suspensive'term,'the'
disposition.'But'that’s'exceptional.'
insolvency' will' remove' the' benefit' of' the' term.' In' the' example' above,' there'
'
should' be' payment' on' X' suspensive' condition' (to' be' rescissible).' The'
2. The"transferee"should"NOT"be"an"innocent"purchaser"for"value."
insolvency' will' not' affect' the' suspensive' condition' unlike' when' it' is' a'
IPV'means'that'one'is'in'good'faith;'he'or'she'must'not'be'privy'to'
suspensive'term.'
' the'fraud.''
' "
Under'special'laws,'certain'payments'made'in'a'state'of'insolvency'are'not'only' [To'prove'this],'you'prove'fair"exchange.'Prove'that'you'paid'good'
rescissible,'they'are'void.'In'the'old'insolvency'law,'that'was'the'rule.'If'a'party' money' in' this' transaction.' How' can' you' claim' fraud' when' there' is'
subject' of' an' insolvency' proceeding' paid' without' court' approval,' the' payment' fair'exchange?"
was'void.'But'in'the'new'law'(Financial'Rehabilitation'Insolvency'Act),'it'made' '
the' problem' murkier.' Instead' of' saying' it' is' void,' the' law' said' that' is' void' or' 3. Contract"should"be"FRAUDULENT.'Fraud'is'difficult'to'prove'
rescissible.'So'who'knows'now?'Before,'it'was'very'clear'cut.'' because'it'is'a'state'of'mind.'But,'you'can'still'show'circumstances'to'
' prove'the'fraudulent'intent'or'you'can'show'presumptions.'The'law'
CONTRACT'OR'CONVEYANCE'IN'FRAUD'OF'A'CREDITOR' provides'certain'presumptions'(see$Art.'1387).''
The'creditor'has'no'other'method'to'obtain'payment.'This"contract"is"rescissible.'' "
' In'donation'of'property'of'gratuitous'title'is'presumed'to'be'in'fraud'
"

ON"RESCISSIBLE"PAYMENTS:"
It'should'be'subjected'to'a'suspensive'condition.'If'it'is'a'suspensive'term,'the'
insolvency' will' remove' the' benefit' of' the' term.' In' the' example' above,' there'
should' be' payment' on' X' suspensive' condition' (to' be' rescissible).' The'
insolvency' will' not' affect' the' suspensive' condition' unlike' when' it' is' a'
suspensive'term.'
'
of'creditors'when'the'donor'does'not'reserve'sufficient'properties'to'
pay'other'debts'contracted'before'the'donation.'
'
There'was'a'donation'and'nothing'was'left.'This'will'be'presumed'to'
be'fraudulent.'If'it'is'onerous,'there'is'another'presumption.'Let’s'say'
there'is'a'sale.'The'sale'was'made'when'there'is'a'judgment'rendered'
in'any'instance'or'any'writ'of'attachment'has'been'issued.''

' '

'
"

REMEMBER:" "

There'must'be'no'other'remedy'available.'Creditor'must'have'exhausted'ALL' ILLUSTRATION"11:"PRESUMPTION"OF"FRAUD"
ASSETS'or'REMEDIES'against'the'debtor'first.'' Y'obtained'a'judgment'against'D'or'attachment'of'another'property'of'D.'That'
will' be' an' example' of' onerous' disposition' that' will' be' presumed' to' be'
'

'
"
REQUISITES"BEFORE"RESCISSION"MAY"BE"RESORTED"TO:"
1. The" rescinding" creditor" should" be" a" creditor" prior" to" a" rescissible"
contract.'In'our'example'(see$ILLUSTRATION 10),'creditor'is'a'creditor'
on'Day'1.'The'rescissible'contract'was'done'on'Day'2.'If'it'were'the'
other'way'around,'that'would'not'make'the'contract'rescissible'with'
fraudulent.' If' D' is' subject' of' an' adverse' decision' of' another' case' and' made'
another'disposition,'it'will'be'presumed'to'be'fraudulent.'
'
Why" is" there" a" presumption" of" fraud?' When' somebody' is' collecting' from'
you,'you’re'instinct'is'to'hide'from'the'claiming'party.'That'is'why'there'is'a'

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presumption.'The'decision'can'refer'to'any'property'or'any'judgment'against' A:'' No,'an'innocent'purchaser'of'value'will'defeat'any'claim'of'badges'of'fraud.'

the'debtor.'' If' you' show' a' badge' of' fraud' (close' friends' etc.)' but' if' the' buyer' paid' X'
amount,'it'will'be'difficult'for'rescission'to'prosper'when'there'is'payment'of'
'

"
Q:""What"is"the"reckoning"point"for"setting"aside"property"for"the"fulfillment"of" the'fair'market'price."
the"debt?"The"date"of"liquidation"or"the"date"of"donation" '
"

A:' At' the' time' of' the' donation,' debtor' should' set' aside' properties' for' his' Note:"Badges'of'fraud'are'merely'presumptions.'They"are"REBUTTABLE.'"
'

support.'If'there'is'none'left'and'he'made'a'complete'conveyance,'it'will'be' '
presumed' to' be' fraudulent.' You' have' to' reckon' as' of' Day' 2' from' our' Q:""Wouldn’t"it"be"better"for"the"bank"to"go"after"the"12M"and"not"the"property?"
example." A:'' The'attempt'of'the'bank'was'to'circumvent'the'proceeding'to'claim'from'the'
' corporation'(they'would'have'to'wait.)'This'was'a'shortcut'so'that'they'could'
You'can'also'rely'on'the'badges'of'fraud.'What'are'badges'of'fraud?'Example'will' collect'immediately.'
be' the' relationship' between' X' and' D.' Maybe' they' are' friends' or' do' business' '
together.'Another'example'will'be'payment'of'nominal'sum'or'the'timing,'which' "

ABSOLUTELY"SIMILATED"AND"RESCISSIBLE"CONTRACTS"IN"FRAUD"
you' can' put' together' to' impress' upon' the' court' that' there' was' a' fraudulent'
OF"CREDITORS"
scheme.'But'as'I'said,'it'is'very'difficult'to'rescind.'Rescission'is'subsidiary'and'it'
There' is' no' prescriptive' period' to' challenge' absolutely' simulated' contracts.'
also'has'a'lot'of'requirements'like'what'we'have'discussed'in'Manila'Bank.'If'you'
The' action' is' recovery' of' property' of' debtor.' There' must' be' absence' of' any'
could' go' for' absolute' simulation,' you' will' have' more' wiggle' room.' First,' it' is' a'
consideration.''
principal' action' and' you' will' only' be' collecting' what' the' debtor' owns.' Second,'
'
you'are'not'subject'to'prescription.'
When' there' is' consideration' paid,' contract' is' VALID,' but' MAY" BE"
'
RESCISSIBLE.""
When'there'is'a'contract'in'fraud'of'a'creditor,'the'important'matter'will'be'the' '

consideration' paid.' As' long' as' there' is' adequate' consideration,' there' is' a' fair' '
exchange.'It'will'be'difficult'to'rescind'the'contract.'The'problem'is'how'to'know' '
what' is' adequate' in' the' context' of' the' contract.' For' that,' we' have' the' case' of' '
Union$Bank.''
'
UNION"BANK"V."ONG"
In'this'case,'the'Supreme'Court'held'that:'
1. The'disposition'was'not'in'fraud'of'creditors'because'the'price'paid'was'
sufficient.' The' disparity' between' the' fair' market' value' and' the'
purchase'price'was'not'gross'according'to'the'statement'of'the'witness.'
A' discrepancy' of' 15%' was' normal.' The' buyer' also' shouldered' the'
expenses'of'the'sale'(documentary'stamp'tax'etc.),'which'could'explain'
the'discrepancy.'
2. The'bank'did'not'show'that'Ong'does'not'have'any'other'property'for'
rescission'to'prosper.'
'
Q:""In"the"earlier"example"of"subsequent"sales,"the"subsequent"buyer"cannot"be"
an"innocent"purchaser"of"value"because"of"the"badges"of"fraud?"

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'
"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
TUESDAY,'17'FEBRUARY'2015'
'

REVIEW:"RESCISSIBLE"CONTRACTS" '
With'respect'to'contracts'in'fraud'of'creditors,'a'crucial'issue'is'the'establishment' What' does' that' mean?' You' can' enforce' the' contract' until' it' is' annulled' even' if'
of'the'fact'of'fraud.'We'see'that'in'the'case'of'Union'Bank'wherein'the'party,'the' let’s' say,' the' party' complaining' for' a' vice' of' consent,' if' that' party' continuously'
seller'who'assailed'that'the'sale'was'rescissible,'was'able'to'sustain'the'existence' benefits' from' the' contract,' that' may' render' the' contract' completely' valid.' That'
of'fraud'by'showing'the'price'paid'was'lower'than'the'value'of'the'fair'market' may'be'your'ratification'?'if'there'is'an'acceptance'of'benefit'by'an'incapacitated'
price'and'thereby'disputing'any'legal'presumption'of'the'existence'of'fraud.' party'who'could'have'complained'a'vice'of'consent.''
' '
How'do'you'prove'fraud?' Q:" If"there"is"a"voidable"contract,"who"can"question"or"file"and"action"for"the"
' annulment"of"contract?"
In' the' case' of' Silverio,' there,' there' is' an' establishment' of' fraud,' although' what' A:'' The'injured'party'may'file'an'action'for'the'annulment'of'a'contract."
was'really'the'case'was'an'absolute'simulation.'From'the'facts'of'that'case,'you' "
can' see' how' the' established' facts' can' show' the' existence' of' fraud.' The' deed' of' Q:""Who"is"the"injured"party?""
sale' was' notarized' but' used' a' number' allocated' for' an' affidavit;' there' was' no' A:'' The'injured'party'is'the'party'who'is'either'incapacitated,'or'whose'consent'
recollection'on'the'date'when'it'took'place'or'the'price.'These'are'also'badges'of' was' vitiated.' A' capacitated' party' cannot' allege' the' incapacity' of' another' to'
fraud' if' you' are' doing' litigation.' However' it' is' still' better' to' rely' on' absolute' annul'the'contract."
simulation' to' characterize' the' contract' of' fraud' to' have' more' wiggle' room' for' '
maneuver'to'get'payment,'which'is'your'objective.' Let’s'say,'I'enter'into'a'contract'with'a'minor'for'the'sale'of'a'PS4,'which'would'
' be'a'voidable'contract.'I'cannot'use'the'incapacity'of'the'other'party'as'a'ground'
VOIDABLE"CONTRACTS' for'annulment.'The'person'who'is'the'source'of'the'vice'of'consent'cannot'allege'
So' let’s' go' now' to' voidable' contracts.' Somehow' we' discussed' this' concept' of' the'same'thing'otherwise'that'party'would'benefit'from'his'own'wrongdoing.'
voidable' contract' when' we' discussed' consent' and' the' vices' of' consent,' '
specifically'fraud,'mistake,'force,'intimidation,'violence,'and'undue'influence.'A' You'can'see'that'the'one'who'will'file'is'a'contracting'party.'A'third'party'may'
contract'is'voidable'due'to'defective'consent.'' file' pursuant' to' an' accion$ suborgatoria,' when' a' creditor' exercises' the' rights' of' a'
' debtor'for'the'purpose'of'collecting'payment.'So'accion$suborgatoria'by'a'creditor'
So'if'you'look'at'a'rescissible'contract,'it’s'valid,'and'you'define'a'valid'contract' of'the'injured'party.'A'third'party'may'file'for'annulment'on'behalf'of'the'injured'
when' you' have' all' the' essential' elements:' consent' of' the' parties,' object,' and' party.'
cause.' In' a' rescissible' contract,' the' only' problem' is' that' there" is" lesion" or" '
economic" prejudice" characterized" by" law" as" rendering" the" contract" as" You'also'learned'when'we'discussed'mistake'and'fraud.'
rescissible.'' '
' Q:""When" can" a" party" use/claim" mistake" or" fraud" as" a" ground" for" annulling" a"
contract?""
"

REMEMBER:"
A' rescissible' contract' is' complete' in' all' the' requisite' elements' of' a' contract,' A:'' The'party'can'claim'mistake'or'fraud'as'ground'for'annulment'only'if'he'or'
but' lesion' or' economic$ prejudice,' as' characterized' by' law' (in' ART." 1381f1382),' she' is' in' no' position' to' know' the' facts' by' the' exercise' of' due' diligence.'
renders'the'contract'as'rescissible.' Meaning' he' could' not' have' known' the' true' state' of' facts.' If' that' party' is'
'
somehow'or'somehow'has'access'to'the'true'state'of'facts'by'the'exercise'of'
'
due'diligence,'a'claim'of'a'vice'of'consent'based'on'mistake'or'fraud'will'not'
In' a' voidable' contract,' you' have' a' defective' element,' specifically' the' consent' of'
be'available.'"
the'parties.'The'defect'is'either'due'to'legal'incapacity,'for'example'minority'or'
"
consent' vitiated' by' mistake,' violence,' intimidation,' undue' influence,' or' fraud.'
" Why?'Because'when'you'speak'of'mistake'or'fraud'as'a'vice'of'consent,'the'
Those'are'the'two'instances'when'you'will'have'a'voidable'contract.'A'voidable'
premise' is' lack' of' information.' If' you' have' access' to' the' information' by' the'
contract'is'valid'but'is'rendered'voidable.'It'is'valid'until'annulled.'

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exercise' of' due' diligence,' then' you' cannot' claim' that' vice' of' consent.' Your'
negligence' would' be' inexcusable' because' you' could' have' exercised' due'
diligence' and' you' would' have' known' the' true' state' of' facts.' Remember' the'
case'of'you'buying'a'car,'on'its'face'you'would'know'if'it’s'a'different'car'so'
there'could'be'no'mistake'or'fraud.'An'ocular'inspection'would'have'readily'
shown' the' true' state' of' the' property' being' sold.' In' this' case' in' a' proper'
context'can'be'seen'as'a'form'of'inexcusable'negligence'on'the'party'claiming'
mistake'or'fraud'as'a'vice'of'consent."
' JSP:'So'agents'sold'them'airline'tickets,'what'caused'them'to'buy'the'tickets?'
Let’s' say,' you' are' a' buyer' of' a' piece' of' property.' If' you' are' the' buyer,' you' are'
placed'in'a'position'to'conduct'due'diligence'–'meaning'to'investigate.'If'you'do'
not'investigate,'you'will'not'be'in'a'position'to'annul'the'contract'based'on'a'vice'
of'consent'due'to'fraud'or'mistake.'If'a'party'has'the'opportunity'to'ascertain'the'
truth,'that'party'cannot'claim'mistake'or'fraud.'
' '
Example:' there' was' a' jeweler' who' was' buying' a' precious' gem' from' somebody'
who'just'wanted'to'sell'a'precious'gem.'The'banker/jeweler'then'claimed'mistake'
?' Supreme' Court' said' “you’re' a' banker/jeweler,' you’re' in' the' best' position' to'
know'the'facts'and'if'you'did'not'ascertain'the'facts'by'exercising'due'diligence'
then'that'is'your'fault,'you'cannot'claim'mistake.”'
' misrepresented'the'availability'of'plane'tickets.'
CASES"
THE"ROMAN"CATHOLIC"CHURCH"V."PANTE"
The' church' sold' a' 32' square' meter' lot' to' Pante.' The' lot' was' located' near' the'
church.' There' were' two' parties' near' the' location:' the' church' and' the' house' of'
Pante.'Long'story'short,'the'church'sold'the'lot'to'Pante'and'the'Church'wanted'
to' annul' the' sale' and' then' sold' it' to' the' Spouses' Rubi.' They' sold' 200' square'
meters' including' the' lot' sold' to' Pante.' You' now' have' a' valid' sale' because' the'
three' elements' where' there.' The' cause' is' the' price' of' 200' pesos/square' meter.'
known'the'fact'that'Pante'was'not'an'occupant'or'using'it'as'a'residence'but'still'
proceeded'to'sell.'Therefore'they'could'not'claim'mistake'or'fraud.'
'
SPS."VILORIA"V."CONTINENTAL"AIRLINES"
In' this' case,' the' spouses' Viloria' purchased' two' roundtrip' tickets' in' the' agency'
called' Holiday' Travel' where' they' were' attended' to' by' Margaret' Mager.' The'
tickets'were'for'a'trip'to'Newark.'
'
They'bought'airline'tickets'instead'of'an'inter?city'passenger'train,'which'was'not'
available.' Now' let’s' zero' in' on' the' relevant' matter,' the' agent' sold' them' tickets,'
there' were' issues' on' agency' where' the' SC' deemed' there' is' an' agency'
relationship;' spouses' sued' continental' because' continental' is' deemed' the'
principal'of'the'agent.'
According'to'the'spouses'they'purchased'the'tickets'because'of'what?'Something'
was' said' by' the' agent.' According' to' the' purchasers,' the' agent' said' that' there'
were' no' available' train' tickets' so' they' bought' the' plane' tickets.' Then' what'
happened?'The'husband'found'out'that'there'were'available'tickets'after'all.'The'
spouses' now' claimed' that' Mager' as' the' agent' of' continental' airlines'
'
Was"that"a"fraud"as"a"vice"of"consent?'No,'because'when'fraud'is'alleged'as'the'
cause' of' the' vice' of' consent,' the' burden' of' proof' is' on' the' one' claiming' the'
existence' of' fraud.' Except' in' cases' where' the' burden' of' proof' shifts' when' the'
party' claims' fraud' and' that' party' did' not' understand' the' language' of' the'
contract'or'was'illiterate.'In'this'case,'the'one'who'alleged'fraud'should'prove'it.''
'
"

GENERAL"RULE:'When'fraud'is'alleged'as'the'vice'of'consent,'the'burden'of'
Consent'of'both'parties.'Object'was'the'lot.' proof'is'the'one'claiming'the'existence'of'fraud.'
' '
It' was' a' valid' sale' but' the' church' was' claiming' a' defect' in' the' contract.' They' EXCEPTION:' When' one' party' claims' fraud' and' that' same' party' did' not'
were' claiming' that' their' consent' was' vitiated' by' mistake' and' fraud.' They' only' understand'the'language'of'the'contract,'or'was'illiterate,'the'burden'shifts'to'
sold'lots'to'actual'occupants'and'they'found'out'that'Pante'was'not'an'occupant' the' other' party' to' prove' that' the' contract' has' been' fully' explained' to' [the'
of'the'lot.'' party'alleging'fraud'who'did'not'understand'the'language'of'the'contract/was'
' illiterate]'(See$Art.'1332).'
The' Supreme' Court' said' that' there' was' no' mistake' because' the' Church' could' '

'
have'easily'checked'whether'or'not'Pante'was'an'actual'occupant.'The'Court'also'
The' court' said' that' the' Vilorias' failed' to' establish' fraud' because' the' only' proof'
said'that'they'could'not'argue'occupancy'as'a'ground'because'both'parties'were'
they'have'is'the'testimony'of'the'husband.'When'you'establish'fraud,'you'need'
not' occupants,' if' they' could' not' sell' to' Pante,' they' could' not' sell' to' the' Rubis.'
more' than' that.' They' should' have' shown' a' certification' from' AMTRAK' saying'
Clearly,'it'is'not'a'necessary'condition.'There'was'also'a'condition'that'it'should'
that'in'this'day,'there'were'available'tickets.'
be' used' as' a' residence,' but' the' Court' said' that' the' lot' is' not' conducive' for' a'
'
residence'because'it'is'too'small.'In'this'case,'the'Church'should'and'could'have'

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Moreover,'the'spouses'ratified'the'contract'because'the'airline'gave'them'tickets' object' thereof' is' lost' due' to' fraud' or' fault' of' the' person' who' has' the' right' to'
and'allowed'the'spouses'to'rebook'their'tickets'because'refund'cannot'be'done.' institute'the'proceedings.'
They'now'wanted'to'rebook'for'another'person.'Airline'said'no,'it'should'be'for' '
the' same' persons.' That' started' the' case.' There' was' ratification' because' the' What'if'the'basis'of'voidability'is'minority?'Will'the'minor'be'allowed'to'file'for'
spouses' made' an' implied' ratification' inferred' from' the' act' of' claiming' of' annulment'if'he'lost'the'property?'Yes,'because'if'a'minor'enters'into'a'contract,'
replacing' the' tickets,' which' was' a' benefit' in' the' contract.' When' you' accept' a' the' minor' is' only' obliged' to' restore' only' if' he' still' has' the' property' or' he' is'
benefit' under' a' supposedly' voidable' contract' that' is' ratification.' The'' benefited' from' the' property' through' a' judicious' use' thereof.' Even' if' the' minor'
SC'said'that'assuming'there'is'fraud,'there'is'ratification.'You'may'sit'down.' lost' the' property,' he' can' still' sue' and' get' back' the' price' or' damages' without'
' having'to'return'the'property.'
What'is'the'period'for'filing'of'an'action'for'annulment?'Four'years,'but'you'have' '
to' know' the' reckoning' point.' If' it' is' based' on' intimidation,' violence,' or' undue' So,' what' happens' if' the' loss' is' not' due' to' the' fault' of' the' one' who' is' filing' for'
influence,' the' period' begins' from' the' cessation' of' the' vice' of' consent.' If' it' is' annulment?'Let’s'say'it'is'due'to'a'fortuitous'event.'I'think'he'would'return'the'
mistake'or'fraud,'the'period'begins'from'the'day'of'discovery'of'the'mistake'or' monetary'value'of'the'thing.'
fraud,' meaning' knowledge.' If' based' on' minority' or' other' incapacity,' from' the' '
time'capacity'is'acquired.' After'the'proceedings,'the'court'will'decree'an'annulment.'The'court'will'say'that'
' the' contract' is' annulled' while' the' parties' return' what' they' received' from' each'
RATIFICATION'OF'VOIDABLE'CONTRACTS' other'and'the'party'at'fault'paying'damages.'If'one'party'does'not'return'what'he'
In'this'case'of'Viloria'there'was'mention'of'ratification.'Ratification'is'the'cure'of' received,' the' other' party' cannot' be' compelled' to' return.' There' is' a' reciprocal'
defective'consent.'The'parties'may'do'in'either'expressly'or'impliedly.'Impliedly' obligation'to'return.'The'parties'should'mutually'restore'what'was'received'from'
may'be'an'acceptance'of'a'benefit'under'the'contract.'Only'the'injured'party'may' the'other.'
ratify'the'voidable'contract'based'on'defective'consent.'If'it'is'based'on'incapacity' '
the'party'can'ratify'the'contract'by'acquiring'capacity.'A'minor'by'reaching'the' If' the' party' who' is' the' offender' cannot' return' due' to' a' loss,' he' shall' return' the'
age' of' majority.' An' incapacitated' person' can' ratify' a' contract' through' a' legal' fruits' received' and' the' value' of' the' thing' at' the' time' of' the' loss' with' interest.'
representative.' Take'note'of'that.'So'the'first'rule'is'that'if'there'is'a'loss'of'the'thing'through'no'
' fault'of'either'party,'then'there'could'be'no'annulment.'If'the'party'who'lost'the'
Ratification' may' be' express' or' implied.' The' premise' is' that' the' party' ratifying' thing'is'the'plaintiff,'he'shall'return'the'value'of'the'thing.'If'the'party'who'lost'
must'be'aware'that'there'is'defective'consent.'You'cannot'ratify'something'you' the'thing'is'the'defendant,'he'has'to'return'the'value'of'the'thing'plus'interest.'
do'not'know.'The'moment'you'are'in'a'position'to'know'or'you'know,'that'party' '
can' ratify' the' contract.' The' ratification' is' reckoned' from' the' time' of' the' MANZANO"V."LAZARO"
constitution'of'the'contract,'from'the'time'of'perfection,'as'if'there'was'no'defect' In' this' case,' Manzano' engaged' a' campaign' guy' during' his' run' for' vice?mayor.'
at'all.' They'had'a'contract'for'services'where'for'three'months'consultant'would'render'
' services' as' a' campaign' officer' of' sorts' with' specific' obligations.' In' exchange'
If' there' is' annulment,' the' contract' is' set' aside,' there' is' no' contract.' What' is' the' Lazaro'would'receive'a'fixed'fee'every'month'and'a'bonus'in'case'Manzano'won,'
consequence?'Let’s'say'you'have'a'contract'of'sale.'The'seller'is'selling'property' and'he'did.''
for'a'price'to'a'buyer'who'is'a'minor.'In'this'case'you'have'a'voidable'contract' '
because' of' minority.' Who' can' file' the' action?' The' minor' through' a' legal' After'the'election,'Manzano'wanted'to'renege'on'the'obligation.'He'did'not'want'
representative'or'upon'reaching'age'of'majority'within'four'years.' to' pay' and' claims' that' the' consultant' misrepresented' himself' as' equipped' and'
' with' experience' to' act' as' a' campaign' officer.' This' is' just' an' excuse' not' to' pay'
If' you' change' the' example,' instead' of' a' minor' you' have' a' vice' of' consent.' The' because'he'won'and'among'others'through'the'help'of'Lazaro.'This'would'not'be'
buyer'is'now'in'a'position'to'file'for'annulment'but'he'must'be'in'a'position'to' the'case'of'misrepresentation'or'fraud.'And'even'if'there'was'a'vice'of'consent,'
return' what' he' received' because' there' is' a' requirement' of' mutual' restitution.' If' there' was' ratification' because' Manzano' obtained' the' benefit' of' the' contract.' He'
the'buyer'is'not'in'a'position'to'return'the'property,'he'cannot'file'for'annulment.' could'have'annulled'the'contract'from'the'moment'he'found'out'there'was'a'vice'
An' action' for' annulment' of' a' contract' is' extinguished' when' the' thing' or' the' of'consent.'After'learning'all'those'things,'let’s'take'this'case:'
'
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Example'of'the'third'type'of'unenforceable'contracts:'let’s'say'you'have'a'sale'of'
"

ILLUSTRATION" 1:" ONE" WHO" CAUSED" THE" MISTAKE" CANNOT" CLAIM"

ANNULMENT"(ERRONEOUS"DECISION"OF"THE"SC15 )" concert' tickets' by' minors' who' entered' into' a' contract' of' sale.' The' Seller' and'
" Buyer' are' both' minors.' This' is' unenforceable' because' both' are' minors.' This'
however' will' become' a' voidable' contract' if' one' party' through' a' legal'
representative' makes' a' demand' because' it' is' no' longer' between' two'
incapacitated'persons.'
'
" Example'of'the'second'category'–'unauthorized'agents:'Person'A'is'an'agent'of'
' Principal.' This' agent' is' given' a' general' power' of' attorney' for' acts' of'
There'is'a'seller'and'a'buyer,'seller'is'a'real'estate'developer.'S'had'developed' administration' and' no' power' to' perform' acts' of' disposition.' Or' even,' A' has' no'
a' parcel' of' land' and' divided' it' into' six' lots.' S' entered' into' a' contract' of' sale' authorization'at'all'from'P'and'then'sold'a'piece'of'P’s'property'to'X,'X'paid'the'
with' buyer' and' sold' lot' number' 4' thinking' it' was' lot' number' 3.' Seller' was' price.'There'is'no'authorization'from'P'and'there'is'no'act'or'document'of'P'that'
actually'selling'lot'number'3'but'the'contract'had'lot'number'4.'Lot'number'4' could' have' lead' X' to' believe' that' A' has' authorization' to' sell' the' property.' This'
had'an'improvement,'there'was'a'house.'After'the'Contract'of'Sale,'B'visited' will'be'unenforceable.'However'X'can'go'after'A'based'on'rules'of'agency.'
the'property'and'wanted'to'get'the'property,'by'that'time'S'realized'that'he' '
sold' the' wrong' lot' because' it' was' earmarked' for' somebody' else.' So' S' said' I' SPS."ALCANTARA"V."NIDO"
could'give'you'another'lot'but'not'4.'B'said'no'they'had'a'contract.'S'said'that' Where' the' agent' did' not' have' authority' from' the' owner' of' a' lot' and' the' agent'
he' wanted' the' contract' annulled' because' there' was' a' mistake,' I' would' not' sold' the' property' to' another' person' for' a' price.' The' contract' is' a' void' contract'
have'entered'into'this'contract'were'it'not'for'the'mistake'made.' because'there'is'a'special'rule'of'agency.'An'authority'to'sell'real'property'should'
' be' in' writing.' If' there' is' none,' then' the' contract' is' void.' Normally' this' contract'
Seller' said' that' it' was' an' honest' mistake.' The' SC' said' the' contract' can' be' would'be'unenforceable,'but'this'rule'on'agency'made'this'contract'void'because'
annulled'because'it'was'an'honest'mistake'committed'by'the'seller'and'so'the' of'the'lack'of'specific'authorization.'
seller' could' secure' an' annulment.' This' is' wrong' because' only' the' injured' '
party' should' be' able' to' file.' Here,' B' is' the' injured' party.' Another' rule,' the' Let’s' take' another' case,' let’s' say' X' died,' X' has' a' spouse' and' one' child.' X' died'
seller'was'in'the'best'position'to'know'the'facts'as'a'real'estate'developer'so' intestate'and'has'this'pool'of'assets,'who'will'own'them?'If'day'2,'X'died'but'on'
he' cannot' claim' mistake.' But' we' want' the' result' of' mutual' restitution.' day' 1' the' child' sold' his' share' in' the' estate' to' Y.' The' sale' is' void' because' you'
Something' would' be' wrong' if' we' allow' B' to' get' a' lot' with' improvements' cannot'sell'future'inheritance.'
when' he' was' only' buying' an' empty' lot.' You' could' use' just' enrichment' as' '
your'best'shot.'You'could'also'use'absence'of'agreement'on'the'object'of'the' If'on'day'1'X'died,'at'that'point'succession'will'open,'there'will'be'transfer'of'the'
contract.' Therefore' this' contract' will' be' void' and' we' would' have' mutual' assets'of'X'by'operation'of'law.'His'spouse'will'own'½'as'her'conjugal'share.'The'
restitution' without' wrongly' applying' the' rules.' Here,' the' SC' forgot' the' rule' share'of'the'other'half'will'be'¼'for'the'spouse'and'¼'for'the'child.'Let’s'say'after'
that'the'one'who'caused'the'mistake'cannot'claim'annulment.' the' death,' spouse' sold' the' property' to' buyer' and' buyer' paid' the' price.' Spouse'
'

' sold'the'entire'property.''
UNENFORCEABLE"CONTRACTS' '
' What'is'the'status'of'the'sale?''
'
"

THREE"KINDS"OF"UNENFORCEABLE"CONTRACTS:"
1. Those'covered'by'the'statutes'of'frauds;' It'is'partly'valid'and'partly'something'else.'¾'is'valid'because'the'spouse'owns'it.'
With'respect'to'the'child,'if'the'child'is'of'legal'age,'the'status'of'the'contract'is'
2. Those'entered'by'unauthorized'agents;'and'
unenforceable'because'he'did'not'authorize'the'spouse'to'sell'the'¼'following'the'
3. Those'entered'by'parties'that'are'both'incapacitated.'
'
case'of'Alcantara'and'it'will'be'void.'
' '
If' the' child' is' a' minor,' then' in' recissible' contracts' involving' representation' of' a'
ward' if' the' ward' suffered' a' lesion' of' more' than' ¼' of' the' property' and' the'
'''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' '
15 'Based'on'a'real'case:'Sps.'Theis'v.'CA,'G.R.'No.'126013,'February'12,'1997.' contract'is'an'act'of'dominion'–'and'if'there'is'no'approval'of'the'court'then'this'
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is' void.' Court' approval' is' a' requirement.' You' could' say' that' this' is' an'
unenforceable'contract'but'it'is'more'beneficial'to'the'one'who'wants'to'set'aside'
the' contract' if' the' contract' is' void.' This' is' because' if' you' want' to' set' aside' the'
contract,'you'would'want'it'to'not'be'susceptible'to'ratification'by'the'minor.'
' '
Let’s' now' go' to' the' first' category' of' unenforceable' contracts:' the' contracts'
covered'by'the'Statute'of'Frauds.'What'is'the'Statute'of'Frauds?'It'is'a'set'of'laws'
that' require' contracts' to' be' in' writing' to' be' enforceable' and' to' prevent' and' not'
encourage' fraud.' This' is' a' law' requiring' form' for' enforceability.' There' are'
contracts'are:"
' the'price.'All'verbal'agreements.'B'on'day'2'went'to'S'and'says'that'they'should'
"
STATUTE"OF"FRAUDS"
1. Agreement'that'will'be'performed'after'one'year'from'the'making'
2. Special' promise' to' answer' for' the' debt,' default,' or' miscarriage' of'
another'(surety/guarantee)'
3. Agreement'made'in'consideration'of'a'marriage'other'than'a'mutual'
promise'to'marry'(The$family$code$provides$that$the$prenup$must$follow$
a$certain$form$otherwise$it$is$invalid.)'
4. Sale'of'personal'property'at'a'price'not'less'than'500'pesos'
5. An' agreement' for' the' leasing' for' a' longer' period' than' one' year,' or'
for'the'sale'of'real'property'or'of'an'interest'therein'(this'is'the'usual'
case'of'a'Statute'of'Frauds'issue'–'the'sale'of'real'property)'
6. A' representation' as' to' the' credit' of' a' third' person' (must' be' in'
writing,'if'the'representation'is'verbal'it'is'unenforceable)'
'
'
It' can' be' any' note' or' memorandum' signed' by' both' of' the' parties.' The' note' or'
memorandum' should' contain' at' least' the' basic' elements' of' the' contract' –' the'
object,' cause,' consent' of' the' properties' (signature).' Why' is' there' a' statute' of'
frauds?'Because'of'the'recognition'of'the'inability'of'mortals'to'recall,'the'down'
the' line' reason' is' that' you' cannot' rely' on' the' memory' of' mortals' because' they'
tend'to'fail.'There'must'be'written'documentation'to'prevent'the'perpetration'of'
fraud.'
'
If'you'have'a'childhood,'you'would'remember'the'story'of'Alibaba'and'the'Forty'
Thieves.'Alibaba'learned'of'the'password'“open?sesame”'of'the'thieves’'cave.'He'
got' rich' by' stealing' from' there.' His' brother' Kasim' became' envious' so' Alibaba'
shared'the'way'he'acquired'his'riches'to'Kasim.'But'Kasim'could'not'memorize'
so'he'went'to'the'cave'and'managed'to'open'the'cave.'He'was'overwhelmed'by'
the'riches'and'he'gathered'them.'Then'came'the'40'thieves'and'Kasim'forgot'the'
password.' Lesson' of' the' story' is:' “Write' it' down.”' So' if' he' did,' then' we' would'
not'have'heard'of'this'story.'
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That' is' the' purpose' behind' the' Statute' of' Frauds.' You' cannot' rely' on' memory.'
Certain' contracts' require' being' in' writing' to' prove' that' it' is' not' fraudulent' and'
that'frauds'can'be'prevented.'
Remember'that'anything'that'is'in'a'form'of'writing'–'email,'text,'Facebook'post,'
script'–'is'acceptable.'The'important'element'is'that'it'is'in'writing.'
'
Let’s'go'to'the'cases.'An'example'is'a'verbal'contract'of'sale.'S'sells'house'and'lot'
to'B.'B'is'to'pay'the'price.'This'is'day'1.'Conveyance'will'be'done'day'3'as'well'as'
document' their' agreement.' Seller' said' that' he' doesn’t' want' to.' B' sued' S' to'
compel' the' execution' of' the' proper' documentation' for' the' conveyance' of' the'
property.' Can' that' be' done?' NO' because' the' form' is' a' requirement' for' the'
enforceability.'There'is'no'way'for'B'to'compel'S'to'execute'the'proper'form.'If'B'
sued'instead'for'specific'performance'on'day'3,'can'B'win?'Generally'no'because'
the'contract'is'unenforceable,'however'in'the'trial'if'there'is'a'failure'of'S'to'object'
to'evidence'proving'the'transaction,'then'that'will'be'considered'a'waiver.'
'
If' the' contract' is' completely' verbal' and' there' is' no' execution' yet,' it' is'
unenforceable.'But'in'the'case'of'Orduna,'if'the'buyer'paid'a'down'payment'in'a'
verbal' contract.' Seller' cannot' claim' unenforceability' because' the' Statute' of'
Frauds' does' not' apply' to' partially' executed' contracts.' The' reason' for' that' is'
because' the' Statute' of' Frauds' is' intended' to' prevent' frauds.' S' would' be'
defrauding'B'of'his'down'payment'or'earnest'money.'
'
If' you' are' B' and' you' have' a' verbal' contract,' what' do' you' do?' Generally' if' you'
pay' something' of' significance,' then' that' would' be' partial' execution.' You' either'
partially'execute'or'if'you'are'S,'you'can'transfer'the'property'so'you'can'get'the'
price.' Or' you' can' have' written' documentation' even' in' a' napkin' as' long' as' it'
contains'all'the'essential'elements.'
'
Notarization$is$merely$for$convenience.'It'is'not'a'requirement'for'the'validity'of'the'
contract.'Even'if'it'is'written'on'a'napkin,'it'can'be'used'to'compel'the'other'to'
fulfill'the'contract.'There'is'only'writing,'there'is'no'requirement'of'permanence'–'
you'can'write'it'on'the'board,'you'can'carve'it'on'a'tree'it'doesn’t'matter.'
'
Now' take' note' that' the' requirement' is' that' it' is' a' note' or' memorandum.' In' the'
law,'it'must'be'an'instrument,'note,'or'memorandum'and'signed'by'both'of'the'
contracting' parties.' That' is' the' only' thing' required' by' the' Statute' of' Frauds.' It'
does'not'require'acknowledgement'in'front'of'a'notary'public.'
'
How' do' you' test' if' a' note,' memorandum,' or' document' satisfies' the' statute' of'
fraud?' You' can' gather' that' from' the' case' of' Torcuator' v.' Bernabe.' There' were'
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two'documents'presented'there'to'prove'that'there'was'a'contract'of'sale.'There'
was'a'special'power'of'attorney'that'dealt'with'the'power'to'construct'a'house'on'
the'lot.'The'SC'said'that'it'is'not'the'written'memorandum'contemplated'by'law'
because' it' did' not' indicate' the' essential' terms' of' the' contract.' There' was' also' a'
summary' agreement' and' the' objection' there' was' that' the' summary' agreement'
was' vague' and' it' does' not' suffice' the' documentation' required' by' the' statute' of'
frauds.'
'
The' document' must' state' at' least' the' two' other' elements' of' the' contract' at' the'
very' least.' The' Object,' the' Cause,' and' the' parties' must' sign' it' or' at' least' show'
that' the' parties' consent' to' it.' That' is' the' meaning' of' a' written' note' or'
memorandum.'It'should'indicate'the'essential'terms'of'the'contract.'
'
ROSENCOR"V."INQUING"
Take'note'of'the'statute'of'frauds,'it'covers'sale'of'real'property'and'it'must'be'
executory' and' not' partially' executed.' In' Rosencor,' there' is' a' contract' of' lease'
with'a'verbal'right'of'first'refusal.'Is'the'verbal'right'of'first'refusal'enforceable?'
YES'it'is'enforceable.'SC'said'that'not'all'transactions'involving'real'estate'should'
be'in'writing.'The'statute'of'frauds'mentions'specific'contracts,'if'it’s'not'one'of'
those' contracts' then' the' written' requirement' will' not' apply' for' enforceability.'
The'right'of'first'refusal'is'not'yet'a'sale'so'it'can'be'verbal.'
'
Let’s'tie'this'up.'Let’s'say'there'are'a'creditor'(L)'and'a'borrower'(B)'who'owes'
10M.' B' defaulted,' L' sued' B' for' specific' performance.' They' enter' into' a'
compromise'whereby'B'will'just'convey'house'and'lot'instead'of'the'10M'but'it'is'
a'verbal'agreement.'Is'this'enforceable?'NO'because'it'is'verbal.'This'is'a'dacion'
en'pago,'it'is'a'kind'of'sale,'therefore'it'should'comply'with'the'statue'of'frauds'
and'so'it'should'be'in'writing.'
'
Next'meeting,'we'will'continue'with'unenforceable'contracts.'
'
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OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
TUESDAY,'24'FEBRUARY'2015'
'

REVIEW:"UNENFORCEABLE"CONTRACTS"(ART."1403"f"1408)" Clear'on'unauthorized'contracts?''
Again,'when'you'have'an'unenforceable'contract,'it’s'valid.'What'do'you'mean' '
by' valid?' Again' and' again' I’ve' explained' to' you' what' it' means' by' a' valid' 2. BOTH"PARTIES"ARE"INCAPACITATED'
contract.'You'have'a'valid'contract'when'you'have'all'the'requisites,'the'essential' And' then' you' have' the' unenforceable' contracts' because' both' parties' are'
elements'of'a'contract.'Consent'of'the'parties,'cause,'and'object.'' incapacitated'with'due'consent.'As'I'explained'last'time,'it'could'happen'that,'
' you'can'have'this'kind'of'contract'and'one'party'ratifies'the'contract,'and'you'
Now,' in' an' unenforceable' contract,' you' have' all' those' essential' elements.' will'have'a'voidable'contract.''
However,'there'is'a'problem'–'not'only'with'respect'to'form,'but'with'respect'to' '
authority'and'capacity.'' 3. STATUTE"OF"FRAUDS'
' And' then' you' have' the' Statute' of' Frauds.' The' Statute' of' Frauds' provides' a'
formal' requirement' for' certain' contracts.' Memorize' those,' those' are'
"

THREE"KINDS"OF"UNENFORCEABLE"CONTRACTS:"
1. Unauthorized'contracts;' important.'I'will'not'go'through'them'again.''
2. Where'both'parties'are'incapacitated;'and' '
3. Not'in'compliance'with'the'Statute'of'Frauds' So'in'this'case,'in'relation'with'that'of'marriage'settlement'or'pre?nup,'if'it’s'
'
not' in' the' proper' form,' what’s' the' status?' Void;' it' is' not' just' unenforceable.'
'
Now.'Take'note'of'these'contracts'covered'by'the'Statute'of'Frauds.'You'have'
1. UNAUTHORIZED" CONTRACTS' —' whereby' a' party' enters' into' the'
to'know'the'underlying'policy'of'the'Statute'of'Frauds.'The'reason'for'that'is,'
contract,' as' an' agent,' but' without' appropriate' authority' from' the' principal.'
or'the'purpose'is'to'prevent'fraud'and'preclude'perjury.'How'does'it'prevent'
That'will'be'unenforceable.'We’ve'gathered'that'from'early'on,'Article'1317,'
fraud?' If' there' is' written' documentation' of' a' contract,' there' will' be' less'
and'there’s'the'discussion'that'contracts'will'protect'only,'or'will'bind'only,'
reliance'on'memory.'The'law'assumes'that'if'it’s'in'writing,'it'is'more'reliable.'
the'parties.'A'contract'entered'into'without'authority'by'one'party'in'the'act'
That’s'why'it’s'deemed'to'be'enforceable'in'this'context.'Second,'if'it’s'not'in'
of'another'shall'be'unenforceable.'That’s'the'unauthorized'contract.''
writing,' there' is' a' tendency' of' an' interested' party' to' perjure' himself' or'
'
herself,' meaning' to' lie' under' oath' to' establish' a' certain' claim' or' cause' of'
And' you' saw' a' specific' case' in' the' case' of' Alcantara.' Ordinarily,' when' a'
action.'That’s'the'consequence'that'the'Statute'of'Frauds'seeks'to'avoid.''
party' enters' a' contract' in' representation,' supposedly' of' another,' but' in'
'
reality,' there' is' no' authority' for' the' purpose,' then' the' contract' will' be'
Now,'take'note'that'the'Statute'of'Frauds,'because'of'the'underlying'policy,'
unenforceable.' However,' you’ll' have' to' be' aware' that' there' are' certain'
does'not'apply'to'executed'contracts.''I'explained'this'last'time'–'because'if'
special' laws' or' special' legal' provisions,' classifying' those' contracts' as' void,'
you'apply'the'Statute'of'Frauds,'to'executed'or'partially'executed'contracts,'
not'just'unenforceable.''
then'you'will'actually'promote'fraud.''
'
'
We'found'that'out'in'the'case'of'Alcantara.'The'authorization'required'for'the'
For'example,'you'have'a'verbal'contract'of'sale'of'real'property'?'that'will'be'
sale' of' real' property' should' be' in' writing.' If' it’s' not' in' writing' the' contract'
unenforceable'under'the'Statute'of'Frauds.''
shall'be'void.'You'also'have'that'in'the'Family'Code.'Like'that'of'a'marriage'
'
settlement'–'if'it’s'not'in'writing…'well,'that’s'more'of'form.'Or'in'case'of'a'
But'let’s'say,'the'buyer'paid'a'down'payment,'25%'of'the'price.'That'will'be'
contract' entered' into' by' a' guardian' without' appropriate' legal' authority.' Of'
taken'out'of'the'Statute'of'Frauds.'Because'of'you'do'not'take'that'out'of'the'
course' there' is' a' difference' in' jurisprudence.' There' is' jurisprudence' saying'
Statute' of' Frauds,' the' seller' in' that' example' will' benefit' from' the' Statute' of'
that' if' a' parent' enters' into' a' contract' disposing' a' property' of' a' minor' child,'
Frauds' and' actually' defraud' the' buyer' by' claiming' unenforceability' of' the'
that' contract' shall' be' unenforceable.' However,' on' the' other' hand,' there' is'
contract.' That’s' the' reason' why' in,' under' the' Statute' of' Frauds,' a' contract'
also' authority' that' if' there’s' no' court' approval,' the' same' contract' shall' be'
ordinarily'unenforceable'under'the'Statute'of'Frauds'will'be'taken'out'of'the'
void.''
Statute'of'Frauds'once'there'is'partial'execution.''
'

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' seller' to' acknowledge' the' document' before' the' notary' public' so' it' could' be'
RATIFICATION' registered'in'the'appropriate'registry'place.'Clear?'So'you'have'to'go'back'to'our'
If' there’s' a' defect' in' the' form,' meaning' the' contract' is' not' aligned' with' the' discussion'that'that'remedy'applies'only'if'the'contract'is'valid'and'enforceable.''
Statute'of'Frauds,'how'can'you'cure'it?'Ratification.' '
' So'that’s'a'clear'note'or'memorandum'of'the'contract.'That’s'a'written'evidence'
How' can' you' ratify?' You' can' reduce' it' into' writing.' Of' course' there' can' be' of' a' contract.' But' short' of' that,' what' will' constitute' a' written' note' or'
implied'ratification.'A'party'accepting'a'benefit'under'the'contract'—'that'can' memorandum' of' the' contract?' The' first' requirement' is' the' written' note' or'
mean' ratification,' and' it' will' also' be,' what,' aside' from' ratification,' it' will' memorandum,'or'any'written'documentation,'should'be'subscribed'by'the'party'
amount'to?'[Class:'Waiver?]'No,"partial"performance.'So'if'partially'executed' against'whom'the'contract'is'sought'to'be'enforced.'Meaning,'the'party'sought'to'
and' they’ll' benefit' from' the' contract,' there’s' partial' execution.' But' that’s' be' held' liable' under' the' contract.' So' what' would' that' be?' Meaning' that' party'
taken'out'of'the'Statute'of'Frauds.''Another'one'is,'in'case'there'is'an'action' should'sign'that'note'or'memorandum'or'any'written'record.'Now,'what'should'
based'on'an'unenforceable'contract.'And'a'party'does'not'timely'object'to'the' be'there?'As'I'said,'because'you’re'dealing'with'a'contract,'you'need'at'least'the'
presentation' of' evidence' to' prove' the' unenforceable' contract.' That' will' two'other'elements,'cause'and'the'object.''
amount'to'a'waiver.'' '
'
"

What"will"constitute"a"written"note"or"memorandum:'
Clear?'' 1. It' should' be' subscribed' by' the' party' against' whom' the' contract' is'
' sought'to'be'enforced;'and''
SHOWING'COMPLIANCE'WITH'THE'STATUE'OF'FRAUDS' 2. It'should'contain'at'least'the'two'elements'—'cause'and'object.'
Of'course,'we'had'that'case'on'how'we'show'compliance'with'the'Statute'of' ' ''

'
Frauds.'The'best'case'will'be,'if'you'have'a'written'contract.'Example'will'be,'
JSP:" What' can' be' an' example?' Maybe…' Hmm.' Accountants!' What' record' can'
a'Deed'of'Absolute'Sale,'signed'by'the'parties'and'with'a'specific'description'
that'be?'That’s'something'that'is'signed'by'a'party.'Nothing?'Any'record?''
of'the'object'and…''In'fact,'no'need'for'the'statement'of'the'price.'Why?''
A:'' Acknowledgement'receipt.'
'
JSP:"" Acknowledgement' receipt' of' what?' Acknowledgement' receipt.' Meaning'
So' you' have' a' contract,' reduced' in' writing,' stating' the' object,' a' property'
there’s' something' paid.' Therefore,' it’s' partially' executed.' So' it’s' not' the'
covered' by' transfer' certificate' of' title,' the' parties' signed' the' contract,' but'
example.'Maybe…'what?''
there’s'no'statement'of'the'price.'The'contract'will'be'valid'because?'Cause'is'
A:'' Vouchers.'
presumed.'The'existence'of'a'valid'and'lawful'cause'is'presumed.'That’s'why'
JSP:"" Yes,'somebody'signed'by'the'other'party,'indicating'at'least'the'two'items.'
you'will'see'in'other'contracts,'especially'people'who'want'to'hide'the'actual'
Or' sometimes' they' even' have,' let’s' say,' a' purchase' order,' and' then' the'
consideration,' they' would' just' say,' “for' value' receipt.”' Let’s' say' a' sale' of' a'
party'will'sign.'That'can'be'a'note'or'memorandum.'Or'any'writing'or'any'
car,'it'would'just'say'for'value'receipt'and'so'they'won’t'have'to'disclose'the'
written'record'for'that'matter.'What’s'important'is'the'party'gets'hold'the'
actual'price'paid.''
contract'sought'to'be'enforced'signed'that'instrument.'
'
" '
REMEMBER:" That’s'why'in'the'case'of'that'Ayala'Subdivision.'There'were'two'contracts'there.'
Cause"is"presumed."The'existence'of'a'valid'and'lawful'cause'is'presumed.'' Two' documents.' Both' did' not' comply' with' the' requirements' of' the' Statute' of'
'

' Frauds.' First,' there' was' a' special' power' of' attorney' to' construct' –' so' nothing'
So,' now' going' back,' let’s' say' we' have' a' contract,' and' it' sets:' “seller' and' buyer' about'the'sale.'And'then'there’s'an'ambiguous'memorandum'of'the'transaction.'
enter' this' deed' of' absolute' sale' for' the' sale' by' seller' to' the' buyer' of' a' parcel' of' Therefore'the'Court'said'that'that’s'not'sufficient.'Clear?''
land'covered'by'TCT'No.'1'for'X'amount.”'This'is'already'a'contract.'The'parties' '
signed'that'contract.'It’s'not'taken'out'of'the'Statute'of'Frauds.'Take'note,'it'need' And'then'of'course'we'said'that'the'law'requires'written'record.'And'it'should'be'
not'be'in'a'public'document.'The'only'requirement'of'Statute'of'Frauds'is'it'must' in' writing.' It' need' not' be' on' paper,' it' could' be' on' anything.' It' could' be' in' two'
be'in'writing.'So'if'it’s'already'in'writing,'it’s'now'enforceable.'Now'you'link'that' tablets'signed,'like'the'10'commandments.'Or'on'a'napkin.'Whatever.'As'long'as'
now'to'Article'1357,'the'remedy'of'a'party'to'compel'the'other'contracting'party' it' is' in' writing.' Video' recording,' there’s' no' jurisprudence,' but' if' you' go' by' the'
to'reduce'the'contract'into'proper'form.'So'the'buyer'in'that'case'can'compel'the'

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law,' it' will' not' be' sufficient.' Text' messages?' Somebody' asked' that,' right?' Yes.' I'told'you'to'remember'them,'because'if'it’s'not'a'contract'covered'by'the'Statute'
Email?'Yes.'What'else?'Questions?' of'Frauds'and'there'is'no'other'legal'provision'relating'to'fraud,'there’s'no'need'
' for'a'written'instrument.''
Q:"" Sir,"this"question"is"regarding"last"meeting’s"example."Is"a"minor"obliged" '
to"return"the"objects"involved"in"a"contract?"" You’ve' seen' that' in' that' case' of' Rosencor.' In' Rosencor,' there' was' a' contract' of'
JSP:'' What'kind'of'contract?'A'Voidable'contract?" lease,'a'written'contract'of'lease,'and'a'verbal'right'of'first'refusal.'The'court'said'
" the'right'of'first'refusal'is'valid'and'enforceable,'notwithstanding'that'it'was'only'
Q:"" Yes,"sir."He"is"not"obliged"to"return"the"object"if"he"did"not"benefit"from" a' verbal' agreement.' Because' the' Statute' of' Frauds' only' covers' sale' of' real'
it."My"question"is,"sir,"if"the"property"or"that"thing"remains"with"him—"" property,'not'rights'of'first'refusal,'or'any'other'transaction'not'amounting'to'a'
JSP:'' Yes,' those' are' the' two' exceptions.' Either' he' or' she' benefited' from' the' sale'of'real'property.'So'if'it’s'a'transaction'involving'real'property,'and'it'doesn’t'
contract,'or'he'or'she'still'has'the'property.'If'she'still'has,'then'she'has'to' involve'a'sale,'that'will'not'be'covered'by'the'Statute'of'Frauds.''
return.' Remember,' when' we' discussed' this,' my' example' is…' [Let’s' say,' '
somebody'received]…'A'minor'sold'a'property'and'got'cash.'Is'the'minor' By'the'way,'if'you'read'Rosencor,'there'was'a'discussion'there.'If'there’s'a'sale'in'
obliged' to' return' the' cash?' Yes,' if' the' minor' received' a' benefit.' Let’s' say' violation' of' the' right' of' first' refusal,' what' will' be' the' status' of' that' sale?' Take'
used' it' for' education,' or' food,' medicine.' What' if' minor' did' not' use' it' for' note:'it'is'rescissible.''
any'necessity'but'rather'kept'the'money?'There'will'still'be'an'obligation'to' '
return.' There' is' no' obligation' to' return' if' the' minor' in' our' example' could'
"

ILLUSTRATION"1:"RIGHT"OF"FIRST"REFUSAL"(RESCISSIBLE)"
not'come'up'with'the'money'because'the'minor'gambled'it'away.'So,'those'
are' the' alternatives:' either' the' minor' is' still' in' possession,' or' the' minor'
benefited.'"
"
Q:"" So"in"that"sense"sir,"the"minor"can"circumvent,"or"can"use,"or"like,"benefit"
from"it"by"just,"gambling"it"away…"not"benefiting"from"it"actually?"
JSP:'' Yeah!'Theoretically'that'can'be'done.'In'fact,'a'minor'can'do'it.'A'scheming'
minor'can'enter'into'that'contract'and'receive'money,'gamble'it'away,'and'
parents'can'sue'or'recover'what'the'minor'gave'for'the'money.'"
" '
Q:"" Sir,"for"example,"what"if"the"minor"donated"the"money,"what"if"there’s"the" Let’s' say,' you' have' an' owner' (O),' who' grants' a' right' of' first' refusal,' to' X.'
transfusion" of" the" money" to" another" person," which" for" example," in" Owner'sold'the'property'subject'of'the'right'of'first'refusal'to'Y,'in'violation'
connivance"with"that"person,"“Hey"I’ll"give"you"10"million…”" of' this' right' of' first' refusal.' Remember' the' difference' between' Ang' Yu' and'
JSP:'' That’s' a' scheme' of' fraud.' If' that' person' connived' with' the' minor,' that' Equitorial.' If' let’s' say' X,' sues' to' enforce' the' right' of' refusal' –' remember,'
person’s' of' legal' age,' has' the' capacity' ?' that' person' will' be' liable,' but' not' according' to' Ang' Yu,' it' could' not' be' done,' the' remedy' will' only' be' for'
the'minor.'" damages.' Of' course,' Equitorial' was' of' a' different' opinion:' there' can' be'
" specific'performance.'
Q:"" So"sir,"it"could"be"rescinded?" '
JSP:'' Yes.' ' It’s' just' like' doing' a' crime.' Remember' there’s' a' law,' not' sure' if' it’s' Now'in'this'case,'let’s'say'X'wants'to'assail'the'sale'between'O'and'Y.'X'can'
been'repealed.'There’s'a'law'that'reduced'the'liability'of'minors'for'crimes.'' do' so' by' characterizing' this' as' a' rescissible' contract.' We' are' of' the' belief,' of'
There’re' certain' criminal' organizations' that' use' minors.' That’s' the' same' course,' that' Y' is' not' an' innocent' purchaser' for' value,' because' if' Y' is' an'
case.' The' minors' will' have' no' liability' but' those' who' used' them' or' innocent'purchaser'in'good'faith,'for'value,'then'Y$will$be$protected.'This'will'
connived'with'them'will'have'liability.'" not'be'rescissible.'The'only'resource'of'X'will'be'against'O.'Now,'in'that'case'
' of' Rosencor,' the' Court' said' that' this' contract,' assuming' that' Y' is' not' an'
innocent'purchaser'for'value,'will'be'rescissible.'It'assumes'that'Y'was'aware'
"

REMEMBER:"The"enumeration"under"the"Statute"of"Frauds"is"EXCLUSIVE.'"
'
of' the' right' of' first' refusal' and' yet' proceeded' with' the' transaction' with' O.''
' That’s' why' Y' will' be' liable.' But' take' note:' when' the' court' discussed' this'
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rescission,'the'court'explained'that'this'should'be'rescissible'because'that’s$the$ A:'' Sir,'general'rule,'yes.'The'object'must'exist."

only$way$X$in$our$example$could$enforce$the$right$of$first$refusal.' "
' Q:" That’s"the"general"rule"–"object"must"exist."If"it’s"not"existing,"then"it"cannot"
In'short,'if'you'have'this'situation,'it’s'not'really'that'classic'characterization' be."So"I’m"selling"you"a"house"and"lot,"or"a"house"in"BelfAir,"and"it’s"nonf
of' the' rescissible' contract' as' a' subsidiary' remedy.' There' is' no' need' for' X' to' existent"—"invalid"contract?"
prove' that' assets,' although' equal' to' zero,' X' will' just' have' to' show' that' this' A:'' Sir,'valid'contract.'The'general'rule'is—"
was'done'in'violation'of'the'right'of'first'refusal,'and'it'can'be'rescinded,'on' '
the'premise,'of'course'that'Y'is'a'buyer'in'bad'faith.'
"

'
GENERAL" RULE:' The' object' of' the' contract' must' exist' at' the' time' of' the'
' transaction.'
'

Is"there"a"prescriptive"period"for"an"unenforceable"contract?'None'because'it'is' "
unenforceable'so'the'period'will'be'irrelevant.'' Q:""What" does" this" mean?" “Those" whose" cause" or" object" does" not" exist" at" the"
' time" of" the" transaction?”" The" cause…" There" should" always" be" a" cause."
"

REMEMBER:' An' unenforceable' contract' may" be" assailed" ONLY" by" the" There’s" no" problem" with" cause" because" it’s" presumed." How" about" the"
parties,'not'by'third'parties.'' object?"Should"it"exist"at"the"time"of"the"transaction?""
A:'' Sir,'if'it'CAN'exist,'then'it'will'be'valid'sir.'"
'

'
Let’s'now'go'to'VOID'contracts.'' "
" Q:""If" it’s" capable" of" existing." Because?" Why" is" that" your" answer?" This" item"
ARTS."1409f1422"—"VOID"CONTRACTS" refers" to" objects" which" can" exist" or" capable" of" existing." Because?" Because"
Q:" When"is"a"contract"void?"Or,"what"is"a"void"contract?" the"object"of"a"contract"should…"What?''
A:'' A'void'contract'is'one'that'is'invalid'from'the'beginning.'" '
" You' have' to' go' back' to' the' object,' being' the' prestation.' The' requirement' of' a'
Q:""Why"is"a"contract"void?" prestation'is'it"should"be"legally"and"physically"possible.''
A:'' Because'it’s'contrary'to'law—" '
'

" REMEMBER:"
Q:""What"law?"The"Civil"Code?" So,'when'the'article'refers'to'those'whose'cause'or'object'did'not'exist'at'the'
A:'' Any'law." time'of'the'transaction,'you'have'to'distinguish.'It’s'possible'for'you'to'have'
" future'things'as'the'object'of'the'contract,'unless'there'is'a'law'mandating'that'
Q:""Any" law." And?" There" are" so" many" void" contracts" mentioned" in" the" Civil" the'object'be'in'existence'at'the'time'of'the'creation'of'the'contract.''
'

Code." '
A:'' Void'contracts'are'contracts'that'lack'an'essential'element'and'those'contracts' Example' is' mortgage.' The' mortgaged' property' should' be' absolutely' owned' by'
that' are' contrary' to' law' and' public' morals.' There’s' also' the' absolutely' the'mortgagor'at'the'time'of'the'constitution'of'the'obligation.'
simulated'contracts.'" '
" Q:""[What" is]" another" example" of" future" things" which" cannot" be" the" object" of"
Q:" And?" “Those" whose" cause" or" object" did" not" exist" at" the" time" of" the" the"contract?"
transaction.”16"Is"that"correct?"If"I"ask"you"true"or"false"[true"being"true"at"all" A:'' Inheritance.'"
times]"–"the"following"contracts"are"void,"and"then"I"say,"I"enumerate,"those" "
whose"cause"or"object"did"not"exist"at"the"time"of"the"transaction."" Q:""What"kind"of"inheritance?""
" A:'' Future'inheritance.'"
Q:""What’s"the"general"rule?"Can"you"sell"something"that"does"not"exist"yet"at" "
the" time" of" the" contract?" Isn’t" it" that," as" a" rule," things" should" exist" at" the" Q:" So."Again."What"are"the"void"contracts?""
time"of"the"contract?"You"need"the"object"of"the"contract."" A:'' Absolutely'simulated,'those'prohibited'by'law'or'contrary'to'law,'lacking'an'
'''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' ' essential' element…' And' the' objects' sir,' it' has' to' be' legally' and' physically'
16 'In'reference'to'Art.'1409.' impossible."
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'

" JSP:' Yes." That’s" why," what" I’m" trying" to" point" out" here" is," certain" objects" in"
Q:""There"are"SEVEN"(7)"items"here"(Article"1409)."Summarize"them." certain" contexts" make" them" [un]lawful." In" another" context" it" will" be"
A:'' Contrary'to'law'and'it'lacks'essential'elements." lawful.'Like'that'one,'in'our'example,'he'hired'a'prostitute.'Invalid.'That’s'
' prostitution,' it’s' against' the' law.' But' we' bring' in' the' cameraman,' the'
JSP:'If'you'look'at'the'enumeration,'there'are'two'kinds'of'void'contracts.'One,'a' director,'and'we’ll'have'Atty.'Villareal'to'view'it,'so'it’s'a'movie.'Now'it’s'a'
contract'that'lacks'an'essential'element,'and'the'other,'a'contract'that'is'contrary' valid' contract.' So' it$ depends.' You' cannot' say' outright' that' it’s' contrary' to'
to' or' prohibited' by' law.' If' you' look' at' the' enumeration,' it' can' fall' under' either' law,'or'contrary'to'morals.'What’s'important'sometimes'is'the'context.''
category.'' '
'
"

"
The'validity'or'invalidity'of'a'contract'is'oftentimes'dependent'on'the'context.'
TWO"KINDS"OF"VOID"CONTRACTS:'
'

'
1. Contracts'that'lack'an'essential'element;'and' So' again,' void' contracts' are' either' those' that' lack' an' essential' requisite' of' a'
2. Contracts'that'are'contrary'to'law.'' contract'or'those'that'are'prohibited'or'declared'void'by'law.'Void'contracts'have'
'

' no'legal'effect;'does'not'create,'modify,'or'extinguish'a'juridical'relation.''
JSP:' Let’s' have' a' void' object.' Let’s' say...' Mc' hired' a' woman.' Walking' along' '
Burgos.'So'here’s'the'contract.'Mc'and'a'woman'–'we'will'assume'of'legal' Q:""Is"there"a"period"to"assail"a"void"contract?"No."Can"you"cure"a"void"contract?"
age'and'entered'into'the'contract.'The'woman'will'be'rendering'services'to' A:'' Yes'sir,'you'can'make'a'new'contract.'"
Mc.'The'agreement'was,'Mc'would'spank'the'woman,'tie'and'put'a'collar' "
on'her,'and'then'will'be'playing'with'a'lot'of'beads.'Not'the'rosary'kind.'Is' Q:""You" cannot" ratify" a" void" contract" because" it’s" void." But" can" you" cure" the"
that'contract'valid?'' nullity"of"the"contract?"
A:'' Sir'what'else…'Valid…'If'that’s'all,'sir.' A:'' No'sir,'but'you'can'create'a'new'contract."
JSP:'' If'that’s'all???'I’m'not'sure'if'you'know'the'beads,'but'let’s'just'stick'to'the' "
collar'and'the'spanking.'So,'Mc,'will'give'the'woman'a'beating.'' Q:""And"that"will"be"valid"always?""
A:'' Oh'no,'sir.'' A:'' If'the'new'contract'addresses'the'invalid'parts."
JSP:'' But'spanking'is'good?' '
A:'' Sir…'How'hard?' JSP:'You"CANNOT"RATIFY"a"void"contract.'The'parties'can,'however,'execute'a'
' new'contract'to'cure'or'remedy'any'defect'in'the'void'contract.'We'are'assuming'
JSP:'' What'if'we'do'it'the'other'way'around?'The'woman'will'be'spanking'Mc,' of'course'that'the'contract'is'not'contrary'to'law.'Let’s'say,'it'only'lacks'a'specific'
whip'and'all,'made'with'leather'and'studs.'Valid'contract?' object' or' a' determinate' cause.' Of' course,' I' think' I' discussed' this' before.' It’s'
A:'' No'sir.'Void.'Contrary'to'morals.'' possible' for' you' to' restructure' the' contract' in' such' a' way' that' it' will' avoid' the'
JSP:'' Okay,' let’s' say.' Okay' we’ll' be' more' explicit.' So.' Mc' would' be' inserting' –' application'of'the'prohibitory'law.''
just'for'discussion'purposes' –' would'be'inserting'beads'in'all'the'holes'of' '
the'woman.'But'then'I'bring'in'Iñárritu'–'the'director'of'Birdman'–'bring'in'
"

REMEMBER:'
a'cameraman,'and'we’ll'put'it'all'on'cam.'Will'that'be'valid?'' You' cannot' ratify' a' void' contract.' The' parties' can,' however,' execute' a' new'
JSP:'' Or' let’s' say,' Mc' will' be' inserting' something' in' the' private' area' of' the' contract'to'cure'or'remedy'any'defect'in'the'void'contract.''
woman.'Will'that'be'valid?'That'will'amount'to?'' '

'
A:'' If' it' is' against' the' will' of' the' woman' then' it' will' be' rape.' But' sir,' if' it’s'
JSP:'' Give'me'a'law'that'you’ve'learned'before...'In'contracts'involving'spouses.''
consensual,'it’s'still'contrary'to'morals.''
A:'' You'can’t'sell'properties'to'your'spouse.'
JSP:' Is'it'a'valid'contract?'No?'Because?'That'will'amount'to'what?'
JSP:"" A'spouse'cannot'sell'to'the'other.'What’s'the'status'of'that'contract?"
A:'' Prostitution.'
A:" Void,'sir."
JSP:' But'Mc'has'a'medical'license.'Their'contract'is'that'he'will'insert'something,'
"
for'medical'purposes.'
JSP:'' Let’s' assume' it’s' void.' I' will' take' your' word' for' it.' How' do' we' do' it' that'
A:'' Valid,'Sir.'As'in,'he’s'an'OB?Gyne'sir?'
both'spouses'can'do'a'transaction.'That'one'spouse'can'sell'to'the'other.'Is'
that'possible?'I’m'going'by'the'rule.'You’re'saying'that'there’s'a'rule'in'the'
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'

Family'Code'that'a'spouse'cannot'sell'property'to'the'other.'Let’s'say'one' A:'' No'sir."

spouse'wants'to'transfer'property'to'the'other'spouse.'" JSP:" So'Mc'hired'a'prostitute.'That’s'our'example."
' A:'' Yes'sir.'So'Mc'hired'a'prostitute'knowing'that'it'is'illegal.'So'he'cannot'just'
JSP:'' There’s' one' way' to' do' it.' One' way' is' for' the' spouses,' each' will' create' a' claim'the'money'he'paid'and'derive'benefits'from—"
corporation,'for'example,'and'the'corporation'of'one'will'sell'to'the'other,' JSP:' He'cannot'recover'because…'What’s'the'magic'word?"
so' technically' that’s' not' a' sale' from' one' spouse' to' another' because' you’re' A:'' That'it’s'illegal?"
using' a' corporate' layer' or' personality.' So' that’s' one' way' to' avoid.' So' it’s' JSP:'' Of'course'the'woman'cannot'recover'also.'Cannot'recover'physically.'[Class$
possible' for' you' to' avoid' certain' consequences' by' just' changing' the' laughs.]'
structure'or'arrangement'of'your'transaction.'" A:'' He'was'in'bad'faith'sir."
' JSP:'' It’s'contrary'to'law,'it’s'illegal;'it’s'an'unlawful'service.'So?'Can'he'recover?'
JSP:'' What' else?' What’s' something' that' cannot' be' done' and' we' will' think' of' a' I'know'it’s'a'void'contract.'Therefore,'if'it’s'void?'"
way' of' doing' it?' Anything' else' that' you' learned?' That' prevents' you' from' A:'' Because' sir' if' he' wants' to' get' back' his' money' he' has' to' go' to' court' and'
doing'it?' then—"
A:'' The' case' of' Tala' Realty,' sir.' It’s' the' General' Banking' Act' which' prohibits' JSP:' Can'he'go'to'court?'And'say'it’s'void'and'get'the'money'back?'"
banks' from' procuring' properties…' so' what' they' did' was' to' in?house' the' A:'' No'because'he'is'with'unclean'hands.'"
said'properties'to'Tala'and'then'afterwards,'restructure'the—'" JSP:'' Yes,'if'the'woman'is'dirty."[Class$laughs.]'
JSP:'' No'it’s'a'trust,'it’s'void.'We’ll'discuss'that'one.'In'effect,'if'I’m'not'mistaken,' A:'' You'can’t'come'to'court'with'unclean'hands.'He’s'in'bad'faith.' He'knows'
that’s'the'case'wherein'the'bank'could'not'own'and'yet'owned'it'through'a' from' the' beginning' that' it' was' unlawful' but' he' still' proceeded.' He' still'
trustee.'That’s'just'warehousing;'for'legal'intents'and'purposes,'it'should'be' entered'into'the'contract."
void.'" JSP:'' You' have' to' understand' first' that' the' contract' is' illegal' —' its' object' is'
' contrary' to' law.' Therefore,' the' woman' and' Mc' are' in' pari' delicto.' What'
Q:""Is"there"a"way"to"circumvent"this"[i.e.'be'a'dummy],"sir?"" does'that'mean?"
A:'' My'example'would'be'the'cronies'of'the'dictator.'They'did'not'sign'anything' A:'' They'are'at'equal'fault.'"
and'then'when'the'time'came'that'the'government'was'running'after'them,' JSP:'' In' that' case,' neither' of' them' can' go' to' court' and' recover' or' maintain' an'
they' said,' “No,' we' own' this.”' So' you' do' that.' Just' say' you' own.' In' fact,' action.'Aside'from'the'contract'being'void,'they'should'not'be'aided'by'the'
there’s' no' other' incentive' for' you' if' you’re' the' dummy' but' to' declare' court.' Is' there' an' instance' in' that' case' wherein' Mc' could' recover' the'
ownership,' otherwise,' you' will' be' prosecuted' for' a' violation' of' some' penal' P100,000?'"
law.'" A:'' If'he’s'in'good'faith.'"
" JSP:' Like?' What’s' the' exception' given' by' the' law?' So' you’re' referring' to' a'
JSP:" Anyway,' so,' a' void' contract' does' not' have' a' legal' effect.' Parties' cannot' contract'whereby'the'parties'are'in'pari'delicto.'So'they'shall'have'no'cause'
enforce' a' void' contract.' Can' a' party' win' the' defense' of' illegality' of' a' against' each' other.' They' cannot' maintain' an' action.' Can' they' recover?'
contract?'So'a'party'does'not'want'to'comply.'So'to'cure'the'defect'of'the' General'rule:'NO'RECOVERY.'Unless?'
nullity' of' the' contract,' both' parties' sign' the' contract' saying,' “we' are' A:' Unless.'Let’s'say,'before'consummating'the'contract,'Mc'went'to'the'chapel'
waiving'any'right'based'on'the'illegality'of'the'contract.”'Can'that'be'done?" downstairs,'had'a'change'of'heart…'What?'
A:'' No,'because'it’s'void'and'contrary'to'law—" JSP:' What’s'that'circumstance'that'would'allow'him'to'recover?''
JSP:'' So'you"cannot"waive"the"defense"of"illegality.'It’s'just'like'when'you'have' '
a'waiver'of'a'right'to'prosecute'a'crime.'It’s'the'same'thing;'it’s'similar'to' JSP:' When' a' party' repudiates' the' contract' before' the' purpose' could' be'
that,'the'underlying'reason.'' accomplished.'Of'course,'it’s'a'matter'for'the'court'to'decide.'So'Mc'would'
" say'“I'only'parted'with'Php'99,000”'and'he'will'go'to'the'small'case'court,'
JSP:' Now,'let’s'go'back'to'Mc.'Mc'entered'into'a'contract'with'the'woman'to'do' so'less'expense.''
prohibited'acts.'So'we'will'assume'it’s,'what'kind'of'contract?'Void.'Why?" '
A:'' Because'it’s'prohibited'by'law."
"

GENERAL"RULE:'A'party'with'unclean'hands'cannot'recover'or'maintain'an'
JSP:" Because' it’s' contrary' to' law.' It’s' illegal.' So' Mc' paid' Php' 100,000.' Can' Mc' action,' unless' he' repudiates' the' contract' before' the' purpose' could' be'
recover?""
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'

accomplished.''' '
CASES"
'

'
JSP:"" Who'else'can'recover'under'a'void'contract'that'is'illegal?""
A:'' The'incapacitated."
JSP:' The' minor' always' can' recover.' Of' course' this' is' again' based' on' a' court'
order.'So'is'that'illegal?'Let’s'say,'instead'of'hiring'a'prostitute,'he'bought'
shabu.' What' will' happen?' So' let’s' say' X' sold' him' shabu' and' he' paid' Php'
100,000.'Neither'of'them'can'recover.'So'they'get'to'keep'the'shabu'and'the'
money.'Because'the'law'will'leave'them'as'they'are.'Why?'That’s'the'pari'
delicto' rule.' They' cannot' go' to' court,' the' court' could' not' aid' them;'
MENCHAVES"V."TEVES"
Menchaves' and' Teves' entered' into' a' lease' contract.' Menchaves' represented'
himself'to'be'the'owner'of'the'fishpond.'It'was'stated'in'their'contract'that'Teves'
would' have' the' right' to' enjoy' the' use' of' the' property' without' any' disturbance.'
The' SC' held' that' the' fishpond' is' owned' by' the' State' (regalia' doctrine);' hence,'
Menchaves' cannot' sell' or' lease' anything' he' does' not' own' and' could' not' own.'
This'being'contrary'to'law,'the'contract'entered'upon'by'the'parties'is'void.'
'
"

therefore'they'get'to'keep'the'shabu'and'the'money'from'the'drug'trade.'" ILLUSTRATION"2:"DEFECTIVE"CONTRACTS"
"

A:'' Sir,'the'shabu,'the'government'will'take'that'from'Mc.'" ' RESCISSIBLE" VOID" VOIDABLE" UNENFORCEABLE"

JSP:'' How'about'the'money?' Lesion' or' Lack' of' Vitiated' Contrary' to'
A:'' The'money'will'be'given'back—' economic' essential' consent/' Statute' of' Frauds;'
JSP:"" No!'Remember'the'rule'that'they’re'in'pari'delicto.'He'bought'shabu'from' prejudice' elements;' incapacity' unauthorized'
Cause"
X,' paid' Php' 100,000,' leave' that' with' X' now.' Mc' has' the' shabu.' What' will' contrary' agent;' both'
happen' to' the' shabu' now?' You' said' the' government' will' get' the' shabu.' to'law' parties'
Because'they'want'to'get'high.'How'about'the'money?'' incapacitated'
" Prescriptive"
4'years' None' 4'years' None'
JSP:" Both' the' shabu' and' the' money' will' be' forfeited' or' confiscated' by' the' Period"
government.' Remember' the' rule' on' the' proceeds' of' the' crime' –' Waiver' Execute' a' Ratification' Ratification' by'
contrabands' (taken' by' the' state).' The' only' instance' when' a' party' can' new'valid' accepting'
maintain' an' act' based' on' an' illegal' contract' is' when' the' party' is' contract' agreement,'
INNOCENT.'In'our'example,'how'can'Mc'be'considered'innocent?'When$he$ Cure"
express' intent,'
acts$in$good$faith$–$if$he$purchased$the$shabu$thinking$it$was$deodorant.' and' failure' to'
' object'
If'it’s'not'illegal'per'se,'it'will'not'constitute'a'criminal'offense.'The'effect'will'be' Who"can" Any'Person' Any' Any'Person' Only' the' parties/'
the'same,'but'the'objects'or'the'proceeds'of'the'contract'will'not'be'confiscated.' object" Person' no'3rd'party'
' Status" Valid' Void' Valid' Unenforceable'
If' you' look' at' void' contracts,' no' one' can' maintain' an' action' based' on' a' void' '
'

contract.' No' one' can' recover' something' paid' or' given' pursuant' to' a' void' "
"

contract.'However,'there'are'certain'instances'mentioned'in'the'Civil'Code'where' ILLUSTRATION"3:""
recovery'can'be'ordered'by'the'court.'For'example,'a'beneficiary'of'the'agrarian' ABSOLUTELY"SIMULATED"CONTRACTS"V."RESCISSION"[PRESCRIPTION]"
reform' program' disposes' of' land' contrary' to' law.' Ordinarily,' that' will' be'
unlawful'and'the'beneficiary'will'be'penalized.'However,'if'the'court'considered'
the'policy'of'that'program'is'to'give'land'to'the'landless,'then'the'court'may'give'
or' allow' the' conveyance' of' property.' Those' are' the' instances' when' the'
underlying'policy'of'the'law'will'be'served'if'the'court'will'allow'recovery.'But'
that'will'require'judicial'intervention.'
'
Can'good'faith'be'a'defense'in'a'case'wherein'an'indigenous'person'sold'a'land'
'
to' another' party' where' both' parties' did' not' know' that' it' was' illegal?' ' Yes,' but' Let’s' say' X,' in' 2005' extended' a' loan' to' Y.' Y' is' supposed' to' pay' sometime' in'
good'faith'is'very'difficult'to'prove.' 2011.'Before'2011,'in'let'us'say'2010,'Y'sold'his'only'property'to'Z.'Z'paid'only'

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10%' of' the' fair' market' value' based' on' the' document' ?' deed' of' absolute' sale,' Company' X' made' an' offer' because' it' wants' to' consolidate' the' market;' “' I’m'
which'was'also'registered.'On'due'date,'Y'defaulted.'Assets'of'Y'='0.'So'X'could' interested'in'acquiring'your'plant'for'a'reasonable'amount”.''Corporation'says,'
not'recover'from'Y.'What'can'X'do'that'will'allow'X'to'recover?' “You' can' have' my' plant.' My' plant' produces' ‘X' volume’' of' the' product' in' a'
' given' period.”' That' was' the' representation' of' the' Corporation.' They' entered'
Answer:'X'can'pursue'the'theory'of'absolutely"simulated"contract.'Rescission' into'a'sale.'Corporation'sold'the'plant.'Company'X'paid'the'price.'Upon'taking'
is' an' unavailable' remedy' in' this' example' because' the' action' has' already' over' the' plant,' Company' X' discovered' that' the' plant' could' not' produce' this'
prescribed.' volume.' So' Company' X' sued' Corporation' for' annulment' of' the' contract.' Can'
Company'X'annul'the'contract?'
'

"
"
'
ILLUSTRATION"4:""
Answer:' If' we' are' talking' about' annulment' we' are' referring' to' voidable'
ABSOLUTELY"SIMULATED"CONTRACTS"V."RESCISSION"[PRESCRIPTION]"
contract.'But'in'the'case'at'bar,'Company'X'cannot'annul'the'contract'because'of'
'
vitiated' consent' (fraud)' because' both' the' Corporation' and' Company' X' are' in'
the'same'line'of'business'or'industry;'hence,'Company'X'should'have'exercised'
due"diligence'in'ascertaining'the'production'capacity'of'the'plant.''
'

'
X'extended'a'loan'to'Y'on'day'1.'Day'2,'Y'should'pay'principal'and'interest.'Y'
defaulted.' X' sued' Y' for' collection.' Y' offered' a' settlement' (Y' told' X' through'
Skype'that'he'will'just'convey'to'him'a'house'and'lot'equivalent'to'the'value'of'
the' principal' and' interest).' X' agreed.' When' Y' returned,' X' demanded' the'
conveyance'of'property.'Y'refused.'Can'Y'refuse?'
''
Answer:' The' contract" is" unenforceable' because' of' Statute' of' Frauds' –' real'
property' has' to' be' in' writing.' The' contract' agreed' upon' through' Skype' was'
dacion'en'pago.'Therefore,'it'is'considered'a'sale"of"real"property,'and'should'
comply'with'the'Statute'of'Frauds.'
"
'
Take' note:' the' answer' will' be' different' if' the' Corporation' made' this' a'
representation'in'the'contract:'“The'plant'will'produce'X'amount'in'this'period.”''
'
Why' is' there' a' difference?' Because' it' will' be' tantamount' to' causal' fraud,'
otherwise' it' will' be' incidental' fraud' or' fraud' in' performance.' Is' there' a' better'
alternative' than' going' the' annulment' route?' Substantial" breach" because" the"
breach" is" an" essential" consideration." Since" there" is" substantial" breach," the"
remedy"is"resolution.""
"
Why'is'this'better?'Because"the"period"is"longer"(10"years)."It"is"10"years"because"
you" can" assume" that" there" is" a" written" contract" so" the" period" is" 10" years" from"
the"time"the"right"of"action"accrues."In"that"example,"the"right"of"action"accrued"
from"the"time"the"representation"turned"out"to"be"false."
"
NATURAL"OBLIGATION"V."CIVIL"OBLIGATION"

'
" A"natural"obligation"does"not"have"a"juridical"tie.'There'is'no'element'of'telling'
ILLUSTRATION"5:"" a' party' to' a' natural' obligation' to' perform.' That' element' is' specific' to' a' civil'
LACK"OF"DUE"DILIGENCE"IN"CONTRACTS"DES"NOT"RENDER"CONTRACT"VOIDABLE" obligation.'That’s'why'in'civil'obligation'you'can'ask'for'specific'performance'for'
example.' So' these' provisions' on' natural' obligation' are' more' of' rules' of' equity.'
There'are'dated'provisions'here'–'Articles'1426'and'1427.'They'are'dated'because'
any' party' who' is' at' least' 18' years' of' age' can' enter' in' a' completely' valid' and'
enforceable'contract."
'
If'you'look'at'the'provisions'on'natural'obligations,'the'provisions'recognize'the'
natural'obligations'are'not'legally'enforceable.'However,'if'there'is'performance'
by'a'party'to'a'natural'obligation'of'the'object'of'the'obligation,'there'can'be'no'
'
Corporation' owns' a' manufacturing' plant.' Corporation' receives' an' offer' from' recovery'or'reversal'of'the'performance.'Of'course,'that'performance'is'assumed'
Company'X.'They'are'in'the'same'make?up'business'–'selling'the'same'product.'

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to' be' a' performance' with' full' awareness' that' there' is' no' legal' obligation,' that'
there'is'no'juridical'tie'–'no'compelling'element'to'mandate.''
"
"

ILLUSTRATION"6:"PAYMENT"OF"A"PRESCRIBED"OBLIGATION"

'
Example:' You' entered' into' a' contract.' Seller' sold' property' on' day' 1.' Same'
day,' buyer' is' to' pay' the' price.' Buyer' defaulted.' 11' years' after,' seller' made' a'
demand.'Can'seller'demand'payment?''
'
Answer:'No,'action'already'prescribed.'
'
However,'for'example,'B,'well'aware'of'the'prescription'pays,'B'can'no'longer'
recover.'This'is'pursuant'to'the'provision'on'natural'obligation.'That'will'be'
an'example'of'1424'–'payment'of'a'prescribed'obligation.'
'
What’s' crucial' is' the' one' who' is' performing' must' be' aware' that' there' is' no'
legal'compulsion'to'perform,'and'yet'that'party'performs.'In'that'case,'there'
can'be'no'undoing'of'the'transaction.'
'

"
'

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"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
THURSDAY,'26'FEBRUARY'2014'
'

ART."1431f1439"—"ESTOPPEL" You'can'review'these'on'your'own,'but'basically'the'common'thread'you'have'to'
ART." 1431" —" Through$ estoppel$ an$ admission$ or$ representation$ is$ rendered$ conclusive$ remember' is' the' requirements' of' estoppel.' In' estoppel,' a' person' who' made' a'
upon$ the$ person$ making$ it,$ and$ cannot$ be$ denied$ or$ disproved$ as$ against$ the$ person$ representation' cannot' retract' the' representation' and' prejudice' someone' who'
relying$thereon.$$ acted'based'on'that'representation.''
' '
Estoppel' is' a' rule' where' one' party' is' bound' by' his' representations' or' actions'
"

REQUIREMENTS" OF" EQUITABLE" ESTOPPEL" OR" ESTOPPEL' IN' PAIS" BASED" ON"
acted' upon' by' another' party.' Estoppel' assumes' that' there' is' a' disparity' of' JURISPRUDENCE"
information'between'the'parties.'Between'the'one'committing'estoppel,'who'has' For'the'persons'sought'to'be'estopped:'
complete' info,' while' the' other' party' does' not' have' info' and' could' not' acquire' 1. There'must'be'conduct'amounting'to'a'false'representation,'
info'even'if'he'exercised'due'diligence.' concealment'of'facts,'misrepresentation.'
' 2. Intent'or'representation'that'the'conduct'shall'be'acted'upon'or'shall'
If'you'look'at'that'principle'of'estoppel,'it’s'a'common'theme'in'legal'provisions' influence'the'other'party.'For'the'purpose'of'leading'the'other'party'
involving'obligations'or'liabilities;'most'of'these'liability'provisions'turn'on'who' to'act'on'said'representation.'Sounds'like?'What?'Akin'to?'Fraud.''
has'the'information,'who'has'control.' 3. The'party,'who'makes'the'representation,'is'aware'of'the'actual'
' facts,'complete'info.'
"

TWO"KINDS"OF"ESTOPPEL:"
'

"
1. EQUITABLE"ESTOPPEL"(Estoppel'in$pais)' Therefore'the'party,'while'knowing'true'facts,'acted'as'if'the'facts'weren’t'so,'that'
2. ESTOPPEL"BY"DEED" the'facts'were'otherwise.'
"

' '
ESTOPPEL'IN$PAIS$
'

For'the'other'party,'these'are'the'requirements;'
Estoppel'in'pais'or'equitable'estoppel'contemplates'a'situation'where'a'person'is' 1. Lack'of'knowledge'or'means'of'knowledge'of'the'truth'of'the'facts'
bound' by' certain' acts' or' representations' acted' upon' by' another.' Estoppel' by' in'question,'
deed'is'based'on'a'record,'estoppel'in'a'deed'of'sale,'written'contracts,'not'deed' 2. Good'faith'when'acted'on'the'conduct'or'misrepresentation,'
by'act.'Look'at'the'examples'in'1434?1438.' 3. Actions'(Meaning'the'act'was'on'such'conduct)'and'
' 4. Change'in'that'conduct'would'cause'prejudice'
"

ILLUSTRATION"1:"ART."1434"
'

Let’s' say' after' getting' spanked,' student' sold' my' laptop' (referring' to' his'
laptop)'to'X.'The'student'subsequently'acquired'it'from'me'after'said'sale.'He'
is'now'estopped'from'claiming'that'the'laptop'was'not'his'when'he'sold'it.'
'
"
Simply' stated,' look' at' the' applications,' not' dealing' with' contracts' here,' just' a'
transaction.' On' the' other' hand' that' other' party' could' not' have' known' the' true'
facts,'acted'in'good"faith,"no"negligence.'

' '
In' ILLUSTRATION' 1,' of' course' again,' we' assume' that' the' person' who' bought' it'
"

The'party'who'made'that'representation'cannot'be'allowed'to'backtrack.'
does'not'know'who'the'owner'is.'' '

'
'
"
A'usual'example'is'this:'in'my'presence,'A'sold'the'computer'to'B.'A'said,'“I’m$
ILLUSTRATION"2:"ART."1435'' selling$ to$ you$ this$ computer$ for$ 100$ pesos.”' B' bought' it' and' paid.' I' did' not' do'
Let’s'have'another'example:'somebody'acting'as'an'agent.'Let’s'say'A'sold'a' anything,' I' had' an' obligation' to' speak' up' but' I' did' not.' That' is' an' example' of'
computer' to' X' as' my' agent.' He' cannot' claim' that' this' is' his' property' and' estoppel.'Because'I'could'have'prevented'a'prejudice'to'B'by'saying'that'A'could'
therefore,'it'cannot'be'sold'on'my'behalf.' not'sell'it'because'I'own'the'laptop,'but'I'did'not.'Failing'to'act'or'failing'to'object'
'

' to'the'transaction'would'lead'to'estoppel.'Clear?''
'
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unreasonable' amount' of' time.' What' will' that' situation' be?' Upon' default' by'
"

ILLUSTRATION"3:"ESTOPPEL"AND"JURISDICTION"OF"COURTS'
Another' example' of' estoppel' in' court' cases.' Later' on,' you' will' know' that'
certain'courts'have'what'you'call'jurisdiction.'Certain'cases'can'be'filed'in'a'
certain'court.'Petitioner'sues'Respondent'for'specific'performance,'and'it'was'
filed'before'the'Municipal'Trial'Court'when,'in'fact,'it'should'be'filed'with'the'
Defendant,' Plaintiff' made' no' demand,' no' demand' letter,' and' no'
communication' at' all' was' made.' Somehow,' Defendant' got' the' message' that'
Plaintiff' has' forgotten' about' the' liability.' Laches' may' apply.' Estoppel" and"
laches"are"rules"of"equity.''
'

RTC.'It'should'have'been'filed'there,'but'Plaintiff'filed'it'with'the'Municipal' '
Trial'Court.'Later'on,'the'Municipal'Trial'Court'ruled'versus'Defendant,'and'
"

GENERAL"RULE:"Even'if'you'filed'a'case'on'last'day,'it'is'still'okay.'Based'on'
on'appeal,'he'[Defendant]'said'that'the'Municipal'Trial'Court'actually'had'no' jurisprudence,' if' you' have' a' period' in' which' to' file' an' action,' you' will' have'
jurisdiction.'Will'estoppel'apply?'' the' full' benefit' of' the' period.' This' is' true' in' the' case' of' labor' laws.' You' will'
' encounter'in'labor'law'that'in'certain'cases,'the'court'will'say'that'if'a'period'
So'he'acted'as'if'court'had'jurisdiction.'The'general'rule'is'that'the'defendant' is'granted,'that'complete'period'can'be'used'by'a'claimant'even'the'last'day."
will' never' be' estopped' because' law' confers' jurisdiction.' In' certain' cases' it' '

'
may'be'considered.'The'general'rule'is'that'if'the'court'has'no'jurisdiction'and'
Laches'will'apply'in'extraordinary'cases,'wherein'one'may'be'prejudiced.''
the' trial' is' done' with' the' assumption' by' parties' that' the' court' does' have'
'
jurisdiction,'then'they'can'raise'it'on'appeal.'' "

' ILLUSTRATION"5:"ESTOPPEL"BY"AGENCY'
On' the' other' hand,' if' the' court' actually' had' jurisdiction,' and' Defendant' There'are'instances'of'apparent'authority.'Let’s'say'a'company'says'that'this'
proceeded'on'the'theory'that'the'court'had'no'jurisdiction,'estoppel'will'still' officer'is'the'person'you'should'deal'with'in'certain'transactions,'it'has'been'
apply.' In' reality,' the' court' would' act' on' the' case.' Hopefully,' you' will' learn' going'on'for'a'number'of'years,'with'no'issue'on'the'authority'of'the'person.'
that'in'your'rem'law—if'you'make'it'to'rem'law.'' The' company' can' no' longer' question' that' person,' if' whether' or' not' he' has'
authority.''
'

' '

Q:"" Is"good"faith"a"valid"defense"in"estoppel?" "

JSP:' ' The"one"who"made"the"representation,' the' premise' of' estoppel,' as' to' the' There'is'an'issue'here,'recently.'There'was'a'rule'adopted'by'the'BIR'for'the'claim'
person' sought' to' be' estopped,' knows"the"true"state"of"facts.' So' if' there' is' of'refund,'it’s'a'procedure'where'to'file,'when'to'file'for'a'refund.'The'discussion'
no'awareness'and'no'concurring'lack'of'diligence,'you'cannot'comply.'So"it" is,' can' estoppel' be' applied' in' this' case?' ' Even' if' previously' they' allowed' a'
is"a"requisite"that"one"had"the"knowledge"of"the"true"state"of"information.'" different'procedure,'which'is'contrary'to'law,'they'cannot'be'estopped'when'they'
" correct'it.'
LACHES' '
'

Another'principle'related'to'estoppel'is'latches.'A"latch"is"a"failure"or"neglect"for" REMEMBER:"
an" unreasonable" length" of" time" to" do" that," which" should" have" been" done" The"government"cannot"be"estopped.'Let’s'say'a'government'agency'made'a'
earlier.'What’s'the'short'hand'of'this?'You'sleep'on'your'rights.' mistake' in' the' implementation' of' a' law,' and' subsequently,' a' more'
' knowledgeable'officer'corrects'said'mistake.'Those'who'have'been'affected'by'
"

ILLUSTRATION"4:"ESTOPPEL"AND"LACHES"AS"RULES"OF"EQUITY' the' interpretation' cannot' claim' estoppel' because' the' government' cannot' be'
Let’s'say'Plaintiff'has'a'cause'of'action'against'Defendant.'They'entered'into'a' estopped' by' the' acts' of' its' agents.' Even' if' it’s' erroneous' practice.' The'
contract' of' loan,' Plaintiff' lent' loan' on' day' one,' payment' on' day' two.' Then' government'can'correct'it'and'no'one'can'claim'estoppel'in'that'case.'
'

default.'' '
' "

ILLUSTRATION"6:"GOVERNMENT"CANNOT"BE"ESTOPPED'
What’s"the"period"for"defendant"to"file"action?'Based'on'a'written'contract,"
Let’s'say'Procedure'A'Is'contrary'to'law,'which'has'been'going'on'for'years.'
10"years.''Laches'will'be'if'Plaintiff'acted'in'such'a'way'that'to'lead'defendant'
The'SC'came'in'and'decided'that'procedure'A'Is'contrary'to'law.'So'the'BIR'
to'think'that'the'action'is'forthcoming'but'such'is'not'true,'meaning'no'action'
changed'Procedure'A'to'Procedure'B,'it'is'substantial.'It'deals'with'a'period'to'
is' actually' forthcoming.' Plaintiff' actually' remitted' the' liability' and' after'
file'action'with'the'BIR'or'case'of'tax'appeals.''
creating'that'impression'on'defendant.'He'had'it'a'day'before'the'expiration'
'
of' the' period.' It’s' possible' that' Plaintiff' may' be' barred' by' laches.' For' an'
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'

If'we'follow'the'rule'on'estoppel,'can"a"taxpayer,"effected"by"this"change"of" ART."1440f1442"—TRUST"
procedure,"claim"estoppel?"No,'because'the'state'is'not'estopped.'' The'structure'of'trust'is,'we'are'dealing'with'trust'as'a'fiduciary'relationship.'Not'
the'trust'that'you'buy'in'the'pharmacy.''
'

'
What" is" your" counter?" It' can' only' apply' prospectively,' because' a' right' has' '
"

already' been' vested' because' of' the' old' procedure,' but' again,' that’s' a' long' shot.' ABSOLUTE"OWNERSHIP"='legal'title'+'beneficial'ownership'or'title'
'

But'that’s'the'argument'for'this.'What’s'the'counter'there?''When'you’re'dealing' '
with' procedure,' it' can' retroact.' So' in' case' in' this' situation,' and' you’re' the' '

Generally,'trust'is'[characterized'as'such]:'you'have'a'(1)$trustor,'a'(2)$trustee'
government,'you'can'claim'you'are'the'government'and'you'cannot'be'estopped'
and' another' party,' the' (3)' beneficiary.' Normally,' the' trustor' will' place'
and' you' do' not' correct' it,' you' can' be' held' liable.' The' best' counter' is' that' you'
properties'with'the'trustee'but'the'very'benefit'of'that'property'will'be'with'
have'a'vested'right.'"
the'beneficiary?trustor.''
' '

Q:"" Sir,"aside"from"the"fact"that"in"prescription"there"is"a"specific"time"and"in" '

laches"it’s"an"unreasonable"amount"of"time,"what’s"the"difference?"
JSP:'''In' proscription,' you’re' dealing' with' the' lapse' of' time,' meaning' you' just'
count'if'the'entire'period,'if'the'whole'period'lapses,'you'have'prescription.'
But' in' laches' you' have' an' inexcusable,' unjustifiable' delay.' ' So' that’s' why'
even'If'a'party'has'the'benefit'of'the'full'period,'that'party'may'be'barred'
due'to'laches'due'to'that'unexplained'delay'or'inaction.'"
Q:" How,"sir?"
JSP:'' That’s' why' I' told' you' the' general' rule' is' prescription.' Laches' is' an'
WHAT'IS'A'LEGAL'TITLE?'
Let’s'say'I'have'a'client'who'wants'to'establish'a'corporation.'The'client'doesn’t'
want' to' appear' on' records' as' stockholder' of' corporation.' They' split' ownership,'
so' the' lawyer' appears' on' record' as' a' stockholder' but' it’s' the' client' who' has'
beneficial' ownership.' That’s' a' trustor' placing' the' shares' in' the' name' of' the'
trustee.' So' that’s' legal' title,' but' the' trustee' will' recognize' that' the' trustor' will'
have'beneficial'use'of'the'shares.''
'
"

extraordinary'rule,'as'I'said,'in'jurisprudence'the'usual'ruling'is'the'party' ILLUSTRATION"7:"EXAMPLE"OF"TRUST"
has'the'full'benefit'of'the'prescriptive'period.'" Let’s'say'Ayala'wants'to'buy'a'lot'of'properties'in'Batangas.'Let’s'say'they'are'
' land' banking.' Ayala' will' create' a' corporation,' actually' owned' by' them' but'
Why"laches,"then?"" Ayala' is' not' a' shareholder.' So' Ayala' will' ask' four' lawyers' to' be' the'
Because'it'may'be'useful'for'you,'maybe'you'want'to'bar'someone'from'filing'an' shareholders' or' nominees,' so' the' legal' title' will' be' with' them.' Then' these'
action' and' you' know' the' period' has' not' yet' prescribed,' and' you' can' somehow' lawyers'will'normally'execute'a'declaration'of'trust.'
craft' a' theory' that' there' is' an' unexplained' delay' in' filing' the' action.' But' like' I' "
said,'it’s'a'rule'of'equity,'last'resort.'' What"is"a"declaration"of"trust?"It"is"an"acknowledgment"of"the"trustees"that"
" they"hold"the"shares"in"trust"and"for"the"benefit"of"the"trustorfbeneficiary."
Q:" Sir" in" that" case," let’s" say" it’s" my" father," and" he" dies," and" the" credit" is" '
transferred"to"the"heirs."Tapos,"what"if"many"people"owe"my"father"debts," So' this' corporation' buys,' no' one' will' know' who' this' is.' And' later' on' when'
and" I" only" find" out" about" the" debt" 9" years" after" the" right" to" them" has" they'buy'the'land,'they'reveal'and'disclose'that'the'company'is'an'Ayala'land'
arisen."So"can"I"argue"that"I"did"not"about"that"right?" subsidiary.'Clear?'Is'that'legal?'Is'that'fraud?'No,"unless,"the"identity"of"the"
JSP:'' Yes,'laches'will'not'apply'in'that'case'because'you'did'not'know.'Of'course' party"is"an"essential"consideration"of"the"other"party."'
you'are'still'bound'by'the'period,'so'if'its'ten'years'and'its'in'the'contract,'
"

'
then' you' have' to' file,' from' the' breach,' not' from' the' knowledge.' Cause"of" That' is' how' the' Marcos' cronies' got' rich.' That' is' why,' right' now,' the' rule' is:' if'
action"accrues"when"there"is"a"breach."That’s"the"rule"in"contracts."" you’re'bidding,'the'principal'must'be'revealed.''
Q:" Can"someone"argue"operative"fact?" "
JSP:'' You' can' argue' that' but' that' probably' wont' work.' Operative' fact' doesn’t' CASES"'[ART.1440?1442]'
apply'to'procedure." TALA"REALTY"SERVICES"V."CA""
' An' implied' trust' cannot' exist' if' the' parties' could' not' legally' enter' into' the'
Okay,'enough'of'laches'let’s'move'on'to'a'more'important'topic.'' contract'in'the'first'place'
' $

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So'there'is'a'bank,'and'a'realty'company.'The'shareholders'of'the'bank'establish' ART." 1454" —' If$ an$ absolute$ conveyance$ of$ property$ is$ made$ in$ order$ to$ secure$ the$
Tala,' through' relatives' of' one' of' the' shareholders.' This' is' a' warehouse' scheme.' performance$of$an$obligation$of$the$grantor$toward$the$grantee,$a$trust$by$virtue$of$law$is$
So'the'bank'warehoused'with'the'realty'company'because'they'were'not'allowed' established.$If$the$fulfillment$of$the$obligation$is$offered$by$the$grantor$when$it$becomes$
to'own'lands.'During'this'time'section'25(a)'and'34'of'the'General'Banking'Act' due,$he$may$demand$the$reconveyance$of$the$property$to$him.$
limit'a'bans'allowable'investments'in'real'estate'to'50%'of'its'capital'assets.'' "
' An' example' is' absolute' conveyance' by' way' of' security,' where' a' trust' is'
Warehouse'is'placing'it'in'the'name'of'someone'else.'Like'putting'it'in'someone’s' established'by'virtue'of'law,'in'order'to'secure'the'performance'of'an'obligation'
name' for' the' meantime.' So' bank' was' given' right' of' first' refusal.' After' such' a' of'the'grantor'toward'the'grantee.'If'the'fulfillment'of'the'obligation'is'offered'by'
time,' Tala' refused' to' sell' the' properties' back' to' the' bank,' so' the' bank' sued' to' the' grantor' when' it' becomes' due,' he' may' demand' the' reconveyance' of' the'
enforce' the' trust.' So' what' kinds' of' trust' do' you' have' here?' Implied' trust.' Bank' property.'
buys'land,'and'places'it'in'the'hands'of'the'company.'' "
' RINGOR"V."RINGOR'
The'court'decided'this'case'on'the'ratio'that'something'considered'illegal'cannot' This' is' a' case' about' explicit' trust' depending' on' the' intention' of' the' parties' and'
be'a'trust.'The'deal'was'made'to'skirt'the'law.'SC'said,'that'the'trust'cannot'be' need'not'be'in'writing,'imprescriptibility'of'explicit'trusts,'and'Torrens‘'title'not'
because' it' is' contrary' to' law,' your' take' away' is' you' cannot' have' a' trust' if' the' conveying'ownership'but'only'confirms'one'already'existing.'
principle,'meaning'the'trustor,'could'not'have'entered'legally'into'a'contract.'' '
' The'claim'was'that'there'was'no'written'trust'agreement'involving'real'property.''
In' reality' if' you' applied' the' implied' trust' theory,' then' if' you' take' this' and' it' '
shows'that'the'bank'owns'the'lands,'which'is'illegal.'So'it'cannot'be'a'trust'since'
'

In' general,' trust' does' not' require' any' form,' only' that' a' written' document' is'
it'is'illegal.' necessary'when'the'trust'involves'real'property.'
' '

'
Can'an'action'be'taken?'No'because'they'are'in$pari$delicto.'Court'dismissed'the'
Siblings' of' Jose' Ringor' were' using' parol' evidence,' despite' provision' of' law'
case.''
prohibiting'parol'evidence.'
'
'
'
Implied' trust' has' no' documentation,' as' opposed' to' express' trusts,' which' However,'the'court'ruled'that'the'benefit'of'the'property'were'to'be'given'to'not'
requires'it'to'be'in'writing.' only' Jose' Ringor.' There' is' recognition' by' Jose' that' he' was' only' holding' the'
'

' property' in' trust' and' the' heirs' as' the' true' beneficiaries.' The' Court' ruled' that'
ART."1448"—"RESULTING"TRUST"" parol'evidence'were'deemed'allowable'to'prove'the'trust'because'of'the'actions'
For' example:' property' was' bought' and' sold' to' buyer' but' title' was' given' to' of' Jose' constituted' as' already' being' implemented.' There' was' partial'
somebody'else.'This'is'an'example'of'a'trust.' performance.''
' '
ARTS."1450,"1454,"1455,"1456"—"CONSTRUCTIVE"TRUST" This' is' an" EXPRESSED" TRUST.' Ordinarily,' it' cannot' be' proved' by' parol'
" evidence.' However,' in' this' case,' partial' execution,' according' to' the' Court,' will'
dispense'with'the'necessity'of'the'supposed'written'trust'(taking'the'contract'out'
"

In'a'constructive'trust,'there'is'really'no'intention'to'place'the'title'in'someone'
else’s'name.'It'just'happens'by'mistake,'fraud'that'there'becomes'an'implied' of'the'statute'of'frauds).''
trust'recognized'by'law.'In'this'trust,'there'is'no'fiduciary'relation.' '
' "
There'is'no'trust'arrangement,'and'there'is'no'consideration'paid.'It'is'just'to' Q:"""Is"[the"ruling"in"RINGOR]'correct?'
prevent' a' fraud' to' be' committed' that' there' becomes' an' implied' trust? A:'' The'Statute'of'Frauds'does'not'cover'trusts.'There'is'an'expressed'provision.'
constructive'trust.' However,'the'Supreme'Court'[ruled'that],'as'a'way'out,'the'contract'is'akin'to'
the'contracts'covered'by'the'Statute'of'Frauds,'and'because'there'was'partial'
'

'
performance'it'is'then'taken'out'of'the'statute'of'frauds.'The'Supreme'Court'
'
in' this' effect' violated' the' expressed" provision" of" law.' The' Supreme' Court'

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should' have' allowed' it' to' be' proven' as' an' implied' trust' instead' of' ART."1451"—'When$land$passes$by$succession$to$any$person$and$he$causes$the$legal$title$
categorically'making'the'contract'an'expressed'trust.'' to$be$put$in$the$name$of$another,$a$trust$is$established$by$implication$of$law$for$the$benefit$
' of$the$true$owner.$
' '
In"effect,"this"is"jurisprudence"expanding"the"coverage"of"contracts"covered"by" A' person' acquiring' land' by' succession;' but' places' legal' title' in' the' name' of'
the"Statute"of"Frauds." another,'a'trust'established'by'implication'for'the'benefit'of'the'true'owner'of'the'
' property.'
'
'

GENERAL"RULE:'There'is'no'required'form'for'an'expressed'trust.'' "

ILLUSTRATION"9:"ART."1454"
'

'
Lender' extending' a' loan' to' borrower,' that' borrower' must' pay' on' due' date.'
OCO"V."LIMBARING'
Borrower' then' does' an' absolute$ conveyance$ of$ property' by' security.' Lender'
This'is'a'case'about'a'purchase'of'things'for'children'presumed'as'gift,'not'trust.'
would' then' hold' the' securities.' The' lender' will' have' an' obligation' to' return'
'
the' property' upon' payment' of' the' loan.' The' “absolute$ conveyance”' is' an'
Notes/Discussion:$
implied'trust.'It'is'not'a'pledge.'This'is'for'the'lender'to'secure'payment'of'the'
Implied$trust$theory$that$Victor$Limbaring$was$the$trustor2beneficiary$and$the$daughters$
borrower.' This' is' not' a' sale.' Thus' as' for' taxing' purposes,' this' will' be' taxed'
were$the$trustees.$Art.$1448$however$applies$in$this$case,$since$if$it$is$a$child$who$holds$
similar' to' a' pledge.' It' is' not' accurate' that' it' is' termed' as' “absolute'
title,$there$is$a$presumption$of$a$donation.$
conveyance”,'the'property'is'only'held'by'way'of'security'for'payment'of'the'
'
loan.'He'may'not'dispose'of'it'because'they'are'the'trustee.''
Being' an' implied' trust' and' a' presumption,' however' Victor' Limbaring' did' not'
'
bring'any'substantial'evidence'to'dispute'the'said'presumption.'
If'the'lender'sells'the'property'in'bad'faith,'what'is'the'cheapest'remedy'of'the'
'
borrower'to'get'back'the'reconveyance'of'the'property?'Criminal'liability'will'
ART."1449"—'There$is$also$an$implied$trust$when$a$donation$is$made$to$a$person$but$it$
attach'to'the'transaction'on'part'of'the'lender.'They'become'liable'of'the'crime'
appears$that$although$the$legal$estate$is$transmitted$to$the$donee,$he$nevertheless$is$either$
of' estafa.' There' being' an' obligation' to' return' the' said' property' to' borrower'
to$have$no$beneficial$interest$or$only$a$part$thereof$
once'the'condition'is'complied'with.'When'the'lender'sold'the'property,'there'
'
is'misappropriation'of'the'property,'even'if'the'3rd'party?'the'one'bought'the'
Instead' of' an' implied' trust,' there' is' a' donation.' When' a' donation' is' made' to' a'
said'property,'is'an'innocent'purchaser'for'value.'
person'but'it'appears'that'although'the'legal'estate'is'transmitted'to'the'donee,'he' '

nevertheless' is' either' to' have' no' beneficial' interest' or' only' a' part' thereof.' (See$ "
RINGOR$case;$Jose$Ringor$held$part$of$the$property$in$trust$for$the$other$donees)$ REPUDIATION'OF'TRUST'
" '
'
"

ILLUSTRATION"8:"TRUST"BY"OPERATION"OF"LAW" GENERAL"RULE:'Repudiation'of'the'trust'is'needed'for'the'trustee'to'acquire'
There'is'a'trust'by'operation'of'law'when'the'property'will'be'titled'to'lender' ownership'of'the'property'
as' a' security.' There' can' be' redemption' of' the' property' by' payment' of' the' '
price.' EXCEPTION:' When' it' is' a' constructive" trust' because' there' is' no' intent' to'
create' a' fiduciary' relation' as' in' expressed' or' implied?resulting' trusts.' You'
reckon'the'period'from'the'time'of'knowledge.'
'

"
CASES"[ART.'1454]'
' MANILA"BANK"CORPORATION"V."TEODORO"
For'example,'there'is'a'sale.'You'have'property,'you'have'the'price.'Price'for'
Guarantee'or'pledge$
the' sale' was' loaned' by' Lender.' Property' was' titled' to' the' lender' by' way' of'
[This$is$an$example$of$Art.$1454.$Case$was$mentioned$only$in$passing,$in$relation$to$the$
security.'This'is'an'example'of'a'trust'by'operation'of'law.'Buyer'can'redeem'
example$of$Art.$1454].$
the'title'when'Buyer'pays'Lender'the'full'price'of'the'loan.'
" '
' AZNAR"BROTHERS"REALTY"COMPANY"V."HEIRS"OF"AYING"
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Implied'trust'in'case'of'mistake'or'fraud'
The' 5' children' who' have' signed' the' Extra?Judicial' Partition' of' Real' Estate' with'
Deed' of' Absolute' Sale' were' held' as' a' valid' sale' to' the' buyer,' except' as' to' the'
shares'of'the'heirs'who'did'not'participate'in'the'execution'of'the'said'document.'''
'
How"is"there"an"implied"trust?"This'case'is'similar'to'co?owners'perfecting'a'sale'
through' an' agent' of' one' of' the' co?owners.' If" sale" of" real" property" is" without"
written"special"power"of"attorney,"it"is"void.""
'
The' buyer' in' this' case' had' thought' that' everyone' had' been' represented' in' the'
sale,' however' in' this' case,' the' 5' of' those' that' sold' the' property' acted' as' if' they'
had'owned'the'whole.''
'
With' respect' to' the' three' who' did' not' sign,' an' implied?constructive' trust' had'
been' established' with' regard' to' the' buyer' of' the' said' property.' Thus,' between"
the" three" heirs" who" did" not" sign" the" sale" and" the" buyer" of" the" property," a"
impliedfconstructive" trust" was" created.' However,' the' action' for' reconveyance'
prescribes'in'ten'(10)'years.'“The'period'is'based'on'law.”''
'
When" will" the" right" of" action" accrue?" Can" a" trustee" claim" prescription" to"
acquire"ownership"of"property?'Ordinarily,'prescription'to'acquire'the'property'
will' only' accrue' when' the' trustee' repudiates' the' trust' and' claims' ownership' of'
the'property.'

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"

OBLIGATIONS"&"CONTRACTS"
San$Pedro$Lecture$Transcript$
TUESDAY,'03'MARCH'2015'
"

PRESCRIPTION"[5:41]" Of' course,' there' are' certain' provisions' here.' Prescription' does' not' run' between'
What'do'we'mean'by'prescription?' the' husband' and' the' wife' even' if' there’s' separation' of' property.' Also,'
' prescription' does' not' run' between' parents' and' children' during' the' minority' or'
insanity'of'the'latter.'
"

Prescription' as' distinguished' from' laches' deals' with' lapse' of' time.' The'
passage'of'time'has'certain'legal'consequences." '
"
What’s"the"reason?"Why?"What"could"be"the"consequence?"For'example,'there'is'
'
" a'separation'of'property,'what'will'you'do?"One'spouse'will'always'be'watching'
PRESCRIPTION"MAY"BE"CLASSIFIED"INTO"TWO:" over'his'or'her'property'because'the'other'may'be'asserting'ownership'over'that'
1. Acquisitive" Prescription' –' is' a' mode' of' acquiring' of' ownership,' a' thing'and'there'may'be'a'claim'of'prescription.'"
mode'of'acquiring'title.' '
2. Extinctive" Prescription' –' is' a' manner' of' losing' certain' rights' after' If'you'look'closely,'it’s'not'only'the'husband'and'wife,'the'parents'and'the'minor'
the'lapse'of'a'specific'period'of'time.' children.'Between'persons'with'some'kind'of'fiduciary'relationship,'prescription'
'

' will'not'run'until'the'fiduciary'rejects'the'fiduciary'relationship.''
ACQUISITIVE"PRESCRIPTION"[6:57]" '
Q:""Who"can"acquire"property"by"prescription?"" What'case'do'you'remember?'The'trust.'In'case'of'a'trust'prescription'may'never'
A:'' Anyone' pretty' much.' A' minor' or' whoever,' can' acquire' through' acquisitive' run' against' the' trustor?beneficiary' in' favor' of' the' trustee' as' long' as' the' trustee'
prescription.'" does' not' repudiate' the' trust.' Of' course' there’s' an' exception.' What’s' the'
" exception?' When' there' is' no' need' to' repudiate' in' case' of' a' trust:' such' as' in' the'
Q:""Against"whom"can"prescription"run?"" case' of' a' constructive' trust' because' in' that' case' there' is' no' fiduciary' relation.'
A:'' Against' persons' natural' or' juridical' who' is' in' a' position' to' defend' himself,' There' is' no' trust' element' in' the' relationship.' Remember' our' discussion.' In' a'
herself'or'itself.'" constructive' trust' it’s' an' implied' trust' whereby' the' law' imposes' the' trust'
' relationship' to' prevent' fraud' or' some' prejudice' to' the' principal' or' the' deemed'
That’s' why' when' you' look' at' the' enumeration' you’ll' see' that' prescription' can' trustor?beneficiary.' Because' this' is' a' dated' law,' you' have' a' provision' there:'
run' against' minors' as' long' as' they' have' the' appropriate' legal' representative.' If' prescription," acquisitive" or" extinctive," runs" in" favor" of" or" against" a" married"
you' look' at' this' enumeration,' it' says' that' prescription' could' run' against' any' person.""
person' who' can' take' appropriate' legal' action' to' defend' his' or' her' rights' or' "
property.'' ART."1112"—"Persons$with$capacity$to$alienate$property$may$renounce$property$already$
' obtained,$but$not$the$right$to$prescribe$in$the$future.$$
$
"

The"only"exception"is"that"prescription"cannot"run"against"the"State."
"
Prescription$is$deemed$to$have$been$tacitly$renounced$when$the$renunciation$results$from$
' acts$which$may$imply$the$abandonment$of$the$right$acquired.$$
One' has' to' make' a' distinction.' When' you' say' government,' there' are' certain' "
government' agencies' performing' what' you' call' proprietary' and' patrimonial' There' can' be' a' waiver' of' a' benefit' under' prescription.' Any' capacitated' person'
functions.' can' waive' the' right' acquired' through' prescription.' However,' there' can' be' no'
' waiver' of' a' right' to' prescribe' in' the' future.' This' reminds' you' of' that' provision,'
Let’s' say,' there' is' a' government' corporation' performing' proprietary' functions,' like'waiver'of'future'fraud'because'if'there'is'a'waiver'of'a'right'to'prescribe'in'
like' a' development' bank.' Prescription' can' run' against' that' bank.' When' we' say' the'future,'that’s'basically'negating'the'concept'of'prescription.'If'such'is'the'case'
the' State' or' its' subdivisions,' we' are' referring' to' the' National' Government.' You' then'you'can'enter'into'an'agreement'whereby'a'right'will'be'perpetual'and'will'
cannot' acquire' property' of' the' National' Government' especially' those' held' for' never'be'subject'to'prescription.'
public'use.'' '
' Q:""What"can"be"acquired?"What"can"be"the"object"of"prescription?"
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A:'' Anything,' anything' within' the' commerce' of' man.' ' It' means' something' that' 3. Just"title''
can'be'physically'and'legally'appropriated."
'

'
' FIRST'REQUIREMENT:'CONCEPT'OF'OWNER'
ART." 1113" —" All$ things$ which$ are$ within$ the$ commerce$ of$ men$ are$ susceptible$ of$ Ordinary'acquisitive'prescription'requires'possession'in$the$concept$of$owner.$
prescription,$ unless$ otherwise$ provided.$ Property$ of$ the$ state$ or$ any$ of$ its$ subdivisions$ '
not$patrimonial$in$character$shall$not$be$the$object$of$prescription.$$ "

POSSESSION"MUST"BE:"
'
1. Adverse;'
Look' at' the' last' sentence:' property' of' the' State' or' any' of' its' subdivisions,'
2. Public;'
patrimonial' in' character,' shall' not' be' the' object' of' prescription.' Take' note,' in'
3. Peaceful;'and'
Constitutional' Law,' we' make' a' distinction' between' patrimonial' property' and'
4. Uninterrupted'
proprietary'property.'When'we'speak'of'what'is'patrimonial,'it'is'in'that'sense'of' '

the'proprietary,'meaning'in'some'kind'of'performing'a'business.' '
' Let’s' say' there' is' an' unregistered' parcel' of' land' and' you' want' to' acquire' it' by'
So' let’s' say,' it’s' a' property' of' the' government,' of' the' State.' What' cannot' be' prescription.' Let’s' say' extraordinary' prescription.' Take' note:' possession' in' the'
alienated?' Natural' resources' of' the' public' domain' cannot' be' alienated,' except' concept' of' owner' (adverse,' public,' peaceful' and' uninterrupted)' applies' to' both'
agricultural' lands.' In' the' same' manner,' you' cannot' sit' on' Mt.' Pinatubo' for' 30' ordinary'and'extraordinary'acquisitive'prescription.'That’s'the'requirement.'''
years'and'after'adverse'possession,'declare:'“I'own'Mt.'Pinatubo.”'You'can'never' '
acquire'that'property'because'prescription'does'not'apply,'especially'to'property' So'there'is'a'piece'of'unregistered'land.'If'you'want'to'acquire'it'by'prescription,'
in'the'public'domain.'Or'property'for'public'use'like'a'park.'Rizal'Park.'You'can' let’s' say' extraordinary,' you' have' to' take' control' of' this' land.' And' it' must' be'
squat' in' Rizal' Park' for' 100' years' and' never' acquire' Rizal' Park' by' prescription.' public'meaning'you'cannot'just'stay'here'without'making'your'claim'known'to'
Let’s'assume'it’s'unregistered.' other'parties.'Also,'it'should'be'adverse.'Meaning'that'if'somebody'tries'to'enter'
' the' property,' you' try' to' force' him' or' her' out.' Or' it' should' be' in' the' concept' of'
So' that’s' what' is' meant' by' that' provision.' Of' course,' distinguish' that' from' owner.'Let’s'say'you’re'staying'in'the'property'only'as'an'agent'then'that'will'not'
instances' when' a' property' is' owned' by' a' Government' Corporation.' Let’s' say,' be'a'basis'for'prescription.'Meaning'you’re'holding'the'property'on'behalf'of'the'
[we' have]' DBP' or' Land' Bank.' Its' unregistered' land' may' be' acquired' by' owner.' So' the' first' requirement' for' prescription' to' be' claimed' as' a' mode' of'
prescription,' by' somebody' after' fulfilling' the' legal' requirements' because' that' acquiring'ownership'is'that'the'possession'must'be'in'the'concept'of'owner'and'
property'is'held'in'pursuit'of'a'business,'in'the'exercise'of'a'proprietary'function.' as' I' said' it' should' be' adverse,' meaning" to" the" exception" of" others.' It' must' be'
' public'meaning,'the"third"parties"should"be"aware"that"there"is"an"assertion"of"
" ORDINARY" EXTRAORDINARY" ownership" or" dominion" over" the" property.' ' And' it' should' be" uninterrupted.'
Real"Property" 10'years' 30'years' There' must' be' a' lapse' of' time,' meaning' the" possession" must" be" for" the" entire"
Personal"Property" 4'years' 8'years' period" prescribed" by" law.' So' you' have' to' understand' what' the' meaning' of'
' interruption'is.'Articles'1120,'1121,'1122,'1123,'1124'and'1125'provide'the'rules'on'
"
interruption'of'the'period'of'prescription.''
Ordinary" prescription" means" possession" obtained" in" good" faith" and" with"
'
just"title"for"the"time"fixed"by"law." '

"
Interruption'of'possession'can'be'either'natural'or'civil.'
'
" 1. NATURAL:'physical'possession'is'interrupted.'
ACQUISITIVE"PRESCRIPTION"CAN"BE"DIVIDED"INTO"TWO:" 2. CIVIL:'Effected'through'service'of'judicial'summons.'
1. Ordinary'Acquisitive'Prescription'
'

'
2. Extraordinary'Acquisitive'Prescription' '

'
There'is'interruption'when'through'any'cause'it'[possession]'should'cease'for'
'
" one'year.'
REQUIREMENTS"FOR"ORDINARY"ACQUISITIVE"PRESCRIPTION:"
'

'
1. Possession"in"the"concept"of"owner;'
For' example,' I' try' to' lay' claim' to' an' unregistered' land.' So' I' stay' here.' And'
2. Good"faith;'
because' there' is' no' aircon' [referring' to' the' time' when' classroom' aircon' was'
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broken],' I' move' to' another' place.' And' it' took' me' 2' years' to' return.' There' is' an' SECOND'REQUIREMENT:'GOOD'FAITH'
interruption' there.' So' any' period' that' lapsed' before' my' departure' will' not' be' The'second'requirement'is'that'it"should"be"in"good"faith.'This'is'not"required'
counted.'So'I'have'to'start'all'over'again.'If'I'need'30'years,'I'count'again'upon' for'extraordinary'acquisitive'prescription.''
my'return.'When'it'is'one'year'or'less,'there'is'no'deemed'interruption.' '
' What"does"GOOD"FAITH"mean?"
Civil' interruption' on' the' other' hand' is' effected' through' the' service' of' judicial' '
summons.'It'means'that'there'will'be'a'case.''
'

The' definition' of' good' faith' can' be' found' in' ART." 1127." Good" faith' means'
' that'the'possessor'acquired'ownership'believing"that"the"person"from"whom"
'

For' civil' interruption' to' arise,' the' one' claiming' prescription' should' lose' the' he"acquired"title"has"the"right"to"do"so.'
case.'If'the'one'claiming'prescription'wins,'then'the'period'is'uninterrupted.'
'

'
'
' ART." 1129" —" For$ the$ purposes$ of$ prescription,$ there$ is$ just$ title$ when$ the$ adverse$
So'let’s'say,'a'case'is'filed'against'the'person'claiming'acquisitive'prescription.'So' claimant$came$into$possession$of$the$property$through$one$of$the$modes$recognized$by$law$
summons' was' served.' If' summons' was' served' but' later' on,' the' plaintiff…'' for$the$acquisition$of$ownership$or$other$real$rights,$but$the$grantor$was$not$the$owner$or$
continues' [27:23],' civil' interruption' is' effective' through' the' service' of' judicial' could$not$transmit$the$right.$
summons' to' the' possessor,' the' one' claiming' prescription.' For' that' to' be' an' '
interruption' the' suing' party' should' carry' through' its' conclusion' and' win.' THIRD'REQUIREMENT:'JUST'TITLE'
Because'if'the'possessor,'the'one'claiming'prescription'wins'then'there'will'be'no' The'third'requirement'for'ordinary'acquisitive'prescription'is'that'there'must'be'
interruption'or'let’s'say'the'suing'party'desists'or'fails'to'prosecute'the'case'then' just'title.'
you' will' have' no' interruption' or' for' some' reason' there' is' lack' of' jurisdiction' '
that’s' why' the' summons' is' void' for' failure' to' comply' with' legal' requirements.' For'example,'sale'or'succession'or'it'can'be'donation.''
And' of' course' the' recognition' by' the' possessor' of' the' right' of' the' owner' will' '
interrupt'prescription.'That’s'the'reason'why'we'said'that'if'there'is'a'fiduciary' TAN"V."RAMIREZ"
relation' the' fiduciary' should' reject' the' trust' or' fiduciary' relation' before' There'were'two'parties:'the'son'and'the'tenant.'They'were'arguing'who'owns'the'
prescription'can'kick'in.'So,'that’s'possession.' entire'land.'Tenant'argues'that'he'owns'the'land'because'he'has'been'there'for'24'
' years.' ' Also,' tenant' argues' that' he' owns' the' land' by' ordinary' acquisitive'
prescription'because'the'10'year'requirement'has'been'complied'with.'Supreme'
"

ILLUSTRATION"1""
Let’s'say'X'is'the'owner'of'unregistered'land'rather,'possessor'of'unregistered'
land.'X'sold'the'land'to'Y.'In'reality,'X'only'possesses'the'land'but'has'no'title.'
Y'after'exercising'due'diligence'thought'that'X'was'the'owner.'X'was'staying'
there' for' so' many' years' and' X' executed' a' Deed' of' Sale' in' Y’s' favor.' And' Y'
asked' within' the' community' and' was' informed' that' X' indeed' was' the' one'
exercising' ownership' over' the' property.' So,' in' that' case,' Y' will' be' in' good'
faith'because'Y'after'exercising'due'diligence'did'not'see'any'red'flag'that'will'
indicate' that' Y' is' buying' the' property' from' someone' who' is' not' the' owner.'
Again,' you' have' this' recurring' issue' here.' For' you' to' claim' good' faith,' you'
must'have'exercised'due'diligence.'If'there'is'no'exercise'of'due'diligence,'you'
just'assumed'blindly'the'title'of'X—Y'assumed'blindly'the'title'of'X—then'it'
cannot'be'claimed'as'good'faith.'If'there'are'indications'that'X'is'not'really'the'
Court'ruled'that'there'was'bad'faith'because'when'he'acquired'the'property,'the'
tenant' knew' that' the' one' from' whom' he' purchased' the' property' was' not' the'
owner.' Tenant' then' tried' to' argue' extraordinary' acquisitive' prescription,'
however'it'did'not'hold'because'he'has'not'reached'the'30?year'period'prescribed'
by'law.'
'
There'was'a'compromise'agreement'between'tenant'and'the'son'of'Nicomedesa.'
The' compromise' agreement' stated' that' the' dispute' has' been' settled' and' there'
was'a'deed'of'sale'after.'
'
JSP:'The'compromise'agreement'was'being'used'as'a'title.''
'
'

owner.'Let’s'say'X'was'just'a'squatter'known'to'the'community'and'you'just' Just' title' means' that' there' must' be' a' purported' acquisition' of' ownership'
ignored' the' warnings' from' the' community.' Then' Y' cannot' be' considered' to' through'one'of'the'modes'of'acquiring'ownership.'
be' in' good' faith.' So' what’s' essential' is' that' Y' should' believe' that' X' is' the'
'

'
owner.'Of'course,'after'conducting'the'appropriate'due'diligence.' The'question'in'this'case'was'whether'the'compromise'agreement'was'a'mode'of'
'

' acquiring' ownership.' Supreme' Court' said' that' it' was' not' a' mode' of' acquiring'
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ownership'because'the'purpose'of'a'compromise'agreement'is'to'end'litigation.'' How"many"more"years?"
However,' a' compromise' agreement' can' be' the' source' of' just' title' when' it' 3'years,'tack'27'years'of'bad'faith'with'another'3'years'of'bad'faith.'[Bad'faith'can'
contains'a'CONVEYANCE'CLAUSE,'when'there'is'a'provision'clearly'conveying' be'tacked'with'bad'faith.]'No'need'to'claim'good'faith'here.'So'it'will'be'in'the'
title' then' the' compromise' will' suffice' as' a' mode' of' acquiring' ownership.' What' interest'of'Y'to'claim'bad'faith'so'that'he'can'add'the'two'possessions.'
was' missing' in' Tan,$ was' a' clear' agreement' on' a' conveyance.' The' agreement' in' '
the'case'of'Tan$only'provided'for'an'end'to'litigation'and'not'conveyance,'with' Q:""For"example,"I"have"a"father"who"owns"a"land"and"a"house"and"then"when"
no' mention' of' who' would' own' what' and' because' there' was' no' just' title' then' he" was" still" alive," he" allowed" me" to" use" that" property" as" my" own" house."
there' was' no' ordinary' acquisitive' prescription.' There' must' be' a' categorical' When"do"you"count"good"faith"or"bad"faith,"the"ownership"of"my"father"or"
statement'that'one'party'is'transferring'title'to'another.' the"time"that"I"stayed"there?"
' A:'' If'you’re'claiming'ownership,'let’s'say,'[of'an]'unregistered'land.'By'the'way,'
To'summarize,'the'requirements'are:' I'emphasize'that'the'land'is'unregistered'because'if'it’s'registered,'there'is'no'
1. Possession'in'the'concept'of'owner;'' way'you'will'acquire'it'by'prescription.'What'do'I'mean'registered?'I'mean'
2. Good'faith;'and'' registered'under'the'Torrens'system.'You'have'a'Certificate'of'Title'issued'by'
3. Just'title' the'registry'of'deeds.'People'can'squat'there'for'100'years'and'they'will'never'
' acquire'that'land.'It'will'still'be'in'the'name'of'the'registered'owner'and'the'
So' take' note' of' the' period.' If' you' don’t' have' the' requirements' for' ordinary' successors?in?interest.' Let’s' assume' it' is' unregistered' land.' When' do' you'
acquisitive' prescription,' then' you' need' to' fulfill' the' longer' period.' 30' years' for' acquire'by'prescription?'You'have'to'assert'an'interest'or'title'adverse'to'your'
real' property' and' 8' years' for' personal' property' or' movables.' As' we' said,' the' father.' As' long' as' you' recognize' the' title' of' your' father,' you' will' never'
possession'should'be'uninterrupted.'' acquire'the'property.'But'it'is'a'different'matter'when'you'are'claiming'that'
' you' possess' it' in' behalf' of' your' father.' Your' father' can' acquire' it,' for' your'
EXAMPLE"A:" father’s'possession' together'with' your' possession'as' agent'or'representative'
Let’s'say'X'is'a'possessor'in'good'faith'and'with'just'title.'X'thought'all'along'that' can' be' aggregated' and' the' total' will' be' counted' as' prescription,' depending'
X' acquired' the' property' from' someone' who' could' have' conveyed' title.' X' on'the'good'faith'or'the'bad'faith'of'your'father.'"
possessed' the' property' for' 5' years' then' X' sold' the' property' to' Y.' Y' knew' for' a' "
fact,'after'the'exercise'of'due'diligence,'that'X'did'not'validly'acquire'title'that'it' PRESCRIPTION"OF"ACTIONS'
was'conveyed'by'somebody'that'had'no'right'whatsoever'over'the'property.'So' Actions'prescribe'by'mere'lapse'of'time'fixed'by'law.'So'the'moment'the'relevant'
we'will'say,'bad'faith.'" period'of'time'lapses,'then'the'action'will'prescribe.'Meaning'the'legal'action'can'
" no'longer'be'pursued.''
How" many" years" will" Y" need" to" acquire" the" property?" 15,' because' of' tacking.' '
You' tack' the' possession' of' the' predecessor?in?interest' with' the' successor?in? Q:""When"will"the"prescriptive"period"begin?"
interest.' It' is' 15' years' because' 5' years' of' good' faith' is' equivalent' to' 15' years' of' A:'' When'the'right'of'action'accrues.'What'does'that'mean?'When'a'party'is'in'a'
bad'faith.'Y'does'not'need'a'complete'thirty'years.' position' to' take' the' proper' legal' action.' For' example,' in' breach' of' contract,'
' the' action' accrues' not' from' the' time' of' execution' of' the' contract' or' by' the'
EXAMPLE"B:" performance'of'the'parties'but'from'the'moment'of'breach.'Or'when'there'is'
Let’s'say,'bad'faith.'15'years.'Subsequent'good'faith'possession'of'2'years.' a'provision'of'law'that'prescribes'how'the'period'must'be'counted.''
' '
How"many"more"years?"8' years.' You' cannot' tack' good' faith' with' bad' faith.' [In' ' Example:' fraud' in' annulment' of' contracts.' When' will' you' count?' From'
order' for' tacking' to' apply,' good' faith' must' precede' bad' faith.]' Otherwise,' discovery.'"
successor?in?interest' will' benefit' from' the' bad' faith' of' X' and' at' the' same' time' '
claim'good'faith.' Actions'to'recover'movables'shall'prescribe'in'8'years'but'subject'to'the'right'of'a'
' possessor'who'could'have'acquired'it'by'ordinary'prescription.''
EXAMPLE"C:" '
Say'for'instance,'there'is'bad'faith,'27'years.'
"

ILLUSTRATION"2"
'
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'

Let’s' say' that' there' is' a' sale' of' a' bike,' a' mountain' bike.' It' is' sold' by' X' but'
actually'X'is'a'thief'and'X'sold'the'bike'to'Y.'Can'Y'acquire'it'by'prescription?'
' absolute' simulation.' If' you' followed' the' theory' of' absolute' simulation,' there'
X' can' never' acquire' it' by' prescription' because' it' is' the' proceeds' of' a' crime.'
Proceeds' of' a' crime' can' never' be' acquired' by' prescription.' How' about' Y?' It'
can' be' yes' or' no.' The' answer' will' turn' on' whether' Y' violated' the' Anti?
Fencing'Law.'If'Y'violated'the'Anti?Fencing'Law'then'prescription'can'never'
be' claimed.' If' Y' is' buying' stolen' property,' then' Y' can' never' acquire' it' by'
prescription.' But' let’s' say' Y' did' not' qualify' as' a' fence' then' Y' can' possibly'
acquire'it'in'good'faith'and'never'in'bad'faith.'Why?'Because'in'bad'faith,'Y'
will'be'aware'of'the'theft.'
'
period' of' 10' years.' So' if' you’re' short' of' time,' look' for' a' theory' with' a' longer'
period' or' with' no' period.' Remember' the' distinction' between' rescission' and'
would' be' no' prescriptive' period.' If' you' followed' the' theory' of' rescission,' you'
will'be'limited'by'the'4?year'period.'So'remember'Article'1144.'
'
ART."1145"—'The$following$actions$must$be$commenced$within$SIX$YEARS:$
1. Upon$an$oral$contract;$
2. Upon$a$quasi2contract$
'
If' it' is' an' oral' contract,' we' are' assuming' that' it' is' valid' and' enforceable.'
Remember' our' discussion' that' there' are' certain' contracts' which' must' be' in'

'
"
writing'in'order'to'be'valid'or'enforceable.'What'is'an'example'of'a'contract'that'
ILLUSTRATION"3"'"
has'to'be'in'writing'in'order'for'it'to'be'valid?'A'stipulation'for'the'payment'of'
There' it’s' an' action' to' recover' the' bike.' Let’s' say' there' was' no' theft.' The'
interest.'Enforceability,'you'have'the'Statute'of'Frauds.'It'has'to'be'in'writing'to'
property' was' acquired' by' prescription.' Y' possessed' it' in' good' faith' for' 5'
be'enforceable.''
years.' Y' already' is' owner.' The' rightful' owner,' the' previous' owner' could' no'
'
longer'claim'notwithstanding'that'the'previous'owner'has'a'full'8'years.'That'
ART."1149"—'All$other$actions$whose$periods$are$not$fixed$in$this$Code$or$in$other$laws$
period'will'be'subordinate'to'the'right'of'a'good'faith'possessor'acquiring'the'
must$be$brought$within$FIVE$YEARS$from$the$time$the$right$of$action$accrues.$
property'by'prescription'for'a'shorter'period'of'time,'4'years.'The'same'is'true'
'
with'respect'to'recovery'of'real'property.'The'period'is'30'years'again'subject'
This'means'that'the'GENERAL"RULE'is'5'years,'if'there'is'no'specific'provision'
to'the'acquisition'of'a'good'faith'possessor'with'just'title'for'a'shorter'period'
of'law.''
of'time.''
'
' "

A'mortgage'action,'prescribes'in'10'years.'' ILLUSTRATION"4"'"
'
X' and' Y' entered' into' a' loan' contract.' X' extended' the' loan.' On' due' date,' Y'
'
defaulted.'Let’s'call'it'day'1.'What’s'the'period'for'X'to'file?'10'years'because'
ART."1144"—'The$following$actions$must$be$brought$within$10$years$from$the$time$the$
it'is'based'on'a'written'contract.'So'X'sent'a'written'demand'on'the'7th'year.'
right$of$action$accrues:$
Good?'Yes.'X'wrote'to'Y'saying:'“I'demand'payment.'Should'you'fail,'I'will'
1. Upon$a$written$contract;$
take' the' appropriate' legal' action.”' That' was' done' in' the' 7th' year.' What' is' a'
2. Upon$an$obligation$created$by$law;$$
possible'claim'of'Y'against'X?'Laches.'Of'course'that’s'a'long'shot'but'Y'can'
3. Upon$a$judgment$
claim'that'one.'Let’s'say'Y'could'not'claim'laches.'So'7'years,'written'demand,'
'
" threat'of'litigation.'Still'Y'did'not'pay.'X'did'not'do'anything.''
THREE"MODES"OF"INTERRUPTING"PRESCRIPTION:" '
1. Written'extrajudicial'demand' On'the'11th'year'from'day'1,'X'filed'a'collection'case.'Still'good?'Yes.'Because'
2. Action'in'court" from'the'moment'of'demand,'you'count'a'new'10'year'period.''
3. Written'acknowledgement'of'debt'by'the'debtor" '
"

' When'there'is'an'interruption,'the'period'begins'again'fresh.'So'what'do'you'
Remember' the' case' of' GF' equity' (case' where' contract' of' coach' was' unilaterally' do?'There'are'clients'who'are'not'minded'to'sue'but'they'want'to'reserve'the'
terminated' by' Alaska)' when' I' explained' to' you' how' you' play' around' with' the' option' to' collect' just' in' case.' So' what' do' they' do,' the' just' send' periodically'
law.' If' you' look' at' that,' if' you' characterize' it' as' a' labor' claim,' then' the' demand' letters' to' preserve' the' right' of' action.' So' you' can' do' it' to' preserve'
prescriptive'period'is'3'years.'But'in'that'case,'the'action'was'taken'after'6'years.' your'claim.'
'

If'it'was'characterized'as'a'labor'claim'it'would'have'already'prescribed.'So'they' '
changed' the' theory,' they' theorized' breach' of' contract' which' had' a' prescription'
"—"END"OF"LECTURES"—"
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'

Bonus:$JSP$asked$the$class$to$pick$five$questions$from$his$previous$exam/s$that$the$class$ Q:"" Sir,"isn’t"it"presumed"that"if"you"sell"your"only"asset,"then"there"is"fraud?""

would$want$him$to$answer.$$ JSP:'' No,' when' there' is' fair' exchange' such' as' in' this' case,' there' can' be' no'
" assumption' of' fraud.' The' moment' you’re' given' somehow' value'
QUESTION"#1:"" approximating'the'fair'market'value'of'your'property,'even'if'it’s'your'only'
On' 15' June' 2004,' Lender' lent' Borrower' Php10' million.' Under' the' loan' contract,' asset.'It’s'just'a'change'from'lot'and'building'to'having'cash.'At'that'point'
Borrower'should'pay'the'loan'and'interest'of'12%'per'year'on'15'June'1006.'On' Lender'could'still'collect.'
10'September'2005,'Borrower'sold'his'only'asset,'a'lot'with'building'worth'Php60' '
million,'to'Buyer'for'Php45'million.'Buyer'is'a'close'friend'and'business'associate' QUESTION"#2:""
of'Borrower.'Buyer'immediately'registered'the'property'in'his'name.'In'October' Son'is'the'only'son'and'heir'of'Father.'During'the'lifetime'of'Father,'Son'entered'
2009,' Borrower' learned' he' was' terminally' ill' and' decided' to' live' his' remaining' into'a'deed'of'exchange'with'Lawyer,'a'successful'law'practitioner'with'diverse'
days' in' luxury.' By' January' 2006,' Borrower' only' had' Php500,000.' When' Lender' business' interests.' Under' the' deed,' Son' shall' convey' the' 100?hectare' property,'
found' out' Borrower’s' state' of' health' and' financial' condition' in' February' 2006,' which' Son' would' inherit' from' Father,' in' exchange' for' the' two' parcels' of' land'
Lender' asked' Borrower' to' pay' the' loan' with' accrued' interests.' Borrower,' who' worth' Php15,000,000' and' Php5,000,000' cash,' which' Lawyer' immediately'
wanted'to'use'the'remaining'Php500,000'to'drink'himself'to'death'in'Las'Vegas,' conveyed'and'paid'to'Son.'Father'died'five'years'after'execution'of'the'deed.'
refused'to'pay.' '
' a) Lawyer"demanded"Son’s"performance"of"Son’s"obligations"under"the"
a) Can"borrower"validly"refuse"to"pay?"" deed."Son"refused."Can"Lawyer"sue"Son"for"specific"performance?"
No.' The' key' there' is' insolvency.' Therefore,' borrower' loses' the' benefit' Lawyer' sued' for' specific' performance.' Cannot' be.' Contract' for' future'
of'the'period.'Lender'can'demand'payment'and'borrower'cannot'claim' inheritance.'Void.'
that'there'is'a'period.'The'borrower'loses'the'benefit'of'the'period'due' '
to'insolvency.' b) Assuming" Lawyer" cannot" obtain" specific" performance," can" Lawyer"
' recover"the"properties"conveyed"and"the"cash"paid"to"Son?"
b) Lender" sued" to" rescind" the" sale" between" Borrower" and" Buyer." Can" No.' Lawyer' is' in' bad' faith,' cannot' be' protected' by' the' law.' Only'
there"be"rescission?"" aggrieved'party'can'seek'for'relief.'
No.'The'issue'will'turn'on'whether'the'disposition'was'a'fair'exchange.' '
In'this'case,'there'is'a'25%'discount'on'the'FMV'of'the'property'when'it' c) Will" your" answer" be" the" same" if" after" Father" died" and" before"
was'sold'to'Buyer.'It'is'defensible.'In'Union'Bank,'the'discount'and'the' Lawyer’s"demand,"Son"wrote"Lawyer"to"acknowledge"and"confirm"his"
presumption' were' considered' not' material.' The' Court' said' that' the' obligations"under"the"deed?"
spouses'who'sold'the'property'were'able'to'prove'the'fair'exchange.' o Possibly,'no'ratification'because'contract'is'void.'
' o If' it' amounts' to' a' new' contract' then' it’s' a' valid' contract'
c) Who" among" the" buyer," second" buyer" and" third" buyer" may" lender" because'succession'has'opened.'
hold"liable"in"the"rescission"of"the"sale"between"Borrower"and"Buyer?" '
What"will"be"the"extent"of"the"liability"of"each"party?"" d) Assume"that"the"deed"was"valid"and"enforceable."The"deed"provided"
We'are'assuming'that'there'can'be'successive'claims'provided'that'the' that" should" Son" default" in" performing" Son’s" obligations" under" the"
parties'are'privy'to'the'fraud.' deed," Son" (a)" shall" return" the" properties" and" cash" received" from"
' lawyer,"and"(b)"shall"pay"Lawyer"a"default"penalty"equal"to"5%"of"the"
d) Can"lender"validly"rescind?"" original"total"value"of"the"properties"and"cash"received"from"Lawyer"
No.'The'action'has'prescribed.'Four'years'from'the'date'of'registration.' for"every"year"that"Son"was"in"default."A"fraction"of"a"year"was"a"full"
Registration'should'be'notice'to'all'parties.' year" under" the" deed." Upon" inheriting" the" property" from" Father," Son"
o Alternative' answer:' Absolute' Simulation' —' no' period,' immediately" sold" the" property" to" Third" Party," a" buyer" who" paid" the"
imprescriptible.' Given' that' there' is' an' assumption' of' fraud,' market" value" of" the" property" and" who" was" unaware" of" the" deed"
the' badges' of' fraud' can' be' used' to' support' the' theory' of' between"Son"and"Lawyer."Two"and"a"half"years"after"the"sale"to"Third"
absolute'simulation.' Party," Lawyer" learned" of" the" transaction" and" demanded" Son’s"
' payment" of" his" default" obligations." Son" complied" with" the" demand"
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by" returning" the" properties" and" cash" received" from" Lawyer" and"
paying" the" default" penalty" equal" to" 5%" of" the" original" total" value"
thereof," or" Php1,000,000." Lawyer" demanded" an" additional"
Php2,000,000"as"default"penalty."Is"Lawyer"entitled"to"said"amount?"
No.' When' there' is' a' stipulated' penalty,' you' cannot' claim' extra' unless'
there' is' a' stipulation' to' the' contrary' or' there' is' some' other' ground' to'
claim'the'extra.'
' be'a'decision'to'sell.'If'there'was'a'price,'then'you'distinguish'between'
QUESTION"#3:""
Shipper' and' Exporter' entered' into' a' shipping' contract' whereby' for' a' fixed' fee,'
Shipper'shall'ship'to'Country'A'the'mangoes'of'Exporter.'The'contract'prohibits'
the'exporter'from'using'vessels'not'owned'or'operated'by'Shipper.'Although'not'
provided' in' the' contract,' the' Shipper' knew' full' well' that' Exporter' entered' into'
the' contract' to' facilitate' the' exportation' and' distribution' of' Exporter’s' mangoes'
in'Country'A.'The'buyers'and'distributors'of'the'mangoes'in'Country'A'refused'
to'accept'Exporter’s'shipments'through'Shipper.''
' other'loan'obligations'to'at'least'ten'(10)'creditors'worth'P5,000,000'each.'Upon'
Give"two"(2)"alternative"legal"frameworks,"which"Exporter"may"use"to"opt"out"
of"the"contract."
1. Motive'predetermined'the'cause.'If'there'is'a'negation'of'the'cause'then'
cancellation'of'the'contract'is'effected.'
2. Public'policy,'restraint'of'trade'–'exclusivity.'
' Borrower'lost'the'period,'insolvency.'Payment'can'be'demanded.'
QUESTION"#4:""
Lessor'and'Lessee'entered'into'a'written'contract'of'lease.'The'contract'included'
the'following'provisions:'(a)'Lessor'would'lease'to'Lessee'an'office'building'for'
five'(5)'years;'(b)'Lessee'would'pay'a'monthly'rental'of'Php500,000;'(c)'the'rental'
would' be' increased' annually' by' 10%;' (d)' Lessor' would' make' a' deposit' of'
Php1,000,000' to' secure' payment' of' any' unpaid' utilities' or' other' liabilities' of'
Lessee' under' the' contract;' (e)' Lessee' would' have' the' right' to' buy' the' building'
and'the'lot'on'which'it'was'built'beginning'on'the'fourth'year'of'the'lease'until'
expiration'of'the'contract;'and'(f)'should'Lessee'fail'to'exercise'the'right'to'buy,'
Lessee' would' forfeit' in' favor' of' Lessor' any' unused' balance' of' the' security'
deposit'together'will'all'improvements,'which'Lessee'may'have'introduced'and'
which'could'not'be'removed'without'defacing'the'building.'
"
During'the'fourth'year'of'the'lease,'Lessee'informed'Lessor'of'Lessee’s'intention'
to'exercise'the'right'to'buy'the'lot'and'the'building.'
'
a) Lessor"does"not"want"to"sell."What"theory"can"Lessor"use?"Is"there"any"
downside?"
You'now'have'to'make'a'distinction'here'between'an'option'and'a'right'
of' first' refusal.' What' we' have' here' is' a' right' of' first' refusal.' Meaning'
lessee' cannot' force' a' sale' because' lessor' had' not' yet' chosen' to' sell.'
' 181"
There'was'no'price.'That’s'why'it’s'a'right'of'first'refusal,'not'an'option.'
Lessor'could'not'be'forced'to'sell.'
"
b) What"theory"can"Lessee"use"to"enforce"the"right"to"buy?"
If'there’s'a'price,'then'you'have'the'tension'between'Bible'Baptist'and'
Mayfair/Equatorial.' But' here' there’s' no' price.' Considering' there’s' no'
price,'it’s'only'a'right'of'first'refusal.'For'it'to'be'triggered,'there'must'
Equatorial' and' Bible' Baptist.' If' there’s' a' consideration,' use' Bible'
Baptist.'
"
QUESTION"#5:""
On'1'January'2005,'Borrower'borrowed'P10,000,00'from'Lender.'Under'the'loan'
agreement,' Borrower' should' pay' the' Lender' the' loan' amount' and' stipulated'
interests'on'31'December'2010.'Sometime'late'last'year,'Borrower’s'business'plan'
failed,' leaving' Borrower' with' assets' only' of' P15,000,000' in' cash.' Borrower' has'
learning'of'the'dire'financial'situation'of'Borrower,'Lender'demanded'payment'
of'the'loan'obligations.'
'
a) Should" Borrower" pay" Lender" upon" receipt" of" the" demand," will" the"
payment"be"completely"valid?"
"
b) Will" your" answer" be" the" same" if" the" other" creditors" filed" an"
insolvency"case"against"Borrower"on"the"date"of"Lender’s"demand"for"
payment?"
No.' Before' there' was' a' simpler' insolvency' law.' If' you' have' an'
insolvency' law' and' insolvency' proceedings,' there' could' be' no'
disposition.'Payment'is'a'disposition,'unless'there'is'a'court'order.'Any'
payment'would'not'just'be'rescissible'it'would'be'void.'
'