Oblicon Reviewer

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CIVIL OBLIGATIONS General

What is an obligation?.........................................................................2 Sources of Obligation…………………………………………………………….………….2 Duties of Obligor…………………………………………………………………….…..…….5

Kinds of Obligations Pure and Conditional………………………………….……………………………………14 Obligations with a Period………………………………………………………………..19 Alternative………………………………………………………………..…………………….24 Joint and Solidary……………………………………………………………………………26 Divisible and Indivisible……………………………………………………….………….28 Obligations with a Penal Clause………………………………..…………………….29

Extinguishment of Obligations Payment or Performance…………………………………………….………………….31 Loss of the Thing Due……………………………………………………………………..34 Condonation or Remission……………………………………………………………..35 Confusion or Merger of Rights…….…..…………………………………………….37 Compensations…………………………………….………………………………………..37 Novation………………………………………………………………………………………..42 Prescription……………………………………………………………………………………47 Agreement…………………………………………………………………………………….53 Difficulty…………………………………………………………………………….………….54 Impossibility…………………………………………………………………...……………..55

Other Performance Excuses Volenti Non Fit Injuria……………………………………………………………………55 Fortuitous Event………………………………………………………………………..….56

NATURAL OBLIGATIONS What is a natural obligation?.............................................................58

CONTRACTS General

What is a contract?............................................................................60 Kinds of contracts……………………………………………………….…………………..69 Stipulation Pour Autrui…………………………………………………………….……..75 Tortious Interference………………………………………………………………………77

Essential Requisites Consent………………………………………………….……………………..…….………….81 Object……………………………………………………….…………………………………....87 Cause……………………………………………………………………….…………………..…88

Reformation of Instruments Defective Contracts

Rescissible……………………………………………………….………………………….….90 Voidable………………………………………………………………………….……………..96 Unenforceable………………………………………………………..…………………….101 Void………………………………………………………………………………………………104

OBLIGATIONS AND CONTRACTS Block B2014 Finals Reviewer

Prof. Solomon Lumba

TABLE OF CONTENTS

Contents B. Obligations with a Period .......................................................... 19


CIVIL OBLIGATIONS

I. GENERAL What is an obligation? Art. 1156. An obligation is a juridical necessity to give, to do, or not to do. JURIDICAL NECESSITY – juridical tie; connotes that in case of noncompliance, there will be legal sanctions. -An obligation is nothing more than the duty of a person (obligor) to satisfy a specific demandable claim of another person (obligee) which, if breached, is enforceable in court. -A contract necessarily gives rise to an obligation but an obligation does not always need to have a contract. KINDS OF OBLIGATION A. From the viewpoint of “sanction” - (a)CIVIL OBLIGATION – that defined in Article 1156; an obligation, if not fulfilled when it becomes due and demandable, may be enforced in court through action; based on law; the sanction is judicial due process (b)NATURAL OBLIGATION – defined in Article 1423; a special kind of obligation which cannot be enforced in court but which authorizes the retention of the voluntary payment or performance made by the debtor; based on equity and natural law. (i.e. when there is prescription of duty to pay, still, the obligor paid his dues to the obligee – the obligor cannot recover his payment even there is prescription) the sanction is the law, but only conscience had originally motivated the payment. (c) MORAL OBLIGATION – the sanction is conscience or morality, or the law of the church. B. From the viewpoint of subject matter - (a) REAL OBLIGATION – the obligation to give (b) PERSONAL OBLIGATION – the obligation to do or not to do (e.g. the duty to paint a house or to refrain from committing a nuisance) C. From the affirmativeness and negativeness of the obligation - (a) POSITIVE OR AFFIRMATIVE OBLIGATION – the obligation to give or to do (b) NEGATIVE OBLIGATION – the obligation not to do (which naturally includes not to give) D. From the viewpoint of persons obliged - “sanction” -

(a) UNILATERAL – where only one of the parties is bound (b) BILATERAL – where both parties are bound - may be: (b.1) reciprocal (b.2) non-reciprocal – where performance by one is non-dependent upon performance by the other ELEMENTS OF AN OBLIGATION a) ACTIVE SUBJECT – (Creditor / Obligee) the person who is demanding the performance of the obligation; b) PASSIVE SUBJECT – (Debtor / Obligor) the one bound to perform the prestation or to fulfill the obligation or duty; c) PRESTATION – (to give, to do, or not to do) object; subject matter of the obligation; conduct required to be observed by the debtor;

Requisites of Prestation / Object: 1) licit (if illicit, it is void) 2) possible (if impossible, it is void) 3) determinate or determinable (or else, void) 4) pecuniary value

INJURY – wrongful act or omission which causes loss or harm to another DAMAGE – result of injury (loss, hurt, harm) d) EFFICIENT CAUSE – the JURIDICAL TIE which binds the parties to the obligation; source of the obligation. Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles. What are the sources of obligations? Art. 1157. Obligation arises from – (1) law; (2) contracts; (3) quasi-contracts; (4) acts or omissions punished by law; (5)quasi-delicts. (1) LAW (Obligation ex lege) – imposed by law itself; must be expressly or impliedly set forth and cannot be presumed - [See Article 1158]


(2) CONTRACTS (Obligation ex contractu) – arise from stipulations of the parties: meeting of the minds / formal agreement (3) QUASI-CONTRACTS (Obligation ex quasi-contractu) – arise from lawful, voluntary and unilateral acts and which are enforceable to the end that no one shall be unjustly enriched or benefited at the expense of another (4) DELICTS (Obligation ex maleficio or ex delicto) – arise from civil liability which is the consequence of a criminal offense (5) QUASI-DELICTS / TORTS (Obligation ex quasi-delicto or ex quasi-maleficio) – arise from damage caused to another through an act or omission, there being no fault or negligence, but no contractual relation exists between the parties Art. 1158. Obligations from law are not presumed. Only those (1) expressly determined in this code or (2) in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this code. -Unless such obligations are EXPRESSLY provided by law, they are not demandable and enforceable, and cannot be presumed to exist. -The Civil Code can be applicable supplementary to obligations arising from laws other than the Civil Code itself. -Special laws – refer to all other laws not contained in the Civil Code. Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. CONTRACT – meeting of minds between two persons whereby one binds himself, with respect to the other, to give, to do something or to render some service; governed primarily by the agreement of the contracting parties. VALID CONTRACT – it should not be against the law, contrary to morals, good customs, public order, and public policy. In the eyes of law, a void contract does not exist and no obligation will arise from it. OBLIGATIONS ARISING FROM CONTRACTS – primarily governed by the stipulations, clauses, terms and conditions of their agreements. If a contract’s prestation is unconscionable (unfair) or unreasonable, even if it does not violate morals, law, etc., it may not be enforced totally. Interpretation of contract involves a question of law. COMPLIANCE IN GOOD FAITH – compliance or performance in accordance with the stipulations or terms of the contract or agreement.

FALSIFICATION OF A VALID CONTRACT – only the unauthorized insertions will be disregarded; the original terms and stipulations should be considered valid and subsisting for the parties to fulfill. Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of chapter 1, title 17 of this book. QUASI-CONTRACT – juridical relation resulting from lawful, voluntary and unilateral acts by virtue of which, both parties become bound to each other, to the end that no one will be unjustly enriched or benefited at the expense of the other. (See Article 2142) (1) NEGOTIORUM GESTIO – juridical relation which takes place when somebody voluntarily manages the property affairs of another without the knowledge or consent of the latter; owner shall reimburse the gestor for necessary and useful expenses incurred by the latter for the performance of his function as gestor. (2) SOLUTIO INDEBITI – something is received when there is no right to demand it and it was unduly delivered through mistake; obligation to return the thing arises on the part of the recipient. (ex. storekeeper gives excess change, you have the obligation to return the excess) Art. 1161. Civil obligations arising from criminal offenses shall be governed by the penal laws, subject to the provisions of Article 2177, and of the pertinent provisions of Chapter 2, Preliminary in Human Relations, and of Title 18 of this book, regulating damages. Governing rules: 1. Pertinent provisions of the RPC and other penal laws subject to Art 2177 Civil Code [Art 100, RPC – Every person criminally liable for a felony is also civilly liable] 2. Chapter 2, Preliminary title, on Human Relations ( Civil Code ) 3. Title 18 of Book IV of the Civil Code – on damages - Every person criminally liable for a felony is also criminally liable (art. 100, RPC) CRIMINAL LIABILITY INCLUDES: (a) RESTITUTION – restoration of property previously taken away; the thing itself shall be restored, even though it be found in the possession of a third person who has acquired it by lawful means, saving to the latter his action against the proper person who may be liable to him. (b) REPARATION OF THE DAMAGE CAUSED – court determines the amount of damage: price of a thing, sentimental value, etc. (c) INDEMNIFICATION FOR CONSEQUENTIAL DAMAGES – includes damages suffered by the family of the injured


party or by a third person by reason of the crime. Effect of acquittal in criminal case: a. when acquittal is due to reasonable doubt – no civil liability b. when acquittal is due to exempting circumstances – there is civil liability c. when there is preponderance of evidence – there is civil liability Art. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of chapter 2, title 17 of this book, and by special laws. Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter. Art. 2180. The obligation imposed by Article 2176 is demandable not only for one's own acts or omissions, but also for those of persons for whom one is responsible. QUASI-DELICT (culpa aquiliana) – an act or omission by a person which causes damage to another giving rise to an obligation to pay for the damage done, there being fault or negligence but there is no pre-existing contractual relation between parties. - Requisites: a. omission b. negligence c. damage caused to the plaintiff d. direct relation of omission, being the cause, and the damage, being the effect e. no pre-existing contractual relations between parties Fault or Negligence – consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the person, time, and of the place. Obligations derived from quasi delicts are also applicable for persons for whom one is responsible such as: - father / in case unavailable, mother for their minor children - guardians - employers for their employees

- owners / managers of establishments for their employees - the state through its special agent - teachers / heads of establishments of arts and trades for students in their custody Requisites of liability - there exists a wrongful act or omission imputable to the defendant by reason of his fault or negligence - there exists a damage or injury which must be proved by the person claiming recovery - there must be a direct causal connection or a relation of cause and effect between the fault or negligence and the damage or injury, or that the fault or negligence be the cause of the damage or injury. RULE 111 - Prosecution of Civil Action Section 1. Institution of criminal and civil actions. —

(a) When a criminal action is instituted, the civil action for the recovery of civil liability arising from the offense charged shall be deemed instituted with the criminal action unless

offended party waives the civil action

reserves the right to institute it separately

institutes the civil action prior to the criminal action. SAGRADA ORDEN v NACOCO J. Labrador -FACTS: Alien Property Administration had the control and administration of the property by express provision of the law. There’s no agreement b/w the APA and NACOCO to pay rentals on the property. Previous occupant also did not pay rentals. - HELD: No crime since NACOCO entered the premises since it occupied the property with the permission of the APA. Also, no contract or obligation between APA and Taiwan Tekkosho. Therefore, APA occupied the property IN GOOD FAITH. FGU INSURANCE v SARMIENTO J. Vitug - FACTS: Insured company got into an accident. FGU Insurance had to pay for the damages as a result of the accident. They now seek to recover from the trucking company, the other party in the accident.


- HELD: A private hauler is not a common carrier and it was not proven that the driver was negligent. - FGU is the subrogee of the rights and interests of Concepcion industries so it had a right to seek reimbursement for the amount it had paid to the latter from the trucking corporation. However, the liability arose from a contract. A breach upon the contract confers upon the injured party a valid cause for recovering that which had been lost or suffered. - Failure in the compliance of an obligation, in this case the delivery of goods, gives rise to a presumption of lack of care and corresponding liability on the part of the contractual obligor. - Driver may not be held liable since he was not a party to the contract of carriage between petitioner’s principal and defendant. But, civil action may be filed against him based on culpa aquiliana. Negligence must be proved first. -Kinds of Interest: 1) Expectation interest - the interest of a party to a breached contract in receiving the benefit of the bargain by being put in a position as good as that which would have resulted had the contract been performed. It is based on the actual value the contract would have had to the injured party if the contract had been performed. - you pay 1 peso for a car that that should have been delivered. Person did not deliver car. He owes you 1 peso for the car not delivered. 2) Reliance interest - the interest of a party to a breached contract in being compensated for detriments suffered (as expenses incurred) in reliance on the agreement Reliance damages protect a party's reliance interest. Neal spent $100 in reliance on the contract, which constituted Neal's reliance interest. Since reliance damages equal to the value of the reliance interest of the injured party, Matt owes Neal $100. This puts Neal in the same economic position as if the contract never happened. - another example would also be buying mags for a car which was not delivered 3) Restitution interest - interest in having restored to him any benefit that he has conferred on the other party.... Example: A, a social worker, promises B to render personal services to C in return for B's promise to educate A's children. B repudiates the contract after A has rendered part of the services. A can get restitution from B for the services, even though they were not rendered to B, because they conferred a benefit on B.

COCA COLA v. CA J. Davide Jr. - FACTS: Proprietress of a school canteen found foreign substances in the softdrinks she sells at her canteen. - HELD: Liability for quasi delicts may exist even with a contract if the nature that breaks the contract may also be a tort. Existence of a contract does not preclude the action for quasi delicts LRTA v NAVIDAD J. Vitug - FACTS: Man and guard had an altercation. Man fell on the railway tracks of LRT just as the train was approaching. He died. - HELD: Agency can never be liable if guard is not liable. Agency may be liable if guard is liable except if it establishes that it exercised extraordinary diligence in choosing employees. Obligation is based on quasi delict. - LRTA is a common carrier so carrier is presumed to be at fault upon proof of the injury. Burden shifts on the carrier to prove that the injury is due to an unforeseen event or force majeure. - LRTA’s liability is the contract of carriage and its obligation to indemnify the victim arises from the breach of that contract by reason of its failure to exercise the high diligence required of the common carrier. LG FOODS v AGRAVIADOR J. Garcia - FACTS: Boy died after being hit by the van of the petitioners. The driver who was driving the van and an employee of the petitioners killed himself. - HELD: Civil liability arising from the criminal act. Judgement is required. Since driver killed himself, Art 2180 was used (for persons for whom one was responsible). LG foods is principally liable. It was sufficiently alleged that the death of the son was caused by the driver’s negligence. LG foods impliedly admitted the action for quasi delicts by using the defense that they exercised extraordinary diligence to choose its employees. What are the duties of the obligor in obligations to give? To take care of the thing with the diligence of a good father of a family Art. 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care.


- Speaks of an obligation to care of a DETERMINATE thing (that is one which is specific; a thing identified by its individuality) which an obligor is supposed to deliver to another. Reason: the obligor cannot take care of the whole class/genus DUTIES OF DEBTOR: Preserve or take care of the things due. DILIGENCE OF A GOOD FATHER – a good father does not abandon his family, he is always ready to provide and protect his family; ordinary care which an average and reasonably prudent man would do. - Defined in the negative in Article 1173 ANOTHER STANDARD OF CARE – extraordinary diligence provided in the stipulation of parties. FACTORS TO BE CONSIDERED – diligence depends on the nature of obligation and corresponds with the circumstances of the person, time, and place. Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. (1104a)

FRAUD

Negligence

There is deliberate intention to cause damage. Liability cannot be mitigated. Waiver for future fraud is void.

There is no deliberate intention to cause damage. Liability may be mitigated. Waiver for future negligence may be allowed in certain cases:

- This provision provides for a negative definition of “proper diligence of a good father of a family” DILIGENCE – the attention and care required of a person in a given situation and is opposite of negligence. NEGLIGENCE – consists in the omission of that diligence which is required by the nature of the particular obligation and corresponds with the circumstances of the persons, of the time, and of the place.

KINDS of DILIGENCE: 1. DILIGENCE OF A GOOD FATHER – a good father does not abandon his family, he is always ready to provide and protect his family; ordinary care which an average and reasonably prudent man would do. 2. Diligence required by the law governing the particular obligation 3. Diligence stipulated by the parties To deliver the thing Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exists: -When the law or obligation so expressly declares; -When from the nature of the contract, time us the essence and motivating factor for its establishment; -When demand would be useless (prestation is impossible); -In reciprocal obligations, from the moment one of the parties fulfills his obligation; -When the debtor admits he is in default ORDINARY DELAY – mere failure to perform an obligation at the appointed time. LEGAL DELAY (DEFAULT) – tantamount to non-fulfillment of the obligation and arises after an extrajudicial or judicial demand was made upon the debtor. KINDS OF DEFAULT : a) MORA SOLVENDI – delay on the part of the debtor to fulfill his obligation; REQUISITES: 1. failure of the obligor to perform obligation on the DATE agreed upon; 2. demand (judicial/extrajudicial) by the creditor; 3. failure to comply with such demand EFFECTS: 1) debtor – liable for damages and interests 2) debtor – liable for the loss of a thing due to a fortuitous event KINDS: 1) mora solvendi ex re – default in real obligations (to give) 2) mora solvendi ex persona – default in personal obligations (to do)


b) MORA ACCIPIENDI – delay on the part of the creditor to accept the performance of the obligation; Effects: 1. creditor – liable for damages 2. creditor – bears the risk of loss of the thing 3. debtor – not liable for interest from the time of creditor’s delay 4. debtor – release himself from the obligation c) COMPENSATIO MORAE – delay of the obligors in reciprocal obligation. Effect: the default of one compensates the default of the other; their respective liabilities shall be offset equitable. Default / Delay in negative obligation is not possible. (In negative obligation, only fulfillment and violation are possible) Art. 712. Ownership is acquired by occupation and by intellectual creation. Ownership and other real rights over property are acquired and transmitted by law, by donation, by estate and intestate succession, and in consequence of certain contracts, by tradition. They may also be acquired by means of prescription. Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him. REAL RIGHT (jus in re) – right pertaining to person over a specific thing, without a passive subject individually determined against whom such right may be personally enforced. - a right enforceable against the whole world PERSONAL RIGHT (jus ad rem) – a right pertaining to a person to demand from another, as a definite passive subject, the fulfillment of a prestation to give, to do or not to do. - a right enforceable only against a definite person or group of persons. - Before the delivery, the creditor, in obligations to give, has merely a personal right against the debtor – a right to ask for delivery of the thing and the fruits thereof. - Once the thing and the fruits are delivered, then he acquires a real right over them. - Ownership is transferred by delivery which could be either actual or constructive. (Art. 1477)

- The remedy of the buyer when there is no delivery despite demand is to file a complaint for “SPECIFIC PERFORMANCE AND DELIVERY” because he is not yet the owner of the property before the delivery. ACTUAL DELIVERY – actual delivery of a thing from the hand of the grantor to the hand of the grantee (personally), or manifested by certain possessory acts executed by the grantee with the consent of the grantor (realty). FRUITS: 1. NATURAL – spontaneous products of the soil, the young and other products of animals; 2. INDUSTRIAL – produced by lands of any cultivation or labor; 3. CIVIL – those derived by virtue of juridical relation. Art. 725. Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. Art. 1165. When what is to be delivered is a determinate thing, the creditor … may compel the debtor to make delivery. If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. 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 the delivery. *This provision applies to an obligation to give. DETERMINATE THING - something which is susceptible of particular designation or specification; - obligation is extinguished if the thing is lost due to fortuitous events. - Article 1460: a thing is determinate when it is particularly designated and physically segregated from all others of the same class. INDETERMINATE THING - something that has reference only to a class or genus; - obligation to deliver is not so extinguished by fortuitous events. REMEDIES FOR FAILURE OF DELIVERY (determinate thing) 1. Complaint for specific performance – an action to compel the fulfillment of the obligation. 2. Complaint for rescission of the obligation – action to rescind 3. Complaint for damages – action to claim for compensation of damages suffered


- As a general rule, “no person shall be responsible for those events which could not be foreseen, or which, though foreseen, are inevitable, except: 1. in cases expressly specified by the law 2. when it is stipulated by the parties 3. when the nature of the obligation requires assumption of risk - An indeterminate thing cannot be object of destruction by a fortuitous event because genus never perishes. Art. 1477. The ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof. (n) To deliver the fruits of the thing Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him. Art. 441. To the owner belongs: (1) The natural fruits; (2) The industrial fruits; (3) The civil fruits. (354) Art. 442. Natural fruits are the spontaneous products of the soil, and the young and other products of animals. Industrial fruits are those produced by lands of any kind through cultivation or labor. Civil fruits are the rents of buildings, the price of leases of lands and other property and the amount of perpetual or life annuities or other similar income. (355a) Art. 443. He who receives the fruits has the obligation to pay the expenses made by a third person in their production, gathering, and preservation. (356) Art. 444. Only such as are manifest or born are considered as natural or industrial fruits. To deliver the accessions and accessories of the thing Art. 1166. The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned.

ACCESSIONS – fruits of the thing or additions to or improvements upon the principal -those which are naturally or artificially attached to the thing ACCESSORIES – things included with the principal for the latter’s embellishment, better use, or completion When does right to fruits arise? – from the time the obligation to deliver arises -Conditional – from the moment the condition happens - With a term/period – upon the expiration of the term/period - Simple – from the perfection of the contract Art. 445. Whatever is built, planted or sown on the land of another and the improvements or repairs made thereon, belong to the owner of the land, subject to the provisions of the following articles. Art. 447. The owner of the land who makes thereon, personally or through another, plantings, constructions or works with the materials of another, shall pay their value; and, if he acted in bad faith, he shall also be obliged to the reparation of damages. The owner of the materials shall have the right to remove them only in case he can do so without injury to the work constructed, or without the plantings, constructions or works being destroyed. However, if the landowner acted in bad faith, the owner of the materials may remove them in any event, with a right to be indemnified for damages. Art. 459. Whenever the current of a river, creek or torrent segregates from an estate on its bank a known portion of land and transfers it to another estate, the owner of the land to which the segregated portion belonged retains the ownership of it, provided that he removes the same within two years. To pay for damages in case of fraud, negligence, delay or contravention of tenor Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: (1) When the obligation or the law expressly so declare; or (2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or


the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. (1100a) Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101) FRAUD (dolo) – deliberate intentional evasion of the faithful fulfillment of an obligation; NEGLIGENCE (culpa or fault) – voluntary act or omission of diligence, there being no malice, which prevents the normal fulfillment of an obligation; DELAY (mora) – default or tardiness in the performance of an obligation after it has been due and demandable; CONTRAVENTION OF TERMS OF OBLIGATION (violation)– violation of terms and conditions stipulated in the obligation; this must not be due to a fortuitous event. Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. (1102a) INCIDENTAL FRAUD (applicable provisions are Arts. 1170 & 1344) – committed in the performance of an obligation already existing because of a contract; incidental fraud obliges the person employing it to pay damages. CAUSAL FRAUD – (Art. 1338) employed in the execution of contract in order to secure consent; remedy is annulment because of vitiation of consent. Art. 1172. Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. (1103) Court’s discretion because:

(a) negligence depends upon the circumstances of a case – good or bad faith of the obligor may be considered as well as the conduct or misconduct of the obligee; (b) it is not as serious as fraud. Negligence – lack of foresight or knowledge Imprudence – lack of skill or precaution TEST OF NEGLIGENCE Did the defendant, in doing the alleged negligent act, use the reasonable care and caution which an ordinary prudent man would have used in the same situation? Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2, shall apply. Two Types of Negligence:

Basis Culpa Aquiliana (Quasi Delict)

Culpa Contractual (Breach of Contract)

Definition Negligence between parties not so related by pre-existing contract

Negligence in the performance of contractual obligation

Nature of Negligence Direct, substantive and independent

Incidental to the performance of the obligation

Good Father of the family defense

Complete and proper defense (parents, guardians, employers)

Not complete and proper defense in the selection of employees

Presumption of negligence

No presumption – injured party must prove negligence of the defendant

There is presumption of negligence by the fact that the contract was breached. Must show that they are not negligent and breach was caused by fortuitous events.


Ex, Bus with passengers bumps a car. A was a passenger of the bus. B was the driver of the car. There is culpa contractual with regards to A and the bus driver and culpa aquiliana with regards to the car driver and bus driver. Question: Does the employer still have to prove extraordinary diligence in choosing his employees in an action for culpa aquiliana if it was proven that the driver was not negligent? NO! Art. 2199. Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly proved. Such compensation is referred to as actual or compensatory damages. Art. 2200. Indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain. (1106) Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable shall be those that are the natural and probable consequences of the breach of the obligation, and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted. In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation. (1107a) Art. 2202. In crimes and quasi-delicts, the defendant shall be liable for all damages which are the natural and probable consequences of the act or omission complained of. It is not necessary that such damages have been foreseen or could have reasonably been foreseen by the defendant. Art. 2216. No proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or exemplary damages, may be adjudicated. The assessment of such damages, except liquidated ones, is left to the discretion of the court, according to the circumstances of each case. Art. 2217. Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary

computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act for omission. Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him. Art. 2224. Temperate or moderate damages, which are more than nominal but less than compensatory damages, may be recovered when the court finds that some pecuniary loss has been suffered but its amount can not, from the nature of the case, be provided with certainty. Art. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof. Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages. Kinds of Damages – MENTAL MORAL - Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act for omission. Includes sentimental value of property EXEMPLARY - Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages. NOMINAL - Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him. TEMPERATE - Temperate or moderate damages, which are more than nominal but less than compensatory damages, may be recovered when the court finds that some pecuniary loss has been suffered but its amount can not, from the nature of the case, be provided with certainty. ACTUAL / Compensatory - adequate compensation only for such pecuniary loss suffered by him as he has duly proved


LIQUIDATED - Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof. ARRIETA v. NATIONAL RICE J. Regala - Source of obligation: contract - failure of the opening of the letter of credit was the cause for the breach of contract - … it is clear that what singularly delayed the opening of the stipulated letter of credit and which, in turn, caused the cancellation of the allocation in Burma, was the inability of the appellant corporation to meet the condition importation by the Bank for granting the same. - liability and culpability arises from the willful and deliberate assumption of contractual obligations even as it was well aware of its financial incapacity to undertake the prestation - NARIC knew the bank requirements for opening a letter of credit and that it could not meet its requirement. Despite that, it still continued with the bidding. Hence , it must be similarly held to have bound itself to answer for all and every consequences that would result from the representation. aptly observed by the trial court. - “Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable in damages.” - The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for the originally contracted Burmese rice amounted to a waiver by the appellee of whatever rights she might have derived from the breach of the contract. We disagree. Waivers are not presumed, but must be clearly and convincingly shown, either by express stipulation or acts admitting no other reasonable explanation. - damages were based on estimates , cost studies, and evidence. Award should be in Philippine peso. Exchange rate is to be when the obligation was incurred. CATHAY PACIFIC v VAZQUEZ J. Davide - Source of obligation: contract of carriage - breach of contract of carriage -> upgrading the seats from business class to first class is a breach of contract - breach of contract - failure without legal reason to comply with the terms of a contract.”*5+ It is also defined as the “*f+ailure, without legal excuse, to perform any promise which forms the whole or part of the contract

- By insisting on the upgrade, Cathay breached its contract of carriage with the Vazquezes even when the Vasquez’s waived their privilege in not taking the upgraded seats - the upgrading of the seats were not in bad faith. Bad faith is defined as “… a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or interest or ill will that partakes of the nature of fraud” - there was no bad faith since the Vasquez spouses were not induced by deceit in upgrading their seats and it was not for a devious or evil purpose. - overbooking the business class section was not in bad faith since it is in accordance with law (Section 3 of the Economic Regulation No. 7 of the Civil Aeronautics Board) - there are no moral damages since it requires the following: (1) there must be an injury clearly sustained by the claimant, whether physical, mental or psychological; (2) there must be a culpable act or omission factually established; (3) the wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant; and (4) the award for damages is predicated on any of the cases stated in Article 2219 of the Civil Code. - Moral damages predicated upon a breach of contract of carriage may only be recoverable in instances where the carrier is guilty of fraud or bad faith or where the mishap resulted in the death of a passenger.[ Where in breaching the contract of carriage the airline is not shown to have acted fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences of the breach of the obligation which the parties had foreseen or could have reasonably foreseen. In such a case the liability does not include moral and exemplary damages. Nominal damages is applicable since it deals with the right of the spouses. PLEASANTVILLE v CA J. Panganiban Source of obligation: contract - there was good faith in Kee building the properties in the disputed lot. - Good faith consists in the belief of the builder that the land he is building on is his and his ignorance of any defect or flaw in his title. And as good faith is presumed, petitioner has the burden of proving bad faith on the part of Kee. At the time he built improvements on Lot 8, Kee believed that said lot was what he bought from petitioner. He was not aware that the lot delivered to him was not Lot 8. Thus, Kee’s good faith. Petitioner failed to prove otherwise. - Kee’s contract violation -> only applicable in contractual breach


- provision on contract of sale regarding erosion is not applicable to the negligence of the seller’s agent. - waiver to contract away rights to recover damages from negligence is contrary to public policy and is not allowed. - principal is responsible for the acts of the agent, done within the scope of his authority, and should bear the damage caused to third persons. cause of the issue was the agent’s negligence. - Holding of the CA would unjustly enrich KEE: “a. If Eldred Jardinico decides to appropriate the improvements and, thereafter, remove these structures, the third-party defendants shall answer for all demolition expenses and the value of the improvements thus destroyed or rendered useless; “b. If Jardinico prefers that Kee buy the land, the third-party defendants shall answer for the amount representing the value of Lot 9 that Kee should pay to Jardinico.” Kee and Jardincio has already amicably settled through their deed of sale their rights and obligations with regards to Lot 9. What are the duties of the obligor in obligations to do? To do it To shoulder the cost if someone else does it To undo what has been poorly done Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost. This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone. (1098) To pay for damages in case of fraud, negligence, delay or contravention of tenor Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: (1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. (1100a) Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101) Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. (1102a) Art. 1172. Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. (1103) Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. (1104a) (See annotations above) What are the duties of the obligor in obligations not to do? Not to do what should not be done To shoulder the cost to undo what should not have been done Art. 1168. When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also be undone at his expense. (1099a)


* This provision applies to an obligation to do. THREE SITUATIONS: a) Debtor’s failure to perform an obligation creditor may do the obligation, or by another, at the expense of the debtor;- recover damages b) Performance was contrary to the terms agreed upon - order of the court to undo the same at the expense of the debtor c) Performance in a poor manner - order of the court to undo the same at the expense of the debtor To pay damages Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101) Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable shall be those that are the natural and probable consequences of the breach of the obligation, and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted. In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation. (1107a) Art. 2202. In crimes and quasi-delicts, the defendant shall be liable for all damages which are the natural and probable consequences of the act or omission complained of. It is not necessary that such damages have been foreseen or could have reasonably been foreseen by the defendant. To pay for damages in case of fraud, negligence, delay or contravention of tenor Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or (2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. (1100a) Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101) Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. (1102a) Art. 1172. Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. (1103) Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. (1104a) (see annotations above)


II. Kinds of Obligations A. Pure and Conditional Obligations What is a pure obligation? Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once. Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event. What is a conditional obligation? Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. PURE OBLIGATION – an obligation which does not contain any condition or term upon which the fulfillment is made to depend; immediately demandable by the creditors and the debtor cannot be excused from not complying with his prestation. CONDITIONAL OBLIGATION – an obligation which depends upon a future or uncertain event, or upon a past event unknown to the contracting parties. – an obligation subject to a condition. - an event which is not uncertain but must necessarily happen cannot be a condition; the obligation will be considered as one with a term - past event cannot be called a condition but rather, a basis of the contract. Even when unknown to the parties, a past event is not a condition. - it is not the fact stated which serves as a condition but the proof of such fact; the contract or obligation arises, not when the vent happened or the fact came into existence , which would be in the past, but when the proof of such fact or event is presented, which would be the future. Resolutory Condition – the happening of such extinguishes rights already existing; obligation is treated as if it never came into existence - cannot be enforced against a 3

rd party as it is a personal right which he can

enforce only against his creditor who has become a debtor obliged to make restitution - in case of loss of a thing, deteriorations or improvements, the party who has to make the restitution being considered the debtor

- mutual restitution happens not just for the object and the price but also for the fruits and the interests Suspensive Condition – happening of such gives rise to an obligation What is a resolutory condition? Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once. Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event. Art. 1190. When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the fulfillment of said conditions, shall return to each other what they have received. In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid down in the preceding article shall be applied to the party who is bound to return. As for the obligations to do and not to do, the provisions of the second paragraph of Article 1187 shall be observed as regards the effect of the extinguishment of the obligation. -Refers to the fulfillment of a resolutory condition. -When the resolutory condition happened, the obligation is considered as if it did not exist. -The parties are bound to return or restore whatever they have received from each other – “reciprocal restitution” -Donation by reason of marriage – if the marriage does not happen, such donation should be returned to the donor. -Loss, deterioration and improvement – governed by 1189. -In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with. What is a potestative condition? 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.


Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. (1256a) Art. 1309. The determination of the performance may be left to a third person, whose decision shall not be binding until it has been made known to both contracting parties. (n) Art. 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances. (n) Potestative condition – one which depends upon the will of one of the contracting parties Casual condition – depends exclusively upon chance or other factors and not upon the will of the contracting parties Mixed condition – one which depends upon the will of one of the contracting parties and other circumstances, including the will of a third person Kinds of Potestative Condition 1.) Simple – presupposes not only a manifestation of will but also the realization of an external act (if you sell your house) - does not prevent the formation of a valid obligation - it is subject in part to contingencies over which debtor has no control 2.) Purely Potestative – depends solely and exlusively upon the will ( if I like it or if I deem it proper) - destroys the efficacy of the legal tie; - it is only when the potestative condition depends exclusively upon the will of the debtor that the conditional obligation is void. It is valid if it depends partly on the will of the debtor and the 3

rd person,

- dependence on the debtor – illusory obligations – obligation is void but is applicable only when the condition is suspensive and cannot apply to resolutory conditions - potestative and resolutory = may be valid - mixed conditions = valid - if dependent on a 3

rd person who cannot be compelled to carry it out, and it

is found by the court that the obligor has done all in his power to comply with the obligation, the other party may be ordered to comply with his part of the contract

NAGA TELEPHONE v CA J. Nocon Source of obligation: contract - cause of action – one sided contract, petitioner’s use of the telephone posts caused damage - cause of action – no payment for usage of telephone posts despite demands or private respondent - cause of action – poor service which caused damages Respondents answered: - not sufficient COA , barred by prescription, estoppel, their usage could not have caused the deterioration - petitioners refused to comply with private respondent’s demands , it was probably because what is due to them from private respondent is more than its claim against them. - telephone service had been categorized by the National Telecommunication Corporation (NTC) as "very high" and of "superior quality. Issue of the applicability of Art 1267 of the NCC - … we agree with respondent court that the allegations in private respondent's complaint and the evidence it has presented sufficiently made out a cause of action under Article 1267. We, therefore, release the parties from their correlative obligations under the contract. However, our disposition of the present controversy does not end here. We have to take into account the possible consequences of merely releasing the parties therefrom: petitioners will remove the telephone wires/cables in the posts of private respondent, resulting in disruption of their service to the public; while private respondent, in consonance with the contract will return all the telephone units to petitioners, causing prejudice to its business. We shall not allow such eventuality. Rather, we require, as ordered by the trial court: 1) petitioners to pay private respondent for the use of its posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where petitioners use private respondent's posts, the sum of ten (P10.00) pesos per post, per month, beginning January, 1989; and 2) private respondent to pay petitioner the monthly dues of all its telephones at the same rate being paid by the public beginning January, 1989. The peculiar circumstances of the present case, as distinguished further from the Occeña case, necessitates exercise of our equity jurisdiction. Issue of prescription - Article 1144 of the New Civil Code provides, inter alia, that an action upon a written contract must be brought within ten (10) years from the time the right of action accrues. Clearly, the ten (10) year period is to


be reckoned from the time the right of action accrues which is not necessarily the date of execution of the contract. This was when contract was studied since it was disadvantageous (1982) , 10 years have not yet elapsed. Issue of Potestation - petitioners allege that there is nothing purely potestative about the prestations of either party because petitioner's permission for free use of telephones is not made to depend purely on their will, neither is private respondent's permission for free use of its posts dependent purely on its will. Petitioners' allegations must be upheld in this regard. A potestative condition is a condition, the fulfillment of which depends upon the sole will of the debtor, in which case, the conditional obligation is void. 19 Based on this definition, respondent court's finding that the provision in the contract, to wit: (a) That the term or period of this contract shall be as long as the party of the first part (petitioner) has need for the electric light posts of the party of the second part (private respondent) . . .. is a potestative condition, is correct. However, it must have overlooked the other conditions in the same provision, to wit: . . . it being understood that this contract shall terminate when for any reason whatsoever, the party of the second part (private respondent) is forced to stop, abandoned (sic) its operation as a public service and it becomes necessary to remove the electric light post (sic); which are casual conditions since they depend on chance, hazard, or the will of a third person. In sum, the contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly on chance, hazard or the will of a third person, which do not invalidate the aforementioned provision. POLOTAN v CA J. Romero Soutce of obligation – contract PAYMENT OF CHARGES — . . . The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and Trust Company. . . . Provided that if there occurs any change in the prevailing market rates the new interest rate shall be the guiding rate of computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting on the monthly statement served to the Cardholder.

The Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such interest in the event of changes in prevailing market rates and to charge additional service fees as may be deemed necessary in order to maintain its service to the Cardholder. - claims that the terms “rates” are ambiguous and obscure, violated laws on Central Bank Circulars, there was bad faith from diner’s club A contract of adhesion is one in which one of the contracting parties imposes a ready-made form of contract which the other party may accept or reject, but cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his "adhesion" thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing. Admittedly, the contract containing standard stipulations imposed upon those who seek to avail of its credit services was prepared by Diners Club. There is no way a prospective credit card holder can object to any onerous provision as it is offered on a take-it-or-leave-it basis. Being a contract of adhesion, any ambiguity in its provisions trust be construed against private respondent. - these are considered ordinary binding contracts since the party to adheres to the contract is free to reject it - is the contract one sided? No . it’s parties agreed upon the stipulation and petitioner did not specify what provision was in question - it’s not an escalation clause since it refers to the prevailing market rate. Does not state all increase / decrease in rate - Escalation clauses are not basically wrong or legally objectionable as long as they are not solely potestative but based on reasonable and valid grounds. It is beyond the control of any of the parties. What is the effect of impossible conditions? Illegal conditions? Art. 1183. Impossible conditions, those contrary to good customs or public policy and those prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not affected by the impossible or unlawful condition shall be valid. The condition not to do an impossible thing shall be considered as not having been agreed upon.


Question: A promised B to give his car if B can hold the sun. Can B demand the fulfillment of the donation? Art. 727. Illegal or impossible conditions in simple and remuneratory donations shall be considered as not imposed. - impossibility may be physical or juridical -physical if contrary to the laws of nature. Juridical if contrary to law, morals, good customs, public policy and order - intention determines if the act is illicit - impossibility must exist at the time of the creation of the obligation - illogical conditions – is the logical impossibility in an obligation although the condition is not impossibility (I will deliver to you my house if it is destroyed) - divisible obligations – part not affected by the impossible or unlawful obligation shall be valid - negative impossible conditions – considered to have been agreed upon. Does not need to wait upon the conditions. When are conditions deemed fulfilled? Art. 1184. The condition that some event happen at a determinate time shall extinguish the obligation as soon as the time expires or if it has become indubitable that the event will not take place. (1117) Positive condition – refers to the fulfillment of an event or performance of an act Negative condition – refers to the non-fulfillment or non-performance of an act. POSITIVE SUSPENSIVE CONDITION The obligation is extinguished: 1. As soon as the TIME EXPIRES without the event taking place; 2. As soon as it has become certain that the EVENT WILL NOT TAKE PLACE although the time specified has not yet expired. Where no period stated – 2

nd paragraph of 1185 is applicable

Art. 1185. The condition that some event will not happen at a determinate time shall render the obligation effective from the moment the time

indicated has elapsed, or if it has become evident that the event cannot occur. If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been contemplated, bearing in mind the nature of the obligation. (1118)

1184 (Positive Suspensive) 1185 (Negative Suspensive)

A obliges himself to give B some money if B recites on or before June 30

A obliges himself to give B some money if B will not recite on June 30

A liable if B recites on or before June 30

A is not liable if B recites on June 30

A is not liable if B recites after June 30 A is liable if B did not recite on June 30

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. (1119) - This provision speaks of the DOCTRINE OF CONSTRUCTIVE FULFILLMENT Requisites - intent of the obligor to prevent the fulfillment of the condition - actual prevention of compliance - when the act (voluntary), did not have for its purpose the prevention of the condition, this article is not applicable - if in preventing the fulfillment of the condition, the debtor acts pursuant to a right, the condition will not be deemed as fulfilled - when the condition is resolutory but not dependent on the will of the debtor, and he unjustifiably provokes or produces the condition, which would not have happened without his doing so, uit will be considered as not having been fulfilled and there will be no extinguishment of rights. Does the fulfillment of a condition have retroactive effect? Art. 1187. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when the obligation imposes reciprocal prestations upon the parties, the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it should


be inferred that the intention of the person constituting the same was different. In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with. - moment of the creation of the conditional obligation and the fulfillment of the suspensive condition, the creditor enforce the obligation , right is a mere expectancy - cause of action for the enforcement of the obligation accrues, and the period of prescription of the action has to be computed from that moment - effects retroact to when the obligation was created - increase in value which the thing may acquire before the happening of the suspensive condition, inures to the benefit of the creditor - right to the fruits of the thing is not within the principle of retroactivity of conditional obligations - in obligations to do or not to do, the courts shall determine the retroactive effect of the fulfillment of the conditions Common question: A promised to give B his house if B passes the bar. Before the results of the bar came out, A sold his car to C. Is the sale valid? Can B obtain the rentals for the house from the time they had an agreement to when the condition was fulfilled? Validity of sale: determine if the buyer was in good faith and if the house has already been delivered. B may take action against A for damages. Rentals and Fruits: B cannot obtain the rentals / fruits as the fruits will remain with the owner before the condition was fulfilled. Fruits not within the principle of retroactive effect of the fulfillment of the conditions. Can rights be acquired prior to the fulfillment of a condition? Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. (1114) Can payment prior to the fulfillment of a condition be recovered? Art. 1188. The creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of his right. The debtor may recover what during the same time he has paid by mistake in case of a suspensive condition.

Actions available to the creditor: - to prevent the loss or deterioration of the things which are the objects of the obligation by enjoining or restraining acts of alienation or destruction by the debtor himself or by third persons - to prevent concealment of the debtor’s properties which constituted the guaranty in case of non performance of the obligation - to demand security if the debtor becomes insolvent - to compel the acknowledgment of the debtor’s signature on a private document or the execution of the proper public documents for registration so as to affect 3

rd persons

- to register the deeds of sale or mortgages evidencing the contract - to set aside fraudulent alienations made by the debtor - to interrupt the period of prescription by actions against adverse possessors of the things which are the objects of the obligations - if payment was made with knowledge of the condition, there is an implied waiver of the condition , cannot be recovered Rights of the DEBTOR – entitled to recover what has been paid by mistake prior to the happening of the suspensive condition. Who is liable if the thing that is the object of an obligation to give is lost prior to the fulfillment of a suspensive condition? Who is liable if the thing that is the object of an obligation to give is lost after the fulfillment of a suspensive condition? Art. 1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition: (1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished; (2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered; (3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;


(4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case; (5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor; (6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary (right to enjoy products he does not own). - applicable to a determinate thing only, not a generic thing LOSS (1) debtor without fault – obligation is extinguished (2) debtor with fault – obligation to pay damages DETERIORATION (1) debtor without fault – impairment is to be borne by the creditor (2) debtor with fault – creditor chooses: rescission of obligation, fulfillment, indemnity IMPROVEMENT (1) by nature or time – improvement: inure to the benefit of the creditor (2) at the expense of the debtor – granted to the usufructuary B. Obligations with a Period What is an obligation with a period? Art. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes. Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain. A day certain is understood to be that which must necessarily come, although it may not be known when. If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be regulated by the rules of the preceding Section. Term – space of time which exerting an influence on the obligations as a consequence of the juridical act, suspends their demandability or determines their extinguishment Differences from condition

1. as to fulfillment – condition is uncertain , period must necessarily come whther on a date known before hand or at a time which cannot be predetermined 2. influence on the obligation – condition gives rise / extinguishes an obligation, period only has an effect on their demandability or performance 3. as to time – period refers to the future while condition may refer to a past event unknown to the parties 4. will of debtor – condition which depends exclusively on the will of the debtor annuls the obligation , period left to the debtor’s will merely empowers the court to fix such period Requisites of a period – future, certain, possible Kinds of terms According to source – legal, voluntary, judicial Definite or indefinite Express or tacit Suspension of a period – it only relieves the parties from the fulfillment of their respective obligations during that time Who is liable if the thing is that is the object of an obligation to give is lost prior to the arrival of the period? Art. 1194. In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules in Article 1189 shall be observed. LOSS (1) debtor without fault – obligation is extinguished (2) debtor with fault – obligation to pay damages DETERIORATION (1) debtor without fault – impairment is to be borne by the creditor (2) debtor with fault – creditor chooses: rescission of obligation, fulfillment, indemnity IMPROVEMENT (1) by nature or time – improvement: inure to the benefit of the creditor (2) at the expense of the debtor – granted to the usufructuary When is the court authorized to set a period? Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof.


The courts shall also fix the duration of the period when it depends upon the will of the debtor. In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. Art. 1180. When the debtor binds himself to pay when his means permit him to do so, the obligation shall be deemed to be one with a period, subject to the provisions of Article 1197. - only refers to the period , not the obligation itself JUDICIAL PERIOD – period designated by the court. CONTRACTUAL PERIOD – period fixed by the parties in their contract. Court will fix a period: 1. When no period is mentioned, but it is inferable from the nature and circumstances of the obligation that a period was intended by the parties. 2. When the period is dependent upon the will of the debtor. -If the obligation does not state and intend a period, the court is not authorized to fix a period. -The court must fix the duration of the period to prevent the possibility that the obligation may never be fulfilled or to cure a defect in a contract whereby it is made to depend solely upon the will of one of the parties. Court cannot fix the period: 1. If there is a period agreed upon by the parties and it has already lapsed or expired. 2. From the very moment the parties give their acceptance and consent to the period fixed by the court, it becomes a law governing their contract. INDICATIONS OF A TERM OR PERIOD: When the debtor binds himself to pay – -when his means permit him to do so -little by little -as soon as possible -from time to time -as soon as I have the money -in partial payment -when in the position to pay

ARANETA v PHILIPPINE SUGAR ESTATE DEVELOPMENT J. J.B.L. Reyes J. M. Tuason & Co., Inc., owner of the Sta. Mesa Heights Subd., sold a portion thereof through Gregorio Araneta, Inc. (GAI), for the sum of P430,514, to Phil. Sugar Estates Dev’t Co., Ltd (PSEDC). Stipulated in their contract of purchase & sale w/ mortgage: that the buyer will build on the parcel of land the Sto Domingo church &convent; while the seller for its part will construct streets on the NE & NW & SW sides of the land herein sold so that the latter will be a block surrounded by streets on all 4 sides; & the street on the NE side shall be named Sto. Domingo Ave. PSEDC finished the construction of the church & convent, but GAI, w/c began constructing the streets, is unable to finish the construction of the street in the NE side because a certain third party who has been physically occupying a middle part thereof, refused to vacate the same Hence, PSEDC filed its complaint against J. M. Tuason & Co., Inc., & GAI in the CFI, seeking to compel the latter to comply w/ their obligation &/or to pay damages in the event they failed or refused to perform said obligation. Both defendants answered the complaint. GAI’s principal defense was that the action was premature since its obligation to construct the streets in question was w/o a definite period w/c needs to be fixed 1st by the court in a proper suit for that purpose before a complaint for specific performance will prosper. Issues having been joined in trial, CFI (May 31, ’60) dismissed plaintiff's complaint, upholding defenses interposed by GAI Plaintiff moved to reconsider & modify above decision, praying that court fix period w/in w/c defendants will comply w/ their obligation GAI opposed said motion. But CFI granted plaintiff's MFR & amending the dispositive portion of the decision of May 31, ‘60, to read as follows: "WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta, Inc., a period of Two (2) Years from notice hereof, within which to comply with its obligation under the contract, Annex A"


GAI filed MFR but CFI denied. GAI appealed to the CA, contending that the relief granted, i.e., fixing of a period, was not justified by the pleadings & not supported by the facts submitted at the trial of the case in court below & that the relief granted in effect allowed a change of theory after the submission of the case for decision CA upheld the CFI decision. Hence this petition for review by certiorari to the SC WON CFI may fix a period in the same pleading by PSEDC NO. When GAI pleaded in its answer that the contract w/ PSEDC gave GAI "reasonable time w/in w/c to comply with its obligation to construct & complete the streets", what the answer put in issue was not whether the court should fix the time of performance, but WON the parties agreed that the petitioner should have reasonable time to perform its part of the bargain. If the contract so provided, then there was a period fixed, a "reasonable time"; & all that the court should have done was to determine if that reasonable time had already elapsed when suit was filed. If it had passed, then the court should declare that petitioner had breached the contract, as averred in the complaint, & fix the resulting damages. On the other hand, if the reasonable time had not yet elapsed, the court perforce was bound to dismiss the action for being premature. But in no case can it be logically held that under the plea above quoted, court intervention to fix the period for performance was warranted, for Art. 1197 is precisely predicated on the absence of any period fixed by the parties Granting that the court should’ve found that no reasonable time/no period at all had been fixed, still the complaint not having sought that the Court should set a period, the court couldn’t proceed to do so unless the complaint was first amended; for the orig. decision is clear that the complaint proceeded on the theory that the period for performance had elapsed already, that the contract had been breached & defendant was already answerable in damages. Granting further that it lay within the Court's power to fix the period of performance, still the amended decision is defective in that no basis is stated to support the conclusion that the period should be set at 2 yrs after finality of the judgment. Art. 1197 is clear that the period cannot be set arbitrarily.

All that TC's amended decision says in this respect is that "the proven facts precisely warrant the fixing of such a period", a statement manifestly insufficient to explain how the 2 year period given to petitioner herein was arrived at. Art. 1197, CC involves a 2-step process. Court must 1st determine that "the obligation does not fix a period" (or that the period is made to depend upon the will of the debtor), "but from the nature & the circumstances it can be inferred that a period was intended" (Art. 1197, pars. 1&2) Secondly, it must decide what period was "probably contemplated by the parties" Ultimately, the Court can not fix a period merely because in its opinion it is or should be reasonable, but must set the time that the parties are shown to have intended. In this connection, contract shows that the parties were fully aware that the land described therein was occupied by squatters, because the fact is expressly mentioned therein. As the parties must have known that they could not take the law into their own hands, but must resort to legal processes in evicting the squatters, they must have realized that the duration of the suits to be brought would not be under their control nor could the same be determined in advance. The parties must have thus intended to defer the performance of the obligations under the contract until the squatters were duly evicted, as contended by the GAI CA objected that it would render the date of performance indefinite. Yet, the circumstances admit no other reasonable view; & this very indefiniteness is what explains why the agreement did not specify any exact periods or dates of performance. Holding: Reversed; Time for the performance is fixed at the date that all the squatters on affected areas are finally evicted therefrom CPU v CA J. Bellosillo


Iloilo, in 1939, Don Ramon Lopez by a deed of donation donated Lot No. 3174-B-1 of the subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which Transfer Certificate of Title No. T-3910A to CPU. The deed of donation came with 3 annotations on the land: 1.should be used for a medical college with all its buildings as part of the curriculum; 2. shouldn’t be sold, transferred, conveyed to any third party, or encumbered. 3. should be called "RAMON LOPEZ CAMPUS” and it be written in a cornerstone. Any net income from the land or its parks shall be in a fund to be known as the "RAMON LOPEZ CAMPUS FUND" used for improvements of the campus and its building/s. After 50 years(May 31,1989), the heirs of the donor, filed a suit, asking for annulment of donation, reconveyance and damages against CPU alleging that since 1939 the donee allegedly didn’t comply with the conditions, and tried to exchange the land for another land owned by the Nat’l Housing Authority. CPU answered that it didn’t try to use or exchange the land contrary to the conditions, and any action after 50 years has already prescribed. RTC held that CPU failed to comply with the conditions so the donation is declared null and void. The land is ordered to be reconveyed. CA affirmed that the conditions were resolutory(breach terminates rights making the donations revocable) but declared that the conditions didn’t have time limits so the case is remanded for time determination. SO, CPU petitioned the supreme court alleging that the CA erred the certificate title to be onerous obligation, and resolutory condition, that prescription does not deserve disquisition and remanding to the RTC the determination of time to fulfill the medical college condition. Issues WON the obligation was onerous. YES Clearly, the annotations in the deed of donation from Don Ramon, proves that he imposes these obligations. Therefore, these obligations are onerous considerations(one executed for a valuable consideration which is considered to be en equivalent of the donation itself).

Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. Thus, when a person donates land to another on the condition that the latter would build upon the land a school, the condition imposed was not a condition precedent or a suspensive condition but a resolutory one. Only after the donee didn’t fulfill the conditions will the rights be revoked. which brings us to the prescription WON there is prescription. NO The time from which the cause of action accrued for the revocation of the donation and recovery of the property donated cannot be specifically determined in the instant case. There being no stipulations in the deed, the time for the fulfillment of the conditions lay in the will of the donee and prevented the statute of limitations to affect in this case. And to compute for the time from which the cause of action accrued, it begins with the expiration of a reasonable period and opportunity for petitioner to fulfill what has been charged upon it by the donor. And in this case, no exact time can really be surely stipulated in the deed, considering the laws on construction, educational institutions etc. beyond the control of the donee. Thus, when the obligation does not fix a period but from its nature and circumstances it can be inferred that a period was intended, the general rule provided in Art. 1197 of the Civil Code applies, which provides that the courts may fix the duration thereof because the fulfillment of the obligation itself cannot be demanded until after the court has fixed the period for compliance therewith and such period has arrived. And yet, Art. 1197 can’t be applied because the courts think that 50 years was enough time for them to fulfill the conditions. CPU has slept on its obligations. What applies is Art. 1191, when an obligor can’t comply with what is expected of him, the obligee may seek rescission unless the court fixes a period for a just


cause. In this case, there is no just cause, to fix a period would be mere technicality and would only result to a multiplication of suits. Then the court said that since this is a gratuitous donation(contradiction, see dissent) the court affirms the decision of the RTC and modifies that of the CA, CPU is ordered to reconvey the property to the heirs. Davide, J. dissenting (Modal Conditions in donations – Important) He agrees it’s an onerous obligation, but he sees the contradiction when the ponente called it a gratuitous donation in the end. He makes a distinction between “conditions” on the laws of obligation and donation as different(Tolentino). The conditions spoken does not refer to uncertain events on which the birth or extinguishment of a juridical relation as with conditional obligations. What we have in this case is modal condition, which requires a prestation.The conditions Don Ramon made, are actually obligations. They are not resolutory because the moment the obligations are fulfilled, the rights are not extinguished(in fact strengthened). The Parks(footnote in the original case) case do not apply here. Instead what applies is the Barretto v City of Manila. Where the court said in cases where there is no fixed period for the conditions, Art. 1197 applies. Don Ramon wouldn’t have intended for his land to be idle. He also points out that Osmena v Rama doesn’t apply here because in that case it is the debtor who made the promise to do, that’s why time was in his will to comply. So here applying Parks and De Luna v Abrigo, even actions for revocation of donations prescribe too. And the Art.1144 applies that the prescription of an action upon a written contract which is what a deed of an onerous donation is, is 10 years from the time the cause of action accrues. And the time must be determined by the courts by virtue of Art. 1197. Accion Pauliana (rescission) - Creditors have the right to set aside or revoke acts which the debtor may have done to defraud them. All acts of the debtor which reduce his patrimony in fraud of his creditors, whether by gratuitous or onerous title, can be revoked by this action.

Accion Subrogata - Action which the creditor may exercise in place of the negligent debtor in order to preserve or recover for the patrimony of the debtor the product of such action, and then obtain therefrom the satisfaction of his own credit When is the obligation immediately demandable prior to the arrival of the period? Art. 1198. The debtor shall lose every right to make use of the period: (1) When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt; (2) When he does not furnish to the creditor the guaranties or securities which he has promised; (3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory; (4) When the debtor violates any undertaking, in consideration of which the creditor agreed to the period; (5) When the debtor attempts to abscond (depart in a sudden and secret manner) The period is disregarded and the obligation becomes pure and immediately demandable: [IGIVA] [I] When debtor becomes i nsolvent ; -The insolvency need not be judicially declared. It is sufficient that debtor could not pay his debts due to lack of money or funds. [G] When the debtor does not furnish g uaranties or securities; [I] When guaranties or securities given have been i mpaired or have disappeared ; If security was lost through debtor’s fault - impairment If security was lost through fortuitous event – disappearance Ex. House was sold by A to B on an installment basis per month based on a period. House became the mortgage (guaranty). A fire destroyed the house and it was established that there was not negligence involved and it was a fortuitous event. In the quiz, the accepted answer was that the obligation was extinguished due to fortuitous events. However if we apply 1998, the period can no longer be used and A can claim the whole amount (shall lose every right to use the period) unless debtor gives a new guaranty equally satisfactory.


[V] When debtor v iolates an undertaking ; If such undertaking is the reason for the creditor to agree with such period. [A] When debtor attempts to a bscond (escape). Mere attempt to abscond is sufficient. It is an indication of bad faith. Can mistaken payment prior to the arrival of the period be recovered? Art. 1195. Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or believing that the obligation has become due and demandable, may be recovered, with the fruits and interests. If he was not aware of the period or he believes that the obligation has become due and demandable – he can recover what he paid or delivered including fruits and interests; If he was aware and he paid voluntarily – he cannot recover the delivery made; it is deemed a waiver of the benefit of the term and the obligation is considered already matured. The presumption is that the debtor knew that the debt was not yet due. He has the burden of proving that he was unaware of the period. In case of doubt, for whose benefit will a period be construed? Art. 1196. Whenever in an obligation a period is designated, it is presumed to have been established for the benefit of both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or of the other. PRESUMPTION: Obligation with a period is for the benefit of both the creditor and debtor. EXCEPTION: when it appears that the period is for the benefit of one or the other The benefit of the term may be the subject of stipulation of the parties. 1. Term is for the benefit of the debtor alone – he cannot be compelled to pay prematurely, but he can if he desires to do so. - Example: A obliges himself to pay B within 5 years. A cannot be compelled to pay prematurely, but he can pay anytime within 5

years (A will benefit because he can pay anytime he wants as long as it is within 5 years; B will not benefit from the interests if A decides to pay early). 2. Term is for the benefit of the creditor – He may demand fulfillment even before the arrival of the term but the debtor cannot require him to accept payment before the expiration of the stipulated period. - Example: A borrows money from B and is obliged to make the payment on December 5. B may compel A to make the payment before December 5, but A may not compel B to receive the payment before December 5 (B will benefit from the interests that will accrue before December 5). - The creditor may have reasons other than the maturity of interest, that’s why, unless the creditor consents, the debtor has no right to accelerate the time of payment even if the premature tender includes an offer to pay the principal and interest in full. C. Alternative Obligations Kinds of obligations that has many possible prestations to fulfil in order to extinguish the obligation.

Obligations that require a debtor to perform completely one of the several prestations provided as options in the stipulations of the contract.

o The prestations must be lawful and possible. (CC1200)

Fulfilment of one of the provided prestations extinguishes the obligation. Partial fulfilment of any number of the provided prestations does not fulfil the obligation. The creditor cannot be compelled to accept part of one and part of another prestation. (CC1199)

The prestation to be fulfilled is dependent on whom the right to choose is given. In default, the right to choose is given to the debtor. (CC1200)

The choice must be communicated before it becomes effective. The choice will only produce effects upon communication. (CC1201)

o Until the choice is communicated, the person with the right to choose can change his mind.

When an alternative obligation ceases? > What happens to the obligation?

o When only one choice is practicable. (CC1202) o When the choice has been communicated. (CC1201) (CC1205)


Right to choose vested on the debtor o If through the acts of the creditor, the debtor cannot make a

choice according to the terms of the obligation, the debtor may rescind with damages (CC1203)

o Effect of Loss or Impossibility before the choice has been communicated:

Fortuitous event: One or some of the prestations are lost or became impossible

Debtor may choose among the remaining prestations what to fulfil

Fortuitous event: All except one of the prestations are lost or became impossible

Debtor must fulfil the remaining prestation ~ obligation becomes simple

Fortuitous event: All prestations are lost or became impossible

Obligation is extinguished (See: Fortuitous Event)

Debtor’s fault: One or some of the prestations are lost or became impossible

Debtor may choose among the remaining prestations what to fulfil

Debtor’s fault: All except one of the prestations are lost or became impossible

Debtor must fulfil the remaining prestation

Debtor’s fault: All prestations are lost or became impossible

Debtor must pay creditor the price of the last prestation that was lost or became impossible, without prejudice to the creditor’s right to damages

Right to choose vested on the creditor o Effect of Loss or Impossibility before the choice has been

communicated: (CC1204)(CC1205)

Fortuitous event: One or some of the prestations are lost or became impossible

Creditor may choose among the remaining prestations what the debtor will fulfil

Fortuitous event: All except one of the prestations are lost or became impossible

Debtor must fulfil the remaining prestation

Fortuitous event: All prestations are lost or became impossible

Obligation is extinguished (See: Fortuitous Event)

Debtor’s fault: One or some of the prestations are lost or became impossible

Creditor may choose among the remaining prestations what the debtor fulfil OR the price of one of the prestation/s lost due to

the debtor’s fault plus creditor’s rights to damages

Debtor’s fault: All except one of the prestations are lost or became impossible

Creditor may choose that the debtor fulfil the remaining prestation OR the price of one of the prestations lost due to the debtor’s fault plus creditor’s rights to damages

Debtor’s fault: All prestations are lost or became impossible

Creditor may choose the price of one of the prestations lost due to the debtor’s fault plus creditor’s rights to damages

Right to choose vested on Third Person o The choice shall not be binding until it has been made known

to both contracting parties (CC1309) o Effect of Loss or Impossibility before the choice has been

communicated: Same rules as when the choice is by the creditor.

Generic Obligations v Alternative Obligations: o Generic Obligations: prestations must fall on things of the

same kind. o Alternative Obligations: prestations may be of different

quality, kind and quantity.

Alternative Obligations v Facultative Obligations: o Alternative Obligations:

1. Obligations that require a debtor to perform completely one of the several prestations provided as options in the stipulations of the contract.

2. The right to choose the alternative prestation may be granted to the creditor or a third person.

o Facultative Obligations: 1. Obligations when only one prestation has been

provided in the stipulations of the contract but the debtor may render another in substitution. (CC1206)

2. The substitution is always at the discretion of the debtor.


D. Joint and Solidary Obligations Kinds of obligations that differ in the proportion in which the debtor is liable and/or the creditor may rightfully claim. These are the kinds of obligation with many subjects, either active or passive.

Joint Obligation v Solidary Obligation: o Joint Obligation: Obligations that exist between several

persons, whether creditors or debtors, among whom the benefit or the burden of the obligation is divided.

o Solidary Obligation: Obligations that are those in which there being concurrence of several debtors or several creditors, each creditor is given the right to demand, and each debtor is bound to perform the obligation in its entirety.

A mere concurrence of two or more creditors or two or more debtors in one obligation does not imply solidarity or the obligation. There is a presumption against solidarity of obligations. (CC1207)

o Solidary obligation exists only when: It is expressly stated in the stipulation of the

contract. The law or the nature of the obligation requires

solidarity. Joint Obligations

Requisites of a Joint Obligation: o Subject:

Must be more than one (either creditors, debtors or both)

o Shares in the demandability or the liability in the obligation: Presumed equal in share unless the law, nature or

wording of the obligation shows the contrary (CC1208)

Shares are considered distinct from one another, subject to the rules on multiplicity of suits. (CC1208)

Effects of a Joint Obligation: o Divisible prestation:

Creditors may individually and independently demand and compel performance of his share of the credit.

o Indivisible prestation: (CC1209) A creditor’s right may only be prejudiced by the

collective acts of all the creditors.

The debt may be enforced only by proceeding against all debtors.

But consequential damages are charged exclusively to the joint debtor who was responsible for the breach.

o Multiplicity of Subjects Each joint creditor can only demand his share of the

credit. Each joint debtor can only be required to pay his

share of the debt. Solidary Obligations

Requisites of a Solidary Obligation: o Subject:

Must be more than one (either creditors, debtors or both)

o Unity of prestation: Each solidary creditor can collect the entire

obligation. (Mutual Agency of creditors) Each solidary debtor can be compelled to pay or

perform the entire obligation. (Mutual Guaranty among debtors)

o Distribution among solidary parties: Accounting between creditors for the share of each. Contribution between debtors for the share of each. Each creditor may only collect and each debtor may

only be held liable until the extent that the liability is still not paid.

o Kinds of Solidarity based on subjects Active: Solidarity of Creditors Passive: Solidarity of Debtors

o Kinds of Solidarity based on uniformity of conditions Uniform: Same terms and conditions for all. Varied: With different periods and/or conditions for

each. (CC1211) o Effects of a Solidary Obligation:

Active: On debtors

Each creditor can collect the entire debt or extinguish it. (CC1215)


Debtors may pay any one of the solidary creditors but if applicable, payment must be given to the creditor making demand. (CC1214)

Novation: any compensation, confusion or remission made by any of the solidary creditors shall extinguish the obligation. (CC1215)

Active: On co-creditors

The creditors who may have executed any of the acts that will extinguish the obligation shall be liable to the other co-creditors for the share in the obligation corresponding to them. (CC1215)

Each of the solidary creditors may do whatever is useful to the other co-creditors but not anything that may prejudice the latter. (CC1212)

A solidary creditor may not assign his rights without the consent of the others (CC1213)

Passive: On creditors

Each debtor is bound to perform the whole obligation. (CC1207)

Demand against one or some of the debtors shall not bar subsequent demands to other debtors to the extent that the debt has not been fully collected. The creditor may pursue charges against one, some or all of the solidary debtors simultaneously. (CC1216)

If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. (CC1217)

Payment by one of the solidary debtors extinguishes the obligation to the extent of the payment. (CC1217)

If the thing was lost or if the prestation has become impossible without fault of the solidary debtors before demand of the

creditor, the obligation shall be extinguished. (CC1221)

If there was fault on the part of any one of the debtors, all shall be responsible to the creditor. This is without prejudice to the other debtors’ action against the negligent debtor. (CC1221)

Passive: On co-debtors

The solidary debtor who made the payment may claim from his co-debtors their share of the obligation. (CC1217)

But no share can be collected if the payment made by one of the solidary debtor was made after the obligation has prescribed or became illegal. (CC1218)

If a solidary debtor paid the obligation before the remission of the debt of one debtor was done, the latter is still liable to the former who made the payment to the extent of payment made to the latter’s behalf. (CC1219)

Insolvency of one of the solidary debtors passes the liability to the others in proportion to the debt of each. (CC1217)

Defenses that the debtors may raise: o Nature of the obligation:

Prescription Illegality Nullity ab initio Suspensive condition or period Former payment Compensation Release Compromise

o Personal defenses: Incapacity Vice of consent

o Personal to other co-debtors:


The debtor may avail of such defense to the extent of the other debtor’s (the one with excuse) liability. (CC1222)

Ronquillo v Court of Appeals (G.R. L-55138; September 28, 1984)

Facts: Ernesto Ronquillo was one of the 4 people who has a debt of P117,498.98 from Antonio So. The debtors, including Ronquillo entered a compromise agreement with So and the other creditors that the debt will be reduced to P110,000 and that the debtors promised to pay P55,000 first then P55,000 again after 6 months and each debtors bind themselves to pay “individually and jointly.” Ronquillo offered to pay So P13,750 as his share in the P55,000 but So did not want to accept such payment because So is demanding for the whole P55,000 debt. When the whole P110,000 was due, Ronquillo was offering to pay P27,500 but So filed a case and it was held that Ronquillo’s furniture would be sold to fulfil the remaining P82,500 of the obligation. Ronquillo filed the current action to prevent the sale of his properties. Issue: WoN Ronquillo can be held liable for the whole P110,000 debt to So? Held: Yes, according to Justice Cuevas, the phrase “individually and jointly liable” means “solidarily liable.” It is because the word “individually” is synonymous to “collectively,” “separately,” and/or “distinctively.” A person who is “individually liable” is liable for a several obligation which binds oneself to the whole obligation which is equivalent to being solidarily liable.

Philippine National Bank v Independent Planters Association (G.R. L-28046; May 16, 1983)

Facts: During the pendency of a case of PNB against solidary debtors, one of the debtors Valencia died and the lower court dismissed the case due to Valencia’s death.

Issue: WoN the court loses jurisdiction to proceed with the case against surviving defendants if one of the solidary debtors died?

Held: No, Justice Plana stated that as provided in CC1216, the creditor may pursue charges against any one, some or all of the debtors simultaneously as long as the liability still exists. The choice of who to file charges against is given on the creditor according to the protection of his rights and his convenience. Therefore, death of one solidary debtor does not bar the creditor from pursuing charges against surviving debtors.

E. Divisible and Indivisible Obligation The kinds of obligations which, by reason of their purpose are susceptible of being executed by parts or fractions. Indivisible Obligation

Obligation which are not susceptible of being executed by parts or fractions.

Divisible Obligation

Obligations which are susceptible of being executed by parts or fractions.

Solidary Indivisible

By the Source Arises from the tie binds the parties, debtors or creditors

Arises from the nature of the nature of the thing or prestation due

By the Parties Requires at least two creditors and debtors

Can exist between one creditor and one debtor

By the Effects Solidary debtor answers to the creditor for the breach of his co-debtor

Breach by one indivisible debtor does not make the co-debtor liable for such breach

The liability is not understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered. (CC1233)

Unless otherwise stipulated (or provided by law), the creditor cannot be compelled to accept partial performance, nor the debtor required to make partial payments. (CC1248)

o Exceptions: Obligations partly liquidated (CC1248) Instalment contracts (CC1720)


In case of partial illegality, and the obligation is divisible, legal stipulations are enforceable (CC1420)

There may be no recovery quantum meruit (in proportion) unless there is substantial performance. (CC1234)

Effect of two or more debtors or creditors in an indivisible obligation: o Joint Indivisible

The creditor must proceed must proceed against all debtors.

Breach converts the original obligation into an obligation to pay the value.

Indemnity for damages is recoverable only from the guilty debtor. (CC1224)

No mutual agency of co-debtors exists. o Solidary Indivisible

Each debtor may be required to pay the whole. (CC1207)

Breach of one is breach of all. (CC1221) F. Obligations with a Penal Clause Penal Clause is an example of accessory stipulation that is placed in the contract order to compel the complete performance of the obligation. Penal clauses does not take into consideration the actual damages that the creditor will suffer and is usually in excess of the standard damages.

Liquidated Damages v Penal Clauses: o Liquidated Damages:

Stipulated to fix the amount of recoverables in case of breach.

Bears relation to the damages resulting from the breach.

o Penal Clauses: Stipulated to stimulate or induce performance by

the debtor. May bear no relation to the damages resulting from

the breach.

Penal Clauses are strictly construed against the creditor due to the nature of the stipulation.

Kinds of Penal Clauses: o By its effect:

Subsidiary – when only penalty may be enforced.

Complementary – when both the principal obligation and the penalty may be enforced.

o By the source: Conventional – provided by agreement. Legal – provided by law.

o By the purpose: Punitive – where damages may be collected in

addition to the penalty. Reparatory – where the penalty substitutes

indemnification for damages.

Characteristic of a penal clause: o Accessory Obligation:

Nullity of the principal obligation carries with it that of the penal clause. (CC1230)

Nullity of the penal clause does not involve the nullity of the principal obligation. (CC1230)

Requisites for the enforcement of a penal clause o Breach of the principal obligation must be chargeable to the

debtor. (CC1226) In case of fortuitous event, penalty is not collectible.

Unless it was expressly stated otherwise. In case that the breach was due to creditor’s acts,

penalty is also not collectible. Penalty may not be enforced if it is contrary to law. Penalty may not be enforced if both parties commit

culpable breach of reciprocal obligations. o Principal obligation must be due and demandable.

The debtor cannot be exempted from performing or paying the obligation by satisfying the penalty, unless expressly stipulated. (CC1227)

o Penalty is not a substitute for performance.

The penalty shall be reduced equitably by a court: o When there is partial performance. (CC1229) o When the penalty is iniquitous or unconscionable. (CC1229) o When allowed by CC2215:

Where the plaintiff himself has contravened the terms of the contract

Where the plaintiff has derived some resulting benefit


Where exemplary damages are to be awarded, that the defendant acted upon the advice of counsel

Where the loss would have resulted in any event Where the defendant has tried his best to minimize

the loss or injury (CC2215)(CC2203)

The creditor cannot collect other damages in addition to the penalty, except:

o If the obligor refuses to pay the penalty. (CC2209) o If the obligor is guilty of fraud in the fulfilment of the

obligation. (CC1171)(CC1226) o If it is expressly stipulated.

Country Bankers Insurance Corporation v Court of Appeals (G.R. 85161; September 9, 1991)

Facts: Oscar Ventanilla Enterprises Corporation (OVEC), as lessor and Enrique Sy as lessee, entered into a lease agreement of 3 theaters in Cabanatuan City for 6 years. After 2 years, OVEC made demands for repossession due to Sy’s arrears in the monthly payments as well as the non-payment of tax. Sy and OVEC agreed to a penal clause that the remaining deposit will be forfeited, without prejudice to any other obligation still owing, in the event of termination or cancellation of the agreement by reason of lessee’s violation of the terms and conditions of the agreement. Now, Sy still owes P100,000 to OVEC and Sy is claiming that the P100,000 should be taken from the remaining deposit of P290,000.

Issue: WoN the damage of P100,000 to OVEC by Sy should be taken from the remaining deposit of P290,000 of Sy to OVEC?

Held: No, Justice Medialdea stated that the stipulation that

the remaining deposit will be forfeited in case of termination of the agreement by reason of the lessee’s acts is a penal clause that is validly entered into by the parties. Also, OVEC was able to prove that the damage was reasonable and was really incurred by OVEC therefore, aside from the penal clause, such P100,000 damages may also be recovered by OVEC from Sy. The obligee may recover from the obligor not only the penalty but also the damages resulting from the non-

fulfillment or defective performance of the principal obligation.

Makati Development Corporation v Empire Insurance Company (G.R. L-21780; June 30, 1967)

Facts: Makati Development Corporation sold to Rodolfo Andal a lot with a “special condition” that Andal shall commence and complete at least 50% of the construction of his residence in the property within 2 years after the sale or else, the bond of P12,000 made by Andal with Empire Insurance Company as surety would be forfeited. Andal did not build a house but instead sold the house to Juan Carlos but until the deadline in March 31, 1961, no house was built. But by the end of April 1961, more than the required construction was already finished. The lower court in hearing the case lowered the P12,000 to P1,500 because on March 31, 1961, the property was already fenced and walls were already standing which indicates partial fulfilment of the condition. Issues: WoN the lower court erred in lowering the penalty from P12,000 to P1,500?

Held: No, Justice Castro held that partial fulfilment of the obligation is a reasonable ground for the courts to mitigate the penalties stipulated by the parties. It was also held that such penal stipulations shall be strictly construed against the enforcement in its entirety of the indemnification, where it is clear from the contract that the amount or character of the indemnity is fixed without regard to the probable damages which might be anticipated as a result of a breach of the terms of the contract, or, in other words, where the indemnity provided for is essentially a mere penalty having for its object the enforcement of compliance with the contract. Due to the substantial fulfilment of the obligation, it is only correct for the courts to reduce the penalty.


III. EXTINGUISHMENT OF OBLIGATIONS

A. Payment or Performance When is an obligation paid? Payment means: (a) Delivery of money, (b) Performance in any other manner of an obligation [A1232]

Payment should be completely delivered or rendered [A1233] o But if substantially performed in good faith, debtor may

recover as though there had been a strict and complete fulfillment [A1234]

o When creditor accepts incomplete or irregular performance knowingly, without protest or objection, obligation is deemed fully complied with. [A1235]

Payment to creditor after debtor has been judicially ordered to retain the debt (garnishment) shall NOT be valid [A1243]

Debtor cannot compel creditor to receive a different thing, although the thing may be of the same value as, or more valuable than that which is due. [A1244]

When obligation is to deliver a determinate or generic thing, whose quality and circumstances have not been stated

o Creditor cannot demand a thing of superior quality o Debtor cannot deliver a thing of inferior quality o Purpose of obligation and other circumstances shall be taken

into consideration. [A1246]

Payment shall be made: (a) in the currency stipulated, or (b) that which is the legal tender in the Philippines (Philippine Peso)

o Mercantile documents (e.g., promissory notes payable to order, bills of exchange) produce the effect of payment only when they have been cashed. [A1249]

Extraordinary inflation or deflation Value of the currency at the time of the establishment of the obligation shall be the basis for payment

TELENGTAN v US LINES J. Garcia Facts: Telengtan is a domestic corporation doing business under the name and style La Suerte Cigar & Cigarette Factory. Respondent US Lines is a foreign corporation engaged in the business of overseas shipping. On December 15, 1978, the provisions of Far East Conference Tariff No. 12 were made applicable to Philippine containerized cargo. After that date,

consignees who fail to take delivery of their containerized cargo within the 10-day free period are liable to pay demurrage charges. US Lines filed suit against petitioner alleging that between the years 1979 and 1980, goods belonging to petitioner loaded on containers aboard respondent’s vessels arrived in Manila from US ports. After the 10-day free period, petitioner still failed to withdraw its goods. Telengtan said that it has never entered into a contract nor signed an agreement to be bound by any rule on demurrage. It likewise maintains that absent an obligation to pay respondent who made no proper or legal demands in the first place, there is justifiable reason to refuse payment. It also said that upon arrival of the vessels, it presented the Bills of Lading and demanded the delivery of all goods, only to be informed that respondent already unloaded the goods. It contends that respondent violated its contractual obligation to deliver when, instead of delivering the goods to the petitioner as consignee, it deposited the same in bonded warehouse/s. Issue: WON Telengtan is liable for the demurrage charges Held:

Petitioner is at fault when it did not take delivery of the goods prompting the respondent to store it in bonded warehouses.

The withdrawal of goods from the ship was with authority of the Bureau of Customs

Bill of Lading indicates that if the consignee does not take possession or delivery of the goods as soon as the goods are at the disposal of the consignee for removal, the goods shall be at their own risk and expense, delivery shall be considered complete

Extraordinary inflation or deflation exists when there is an unusual increase or decrease in the purchasing power of the Philippine peso which is beyond the common fluctuation in the value of said currency, and such increase or decrease could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation.

There should be an official pronouncement or declaration by competent authorities of the existence of extraordinary inflation or deflation during a given period.

Article 1250, as couched o General Rule: The value of the peso at the time

of the establishment of the obligation shall control and be the basis of payment of the contractual obligation


o Exception: Agreement to the contrary o It is only when there is a contrary agreement

that extraordinary inflation will make the value of the currency at the time of payment, not at the time of the establishment of the obligation.

NOTES from Sir Lumba’s discussion:

There was allegedly an extraordinary devaluation of the peso when Ninoy Aquino was assassinated

Should be computed as to the time when obligation is constituted But in this case, evidence was not sufficiently established that inflation

was extraordinary Example of evidence that may be used: NEDA’s pronouncements of

extraordinary inflation Is payment by an incapacitated person valid? NO. Payment by an incapacitated person shall not be valid because the payor should have FREE DISPOSAL OF THE THING DUE AND CAPACITY TO ALIENATE IT. [A1239] Is partial payment allowed? NO. The creditor cannot be compelled to receive partial prestations and the debtor is not required to make partial payments. Exception: Express stipulation to the contrary. Note: Sir Lumba cited Article 2226 (liquidated damages). I think what he is trying to tell us is that when there is partial payment, it is already considered a breach of the contract, and thus liquidated damages can now be demanded from the violator. Where should payment be made? Payment shall be made:

1. In the place designated in the obligation 2. If no express stipulation and the thing to be delivered is a

determinate thing, payment shall be made wherever the thing might be at the moment the obligation was constituted

3. Domicile of the debtor [A1251]

If the debtor changes his domicile in bad faith or after he has incurred in delay, additional expenses shall be borne by him. [A1251]

Rule 4 Sections 1-3 1. Venue of real actions

court which has jurisdiction over the area of real property involved

2. Venue of personal actions

Where the plaintiff or any of the principal plaintiffs reside

Where the defendant or any of the principal defendants reside

Where non-resident defendant can be found 3. Venue of actions against non-residents

Where plaintiff resides

Where property is situated To whom should the obligation be paid? Payment shall be made to:

1. The person in whose favor the obligation has been constituted 2. His successor in interest 3. Any person authorized to receive it. [A1240]

Payment to an incapacitated person shall be valid if: o He has kept the thing delivered o Insofar as the payment has been beneficial to him

Payment to a third person is valid if it has redounded to the benefit of the creditor. There is no need to prove benefit if:

o After the payment, the third person acquires the creditor’s rights

o If the creditor ratifies the payment to the third person o If by the creditor’s conduct, the debtor has been led to

believe that the third person had authority to receive the payment. [A1241]

Payment made in good faith to any person in possession of the credit (e.g., holder of a promissory note payable to bearer) shall release the debtor. [A1242]

Payment to creditor by debtor after debtor is judicially ordered to retain the debt (garnishment) shall NOT be valid. [A1243]

Does a third person have the right to pay for another?

NO. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation. Exception: stipulation to the contrary


What are the rights of a third person who is able to pay for another?

a. Beneficial Reimbursement/ Right to reimbursement If he has paid without the knowledge or against the will

of the debtor, he can recover only insofar as the payment has been beneficial to the debtor [A1236]

He cannot compel creditor to subrogate him in his rights [A1237]

Exception: Article 1302 Legal Subrogation Assignment of credit

b. Subrogation If he had paid with the consent of the debtor, he may

demand from the debtor what he has paid [A1236]

Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtor’s consent. BUT payment is valid as to the creditor who accepted it. [A1238]

Done emus accept the donation personally… *A745+ When there are several debts, to which should payment be applied?

a. Declaration of debtor at the time of making the payment General Rules:

i. Application shall not be made as to debts which are not yet due Exception: Stipulation to the contrary and when the obligation is for the benefit of one of the parties

ii. If debtor accepts a receipt from creditor, he cannot complain of the creditor’s choice as to the application of payment [A1252]

iii. If debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. [A1253]

b. When application cannot be inferred or payment cannot be applied, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied. [A1254]

Distinguish cession from dacion en pago.

Dation en Pago Payment by Cession

Property is alienated to the creditor in satisfaction of a debt in money

Ceding or assigning the property of the debtor to his creditors in payment of his debts

Transfers the ownership over the thing alienated to the creditor

Only the possession and administration (not the ownership) are transferred to the creitors BUT with the authorization to convert the property into cash

May totally extinguish the obligation and release the debtor

Only extinguishes the credits to the extent of the amount realized from the properties assigned

Cession of only some specific thing

Involves all the property of the debtor

Transfer is in favor of one creditor to satisfy a debt

Transfer is in favor of various creditors

LO v KJS ECO-FORMWORK SYSTEM PHIL. INC. J. Ynares-Santiago Facts: Lo ordered equipments from respondents worth 540,225. He paid 150,000 as down payment. The balance was payable in ten monthly installments. Lo was able to pay the first two monthly installments but not anymore in succeeding installments. Petitioner and respondents executed a Deed of Assignment where petitioner assigned to respondent his receivables in the amount of 335,462 (which I think, was his loan balance from respondent) from JRC. When respondent tried to collect the credit from JRC, it refused claiming that Lo was also indebted to him (thus, there was compensation). Petitioner argues that his obligation was extinguished with the execution of Deed of Assignment of credit. Respondent presented the testimony of its employee that JRC refused to honor the assignment of credit because it claimed that petitioner had an outstanding indebtedness to it. Issue: WON the obligation was extinguished by the assignment of credit


Held:

An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor

In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt.

The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor’s debt.

As such, THE VENDOR IN GOOD FAITH SHALL BE RESPONSIBLE, FOR THE EXISTENCE AND LEGALITY OF THE CREDIT AT THE TIME OF THE SALE BUT NOT FOR THE SOLVENCY OF THE DEBTOR.

It may be said that assignment of credit, which is in the nature of a sale of personal property, produced the effects of a dation in payment which may extinguish the obligation.

Because of its nature as a sale, the vendor is bound by certain warranties. (see above all caps)

Because the obligation was already extinguished by compensation, the credit does no longer exist, thus causing a breach in the obligation. By warranting the existence of the credit, petitioner is deemed to have ensured the performance thereof.

If the creditor refuses to accept payment, is there payment? YES. According to Article 1256, if creditor refuses without just cause to accept the payment, the debtor shall be released from responsibility by the consignation of the thing or sum due. Can the debtor consign a thing prior to refusal of the creditor to accept payment? NO. Before a debtor can consign the thing or sum due, tender of payment to the creditor must be made. HOWEVER, in these cases, tender of payment is not required:

a. When creditor is absent or unknown, or does not appear at the place of payment

b. When he is incapacitated to receive payment at the time it is due c. When, without just case, he refuses to give a receipt d. When two or more persons claim the same right to collect e. When the title of the obligation has been lost.

What is the procedure for consignation?

1. Tender of payment to the creditor 2. Unjust refusal of creditor 3. Debtor should announce the notice of consignation to the persons

interested in the fulfillment of the obligation NOTE: Lack of notice does not invalidate the consignation – it

simply makes the debtor liable for the expenses 4. Deposit of the thing due at the disposal of judicial authority 5. Prove the tender of payment to the judicial authority

NOTE: at this stage, consignation has been duly made 6. Debtor may now ask the judge to order the cancellation of the

obligation 7. Notice of acceptance of consignation

Before the creditor has accepted the consignation OR Before a judicial declaration that he consignation has been properly made, Debtor may withdraw the thing or sum deposited In other words, obligation is still in force.

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

Consignation is always judicial. B. Loss of the Thing Due

What are the requisites in order for loss of the thing to extinguish the obligation?

1. Obligation consists in the delivery of a determinate thing 2. The determinate thing is lost or destroyed without the fault of the

debtor, and before he has incurred in delay 3. When the thing is lost in the possession of the debtor, it shall be

presumed that the loss was due to his fault


EXCEPT: (a) when there is proof to the contrary, or (b) earthquake, flood, storm or other natural calamities. When loss of a thing does not extinguish an obligation

1. Law 2. Stipulation 3. When the nature of the obligation requires the

assumption of risk (insurance policies) 4. Obligation to deliver a generic thing 5. When the debt arose from a criminal offense 6. When there was delay, fraud, negligence or the

obligation was done in contravention of the tenor thereof

7. When the substitute prestation is lost in facultative obligations

NOTE: not exclusive

Will partial loss extinguish the obligation? The courts shall determine whether the partial loss of the object of the obligation is so important as to extinguish the obligation.

Can the creditor run after the third person who caused the loss of the thing? YES. According to Article 1269, “The creditor shall have all the rights of action which the debtor may have against the third person by reason of the loss.” Can a thief (be) exempted from paying for the thing stolen if it is subsequently lost? No, the thief shall not be exempted from the payment of its price, whatever may be the cause for the loss. Exception: when he offered the thing, and the person who should receive it refused without justification to accept it, in which case he may opt to consign it in the courts. Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it.

C. Condonation or Remission What is the nature of a condonation?

Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It shall be subject to the rules which govern inofficious donations. Express condonation shall comply with the forms of donation. [A1270] Discussion on succession General Rule There is a basic amount of one-half (½) that is given to one heir or one group of heirs. Exception

1. Surviving spouse and illegitimate children 2. Article 900: surviving spouse in a marriage in articulo mortis 3. Surviving spouse and illegitimate parents

Rates

Legitimate children alone ½ of estate, divided equally

Legitimate Children Surviving Spouse

½ Share equal to that of one child (1LC)

One Legitimate Child Surviving Spouse

½ ¼

Legitimate Children Illegitimate Children

½ Each will get ½ of share of 1LC ( ½ LC)

Legitimate Children Illegitimate Children Surviving Spouse

½ ½ LC 1LC

One Legitimate Child Illegitimate Child Surviving Spouse

½ ½ LC ¼

Legitimate Parents Alone ½

Legitimate Parents Illegitimate Children

½ ¼

Legitimate Parents Surviving Spouse

½ ¼

Legitimate Parents Illegitimate Children Surviving Spouse

½ ¼ 1/8

Surviving Spouse alone ½

Surviving Spouse Illegitimate Child

1/3 1/3

Surviving Spouse Illegitimate Parents

¼ ¼


Illegitimate children alone ½

Illegitimate parents alone ½

Relevant Provisions

Article 745 The done must accept the donation personally, or through an authorized person with a special power for the purpose, or with a general and sufficient power; otherwise, the donation shall be void. Article 748 The donation of a movable may be made orally or in writing. An oral donation requires the simultaneous delivery of the thing or of the document representing the right donated. If the value of the personal property donated exceeds Five thousand pesos, the donation and the acceptance shall be made in writing. Otherwise, the donation shall be void. Article 749 In order that the donation of an immovable may be valid, it must be made in a public document… Article 752 … No person may give or receive, by way of donation, more than he may give or receive by will. The donation shall be inofficious in all that it may exceed this limitation. Article 771 Donations which … are inofficious, bearing in mind the estimated net value of the donor’s property at the time of his death, shall be reduced with regard to the excess… Article 773 If, there being two or more donations, the disposable portion is not sufficient to cover all of them, those of the more recent dates shall be suppressed or reduced with regard to the excess. Article 908 … To the net value of the hereditary estate, shall be added the value of all donations by the testator that are subject to collation, at the time he made them.

When is condonation implied?

1. The delivery of a private document evidencing a credit, made voluntarily by the creditor to debtor

When the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily

2. The renunciation of the principal debt shall extinguish the accessory obligations

BUT the waiver of the accessory obligations shall leave the principal debt in force

Pledge: presumed to have been remitted when the thing pledged is found in the possession of the debtor, or of a third person who owns the thing.

TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC. v CA J. Bidin Facts: Petitioner and respondent Bank entered into a loan agreement evinced by four promissory notes, a real estate mortgage over three parcels of land and a chattel mortgage over petitioner’s stock and inventories. When petitioner failed to pay, they restructured the loan, and three new promissory notes were executed by Trans-Pacific. The mortgaged parcels of land were sold and the proceeds were given to the bank to be applied against Trans-Pacific’s restructured loan. Respondent bank returned the duplicate original copies of the three promissory notes with the word “PAID” stamped thereon. However, respondent bank still demanded from Trans-Pacific the payment of 492,100 representing accrued interest. Respondent bank said that the promissory notes were erroneously released. Issue: WON petitioner has indeed paid in full its obligation to respondent bank. Held:

Article 1271: The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter

This is a presumption, not of payment, but of the renunciation of the credit.

The presumption is not conclusive but merely prima facie. If there be no evidence to the contrary, the presumption


stands. Conversely, the presumption loses its legal efficacy in the face of proof or evidence to the contrary.

There was no proof that the amounts paid by petitioner were inclusive of interest.

In this case, the court finds sufficient justification to overthrow the presumption of payment by the delivery of the documents evidencing petitioner’s indebtedness, the letters of admission and counsel-induced recalcitrance.

Presumption that interest is paid before principal obligation is rebuttable.

D. Confusion or Merger of Rights What is confusion or merger? It is the meeting in one person of the characters of the creditor and debtor. [A1275]

Requisites: o Must take place between the creditor and the principal

debtor o Same obligation must be involved o Must be total

Merger benefits the guarantors.

Merger of characters of creditor and guarantor DOES NOT extinguish the obligation [A1276]

Does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. [A1277]

E. Compensation What are the requisites of compensation? Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. De Leon: Compensation is the extinguishment to the concurrent amount of the debts of two persons who, in their own right, are reciprocally principal debtors and creditors of each other. The object of compensation is the prevention of unnecessary suits and payments thru the mutual extinction by operation of law of concurring debts. Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy,

commenced by third persons and communicated in due time to the debtor.

Requisites of Legal Compensation: (1) That each one of the obligors be bound principally, and that he be at

the same time a principal creditor of the other; Examples: a) A owes B P10,000, with C as guarantor. B owes C P10,000.

There will be no compensation between B and C because while B is principally liable to C, C is merely subsidiarily liable to B. Hence, C can demand payment from B.

b) A owes B P10,000. B owes A P10,000, the latter as guardian or administrator. There will be no compensation. In this case, A is personally liable to B, while B is not principally liable to A. The real creditor of B is the ward under guardianship or the estate under administration. A is creditor of B in a representative capacity.

c) A owes B and C P10,000. B and C are partners in Partnership P. Partnership P owes A P10,000. A cannot set up compensation because B and C are not principally liable to A.

(2) Both debts consist in a sum of money, or of consumable things of the same kind and quality Examples: a) A owes B P10,000. B owes A an electric range worth P10,000.

No compensation will take place.

b) A owes B 10 sacks of “wagwag” rice. B owes A any 10 sacks of rice.


There can be no legal compensation in this case because of lack of identity of the kind and quality of the rice due. However, compensation can be claimed by B since he can deliver any kind of rice. It would be the same as if B received 10 sacks of “wagwag” rice from A and then returned the same to A in payment of his debt. But A cannot set up compensation if opposed by B. This is an example of facultative compensation.

c) A owes B P10,000. B owes A P10,000 or a cow. There can be no legal compensation because B may prefer to deliver a cow. But if the right of choice belongs to A, compensation will take place.

(3) The two debts are due or demandable Notes: a) When the obligation is payable on demand, the obligation is not

yet due where no demand has not been made. b) A debt that has prescribed is no longer demandable and

consequently, cannot be compensated, unless the compensation has taken place before the lapse of the period of prescription.

c) Natural obligations are not legally demandable. Examples: a) A owes B P10,000 due today. B owes A P10,000 payable upon

receipt from A of notice to pay. A owes C a judgment debt of P10,000. Since B’s obligation appear to be payable on demand, in the absence of demand made by A, the obligation of B is not yet due. Without compensation having taken place, B remains indebted to A for P10,000. This obligation of B may be garnished in favor of C to satisfy A’s judgment debt.

b) A owes B P10,000 due today. B owes A P10,000 due next month. Compensation cannot take place as the debts are not due on the same date. However, if A has not yet paid B on the date that the obligation of B becomes due, there will be compensation on that date. If the debt of B is subject to a suspensive condition which has not yet happened, there can also be no compensation.

(4) The two debts are liquidated.

A debt is liquidated if the amount thereof is known or can be determined by a simple computation. Examples: a) A owes B P10,000. B owes A the share of the latter in a business

the amount of which is still to be ascertained. Compensation will not take place as the debt of B is not liquidated. If part of the debt of B has been liquidated, compensation takes place with respect to that part without waiting for the liquidation of the rest.

b) D has a savings account with Bank B, which bank extended to D a loan. D’s loan has become demandable. His savings account is also demandable anytime. B has the right to compensate or off-set D’s outstanding loan with his deposit account.

(5) No retention or controversy has been commenced by a third person. There is said to be retention when the credit of one of the parties is subject to the satisfaction of the claim of third person, while a controversy exists when a third person claims he is the creditor of one of the parties. The retention or controversy commenced by a third person must be communicated “in due time” to the debtor. By “in due time” means the period before legal compensation is supposed to take place, considering that legal compensation operates so long as the requisites concur even without any conscious intent on the part of the parties. A controversy that is communicated to the parties after that time may no loner undo the compensation that had taken place by force of law. Example: A owes B P10,000. B owes A P10,000. B also owes C P10,000. C causes the garnishment of the credit of B against A and notifies A not to pay B P10,000 as C has a better right to the said amount. B may not owe C but the latter claims that he and not B is the creditor of A. In this case, compensation cannot take place between A and in view of a controversy commenced by C, a third person. In the meantime, the compensation is suspended. If C loses the case, compensation shall be deemed to have taken place as of the date the requisites for legal compensation concurrent.

Art. 1282. The parties may agree upon the compensation of debts which are not yet due.


This is the exception to requisite no. 3 under Art. 1279, viz., that only debts which are due and demandable can be compensated. Voluntary or conventional compensation includes any compensation which takes place by agreement of the parties even if all the requisites for legal compensation are not present. The absence of mutual creditor-debtor relation cannot negate the conventional compensation. The only requisites are:

(1) Each of the parties has the right to disposed of the credit he seeks to compensate

(2) They agree to the mutual extinguishment of their credits What are the kinds of compensation? Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is total compensation. Total compensation results when the two debts are of the same amount. If they are of different amounts, compensation is total as regards the smaller debt, and partial only with respect to the larger debt. Kinds of Compensation:

(1) By its effect or extent: a. Total b. Partial

(2) By its cause or origin:

a. Legal – when it takes place by operation of law when all the requisites are present even without the knowledge of the parties.

b. Conventional or voluntary – when it takes place by agreement of the parties.

c. Judicial – when it takes place by order from a court in a litigation. (This is actually a form of legal or voluntary compensation, when declared by courts by virtue of an action by on of the parties.)

d. Facultative – when it can be set up only by one of the parties. When will compensation not take place? Art. 1286. Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. Example:

A owes B $1,000 payable in New York. B owes A P45,000 (equivalent amount) payable in Manila. If A claims compensation, he must pay for the expenses of exchange. Art. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation.

(1) Compensation occurs automatically by mere operation of law From the moment all the requisites mentioned in Article 1279 concur, legal compensation takes place automatically even in the absence of agreement between the parties and even against their will, and extinguishes reciprocally both debts as soon as they exist simultaneously, to the amount of their respective sums.

(2) Full legal capacity of parties not required As it takes place by mere operation of law, and without any act of the parties, it is not required that the parties have full legal capacity to give or to receive, as the case may be.

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. Where compensation has taken place before assignment When compensation takes effect by operation of law or automatically, the debts are extinguished to the concurrent amount. If subsequently, the extinguished debt is assigned by the creditor to a third person, the debtor can raise the defense of compensation with respect to the debt. It is well-settled that the rights of the assignee are not any greater than the rights of the assignor since the assignee is merely substituted in the place of the assignor. Example: A owes B P3,000 due yesterday. B owes A P1,000 due also yesterday.


Both debts are extinguished up to the amount of P1,000. Hence, A still owes B P2,000 today. Now, if B assigns his right to C, the latter can collect only P2,000 from A. However, if A gave his consent to the assignment before it was made or subsequently (par. 1), A loses the right to set up the defense of compensation. So A will be liable to C for P3,000 but he can still collect the P1,000 owed by B. In other words, the compensation shall be deemed not to have taken place. Where compensation has taken place after assignment

(1) Assignment with the consent of debtor A owes B P3,000 due November 15. B owes A P1,000 due November 15. B assigned his right to C on November 1 with the consent of A. On November 15, A cannot set up against C, the assignee, the compensation which would pertain to him against B, the assignor. In other words, A is liable to C for P3,000 but he can still collect the P1,000 debt of B. However, if A, while consenting to the assignment, reserved his right to the compensation, he would be liable only for P2,000 to C.

(2) Assignment with the knowledge but without the consent of debtor A owes B P1,000 due November 1. B owes A P2,000 due November 10. A owes B P1,000 due November 15. A assigned his right to C on November 12. A notified B but the latter did not give his consent to the assignment. How much can C collect from B? B can set up the compensation of debts on November 10 which was before the cession on November 12. (par. 2) There being partial compensation, the assignment is valid only up to the amount of P1,000. But B cannot raise the defense of compensation with respect to the debt of A due on November 15 which has not yet matured. So, on November 12, B is liable to C for P1,000. Come November 15, A will be liable for his debt of P1,000 to B.

(3) Assignment without knowledge of the debtor In the preceding example, let us suppose that the assignment was made without the knowledge of B who learned of the assignment only on November 16.

In this case, B can set up the compensation of credits before and after the assignment. The crucial time is when B acquired knowledge of the assignment and not the date of the assignment. If B learned of the assignment after the debts had already matured, he can raise the defense of compensation; otherwise, he cannot.

Class discussion In other words, the debtor can always set up compensation to extinguish his obligation prior to the debtor’s knowledge of the assignment, unless the debtor consents to the assignment.

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligation of a depositary or of a bailee in commodatum. Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301. Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense.

(1) Where one of the debts arises from a depositum A deposit is constituted from the moment a person receives a thing belonging to another with the obligation of safely keeping it and of returning the same. Note: A bank deposit is not a depositum as defined in the Civil Code. It is really a loan which creates the relationship of debtor and creditor. *Article 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. Example: A owes B P10,000. B, in turn owes A the amount of P10,000 representing the value of a ring deposited by A with B, which B failed to return. In this case, B, who is the depositary, cannot claim legal compensation even if A fails to pay his obligation. The remedy of B is to file an action against A for the recovery of the amount of P10,000.


The relation of the depositary to the depositor is fiduciary in character since it is based on trust and confidence. B’s claim for compensation against A would involve a breach of that confidence. B A can set up his deposit by way of compensation against B’s credit. This is an example of facultative compensation. The benefit granted by law is available only to A, as depositor, and can be waived by him.

(2) Where one of the debts arises from a commodatum Commodatum is a gratuitous contract whereby one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it. *Article 1935. The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. Example: In the preceding example, if B borrowed the ring of A, B cannot refuse to return the ring on the ground of compensation because no compensation can take place when one of the debts arises from a commodatum. The purpose of the law is to prevent a breach of trust and confidence on the part of the borrower (or depositary in a depositum). A, however, can assert compensation of the value of the ring against the credit of B.

(3) Where one of the debts arises from a claim for support due by gratuitous title Support comprises everything that is indispensable for sustenance, dwelling, clothing, medical attendance, education and transportation, in keeping with the financial capacity of the family. Examples: (a) A donates to B an allowance of P1,000 a month for five years for

the latter’s support. However, previous to the donations, B already owed A P10,000 which was due and unpaid. In this case, A cannot say to B, “Inasmuch as you owe me P10,000, I will not pay your allowance for ten months.”

(b) Similarly, if A is the father of B, a minor, who under the law is entitled to be supported by A, and B owes A P10,000, A cannot compensate his obligation to support B by what B owes him because the right to receive support cannot be compensated with

what the recipient (B) owes the obligor (A). However, if A failed to support B for some months, the support in arrears may be compensated with the debt of B. Compensation can take place because B no longer needs the support in arrears as he was able to exist even without the support of A during those months.

(4) Where one of the debts consists in civil liability arising from a penal offence Example: A owes B P1,000. B stole the ring of A worth P1,000. Here, compensation by B is not proper. But A, the offended party, can claim the right of compensation. The prohibition in Article 1288 pertains only to the accused by not to the victim of the crime.

Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof. Compensation may also take place when so declared by a final judgment of a court in a suit (judicial compensation). A party may set off his claim for damages against his obligation to the other party by proving his right to said damages and the amount thereof. Both parties must prove their respective claims. In the absence from both parties on their claims, offsetting is improper. The right to offset may exist but the question of how much is to be offset is factual in nature. Art. 1284. When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. Example: A owes B P10,000. Subsequently, A, through fraud, was able to make B sign a promissory note that B is indebted to A for the same amount. The debt of A is valid but that of B is voidable. Before the debt of B is nullified, both debts may be compensated against each other if all the requisites for legal compensation are present. Suppose B’s debt is later on annulled by the court, is A still liable considering that compensation had already taken place? Yes. The effect of annulment is retroactive. It is the same as if there had been no compensation.


Can third parties set up compensation? Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor. This is an exception to the general rule that only the principal debtor can set up against his creditor what the latter owes him. Although the guarantor is only subsidiarily, not principally, bound, he is given the right to set up compensation. The reason is that the extinguishment of the principal obligation as a consequence of compensation carries with it the accessory obligation such as guaranty. Note: Here, what are compensated against each other are the principal debts of the principal debtor and principal creditor to each other. No debt of the guarantor to the creditor is involved. If there are several debts, which shall be compensated? Art. 1289. If a person should have against him several debts which are susceptible of compensation, the rules on the application of payments shall apply to the order of the compensation. Follow rules of application in Articles 1252 to 1254. Example: A is indebted to B in the amount of:

(1) P1,000 without interest due today (2) P1,000 with interest of 12% due also today (3) P1,000 with interest of 10% due yesterday

B owes A P1,000 due today. For purposes of the application of payment, A is the debtor. He must specify to B which of the three debts should be compensated. If he fails to inform B, then the latter should apply the compensation to the second obligation of A, namely, the obligation bearing the 12% interest because it is the most onerous obligation.

F. Novation What is novation? Art. 1291. Obligations may be modified by:

(1) Changing their object or principal conditions; (2) Substituting the person of the debtor; (3) Subrogating a third person in the rights of the creditor.

Novation – Novation is the total or partial extinction of an obligation through the creation of a new one which substitutes it. It is the substitution or change of an obligation by another, which extinguishes or modifies the first.

Art. 1292. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. Requisites of novation Four essential requisites, namely:

(1) The existence of a previous valid obligation; (2) The intention or agreement and capacity of the parties to extinguish

or modify the obligation; (3) The extinguishment or modification of the obligation; and (4) The creation or birth of a valid new obligation.

Novation with respect to criminal liability Novation is not a mode of extinguishing criminal liability. It may prevent the rise of criminal liability as long as it occurs prior to the filing of the criminal information in court. In other words, novation does not extinguish criminal liability but may only prevent its rise. Novation not presumed While as a general rule, no form of words or writing is necessary to give effect to a novation, it must be clearly and unmistakably established by express agreement or by the acts of the parties, as novation is never presumed. Ways of effecting conventional novation There are only two (2) ways which indicate the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same.

(1) By the express agreement of the parties or acts of equal or equivalent import

(2) By the irreconcilable incompatibility of the two obligations with each other in every material respect. This can take place even in the absence of an express agreement.

Effect of modification of original obligation (1) Slight modifications and variations – when made with the consent of

the parties, they do not abrogate the entire contract and the rights and obligations of the parties thereto, but the original contract continues in force except as the altered terms and conditions of the obligation are considered to be the essence of the obligation itself. This is especially true where the original contract expressly provides that such modifications and alterations may be made. The following are not changes which involve “principal” conditions: a) A promise by the debtor to pay an extra rate of interest


b) Mere extension of the term (period) for payment or performance is not a novation

c) Addition of a new obligation (guaranty) not inconsistent with the old one

d) Where surety subsequently made an agreement with the creditor to be bound also as principal

e) Mere reduction of the amount due f) Acceptance of partial payment

(2) Material deviations or changes – where the original contract is

deviated from in material respects so that the object or principal condition cannot reasonably be recognized as that originally contracted for, the original contract should be treated as abandoned.

Matute v Hernandez (1938) 66 Phil 68 The increase in the price of meat allowed the petitioner by the Acting Purchasing Agent undoubtedly constitutes a novation of the contract of December 24, 1936 entered into between the Government and petitioner after a public bidding had been held [for that December 24, 1936 contract]. The price of the supply of meat to the Government was one of the principal conditions of the contract. Therefore, in order that the renewal [novation of the contract] thereof may be valid it was necessary to comply with Executive Order No. 16. In this case, no public bidding, as required by the Executive Order for contracts of public service, occurred to increase the price of the meat. The other requirements in the Executive Order, i.e. consultation and approval by the Auditor-General and the Secretary of Justice aside from the Secretary of the Department concerned, were also lacking. Novation did not take place. Broadway Centrum v Tropical (1993) 224 SCRA 302 The sole issue confronting [the Court] is whether or not the letter-agreement dated 20 April 1982 had novated the Contract of Lease of 28 November 1980. Broadway Centrum is the lessor, while Tropical is the lessee. Tropical insists that the letter-agreement novated the contract, while Broadway believes otherwise. The 20 April 1982 letter-agreement provided for the provisional and temporary agreement to a reduction of monthly rentals. It further contained that “this provisional agreement should not be interpreted as amendment to the lease contract entered into” between the parties.

If objective novation is to take place, it is essential that the new obligation expressly declare that the old obligation is to be extinguished, or that new obligation be on every point incompatible with the old one. The will to novate, whether totally or partially, must appear by express agreement of the parties, by their acts which are too clear and unequivocal to be mistaken. It is entirely clear to the court that the letter-agreement of 20 April 1982 did not extinguish or alter the obligations of respondent Tropical and the rights of petitioner Broadway under their lease contract dated 28 November 1980. Clearly, the reduction of the monthly rentals was only provisional and temporary, as agreed to by both parties. This was not to persist for the rest of the life of the Contract of Lease. Novation did not take place. What is expromision? Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. Expromision This takes place when a third person of his own initiative and without the knowledge or against the will of the original debtor assumes the latter’s obligation with the consent of the creditor. It is essential that the old debtor be released from his obligation; otherwise, there is no expromision. Novation is never presumed; thus, the mere fact that the creditor receives a guaranty or accepts payment from a third person who has agreed to assume the obligation, when there is not agreement that the first debtor shall be released from responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor. Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor. In expromision, the new debtor’s insolvency or non-fulfillment of the obligation will not revive the action of the creditor against the old debtor whose obligation is extinguished by the assumption of the debt by the new debtor. Remember that in expromision, the replacement of the old debtor is not made at his own initiative. What is delegacion? Art. 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the


latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when he delegated his debt. Delegacion This takes place when the creditor accepts a third person to take the place of the debtor at the instance of the latter. The creditor may withhold approval. The new debtor is entitled to reimbursement and subrogation under Article 1297. Article 1295 only speaks of insolvency. Hence, in delegacion, if the non-fulfillment of the obligation is due to other causes, the old debtor is not liable. The general rule is that the old debtor is not liable to the creditor in case of the insolvency of the new debtor. The exceptions are:

(1) The said insolvency was already existing and of public knowledge (although it was not known to the old debtor) at the time of the delegacion.

(2) The insolvency was already existing and known to the debtor (although it was not of public knowledge) at the time of the delegacion.

Article 1302. It is presumed that there is legal subrogation: …

(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor.

… Example: A owes B P1,000. C pays B with the express or implied consent of A. In this case, C will be subrogated in the rights of B. What is the effect of novation on accessory obligations? Art. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. The above article follows the general rule that the extinguishment of the principal obligation carries with it that of the accessory obligations. It provides, however, an exception in the case of an accessory obligation created in favor of a third person which remains in force unless said third person gives his consent to the novation. This is so because a person should not be prejudiced by the act of another without his consent.

What is the effect if the new obligation is void? Art. 1297. If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any event. The general rule is that there is no novation if the new obligation is void, and therefore, the original one shall subsist from the reason that the second obligation being inexistent, it cannot extinguish or modify the first. The exception is where the parties intended that the old obligation should be extinguished in any event, the old obligation shall be extinguished. New obligation is voidable (not void) If the new obligation is only voidable, novation can take place. But the moment it is annulled, the novation must be considered as not having taken place, and the original one can be enforced, unless the intention of the parties is otherwise. What is the effect of the old obligation is void? Art. 1298. The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor, or when ratification validates acts which are voidable. A void obligation cannot be novated because there is nothing to novate. However, if the original obligation is only voidable or if the voidable obligation is validated by ratification, the novation is valid. What stipulations in the old obligation are presumptively carried over in the new obligation? Art. 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. The reason for the rule contained in this Article is that the efficacy of the new obligation depends upon whether the condition which affects the old obligation is complied with or not. What is conventional subrogation? Art. 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect. Subrogation It is the substitution of one person in the place of another with reference to a lawful claim or right, so that he who is substituted succeeds to the right of the


other in relation to a debt or claim, including its remedies and securities. It contemplates full substitution such that it places the party subrogated in the shoes of the creditor, and he may use all means which the creditor could employ to enforce payment. Conventional Subrogation It takes place by express agreement of the original parties (the debtor and the original creditor) and the third person (the new creditor). Conventional subrogation must be clearly established in order that it may take place. Art. 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person. The consent of all the parties is an essential requirement. Art. 1303. Subrogation transfers to the person subrogated the credit will all the rights thereto appertaining, either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. The effects of conventional subrogation are subject to the stipulation of the parties, as contrasted to the effects of legal subrogation as provided in Article 1303, which may not be modified by agreement. What is legal subrogation? Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;

(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor;

(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share.

Legal Subrogation It takes place without agreement but by operation of law. Legal subrogation is not presumed except in the cases expressly provided by law (Art. 1302). Art. 1303. Subrogation transfers to the person subrogated the credit will all the rights thereto appertaining, either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. The effect of legal subrogation is to transfer to the new creditor the credit and all the rights and actions that could have been exercised by the former creditor either against the debtor or against third persons, be they guarantors or mortgagors. Simply stated, except only for the change in the person of the creditor, the obligation subsists in all respects as before the novation.

The effect of legal subrogation as provided in Article 1303 may not be modified by agreement. What is partial subrogation? Art. 1304. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit. The creditor to whom partial payment has been made by the new creditor remains a creditor to the extent of the balance of the debt. In case of insolvency of the debtor, he is given a preferential right under the above article to recover the remainder as against the new creditor. Example: D is indebted to C for P10,000. X pays C P6,000 with the consent of D. There is here partial subrogation as to the amount of P6,000. C remains the creditor with respect to the balance of P4,000. Thus, two credits subsist. In case of insolvency of D, C is preferred to X, that is, he shall be paid from the assets of D ahead of X. Distinguish subrogation from assignment of credit. Art. 1624. An assignment of credits and other incorporeal rights shall be perfected in accordance with the provisions of Article 1475. *Article 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. Art. 1626. The debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation. Art. 1627. The assignment of a credit includes all the accessory rights, such as a guaranty, mortgage, pledge or preference. Art. 1628. The vendor in good faith shall be responsible for the existence and legality of the credit at the time of sale, unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge. Even in these cases he shall only be liable for the price received and for the expenses specified in No. 1 of Article 1616.


The vendor in bad faith shall always be answerable for the payment of all expenses, and for damages. *Article 1616. The vendor cannot avail himself of the right of repurchase without returning to the vendee the price of the sale, and in addition: (1) The expenses of the contract, and any other legitimate payments made by reason of the sale; … Art. 1629. In case the assignor in good faith should have made himself responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only, from the time of the assignment if the period had already expired. If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year after the maturity. Art. 1213. A solidary creditor cannot assign his rights without the consent of the others. Conventional Subrogation and Assignment of Credit Distinguished

Conventional Subrogation Assignment of Credit

A credit is extinguished and another appears, which the new creditor claims as his own

There is a transfer of same credit which belonged to another and which, upon being transferred, is not extinguished

The consent of the debtor is required so that it may fully produce legal effects

The consent of the debtor is not required, his knowledge thereof affecting only the validity of the payment he might make. What the law requires is merely notice to the debtor as the assignment takes effect only from the time he has knowledge thereof.

Its effects begin from the time of novation itself, that is, from the moment all the parties have given their consent

The effects with respect to the debtor begin from the date of notification

The nullity or defects of the previous obligation may be cured by the novation

The nullity or defects of the obligation are not remedied, because only the correlative right of the obligation is transmitted

Class discussion

Article 1301 does not require payment for conventional subrogation to take place. What is required is the consent of all parties. On the other hand, in Article 1302 (2), payment is necessary for legal subrogation to take place.

Licaros v Gatmaitan (2001) 362 SCRA 548 The threshold issue for the determination of [the] Court is whether the Memorandum of Agreement between petitioner and respondent is one of assignment of credit or one of conventional subrogation. This matter is determinative of whether or not respondent became liable to petitioner under the promissory note considering that its efficacy is dependent on the Memorandum of Agreement, the note being merely an annex to the same memorandum. Petitioner Licaros invested his funds with the Anglo-Asean Bank, an offshore bank, but had difficulty retrieving not only the interests or profits, but even the very investments he had put. Respondent Gatmaitan, a reputable banker and investment manager, voluntarily offered to assume the payment of Anglo-Asean’s indebtedness to Licaros subject to certain terms and conditions. A Memorandum of Agreement was executed and notarized to this effect. A promissory note was appended to the Memorandum of Agreement representing the amount. Contained in the Memorandum is the stipulation: “WHEREAS, the parties herein have come to an agreement on the nature, form and extent of their mutual prestations which they now record herein with the express conformity of the third parties concerned.” Hence, included in the signatories of the Memorandum of Agreement is Anglo-Asean, as Conforme. The document, however, remained unsigned by the bank. Gatmaitan was unable to collect from Anglo-Asean, resulting in the nonfulfillment of his promise to pay Licaros the amount stated in his promissory note. Licaros contends that he has a right to collect from Gatmaitan regardless of the outcome of Gatmaitan’s efforts. [The Court] agrees with the finding of the Court of Appeals that the Memorandum of Agreement was in the nature of a conventional subrogation which requires the consent of the debtor, Anglo-Asean Bank, for its validity. The Memorandum stipulated that there should be “express conformity of the third parties concerned,” this third party admittedly being Anglo-Asean Bank. The consent of the third party being required by the Memorandum, the agreement therefore is one of conventional subrogation, and not of assignment of credit.


Conventional subrogation requires the agreement among the three parties concerned. On the other hand, in assignment of credit, a creditor may validly assign his credit and its accessories without the debtor’s consent. The intention of the parties to treat the Memorandum of Agreement as embodying a conventional subrogation is shown not only by the “whereas clause” but also by the signature space reserved for the signature of a representative of Anglo-Asean Bank as conforme. The Memorandum of Agreement embodies a contract for conventional subrogation and in such a case, the consent of the original parties and the third person is required. The absence of such conformity by Anglo-Asean Bank prevented the Memorandum of Agreement from becoming valid and effective. No conventional subrogation took place.

G. Prescription Prescription – the acquisition or loss of a right by the lapse of time based on negligence or presumed abandonment Art. 1106. By prescription, one acquires ownership and other real rights through the lapse of time in the manner and under the conditions laid down by law. In the same way, rights and conditions are lost by prescription. (1930a) Distinguish between acquisitive and extinctive prescription. Acquisitive - the acquisition of a right by the lapse of time through adverse possession/ usurpation Rationale: based on the assertion by a usurper of an adverse right for such a long time as to give rise to the presumption that the owner has given up such right Extinctive – the loss of a right of action by the lapse of time Rationale – based on the probability that the alleged right never existed or has been extinguished. To protect vigilant and not one who sleeps on his rights When will prescription not run? Art. 1109. Prescription does not run between husband and wife, even though there be a separation of property agreed upon in the marriage settlements or by judicial decree. Neither does prescription run between parents and children, during the minority or insanity of the latter, and between guardian and ward during the continuance of the guardianship. (n) Rationale: influence or affection may often prevent one bringing an action against the other anyway.

Exception: prescription runs between husband and wife who are legally separated Art. 1113. All things which are within the commerce of men are susceptible of prescription, unless otherwise provided. Property of the State or any of its subdivisions not patrimonial in character shall not be the object of prescription. (1936a) That which is not subject to appropriation cannot be acquired by prescription Art. 1136. Possession in wartime, when the civil courts are not open, shall not be counted in favor of the adverse claimant. Art. 1154. The period during which the obligee was prevented by a fortuitous event from enforcing his right is not reckoned against him. (n) Can prescription be waived? Yes Art. 1112. Persons with capacity to alienate property may renounce prescription already obtained, but not the right to prescribe in the future. Prescription is deemed to have been tacitly renounced when the renunciation results from acts which imply the abandonment of the right acquired. (1935) Renunciation is unilateral, it does not require the acceptance of the person benefitting However, renunciation in advance is void; an agreement based on waiving future prescription is nonbinding. Waiving of prescription by those without capacity or by ones representatives is nonbinding. Distinguish between ordinary and extraordinary prescription. Art. 1117. Acquisitive prescription of dominion and other real rights may be ordinary or extraordinary. Ordinary acquisitive prescription requires possession of things in good faith and with just title for the time fixed by law. (1940a) Requisites of prescription:

a. Capacity to acquire by prescription b. The thing is capable of acquisition by prescription c. Possession of the thing under certain conditions d. Lapse of time provided by law

While the first two are common of all prescriptions the latter two vary as to WON the prescription is ordinary or extraordinary. Ordinary prescription requires

a. Good faith possession b. Just title c. Possession for a period of time fixed by law

MOVABLES


Art. 1132. The ownership of movables prescribes through uninterrupted possession for four years in good faith. The ownership of personal property also prescribes through uninterrupted possession for eight years, without need of any other condition. With regard to the right of the owner to recover personal property lost or of which he has been illegally deprived, as well as with respect to movables acquired in a public sale, fair, or market, or from a merchant's store the provisions of Articles 559 and 1505 of this Code shall be observed. (1955a) Art. 1133. Movables possessed through a crime can never be acquired through prescription by the offender. (1956a) IMMOVABLES Art. 1134. Ownership and other real rights over immovable property are acquired by ordinary prescription through possession of ten years. (1957a) Art. 1137. Ownership and other real rights over immovable also prescribe through uninterrupted adverse possession thereof for thirty years, without need of title or of good faith. (1959a) When the title is void (e.g. oral donation of real property) he may acquire ownership under the provision of this article. Art. 559. The possession of movable property acquired in good faith is equivalent to a title. Nevertheless, one who has lost any movable or has been unlawfully deprived thereof may recover it from the person in possession of the same. If the possessor of a movable lost or which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor. (464a) Art. 1505. Subject to the provisions of this Title, where goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller's authority to sell. Nothing in this Title, however, shall affect: (1) The provisions of any factors' act, recording laws, or any other provision of law enabling the apparent owner of goods to dispose of them as if he were the true owner thereof; (2) The validity of any contract of sale under statutory power of sale or under the order of a court of competent jurisdiction; (3) Purchases made in a merchant's store, or in fairs, or markets, in accordance with the Code of Commerce and special laws. (n) Art. 719. Whoever finds a movable, which is not treasure, must return it to its previous possessor. If the latter is unknown, the finder shall immediately

deposit it with the mayor of the city or municipality where the finding has taken place. The finding shall be publicly announced by the mayor for two consecutive weeks in the way he deems best. If the movable cannot be kept without deterioration, or without expenses which considerably diminish its value, it shall be sold at public auction eight days after the publication. Six months from the publication having elapsed without the owner having appeared, the thing found, or its value, shall be awarded to the finder. The finder and the owner shall be obliged, as the case may be, to reimburse the expenses. (615a) Art. 720. If the owner should appear in time, he shall be obliged to pay, as a reward to the finder, one-tenth of the sum or of the price of the thing found. (616a) Art. 526. He is deemed a possessor in good faith who is not aware that there exists in his title or mode of acquisition any flaw which invalidates it. He is deemed a possessor in bad faith who possesses in any case contrary to the foregoing. Mistake upon a doubtful or difficult question of law may be the basis of good faith. (433a) Art. 1127. The good faith of the possessor consists in the reasonable belief that the person from whom he received the thing was the owner thereof, and could transmit his ownership. (1950a) Art. 1128. The conditions of good faith required for possession in Articles 526, 527, 528, and 529 of this Code are likewise necessary for the determination of good faith in the prescription of ownership and other real rights. (1951) Good faith

- The well founded belief that the grantor is the owner.It is the belief in the validity, and not merely ignorance of a defect.

- The belief must be continuous

- Any other defect will invalidate the title, and when there is no just title there can be no prescription

- Good faith is always presumed, the burden of proof rests on those claiming otherwise.

- There is a presumption that the possession continues to be enjoyed in the same character in which it was acquired, until the contrary is proven.

Art. 308. Who are liable for theft. — Theft is committed by any person who, with intent to gain but without violence against or intimidation of persons


nor force upon things, shall take personal property of another without the latter's consent. Theft is likewise committed by: 1. Any person who, having found lost property, shall fail to deliver the same to the local authorities or to its owner; 2. Any person who, after having maliciously damaged the property of another, shall remove or make use of the fruits or object of the damage caused by him; and 3. Any person who shall enter an inclosed estate or a field where trespass is forbidden or which belongs to another and without the consent of its owner, shall hunt or fish upon the same or shall gather cereals, or other forest or farm products. Art. 536. In no case may possession be acquired through force or intimidation as long as there is a possessor who objects thereto. He who believes that he has an action or a right to deprive another of the holding of a thing, must invoke the aid of the competent court, if the holder should refuse to deliver the thing. (441a) Art. 537. Acts merely tolerated, and those executed clandestinely and without the knowledge of the possessor of a thing, or by violence, do not affect possession. (444) In what concept must be the possession for prescription to run? Art. 1118. Possession has to be in the concept of an owner, public, peaceful and uninterrupted. (1941) Art. 1119. Acts of possessory character executed in virtue of license or by mere tolerance of the owner shall not be available for the purposes of possession. (1942) Concept of owner

- necessary for possession

- vs license: a positive act of owner in favor of a holder

- vs tolerance: passive acquiescence by owner of acts of another which are contrary to former.

Public - manifest and visible to all, the opposite of clandestine, there is the presumption that the public and the owner are aware of the possession. Peaceful – acquired and maintained without violence whether physical or moral. Except that force may be used to repel an unlawful physical invasion. Uninterrupted – continuous, there must be no act of deprivation of enjoyment of the thing by a third person or other act which interrupts prescription. Interruption is a positive act of a third person. Uninterruption is distinct from

discontinuity, since the former is a positive act of a third person while the latter is a negative act of the possessor. Art. 541. A possessor in the concept of owner has in his favor the legal presumption that he possesses with a just title and he cannot be obliged to show or prove it. (448a) How is prescription interrupted? Art. 1120. Possession is interrupted for the purposes of prescription, naturally or civilly. (1943) Effect of interruption – all the benefits acquired so far from the possession cease, when it resumes the time lapsed will start anew. Interruption is the opposite of suspension where in the past period is included in the computation of the total time lapsed. Art. 1121. Possession is naturally interrupted when through any cause it should cease for more than one year. The old possession is not revived if a new possession should be exercised by the same adverse claimant. (1944a) Art. 1122. If the natural interruption is for only one year or less, the time elapsed shall be counted in favor of the prescription. (n) Art. 1123. Civil interruption is produced by judicial summons to the possessor. (1945a) Art. 1124. Judicial summons shall be deemed not to have been issued and shall not give rise to interruption: (1) If it should be void for lack of legal solemnities; (2) If the plaintiff should desist from the complaint or should allow the proceedings to lapse; (3) If the possessor should be absolved from the complaint. In all these cases, the period of the interruption shall be counted for the prescription. (1946a) In civil interruption, the effect of the recovery of the possession is that the period of interruption is included in the computation of the prescription. Technically then, it is as if there was no interruption and that the possession was continuous. Art. 1125. Any express or tacit recognition which the possessor may make of the owner's right also interrupts possession. (1948) The recognition of the possessor of the owners’ rights will interrupt possession. However, the declaration of a 3

rd person that the holder is not the owner will

not interrupt possession. Art. 1126. Against a title recorded in the Registry of Property, ordinary prescription of ownership or real rights shall not take place to the prejudice


of a third person, except in virtue of another title also recorded; and the time shall begin to run from the recording of the latter. As to lands registered under the Land Registration Act, the provisions of that special law shall govern. (1949a) Recorded titles as to third persons Third persons are those who acquire their rights subsequently, relying on the registration of ownership in the registry. They cannot be prejudiced by a period of possession prior to their acquisition. This will apply provided that the following conditions are met:

a) acquisition is by onerous title b) acquisition is from one who, accdg to the registry, can transmit the

title c) acquisition is registered d) That the third person has no knowledge of the prescription.

Registered lands – adverse possession may not be allowed to defeat the owner’s right to possession of lands registered under the Torrens system, nor will it run against the owners hereditary successors. But laches may be set up as to registered lands. Art. 1127. The good faith of the possessor consists in the reasonable belief that the person from whom he received the thing was the owner thereof, and could transmit his ownership. (1950a) Art. 1129. For the purposes of prescription, there is just title when the adverse claimant came into possession of the property through one of the modes recognized by law for the acquisition of ownership or other real rights, but the grantor was not the owner or could not transmit any right. (n) Art. 1130. The title for prescription must be true and valid. (1953) For prescription to run, the title must be just, true, valid, and proved. The purpose of just title is the transmission of ownership which would have transferred ownership if the grantor had really been the owner. The defect is cured by prescription. e.g. sale, donation, and dation transfer ownership. But lease, loan, and deposit do not transfer ownership and therefore do not give rise just title A true title is one that actually exists, as opposed to a simulated title which cannot be the basis of prescription. A false title is one which does not exist but is believed to exist. It will be sufficient of the mistake of fact is with regards to acts of a third person. If the mistake refers to the act of the possessor himself, it will be considered insufficient. e.g purchasing from an insane party with knowledge of the vendors incapacity will render the title insufficient. But purchasing without such knowledge of the incapacity will render the title sufficient.

Valid title – the title should be sufficient to transfer right if the grantor had been the owner. Void titles are insufficient and cannot give rise to prescription. Voidable titles are sufficient so long as it has not been annulled. For titles with suspensive condition, prescription only runs from the fulfillment of such a condition. For titles with resolutory conditions, prescription begins at once without prejudice to the fulfillment of the condition Art. 1131. For the purposes of prescription, just title must be proved; it is never presumed. (1954a) Proof of title: required for purpose of prescription. It is an exception to 541 which refers to an existing fact of possession. This article refers to the acquisition of right of ownership. Since a new right is sought to be created, the law becomes more exacting How is prescription computed? Art. 1138. In the computation of time necessary for prescription the following rules shall be observed: (1) The present possessor may complete the period necessary for prescription by tacking his possession to that of his grantor or predecessor in interest; (2) It is presumed that the present possessor who was also the possessor at a previous time, has continued to be in possession during the intervening time, unless there is proof to the contrary; (3) The first day shall be excluded and the last day included. (1960a) Tacking means adding the period of possession of the predecessor to that of the successor. Tacking of possession requireds:

A) The present possessor must have obtained it from previous possessor B) There must be privity between them

Tacking is only possible with succession, usurpers cannot tack Different characteristics of possession: from good to bad faith and vice versa When the possession of the predecessor is in good faith and that of the successor is in bad faith, tacking is permitted. The period of possession in good faith is computed in the proportion that the period of extraordinary prescription bears to that of ordinary prescription. When the possession of the predecessor is in bad faith and that of the successor is in good faith then tacking does not apply for ordinary prescription. However, if the period of the predecessor is so long as to be beneficial to the successor, he may claim tacking for extraordinary prescription. Art. 544. A possessor in good faith is entitled to the fruits received before the possession is legally interrupted. Natural and industrial fruits are considered received from the time they are gathered or severed.


Civil fruits are deemed to accrue daily and belong to the possessor in good faith in that proportion. (451) What is the prescriptive period to recover movables and immovable? Movables – 8 years Immovables – 30 years Art. 1140. Actions to recover movables shall prescribe eight years from the time the possession thereof is lost, unless the possessor has acquired the ownership by prescription for a less period, according to Articles 1132, and without prejudice to the provisions of Articles 559, 1505, and 1133. (1962a) Art. 1141. Real actions over immovables prescribe after thirty years. This provision is without prejudice to what is established for the acquisition of ownership and other real rights by prescription. (1963) LOSS OF POSSESSION Art. 555. A possessor may lose his possession: (1) By the abandonment of the thing; (2) By an assignment made to another either by onerous or gratuitous title; (3) By the destruction or total loss of the thing, or because it goes out of commerce; (4) By the possession of another, subject to the provisions of Article 537, if the new possession has lasted longer than one year. But the real right of possession is not lost till after the lapse of ten years. (460a) When is prescription interrupted? Art. 1155. The prescription of actions is interrupted when they are filed before the court, when there is a written extrajudicial demand by the creditors, and when there is any written acknowledgment of the debt by the debtor. (1973a) Filing in court – interruption of extinctive prescription commences upon the docketing and continues during the pendency of the action. Upon dismissal, the prescription runs anew. However, when an action is filed and the plaintiff desists in the prosecution, the action is deemed never to have commenced. Written extrajudicial demand – must be in writing, verbal demand is insufficient. Written acknowledgement of debt – may be express or implied in writing. May be made by an agent or legal representative. However, acknowledgement of a debt after the prescription has expired does not amount to a renunciation of a prescription already acquired. Partial payment does not interrupt prescription because although it can be considered an acknowledgment of a debt, as long as it is not in writing, there will be no interruption.

Other causes which do not interrupt prescription:

- Death of the debtor

- Transfer of creditors rights to another person

- Institution of a criminal action

- A stay of execution

- Incarceration

- Extinction of debt of a joint debtor does not necessarily affect that of co debtors

Cutanda v Cutanda (2000) 335 SCRA 418 The petition is meritorious. [The Court] held that prescription, not laches is the proper ground for holding private respondent’s action to be barred. Private respondents did not assert ownership over the lands until 55 years later, when they filed their complaint for recovery of possession. Insofar as petitioners are concerned, private respondents’ cause of action was barred, not by laches but by extinctive prescription. Anastacio Cutanda, ascendant of petitioners, was in possession of the land for a period of 35 years, such possession appearing to be adverse, continuous and in the concept of owner because Anastacio Cutanda cultivated the land, thereby, performing an act of ownership over it. Indeed, ten years after his possession of the subject parcel of land had begun, Anastacio Cutanda became owner of the land in question through acquisitive prescription. Seraspi v CA (2000) 331 SCRA 293 Marcelino Recasa was the owner of two parcels of land. The heirs of his second marriage sold the land to the the ascendants of petitioners, Quirico Seraspi and Purificacion Seraspi. The Seraspis then mortgaged the land to secure a loan from Kalibo Rural Bank, Inc. They defaulted and the mortgage was foreclosed. In 1958, the land eventually was sold to Manuel Rata, brother-in-law of Quirico Seraspi. Rata allowed Quirico to administer the property. In 1974, Quirico, however, had been paralyzed duo to a storke. Private respondent Simeon Recasa, Marcelino’s child from a third marriage, took advantage of this and forcibly entered the lands in question and took possession thereof. In 1983, the Seraspis purchased the land from Manuel Rata and afterwards filed a complaint against Simeon Recasa for recovery of possession of the lands. The question is whether private respondent has acquired the ownership of the two lands by prescription.


Acquisitive prescription of dominion and other real rights may be ordinary or extraordinary , depending on whether the property is possessed in good faith and with just title or the time fixed by law. Private respondent, however, had neither just title nor good faith. Article 1129 provides: For purposes of prescription, there is just title when the adverse claimant came into possession of the property through one of the modes recognized by law for the acquisition of ownership or other real rights, by the grantor was not the owner or could not transmit any right. Private respondent did not acquire possession of the property through any of the modes recognized by the Civil Code in Art. 712. Neither can private respondent claim good faith in his favor. Good faith consists in the reasonable belief that the person from whom the possessor received the thing was its owner but could not transmit the ownership thereof. Private respondent entered the property without the consent of the previous owner. For all intents and purposes, he is a mere usurper. The basis of petitioners’ claim of ownership is the contract of sale they had with Rata, but this by itself is insufficient to make them owners of the property. The ownership of the thing sold is not transferred to the vendee until actual or constructive delivery of the property. When they bought the property, the property was in the possession of private respondent. However, this does not give private respondent a right to remain in possession of the property. Petitioners’ title to the property prevails over private respondent’s possession in fact but without bassi in law. Private respondent did not acquire the property through prescription. United States v Cerna (1912) 21 Phil 144 In December 1902, Sabina Merenguel lost a 3-year old carabao which joined other carabaos belonging to Julian Nayre and afterwards strayed away and was not found by Sabino Merenguel until April 1909, in the possession of Policarpio Cerna. Prescription is required to enable the finder or a third person to acquire title to the find; and the former, as a general rule, must have possessed if for the extraordinary term of six years, on account of the lack of good faith and because, for the same reason, his possession is not equivalent to a title. Here, Cerna had an uninterrupted possession of the carabao from January 1, 1903 to April 1909. In April 1909, therefore, the defendants had already possessed the lost animal for an uninterrupted period of six years, and the ownership of personal property prescribes by uninterrupted possession for six years, without the necessity of any other condition.

Cerna is the owner of the carabao. Pajunar v CA (1989) 175 SCRA 464 In 1980, petitioner Pajunar learned that the disputed female mestisa carabao was in the possession of private respondent Eluna, the latter possessing the carabao after bartering this male cow to a third person Enopio in 1969. The prescription issue is whether or not the carabao belonged to private respondent, him being in possession of the carabao for more than 10 years. The possession in good faith for four (4) years is not applicable, neither can possession in bad faith of eight (8) years benefit respondents, for when the owner of a movable has lost or has been illegally deprived of his property he can recover the same without need to reimburse the possessor, as provided in Art. 559 of the Civil Code. Neither can Art. 716 of the Civil Code apply, for this article evidently refers to a possessor in good faith. From the records it is clear that although the animal was branded “ART” in her front and hind legs at the time she was acquired by respondent Eluna, said respondent did not or could not register the transfer to him in accordance with Section 529 of the Revised Administrative Code (which says that registration is necessary to validity of transfer of cattle.) The records show that respondents did not comply with this requirement. Respondents are not possessors in good faith, as a possessor in good faith is one not aware that there exists in his title or more of acquisition any flaw which invalidates it. Petitioners are the owners of the carabaos (the mestisa carabao and its offsprings) in question. Cajuigan v Natividad (1910) 14 Phil 734 Plaintiff Cajuigan is the administrator of the estate of Capricho and Morales. It appears that three carabaos are in the possession of defendant Natividad. Plaintiff commenced the action to recover the carabaos from the defendant, the carabaos being part of the estate of the decedents. The decedents had debts to the defendant worth P486.94. Upon death of the decedents intestate, Sotero Morales, the first administrator, delivered the disputed carabaos to the defendant to satisfy his claim. The new administrator, plaintiff Cajuigan, now wants to recover the said carabaos, contending that the first administrator had no authority to pay the claim of Natividad against the estate, without the express permission of the court. He also contends that it was the duty of the defendant, if he had a claim


against the estate in question, to have presented it to the committee appointed for the purpose of allowing claims. Both contentions are valid. It is not disputed, however, by the plaintiff, that the carabaos were turned over to Natividad by the first administrator, Sotero Morales, and accepted by Natividad in good faith, believing that the carabaoes had been turned over to him in part payment of his claim against the said estate. Can an administrator maintain an action to recover personal property belonging to an estate, which has been in the possession of the defendant for a period of more than four years, he possessing the same in good faith? The court held in the negative. The Code of Procedure in Civil Actions provides that an action for the recovery of personal property shall be limited to four years. The right of the plaintiff to recover the carabaos in question, therefore, cannot be sustained. *Article 1955 of the (Old) Civil Code provides that “The ownership of personal property in prescribes by uninterrupted possession in good faith, for a period of three years.” Tan v CA (1991) 195 SCRA 355 This petition stems from an action of petitioner Tan for the reconveyance of shares of stock against the Central Bank. During the Martial Law regime, Continental Bank was ordered to close by the Central Bank Monetary Board, due to the insolvency of the bank. Thereafter, petitioner was arrested and during detention in 1977, he executed certain agreements transferring and assigning shares of stock in Continental Bank to three corporations. Petitioner alleged that the transfer was due to fraud. In 1987, petitioners filed a case of reconveyance of shares of stock. The question is whether or not any action for reconveyance has nevertheless prescribed, on the basis of provisions governing reconveyance. The rule anent prescription on recovery of movable (shares of stock in this case) is expressed in Article 1140 of the Civil Code. It is evident that the petitioners had at most eight years within which to pursue a reconveyance, reckoned from the loss of the shares in 1977, when the petitioner Tan executed the various agreements in which he conveyed the same in favor of three corporations. Since the complaint was filed in 1987, ten years more or less after the petitioners transferred the shares in question, it is clear that the petitioners have come to court too late. *The Court+ cannot accept the petitioners’ contention that the period during which authoritarian rule was in force had interrupted prescription and that the

same began to run only on February 25, 1986, when the Aquino government too power. It is true that under Art. 1154: Article 1154. The period during which the obligee was prevented by a fortuitous event from enforcing his right is not reckoned against him. fortuitous events have the effect of tolling the period of prescription. However, it cannot be say, as a universal rule, that the period from September 21, 1972 to February 25, 1986, involves force majeure. This claim should be taken on a case-to-case basis. *The Court+ is convinced, from petitioner Tan’s very behavior (of instituting actions in court that did not involve the conveyance of shares), that his detention was not an impediment to a judicial challenge, and the fact of the matter was that he was successful in obtaining judicial assistance. Under these circumstances, [the Court] cannot declare detention, or authoritarian rule for that matter, as a fortuitous event insofar as he was concerned, that interrupted prescription. Prescription was not interrupted. Tan’s action came too late.

H. Agreement

Saura vs. DBP Facts:

Saura applied to Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000 to be used as follows:

P250,000.00 for the construction of a factory building (for the manufacture of jute sacks);

P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and - P9,100.00 as additional working capital.

The jute mill machinery had already been purchased by Saura on the strength of a letter of credit extended by the Prudential Bank and Trust Co. and that to secure its release without first paying the draft, Saura, Inc. executed a trust receipt in favor of the said bank.

RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be secured by a first mortgage on the factory building to be constructed, the land site thereof, and the machinery and equipment to be installed.

It appears, however, that despite the formal execution of the loan agreement the reexamination contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10,


1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the loan from P500,000.00 to P300,000.00.

Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request was denied by RFC.

Saura, Inc. took exception to the cancellation of the loan and informed RFC that China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us the P500,000.00 originally approved by you.".

RFC passed Resolution No. 9083, restoring the loan to the original amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly with the borrower-corporation," but with the following proviso:

x x x 1. That the raw materials (kenaf) needed by the borrower-corporation to carry out its operation are available in the immediate vicinity;

x x x

However, Saura stated that according to a special study made by the Bureau of Forestry "kenaf will not be available in sufficient quantity this year or probably even next year;"

Saura requested RFC to cancel the mortgage. RFC executed the deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc.

Almost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor of the defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and approved, thereby preventing the plaintiff from completing or paying contractual commitments it had entered into, in connection with its jute mill project.

The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties and that the defendant was guilty of breach.

Issue: WON there was a perfected contract between Saura and DBP WON Saura is entitled to damages

Held:

There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed and registered. But this fact alone falls short of resolving the

basic claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.

It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory to be constructed would utilize locally grown raw materials, principally kenaf. Evidently Saura, Inc. realized that it could not meet the conditions required by RFC stated that local jute "will not be able in sufficient quantity this year or probably next year," and asking that out of the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor." This was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon.The action thus taken by both parties was in the nature cf mutual desistance — what Manresa terms "mutuo disenso" 1 — which is a mode of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment.

Dispositive: Judgment appealed from is reversed and the complaint dismissed, with costs against the plaintiff-appellee.

I. Difficulty What is clausula rebus sic stantibus? Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. (n) Occena vs. Jabson Facts:

Tropical Homes, Inc. filed a complaint for modification of the terms and conditions of its subdivision contract with petitioners (landowners of a 55,330 square meter parcel of land in Davao City) alleging that due to the increase in price of oil and its derivatives and the concomitant worldwide spiraling of prices, further performance by the plaintiff under the contract, will result in situation where defendants would be unjustly enriched at the expense of the plaintiff; will cause an iniquitous distribution of proceeds from the sales of subdivided lots in manifest actually result in the unjust and intolerable exposure of


plaintiff to implacable losses, all such situations resulting in an unconscionable, unjust and immoral situation contrary to and in violation of the primordial concepts of good faith, fairness and equity which should pervade all human relations.

Petitioners moved to dismiss the complaint principally for lack of cause of action, and upon denial thereof and of reconsideration by the lower court elevated the matter on certiorari to respondent Court of Appeals.

CA set aside the preliminary injunction previously issued by it and dismissed petition.

Hence, the petition at bar wherein petitioners insist that the worldwide increase in prices cited by respondent does not constitute a sufficient cause of action for modification of the subdivision contract.

Issue: WON the Court should grant the petition Held:

While respondent court correctly cited in its decision the Code Commission's report giving the rationale for Article 1267 of the Civil Code, it misapplied the same to respondent's complaint.

Respondent's complaint seeks not release from the subdivision contract but that the court render judgment modifying the terms and Conditions of the Contract.

The cited article does not grant the courts this authority to remake, modify or revise the contract or to fix the division of shares between the parties as contractually stipulated with the force of law between the parties, so as to substitute its own terms for those covenanted by the parties themselves. Respondent's complaint for modification of contract manifestly has no basis in law and therefore states no cause of action. Under the particular allegations of respondent's complaint and the circumstances therein averred, the courts cannot even in equity grant the relief sought.

Dispositive: The resolution of respondent appellate court is reversed and the petition for certiorari is granted and private respondent's complaint in the lower court is ordered dismissed for failure to state a sufficient cause of action. Naga Telephone vs. CA, supra

J. Impossibility What is the effect of impossibility? Art. 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor. (1184a) IV. Other Performance Excuses

K. Violenti Non Fit Injuria What is violenti non fit injuria? Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable. (1105a)

Latin: "to a willing person, no injury is done" or "no injury is done to a person who consents"

General Rule: No liability for fortuitous event.

Exceptions: The debtor is responsible for a fortuitous event in the ff. cases: o When expressly declared by law (such as when the possessor is in

bad faith or is in default). o When expressly declared by stipulation or contract. o When the nature of the oblig requires the assumption of risk

(Doctrine of Created Risk)

Essential characteristics of a fortuitous event o The cause must be independent of the will of the debtor o Impossibility of foreseeing or impossibility of avoiding it, even if

foreseen. o The occurrence must be such as to render it impossible for the

debtor to fulfil his obligation in a normal manner.

Loss in a shipwreck o As a general rule, the loss of the ship due to a fortuitous event

should be borne by the owner; the loss of the cargo, by their owners, unless the captain lacked skill or there was malice or negligence.

Loss because of an act of government


o In case there is a law, it shall be considered as an act of sovereign power and therefore, whatever loss incurred can be attributed to a force majeure and certainly the State cannot complain of a loss caused by itself.

Combination of fortuitous event and negligence o If the fortuitous event was the proximate cause, the oblig is

extinguished. o If the negligence was the proximate cause, the oblig is not

extinguished—converted to a monetary oblig for damages.

L. Fortuitous Event

What are the acts of God? Art. 1174- refer to 104 Art. 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay. When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. (1182a)

Examples of instances when the law requires liability even in the case of a fortuitous event: o When the debtor is in default (mora) o When the debtor has promised to deliver the same thing to two or

more persons (parties) who do not have the same interest o When the oblig arises from a crime o When a borrower (of an object) has lent the thing to another who

is not a member if his own household. o When the thing loaned has been delivered with appraisal of the

value, unless there is a stipulation exempting the borrower from responsibility in case of a fortuitous event.

o When the payee in solutio indebiti is in bad faith

An act of God has been defined as an accident, due directly and exclusively to natural causes without human intervention, which by no amount of foresight, pains or care, reasonably to have been expected, could have been prevented. (1 Corpus Juris 1174). (Nakpil and Sons vs.

CA) o The principle embodied in the act of God doctrine strictly requires

that the act must be one occasioned exclusively by the violence of nature and all human agencies are to be excluded from creating or entering into the cause of the mischief. When the effect, the cause of which is to be considered, is found to be in part the result of the participation of man, whether it be from active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were, and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).

o The negligence of the defendant and the third-party defendants petitioners was established beyond dispute both in the lower court and in the Intermediate Appellate Court. Defendant United Construction Co., Inc. was found to have made substantial deviations from the plans and specifications. and to have failed to observe the requisite workmanship in the construction as well as to exercise the requisite degree of supervision; while the third-party defendants were found to have inadequacies or defects in the plans and specifications prepared by them. As correctly assessed by both courts, the defects in the construction and in the plans and specifications were the proximate causes that rendered the PBA building unable to withstand the earthquake of August 2, 1968. For this reason the defendant and third-party defendants cannot claim exemption from liability. (Decision, Court of Appeals, pp. 30-31).

o In any event, the relevant and logical observations of the trial court as affirmed by the Court of Appeals that "while it is not possible to state with certainty that the building would not have collapsed were those defects not present, the fact remains that several buildings in the same area withstood the earthquake to which the building of the plaintiff was similarly subjected," cannot be ignored.

Art. 1221. If the thing has been lost or if the prestation has become impossible without the fault of the solidary debtors, the obligation shall be extinguished. If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor.


If through a fortuitous event, the thing is lost or the performance has become impossible after one of the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, the provisions of the preceding paragraph shall apply. (1147a)

Loss because of a fortuitous event after default—there will be liability because of the default.

When will force majeure not extinguish an obligation? Art. 1174- refer to 104 Art. 1262- refer to 105 Art. 1221- refer to 105 Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. (1185)

Even for fortuitous event, the oblig is not extinguished.

Exception: When the creditor (the offended party in the crime) is in mora accipiendi.

Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of article 1165. This presumption does not apply in case of earthquake, flood, storm, or other natural calamity. (1183a)

The presumption of fault does not apply in the case if a natural calamity. Although fire is not a natural calamity, if a tenant is able to prove that the fire caused in his apartment was purely accidental, he is not liable.

Art. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by Article 1170, may compel the debtor to make the delivery.

If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. 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 the delivery. (1096)

Effect of fortuitous event o Specific oblig- extinguished by a fortuitous event of act of God o Generic oblig- never extinguished by fortuitous event

Two instances where a fortuitous event does not exempt (3rd

par) o If the obligor delays o If the obligor is guilty of bad faith

National Power Corporation vs. CA Facts:

The private respondents, owners of different parcels of land in Angat and Norzagaray, Bulacan, suffered extensive damage to and lose of their properties as a result of the inundation.

Demands for the payment thereof having been rejected by the petitioners, the private respondents filed with the RTC, an action for damages against the petitioners.

Petitioners said that they took all the necessary precautions in anticipation of the typhoon, exercised due care in the maintenance and operation of the Angat Hydro-electric plant and sent out early written warnings. They further rely on the defense of force majeure, and aver that there exists no causal relation between the alleged damages and losses suffered by the plaintiffs.

RTC rendered its decision against the petitioners.

Appellate court affirmed the findings of the trial court on the negligence of the petitioners.

Issue: WON the petitioners should be liable for damages Held:

Petition must be dismissed because the losses and damages sustained by the private respondents had been proximately caused by the negligence of the petitioners, although the typhoon which preceded the flooding could be considered as a force majeure.

Petitioners cannot be heard to invoke the act of God or force majeure to escape liability for the loss or damage sustained by the private respondents since they, the petitioners, were guilty of negligence. This event then was not occasioned exclusively by an act of God or force


majeure; a human factor - negligence or imprudence - had intervened. The effect then of the force majeure in question may be deemed to have, even if only partly, resulted from the participation of man. Thus, the whole occurrence was thereby humanized, as it were, and removed from the rules applicable to acts of God.

Dispositive: The instant petition is hereby DENIED, with costs against the petitioners. Nakpil and Sons vs. CA Facts:

The private respondent (Philippine Bar Association) hired the services of the petitioner to make the plans and specifications for the construction of their office building.

The building was completed by the contractor but subsequently, an earthquake struck causing its partial collapse and damage.

After the protracted hearings, the Commissioner eventually submitted his report with the findings that while the damage sustained by the PBA building was caused directly by the earthquake whose magnitude was estimated at 7.3 they were also caused by the defects in the plans and specifications prepared by the third-party defendants' architects, deviations from said plans and specifications by the defendant contractors and failure of the latter to observe the requisite workmanship in the construction of the building and of the contractors, architects and even the owners to exercise the requisite degree of supervision in the construction of subject building.

Plaintiff commenced this action for the recovery of damages arising from the partial collapse of the building against United Construction, Inc. and its President and General Manager Juan J. Carlos as defendants. Plaintiff alleges that the collapse of the building was accused by defects in the construction, the failure of the contractors to follow plans and specifications and violations by the defendants of the terms of the contract.

Issue: WON the petitioner is liable for damages in this case Held:

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation due to an "act of God," the following must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be

either unforseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any participation in, or aggravation of the injury to the creditor.

It has been held that when the negligence of a person concurs with an act of God in producing a loss, such person is not exempt from liability by showing that the immediate cause of the damage was the act of God. To be exempt from liability for loss because of an act of God, he must be free from any previous negligence or misconduct by which that loss or damage may have been occasioned.

The negligence of the defendant and the third-party defendants petitioners was established beyond dispute both in the lower court and in the Intermediate Appellate Court. Defendant United Construction Co., Inc. was found to have made substantial deviations from the plans and specifications. and to have failed to observe the requisite workmanship in the construction as well as to exercise the requisite degree of supervision; while the third-party defendants were found to have inadequacies or defects in the plans and specifications prepared by them.

The relevant and logical observations of the trial court as affirmed by the Court of Appeals that "while it is not possible to state with certainty that the building would not have collapsed were those defects not present, the fact remains that several buildings in the same area withstood the earthquake to which the building of the plaintiff was similarly subjected," cannot be ignored.

NATURAL OBLIGATIONS

Distinguish civil and natural obligations. Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles.

Civil and natural obligs distinguished o Voluntary fulfilment defined

Voluntary fulfilment means that the debtor complied with the same even if he knew that he could have been legally forced


to do so. In case of partial voluntary fulfilment, there has not yet been created a legal oblig.

o Undue payment distinguished from natural oblig If I pay a debt that has prescribed—

Not knowing it has prescribed, I can recover on the ground of undue payment.

Knowing that it has prescribed, I cannot recover for this would be a case of a natural oblig.

o No juridical tie in moral obligs While there is a juridical tie in natural obligs, there is none in

moral obligs.

Example of other natural obligs Obligation to pay interest for use of money, even if not agreed

upon in writing. Duty to support natural or spurious children (even if not

recognized voluntarily or by judicial compulsion and even if there is a judgment denying recognition).

Giving material and financial assistance to children upon their marriage.

Conversion of moral obligs to civil obligs o Moral obligs may be converted into civil obligs. Ex.

Acknowledgement of a prescribed debt Art. 1424. When a right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who voluntarily performs the contract cannot recover what he has delivered or the value of the service he has rendered.

Effect of extinctive prescription- By virtue of extinctive prescription, a right to property has been lost. Hence, the existence of the Article.

Art. 1425. When without the knowledge or against the will of the debtor, a third person pays a debt which the obligor is not legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily reimburses the third person, the obligor cannot recover what he has paid.

Payment with debtor’s consent- If payment is made with the consent of the debtor, a civil oblig arises.

Art. 1426. When a minor between eighteen and twenty-one years of age who has entered into a contract without the consent of the parent or guardian,

after the annulment of the contract voluntarily returns the whole thing or price received, notwithstanding the fact the he has not been benefited thereby, there is no right to demand the thing or price thus returned. Art. 1427. When a minor between eighteen and twenty-one years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith. (1160A)

Contract by Minors—No annulment yet o Generally, annulment requires mutual restitution. Here, the oblige

who has spent or consumed the object in good faith is not required to restore.

o Good faith of the oblige must be present at the time of the spending or consuming.

o Note that the majority age today is 18. And fungible here really means consumable.

Art. 1428. When, after an action to enforce a civil obligation has failed the defendant voluntarily performs the obligation, he cannot demand the return of what he has delivered or the payment of the value of the service he has rendered.

Winner in an action to enforce a civil obligation—Here the defendant may have realized that he should have lost the case, instead of winning it, this the existence of the Article.

Art. 1429. When a testate or intestate heir voluntarily pays a debt of the decedent exceeding the value of the property which he received by will or by the law of intestacy from the estate of the deceased, the payment is valid and cannot be rescinded by the payer.

Rule in case of payment of debts beyond value of the decedent’s estate o Heirs inherit obligs only to the extent of the value of the

inheritance. This is the reason for the Article, coupled with the basis for the natural oblig.


Art. 1430. When a will is declared void because it has not been executed in accordance with the formalities required by law, but one of the intestate heirs, after the settlement of the debts of the deceased, pays a legacy in compliance with a clause in the defective will, the payment is effective and irrevocable.

Payment of legacies despite the fact that the will is void o If the will is void, the legacy would also be void and the deceased

is considered to have died without a will. This is the reason for the existence of this Article.

Analogous cases o By analogy, all alienations defective for lack of proper formalities

may be included under Art. 1430.

CONTRACTS

V. General What is a contract? Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. (1254a) Contract, defined

o A contract, from the Latin “contractus” and from the French “contract”, is a juridical convention manifested in legal form, by virtue of which, one or more persons (or parties) bind themselves in favour of another or others, or reciprocally, to the fulfilment of a prestation to give, to do, or not to do.

Elements of a contract o Essential elements (without them a contract cannot exist)

Consent Subject matter Cause or consideration Form (some contracts) Delivery (some contracts)

o Natural elements (those found in certain contracts and presumed to exist, unless the contrary has been stipulated) Warranty against eviction and against hidden defects in the

contract of sale

o Accidental elements (various particular stipulations that may be agreed upon by the contracting parties in a contract. They are called accidental because they may be present or absent, depending upon whether or not the parties have agreed upon them) Stipulation to pay credit Stipulation to pay interest Designation of the particular place for delivery or payment

Classification of contracts o Acc to perfection or formation

Consensual (perfected by mere consent; ex. Sale) Real (perfected by delivery; ex. Depositum, pledge,

commodatum) Formal or solemn (where special formalities are essential

before the contract may be perfected; ex. A donation inter vivos of real property requires for its validity a public instrument)

Note: Donation is sometimes considered a contract even if Art. 712 states that a donation is a mode of transferring of real rights.

o Acc to cause or equivalence of the value of prestations Onerous- where there is an interchange of equivalent

valuable consideration Gratuitous or lucrative- this is FREE, thus one party receives

no equivalent prestation except a feeling that one has been generous or liberal

Remunerative- (one where one prestation is given for a benefit or service that had been rendered previously)

o Acc to importance or dependence of one upon another Principal- contract may stand alone by itself; ex. Sales, lease Accessory- depends for its existence upon another contract;

ex. Loan; here the principal contract is one of loan. o Acc to the parties obligated

Unilateral- one of the parties has an oblig; ex. Commodatum (like the borrowing of a bicycle)

Bilateral (or synalagmatic)- both parties are required to render reciprocal prestatioons; ex. Sale

o Acc to their name or designation Nominate- contract is given a particular or special name; ex.

Commodatum, partnership, sale, agency, deposit


Innominate (contraltos innominados)- not given any special name; ex. “do ut des” meaning “I give that you may give”

o Acc to the risk of fulfilment Commutative- parties contemplate a real fulfilment,

therefore, equivalent values are given; ex. Sale, lease Aleatory- fulfilment is dependent upon chance, thus the

values may vary because of the risk or chance o Acc to the time of performance of fulfilment

Executed- one contemplated at the time the contract is entered into, that is, the oblig are complied with at this time; ex. Sale of property which has already been delivered, and which has already been paid for

Executory- one where the prestations are to be complied with at some future time; ex. A perfected sale, where the property has not yet been delivered and where the price has not yet been given

o Acc to subject matter Contracts involving things (like sale) Contracts involving rights or credits (provided these are

transmissible, like a contract of usufruct or assignment of credits)

Contracts involving services (like agency, lease of services, a contract of common carriage, a contract of carriage <simple carriage>)

o Acc to obligs imposed and regarded by the law Ordinary- like sale, the law considers this as an ordinary

contract Institutional- like the contract of marriage; the law considers

marriage as an inviolable social institution o Acc to the evidence required for its proof

Those requiring merely oral or parol evidence Those requiring written proof; ex. Contracts enumerated

under the Stature of Frauds o Acc to the number of persons actually and physically entering into

the contracts Ordinary- where two parties are represented by different

persons; ex. Sale Auto-contracts- where only one person represents two

opposite parties, but in different capacities; ex. An agent

representing his principal sells a specific car to himself, as a buyer

o Acc to the number of persons who participated in the drafting of the contract Ordinary- (like a ordinary sale) Contract of adhesion- (like one prepared by a real estate

company for the sale of real estate; or one prepared by an insurance company)

o Acc to the nature of the contract Personal Impersonal

Stages of a contract o Preparation (or conception or Generacion)—Here the parties are

progressing with their negotiations; they have not yet arrived at any definite agreement, although there may have been a preliminary offer and bargaining.

o Perfection (or birth)—Here the parties have at long last came to a definite agreement, the elements of definite subject matter and valid cause have been accepted by mutual consent.

o Consummation (or death or termination)—Here the terms of the contract are performed, and the contract may be said to have been fully executed.

Parties to a contract o The law speaks of a meeting of minds between two “persons”. The

meeting of the minds really refers to two “parties”. If at the time of supposed perfection, one of the parties had already previously died, there can be no meeting of the minds; hence no contract.

Basic principles or characteristics of a contract o Freedom (or liberty) to stipulate (provided not contrary to law,

morals, good customs, public order, or public policy) o Obligatory force and compliance in good faith o Perfection by mere consent (consensuality) as a rule o Both parties are mutually bound o Relatively (Generally, it is binding only between the parties, their

assign and heirs)

Co-existence of a contract with a quasi-delict (tort) o The existence of a contract between the parties does not

constitute a bar to the commission of a tort by one against the other and the consequent recovery of damages.

Legal effects of a contract


o The legal effects of a contract are determined by extracting the intention of the parties from the language they used and from their contemporaneous and subsequent acts. This principle gains more force when third parties are concerned. To require such persons to go beyond what is clearly written in the document is unfair and unjust. They cannot possibly delve into the contracting parties’ minds and suspect that something is amiss when the language of the instrument appears clear and unequivocal.

What is pacta sunt servanda? Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. (1091a)

Latin: "agreements must be kept"

Obligations ex-contractu o While obligs arising from a contract have the force of law between

the parties, this does not means that the law is inferior to contracts. This is so because before a contract can be enforced, it must first be valid and it cannot be valid if it is against the law. Moreover, the right of the parties to stipulate is limited. Hence, Art. 1306, CC says: “the contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy.

Meaning of the article o The article means that neither party may unilaterally and upon his

own exclusive volition, escape his obligs under the contract, unless the other party assented thereto, or unless for causes sufficient in law and pronounced adequate by a competent tribunal.

o Compliance in good faith means that we must not interpret “not by the letter that killeth but by the spirit that giveth life”.

The right to enter into contracts o The right to enter into lawful contracts constitute one of the

liberties of the people of the State. If that right be struck down or arbitrarily interfered with, a substantial impairment of constitutional rights would result. Nevertheless, in contracts where public interest is involved the government has a right to intervene for the protection of the whole.

Differences between an obligation and a contract o An oblig is the result of a contract. Hence, while a contract, if

valid, always results in obligs, not all obligs come from contracts. A

contract always presupposes a meeting of the minds, this is not necessarily true for all kinds of oblig.

o Be it not, however, from another viewpoint that a contract may itself be the result of an oblig.

The so-called innominate contracts—no express name o Do ut des—I give that you may give o Do ut facias—I give that you may do o Facio ut des—I do that you may give o Facio ut facias—I do that you may do

Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. (1258)

This article stresses the CONSENSUALITY OF CONTRACTS (or perfection by mere consent)

How contracts are perfected o Consensual contracts- by mere consent (this is the general rule);

ex. Contract of sale o Real contracts- perfected by delivery; ex. Deposit and pledge o Formal or solemn contracts- here a special form is required for

perfection; ex. A simple donation inter vivos of real property, to be valid and perfected must be in a public instrument

Perfection of consensual contracts o Consensual contracts are perfected from the moment there is

agreement (consent) on the subject matter and the cause or consideration

Consequences of perfection o The parties are bound to the fulfilment of what has been expressly

stipulated and compliance thereof must be in good faith o The parties are also bound to all the consequences which, acc to

their nature may be in keeping with good faith, usage and law. Ang Yu vs. CA Facts:

Plaintiffs (Ang Yu) are tenants or lessees of residential and commercial spaces owned by defendants (Bobby Cu Unjieng) in Binondo, Manila.


They have occupied said spaces since 1935 and have been religiously paying the rental and complying with all the conditions of the lease contract.

Defendants informed plaintiffs that they are offering to sell the premises and are giving them priority to acquire the same; that during the negotiations, Bobby Cu Unjieng offered a price of P6-million while plaintiffs made a counter offer of P5-million; that plaintiffs thereafter asked the defendants to put their offer in writing to which request defendants acceded.

In reply to defendant's letter, plaintiffs wrote them asking that they specify the terms and conditions of the offer to sell.

Since defendants failed to specify the terms and conditions of the offer to sell and because of information received that defendants were about to sell the property, plaintiffs were compelled to file the complaint to compel defendants to sell the property to them.

Defendants filed their answer denying the material allegations of the complaint and interposing a special defense of lack of cause of action.

The court dismissed the complaint on the ground that the parties did not agree upon the terms and conditions of the proposed sale, hence, there was no contact of sale at all.

The Cu Unjieng spouses executed a Deed of Sale transferring the property in question to Buen Realty and Development Corporation. Buen Realty, as the new owner of the subject property, wrote to the lessees demanding the latter to vacate the premises. In its reply, it stated that Buen Realty and Development Corporation brought the property subject to the notice of lis pendens.

Issue: WON there was a perfected contract between Ang Yu and Cu Unjieng Held:

Until the contract is perfected, it cannot, as an independent source of obligation, serve as a binding juridical relation. In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is perfected when a person, called the seller, obligates himself, for a price certain, to deliver and to transfer ownership of a thing or right to another, called the buyer, over which the latter agrees.

When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the ownership of the thing sold is retained until the fulfillment of a positive suspensive condition (normally, the full payment of the purchase price), the breach of the condition will

prevent the obligation to convey title from acquiring an obligatory force.

An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is fixed, can be obligatory on the parties, and compliance therewith may accordingly be exacted.

An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a valuable consideration distinct and separate from the price, is what may properly be termed a perfected contract of option. This contract is legally binding, and in sales, it conforms with the second paragraph of Article 1479 of the Civil Code.

Even on the premise that such right of first refusal has been decreed under a final judgment, like here, its breach cannot justify correspondingly an issuance of a writ of execution under a judgment that merely recognizes its existence, nor would it sanction an action for specific performance without thereby negating the indispensable element of consensuality in the perfection of contracts. 11 It is not to say, however, that the right of first refusal would be inconsequential for, such as already intimated above, an unjustified disregard thereof, given, for instance, the circumstances expressed in Article 19 of the Civil Code, can warrant a recovery for damages.

The final judgment, it must be stressed, has merely accorded a "right of first refusal" in favor of petitioners. The consequence of such a declaration entails no more than what has heretofore been said. In fine, if, as it is here so conveyed to us, petitioners are aggrieved by the failure of private respondents to honor the right of first refusal, the remedy is not a writ of execution on the judgment, since there is none to execute, but an action for damages in a proper forum for the purpose.

Regino vs. Pangasinan Facts:

Petitioner Khristine Rea M. Regino was a first year computer science student at Respondent Pangasinan Colleges of Science and Technology (PCST). Reared in a poor family, Regino went to college mainly through the financial support of her relatives. During the second semester of school year 2001-2002, she enrolled in logic and statistics subjects under Respondents Rachelle A. Gamurot and Elissa Baladad, respectively, as teachers.


Financially strapped and prohibited by her religion from attending dance parties and celebrations, Regino refused to pay for the tickets.She was then disallowed to take the examinations.

Petitioner filed a Complaint for damages against PCST, Gamurot and Baladad.

RTC dismissed the Complaint for lack of cause of action. Issue: WON she has a cause of action against PCST Held:

In Alcuaz v. PSBA, the Court characterized the relationship between the school and the student as a contract, in which "a student, once admitted by the school is considered enrolled for one semester." Two years later, in Non v. Dames II, the Court modified the "termination of contract theory" in Alcuaz by holding that the contractual relationship between the school and the student is not only semestral in duration, but for the entire period the latter are expected to complete it." Except for the variance in the period during which the contractual relationship is considered to subsist, both Alcuaz and Non were unanimous in characterizing the school-student relationship as contractual in nature.

The terms of the school-student contract are defined at the moment of its inception -- upon enrolment of the student. Standards of academic performance and the code of behavior and discipline are usually set forth in manuals distributed to new students at the start of every school year. Further, schools inform prospective enrollees the amount of fees and the terms of payment.

In the present case, PCST imposed the assailed revenue-raising measure belatedly, in the middle of the semester. It exacted the dance party fee as a condition for the students' taking the final examinations, and ultimately for its recognition of their ability to finish a course. The fee, however, was not part of the school-student contract entered into at the start of the school year. Hence, it could not be unilaterally imposed to the prejudice of the enrollees.

Such contract is by no means an ordinary one. In Non, we stressed that the school-student contract "is imbued with public interest, considering the high priority given by the Constitution to education and the grant to the State of supervisory and regulatory powers over all educational institutions".

Non vs. Dames Facts:

Petitioner students of Mabini Colleges were not allowed to re-enroll because they participated in student mass actions against their school the preceding semester.

Petitioners continued their rally picketing, even though without any renewal permit, physically coercing students not to attend their classes, thereby disrupting the scheduled classes and depriving a great majority of students of their right to be present in their classes

The lower court considered that in signing their enrollment forms, they waived the privilege to be re-enrolled. The Mabini College reserves the right to deny admission of students xxx whose activities unduly disrupts or interfere with the efficient operation of the college xxx.

Judge Dames‘ decision considering these facts said that what the students assert is a mere privileges not a legal right. Respondent Mabini College is free to admit or not to admit the petitioners for re-enrollment in view of the academic freedom enjoyed by the school.

Issue: WON schools can deny admission to students on the ground of termination of contract Held:

In Alcuaz, it was said that enrollment is a written contract for one semester and contracts are respected as the law between the contracting parties. At the end of each semester, the contract is deemed terminated.

However, this case is not a simple case about a school refusing re-admission. The refusal to readmit or to re-enroll petitioners was decided upon and implemented by school authorities as a reaction to student mass actions

Permissible limitations on student exercise of constitutional rights within the school. Constitutional freedom of free speech and assembly also are not absolute. However, imposition of disciplinary sanctions requires observance of procedural due process and penalty imposed must be proportionate to the offense committed. (procedural due process: right to be informed in writing, right to answer the charges, right to be informed of the charges against them, right to adduce evidence, and for this evidence to be duly considered)

The nature of contract between a school and its students is not an ordinary contract but is imbued with public interest. The Constitution


allows the State supervisory and regulatory powers over all educational institutions. According to par 107 and 137 of the respondent school‘s manual, a student is enrolled not just for one semester but for the entire period necessary for the student to complete his/her course. BP Blg. 232 gives the students the right to continue their course up to graduation.

School said most of them had failing grades anyway. In answer students say they are graduating students and if there are any deficiencies these do not warrant non-readmission. Also there are more students with sores deficiencies who are re-admitted. And some of the petitioners had no failing marks.

The court held that the students were denied due process in that there was no due investigation. In fact it would appear from the pleadings that the decision to refuse them re-enrollment because of failing grades was a mere afterthought.

Discipline may be warranted but penalty should be commensurate to the offense committed with due process.

Dispositive: Petition GRANTED. Orders of RTC ANNULED. Mabini College ordered to readmit and allow reenrollment of petitioners, without prejudice to its taking the appropriate action, if shown that they have failed to satisfy the school's prescribed academic standards. What is freedom of contract? Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. (1255a)

Principle of Freedom o The free entrance into contracts generally without restraint is one

of the liberties guaranteed to the people. However, the constitutional prohibition against impairment of contractual obligs refers only to contracts which are not legal, not to void or inexistent ones.

Limitations on the nature of the stipulations o The law o Moral o Good customs o Public order

o Public policy

Limitations imposed by law o The contractual stipulations must not be contrary to mandatory

and prohibitive laws. Directory and suppletory laws need not be complied with, since these are either discretionary or merely supply the omissions of the parties.

o Contracts must respect the law, for the law forms part of the contract. Indeed the provisions of all laws are understood to be incorporated in the contract.

Limitations imposed by morals o Morals deal with right and wrong and with human conscience.

Limitations imposed by good customs o Good customs are those that have received for a period time

practical and social confirmation. Acc to the Code Commission, good customs and morals overlap each other; but sometimes they do not.

Limitations imposed by public order o Public order deals with the public weal and includes public safety.

Limitations imposed by public policy o Public policy, which varies according to the culture of a particular

country, is the public social and legal interest in private law. It is said to be the manifest will of a State.

o A contract is contrary to public policy if it “has a tendency to injure the public, is against the public good or contravenes some established interest of society or is inconsistent with sound policy and good morals or tends clearly to undermine the security of individual’s rights.

Designation of the name of a contract o The parties generally may agree on any contract but the name

that they give to it should not be controlling for a contract is what the parties intended it to be not what they call it.

o This is because a contract must be judged by its character, its nature and its legal qualifications. The courts will therefore look not so much at the form of the transaction as at its substance.

Section 10, Art. III, 1987 Constitution. No law impairing the obligation of contracts shall be passed.


Republic vs. PLDT Facts:

PLDT contracted an agreement with RCA Communications for connecting calls to and from RCA to Philippines and vice versa. Later, the agreement extended to radio and telephone messages to and from European and Asiatic countries.

Later, PLDT made known the termination of the agreement, complying with the 24-month notice agreement.

Created in 1947, the Bureau of Telecommunication set up a Government telephone system by renting trunk lines from PLDT. In doing so, the Bureau has agreed to abide by the rules and regulations of PLDT, which includes the prohibition for public use that which was furnished for private use. In 1948, the Bureau extended service to the general public.

In 1958, after the termination of the contract of RCA and PLDT, the Bureau entered into an agreement with RCA for a joint overseas telephone service. PLDT then complained that the Bureau was violating their agreement as the latter was using PLDT's trunk lines for public use and not just private. PLDT then gave notice that if these actives continued they would be disconnecting the service. When no reply was received, PLDT pulled the plug on the Bureau.

The Bureau proposed an interconnecting agreement but the negotiations failed.

The Bureau prayed for a judgment commanding PLDT to execute an agreement allowing it to use PLDT's facilities, as well as a writ of preliminary injunction to restrain PLDT from severing existing as well as restoring those already severed.

Lower court directed PLDT to reconnect. PLDT filed its answer denying any obligation it has to the Bureau, as well as assailing the jurisdiction of the CFI. PLDT also claimed that the Bureau was engaged in commercial telephone operations which was in excess of its authority.

Court then said that it could not compel the parties to enter into agreement; that under EO 94, establishing the Bureau, said Bureau is not limited to government services, nor was it guilty of fraud, abuse, of misuse of PLDT's poles, as well as declared the injunction permanent. Complaint was dismissed, hence this appeal.

Issue: WON the parties could be compelled to enter into a contract Held:

The parties cannot be coerced to enter into a contract where no agreement had between them as to the principal terms and conditions

of the contract. Freedom to stipulate such terms and conditions is of the essence of our contractual system, and by express provision of the statute, a contract may be annulled if tainted by violence, intimidation or undue influence.

But the court has apparently overlooked that while the Republic may not compel the PLDT to celebrate a contract with it, Republic may, in the exercise of the sovereign power of eminent domain, require the telephone company to permit interconnection of the government telephone system and that of the PLDT, as the needs of the government service may require, subject to the payment of just compensation to be determined by the court.

However, no cogent reason appears why the said power may not be availed of to impose only a burden upon the owner of condemned property, without loss of titled and possession. The beneficiary of the interconnecting service would be the users of both telephone systems, so that the condemnation would be for public use.

Dispositive: Decision of CFI AFFIRMED except in so far as it dismisses the petition of the Republic to compel the PLDT to continue servicing the Government telephone system upon such terms, and for a compensation.

Ollendorf vs. Abrahamson Facts:

Plaintiff Ollendorf and defendant Abrahamson made and entered into Contract of Agreement. The first part hereby agrees to employ the defendant and the party of the second obliges himself to work for the plaintiff within the period of two years.

Defendant obligates and binds himself to devote his entire time, attention, energies and industry on the promotion of the furtherance of the business and interest of the party. Failure on the said duty shall entitle the plaintiff to discharge and dismiss the defendant.

The second part of the contract further binds the party that he will not enter whether directly or indirectly to engage in a similar or competitive business.

Under the term of this agreement, the plaintiff left the employment due to illness and went to U.S.

Some months after his departure for the US, defendant returns to Manila as the Manager of the Philippine Underwear Company. Defendant admits that both firms turn out the same class of goods


and those they are exported to the same market. The only difference between the two companies is the method of doing the finishing work- the manufacture of the embroidered material into finished garments.

Ollendorf commenced the action to prevent, by injunction, any further breach of that part of defendant's contract of employment by plaintiff.

Lower court granted a preliminary injunction. Issue: WON the contract of employment is void Held:

A contract by which an employee agrees to refrain for a given length of time after the expiration of the term of his employment, from engaging in a business competitive with that of his employer is not void as being restraint of trade, if the restraint imposed is no greater in restraint imposed is no greater than that which is necessary to afford a reasonable protection to the employer.

The only limitation upon the freedom of contractual agreement is that the pacts established shall not be contrary to law, morals, or public order. The industry of counsel has failed to discover any direct expression of the legislative will which prohibits such a contract as that before us. It certainly is not contrary to any moral precept.

The validity of restraints upon trade or employment is to be determined by the intrinsic reasonableness of the restrictions in each case, rather than by any fixed rule, and that such restrictions may be upheld when not contrary to the public welfare and not greater than is necessary to afford a fair and reasonable protection to the party in whose favor it is imposed.

The restraint imposed upon defendant by his contract is not unreasonable. The public policy which allows a person to obtain employment on certain terms understood by and agreed to by him, and to repudiate his contract, conflicts with and must, to avail the defendant, for some sufficient reason, prevail over, the manifest public policy, which as a rule holds to his bond.

Star Paper vs. Simbol Facts:

Respondents Simbol, Comia and Estrella were all regular employees of the company.

Simbol met Alma, also an employee of the company. When they got married, Simbol resigned pursuant to the company policy of the ban of spouses working in the same company.

Comia also resigned after being advised of the policy.

Estrella got herself pregnant by Zuniga, a co-worker who was married. She opted to resign from the company.

The respondents each signed a Release and Confirmation Agreement. They stated that they have no money and property accountabilities in the company and that they release the latter of any claim or demand of whatever.

Respondents offer a different version of their dismissal. Simbol and Comia allege that they did not resign voluntarily; they were compelled to resign in view of an illegal company policy.

Estrella alleged that Zuniga misrepresented himself himself as a married but separated man. After she got pregnant, she discovered that he was not separated. She then severed her relationship with him to avoid dismissal. She met an accident which required her to recuperate for 21 days. When she returned to work, she was denied entry. She was directed to proceed to the personnel office where one of the staff handed her a memorandum stating that she is dismissed for immoral conduct.

Respondents filed a complaint for unfair labor practice, constructive dismissal, separation pay and attorney's fees.

The labor arbiter dismissed the complaint for lack of merit.

NLRC affirned the decision.

CA reversed decision of NLRC. Issue: WON the policy of the employer banning spouses from working in the same company violates the rights of the employee Held:

The policy of petitioners prohibiting close relatives from working in the same company takes the nature of an anti-nepotism employment policy.

Unlike in our jurisdiction where there is no express prohibition on marital discrimination, there are 20 statutes in the US prohibiting marital discrimination. In other statutes, they rule that unless the employer can prove that the reasonable demands of the business require a distinction based on marital status and there is no better available or acceptable policy which would better accomplish the business purpose, an employer may not discriminate against an


employee based on the identity of the employer's spouse. This is known as the bonafide qualification exception.

We do not find a reasonable business necessity in the case at bar. Petitioners' sole contention that the company did not just want to have two or more of its employee related between the third degree by affinity/consanguinity is lame. It is significant to note that respondents were hired after they were found fit for the job, but were asked to resign when they married a co-employee. Petitioners failed to establish that the marriage of its employees could be detrimental to its business operations.

The failure of petitioners to prove a legitimate business concern in imposing the questioned policy cannot prejudice the employee's right to be free from arbitrary discrimination based upon stereotypes of married persons working together in one company.

The absence of a statute expressly prohibiting marital discrimination in our jurisdiction cannot benefit the petitioners. The protection given to labor in our jurisdiction is vast and extensive that we cannot prudently draw inferences from the legislature's silence that married persons are not protected under our Constitution and declare valid a policy based on a prejudice or stereotype.

Heirs of Espiritu vs. Landrito Facts:

Spouses Landrito loan from Spouses Espiritu the amount of P350,000 payable in 3 month. To secure the loan, the spouses Landrito executed a mortgage over a lot in favor Spouses Espiritu. From the P350,000 that the Landritos were supposed to receive P17,500 was deducted as interest for the first month which was equivalent to 5% of the principal debt and P7,500 was further deducted as service fee.

After three months, when the debt became due and demandable, the Spouses Landritos were unable to pay the principal and had not been able to make any interest payments other than the amount initially deducted from the proceeds of the loan.

The loan agreement was extended and was restructured in such a way that the unpaid interest became part of the principal, thus increasing the principal to P385,000.

Due to the continued inability of the Spouses Landritos to settle their obligations with the Spouses Espiritu, the loan was renewed, three more times until the principal reached P874,125.

The debt remained unpaid and as a consequence the Spouses Espiritu foreclosed the mortgaged property. During the auction sale, the property was sold to the Spouses Espiritu as the lone bidder.

The Spouses Landrito failed to redeem the property although they alleged that they negotiated for the redemption of the property. While the negotiated price for the land started at P1,595,392, it was allegedly increased by the Spouses Espiritu from time to time. Spouses Espiritu increased the amount demanded to P2.5M and gave them until July, 1992 to pay said amount. However, they found out that on June 24, 1992, the spouses Espiritu had already executed an Affidavit of Consolidation of Ownership and registered the mortgged property in their name and that the TCT was already issued in the name of Spouses Espiritu.

Spouses Landrito, represented by their son Zoilo Landrito, filed an action for annulment or reconveyance of title with damages against Spouses Espiritu.

Trial court dismissed the complaint and upheld the validity of the foreclosure sale.

CA reversed the decision. Hence, this instant petition. Issue: WON the interest rates imposed are unreasonable Held:

The real Estate Mortgage executed between the parties specified that the "principal indebtedness shall earn interest at a legal rate". The agreement contained no other provision on interest or any fees or charges incident to the debt. The total interest and charges amounting to P559,125 on the original principal of P350,000 was accumulated two years and one month. The records fail to show any computation on how much interest was charged and what other fees were imposed. Not only did lack of transparency that characterized the agreements, the interest rates and the service charged imposed, at an average 6.39% per month are excessive.

The omission of the Spouses Espiritu in specifying in the contract the interest rate which was actually imposed, in contravention of the law, manifested bad faith.

Stipulation authorizing iniquitous or unconscionable interests are contrary to morals if not against the law. The debt due is to be considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive interest formerly imposed.


Since the Spouses Landrito, the debtors, were not given an opportunity to settle their debt, at the correct amount and without the iniquitous interest imposed, no foreclosure proceedings may be instituted. The foreclosure sale conducted upon their failure to pay should be nullified since the amount demanded was overstated.

Macalinao vs. BPI Facts:

Macalinao was an approved cardholder of BPI Mastercard. She made some purchases through the use of the said credit card and defaulted in paying for said purchases.

She subsequently received a demand letter from BPI.

Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI Mastercard, the charges or balance remaining unpaid after the payment due date indicated on the monthly Statement of Accounts shall bear interest at the rate of 3% per month and an additional penalty fee equivalent to another 3% per month.

For failure of Macalinao to settle her obligations, BPI filed with the MeTC a complaint for a sum of money against her and her husband. In said complaint, BPI prayed for the payment of the amount of P154,608.78 plus 3.25% finance charges and late payment charges equivalent to 6% of the amount due.

For failure to file their answer, MeTC ruled in favor of BPI.

Macalinao appealed in the RTC which affirmed the decision. CA also affirmed, hence this petition.

Issue: WON the stipulated interest rate was unscionable, and iniquitous Held:

In its complaint, BPI originally imposed the interest and penalty charges at the rate of 9.25% per month or 111% per annum. This was declared unconscionable by the lower courts for being clearly excessive and was thus reduced to 2% per month or 24% per annum. CA modified to 3% per month and 36% per annum.

The interest rate and penalty charge of 3% per month should be equitably reduced to 2% per annum.

Even if the Terms and Conditions contain the stipulated 3% interest rate, such stipulation is void for being contrary to morals, if not against the law. Since the stipulation on the interest rate is void, it is as if there was no express contract. Hence, the court may reduce the interest as reason and equity demand.

The records would reveal that Macalinao made partial payments to BPI, in addition to the unconscionable interest rate. Under these circumstances, the Court finds it equitable to reduce the interest rate in line with the prevailing jurisprudence and in accordance with Art. 1229 of the Civil Code.

What are the kinds of contracts? Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by the customs of the place. (n)

Nominate

Innominate—no express name o Governing rules for innominate contracts

Stipulations Titles I and II of Book IV- Obligations and Contracts Rules on the most analogous nominate contracts Customs of the place

o 4 kinds of innominate contracts Do ut des (I give that you may give) Do ut facias (I give that you may do) Facio ut des (I do that you may give) Facio ut facias (I do that you may do)

Consensual

Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. (1258)

o This article stresses the CONSENSUALITY OF CONTRACTS (or perfection by mere consent)

o How contracts are perfected Consensual contracts- by mere consent (this is the general

rule); ex. Contract of sale Real contracts- perfected by delivery; ex. Deposit and pledge Formal or solemn contracts- here a special form is required

for perfection; ex. A simple donation inter vivos of real


property, to be valid and perfected must be in a public instrument

o Perfection of consensual contracts Consensual contracts are perfected from the moment there is

agreement (consent) on the subject matter and the cause or consideration

o Consequences of perfection The parties are bound to the fulfilment of what has been

expressly stipulated and compliance thereof must be in good faith

The parties are also bound to all the consequences which, acc to their nature may be in keeping with good faith, usage and law.

Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. (1450a)

Solemn

Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a)

o Generally, form is not required- It is enough that there be consent, subject matter, and cause. This rule applies however to consensual contracts. Formal contracts (Solemn contracts) require a certain

specified form, in addition to consent, subject matter and cause. Ex. Donation must be in a public instrument

Real contracts require delivery to be valid as a real contract even as between the parties, in addition to consent, subject matter and cause.

o When form is important

For validity- this is true in formal or solemn contracts For enforceability- this is true for the agreements enumerated

under the Statute of Frauds, but of course this requirement may be waived by acceptance of benefits (partial) or by failure to object to the presentation of oral (parol) evidence.

For convenience- this is true for the contracts enumerated for example under Art. 1385, CC.

o Example of formal contracts

If the form is not complied with, Art. 1457 cannot be availed of.

Donations of real property- require a public instrument Donations of personal property- require a written contract or

document if the donation exceeds P500 Stipulation to pay interest on loans, interest for the use of the

money- must be in writing Transfer of large cattle- requires the transfer of the certificate

of registration Sale of land thru an agent- authority of the agent must be in

writing Contracts of antichresis- principal loan and interest if any

must be specified in writing

Art. 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract. (1279a)

o Right of one party to compel the other to execute the necessary form The article applies only when form is needed only for

convenience, not for validity or enforceability In other words, before the contracting parties may be

compelled to execute the needed form, it is essential that the contract be:

Perfected

Enforceable under the State of Frauds

Art. 1358. The following must appear in a public document:


(1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein a governed by Articles 1403, No. 2, and 1405; (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; (4) The cession of actions or rights proceeding from an act appearing in a public document. All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles, 1403, No. 2 and 1405. (1280a)

o Form for convenience The necessity for the public document in the contract

enumerated here is only for convenience, not for its validity or enforceability.

Formal requirements are for the benefit of 3rd

parties. Non-compliance does not adversely affect the validity of the contract not the contractual rights and obligs of the parties.

Art. 712. Ownership is acquired by occupation and by intellectual creation. Ownership and other real rights over property are acquired and transmitted by law, by donation, by estate and intestate succession, and in consequence of certain contracts, by tradition. They may also be acquired by means of prescription. (609a) Art. 1403. The following contracts are unenforceable, unless they are ratified: (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (a) An agreement that by its terms is not to be performed within a year from the making thereof;

(b) A special promise to answer for the debt, default, or miscarriage of another; (c) An agreement made in consideration of marriage, other than a mutual promise to marry; (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (e) An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person.

o The Statute of Frauds Purpose- to prevent fraud and not to encourage the same.

Thus, certain agreements are required to be in writing so that they may be enforced.

How the Statue of Frauds prevents fraud

Since memory is many times unreliable, oral agreements may sometimes result in injustice. To aid human memory, to prevent the commission of injustices due to faulty memory, to discourage intentional misrepresentations, are the principal aims of the Statute of Frauds.

Some basic and fundamental principles concerning the Statue of Frauds (General Rules of Application)

The Statute of Frauds applies only to executory contracts (contracts where no performance has yet been made) and not partially or completely executed (consummated contracts). If oral evidence will not be allowed to prove an agreement where one party has performed his oblig, unfairness would result. Indeed, oral or parol evidence may be introduced to prove partial performance. If documentary or written evidence would still be required for the proof of partial performance, the precise evil sought to be avoided by the Statute of Frauds would be


present, namely one who has received some benefits would be allowed to defraud the grantor thereof.

The Statute of Frauds cannot apply if the action is neither for damages because of the violation of an agreement nor for the specific performance of said agreement.

The Statute of Frauds is exclusive, that is, it applies only to the agreements or contracts enumerated therein.

The defense of the Statute of Frauds may be waived.

The Statute of Frauds is a personal defense, that is, a contract infringing it cannot be assailed by 3

rd persons.

Contracts infringing the Statute of Frauds are not void; they are merely unenforceable.

The Statute of Frauds is a Rule of Exclusion, i.e., oral evidence might be relevant to the agreements enumerated therein and might therefore be admissible were it not for the fact that the law or the statute excludes said oral evidence.

The Statute of Frauds does not determine the credibility or weight of evidence. It merely concerns itself with the admissibility thereof.

The Statute of Frauds does not apply if it is claimed that the contract does not express the true agreement of the parties. As long as the rule or real agreement is not covered by the Statute of Frauds, it is proved by oral evidence.

Express trust concerning real property

It will be observed that while the Statute of Frauds makes no mention of it, still under Art. 1443, “no express trusts concerning an immovable or any interest therein may be proved by parol (oral) evidence.” Hence, we can safely conclude that the Statute of Frauds also applies to such express (conventional) trust.

Meaning of formal requirements of “sufficient memorandum”

Our SC has held that no particular form of language or instrument is necessary to constitute a memorandum or note in writing under the Statute of Frauds; any document or writing under the contract or for another purpose, which complies with all the statutory requirements of the statute as to contents and signature, may be considered as sufficient memorandum or note.

Thus, the memorandum may be written in pencil or in ink; it may be filled in or in printed form. It does not have to be contained in a single instrument, nor, when contained in two or more papers, need each paper be sufficient as to contents and signature to satisfy the Statute. If there are two or more writings which are properly connected, they may be considered together; omissions in one may be supplied or clarified by the other, and their sufficiency will depend as to WON when construed together, they are able to satisfy the requirement of the Statute of Frauds as to signature.

Rule on authority of the agent to sell land or any interest therein

Under the CC, “when a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing; otw, the sale shall be void (not unenforceable).”

Oral promise to put in writing

An oral promise to put in writing an agreement that is covered by the Statute is itself unenforceable.

The 3rd

kind of unenforceable contract

The 3rd

kind of unenforceable contract is one where both parties are incapacitated to give consent.

Real

Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the object of the obligation. (n)

o Perfection of real contracts Real contracts require consent, subject matter, cause or

consideration and DELIVERY. o Real contracts referred to are

Deposit Pledge Commodatum- a loan where the identical object must be

returned. o Future real contracts as consensual contracts


A contract “to make a deposit, to make a pledge, or to make a commodatum” is a consensual contract. After delivery, the contract becomes a real contract.

o The contract of carriage The contract “to carry” (at some future time) is consensual

and is perfected by mere consent. The contract of carriage is a real contract, for not until the

carrier is actually used can we consider the contract perfected, that is, ‘til the moment of actual use, the carrier cannot be said to have already assumed the oblig of a carrier.

Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. (1758a) Art. 1963. An agreement to constitute a deposit is binding, but the deposit itself is not perfected until the delivery of the thing. (n) Art. 2085. The following requisites are essential to the contracts of pledge and mortgage: (1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857) Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (1858) Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a) Art. 2093. In addition to the requisites prescribed in Article 2085, it is necessary, in order to constitute the contract of pledge, that the thing

pledged be placed in the possession of the creditor, or of a third person by common agreement. (1863) Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (n) Art. 1935. The bailee in commodatum acquires the used of the thing loaned but not its fruits; if any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. (1941a) Ang Yu, supra BPI Investment Corporation vs. CA Facts:

Frank Roa obtained a loan from Ayala Investment and Development Corporation (AIDC), predecessor of BPIIC for the construction of a house. Said house and lot were mortgaged to AIDC to secure the loan.

Roa sold the house and lot to private respondents ALS and Litonjua for P850,000. They paid P350,000 in cash and assumed the P500,000 balance of Roa's indebtedness with AIDC. The latter, however was not willing to extend the old interest rate to private respondents and proposed to grant them a new loan.

On March 1981, private respondents executed a mortgage deed containing the AIDC stipulations.

ALS and Litonjua updated Roa's arrearages by paying BPIIC reducing ROA's principal balance to P457,204 which, in turn, was liquidated when BPIIC applied thereto the proceeds of private respondents' loan of P500,000.

On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be what was left of their loan after full payment of Roa's loan.

BPIIC instituted foreclosure proceedings against private respondents on the ground that they failed to pay mortgages indebtedness.

ALS and Litonjua filed civil case against BPIIC maintaining that they should not be made to pay the amortization before the actual release of the P500,000 loan in August and September 1982.

Lower court rendered judgment in favor of ALS and Litonjua.


CA affirmed decision, hence this petition. Issue: WON a contract of loan is a consensual contract Held:

A loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery of the object of the contract.

A perfected consensual contract can give rise to an action for damages. However, said contract does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection and which gives rise to obligations only on the part of the borrower.

In the case, the loan contract between BPI and ALS & Litonjua was perfected only on Sept. 1982, the date of the second release of the loan. Following the intentions of the parties on the commencement of the monthly amortization private respondents' obligation to pay commenced only on Oct. 13, 1982, a month after the perfection of the contract.

What is the principle of mutuality? Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. (1256a)

Mutuality of contracts o Both parties are bound. The principle is based on the essential

equality of the parties. It is repugnant to bind one party and yet leave the other free.

Consequences of mutuality o A party cannot revoke or renounce a contract without the consent

of the other, nor can it have it set aside on the ground that he had made a bad bargain.

o When the fulfilment of the condition depends upon the sole will of the debtor, the conditional oblig is void if the condition is suspensive. If resolutory, the oblig is valid. Hence, it is all right for the contract to expressly give to one party the right to cancel the same. This is because when the contract is thus cancelled, the agreement is really being fulfilled.

Art. 1309. The determination of the performance may be left to a third person, whose decision shall not be binding until it has been made known to both contracting parties. (n)

The decision binds the parties only after it is made known to both.

Effect of stipulation regarding arbitration o If in a contract, there is a stipulation for arbitration and one party,

in case of dispute, refuses to submit the matter to arbitration, the aggrieved party whose goes to court to request it to order the other party to submit the matter to arbitration, should not anymore present to the court the merits of the disputed matters. The decision on said merits will be up to the arbitrator. The only function of the Court in this case would be to decide WON the parties should proceed to arbitration.

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. (1115) Who can demand enforcement of contract? Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent. If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (1257a)

Principle of relativity o Contracts are generally effective only between the parties, their

assigns and their heirs.

Exceptions to the principle of relativity (refer to Paras p576-583) o Where the oblig arising from the contract are not transmissible by

their nature, by stipulation or by provision of law. o Where there is a stipulation pour autrui (a stipulation in favour of

a third party) o Where a 3

rd person induces another to violate his contract.


o Where, in some cases, 3rd

persons may be adversely affected by a contract where they did not participate.

o Where the law authorizes the creditor to sue on a contract entered into by his debtor.

Discussion of the general rule o “Contracts take effect only between the parties, their assigns and

heirs” and therefore, generally, its terms cannot determine the rights of 3

rd persons. The revocation, for example of a deed of sale

is not conclusive on those individuals who are parties thereto. However, a person who takes advantage of a contract, although he is not a signatory thereto, can properly be bound by the terms thereof. He cannot take advantage of a contract when it suits him to do so and reject its provision when he thinks otw.

o Reasons for the rule” “Res inter alios acta aliis neque nocet prodest.” (The act, declaration or omission of another, cannot affect another, except as otw provided by law or agreement).

o Strangers, thereof, cannot generally demand the enforcement of a contract.

o Heirs are bound to respect the contracts entered into by their predecessors in interest in view of their privity of interest with such predecessor. He must be a compulsory or forced heir for the simple reason

that the deceased could do with the property whatever he desired as long as he respects the rights of his compulsory heirs.

Can 3

rd parties have personality to assail a contract?

Art. 1313. Creditors are protected in cases of contracts intended to defraud them. (n)

This article represents another instance when an outsider can in a sense interfere with another’s contract.

What is a stipulation pour autrui? Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (1257a) Mandarin Villa vs. CA Facts:

Clodualdo de Jesus, a practicing lawyer and businessman, hosted a dinner for his friends at the petitioner's restaurant the Mandarin Villa Seafoods Village.

After dinner the waiter handed to him the bill in the amount of P2,658.50.

Private respondent offered to pay the bill through his credit card issued by BANKARD. This card was accepted by the waiter who immediately proceeded to the restaurant's cashier for card verification. Ten minutes later, however, the waiter returned and audibly informed private respondent that his credit card had expired.

Private respondent remonstrated that said credit card had yet to expire on September 1990, as embossed on its face.

Private respondent and two of his guests approached the restaurant's cashier who again passed the credit card over the verification computer. The same information was produced, i.e., CARD EXPIRED. Private respondent and his guests returned to their table and at this juncture, Professor Lirag, another guest, uttered the following remarks: "Clody, may problema ba? Baka kailangang maghugas na kami ng pinggan?"

Private respondent left the restaurant and got his BPI Express Credit Card from his car and offered it to pay their bill. This was accepted and honored by the cashier after verification.

De Jesus filed a suit for damages.

Lower Court renderd decision directing Mandarin Villa and BANKARD to pay jointly and severally.

Upon appeal, CA found Mandarin solely responsible for damages. Issue: WON de Jesus is entitled for damages Held:

Mandarin villa can be faulted for it's cashier's refusal to accept de Jesus' BANKARD credit card. Mandarin Villa is affiliated with BANKARD as shown in the Agreement entered into by petitioner and BANKARD.


While private respondent may not be a party to the agreement, a stipulation in the said agreement conferred a favor upon the private respondent, a holder of the credit card. This stipulation is a stipulation pour autrui. Respondent may demand its fulfillment provided his acceptance to the petitioner before its revocation. Private respondent's offer to pay by means of BANKARD credit card constitutes not only an acceptance but also an explicit communication of his acceptance to the obligor.

Also, the record shows that petitioner posted a logo inside Mandarin Seafood Village stating that "Bankard is accepted". This representation is conclusive upon the petitioner which it cannot deny or disprove as against the private respondent, the party relying thereon. Petitioner, therefore, cannot disclaim its obligation to accept private respondent's BANKARD credit card without violating the equitable principle of estoppel.

Uy vs. CA Facts:

Petitioners William Uy and Rodel Roxas are agents authorized to sell 8 parcels of land by the owners. They offered to sell the lands to National Housing Authority to be utilized and developed as a housing project.

NHA Board passed Resolution No. 1632 approving acquisition of said lands. The parties executed a series of Deeds of Absolute Sale. Of the 8 parcels of lands, only 5 were paid for by the NHA because of a report by DENR that the remaining area is not suitable for a housing project.

NHA issued another resolution cancelling the sale over the 3 parcels of land.

Petitioners filed before RTC a Complaint for Damages against NHA and its General Manager Balao.

RTC rendered a decision declaring the cancellation of the contract to be justified.

CA reversed decision. Issue: WON the agents are real parties-in-interest Held:

Petitioners are not parties to the contract of sale between their principals and NHA. They are mere agents of the owners of the land subject of the sale. As agents, they only render some service or do something in representation or on behalf of their principals. The rendering of such service did not make them parties to the contracts

of sale executed in behalf of the latter. Since a contract may be violated only by the parties thereto as against each other, the real parties-in-interest, either as plaintiff or defendant, in an action upon that contract must, generally, either be parties to said contract.

Also, petitioners have not shown that they are assignees of their principals to the subject contracts. While they alleged that they made advances and that they suffered loss of commissions, they have not established any agreement granting them the right to receive payment and out of the proceeds to reimburse for advances and commissions before turning the balance over to the principals.

It does not appear that petitioners are beneficiaries of a stipulation pour autrui under the second paragraph of Article 1311 of the Civil Code. Indeed, there is no stipulation in any of the Deeds of Absolute Sale clearly and deliberately conferring a favor to any third person.

The fact that an agent who makes a contract for his principal will gain or suffer loss by the performance or nonperformance of the contract by the principal or by the other party thereto does not entitle him to maintain an action on his own behalf against the other party for its breach. An agent entitled to receive a commission from his principal upon the performance of a contract which he has made on his principals account does not, from this fact alone, have any claim against the other party for breach of the contract, either in an action on the contract or otherwise. An agent who is not a promisee cannot maintain an action at law against a purchaser merely because he is entitled to have his compensation or advances paid out of the purchase price before payment to the principal.

As petitioners are not parties, heirs, assignees, or beneficiaries of a stipulation pour autrui under the contracts of sale, they do not, under substantive law, possess the right they seek to enforce. Therefore, they are not the real parties-in-interest in this case. Petitioners not being the real parties-in-interest, any decision rendered herein would be pointless since the same would not bind the real parties-in-interest.

Baluyot vs. CA Facts:

Petitioners Timoteo Baluyot, Jaime Benito, Benigno Eugenio, Rolando Gonzales, and Fortunato Fulgencio are residents of Barangay Cruz-na-Ligas and members of The Cruz-na-Ligas Homesite Association, Inc.


On March 13, 1992, petitioners filed a complaint for specific performance and damages against private respondent University of the Philippines before the RTC. The complaint was later on amended to include private respondent Quezon City government as defendant.

Plaintiffs and their ascendants have been in open, peaceful, adverse and continuous possession in the concept of an owner since memory can no longer recall of that parcel of riceland known as Sitio Libis, Barrio Cruz-na-Ligas.

In 1979, the UP Board of Regents approved the donation of about 9.2 ha directly to the residents of Brgy. Krus na Ligas. Despite the willingness of UP to proceed with the donation, execution of the legal instrument to formalize it failed because of the unreasonbale demand of the residents for an area bigger than 15.8 ha.

UP backed-out from the arrangement to donate directly to the Association, instead it resumed to negotiate the donation thru Quezon City Government.

QC Government immediately prepared the groundworks, however, UP under President Abueva had failed to deliver the certificate of title covering the property to the donated to enable QC Government to register the said Deed of Donation so that corresponding of title be issued under its name.

UP continuously refused despite requests from the QC Government.

Upon expiration of the period of 18 months, UP through Pres. Abueva issued Administrative Order No. 21 declaring the deed of donation revoked and the donated property be reverted to UP.

Trial Court ruled that petitioners did not have a cause of action for specific performance on the ground that the deed of donation had already been revoked.

Upon appeal, CA ordered the dismissal of the civil case. Issue: WON the petitioners have a cause of action Held:

While, admittedly, petitioners were not parties to the deed of donation, they anchor their right to seek its enforcement upon their allegation that they are intended beneficiaries of the donation to the Quezon City government. Art. 1311, second paragraph, of the Civil Code.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties

must have clearly and deliberately conferred a favor upon a third person. Specific paragraphs of the complaint are sufficient to bring petitioners action based on Art. 1311.

The contention of the respondents, based on the finding of the trial court, that the donation has already been revoked has no merit. The trial court's ruling on this point was made in connection with petitioners' application for a writ of preliminary injunction to stop respondent from ejecting petitioners. The trial court denied injunction on the ground that the donation had already been revoked and therefore petitioners had no clear right to be protected. It is evident that the trial court's ruling on this question was only tentative, without prejudice to the final resolution of the question after the presentation by the parties of their evidence.

Dispositive: Reviewed decision REVERSED and the case REMANDED to trial court for trial on the merits. Can a contract create a real right? Art. 1312. In contracts creating real rights, third persons who come into possession of the object of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration Laws. (n)

This article constitutes one of the exceptions to the general rule that a contract binds only the parties.

A real right binds the property over which it is exercised. Art. 712. Ownership is acquired by occupation and by intellectual creation. Ownership and other real rights over property are acquired and transmitted by law, by donation, by estate and intestate succession, and in consequence of certain contracts, by tradition. They may also be acquired by means of prescription. (609a) Art. 415. The following are immovable property: (10) Contracts for public works, and servitudes and other real rights over immovable property. (334a) What is tortuous interference? Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. (n)


Rule if contract is violated thru inducement of 3rd

person o This article gives an instance when a stranger to a contract can be

sued in view of his unwarranted interference. Whoever is injured may properly sue for damages.

Gilchrist vs. Cuddy Facts:

Cuddy was the owner of the film Zigomar. He rented it to Gilchrist for a week for P125.

A few days prior to this, Cuddy sent the money back to Gilchrist saying that he had made other arrangements with his film. The other arrangement was the rental to Espejo and his partner for P350 for the week and the injunction was asked by Gilchrist against these parties.

The Court issued mandatory injunction ordering Cuddy to deliver the film to Gilchrist and an ex parte preliminary injunction restraining Espejo and partner from receiving and exhibiting film until further orders from the court.

Issue: WON Espejo and his partner were liable for interfering with the contract between Gilchrist and Cuddy Held:

It is said that the ground on which the liability of a third party for interfering with a contract between others rests, is that the interference was malicious. The contrary view, however, is taken by the Supreme court of the United States.In Angle vs. Railway, the only motive for interference was the desire to make a profit to the injury of one of the parties of the contract. There was no malice in the case beyond the desire to make an unlawful gain to the detriment of one of the contracting parties.

In the case at bar, the only motive for the interference was a desire to make a profit. There was no malice beyond this desire, but this fact does not relieve them of the legal liability for interference with that contract and causing its breach.

The liability of the appellants arises from unlawful acts and not from contractual obligations, as they were under no such obligations to induce Cuddy to violate his contract with Gilchrist to violate his contract with Gilchrist. Art. 1902 of the Civil Code provides that a person whi, by act or omission, causes damage to another when there is fault or negligence, shall be obliged to repair the damage so done.

But the fact that the appellant's interference was actionable did not of itself entitle Gilchrist to sue out an injunction against them. The allowance of the remedy must be justified under Sec. 164 of the Code of Civil Procedure. There is nothing in Sec. 164 that before an injunction may issue, the strangers must know the identity of both parties. Courts usually grant an injunction where the profit of the injured person are derived from his contractual relations with a large and indefinite number of individuals. Injunction against further interference with the contract was properly issued.

Daywalt vs. La Corporacion Facts:

Teodorica Endencia executed a contract where she obligated herself to convey to Daywalt, a tract of land.

It was agreed that a deed should be executed as soon as the title is perfected in the proceedings of the Court of Land Registration and a Torrens title procured therefore in Endencia's name.

A decree recognizing the right of Endencia as owner was entered in said court but the Torrens title certificate was not issued until later.

The parties made a new contract with a view to carrying their original agreement into effect. The second was not immediately carried into effect for the reason that the Torrens certificate was not yet obtainable.

The parties entered into another agreement, replacing the old.

The Torrens certificate was in time issued to Endencia but in the course of the proceedings, it was found that the area of the tract in the contract was about 1,248 ha instead of 452 ha as stated in the contract.

La Corporacion de los Padres de Recoletos was at this time the owner of a property immediately adjacent to the land which Endencia had sold to Daywalt.

Fr. Sanz, its representative whom Endencia is well acquainted with, was aware of the 1st and 2nd contract. When the Torrens certificate was finally issued, Endencia delivered it for safekeeping to the corporation where it was taken to Manila where it remained in the custody of Labarga.

When La Corporacion sold the San Jose estate, some cattle were removed to the estate of the corporation immediately adjacent to the property which the plaintiff had purchased from Endencia.


As Endencia still retained possession of said property, Father Sanz entered into an arrangement with her where large number of cattle belonging to the corporation were pastured upon said land.

Daywalt sought to recover from corporation damages for the use and occupation of the land by reason of pasturing the cattle.

Daywalt alleged that, by interfering in the performance of the contract in question and obstructing him in his effort to secure the certificate of title to the land, the corporation made itself a co-participant with Endencia in the breach of the contract.

Issue: WON the corporation will be liable for the damage through collusion with the Endencia Held:

Fr. Labarga and his associate believed in good faith that the contract could not be enforced and that Endencia would be wronged if it should be carried into effect.

Whatever may be the character of the liability which a stranger to a contract may incur by advising or assisting one of the parties to evade performance, there is one proposition upon which all must agree. A stranger cannot become more extensively liable in damages for the non-performance of the contract than the party in whose behalf he intermeddles. To hold the stranger liable for damages in excess of those that could be recovered against the immediately party to the contract would lead to results at once grotesque and unjust.

If a party enters into contract to go for another upon a journey to a remote and unhealthful climate, and a third person with a bona fide purpose of benefiting the one who is under contract to go dissuades him from the step, no action will lie. But if the advice is not disinterested and the persuasion is used for the indirect purpose of benefiting the defendant at the expense of the plaintiff, the intermedler is liable if his advice is taken and the contract broken.

So Ping Bun vs. CA Facts:

Tek Hua Trading Co, through its managing partner, So Pek Giok, entered into lease agreements with lessor DCCSI.

The contract each had a one-year term. They provided that should the lessee continue to occupy the premises after the term, the lease shall be on a month-to-month basis.

When the contract expired, the parties did not renew the contracts, but Tek hua continued to occupy the premises.

Tek Hua was dissolved. Later, the original members of Tek Hua formed Tek Hua Enterprising Corp.

When So Pek Giok, managing partner of Tek Hua Trading died, his son So Ping Bun, occupied the warehouse for his own textile business.

Tiong, president of Tek Hua, sent a letter demanding So Ping Bum to vacate the premises.

So Ping Bun refused and instead requested formal contracts. DCCSI acceded to the request.

Private respondents filed a petition for injunction for the nullification of the lease contracts between DCCSI and petitioner with damages.

Trial court ruled in favor of the respodents. Upon appeal, the Court of Appeals affirmed. Hence, this petition.

Issue: WON So Ping Bun is liable for tortuous interference of contract Held:

A duty which the law of torts is concerned with is respect for the property of others, and a cause of action ex delicto may be predicated upon an unlawful interference by one person of the enjoyment by the other of his private property. In the present case, petitioner's Trendsetter Marketing asked DCCSI to execute lease contracts in its favor, and as a result petitioner deprived respondent corporation of the latter's property right. This was a clear case of tortuous interference.

Section 1314 of the Civil Code categorically provides that "Any third person who induces another to violate his contract shall be liable for damages to the other contracting party". While lack of malice precludes damages, it does not relieve the interferer of the legal liability for entering into contracts and causing breach of existing ones. The respondent appellate court correctly confirmed the permanent injunction and nullification of the lease contracts between DCCSI and Trendsetter Marketing without awarding damages. The injunction saved the respondents from further damage or injury caused by petitioner's interference.

Tayag vs. Lacson Facts:

Respondents Angelica Tiotuyco Vda. de Lacson, and her children Amancia, Antonio, Juan, and Teodosia, all surnamed Lacson, were the


registered owners of three parcels of land. The properties, which were tenanted agricultural lands, were administered by Renato Espinosa for the owner.

A group of original farmers/tillers,individually executed in favor of the petitioner separate Deeds of Assignment in which the assignees assigned to the petitioner their respective rights as tenants/tillers of the landholdings possessed and tilled by them for and in consideration of P50.00 per square meter. The petitioner was also granted the exclusive right to buy the property if and when the respondents, with the concurrence of the defendants-tenants, agreed to sell the property. In the interim, the petitioner gave varied sums of money to the tenants as partial payments, and the latter issued receipts for the said amounts.

The petitioner called a meeting of the defendants-tenants to work out the implementation of the terms of their separate agreements. However, the defendants-tenants, through Joven Mariano, wrote the petitioner stating that they were not attending the meeting and instead gave notice of their collective decision to sell all their rights and interests to Lacson, as tenants/lessees, over the landholding to the respondents.

The petitioner filed a complaint with the RTC against the defendants-tenants, as well as the respondents, for the court to fix a period within which to pay the agreed purchase price of P50.00 per square meter to the defendants, as provided for in the Deeds of Assignment. The petitioner also prayed for a writ of preliminary injunction against the defendants and the respondents therein.

The defendants-tenants Tiamson, et al., alleged in their answer with counterclaim for damages, that the money each of them received from the petitioner were in the form of loans, and that they were deceived into signing the deeds of assignment.

Issue: WON the respondent is liable for tortuous interference for inducing the defendants-tenants to violate the deeds of assignment Held:

For Art. 1314 to apply, the pleader is burdened to prove the following: (1) the existence of a valid contract; (2) knowledge by the third person of the existence of the contract; and (3) interference by the third person in the contractual relation without legal justification.

Where there was no malice in the interference of a contract, and the impulse behind ones conduct lies in a proper business interest rather than in wrongful motives, a party cannot be a malicious interferer.

Where the alleged interferer is financially interested, and such interest motivates his conduct, it cannot be said that he is an officious or malicious intermeddler.

Even if the respondents received an offer from the defendants-tenants to assign and transfer their rights and interests on the landholding, the respondents cannot be enjoined from entertaining the said offer, or even negotiating with the defendants-tenants. The respondents could not even be expected to warn the defendants-tenants for executing the said deeds in violation of P.D. No. 27 and Rep. Act No. 6657. Under Section 22 of the latter law, beneficiaries under P.D. No. 27 who have culpably sold, disposed of, or abandoned their land, are disqualified from becoming beneficiaries.

From the pleadings of the petitioner, it is quite evident that his purpose in having the defendants-tenants execute the Deeds of Assignment in his favor was to acquire the landholding without any tenants thereon, in the event that the respondents agreed to sell the property to him. The petitioner knew that under Section 11 of Rep. Act No. 3844, if the respondents agreed to sell the property, the defendants-tenants shall have preferential right to buy the same under reasonable terms and conditions.

Under Section 12 of the law, if the property was sold to a third person without the knowledge of the tenants thereon, the latter shall have the right to redeem the same at a reasonable price and consideration. By assigning their rights and interests on the landholding under the deeds of assignment in favor of the petitioner, the defendants-tenants thereby waived, in favor of the petitioner, who is not a beneficiary under Section 22 of Rep. Act No. 6657, their rights of preemption or redemption under Rep. Act No. 3844. The defendants-tenants would then have to vacate the property in favor of the petitioner upon full payment of the purchase price. Instead of acquiring ownership of the portions of the landholding respectively tilled by them, the defendants-tenants would again become landless for a measly sum of P50.00 per square meter.

The petitioners scheme is subversive, not only of public policy, but also of the letter and spirit of the agrarian laws. That the scheme of the petitioner had yet to take effect in the future or ten years hence is not a justification. The respondents may well argue that the agrarian laws had been violated by the defendants-tenants and the petitioner by the mere execution of the deeds of assignment. In fact, the petitioner has implemented the deeds by paying the defendants-


tenants amounts of money and even sought their immediate implementation by setting a meeting with the defendants-tenants. In fine, the petitioner would not wait for ten years to evict the defendants-tenants. For him, time is of the essence.

VI. Essential Requisites

A. Consent

When is there consent? When there is a meeting of the offer and the acceptance upon the thing and the cause Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (1262a) Consent – concurrence of the minds of the parties on the OBJECT and the CAUSE which are to constitute the contract Note: Where there is merely an offer by one party without an acceptance by the other, there is no consent. As Sir Lumba says, a contract is a promise to a promise. Ex. I will deliver the car if I want to. No Contract I will sell you the car if I am able to purchase it. No Contract Elements of Consent:

a) Plurality of subjects b) Capacity c) Intelligence and Free will d) Express or tacit manifestation of the will e) Conformity of the internal will and its manifestation

Forms of Consent: a) Express b) Implied

Note: In quasi-contracts, there is what is called presumptive consent. OFFER – unilateral proposition which one party makes to the other for the celebration of a contract. It must be

a) Definite – distinguished from mere communications indicating that a party is disposed to enter into a certain contract, or inviting the other to make an offer Ex. I will give you my watch if you buy it for P1, 500 as opposed to I am in position and willing to entertain the purchase of this watch under the following conditions

b) Complete – Sufficient clearness of the kind of contract intended and definitely stating the conditions of the contract

c) Intentional – Must be made with seriousness, not for fun or in jest, or out of courtesy, or as an example in teaching

Note: ACCEPTANCE must be unequivocal and unconditional, and shall be without any variation whatsoever.

Mere amplification of the offer must be understood as an acceptance of the original offer, plus a new offer which is contained in the amplification. However, it is the consent of the original offeror that controls. Ex. X offers to sell 5 kilos of mandarin oranges for P20 per kilo. Y answers that he is buying and adds 3 kilos more to be bought at the same price. – The first offer for 5 kilos is already accepted and the other 3 is subject to the acceptance of X.

Unless the offeror knows of the acceptance, there is no meeting of the minds between the parties, no real concurrence of the offer and acceptance. Ex. Letter, Telegram, Telephone

Art. 1320. An acceptance may be express or implied. (n) Art. 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with. (n)

The offeror has the right to prescribe the conditions of the acceptance (time, place and manner), and when reasonable must ALL be complied with.

An offer with a period lapses upon the termination of the period.

An acceptance which is not made in the manner prescribed by the offeror is not effective, but constitutes a counter-offer which the offeror may accept.


What is the cognition theory? Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (1262a) Art. 1322. An offer made through an agent is accepted from the time acceptance is communicated to him. (n)

When the intermediary has no power to bind either the offeror or the offeree, then he is not an agent. In this case, acceptance only occurs when he in turn communicates acceptance to the offeror.

Malbarosa v. CA [April 30, 2003] Ponente: Justice Callejo Sr. Facts: Petitioner Malbarosa was the president and general manager of Philtectic Corp., a company belonging to respondent SEADC. Sometime in January 1990, petitioner expressed through a letter addressed to Senen Valero, Vice-Chairman of respondent company, his desire to leave the company and requesting that his 1989 incentive compensation be paid to him. On March 14, 1990, respondent through Valero signed a letter-offer stating that petitioner was entitled to a compensation of P251,057.67 and that the amount be satisfied as consisting of: the car valued at P220,000 and the membership in the Architectural center valued at around P60,000. Respondent required that if the petitioner agreed to the offer, he should affix his signature at the bottom of the page. On March 16, 1990, Da Costa met with petitioner and handed him the original copy of the March 14 Letter-offer. Petitioner was dismayed when he read what he was about to get. Petitioner refused to sign the letter-offer and said that he would review it. Despite the lapse of more than two weeks, respondent had not received the original letter with petitioner’s signature. Respondent decided to withdraw its offer. On April 4, 1990, Philtectic wrote the petitioner withdrawing the March 14 Letter-offer and demanding petitioner return the car and his membership certificate. Petitioner wrote Philtectic informing them that he can’t comply with the demand as he already accepted the offer when he affixed on March 28, 1990 his signature on the original. Respondent filed a complaint in court to recover the property but petitioner was able to recover the possession through the filing of the counter-bond. He

adduced evidence that he had called Da Costa’s office on March 29 in order to communicate his acceptance but it was the telephone receptionist who answered. She testified in court that she relayed the message to Da Costa and he merely nodded. Trial Court: No perfected contract over the March 14 Letter-offer due to failure to notify acceptance on petitioner’s part Court of Appeals: Affirmed with modification by allowing the payment of the rental of the car at the rate of P1000.00 per day Issues: 1. Whether or not a contract exists between parties by virtue of petitioner’s

acceptance of the Letter-offer. 2. Whether or not there was an effective withdrawal by respondent of said

letter-order. Held: There is no contract between the parties. Withdrawal of respondent is valid. Petition is dismissed and CA decision affirmed. Ratio: Under Article 1318 of the CC, the essential requisites of a contract are: 1) consent of contracting parties; 2) Object certain which is the subject matter of the contract; and 3) Cause of the obligation which is established. Under Article 1319 of the NCC, the consent by a party is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The acceptance must be absolute, unconditional, and without variance of any sort from the offer. The acceptance of an offer must be made known to the offeror. Unless the offeror knows of the acceptance, there is no meeting of minds of the parties. The contract is perfected only from the time an acceptance of an offer is made known to the offeror. An acceptance which is not made in the manner prescribed by the offeror is not effective but constitutes a counter-offer which the offeror may accept or reject. The contract is not perfected if the offeror revokes or withdraws its offer and the revocation or withdrawal is the first to reach the offeree. In the present case, respondent required petitioner to affix his signature at the bottom of the page to show acceptance, thus foreclosing other forms of acceptance. Upon receipt, petitioner refused to act on it saying he needed time to decide. No contract was perfected.


Despite petitioner’s claim that he signed the documents on March 28, way before respondent’s withdrawal of the offer on April 4, still the letter of the petitioner accepting the offer was received on April 7. By then, respondent had already withdrawn its offer. Indubitably, there was no contract perfected by the parties. It must also be underscored that there was no time frame fixed by respondent for petitioner to accept or reject its offer. When the offeror had not fixed a period for offeror to accept the offer, and the offer is made to a person present, the acceptance must be made immediately. The respondent had the option to withdraw or revoke the offer. As regards the effectiveness of the withdrawal, the Court held that implicit in the authority given to Philtectic Corporation to demand for and recover from the petitioner the subject car and to institute the appropriate action against him to recover possession of the car is the authority to withdraw the respondent's March 14, 1990 Letter-offer. It cannot be argued that respondent authorized Philtectic Corporation to demand and sue for the recovery of the car and yet did not authorize it to withdraw its March 14, 1990 Letter-offer to the petitioner. Besides, when he testified, Senen Valero stated that the April 4, 1990 letter of Philtectic Corporation to the petitioner was upon his instruction and conformably with the resolution of the Board of Directors of the respondent. When is there an offer? An offer is a unilateral proposition which one party makes to the other for the celebration of a contract. It must be:

a) Definite – distinguished from mere communications indicating that a party is disposed to enter into a certain contract, or inviting the other to make an offer Ex. I will give you my watch if you buy it for P1, 500 as opposed to I am in position and willing to entertain the purchase of this watch under the following conditions

b) Complete – Sufficient clearness of the kind of contract intended and definitely stating the conditions of the contract

c) Intentional – Must be made with seriousness, not for fun or in jest, or out of courtesy, or as an example in teaching

Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. (n) General Rule: Business advertisements of things for sale are not definite offers. Exception: When the offer is stated with the necessary specification of essential elements leading to the future contract

Ex. “For immediate sale: 500 sq. m. lot at No. 859 Espana Street, Manila for P25,000 cash”

Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. (n) Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. (n) Tolerated Fraud (Dolus Bonus) – practice has come to tolerate such false affirmations as advertisements or testimonies minimizing the defects of the thing, exaggerating its good qualities, and giving it qualities that it does not have

These do NOT give rise to an action for damages, either because of their insignificance or because the stupidity of the victim is the real cause of his loss.

Can an offer be withdrawn? YES Art. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. (n) General Rule: When the offeror has stated a fixed period for acceptance, the offeree may accept at any time until such period expires. However, the law permits the offeror to withdraw the offer at any time before acceptance, even before the period of acceptance has expired so long as he has allowed the offeree sufficient opportunity, depending upon the circumstances and the nature of the proposed contract, to decide upon his course of action and communicate his reaction. Otherwise, the offeror shall be held liable for damages. Option Contract – a preparatory contract in which one party grants to the other, for a fixed period and under specified conditions, the power to decide whether or not to enter into a principal contract. The grant must be exclusive and must be supported by an independent consideration.


Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. (1451a)

This article is NOT inconsistent with Art. 1324. If the option is not supported by any independent consideration distinct from the price certain, the offer can still be withdrawn even if the offer is already accepted.

Sanchez v. Rigos [June 14, 1972] Ponente: C.J. Concepcion Facts: On April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina Rigos executed an instrument entitled “Option to Purchase” where the latter “agreed, promised and committed…to sell” to the former a parcel of land situated in San Jose, Nueva Ecija for P1, 510. It was further stipulated that the option shall be deemed terminated if Sanchez fails to exercise his right to buy the property within 2 years. Within the same period, Sanchez attempted to make several tenders of payment of P1, 510 to no avail because Rigos rejected the same. Because of this, the former deposited said amount with the CFI of Nueva Ecija and commenced an action for specific performance and damages against the latter. The CFI rendered judgment for Sanchez. Issue: Whether or not the offer can still be withdrawn after Sanchez notified Rigos of his acceptance of the option within the period agreed upon Held: No. Ratio: If the option is given without a consideration, it is a mere offer of a contract of sale which is not binding until accepted. If, however, acceptance is made before a withdrawal, it constitutes a binding contract of sale even though the option was not supported by sufficient consideration. The option did not impose upon Sanchez the obligation to purchase her property. The instrument is not a contract to buy and sell; it is a mere option as evinced by the title of the document itself. Moreover, Art. 1324, CC provides the general rule regarding offer and acceptance that, when the offerrer gives to the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance except when the option is founded upon consideration. In other words, if the option is given without a consideration, it is a mere offer of a contract of sale which is not binding until accepted. If, however, acceptance is made before a withdrawal, it constitutes a binding contract of sale even though the option was not supported by a sufficient consideration. The concurrence of both

acts—the offer and the acceptance—generates a contract if there was none existing before. Antonio, J., concurring: While the law permits the offeror to withdraw the offer at any time before acceptance even before the period has expired, the offeror cannot exercise this right in an arbitrary or capricious manner for the reason that a contrary view would remove the stability and security of business transactions. Since Sanchez had offered P1, 510 before any withdrawal from the contract has been made by Rigos, a bilateral reciprocal contract to sell and to buy was generated. Ang Yu v. CA [Supra] P.U.P. v. CA [November 14, 2001] Ponente: J. Bellosillo Facts: In 1965, Firestone leased 2.9 hectares of National Development Corporation’s land in Manila for a period of 10 years, renewable for another 10 years under the same terms and conditions. Firestone constructed several buildings on the lot. 3 ½ years later, Firestone entered into another contract for the use of the prefabricated warehouses and was agreed to be co-extensive with the earlier contract. Firestone entered into a similar contract with NDC in 1974. The contracts were to expire on 1978. Firestone requested for an extension of the lease and the parties adopted a resolution for its extension. One of the conditions added was that “in the event NDC "with the approval of higher authorities, decide to dispose and sell these properties including the lot, priority should be given to the LESSEE"” On 22 December 1978, in pursuance of the resolution, the parties entered into a new agreement for a ten-year lease of the property, renewable for another ten (10) years, expressly granting FIRESTONE the first option to purchase the leased premises in the event that it decided "to dispose and sell these properties including the lot. In 1988, FIRESTONE informed NDC latter through several letters and telephone calls that it was renewing its lease over the property. NDC did not take any action. Rumors circulated that NDC will sell the land to PUP. FIRESTONE instituted an action for specific performance to compel NDC to sell the leased property in its favor and likewise prayed for the issuance of a writ of preliminary injunction to enjoin NDC from disposing of the property pending the settlement of the controversy.


Memorandum Order 24 conveyed that property from NDC to PUP which cancelled NDC’s obligation of P57 M. PUP then increased the rentals and demanded that the occupants of the property vacate it immediately. Lower court decision ordered PUP to sell to FIRESTONE the "2.6 hectare leased premises or as may be determined by actual verification and survey of the actual size of the leased properties where plaintiff's fire brick factory is located" at P1,500.00 per square meter considering that, as admitted by FIRESTONE, such was the prevailing market price thereof. FIRESTONE could exercise its option to purchase the property until 2 June 1999 inasmuch as the 22 December 1978 contract embodied a covenant to renew the lease for another ten (10) years at the option of the lessee as well as an agreement giving the lessee the right of first refusal. CA affirmed the decision. Issues:

1. Whether or not the transfer of the land from NDC to PUP was one for a sale or was a mere paper transfer

2. Whether or not FIRESTONE can rightfully invoke its right of first refusal Held: The transfer of land from NDC to PUP was one for sale. FIRESTONE has availed and existing right of first refusal as lessee of the premises. The preponderance of evidence shows that NDC sold to PUP the whole NDC compound, including the leased premises, without the knowledge much less consent of private respondent FIRESTONE which had a valid and existing right of first refusal. All three (3) essential elements of a valid sale, without which there can be no sale, were attendant in the “disposition” and “transfer” of the property from NDC to PUP – consent of the parties, determinate subject matter, and consideration therefor. Consent to the sale is obvious from the prefatory clauses of Memorandum Order No. 214 which explicitly states the acquiescence of the parties to the sale of the property. Furthermore, the cancellation of NDC's liabilities in favor of the National Government in the amount of P57,193,201.64 constituted the "consideration" for the sale. The conduct of petitioner PUP immediately after the transaction is in itself an admission that there was a sale of the NDC compound in its favor which are the acts of ownership in ordering the land to be vacated. In the instant case, the right of first refusal is an integral and indivisible part of the contract of lease and is inseparable from the whole contract. The consideration for the right is built into the reciprocal obligations of the

parties. The stipulation is part and parcel of the contract of lease making the consideration for the lease the same as that for the option. It is a settled principle in civil law that when a lease contract contains a right of first refusal, the lessor is under a legal duty to the lessee not to sell to anybody at any price until after he has made an offer to sell to the latter at a certain price and the lessee has failed to accept it.

39 The lessee has a right that the

lessor's first offer shall be in his favor. The option in this case was incorporated in the contracts of lease by NDC for the benefit of FIRESTONE which, in view of the total amount of its investments in the property, wanted to be assured that it would be given the first opportunity to buy the property at a price for which it would be offered. Consistent with their agreement, it was then implicit for NDC to have first offered the leased premises of 2.60 hectares to FIRESTONE prior to the sale in favor of PUP. Only if FIRESTONE failed to exercise its right of first priority could NDC lawfully sell the property to petitioner PUP. When does an offer become ineffective?

Incapacity of either party before acceptance (Death, Civil Interdiction, Insanity, or Insolvency)

Lack of authority of offeror

Absence of any of the essential requisites

No acceptance/ Rejection of the offer

Time, manner and place of acceptance not complied with

Withdrawal of offer before acceptance Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. (n)

The contract is not yet perfected at any time before acceptance is conveyed. The disappearance or loss of capacity of either party before acceptance before perfection prevents the contractual tie from being formed.

Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. (1258) Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him.


A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. (1259a)

If the contract is entered into in behalf of another who has not authorized it, such contract is not valid and binding upon him unless he ratifies the transaction.

Art. 1318. There is no contract unless the following requisites concur: (1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is established. (1261) Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (1262a) Art. 1320. An acceptance may be express or implied. (n) Art. 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with. (n) Art. 1322. An offer made through an agent is accepted from the time acceptance is communicated to him. (n) Art. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. (n) Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. (n)

Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. (n) Mindanao Terminal v. Confesor [May 5, 1997] Ponente: J. Mendoza Facts: Mindanao Terminal and Brokerage Service, Inc., and respondent Associated Labor Unions, entered into a collective bargaining agreement for a period of five (5) years, starting on August 1, 1989, and ending July 31, 1994. On the 3

rd year, the parties met for a renegotiation which eventually resulted in

a deadlock. On December 18, 1992, as a result of a conference called by the NCMB, the Union and the Company went back to the bargaining table and agreed on wage increase, VL / SL, hospitalization benefits, 13

th month pay, signing bonus and

seniority. Thus, as the Med-Arbiter noted in the record of the January 14, 1993 conference, "the issues raised by the notice of strike had been settled and said notice is thus terminated." But no sooner had he stated this than the Company claimed that the wage increases which it had agreed to give to the employees should be creditable as compliance with future mandated wage increases. In addition, it maintained that such increases should not be retroactive. Mediation proved to be futile. The Secretary of Labor assumed jurisdiction over the issue and ordered that the wage increases for the fourth and fifth years of the CBA were not to be credited as compliance with future mandated increases. In addition, the fourth year wage increase was to be retroactive to August 1992 and was to be implemented until July 31, 1993, while the fifth year wage increase was to take effect on August 1, 1993 until the expiration of the CBA. The company sought reconsideration but was denied hence this petition for certiorari, alleging grave abuse of discretion on the part of respondent Secretary of Labor. Issue: Whether or not the parties have reached an agreement or a contract on the CBA Held: Yes. Even without any written evidence of the CBA made by the parties, a valid agreement existed from the moment the minds of the parties met on all matters they set out to discuss. Ratio: The two terms, "agreement" and "contract," are indeed similar, although the former is broader than the latter because an agreement may not have all the elements of a contract. As in the case of contracts, however, agreements may


be oral or written. Hence, even without any written evidence of the Collective Bargaining Agreement made by the parties, a valid agreement existed in this case from the moment the minds of the parties met on all matters they set out to discuss. Art. 1315 of the Civil Code states that contracts are perfected by mere consent, and from that moment, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. The Secretary of Labor found that "as early as January 14, 1993, well within the six (6) month period provided by law, the Company and the Union have perfected their agreement."

7 The claim of petitioner to the contrary

notwithstanding, this is a finding of an administrative agency which, in the absence of evidence to the contrary, must be affirmed. What is the effect of simulated consent? Void if absolute simulation, Can be valid if it is relatively simulated Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. (n) Simulation – defect in declaration. It is a declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce, for purposes of deception, the appearance of a juridical act which does not exist or is different from that which was really executed. Absolute Simulation (Simulados) – the parties do not have any intention of being bound by any contract Ex. A deed of absolute sale of land, stating that possession has been transferred and the price paid, when in reality there has been no agreement of sale between the parties. Relative Simulation (Disimulados) – the parties have an agreement which they conceal under the guise of another contract. There are two juridical acts involved:

a) Ostensible act – contract that the parties pretend to have executed b) Hidden act – the true agreement between the parties

Ex: A deed of sale of a piece of land is executed by parties to conceal their true agreement which is a donation Note: If the concealed or hidden act is lawful, it is enforceable if the essential requisites are present. Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for

any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement. (n) The nullity of an absolutely simulated contract is based on want of true consent where the parties do not have any intent to be bound at all. It is generally fraudulent and for the purpose of injuring third persons. If the purpose of the contract is licit, then the parties may prove the simulation in order to recover what may have already been given. If it has an illegal object, please see Arts. 1411 and 1412 under Void Contracts. The relatively simulated contract is valid, except when it prejudices third persons or has an illicit purpose.

B. Object (Prestation)

What can be the object of a contract?

Things within the commerce of men

Transmissible rights

Licit things

Determinate things

Possible things Art. 1347. All things which are not outside the commerce of men, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object of contracts. No contract may be entered into upon future inheritance except in cases expressly authorized by law. All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract. (1271a) Requisites of Object:

a) Within the commerce of man b) Licit c) Possible d) Determinate as to its kind

Things outside the commerce of man – those things which are not susceptible of appropriation or private ownership, and are not transmissible Ex. Perpetual servitude or slavery, Personal rights (marital authority), Public offices, Right of suffrage, Property pertaining to public dominion (roads, plazas, rivers), Sacred things Art. 1348. Impossible things or services cannot be the object of contracts. (1272)


Impossible Things – not susceptible of existing, or are outside the commerce of men, or personal services beyond the ordinary power of man. Note: The impossibility must be actual and contemporaneous with the making of the contract. Kinds of Impossibility:

a) Absolute or Objective – nobody can perform it. Effect: Contract is nullified

b) Relative or Subjective – it cannot be performed due to special conditions or qualifications of the debtor Effect: If permanent, contract is nullified If temporary, contract is not nullified

Art. 1349. The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties. (1273) Determinate as to its kind or species Ex. A horse, Carabao, a book Not determinate as to its kind or species Ex. Something, an animal What is the status of a contract with an unlawful object? Void or Inexistent Art. 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; (3) Those whose cause or object did not exist at the time of the transaction; (4) Those whose object is outside the commerce of men;

C. Cause

What is the cause of contracts? Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274) Onerous Contracts – cause is the prestation Remuneratory Contracts – cause is the service rendered Contract of Pure Beneficence – essentially a donation where cause is the generosity or liberality of the benefactor

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. (1277)Art. 1350 Unless the contrary is proved, a contract is presumed to have a good and sufficient consideration. The presumption, however, applies only when no cause is stated in the contract. Differentiate motive from cause. Art. 1351. The particular motives of the parties in entering into a contract are different from the cause thereof. (n)

CAUSE MOTIVE

Objective, intrinsic and juridical reason for the existence of the contract itself

Psychological, individual or personal purpose of a party to a contract

Objective of a party in entering into the contract

Person’s reason for wanting to get such objective

Always the same for each kind of contract

Differs with each person

Essential requisite which affects validity or enforceability of a contract

Does not affect the validity or existence of a contract

What is the status of a contract with an unlawful cause? Void Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy. (1275a) Ex. An agreement to resume concubinage which had been interrupted by quarrels Art. 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; (3) Those whose cause or object did not exist at the time of the transaction; What is the status of a contract with a false cause? Void, if not founded upon another licit cause Art. 1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful. (1276)


VII. Reformation of Instruments When may a contract be reformed? When equity demands it and only when the true intention of the parties is not expressed in the document or instrument Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed. If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract. Requisites of Reformation:

a) Meeting of the minds upon the contract b) Instrument or document evidencing the contract does not express the

true agreement of the parties c) Due to mistake, fraud, inequitable conduct or accident

Upon reformation of an instrument, the effect relates back to the time of its original execution, especially as between the parties. Note: The statute of frauds is no impediment to the reformation of an instrument. Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention, the former may ask for the reformation of the instrument. Where one party to an instrument has made a mistake and the other knows it and conceals the truth from him, such as when one party is illiterate and the other party fails to correct his mistake, then this is sufficient ground for reformation. The mistake of one party must refer to the content of the instrument, not the subject matter or principal conditions of the contract. Art. 1363. When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former, the instrument may be reformed. Art. 1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the

instrument does not express the true intention of the parties, the courts may order that the instrument be reformed. This article refers to mistake committed by the clerk or typist. Ex. Typographical errors Art. 1365. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper. Rule 130 - Sec. 9 PAROL EVIDENCE RULE Evidence of written agreements. — When the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement. However, a party may present evidence to modify, explain or add to the terms of written agreement if he puts in issue in his pleading: (a)An intrinsic ambiguity, mistake or imperfection in the written agreement; (b)The failure of the written agreement to express the true intent and agreement of the parties thereto; (c)The validity of the written agreement; or (d)The existence of other terms agreed to by the parties or their successors in interest after the execution of the written agreement. The term "agreement" includes wills. (7a) When may a contract not be reformed?

Simple donations inter vivos wherein no condition is imposed

Wills

Real agreement is void

Action to enforce instrument is instituted Art. 1366. There shall be no reformation in the following cases: (1) Simple donations inter vivos wherein no condition is imposed; (2) Wills; (3) When the real agreement is void. Rationale: An action to reform a written instrument is in the nature of an action for specific performance and requires a valuable consideration, something that is lacking in wills and donations. Art. 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation.


Rationale: Reformation and an action to enforce instrument are inconsistent remedies, the latter being an affirmance of the written contract. An action to enforce the instrument necessarily entails ratification of the same. Distinguish the actions for reformation and annulment? Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed. If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract.

REFORMATION ANNULMENT

Presupposes a valid existing contract between the parties

No real and valid contract was made

Only the document signed by them does not correctly express their agreement

Minds of the parties did not meet, or consent was vitiated

Gives life to the contract upon certain corrections

Effect is complete nullification of the contract

Do third parties have personality to file an action for reformation? YES Art. 1368. Reformation may be ordered at the instance of either party or his successors in interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns. Who may file action:

Mutual Mistake a) Either party b) Successors interest

One party is at fault a) Injured party b) Heirs or assigns of injured party

VIII. Defective Contracts

A. Rescissible “a contract that has caused a particular damage to one of the parties or to a

third person, and which for equitable reasons may be set aside even if it is valid.” (Tolentino) When are contracts rescissible? Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290) Rescission – “A remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them by a contract, by means of the restoration of the restoration things to their condition prior to the celebration of said contract.” (Tolentino, quoting Manresa) * Relief for the protection of one of the contracting parties AND third persons from all injury and damages the contract may cause OR protect some incompatible and preferent right created by the contract. * Implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone. * Set asides the act or contract for justifiable reasons of equity. * Grounds for rescission can only be for legal cause. * Voidable contracts may also be rescinded. KINDS OF RESCISSIBLE CONTRACTS Art. 1381. The following contracts are rescissible:

Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one fourth of the value of the things which are the object thereof;

Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;

Those undertaken in fraud of creditors when the latter cannot in any other manner collect claims due them;

Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority;

All other contracts specially declared by law to be subject to rescission. (1291a)

1 and 2) Contracts entered into by GUARDIANS for their wards, or trustees or administrators for the ABSENTEES, are rescissible if the party represented


suffers lesion of by more than one-fourth of the value of the things which are objects of the contract. Lesion – “injury which one of the parties suffers by virtue of a contract which is disadvantageous to him.” (Tolentino) EXCEPTION: Article 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts. (1296a) * As a rule, guardians cannot enter into contracts involving a disposition of the ward's property without approval of the guardianship court since a guardian is only authorized to manage the estate. Therefore, the contracts contemplated by Article 1381 are contracts entered into by the guardians for the ward which would not require court approval i.e. contracts which constitute mere acts of administration. 3) Contracts in Fraud of Creditors Accion Pauliana – the rescissory action to set aside contracts in fraud of creditors Article 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111) Requisites of Accion Pauliana: a) that the plaintiff asking for recission has a credit prior to the alienation, although demandable later. b) that the debtor has made a subsequent contract conveying a patrimonial benefit to a 3rd person. c) that the creditor has no other legal remedy to satisfy his claim, but would benefit by the recission of the conveyance to the 3rd person. d) that the act being impugned is fraudulent. e) that the 3rd person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud. * It must be shown that the conveyance was fraudulent or with intent to prejudice creditors of the party making the conveyance.

* The fraud may be established by presumption, under Article 1387, or from evidence, independently of such presumption. *Without proof of fraudulent intent, the contract cannot be rescinded. GENERAL RULE: * Credit must be existing at the time of the fraudulent alienation, even if it is not yet due. * At the time the accion pauliana is brought, the credit must already be due EXCEPTIONS: Accion pauliana can also be brought in the following cases: * The alienation is prior to the credit and the debtor purposely and in bad faith deprives himself of the ability to meet the consequences of obligations he intends to incur in the future. * Parties who may appear to have become creditors after the alienation, but may be considered as having a prior right.

Those whose claims were acknowledged by the debtor after the alienation, but the origin of which antedated the alienation.

Those who become subrogated, after the alienation, in the rights of creditors whose credits were prior to the alienation.

TEST of FRAUD: The test as to whether or not conveyance is fraudulent is, does it prejudice the rights of creditors? Both elements must be present else a conveyance may be set aside as to creditors a) Founded on good consideration b) made with bona fide intent Good consideration - creditor is not prejudiced because the property was merely replaced or substituted. BADGES OF FRAUD (INDICIA OF FRAUD): a) fictitous/ insufficient consideration b) conveyance is after suit is filed and while it is pending c) sale on credit by insolvent debtor d) evidence of insolvency or large indebtedness e) transfer of all or nearly all of debtor's property f) transfer is between father and son when some of above is present


g) failure of vendee to take exclusive possession of the property 4) Things under litigation, without knowledge and approval of litigant or of competent judicial authority. EXAMPLE: “In a suit of replevin, where a plaintiff seeks to recover personal property from the defendant, the latter, during the pendency of the suit, cannot sell in bad faith the property being litigated to any third person. If he does and the transferee also acts in bad faith, the contract is rescissible.” (Sta. Maria) 5) Provided for by law to be subject to rescission Articles 1526, 1534, 1538, 1539, 1542, 1556, 1560, 1567 and 1659 Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence. (n) GENERAL RULE: Lesion or inadequacy of cause will not subject the contract to rescission. EXCEPTION: Those mentioned in Article 1381, or if attended by fraud, mistake or undue influence. Art. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. (1292) Where a debtor transfers property to a creditor in payment of a debt which has not yet matured, at a time when the debtor is insolvent, and when the consideration for the transfer was grossly inadequate, compared to the actual value of the property transferred, the transfer is fraudulent and may be set aside by creditors prejudiced thereby. * insolvency law: all payments made by debtor after the mere filing of insolvency will not be rescissible, but will be void under the insolvency law.

Art. 1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition: (4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case; * Prior to the fulfillment of a suspensive condition, If the object of the prestation deteriorates through the fault of the debtor, the creditor could choose to rescind the contract with damages. 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. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. (1124) Rescission Art 1380 Distinguished from Resolution Art 1191

1191 1380

Similarities 1. Presupposes contracts validly entered into and existing 2. Mutual restitution when declared proper

Who may demand

Only by a party to the contract 1. Party to the contract suffering lesion 2. Third parties prejudiced by the contract


Grounds Non-performance (implied tacit condition in reciprocal obligations)

Various reasons of equity provided by the grounds, mainly economic injury or lesions

Scope of Judicial Control

Court determines sufficiency of reason to justify extension of time to perform obligation (whether slight or casual breach)

Sufficiency of reason does not affect right to ask for rescission (cannot be refused if all the requisites are satisfied)

Kind of Obligation applicable to

Only to reciprocal Unilateral, reciprocal Even when contract is fully fulfilled

Character Principal Remedy Secondary/ Subsidiary

Art. 1203. If through the creditor's acts the debtor cannot make a choice according to the terms of the obligation, the latter may rescind the contract with damages. (n) * In alternative obligation, if the debtor is has been prevented from making a choice due to the fault of the creditor, the debtor can ask for the rescission of the contract with damages. Art. 1192. In case both parties have committed a breach of the obligation, the liability of 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 deemed extinguished, and each shall bear his own damages. (n) in pari delicto (“in equal fault”) – both parties are equally at fault, the court may deem the contract extinguished if it cannot determine who is the first infractor. EFFECTS OF RESCISSION Art. 1385. Rescission creates the obligation to return the things which were

the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. (1295) * “In restitution, the parties, shall be placed in the same position where they were before they entered into the assailed contract. The objective is to restore the parties to their original position. Not only should the parties return the object subject of the rescissible contract but also the fruits or interest if any. If the object of the contract cannot be restored because of loss, damages may be claimed from the person responsible for the loss.” (Sta. Maria) * A party cannot rescind the and at the same time retain the consideration, or part of the consideration, received under the contract. One cannot have the benefits of rescission without assuming its burdens. * When things, which are the object of a contract ,is legally in the possession of a third person who acquired them in good faith, rescission cannot take place. EXTENT OF RESCISSION Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n) * The extent of the revocation is only to the amount of the prejudice suffered by the creditor who instituted the action for rescission. As to the excess, the alienation is maintained. Who may bring action for rescission? 1) The creditor injured by the contract 2) The heirs of the creditor injured by the contract. 3) The creditors of the creditor injured by the contract by virtue of the right granted by Article 1177 (accion subrogatoria) PRESUMPTIONS OF FRAUD Art. 1387. All contracts by virtue of which the debtor alienates property by


gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence. (1297a) * Applies only when the there has been in fact an alienation or transfer or transfer. * Rebuttal by evidence that conveyance was made: 1) in good faith 2) for a sufficient cause Art. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them. If there are two or more alienations, the first acquirer shall be liable first, and so on successively. (1298a) PRESCRIPTIVE PERIOD Art. 1389. The action to claim rescission must be commenced within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known. (1299) * prescriptive period begins to run after the aggrieved party has unsuccessfully exhausted all possible remedies to enforce the obligation or to recover what has been lost.

UNIVERSAL FOOD v CA, G.R. No. L-29155; May 13, 1970 FACTS:

That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented a formula for the manufacture of a food seasoning (sauce) derived from banana fruits popularly known as MAFRAN sauce.

Due to lack of sufficient capital to finance the expansion of the business, in 1960, said plaintiff secured the financial assistance of Tirso T. Reyes who, after a series of negotiations, formed with others defendant Universal Food Corporation eventually leading to the execution on May 11, 1960 a "Bill of Assignment".

Conformably with the terms and conditions, plaintiff Magdalo V. Francisco, Sr. was appointed Chief Chemist and plaintiff Victoriano V. Francisco was appointed auditor and superintendent. Since the start of the operation of defendant corporation, plaintiff Magdalo V. Francisco, Sr., when preparing the secret materials inside the laboratory, never allowed anyone, not even his own son, or the President and General Manager Tirso T. Reyes, of defendant, to enter the laboratory in order to keep the formula secret to himself.

Thereafter, however, due to the alleged scarcity and high prices of raw materials, on November 28, 1960, Secretary-Treasurer Ciriaco L. de Guzman of defendant issued a Memorandum, that only Supervisor Ricardo Francisco should be retained in the factory and that the salary of plaintiff Magdalo V. Francisco, Sr., should be stopped for the time being until the corporation should resume its operation.

Plaintiff Magdalo V. Francisco, Sr. received his salary as Chief Chemist in the amount of P300.00 a month only until his services were terminated on November 30, 1960.

Due to these successive memoranda, without plaintiff Magdalo V. Francisco, Sr. being recalled back to work, the latter filed the present action on February 14, 1961.

About a month afterwards, in a letter dated March 20, 1961, defendant, thru its President and General Manager, requested said plaintiff to report for duty, but the latter declined the request because the present action was already filed in court

ISSUE: WON Franscisco can rescind the contract HELD: Yes RATIO:

Under 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. The injured party may choose between


fulfillment and rescission of the obligation, with payment of damages in either case.

The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement.

The question of whether a breach of a

contract is substantial depends upon the attendant circumstances. The dismissal of the respondent patentee Magdalo V. Francisco, Sr. as the permanent chief chemist of the corporation is a fundamental and substantial breach of the Bill of Assignment. He was dismissed without any fault or negligence on his part. Thus, apart from the legal principle that the option — to demand performance or ask for rescission of a contract — belongs to the injured party,

the fact remains that the

respondents-appellees had no alternative but to file the present action for rescission and damages.

MAGDALENA ESTATE v MYRICK, G.R. No. 47774, March 14, 1941 FACTS:

Magdalena Estate, Inc. sold to Louis Myrick lots No. 28 and 29 of Block 1, Parcel 9 of the San Juan Subdivision, San Juan, Rizal. Their contract of sale provides that the Price of P7,953 shall be payable in 120 equal monthly installments of P96.39 each on the second day of every month beginning the date of execution of the agreement.

In pursuance of said agreement, the vendee made several payments amounting to P2,596.08, the last being due and unpaid was that of May 2, 1930. By reason of this, the vendor, through its president, notified the vendee that, in view of his inability to comply with the terms of their contract, said agreement had been cancelled, relieving him of any further obligation thereunder, and that all amounts paid by him had been forfeited in favor of the vendor. To this communication, the vendee did not reply, and it appears likewise that the vendor thereafter did not require him to make any further disbursements on account of the purchase price.

ISSUE: Was the petitioner authorized to forfeit the purchase price paid? HELD: No. RATIO: The contract of sale contains no provision authorizing the vendor, in the event of failure of the vendee to continue in the payment of the stipulated monthly installments, to retain the amounts paid to him on account of the purchase

price. The claim therefore, of the petitioner that it has the right to forfeit said sums in its favor is untenable. Under Article 1124 of the Civil Code, however, he may choose between demanding the fulfillment of the contract or its resolution. These remedies are alternative and not cumulative, and the petitioner in this case, having elected to cancel the contract cannot avail himself of the other remedy of exacting performance. As a consequence of the resolution, the parties should be restored, as far as practicable, to their original situation which can be approximated only be ordering the return of the things which were the object of the contract, with their fruits and of the price, with its interest, computed from the date of institution of the action. U.P. v DELOS ANGELES, G.R. No. L-28602 FACTS: On November 2, 1960, UP and ALUMCO entered into a logging agreement whereby the latter was granted exclusive authority to cut, collect and remove timber from the Land Grant for a period starting from the date of agreement to December 31, 1965, extendible for a period of 5 years by mutual agreement. On December 8, 1964, ALUMCO incurred an unpaid account of P219,362.94. Despite repeated demands, ALUMCO still failed to pay, so UP sent a notice to rescind the logging agreement. On the other hand, ALUMCO executed an instrument entitled “Acknowledgment of Debt and Proposed Manner of Payments. It was approved by the president of UP, which stipulated the following: 3. In the event that the payments called for are not sufficient to liquidate the foregoing indebtedness, the balance outstanding after the said payments have been applied shall be paid by the debtor in full no later than June 30, 1965. 5. In the event that the debtor fails to comply with any of its promises, the Debtor agrees without reservation that Creditor shall have the right to consider the Logging Agreement rescinded, without the necessity of any judicial suit ALUMCO continued its logging operations, but again incurred an unpaid account. On July 19,1965, UP informed ALUMCO that it had, as of that date, considered rescinded and of no further legal effect the logging agreement, and that UP had already taken steps to have another concessionaire take over the logging operation. ALUMCO filed a petition to enjoin UP from conducting the bidding. The lower court ruled in favor of ALUMCO, hence, this appeal. ISSUE: Can petitioner UP treat its contract with ALUMCO rescinded, and may disregard the same before any judicial pronouncement to that effect?


HELD: Yes. RATIO: In the first place, UP and ALUMCO had expressly stipulated that upon default by the debtor, UP has the right and the power to consider the Logging Agreement of December 2, 1960 as rescinded without the necessity of any judicial suit. As to such special stipulation and in connection with Article 1191 of the Civil Code, the Supreme Court, stated in Froilan vs. Pan Oriental Shipping Co: “There is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to resort to court for rescission of the contract.”

B. Voidable or Annullable

“a contract in which the consent of one party is defective, either because of want of capacity or because it is vitiated, but which contract is valid until set aside by a competent court.” -Tolentino KINDS OF VOIDABLE OR ANNULLABLE CONTRACTS Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties:

Those where one of the parties is incapable of giving consent to a contract;

Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. (n) * There may have been be no damage to the contracting parties 1) want of capacity 2) vitiated consent CHARACTERISTICS OF VOIDABLE CONTRACTS

Their defect consists in the vitiation of consent of one of the contracting parties

They are binding until they are annulled by a competent court

They are susceptible of convalidation by ratification or by prescription

MERCADO v ESPIRITU, G.R. No. L-11872; December 1, 1917 FACTS: Margarita Espiritu, the mother of the plaintiffs, on May 25, 1894 sold to Luis Espiritu, her brother, a portion of her land for P2000 which she acquired from her father, Lucas Espiritu. On 1896/1897 however, Margarita died and she left to her children Domingo and Josefa 12 hectares of land in Bulacan. The widower, Wenceslao Mercado, as the administrator of the property of his children sold under pacto de retro on May 14, 1901 a parcel of land worth P375 to Luis to "cover his children's needs". And this amount being insufficient he successively borrowed from said Luis Espiritu other sums of money aggregating a total of p600, but later, on May 17, 1910, the plaintiffs, alleging themselves to be of legal age, executed, with their sisters ratifying said sale under pacto de retro of the land that had belonged to their mother, effected by their father in favor of Luis Espiritu for the sum of p2600. Because of the past revolution, official documents like birth certificates were burned. It is important to note that Wenceslao kept a personal journal which states that the plaintiffs were indeed minors upon the sale of the land in 1894. So, on May 20, 1901, a notarized deed of the land is procured by Wenceslao in his name and the name of his children (who allege that they were minors at the time) and at the same time, proves that a portion of the land in question was sold to Luis in 1894. By 1904, Wenceslao died, his children files for the annulment of the sale Luis Espiritu, who also died, so the case is filed against his son, Jose Espiritu. ISSUES: (1) Whether or not the plaintiffs were minors at the date of the sale in 1894. (2) Whether or not the plaintiffs can ask for the nullification of the sale due to their minority. HELD: (1) There are insufficient facts to prove the plaintiffs' minority (2) No. Minors were held liable because of active misrepresentation. RATIO:

The statement made by one of the adult parties of said deed, in reference to certain notes made in a book or copybook of a private nature, which she said their father kept during his lifetime and until his death, is not sufficient to prove the plaintiff’s minority on the date of the execution of the deed.

The courts, in their interpretation of the law, have laid down the rule that the sale of real estate, made by minors who pretend to be of legal age, when in fact they are not, is valid, and they will not be permitted


to excuse themselves from the fulfillment of the obligations contracted by them, or to have them annulled in pursuance of the provisions of Law 6, title 19, of the 6th Partida; and the judgment that holds such a sale to be valid and absolves the purchaser from the complaint filed against him does not violate the laws relative to the sale of minors' property, nor the juridical rules established in consonance therewith.

BRAGANZA v DE VILLA ABRILLE, G.R. No. L-12471; April 13, 1959 FACTS:

Petitioners received from Villa Abrille, as a loan, on October 30, 1944 P70,000 in Japanese war notes and in consideration thereof, promised in writing (Exhibit A) to pay him P10,000 "in legal currency of the P. I. two years after the cessation of the present hostilities or as soon as International Exchange has been established in the Philippines", plus 2 % per annum.

Because payment had not been made, Villa Abrille sued them in March 1949.

Defendants claimed to have received P40,000 only � instead of P70,000 as plaintiff asserted. They also averred that Guillermo and Rodolfo were minors when they signed the promissory note Exhibit A.

The Court of Appeals found them liable pursuant to the following reasoning:

. . . . These two appellants did not make it appears in the promissory note that they were not yet of legal age. If they were really to their creditor, they should have appraised him on their incapacity, and if the former, in spite of the information relative to their age, parted with his money, then he should be contended with the consequence of his act. But, that was not the case. Perhaps defendants in their desire to acquire much needed money, they readily and willingly signed the promissory note, without disclosing the legal impediment with respect to Guillermo and Rodolfo. When minor, like in the instant case, pretended to be of legal age, in fact they were not, they will not later on be permitted to excuse themselves from the fulfillment of the obligation contracted by them or to have it annulled. (Mercado, et al. vs. Espiritu, 37 Phil., 215.) ISSUE: WON Rodolfo and Guillermo Braganza could be legally bound by their signatures in Exhibit A? No! RATIO:

The Mecado case cited in the decision under review is different because

the document signed therein by the minor specifically stated he was of age; here Exhibit A contained no such statement. In other words, in the Mercado case, the minor was guilty of active misrepresentation; whereas in this case, if the minors were guilty at all, which we doubt it is of passive (or constructive) misrepresentation.

In order to hold infant liable, however, the fraud must be actual and not constructure. It has been held that his mere silence when making a contract as to age does not constitute a fraud which can be made the basis of an action of decit.

The fraud of which an infant may be held liable to one who contracts with him in the belief that he is of full age must be actual not constructive, and mere failure of the infant to disclose his age is not sufficient.

Upon the other hand, these minors may not be entirely absolved from monetary responsibility. In accordance with the provisions of Civil Code, even if their written contact is unenforceable because of non-age, they shall make restitution to the extent that they have profited by the money they received. (Art. 1340) There is testimony that the funds delivered to them by Villa Abrille were used for their support during the Japanese occupation. Such being the case, it is but fair to hold that they had profited to the extent of the value of such money.

Wherefore, as the share of these minors was 2/3 of P70,000 of P46,666.66, they should now return P1,166.67.

3 Their promise to pay

P10,000 in Philippine currency, (Exhibit A) can not be enforced, as already stated, since they were minors incapable of binding themselves. Their liability, to repeat, is presently declared without regard of said Exhibit A, but solely in pursuance of Article 1304 of the Civil Code.

INCAPABLE OF GIVING CONSENT Article 234. (Family Code). Emancipation takes place by the attainment of majority. Unless otherwise provided, majority commences at the age of twenty-one years. Emancipation also takes place:

By the marriage of the minor; or

By the recording in the Civil Register of an agreement in a public instrument executed by the parent exercising parental authority and the minor at least eighteen years of age. Such emancipation shall be irrevocable. (397a, 398a, 400a, 401a)

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

Unemancipated minors;


Insane or demented persons, and deaf-mutes who do not know how to write. (1263a)

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

minors

deaf-mutes who cannot write

insane

imbeciles or demented

under civil interdiction

hypnotized

intoxicated VITIATED CONSENT a) MISTAKE Art. 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract. Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications have been the principal cause of the contract. A simple mistake of account shall give rise to its correction. (1226a) Art. 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract. (n) * Mistake should refer to the substance of the thing which is the object of the contract, or those conditions which principally induced the parties to enter into a contract. * Conditions must not be mere incidents to the consideration. b) VIOLENCE and INTIMIDATION

Art. 1335. There is violence when in order to wrest consent, serious or irresistible force is employed. There is intimidation when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his house, descendants or ascendants, to give his consent. To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind. A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent. (1267a) Art. 1336. Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract. (1268) * The violence must be serious and irresistible. * The duress or intimidation must be more than the “general feeling of fear.” There must be acts or instances of such nature and magnitude as to have, of themselves, inflicted fear or terror upon the subject thereof that his execution of the questioned deed or act cannot be considered voluntary. c) UNDUE INFLUENCE Art. 1337. There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. (n) * Undue influence is unrighteous, illegal and designed to perpetrate wrong. The party influenced must be deceived by some false representation, stratagem or by coercion, physical or moral. * Not all influence is prohibited by law. Solicitations and entreaties, fair argument and persuasion, or appeals to the emotions or affections will not amount to undue influence unless they overcome the will of the person and take away his ability to act as a free agent.


d) FRAUD Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. (1269) * Generally, fraud, either at law or in equity, is a false representation of a material fact made by word or conduct with knowledge of its falsehood or in reckless disregard of its truth, in order to induce and actually inducing another to act thereon to his injury. Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. (n) * The mere fact that one of the parties has superior knowledge of the value of the property subject of the transaction than the other party does not per se constitute fraud. There is only fraud when a legal or equitable duty is imposed upon the dominant party to reveal certain facts material to the transaction or where there is a confidential relationship between the parties. Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. (n) Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former's special knowledge. (n) * Other party must know that he is an expert. * Other party relied on the opinion based on that knowledge Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. (n) * Where both parties gave consent to a contract due to a substantial mistake caused by a third party, the contract can be annulled. Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n)

* Every fraud is a misrepresentation, but not every misrepresentation is fraudulent. * Misrepresentation may be made without knowledge of its falsity and therefore completely done in good faith. In such a case, it would constitute a mistake. Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties. Incidental fraud only obliges the person employing it to pay damages. (1270) * Must not be in pari delicto * Must not be dolo incidente which is accidental and collateral fraud * Must be dolo causante which refers to the very cause why the other party entered into the contract WHO MAY AND MAY NOT INSTITUTE AN ACTION FOR ANNULMENT Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. (1302a) Who May: All who are obliged principally or subsidiarily a) Interest in the contract – there must be legal capacity by being bound to the contract either principally or subsidiarily b) victim and not party responsible for the defect – he who comes to the court must come with clean hands (clean hands doctrine) Who May Not: a) Capable parties cannot allege the incapacity of those with whom they contracted b) Parties who exerted intimidation, violence or undue influence or employed fraud or caused mistake c) third person who is stranger to the contract. UNLESS he can prove that the contract prejudiced his rights with respect to one of the contracting parties, he


may ask for annulment e.g. guarantors and sureties. PRESCRIPTIVE PERIOD Art. 1391. The action for annulment shall be brought within four years. This period shall begin: In cases of intimidation, violence or udue influence, from the time the defect of the consent ceases. In case of mistake or fraud, from the time of the discovery of the same. And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. (1301a) Period shall begin:

Intimidation, violence or undue influence- from the time consensual defect ceases

Mistake or fraud- from the time of discovery of the same

Incapacity- from the time guardianship ceases * Extinctive prescription shall apply not only to action for annulment, but also the the defense of nullity * applies to parties to the contract, but not to third parties. OTHER INSTANCES WHERE AN ACTION FOR ANNULMENT IS EXTINGUISHED Art. 1392. Ratification extinguishes the action to annul a voidable contract. (1309a) * Ratification – the act of curing the defect which made the contract annullable Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. (1311a) Art. 1394. Ratification may be effected by the guardian of the incapacitated person. (n)

Art.1395. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment. (1312) * Ratification is a unilateral act. It is usually done by the injured party and not by the party causing the injury. The consent of the injuring party is not required because such party normally desires the effectivity of the contract anyway from its inception. Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. (1313) * Ratification transforms the contract completely as one without infirmity. This curing effect retroacts to the day when the contract was entered into. Hence, upon ratification, it is as if the contract has never been visited by any infirmity or defect at all. Art. 1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings. If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff. (1314a) * It is a rule that no one can come to court with unclean hands. Hence, the injured party lost the thing which is the object of the obligation by his fault, he cannot seek the annulment of the contract as such right will be considered extinguished. * However, if the party is one who is incapacitated, the mere fact that the thing which is the object of the obligation has been lost, the incapacitated person is not obliged to make any restitution except when it has benefited him. EFFECT OF ANNULMENT Art. 1398. An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases


provided by law. In obligations to render service, the value thereof shall be the basis for damages. (1303a) * When the annulment of the contract has been decreed, the contracting parties must be returned to their original position. Hence, whatever has been given must be returned to the giver. Art. 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. (1304) * However, the law states that when the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as has been benefited by the thing or price received by him. Art. 1400. Whenever the person obliged by the decree of annulment to return the thing can not do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date. (1307a) * When the object to be returned cannot be returned because it was lost by the person obliged to return it due to fault of the said person, the value of the object, its fruits, and interest shall be given instead to satisfy the order of restitution. Art. 1402. As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him. (1308) * Restitution requires the return by the parties of what each has received from the other. If one of them cannot restore to the other what he has received from the said other, such other person cannot be compelled to return what he, in turn, has received. (However, Article 1399)

C. Unenforceable Contracts

Contracts that cannot be enforced unless ratified in the manner provided by law

Occupies an intermediate ground between voidable and void contracts

Unenforceable Rescissible & Voidable

Legal Effect No legal effect unless ratified

With legal effects unless set aside by a competent court

Defectiveness Nearer to absolute nullity Farther from absolute nullity

Kinds of Unenforceable Contracts

1. Unauthorized contracts (Art. 1403, 1) 2. Those that fail to comply with the Statute of Frauds (Art. 1403, 2) 3. Those where both parties are incapable of giving consent to a contract

(Art. 1403, 3) Unauthorized contracts: contracts entered into by a person for and in the name of another, without authority to do so.

An unauthorized contract may be ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party (Art. 1317).

The “agent” assumes personal liability until it is ratified.

If the agent contracts in the name of the principal, exceeding the scope of his authority, and the other party is aware of the limits of the powers granted by the principal, and the principal does not ratify the contract, it shall be void. However, the agent is liable if he undertook to secure the principal's ratification (Art. 1898).

Contracts not in compliance with the Statute of Frauds: contracts which are not put into writing as required by law

Statute of frauds: It is descriptive of laws, statutes or provisions requiring certain agreements to be in writing before they can be enforced in a judicial action

Purpose: To prevent fraud and perjury in the enforcement of obligations

Effect: Only makes ineffective the action for specific performance

General rules of application: o It applies only to executory contracts and not to partially or

completely executed contracts. o It applies exlusively to actions for specific performance of the

contract or for damages.


o It applies only to the agreements or contracts enumerated in Art. 1403, 2.

o The defense of the Statute of Frauds may be waived. o The Statute of Frauds is a personal defense. A contract

infringing it cannot be assailed by third persons (Art. 1408). o The Statute of Frauds is only concerned with the admissibility

of evidence, not the credibility or weight thereof. o An agreement not covered by the Statute of Frauds is

provable by oral evidence.

Required Note or Memorandum by the Statute of Frauds (may be in one writing or in separate ones)

o The names of the parties o The terms and conditions of the agreement o A description of the subject matter sufficient to render it

capable of identification o The date and place of the making of the agreement o The signature of the party assuming the obligation

Exception: sale by auction –

The amount and kind of property sold

The terms of the sale

The price

The names of the purchasers and persons on whose account the sale is made

6 Agreements Covered by the Statute of Frauds (Art. 1403, 2) 1. An agreement that by its terms is not to be performed within a year

from the making thereof o Only full or complete performance by one side will take the

case out of the operation of the Statute 2. A special promise to answer for the debt, default, or miscarriage of

another o Subsidiary or collateral promise to pay, contract of guaranty

3. An agreement made in consideration of marriage other than a mutual promise to marry

o Marriage settlements, donations propter nuptias 4. An agreement for the sale of goods, chattels, or things in action, at a

price not less than five hundred pesos o In separable contracts, each article is taken separately, and

the application of the Statute depends upon its price.

o Exceptions: partial payment, buyer’s acceptance of part of the goods

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

o Lease of real property for more than one year o Sale of real property, regardless of price

6. A representation as to the credit of a third person o Not a guaranty for there is no promise to answer for

another’s debt; only an assurance by a person who does not take part in the contract proper

Under Art. 1443, the Statute of Frauds also applies to express trusts concerning an immovable or any interest therein.

Contracts where both parties are incapable of giving consent: Upon ratification by one party, the unenforceable contract is converted to a voidable one. Ratification of Unenforceable Contracts

Mere lapse of time does not ratify an unenforceable contract.

Unenforceable Contract Ratification

Unauthorized Express or implied, by the person on whose behalf the contract has been executed

Infringing the Statute of Frauds Failure to object to the presentation of oral evidence to prove the contract OR Acceptance of benefit under the contracts

Both parties are incapacitated Express or implied, Voidable – if by the parent or the guardian of one of the parties Valid – if by the parents or the guardians of both parties

Ortega v. Leonardo (1958) Facts: Ortega was occupying a parcel of land in San Andres, Malate. The said land was assigned by the Government to the Rural Progress Administration. As occupant, she asserted her right to purchase the land. Leonardo asserted the similar right,


alleging occupancy of the same land. He promised Ortega that he would sell to her a portion of the lot if she would desist from pressing her claim. There were conditions given by Leonardo. Ortega must: 1) pay for the surveying and subdivision of the Lot; and 2) continue holding the lot as tenant by paying a monthly rental of P10.00 until said portion shall have been segregated and the purchase price fully paid. Upon Leonardo’s acquisition of the title, Ortega fulfilled all the conditions. She tendered to him the purchase price which the latter refused to accept. Issue: WON their oral agreement to sell the piece of land is covered by the Statute of Frauds Held: No. The contract has been partially performed by Ortega. Partial payment of the purchase price alone is not sufficient to constitute partial performance. However, in the case at bar, there were several circumstances indicating partial performance: 1) relinquishment of rights, 2) continued possession, 3) building of improvements on the land, 4) tender of payment, 5) surveying of the lot at Ortega’s expense, 6) payment of rentals. None of these would separately suffice, but the combination of relinquishment, survey and tender, is more than enough. Babao v. Perez (1957) Facts: Celestina Perez owned a parcel of land in San Juan, Batangas. Her niece married Santiago Babao. Babao and she entered into a verbal agreement. Babao would improve the land by leveling and clearing all the forest trees, and by planting crops. He would also act as the administrator of the land, with all expenses at his cost. Perez, in turn, would convey to him or to his wife half of the land, together with all the improvements thereon. Babao left 50 of 156 hectares unimproved. A few days before Perez died, she sold 127 ha. of the land in question. This deprived Babao of possession and administration of the land. Issue: WON the alleged verbal agreement falls within the prohibition of the Statute of Frauds Held: Yes. The alleged verbal agreement appears to be one with terms of non-performance within one year. In such case, all that is required is complete performance within one year by one party. Nothing less than full performance by one party will suffice. Babao, therefore, did not fully comply with the alleged contract. Also, the agreement cannot be considered as a sale of real property

or of an interest therein, which could accept the partial performance of Babao. It is because such an oral agreement must not be vague and ambiguous for it to be enforceable on the ground of partial performance. It must be clear and definite. In this case, the agreement did not specify the number of hectares to be planted with coconuts, rice, corn or other crops. A witness even testified to the vagueness and ambiguity of the agreement. Therefore, Babao cannot recover half of the land by virtue of the oral agreement. His oral evidence was submitted in violation of the Statute of Frauds. Cabague v. Auxilio (1952) Facts: Auxilio and his daughter promised marriage to Cabague’s son on the condition that the Cabagues would improve the Auxilios’ house and spend for the wedding feast and the needs of the bride. Relying on the other party’s promise, the Cabagues made the improvement and spent P700. The Auxilios, however, refused to fulfill their part. Issue: WON their oral transaction may be proved in court Held: No. The transaction actually involves two kinds of agreements. One is the lovers’ mutual promise to marry. The other is an agreement made upon consideration of the marriage. Cabague’s son may sue the girl for damages by reason of breach of their mutual promise to marry. But Cabague cannot sue anyone for the other agreement. It cannot be enforced because it was covered by the Statute of Frauds – oral evidence is not admissible to prove an agreement made upon the consideration of marriage, other than a mutual promise to marry. Litonjua v. Fernandez (2004) Facts: Two brokers offered to sell parcels of land in San Pablo City to the Litonjuas. They arranged to meet Fernandez who was representing the owners of the said land. It was agreed that the Litonjuas would purchase the land, and such sale would be finalized on a certain date. This did not take place because Fernandez was encountering some problems with the tenants. The Litonjuas demanded the finalization of the transaction, the execution of the Deed of Absolute Sale, and the turnover of the subject properties. In reply, Fernandez wrote a letter denying her agreement to sell the land. She also said that because of the


problem with the tenants, the sale would not push through anymore. They would no longer be selling the property until all the problems had been settled. Issue: WON Fernandez’ letter to Litonjua is a sufficient note or memorandum required by the Statute of Frauds Held: No. The letter revealed a consistent denial of having a commitment to sell the properties. There was no perfected contract of sale or contract to sell. There was even no evidence to show that the owners of the land authorized Fernandez to sell their properties. The application of the Statute of Frauds presupposes the existence of a perfected contract. However, the required note or memorandum must contain the essential elements of the contract expressed with certainty: 1) all the essential terms and conditions of the sale of the properties; 2) an accurate description of the property subject of the sale; and, 3) the names of the owners of the properties. This was not the case in the letter sent by Fernandez to the Litonjuas. Fernandez and the owners, then, could not be held liable in the action for specific performance with damages.

D. Void

Contracts which have no force and effect from the very beginning, as if it had never been entered into

Characteristics of Void Contracts 1. The action or defense for their declaration as inexistent does not

prescribe (Art. 1410). 2. The right to set up the defense of illegality cannot be waived (Art.

1409), and may be considered on appeal even if not raised in the trial court.

3. The defense of illegality of contracts is not available to third persons whose interests are not directly affected (Art. 1421).

4. Cannot give rise to a contract; “a contract which is the direct result of a previous illegal contract is also void and inexistent” (Art. 1422)

5. Generally produces no effect 6. No action for annulment is necessary, because the nullity exists ipso

jure; a judgment of nullity would be merely declaratory 7. Cannot be ratified (Art. 1409)

Technically, the action to annul a void or inexistent contract does not prescribe. Nonetheless, it may be barred by laches.

Void Contract Rescissible Contract

Defect inherent in the contract itself Defect in their effects, either to one of the parties or a third party

Nullity a matter of law and public interest

Nullity based on equity and more a matter of private interest

No legal effects even if no action is taken to set it aside

Remains valid and produces all its effects if no action is taken to set it aside

Action to declare nullity never prescribes

Action to rescind prescribes

Void Contract Voidable Contract

Cannot be ratified May be ratified

Generally, effects are not produced at all

Produces effects until annulled

Ordinarily, the defect is that public policy is militated against

The defect is due to incapacity or vitiated consent

Void from the very beginning so generally, no action is required to set it aside, unless the contract has already been performed

Valid until annulled

Cannot be cured by prescription May be cured by prescription

Defense may be availed of by anybody whose interest is directly affected

Defense may be invoked only by the parties, principally or subsidiarily liable, or their successors in interest and privies

Referred to as absolute nullity Referred to as relative or conditional nullity

Void Contract Unenforceable Contract

Cannot be ratified May be ratified

No contract at all There is a contract but it cannot be enforced by a court action

Can be assailed by anybody directly affected

Cannot be assailed by third parties


7 Kinds of Void and Inexistent Contracts (Art. 1409)

1. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy

o Restricts the freedom to contract 2. Those which are absolutely simulated or fictitious

o If relatively simulated, the hidden or intended contract is generally binding.

3. Those whose cause or object did not exist at the time of the transaction

o But there can be valid contracts involving future property, e.g. sale of future or after-acquired property

4. Those whose object is outside the commerce of men 5. Those which contemplate an impossible service 6. Those where the intention of the parties relative to the principal

object of the contract cannot be ascertained 7. Those expressly prohibited or declared void by law

On Labor:

When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit (Art. 1418).

When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency (Art. 1419).

Cui v. Arellano (1961) Facts: Cui was enrolled in the College of Law of Arellano University up to the first semester of his senior year. All the time, he was awarded scholarship grants for scholastic merit. He was made to sign the following contract or agreement: “In consideration of the scholarship granted to me by the University, I hereby waive my right to transfer to another school without having refunded to the University (defendant) the equivalent of my scholarship cash.” His semestral tuition was returned to him at the end of the semester. Capistrano, his uncle was the dean and legal counsel of the said college. But he left to accept the deanship and chancellorship of the College of Law of Abad Santos University. Cui could not pay his tuition in Arellano University, and so he enrolled for the last semester

of his fourth year law in Abad Santos University where he subsequently graduated. For his application to take the bar exam, he requested his transcript of records from Arellano University. The latter refused. Cui was asked to pay back the tuition refunded to him, totaling P1,033.87. He paid the amount under protest. The Bureau of Private Schools previously issued a memorandum on the subject of scholarship. It upheld Cui’s right to secure his transcript of records without being required to refund. Issue: WON the contract signed by Cui, waiving his right to transfer to another school without refunding to Arellano the equivalent of scholarships, is valid Held: No. The stipulation in question is contrary to public policy, and hence, null and void. The memorandum issued merely incorporates a sound principle of public policy. Scholarships are awarded in recognition of merit, and not to keep outstanding students in school to bolster its prestige. The practice of awarding scholarships to attract students and keep them in school is not good customs nor has it received some kind of social and practical confirmation. Scholarships are granted not to attract and to keep brilliant students in school for propaganda, but to reward merit or help gifted students in whom society has an established interest. Saura v. Sindico (1960) Facts: Saura and Sindico were contesting for nomination as the official candidate of the Nacionalista party in the congressional elections. They entered into a written agreement containing a pledge that no one of them shall either run as a rebel or independent candidate after losing in said convention. Saura was chosen as the Nacionalista Party’s candidate. Sindico, however, still filed her certificate of candidacy for the same office. Hence, this suit for the recovery of damages for breach of contract. Issue: WON the written agreement was null and void Held: Yes. Certain rights of individuals, which the law and public policy have deemed wise to exclude from the commerce of man, may not be the object of contracts. These include political rights inferred upon citizens, i.e., right to vote, right to present one’s candidacy to the people and be voted to public office. Such rights may not be bargained for they are conferred for the public good and interest. The action for damages by Saura cannot be entertained because it would result in limiting the choice of the electors to only those persons selected by a small group or party bosses.


Effects of Declaration of Nullity

If the act in which the unlawful or forbidden cause consists constitutes a criminal offense: (Art. 1411)

1. If both parties are in pari delicto: no action against each other and both shall be prosecuted

2. If only one of the parties is at fault: the innocent one may claim what he/she has given and shall not be bound to comply with his promise

If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense: (Art. 1412)

1. If both are in pari delicto: cannot recover and cannot demand performance against each other

2. If only one of the parties is at fault: the innocent one may claim what he/she has given and shall not be bound to comply with his promise

When else may recovery be allowed? 1. By the debtor: interest paid in excess of the interest allowed

by the usury laws, with interest thereon from the date of the payment (Art. 1413)

2. By the party repudiating the contract: the money paid or property delivered for an illegal purpose, when the purpose has not been accomplished or there was no damage caused to a third person yet, ONLY IF it will further public interest, as will be decided by the courts (Art. 1414)

3. By the incapacitated person: money or property paid or delivered in an illegal contract (Art. 1415)

4. By the plaintiff: money or property paid or delivered in a merely prohibited agreement (not illegal per se), and that prohibition is for his/her protection, ONLY IF public policy will be enhanced (Art. 1416)

5. By a purchaser: amount in excess of the maximum price, when there is a statute determining the price of any article or commodity (Art. 1417)

Yu Bun Guan v. Ong (2001)

Facts: Ong and Guan were married according to Chinese rites. Using her personal funds, Ong purchased a parcel of land in Rizal, and registered it under her name. Using their conjugal funds, the couple purchased a house and lot, registered in their names. Guan abandoned his wife and three children. But before they got separated, Ong was convinced by Guan to execute a Deed of Sale of her property in Rizal to him. In return, Guan promised to construct a commercial building for their children. The consideration for the simulated sale was a Deed of Absolute Sale to be executed in favor of their children and that he would pay the loan he obtained. Guan did not pay the consideration of P200,000 for the sale. Ong kept the new TCT to insure that Guan would do what he promised. Issue: WON the in pari delicto principle applies to absolutely simulated or fictitious contracts Held: No. A deed of sale, where the stated consideration has not been paid, is null and void. The sale in this case was absolutely simulated, thus, void. When the nullity arises from the illegality of the consideration or the purpose of the contract, recovery to the guilty parties is denied. But it is different with inexistent contracts such as the simulated sale between Guan and Ong. In this case, Ong was not in pari delicto with Guan. The contract was fictitious due to the lack of consideration. The land in Rizal may be recovered by Ong who purchased the land using her personal funds. The transfer certificate of title was cancelled, there being no legal basis for its issuance.

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