oblicon reviewer 2010

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De La Salle University

College of Law

OBLIGATIONS AND CONTRACTS

Atty. Chato Olivas-Gallo

De La Salle University OBLIGATIONS AND CONTRACTS

TABLE OF CONTENTS I. OBLIGATIONS page/s

Chapter 1: General Provisions of Obligations .................................................................1-3 Chapter 2: Nature and Effects of Obligations....... ........................................................3-12 Chapter 3: Different Kinds of Obligations…………......................................................12-34

Section 1: Pure and Conditional Obligations..................................................12-19 Section 2: Obligations with a Period………....................................................19-23 Section 3: Alternative Obligation………..........................................................23-24 Section 4: Joint and Solidary Obligations……................................................24-30 Section 5: Divisible and Indivisible..................................................................30-32 Section 6: Obligations with a Penal Clause................................................... 32-34

Chapter 4: Modes of Extinguishing Obligations...........................................................34-58 Section 1: Payment or Performance……........................................................38-45 Section 2: Loss of the Thing Due....................................................................46-48 Section 3: Condonation or Remission of Debt ...............................................48-50 Section 4: Confusion and Merger of Rights……..................................................50 Section 5: Compensation................................................................................50-53 Section 6: Novation…………………………….................................................53-58

II. Contracts

Chapter 1: General Provisions.....................................................................................58-67 Chapter 2: Essential Requisites...................................................................................67-78 Chapter 3: Formal Contracts…………………..............................................................78-80 Chapter 4: Reformation of Instruments……................................................................80-84 Chapter 5: Interpretation of Contracts……..................................................................84-90 Chapter 6: Rescissible Contracts……………..............................................................90-97 Chapter 7: Voidable Contracts……………….............................................................97-111 Chapter 8: Unenforceable Contracts.......................................................................111-119 Chapter 9: Void and Inexistent Contracts................................................................119-126

III. Natural Obligations…………....................................................................................127-128

IV. Estoppel………………………..................................................................................128-138

V. Trusts

Chapter 1: General Provisions………………...........................................................138-140 Chapter 2: Express Trust.........................................................................................140-144 Chapter 3: Implied Trust…………………….............................................................144-150

BAR EXAMINATION QUESTIONS......................................................................................151-153

BIBLIOGRAPHY



ADVISER Atty. Chato Olivas-Gallo

AUTHORS

Ang, Victor Reynaldo

Baluyut, Maria Corazon

Batonghinog, Minrado, Jr.

Bongon, Danna Magnolia

Bordeos, James Aris

Caluag, Bon Jeffrey

Calugay, Katrina

Celles, Leandro

Chavez, Marian Camille

Chua, Chantal

Cua, Bryan O’neal

De Leon, Dino

Del Castillo, Jan Emmanuel

Espinosa, Jose Joven

Paulo

Gador, Ken

Guinto, Aleli

Haulo, Oilie

Hernandez, Ana Victoria

Intal, Pauline Grace

Labares, Gallard Kevin

Lucero, Paula Bettina

Marquez, Jerika Everly

Mendoza, Othello II

Millete, Martin Angelo

Mojica, Ma. Cristina

Reonal, Reannah

Rico, Danilo II

Rubio, Darwin Perry

Salas, Maria Patricia

Sison, Kimberly Rae

Sucgang, Justin

Uy, Michael Vincent



Acknowledgment

The authors of this reviewer would like to thank, our professor in Obligations and

Contracts, Atty. Chato Olivas-Gallo, for her guidance and unending support in the making of this reviewer. Her notes on the subject discussed in class are also part of this reviewer.

The authors would also like to acknowledge the book in Obligations and Contracts written

by Atty. Ernesto Pineda. Most of the information used in this reviewer was from Atty. Pineda’s book.

The authors would also like to thank De La Salle University- College of Law, for

challenging its students to be better and to pursue excellence. Lastly, full credit goes to the thirty-one (31) students who did their part to make this

reviewer possible.

Atty. Chato Olivas-Gallo Page 1


CHAPTER 1: GENERAL PROVISIONS OF OBLIGATIONS Art. 1156. An obligation is a juridical necessity to give to do or not to do. (n) Art. 1157. Obligations arise from: (1) Law; (2) Contracts; (3) Quasi-contracts; (4) Acts or omissions punished by law; and (5) Quasi-delicts. (1089a) Art. 1158. Obligations derived from law are not presumed. Only those expressly determined in this Code or 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 Book. (1090)

Art. 1160. Obligations derived from quasicontracts shall be subject to the provisions of Chapter 1 Title XVII of this Book. (n) 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 Title on Human Relations and of Title XVIII of this Book regulating damages. (1092a) Art. 1162. Obligations derived from quasi delicts shall be governed by the provisions of Chapter 2 Title XVII of this Book and by special laws. (1093a) Elements of Obligation:

1) Active Subject – the one who is

demanding the performance of the obligation. Also called the creditor or obligee.

2) Passive Subject – the one bound to perform the prestation

to give, to do or not to do. Also called as debtor or obligor.

3) Prestation or object – the subject matter of the obligation which has an economic value or susceptible of pecuniary substitution in case of noncompliance. It is the particular conduct of the debtor (Pineda).

4) Efficient cause – the juridical tie or vinculum by virtue of which the debtor has become bound to perform the prestation.

Kinds of Obligations:

(a) As to juridical enforceability

1. Civil obligation 2. Natural obligation 3. Moral obligation

(b) As to the Subject Matter

1. Real obligation 2. Personal obligation

(c) As to the number of persons

bound to perform 1. Unilateral obligation 2. Bilateral obligation

(d) As to the capability of fulfillment

1. Possible obligation 2. Impossible obligation

(e) As to the susceptibility of partial

fulfillment 1. Divisible obligation 2. Indivisible obligation

(f) As to their dependence upon

one another 1. Principal obligation 2. Accessory obligation

(g) As to the existence of a burden

or condition 1. Pure obligation 2. Conditional obligation 3. Obligation with a term

(h) As to the nature of performance

1. Positive obligation 2. Negative obligation

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



(i) As to the character of responsibility or liability 1. Joint obligation 2. Solidary obligation

(j) As to the nature of creation of

the obligation 1. Legal obligation 2. Conventional obligation

(k) As to the grant of right to

choose one prestation out of several, or to substitute the first one 1. Alternative obligation 2. Facultative obligation

(l) As to the imposition of penalty

1. Simple obligation 2. Obligation with penalty

Characteristics of a Quasi- Contract:

1. The acts executed must be lawful to distinguish it from a delict or crime where the acts are unlawful.

2. The acts executed must be voluntary to distinguish it from quasi- delict where the acts involved constitutes a fault, negligence, or lack of foresight (Art. 2176).

3. The acts executed must be unilateral to distinguish it from an ordinary contract where there is meeting of the minds between two parties (Art. 1305).

Principal Kinds of Quasi- Contract:

1. Negotiorium Gestio- A juridical relation which takes place when somebody takes charge of the agency or management of the business or property of another without any power from the latter (Art. 2150).

2. Solution Indebiti- A juridical relation which takes place when somebody received something from another without any right to demand for it, and the thing was unduly delivered to him through mistake. The obligation to return the thing arises on the part of the recipient (Art. 2154).

Elements of a Quasi- Delict: 1. There is fault or negligent on the

part of the defendant resulting in the wrongful act or omission, whether voluntary or not, and whether criminal or not;

2. There is damage and injury suffered by another person;

3. There is a direct causal relation between the fault or negligence and the resulting damage and injury. (proximate cause)

Doctrine of Proximate Cause:

- A proximate cause is such an adequate and efficient cause as, in the natural order of events, and under the particular circumstances surrounding the case, would necessarily produce the event (Urbano vs. IAC 157 SCRA 1).

___________________________________

Narciso Gutierrez v Bonifacio Gutierrez, Maria De Gutierrez, Manuel

Gutierrez, Abelardo Velasco and Saturnino Cortez

G.R. No. 34840 September 23, 1931 Digested by: Victor Reynaldo Ang

Facts: A collision between a passenger truck driven by Abelardo Velasco and an automobile driven by an 18 year-old Bonifacio Gutierrez resulted to injuries to the plaintiff, Narciso Gutierrez who suffered a leg fracture which required medical attention for a considerable amount of time.

Issue: (1) Is Manuel Gutierrez, being

not only the owner of the car but the head of the house liable for the damages caused by his son? (2)Are Abelardo Velasco and

Saturnino Cortez, the owner of the truck also liable? Held: Yes. They are jointly and severally liable for the damages because of their negligence. Culpa contractual for the owner of the bus for breach of contract of carriage while Culpa aquillana for the owner of the car. “It is uniformly held that the head of a house, the owner of an automobile, who



maintains it for the general use of his family is liable for its negligent operation by one of his children, whom he designates or permits to run it, where the car is occupied and being used at the time of the injury for the pleasure of other members of the owner's family than the child driving it. The theory of the law is that the running of the machine by a child to carry other members of the family is within the scope of the owner's business, so that he is liable for the negligence of the child because of the relationship of master and servant.”

NATURE AND EFFECT OF OBLIGATIONS

1) Obligor's duty to take care (Art. 1163)

2) Right to fruits (Art. 1164) 3) Right to demand

compliance (Art. 1165) 4) Obligor's duty to deliver

accessions and accessories (Art. 1166)

5) Do it properly or pay the price (Art. 1167)

6) Don't do or pay the price (Art. 1168)

7) No demand, no delay (Art. 1169)

8) FNDV (Art. 1170) 9) Fraud does not pay (Art. 1171) 10) Negligence (Art. 1172) 11) Diligence (Art. 1173) 12) Fortuitous Event (Art. 1174) 13) Usurious Transactions (Art.

1175) 14) Interest and installments (Art.

1176) 15) Accion subrogatoria (Art. 1177) 16) Transmissibility of rights (Art.

1178)

CHAPTER 2: NATURE AND EFFECTS OF OBLIGATIONS 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. (1094a) 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. (1095)

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)

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. (1097a) 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) 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)



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) 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) Art. 1175. Usurious transactions shall be governed by special laws. (n) Art. 1176. The receipt of the principal by the creditor without reservation with respect to the interest shall give rise to the presumption that said interest has been paid. The receipt of a later installment of a debt without reservation as to prior instalments shall likewise raise the presumption that such installments have been paid. (1110a) Art. 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) Art. 1178. Subject to the laws all rights acquired in virtue of an obligation are transmissible if there has been no stipulation to the contrary. (1112) Nature and Effects of Obligations

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)



1. Obligor's duty to take care (Art. 1163) 2. Right to fruits (Art. 1164) 3. Right to demand compliance (Art. 1165) 4. Obligor's duty to deliver accessions and

accessories (Art. 1166) 5. Do it properly or pay the price (Art. 1167) 6. Don't do or pay the price (Art. 1168) 7. No demand, no delay (Art. 1169) 8. FNDV (Art. 1170) 9. Fraud does not pay (Art. 1171) 10. Negligence (Art. 1172) 11. Diligence (Art. 1173) 12. Fortuitous Event (Art. 1174) 13. Usurious Transactions (Art. 1175) 14. Interest and installments (Art. 1176) 15. Accion subrogatoria (Art. 1177) 16. Transmissibility of rights (Art. 1178)

NATURE AND EFFECT OF OBLIGATIONS Art. 1163 “Obligor's duty to take care” 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. Art. 1164 “Right to fruits” 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. 1165 “Right to demand compliance” 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. Art. 1166 “Obligor's duty to deliver accessions and accessories” The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned. Art. 1167 “Do it properly or pay the price” 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.

Art. 1168 “Don't do or pay the price” When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also be undone at his expense. Art. 1169 “No demand, no delay” 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.

Art. 1170 “FNDV fraud, negligence, delay, violation of contract” 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. Art. 1171 “Fraud does not pay” Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. Art. 1172 “Negligence” 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. Art. 1173 “Diligence” 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. Art. 1174 “Fortuitous Event” 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. Art. 1175 “Usurious Transactions” Usurious transactions shall be governed by special laws. Art. 1176 “Interest and installments” The receipt of the principal by the creditor without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. The receipt of a later installment of a debt without reservation as to prior installments, shall likewise raise the presumption that such installments have been paid. Art. 1177 “Accion subrogatoria” 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. Art. 1178 “Transmissibility of rights” Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary.

Diligence of a good father of a family: The Civil Code explains- 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. Exception:

- If the law or by agreement of the parties, extraordinary diligence is required, then the obligor shall exercise extraordinary diligence.

The Roman Catholic Bishop of Jaro v

Gregorio de la Pena G.R. No. 6913 November 21, 1913 Digested by: Vic Reynaldo Ang

Facts: In 1898 Father de la Pena, as trustee of a charitable bequest made for the construction of a leper hospital had in him the funds collected for the said charitable purposes amounting to P6,641. In the same year he deposited in his personal account in the Hongkong and Shanghai Bank the amount of P19,000. He was then arrested during the war as a political prisoner. While he was detained, the authorities confiscated the money in his account because they believed that he was an insurgent and that the funds were to be used for revolutionary purposes.

Issue: Is he liable for the loss of the money forcibly taken from him since he deposited it in his personal account?

Held: No. Although the Civil Code states that "a person obliged to give something is also bound to preserve it with the diligence pertaining to a good father of a family" (art. 1094), it also provides, following the principle of the Roman law,major casus est, cui humanainfirmitasresistere non potest, that "no one shall be liable for events which could not be foreseen, or which having been foreseen were inevitable, with the exception



of the cases expressly mentioned in the law or those in which the obligation so declares." (Art. 1105.) By placing the money in the bank and mixing it with his personal funds De la Peña did not thereby assume an obligation different from that under which he would have lain if such deposit had not been made, nor did he thereby make himself liable to repay the money at all hazards. If the had been forcibly taken from his pocket or from his house by the military forces of one of the combatants during a state of war, it is clear that under the provisions of the Civil Code he would have been exempt from responsibility. The fact that he placed the trust fund in the bank in his personal account does not add to his responsibility. Such deposit did not make him a debtor who must respond at all hazards. Classes of Delivery or Tradition:

1. Real or Actual Tradition-

contemplates the actual delivery of the thing from the hand of the grantor to the hand of the grantee.

2. Constructive Tradition- the delivery of the thing is not actual but representative or symbolical in essence. Kinds-

a. TradicionSymbolica-

delivery of certain symbols or things representing the thing being delivered such as keys or titles.

b. Tradicion Instrumental- delivery of the instrument or conveyance to the grantee by the grantor.

c. Tradicion Longa Manu- pointing of the thing (movable property) within sight.

d. TradicionBrevi Manu- grantee’s continuation of his possession over the thing delivered but now under a title of ownership.

e. TradicionConstitutumPossessorium- consists in the owner’s continuous possession of the property he had sold to another person.

f. Tradicion by Operation of Law- delivery of the thing by operation of law.

g. Quasi- Tradicion- delivery of incorporeal property.

Personal and Real Right: (Hector S. de Leon, The Law on Obligations and Contracts)

1. Personal Right- is the right or power of a person (creditor) to demand from another (debtor), as a definite passive subject, the fulfillment of the latter’s obligation to give, to do, or not to do.

2. Real Right- is the right or interest of a person over a specific thing, without a definite passive subject against whom the right may be personally enforced.

Determinate or specific thing- something which is susceptible of particular designation or specification. Indeterminate or generic thing- something which is not particularized or specified but has reference only to a class or genus. Remedies of Creditor when Debtor fails to deliver a determinate thing:

a) Complaint for specific performance-

an action to compel the fulfillment of the obligation. This action presupposes that it is based on a contractual relationship between contracting parties.

b) Complaint for rescission of the obligation- is an action to rescind under Art. 1380.

c) Complaint for resolution- an action for cancellation under Art. 1191.

d) Complaint for damages- an action to claim for compensation of damages



suffered, either in addition to the first three actions or independently.

Kinds of Delay:

(a) Ordinary Delay- the mere failure to perform an obligation at the appointed time.

(b) Extraordinary Delay or Legal Delay- delay which is tantamount to non- fulfillment of the obligation and arises after an extrajudicial or judicial demand had been made upon the debtor. The debtor is said to be in default now.

Remedies of the Creditor:

SITUATION REMEDY Failure of debtor to fulfil the obligation

The same be done by the creditor himself or by another person but at the expense of the debtor

Obligation was done in violation of the agreement

The creditor or another may execute the obligation at the expense of the debtor

Poor performance Undo the act at the expense of the creditor

Legal Delay- For an obligor to be in default, there must be a demand made upon him for the performance of the obligation either judicially or extrajudicially

Exceptions to the Rule: (ENU)

1. (Express declaration)When the law or obligation Expressly declares

2. (Nature of Contract) When from the nature of the contract, it appears that time is of the essence and such is the motivating factor in the establishment of the contract

3. (Useless ) When demand becomes useless

4. (not in the Codal Provision) Admission of the debtor that he is in default

Classes of Default

1. Mora Solvendi- default on the part of the Debtor

2. Mora Accipiendi- default on the part of the Creditor/Obligee

3. CompensatioMorae- default on the part of both debtor and creditor which arises in reciprocal obligation

Rufina Causing v. Alfonso Bencer G. R. No. L-11328 January 15, 1918 Digested by: Maria Corazon Baluyut

Facts: Causing wants to annul a contract of sale of a parcel of land and to recover the property from Bencer. She along with her minor nieces are the owners of the said property. In 1909 Causing negotiated with Bencer to sell the property for P1,200. She went to an attorney; however when the attorney learned that the minors had an interest in the property he informed Causing that there is a need for judicial sanction. This caused the transfer of the title (to Bencer) to be abandoned but nevertheless Bencer paid P800 of the purchase price and took possession o the land knowing that he was to pay the balance later. Subsequently, Causing took steps to acquire judicial approval. In 1910 a new engagement was made when Bencer was advised to pay an additional P600 to what he already paid (making the purchase price P1400 in all). After some time neither party performed the engagement. When the minors were now of age Causing became the possessor of their shares, the property increased in value and she now had the desire to rescind the contract and recover the property from Bencer. The lower court dismissed the action to recover the property but ordered for the payment of the P600 balance with interest. Issue: Can Causing rescind the contract because Bencer failed to pay the purchase price? Holding: No, the Supreme Court finds no valid reason for them to permit a rescission of the contract. Ratio: It is evidently a case where the contract entailed mutual obligation, and if either party can be said to have been in



default it was the plaintiff, Rufina Causing, rather than the defendant, Bencer. In article 1100 of the Civil Code it is declared that in mutual obligations neither party shall be deemed to be in default if the other does not fulfill, or offer to fulfill his own obligation, and that from the time one person obligated fulfills his obligation the default begins for the other party. We find that the contract contemplated a conveyance of the entire interest in the land; and the plaintiff clearly obligated herself to that extent. She was therefore not in a position to compel the defendant to pay until she could offer to him a deed sufficient to pass the whole legal estate; and for the same reason, she cannot now be permitted to rescind the contract on the ground that the defendant has heretofore failed to pay the purchase price. Fraud- Intentional evasion of the faithful performance of the obligation Negligence/Fault- omission of the diligence required by the nature of obligation and commensurate with the demands of the subsisting circumstances of time, place, condition of persons involved Delay- this is the default or tardiness in the performance of the obligation after it has become due and demandable. Also called “mora” Violation of terms of contract- the act of contravening the tenor or terms or conditions of the contract; also called “volatio”

FRAUD IN EXECUTION

FRAUD IN PERFROMANCE

Reference Article

1338 1170 and 1171

Time of existence

Exists ahead of the contractual obligation between the parties and can only be found in contracts and wills

Already in existence; performance of an obligation already in existence

Effect Nullity Gives rise to damages and recission

Negligence v. Fraud: the former has no deliberate intention to cause damage even voluntarily done while the latter has a deliberate intention or plan to cause damage.

Due Diligence- measure of prudence, activity or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent man under the particular circumstances

Test of Negligence: “Would an prudent man in the position of the person whom negligence is attributed, foresee harm to the person injured as a reasonable consequence of the course to be pursued? Fortuitous event- is an occurrence or happening which could not be foreseen or even if foreseen, is inevitable

Requisites to Exempt Obligor from Liability By Reason of Fortuitous Event

C - "Cause" of the breach must be independent of the debtor's will U - "Unforseeable" or "Unavoidable" event P - debtor had no "Participation" in the aggravation or injury of the creditor I - the event must be such as to render it "Impossible" for D - the "Debtor" to fulfill his obligation in a normal manner.

Exceptions which make an Obligor Liable for Fortuitous Events with examples

1) When it is expressly stipulated that he shall be liable even if the non-compliance is due to a fortuitous event. A and B entered into a contract where B undertakes to deliver bundles of coupon bond to A’s office on specific dates specified in the contract, for a period of 6 months. The contract clearly states the B shall incur liability for... failure to deliver such items to A’s office on any of the specific dates stipulated in the contract, even if such failure is due to a fortuitous event. On one of the dates of delivery, as B just finished loading the last bundle of paper inside the delivery



truck and to proceed to A’s office, a lightning struck his vehicle. Within a matter of seconds, the truck bursts into flames as the gas tank exploded due to the heavy amount of electricity caused by the lightning. B could no longer save the vehicle nor the bundles of paper inside, much less to deliver them to A. B is still liable even if the non-performance of the obligation was due to an act of God, because of the express stipulation found in his contract with A. 2) When the nature of the obligation requires the assumption of risk. A and B entered into a contract where B undertakes to deliver meat products, such as poultry, pork, and beef, to A’s canteen. In delivering such products, B uses his delivery truck which was equipped with built in freezer that is so cold that a bottle of water placed inside would turn into ice with less than a minute. Because of this, B is confident that the meat products to be delivered would not perish in transit. On the date of one of his deliveries to A, it was reported that the country would be experiencing its hottest day of the year, even to a point that people can cook a 2 inch thick steak under the heat of the sun. Because of such, the built in freezer of the delivery truck could not sustain the necessary temperature to keep the meat products from perishing. The result is that the meat products reached A’s canteen with a rotten state and no longer edible. B is liable even if the cause of his failure to comply with his obligation was due to nature’s wrath because meet products are perishable, and the nature of such obligation requires the assumption of risks. 3) When the obligor is in delay. A and B are friends. A sold to B a brand new cell phone for P 12,000.00 only, the phone is to be delivered 3 days after full payment by B. After 3 days, B texted A asking for the delivery of the phone but A said he could not do so on at the time and said that he’ll give the phone the following day. After their conversation, A’s house was submerged into water because of a flash flood due to typhoon Ondoy. The cell phone was soaked and is now beyond repair. A bears liability, regardless if the non-

performance of the obligation was due to a fortuitous event, because he was in delay of such performance. 4) When the obligor has promised the same thing to two or more persons who do not have the same interest. A promised to deliver a sala-set to B in exchange for P 5,000.00. A also promised the same thing to spouses C and D. The sala-set perished when the bodega, where the sala-set was stored, caught fire last New Year’s Eve. Eventually, a stray quitis found its way inside the bodega and caused the fire. A bears the loss of the thing because he promised the same sala-set to two or more persons who do not have the same interest. 5) When the possessor is in bad faith and the thing is lost or deteriorated due to fortuitous event On 21 January 2011, R sold his BMW car to M for 5,000 Euros. After paying the agreed amount, M demanded R to deliver the car to his residence. However, instead of heeding the demand, R, for sentimental reasons, simply parked the car in his garage. ...On 25 January 2011, an earthquake occurred, causing R’s garage to cave-in and ultimately shredding the car into pieces. R is liable despite the fortuitous event, because he was a possessor in "bad faith" after continuously possessing the car in spite of M’s demand. 6) When the obligor contributed to the loss of the thing X gave Y company a package to be delivered to Z via air mail. However, Y Company placed the package on a ship. While traversing the sea, the ship was caught by a storm and sank. Y is liable 7) When the obligor is guilty of fraud, negligence, or delay or if he contravened the tenor of the obligation A ordered 3 boxes of chocolates from B, to be delivered at a certain date. On the day of the delivery, B rode his old car and placed the boxes on the passenger sit where he knew that the door was broken. On his way to A's house an earthquake occurred that



shook the broken car door open and thus the 3 boxes of chocolates fell and was destroyed. B is liable for the destroyed chocolates despite the fact that an earthquake happened causing the boxes to fall, because he acted negligently when he placed the boxes in the passenger sit when he had full knowledge that the car door on that side was broken. 8) An act of God cannot be invoked to protect a person who has failed to take steps to forestall the possible adverse consequence of that loss- when the effect is found to be partly the result of the person's participation, whether by active intervention, neglect or failure to act, the whole occurrence is humanized and removed from the rules applicable to the acts of God. On February 7, 2001, P and R had a verbal agreement to lease to R the van of P for two weeks in consideration of a P5,000 payment. R, while driving P's van on the highway, noticed that the car's hood was smoking but R still continued to drive to his destination which was still 500 meters away. Before he could even reach his destination the engine exploded and caused a fire. R is liable for the damage in the car because he should have stopped when he saw the smoke from the hood.

Medel vs. Court of Appeals G.R. No. 131622 November 27, 1998

Digested by Maria Corazon Baluyut

Facts: Veronica R. Gonzales is engaged in the money lending business under the name “Gonzales Credit Enterprises”. Herein petitioners Servando Franco and Leticia Medel were able to obtain loans from Veronica on three separate occasions. On all occasions Servando and Leticia were unable to pay the loan upon its maturity. Dr. Rafael Medel consolidated all unpaid loans coming to a total of P 440,000 and was able to obtain another loan of P 60,000 bringing their debt to a total of P 500,000. Petitioners executed a promissory note stating that they will pay the loan at a rate of 5.5% per month plus 2% service charge per annum from the date of execution of the promissory note. Moreover, failure to pay will mean an

additional amount equivalent to 1% per month of the amount due and demandable, as penalty; and another additional 25% in full without deductions as Attorney’s fees. Upon maturity of the loan, petitioners (borrowers) were unable to pay. Veronica and her husband Danilo G. Gonzales filed a complaint before the Regional Trial Court for the collection of the full amount of the loan including all interest and other charges as stated in the promissory note. In his defense Servando asserts that he did not obtain any loan and that he was only signatory as one of the witness to the promissory note. On the other hand, Leticia and Rafael Medel assert that (a) the interest rate is excessive at 5.5% per month with additional service charge of 2% per annum, and penalty charge of 1% per month; (b) stipulation for attorney’s fees of 25% of the amount due is unconscionable, illegal and excessive. The trial court decided that although the Usury Law had been repealed, the interest charged by the plaintiff’s on the loans was revolting to the conscience. Thus it applied the provision on the New Civil Code that “legal rate of interest for loan xxx of money xxx is 12% per annum”. However on appeal, the Court of appeals reversed the decision of the trial court by saying that the “Usury Law having become legally inexistent with the promulgation by the Central Bank xxx the lender and borrower could agree on any interest that may be charged on the loan”.

Issue: Is the promissory note valid? Will it be the basis for the payment of interest and other charges?

Held: No. The Supreme Court held that the stipulated rate of interest at 5.5% per month on the P 500,000 loan is excessive, iniquitous, unconscionable and exorbitant. However, the court did not consider the rate as “usurious” because it has been consistently held that the Central Bank circular has removed the interest ceilings prescribed by the Usury Law and that this has become ‘legally inexistent’. Under the circumstances the interest rate at 12% per annum and an additional 1% per month penalty charge as liquidated damages may be more reasonable.



Actions or Remedies Available to the Creditor for protection of interest: 1. Exhaustion of debtor’s properties still in

his possession. This is effected by a writ of attachment before the judgment or writ of execution if there is already a final and executory judgement

2. Accion Subrogatoria- an action where the creditor whose claims had not been fully satisfied, may go the debtors (third persons) of the defendant-debtor. Limitation: Creditor is not allowed to pursue actions on behalf of the debtor which are personal to the latter (e.g. right to revoke donation due to ingratitude, right to exercise parental authority etc.)

3. Accion Pauliana- where the creditor files an action for the rescission of acts or contracts entered into by the debtor designated to defraud the former (See 1380, 1382[3] and 1389)

CHAPTER 3: DIFFERENT KINDS OF OBLIGATIONS Section 1:Pure and Conditional Obligations 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. (1113) 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. (n) 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) 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) 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. (1116a) 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) 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) Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. (1119) 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. (1120) 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. (1121a) 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. (1122)

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. (1123) 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) 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) Pure Obligation The effectivity or extinguishment does not depend on the fulfillment or non-fulfillment of a condition or on the expiration of a term or period, and is immediately demandable. Note: The quality of immediate demandability is not violated when a reasonable period is granted for performance. Conditional Obligation Effectivity is subordinated to the fulfillment or non-fulfillment of a future and uncertain act or event. Characteristics of a condition: 1)Future and uncertain 2) Past event but unknown to parties (the knowledge to be acquired in the future of a past event which at the moment is unknown to parties interested. It is only in that sense that the event is to be deemed uncertain). 3) Not impossible Note: When the debtor binds himself to pay when his means permit him to do so, the oblication shall be deemed to be one with a period (Article 1180). Effects of failure to comply with condition:

1) If condition is imposed on the perfection of a contract results in the failure of the contract

2) If condition is imposed on the performance of the obligation: gives other party an option either to refuse to proceed with the compliance of the obligation of to waive the condition.

When obligation demandable at once:

1) When it is pure; 2) When it is subject to a resolutory

condition; 3) When it is subject to a resolutory

period.

Traditional Classifications of conditions: 1) Suspensive- fulfillment of condition

results in acquisition of rights arising out of the obligation

2) Resolutory- fulfillment of the condition results in extinguishment of rights arising out of obligation

3) Potestative- fulfillment of the condition depends on the will of a party to the obligation

4) Casual- fulfillment of the condition depends on chance and/or the will of third person

5) Mixed- fulfillment of condition depends partly on the will of a party to the obligation and partly chance and/or will of a third person

6) Possible- condition is capable of real action according to nature, law, public policy, or good customs

7) Impossible- condition is not capable of realization according to nature, law, public policy, or good customs

8) Positive- involves performance of an act

9) Negative- involves the omission of an act

10) Divisible- susceptible of a partial performance or realization

11) Indivisible- not susceptible of partial performance or realization

12) Conjunctive- There are several conditions which must all be realized

13) Alternative- there are several conditions, but only one must be realized

14) Express- condition is sated expressly

15) Implied- condition is tacit

Effects of suspensive, resolutory, potestative, mixed, casual condition (Article 1181-1182) 1) Suspensive Condition

Obligation shall only be effective upon the fulfillment of the condition, upon constitution of obligation, before fulfillment, oblige acquired a



mere hope of expectancy, protected by law.

a. Before fulfillment-demandability and the acquisition of the rights arising from the obligation is suspended. Obligation of obligor to comply with the prestation is held in suspense until fulfillment of condition. Anything paid by mistake during such time may be recovered.

b. After the fulfillment-the obligation arises or becomes effective; obligor can be compelled to comply with what is incumbent upon him.

2) Resolutory condition Obligation becomes demandable immediately after its constitution and rights are immediately vested in the obligee, but such rights are always subject to the threat or danger of extinction. Principle of retroactivity applies (Article 1190)

a. Before fulfillment-right recognized in Art. 1188. N case of a suspensive condition should likewise be available in obligations with a resolutory condition.

b. After fulfillment-whatever may have been paid or delivered by one or both of the parties upon the constitution of the obligation shall have to be returned upon the fulfillment of the condition. There is a return to the status quo. Aside from the actual things received, the fruits or the interests thereon should also be returned after deducting the expenses made for their production, gathering and preservation. When condition is not fulfilled, rights are consolidated and they become absolute.

3) Potestative condition

a. When it depends exclusively upon the will of the creditor-condition and obligation is valid

b. When it depends exclusively upon the will of debtor in case of a suspensive condition, it is void; illusory

c. When it depends exclusively upon the will of debtor in case of a resolutory condition-it is valid; not illusory

Noted: If the obligation is a pre-existing one, and does not depend for its existence upon the fulfillment by the debtor of the potestative condition, only the condition is void leaving unaffected the obligation itself. (valid)

4) Both Mixed and Casual condition-the obligation and condition shall take effect Effects of impossible conditions (Art. 1183) 1) Voids both obligation and

condition 2) If condition is negative, it is

disregarded and obligation becomes pure

3) Only affected obligation is void 4) Only the specific condition is

void 5) It is considered as not imposed

Effects of positive and negative condition

In positive condition, obligation is extinguished as soon as the time expires or it becomes obvious that the event will not take place

In negative condition, the obligation is effective from the moment the time indicated has lapsed or if it has become evident that the event cannot occur, although indicated time has not yet lapsed.



Intention of parties shall govern if no time has been fixed.

Doctrine of constructive fulfillment of suspensive condition (Art. 1186)

1) Deemed fulfilled when obligor prevented the obligee from complying. Prevention must be willful

2) Only applies to suspensive condition 3) Mere intention to prevent is not

enough. There must be actual prevention

Requisites: a) Condition must be suspensive b) Debtor actually prevents the

fulfillment of the condition c) He acts voluntarily

Brigido Valencia v. RFC and CA G.R. No. L-10749 April 25, 1958

Digest by: Minrado Batonghinog, Jr.

Facts: Respondent RFC issued and advertised an invitation to bid for the construction of a building in Davao City. Petitioner Valencia submitted his bid in accordance with the respondent’s invitation, indicating 4 items: 1) complete construction of the building including electrical and plumbing installations for P 389,980.00; 2) complete construction of the building only for P 358,480.00; 3) electrical installations only for P 18,900.00; 4) plumbing installations only for P 12,600.00. The plumbing installation was awarded to the petitioner and he was notified through a letter dated July 28, 1952. Petitioner replied to such notice expressing his gratitude for the award but indicated that it would be advantageous for the respondent to have the plumbing installation awarded to the contractor which would undertake the construction of the building as well. Petitioner failed to sign the contract which led the respondent to award the plumbing installation to the contractor that would construct the building in the amount of P 19,000. Respondent instituted an action in the CFI of Manila for the recovery of damages amounting to P 6,200 (difference from the amount awarded to the petitioner and the amount of the same undertaking awarded to the contractor for building construction) and attorney’s fees

amounting to P 1,000. CFI ruled in favor of petitioner, but CA reversed the CFI ruling and ordered the petitioner to pay P 6,200 representing damages and attorney’s fee of P 1,000 to the respondent. Issue: Is the petitioner under obligation to undertake the plumbing installation in favor of the respondent, non compliance of which resulted to the damages sought by the respondent? Held: YES. SC ruled that there already exists a contractual obligation between the petitioner and the respondent resulting from the petitioner’s offer consisting of 4 items, and the acceptance of one of the offers, specifically item no. 4 (plumbing installation only). The acceptance of such offer, which was made by petitioner based on the instructions given by the respondent, perfected the contract which gave rise to contractual obligations of the petitioner.

Contrary to the petitioner’s argument that the acceptance was made after the lapse of the duration of his bid and therefore the contract was not perfected, was not considered by the Court because in the first place his bid did not specify its duration. What lapsed was the bond that the petitioner issued. In addition to such, the acts of the petitioner at the time he was given notice of the acceptance of his offer shows that he knew that the contract was perfected.

By submitting his bid in accordance with the conditions and requirements imposed by the respondent, there was already an acceptance of the respondent’s terms and condition by the petitioner, and because of the un-qualified acceptance of his offer done by the respondent, the contract was deemed perfected. Petitioner’s failure to comply with the notice sent to him regarding the signing of the contract did not relieve him of his obligation nor affect the existence of a contract between him and the respondent.

Ratio: “Each one of these items was complete in itself, and, as such, it was distinct, separate and independent from the other items. The award in favor of petitioner herein, implied, therefore, neither a modification of his offer nor a partial



acceptance thereof. It was an unqualified acceptance of the fourth item of his bid, which item constituted a complete offer or proposal on the part of petitioner herein. The effect of said acceptance was to perfect a contract, upon notice of the award to petitioner herein.”

“As regards the second argument, petitioner's bid did not specify its duration. It enclosed therewith a bond for ten per centum (10%) of the amount of said bid, in compliance with paragraph 10 of the instruction to bidders. Although the bond itself stated that it expired on June 15, 1952, this does not mean that the bid lapsed on the same date. The bond merely guaranteed the performance of a principal obligation of petitioner herein. Needless say, this principal obligation may stand without said bond, which is merely accessory thereto, although the latter cannot exist without the former. Moreover, the bond was given for the benefit, not of petitioner, but of respondent, so that the latter could legally waive said benefit.”

“Referring now to the third argument, paragraph 10 of the aforementioned instruction to bidders, imposed upon them the obligation to execute the corresponding documents "within five (5) days after notice of the acceptance of his bid." Paragraph 15 of said instruction to bidders, further provided:

The contract shall be made and executed in quadruplicate and shall be accompanied by a bond or bonds given by the contractor with two or more good and sufficient sureties or with a surety company, satisfactory to the Manager, Industrial Department, RFC in a penal sum equal to twenty (20) per cent of the full contract price of the work, conditioned for the faithful performance of the contract according to its tenor and effect and the satisfaction of obligation for materials used and labor employed upon the same. The obligation to give the performance bond mentioned in this paragraph, as well as to execute the instrument incorporating the construction contract, within five (5) days from notice of acceptance of the bid, as

stated in paragraph 10 of the instruction to bidders, were accepted by petitioner herein, for he submitted his bid "subject to all conditions and requirements" of respondent's invitation for bids. Hence, his (petitioner's) bid explicitly says: We (or I) make this proposal with a full knowledge of the kind, quantity, and quality of the articles and services required and said proposal is accepted will, after receiving written notice of such acceptance, enter into contract within five (5) days, with good and sufficient securities for the faithful performance thereof. Accordingly, respondent's communication of June 16, 1952, advised petitioners that the contract for plumbing installations was awarded to him for P12,800 "with performance bond of 20% thereof." Again, the letter of respondent's manager in Davao, dated July 28, 1952, in-formed petitioner that the contract for the plumbing installations had been received from the head office and asked him to call at the writer's office for the purpose of affixing his signature on said contract, and requested him to post said performance bond. Petitioner's failure to do so did not relieve him of the obligation arising from the un-qualified acceptance of his offer. Much less did it affect the existence of a contract between him and respondent. Petitioner insists that the giving of a performance bond was a condition precedent. But such condition presupposes the existence of a contract, which is qualified thereby. Compliance with said condition is essential to the existence of petitioner's right to undertake the plumbing installations and collect the price thereof. But, he had a contractual right to give the performance bond, in the sense that respondent had granted him by agreement the right to post said bond, and, once this had been done, he could invoke and enforce his other rights by virtue of the award in his favor. At the same time, respondent had a contractual right to demand the posting of the performance bond, and, upon failure of petitioner to do so, respondent had a similar right to refuse to allow petitioner to under-take the plumbing installations and to demand damages for breach of petitioner's



obligations. In either case, the existence of the contractual relation between the parties did not depend upon the posting the performance bond. Although, the latter was essential to the birth of some of the rights stipulated in favor of petitioner herein, those of respondent were not conditioned upon the giving of said performance bond.”

Reynaldo Labayen, et. al. v. Talisay-Silay

Milling Co., Inc. G.R. No. L-29298 December 15, 1928

Digest by: Minrado Batonghinog, Jr.

Facts: Labayen, the plaintiff, owns Hacienda Dos Hermanos. He entered into a contract with the defendant, Talisay-Silay Milling Co., Inc. for the grinding of the plaintiff’s sugar cane. The contract was subject to a condition, that in order for the defendant company to proceed with the grinding of the sugar canes, it must first be allowed to construct a permanent railroad for the transportation of the sugar canes. The railroad construction of the company did not reach Hacienda Dos Hermanos. According to the defendant, it could construct a railroad to the plaintiff’s hacienda but it would be very dangerous. The plaintiff sued the company for damages resulting from a breach of their contract to grind the former’s sugar cane. After the re-hearing of the case, the defendant company was absolved and the plaintiff was condemned to pay damages to the defendant. Issue: Is the defendant company liable for damages for non-compliance with his obligation to grind sugar, if such obligation is burdened with a condition performance of which would result to undesirable harm? Held: No. SC affirmed the decision of the lower court. Ratio: SC ruled that one cannot obligate himself to do something which is dangerous and harmful to life and property. The general contract entered into by the plaintiff and defendant was intended to be limited to haciendas susceptible of having a permanent railroad for the operation of the defendant company. According to the Court, not to allow an exception would be against public policy by forcing the performance of

such condition upon the defendant company which is harmful and undesirable. Another aspect of the case is the finding that the railroad could have been made to reach the plaintiff’s hacienda, but it would have to pass through the haciendas of Esteban de la Rama, but the latter did not allow at that time. This was a scenario contemplated by the 10th paragraph of the Mutual Obligations provision of the contract where the defendant is absolved from any liability due to non-compliance of the terms of the contract grounded under reasonable conditions. The Court added that: “The foregoing points being admitted, it logically follows that the defendant can recover on its cross-complaint. The defense to the cross-complaint is identical with the theory of the complaint. For the same reasons that the plaintiff cannot recover must be make good for his debt to the defendant.” Retroactivity in suspensive condition Rationale: condition is only an accidental element of the obligation. An obligation can exist even without a condition Retroactivity has not application to real contracts and contracts which can only be realized within successive intervals. In reciprocal and unilateral obligations, there’s no retroactivity. Rights pending fulfillment of suspensive conditions

1) Creditor-bring actions for preservation of his rights

2) Debtor-to recover what had been paid by mistake. If payment is not made by mistake, debtor is implied to have waived the condition

Effects f loss, deterioration and improvement in real obligations

a. Loss-with debtor’s fault, obligation is not extinguished; without debtor’s fault, it is extinguished.

b. Deterioration- with debtor’s fault, creditor may choose between bringing an action



for rescission or specific performance with damages; without debtor’s fault, it is extinguished; without debtor’s fault, impairment to be borne by creditor.

c. Improvement-by nature or time, inure to the benefit of the creditor; at the debtor’s expense, debtor shall have no right other than that granted to a usufructuary.

Rescission of reciprocal obligations in general Definition: right to cancel or resolve the contract or reciprocal obligations in case of non-fulfillment on the part of one. It is not absolute as the court is given discretionary power to fix period within which defaulting party may comply (art. 1191). Right to rescind may be waived explicitly and impliedly.

Section 2: Obligations 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. (1125a) 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. (n) 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. (1126a) 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. (1127) 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. (1128a) 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.



(1129a) Obligations with a term or period are demandable only when the day fixed for their performance arrives Classifications of periods:

1. Ex die- with a suspensive effect; it becomes effective only upon the arrival of a certain day

2. In diem- with a resolutory effect; obligation will subsist up to a certain day

3. Legal - granted by law 4. Voluntary - stipulated by parties 5. Judicial - fixed by courts 6. Definite - date/time is known

beforehand Requisites 1. It must be future, 2. Certain (sure to come but may be

extended) 3. Possible, legally and physically Term/Period and Condition Distinguished Basis Period Condition Time Always refers

to the future Can refer to an unknown past event

Fulfillment Sure to happen at an exact date known from the start or at an indefinite time, but is sure to arrive

May or may not happen being an uncertain event

Influence on the obligation

Affects only the obligation’s demandability or performance

May cause the arising or cessation of the obligation

Ernest Berg v. Magdalena Estate, inc. G.R. No. L-3784 October 17, 1952

Digest by: James Aris Bordeos Facts: This is an action for partition of the property known as Crystal Arcade situated in Manila. The plaintiff and defendant are co-owners of said property, the former owning 1/3 and the latter 2/3.

Hemady claims that it sold to Berg 1/3 of the property in litigation subject to the express condition that should either one decide to sell his undivided share, the party selling would grant to the other part first an irrevocable option to purchase it. Hemady claims that Berg offered to sell his part for P200k and it was accepted. But Berg refused to accept the payment of the price, and for this refusal Hemady suffered damages in the amount of P100k, and asks for specific performance. Berg claims that his offer with Hemady was P350k, while Hemady claims that Berg offered to sell it for P200k subject to the condition that the necessary permit be obtained from the United States Treasury Department.

The lower court ruled in favor of the plaintiff holding that no agreement has been reached between the parties relative to the purchase and sale of the property in question, and, recognizing the right of plaintiff to demand partition under the provisions of Rule 71 of the Rules of Court, it granted the relief prayed for in the complaint. Hence this appeal.

Issue: 1. Whether an agreement to sell has actually been reached between plaintiff and defendant?

Held: No. SC found no error in the decision appealed from and affirmed RTC decision. "when the fulfillment of the condition depends upon the exclusive will of the debtor the conditional obligation shall be void."

Ratio: Aside from the testimony of Berg and Hemady, no document has been presented evidencing that alleged agreement to sell. Berg invoked the rule that such agreement can only be established by a contract in writing, or by a note or memorandum subscribed by the party sought to be charged, as prescribed by the statute of frauds. So Hemady submitted in evidence exhibits "3" (Berg's application) and "4" (Hemady's application), contending that these documents, read in connection with exhibit "1"(deed of sale containing the irrevocable option), constitute a written proof contemplated by said statute. SC found the evidence in the exhibits satisfactory, “all the



requirements of the statute as to contents and signature and, as such, they constitute sufficient proof to evidence the agreement in question.”

“[T]he clause on which defendant relies for the enforcement of its right to buy the property, is not a term, but a condition. Considering the first alternative, that is, until defendant shall have obtained a loan from the National City Bank of New York, it is clear that the granting of such loans is not definite and cannot be held to come within the terms "day certain" provided for in the Civil code, for it may or it may not happen.” And if we consider that the period given was until such time as defendant could raise money from other sources, we also find it to be indefinite and contingent and so it is also a condition and not a term within the meaning of the law. In any event it is apparent that the fulfillment of the condition contained in this second alternative is made to depend upon the defendant's exclusive will, and viewed in this light, we are of the opinion that plaintiff's obligation to sell did not arise, for, under Article 1115 of the old Civil Code, "when the fulfillment of the condition depends upon the exclusive will of the debtor the conditional obligation shall be void."

La Compañia General de Tabacos de Filipina v. Vicente Araza

GR No. 3019-February 9, 1907 Digest by: Bon Jeffrey Caluag

Facts: Araza (the defendant) has a debt of 8000 pesos to Compania General which is payable by installment (500 pesos on the 30th of June, 1901, and the remainder at the rate of 100 pesos a month, payable on the 30th day of each month). Defendant failed to pay the installment only paying 400 pesos. Thus, Compania General Instituted this action seeking the foreclosure of the mortgage for 8,000 pesos (the entire amount of mortgage). The defendant alleges that the document, which was the basis of the plaintiff's claim was executed by error on his part and through fraud on the part of the plaintiff. Issue: Does the creditor hold a right to recover the whole amount of the mortgage

on the ground that debtor failed to pay the installment? Held: NO. The case was instituted on the trial court on June 12, 1901. Given that, the only demandable payment is the 100 pesos to complete the first agreed installment. The court gave credit to the 400 pesos which Arza admitted to have paid and was received by the plaintiff. The Compania General has no right to recover what is not yet demandable nor due. Likewise, the contract contains no provision that upon the failure of the debtor to pay one of the installment, the total amount of debt should be paid at once. Rationale: “We are of the opinion that the obligation can be enforced in this action for only the amount due and payable on the 12th day of June, 1903.” “The contract does not provide for the payment of any interest. There is no provision in it declaring expressly that the failure to pay when due should put the debtor in default. There was therefore no default which would make him liable for interest until a demand was made. (Civil Code, Art. 1100; Manresa, Com. on Civil Code, vol 8, p. 56.)” ‘A Day Certain’ -understood to be that which must necessarily come, although it may not be known (Par. 3, Art. 1193, CC) General Rule: anything paid in good faith before the arrival of the period may be recovered Exceptions:

1. When obligation is reciprocal, and there has been premature performance on both sides

2. Obligation is a loan on which the debtor is bound to pay interest

3. Period is exclusively for the benefit of the debtor

Consequences of Premature Payment or Delivery If debtor is in:

1. Good faith- he may recover 2. Bad faith- he cannot recover



Benefit of the Period As a general rule, it is for the benefit of both the obligor and oblige, unless it can be proved that it was established in favor of one of tem If the period was for the benefit of: Creditor- may demand the fulfillment of the obligation at any time but the obligor cannot compel him to accept payment before the expiration of period Debtor- cannot be compelled to perform obligation prematurely, but he can do so if he desires Instances when the court may fix the period: 1. If the obligation does not fix a period,

but from its nature circumstances it can be inferred that a period was intended;

2. If the duration of the period depends upon the will of the debtor; and

3. Ife the debtor binds himself when his means permit him to do so (Art. 1180)

Cosmic Lumber Company, Inc. V. Gapita

Manaois GR No. L-12692-January 30, 1960

Digest by: Bon Jeffrey Caluag Facts: Manaois (defendant- appellant) on different dates (from November 10, 1952 to June 30, 1953) bought and received various construction materials and hardware goods from Cosmic Lumber (plaintiff-appellee) amounting to P12,127.57. She paid P6,979.83 from November 04, 1952 to March 10, 1954 and was credited to the account of the appellant. After instituting the original complaint on March 24, 1954, Manaois paid Cosmic Lumber with 1,000 pesos reducing her debt to P4, 147.74. Appellant argues that no stipulation of time or fixed time of payment where in the nature of the circumstances of the obligation, the period was intended; and thus the Court is tasked to fix the period of payment. The parties in the case entered into a contract of sale on credit which among others states that “…hereby agreed that all may/or purchases from this Company are payable in the said City of Dagupan. It is agreed that if this bill is not paid within... days from date hereof I/we will pay interest at the rate of 10 per centum per annum on all overdue

accounts. The buyer hereby agrees to pay and all attorney's fees and court costs should the seller institute legal action. Goods travel at buyer's risk.” Issue:

1. Was there an intended date? 2. Should the Court set the date?

Held: Yes on both issues. The nature and circumstance of the contract shows that the parties intended to have a date but failed to do so. Note that in the contract it says “bill is not paid within . . . days”. In such case pursuant to Article 1197 of the Civil Code, the Court may fix the date. Rationale: “The parties intended to fix a period for payment of the appellant's obligation but failed to do so. Under article 1197 of the new Civil Code, the Court may fix it. Taking into consideration that from 10 November 1952, the first sale, and 30 June 1953, the last sale, to the present, more than six and nearly seven years already have elapsed, the appellant who does not deny her obligation must be ordered to pay the appellee the amount she still owes it within fifteen (15) days from the date the judgment shall have become final.” The debtor shall lose the right to make use of the period if: 1. He becomes insolvent, unless he gives

a guaranty or security for the debt (the insolvency need not be judicially declared)

2. He does not furnish to the creditor the guaranties or securities which he has promised

3. By his own act he has impaired said guaranties or securities after their establishment , and when through fortuitous event they disappear, unless he immediately gives new ones equally satisfactory

4. He violates any undertaking in consideration of which the creditor agreed to the period

5. He attempts to abscond



Section 3: Alternative Obligation Art. 1199. A person alternatively bound by different prestations shall completely perform one of them.

The creditor cannot be compelled to receive part of one and part of the other undertaking. (1131) Art. 1200. The right of choice belongs to the debtor, unless it has been expressly granted to the creditor.

The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have been the object of the obligation. (1132) Art. 1201. The choice shall produce no effect except from the time it has been communicated. (1133) Art. 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only one is practicable. (1134) 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) Art. 1204. The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things which are alternatively the object of the obligation have been lost, or the compliance of the obligation has become impossible.

The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or that of the service which last became impossible.

Damages other than the value of the last thing or service may also be awarded. (1135a) Art. 1205. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative

from the day when the selection has been communicated to the debtor.

Until then the responsibility of the debtor shall be governed by the following rules:

(1) If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that which the creditor should choose from among the remainder, or that which remains if only one subsists;

(2) If the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to damages;

(3) If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any one of them, also with indemnity for damages.

The same rules shall be applied to obligations to do or not to do in case one, some or all of the prestations should become impossible. (1136a) Art. 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution, the obligation is called facultative.

The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render him liable. But once the substitution has been made, the obligor is liable for the loss of the substitute on account of his delay, negligence or fraud. (n) Conjunctive- debtor has to perform all the several prestations in the contract in the contract to extinguish the obligation Alternative- alternatively bound by different prestations but the complete performance of



one of them is sufficient to extinguish the obligation Rights of Choice in belongs to the debtor, except when it was expressly granted to creditor.

Agoncillo and Mariño v. Javier G.R. No. L-12611, August 7, 1918

Digested by: Katrina Calugay

Facts: Anastasio, Jose and Florencio (all surnamed Alano) executed a document in favor of Da. Marcela Mariño, containing among others; a.) That as the testamentary heirs, they will be the one to pay Rev. Anastasio Cruz’ debt to Mariño amounting to P2,730.50. b.) A mortgage of the property bequeathed to them by Cruz is entered to secure the payment of the debt c.) In case of insolvency, the right of ownership and possession of the lot will be transferred to Mariño d.) If the value of the property is insufficient to cover the total amount of indebtedness, Anastasio shall mortgage his four parcels of land to secure the balance. Since then, no part of the debt was paid except for the P200 paid by Anastasio. Eventually, Anastasio died intestate. Notices were published, informing the creditors to present their claims against his estate. No claims were presented until the period for presentation expired. A year after, Mariño requested for the proceeding’s reopening, claiming that she is a creditor of Anastasio. She also claims that the contract entered between them is that of a loan with a stipulation that in case the debtors fail to settle the debt, the properties will be conveyed in her favor. The Alanos on the other hand, contend that any cause of action which Mariño has against Anastasio’s estate has been barred by her failure to present her claim within the required period and that the document does not constitute a valid mortgage. Issue: Can Mariño validly claim the properties in dispute? Held: No. The contract is not to permit Mariño to forfeit the security upon debtors’ failure to pay the debt at maturity. The

contract simply means that if the debt is not paid in money it shall be paid in another mode, which in this case is the transfer of the property. It is incorrect to say that the title to the house and lot shall automatically be transferred upon mere failure to pay. The obligations assumed by the Alanos were alternative, giving them the right to elect which obligation they would want to perform. It is also wrong to say that the right to settle the obligation by the payment of money was lost because of the failure to pay the debt at its maturity. Since the action to recover the debt has already prescribed, the liability of conveying the properties has also prescribed, it being dependent upon their failure to pay the debt in money. The court thus dismissed all the claims against the Alanos. Ratio: “The contract now under consideration is not susceptible of the interpretation that the title to the house and lot in question was to be transferred to the creditor ipso facto upon the mere failure of the debtors to pay the debt at its maturity. The obligations assumed by the debtors were alternative, and they had the right to elect which they would perform (Civil Code, art. 1132). The conduct of the parties (Civil Code, art. 1782) shows that it was not their understanding that the right to discharge the obligation by the payment of money was lost to the debtors by their failure to pay the debt at its maturity. The plaintiff accepted a partial payment from Anastasio Alano in 1908, several years after the debt matured. The prayer of the complaint is that the defendants be required to execute a conveyance of the house and lot, after its appraisal, "unless the defendants pay the plaintiff the debt which is the subject of this action." …The distinction is one which is well-established, although the authorities cited do not fully support plaintiffs' contentions, but in this particular case the question is academic, for the undertaking is in the alternative to pay a sum of money — an essentially divisible obligation — or to convey the house. As the alternative indivisible obligation is imposed only in the



event that the debtors fail to pay the money, it is subject to a suspensive condition, and the prescription of the obligation whose non-performance constitutes the condition effectively prevents the condition from taking place.” The choice shall produce effect only upon communication of the choice of the other party. There is no special form for the communication notification. Once the debtor’s choice is

communicated, the creditor’s concurrence is not required.

Once choice is made it can no longer be renounced and parties are bound by it

When choice is rendered impossible through the creditor’s fault, the debtor MAY bring an action to rescind the contract with damages Alternative obligations are converted to simple obligations when: 1. the person who has a right of choice has

communicated his choice. 2. only one prestation is practicable

Legarda v. Miailhe G.R. No. L-3435, April 28, 1951

Digested by: Katrina Calugay Facts: On February 17, 1926, William Burke (original defendant-mortgagee who was later substituted by Victoria Miailhe) and Clara Tambunting de Legarda (plaintiff-mortgagor) entered into a contract of mortgage amounting to Php75,000. Because of Burke’s liberality, the mortgage was renewed from time to time until March 16, 1940. In this mortgage renewal, Burke was given the option to demand the payment of the Php70,000 balance either in Philippine or English currency and that this option has to be exercised on February 17, 1943. However before the obligation’s maturity, Legarda deposited in court a certified check representing Japanese Military notes worth Php75,920.83 to satisfy the princial and the interests due her. Burke refused to receive the payment because it is not in the currency agreed upon by them. Legarda filed a complaint alleging Burke’s unjustified refusal to accept her payment. Burke in his answer said that the obligation has not yet become due and that

it is contrary to their agreement. The Court of First Instance dismissed the complaint and ordered the satisfaction of the debt. To this, Legarda appealed. Issue: Can Burke validly refuse Legarda’s payment? Held: No. Although Burke has the right to demand payment in the currency he may elect, he cannot exercise the same as his right of election ceased to exist. It is settled in their mortgage renewal that his option to elect is to be exercised upon the obligation’s maturity, which is February 17, 1943, a date well within the Japanese occupation. Because of the proclamation issued by the Japanese Imperial Commander, all other currencies, including the English ceased to exist. This made Burke’s right of election legally impossible, and Legarda’s payment in Japanese Military notes valid. In an alternative obligation, ones right to choose ceases when the undertakings are impossible or illegal. However despite this, the court declared that the payment does not have any legal effect because it was made in a certified check, which is not considered as a legal tender. The court then affirmed the lower court’s decision. Ratio: “As we have stated before, the option to demand payment of the indebtedness has to be exercised upon maturity of the obligation, which is February 17, 1943. On this date, the only currency available is the Philippine currency, or the Japanese Military notes, because all other currencies, including the English, were outlawed by a proclamation issued by the Japanese Imperial Commander on January 3, 1942. This means that the right of election ceased to exist on that date because it had become legally impossible. And this is so because in alternative obligations there is no right to choose undertakings that are impossible or illegal (Civil Code, art. 1132, par. 2). In other words, the obligation on the part of the debtor to pay the mortgage indebtedness has since then ceased to be alternative. (Articles 1134 & 1136(1) of the Civil Code.) It appears, therefore, that the tender of payment made by the plaintiff in Japanese



Military notes was a valid tender because it was the only currency permissible at the time, and the same was made in accordance with the agreement because payment in Japanese Military notes during the occupation is tantamount to payment in the Philippine currency. (Haw Pia vs. China Banking Corporation, 45 Off. Gaz., Supp.[9] 229; Phil. Trust vs. Araneta, 46 Off. Gaz., 4254; Allison D. Gibbs vs. Eulogio Rodriguez, 47 Off. Gaz., 186.) But the consignation of the sum of P75,920.83 in Japanese currency made by the plaintiffs with clerk of court does not have any legal effect because it was made in certified check, "does not meet the requirements of a legal tender." Loss of Objects A. If the choice belongs to the debtor:

1. Through fortuitous Event Total loss - debtor is released

from the obligation Partial loss- deliver that which

he shall choose from among the remainder

2. Through the debtor’s fault Total loss - creditor shall have a

right to indemnity for damages based on the value of the last thing which disappeared or service which become impossible

Partial loss - deliver that which he shall choose from among the remainder without damages

B. If the choice belongs to creditor 1. Through Fortuitous Event

Total loss- debtor is released from the obligation

Partial loss - deliver that which he shall choose from among the remainder

2. Through the debtor’s fault

Total loss - creditor may claim the price/value of any of them with indernity for damages

Partial loss - creditor may claim any of those subsisting without a right to

damages OR price/value of the thing lost with right to damages

FACULTATIVE OBLIGATION Kind of obligation where the obligor is obliged to perform only one prestation, but he is allowed to perform or deliver one in substitution thereof If the thing was lostbefore substitution

Obligor in bad faith- he is liable Goodfaith/negligence - he is not

liable If the thing was lost after the substitution

Due to obligor’s delay, negligence of fraud – he is liable; once substitution is made, the obligation is converted into a simple one

Section 4: Joint and Solidary Obligations Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. (1137a) Art. 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits. (1138a) Art. 1209. If the division is impossible, the right of the creditors may be prejudiced only by their collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the others shall not be liable for his share. (1139) Art. 1210. The indivisibility of an obligation does not necessarily give rise



to solidarity. Nor does solidarity of itself imply indivisibility. (n) Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions. (1140) Art. 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter. (1141a) Art. 1213. A solidary creditor cannot assign his rights without the consent of the others. (n) Art. 1214. The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by one of them, payment should be made to him. (1142a) Art. 1215. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of Article 1219.

The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them. (1143) Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. (1144a) Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for

the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded.

When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each. (1145a) Art. 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or become illegal. (n) Art. 1219. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of them before the remission was effected. (1146a) Art. 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors. (n) 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) Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those



which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. (1148a) Joint- each of the debtors is bound to fulfill the obligation; on the other hand, each one of the creditors has a right to demand full compliance with the obligation Solidary- each of the debtors is liable for the entire obligation and each of the creditors is entitled to demand the satisfaction of the whole obligation from any or all of the creditors Presumption: When there are a number of creditors and a number of debtors, then the obligation is presumed to be joint unless the contrary appears from the law, nature of the obligation, and stipulation of the parties. Effects of Joint Obligation

1. each debtor is liable only for a proportionate part of the debt

2. each creditor is entitled only to a proportionate part of the credit

Kinds of Solidarity

Active - any one of the creditors can demand the fulfillment of the entire obligation.

Passive - any of the debtors can be made liable for the fulfillment of the entire obligation

As to creation Legal- imposed by law Conventional- established by

voluntary agreement of the parties Real-due to the nature of the

obligation

Joined Indivisible Obligation compliance with the obligation

requires the concurrence of all the debtors, although each for his part

insolvency of one of the debtors-the others shall not be liable for his shares

Joint Divisible Obligation each debtor can be held liable only

for the payment of his proportionate share of the debt.

breach of obligation by one of the debtors- damages due must be borne by him alone

Solidarity

exists although creditors and debtors may not be bound in the same manner and by the same periods and conditions.

Forms of passive solidarity

a. Uniform- parties are bound by the same stipulations.

b. Non-uniform or Varied - parties are not subject to the same stipulations

Effects of Solidarity:

Each one of the solidary creditors may do whatever may be useful or beneficial to the others, but not anything which may be prejudicial to the latter

Creditor cannot assign his rights without the consent of others

Debtor may pay any of the creditors, but if one has demanded payment already, the debtor should pay him (creditor is obliged to reimburse the other creditors; the debtors benefited by the payment of the obligation are obliged to reimburse the debtor who paid

Effect of Remission

obligation is totally extinguished but the solidary debtor is not released from his obligation to his co-debtors in case the debt had been totally made by one of them before the remission

If there is no previous payment, the debtor who received the remission cannot seek reimbursement from his co-debtors

The demand made against one of the solidary debtors shall not be an obstacle to those which may subsequently be directed against the others so long as the debt has not been fully collected.



Effect of the four modes of extinguishing obligations (novation, compensation, confusion or remission)

- acts prejudicial to the other solidary co-creditors, because said acts have the effect of extinguishing the debt or obligation which is due to all of them

- the one who had collected the debt shall be liable for the shares corresponding to all his co-creditors

Novation - when obligations are 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

If prejudicial, the solidary creditor

who effected the novation shall reimburse the others for damages incurred by them;

If beneficial and the creditor who effected the novation is able to secure performance of the obligation, such creditor shall be liable to the others for the share which corresponds to them, not only in the obligation, but also in the benefits;

If effected by substituting another person in place of the debtor, the solidary creditor who effected the novation is liable for the acts of the new debtor in case there is deficiency in performance or in case damages are incurred by the other solidary creditors as a result of the substitution;

If effected by subrogating a third person in the rights of the solidary creditor responsible for the novation, the obligation of the debtor or creditors is not in reality extinguished; the relation between the other creditors not substituted and the debtor/s is maintained.

Compensation – when two persons, in their own right, become creditors and debtors of each other

Confusion or Merger of Rights – when the characters of creditor and debtor are merged in the same person

Compensation and Confusion 1. PARTIAL: rules on application of

payment shall apply, without prejudice to the right of other creditors who have not caused the confusion or compensation to be reimbursed to the extent that their rights are diminished or affected;

2. TOTAL: obligation extinguished, what is left is the ensuing liability for reimbursement within each group – the creditor causing the confusion or compensation is obliged to reimburse the other creditors; the debtors benefited by the extinguishment of the obligation are obliged to reimburse the debtor who made the confusion or compensation possible.

Remission or Condonation – this is the gratuitous abandonment by the creditor of his right

1. ENTIRE OBLIGATION: obligation is totally extinguished but the solidary debtor who obtained it does not entitle him to reimbursement from his co-debtors;

2. For the benefit of one of the debtors covering his entire share: he is completely released from the creditor/s;

3. For the benefit of one of the debtors and it covers only part of his share: his character as a solidary debtor is not affected.

Against whom will the creditor’s action be addressed (when there is passive solidarity)?

(a) any of the solidary debtors; (b) some of the solidary debtors; or (c) all of the solidary debtors

simultaneously.

Effect of Demand upon a Solidary Debtor The demand made against one of

them shall not be an obstacle to those which may subsequently be directed against the others so long



as the debt has not been fully collected.

The creditor may proceed against any one of the solidary debtors or against all of them simultaneously.

A creditor’s right to proceed against the surety exists independently of his right to proceed against the principal.

Note: If a claim from one of the solidary debtors has been dismissed by a court on grounds other than the extinguishment of the whole obligation or that the claim has prescribed, it does not necessarily mean that the solidary indebtedness cannot be claimed against the other solidary debtors who were not impleaded in the case or against those who were impleaded but whose liability was found by the court as proper. (Inciong v. CA, G.R. No. 96405, June 26, 1996)

Payment

- consists in the delivery of the thing or the rendition of the service which is the object of the obligation

- payment by one of the solidary debtors extinguishes the obligation

- obligation of the co-debtors to reimburse becomes a joint one

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

- Solidary debtor who made the payment merely entitles him to claim from his co-debtors the share which corresponds to them with interest from the time of payment; does not create a real case of subrogation; if payment was made before the debt is due, no interest for the intervening period may be demanded.

- Share of the insolvent solidary debtor share shall be borne by all his co-debtors, in proportion to the debt of each.

Payor is not entitled to reimbursement when:

(a) obligation had already prescribed due to lapse of time required by law; or

(b) obligation or prestation has become illegal before it could be performed.

- creditor cannot, by his act of belated remission, exempt any debtor from the latter’s obligation to his co-debtors

- this article applies only when

remission covers the whole or entire obligation and the remission is obtained by one of the solidary debtors without spending anything for its agent

- in case the remission is only partial – solidary debtor who paid the unremitted part of the obligation is entitled to reimbursement with respect only to the amount he actually paid

Effect of Loss or Impossibility of Prestation

1. If it is not due to the fault and before delay of the solidary debtors, the obligation is extinguished.

2. If the loss or impossibility is due to the fault of one of the solidary debtors or due to a fortuitous event after one of the solidary debtors had already incurred in delay, the obligation is converted into an obligation of indemnity for damages but the solidary character of the obligation remains.

Defenses a Solidary Debtor May Avail

1. Defenses arising from the nature of the obligation (examples: payment, prescription, remission, statute of frauds, presence of vices of consent and similar others)

2. Defenses personal to him (examples: minority, insanity, and others purely personal)

3. Defenses personal to the others, but only as regards that part of the debt for which the latter are liable

Section 5: Divisible and Indivisible Obligations Art. 1223. The divisibility or indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor does not



alter or modify the provisions of Chapter 2 of this Title. (1149) Art. 1224. A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the obligation consists. (1150) Art. 1225. For the purposes of the preceding articles, obligations to give definite things and those which are not susceptible of partial performance shall be deemed to be indivisible.

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

However, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties.

In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case. (1151a) Divisible Obligations Susceptibility of an obligation to be performed partially Indivisible Obligations Non-susceptibility of an obligation to partial performance Test of Divisibility: Whether the prestation is susceptible of partial compliance or not Kinds of Division of Things

1. Qualitative division – depends on the quality of the thing; thing not homogenous

2. Quantitative division – depends on quantity; there is homogeneity in the thing

3. Ideal division – divisibility is not material division of a thing but only mental or intellectual division

Kinds of Indivisibility

1. Legal indivisibility – provided by law 2. Conventional indivisibility – agreed

upon by the contracting parties 3. Natural indivisibility – nature of the

object or subject matter of the obligation

- applies to a joint indivisible

obligation – action for enforcement of the obligation must be pursued against all the debtors

- anyone of the debtors fails to comply will be liable for damages

- debtors who may have been ready to comply with what is incumbent upon them shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or the value of the service in which the obligation consists

- the debtor who failed or refused to comply with the prestation shall bear the burden of paying all of the damages to the creditor/s and shall indemnify the other debtors for damages suffered as a result of the transformation of the obligation into one of indemnity

In obligation to give, even though the object may be physically divisible, the obligation is still indivisible if it is provided by law or it is so intended by the parties In obligations to do, the obligation shall be considered divisible when it has for its object:

o the execution of a certain number of days of work

o the accomplishment of work by metrical units

o the accomplishment of analogous things which by their nature are susceptible of partial performance



In obligations not to do, it depends upon the character of the prestation in each particular case General Rule: Creditor cannot be compelled partially to receive the prestation in which the obligation consists; neither may the debtor be required to make partial payments Exceptions:

1. When the obligation expressly stipulates the contrary

2. When the different prestations constituting the objects of the obligation are subject to different terms and conditions

3. When the obligation is in part liquidated and in part unliquidated

Note: When there is plurality of debtors and creditors, the effect of divisible/indivisible character of the obligation depends on whether the obligation is joint or solidary.

If solidary – Arts. 1211 to Art. 1222 appwwdsly

If joint divisible – Art. 1208 is applicable

If joint indivisible – Art. 1209 and 1224 apply

Section 6: Obligations with a Penal Clause Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. (1152a) Art. 1227. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the

penalty at the same time, unless this right has been clearly granted him. However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced. (1153a)

Art. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded. (n) Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (1154a) Art. 1230. The nullity of the penal clause does not carry with it that of the principal obligation.

The nullity of the principal obligation carries with it that of the penal clause. (1155) Penal Clause - an accessory undertaking to assume greater liability in case of breach and is attached for the purpose of insuring its performance. Penal Clause and Condition Distinguished Penal Clause Condition Constitutes an obligation Does not constitute

an obligation May become demandable upon default of the unperformed obligation and sometimes jointly with it

Never demandable

Purpose of Penalty:

1. Funcion coercitiva o de garantia – to insure the performance of the obligation;



2. Funcion liquidatoria – to liquidate the amount of damages to be awarded in case of breach of the principal obligation (compensatory)

3. Funcion estrictamente penal – in certain exceptional cases, to punish the obligor in case of breach of the principal obligation (punitive). Does not resolve the question of damages

Enforceability of Penalty Penalty as a stipulation in a contract is demandable only if there is a breach of the obligation and it is not contrary to law, morals, good customs, public order or public policy.

Siy v CA (138 SCRA 536)

Digested by: Leandro Celles Facts: The spouse Valdez, the respondents, owns a house and lot in Makati. They then entered a contract of sale with Virgilio Siy, the petitioner, the problem stemmed from their subsequent agreements. Initially they agreed that a contract of deed of sale shall be executed upon the approval of their SSS loan. It is also agreed that a payment of P50 monthly for the rental of the property and P30 per day of delay. Since the property was mortgaged to the GSIS they were asked to execute a Deed of Sale with Assumption of Mortgage stating that the petitioner has paid the for the improvements incurred in the property and the balance to be paid upon approval of the SSS loan which they did. The spouses Valdez then evidently chose to rescind the contract because Ignacio was unable to pay neither the initial payment nor the balance to be paid from the SSS loan within the period agreed upon. Issues: 1. Is Ignacio liable to pay for damages for the failure to fulfill payment of the land? 2. Did the court correctly impose the penalty to be paid? Held: 1. Yes. Ignacio’s failure to pay within the period provided for in the contract is a clear breach of contract and entitles the

Spouses the accessory damages as stipulated. 2. No. The Court should not include the penalty clause and the part of the purchase price in the computation of damages. He is only liable to pay for the use of the house and lot until he vacates the premises. The petitioner and his family have lived in the respondents' house all these years without paying either the price he obligated himself to pay or the monthly rentals he agreed to pay as early as 1963. At the very least, the petitioner should pay P50.00 monthly rentals with legal interest from March, 1963. Rationale: "... The Breach of contract committed by appellee gave appellant, under the law and even under general principles of fairness, the right to rescind the contract or to ask for its specific performance, in either case with right to demand damages...” It is evident, in the case at bar, that the respondents chose to rescind the contracts after the petitioner repeatedly failed to pay not only the balance but the initial amount as downpayment in consideration of which the contracts or agreements were executed. As a matter of fact, the petitioner later asked the SSS to cancel his loan application. He thereby abandoned his own claim for specific performance "The law, however, does not authorize the injured party to rescind the obligation and at the same time seek its partial fulfillment under the guise of recovering damages.” Limitation upon the Right of the Debtor in Obligations with a Penal Clause General Rule: Debtor cannot exempt himself from the performance of the principal obligation by paying the stipulated penalty Exception: Unless this right has been expressly reserved for him. Limitations on the Right of the Creditor in Obligations with a Penal Clause General Rule: Creditor cannot demand the fulfilment of the principal obligation and demand the satisfaction of the penalty at the same time.



Exception: Unless the right has been clearly granted to him.

If creditor has chose fulfilment of the principal obligation and performance thereof became impossible without his fault, he may still demand satisfaction of the penalty.

If there was fault on the part of debtor, creditor may demand not only satisfaction of penalty but also the payment of damages.

Proof of Actual Damages The rule that proof of actual damages is not necessary is applicable only to the general rule stated in Art. 1226 and not to the exceptions. Penalty is exactly identical with what is known as “liquidated damages” under Art. 2226. When Penalty May Be Reduced

1. If the principal obligation has been partly complied with;

2. If the principal obligation has been irregularly complied with; and

3. If the penalty is iniquitous or unconscionable even if there has been no performance.

Effect of Nullity of Obligation or Penalty

- If principal obligation is void - penal clause shall also be void because the penalty is merely an accessory obligation

- If penal clause is void, principal obligation is not affected.

CHAPTER 4: Modes of

Extinguishing Obligations Art. 1231. Obligations are extinguished:

(1) By payment or performance:

(2) By the loss of the thing due:

(3) By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of creditor and debtor;

(5) By compensation;

(6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code. (1156a)

A. Payment/performance B. Loss of the thing due C. Condonation or remission of debt D. Confusion or merger E. Compensation F. Novation G. Annulment H. Rescission I. Fulfilment of a resolutory condition J. Prescription

Section 1. Payment or Performance Art. 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (n) Art. 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. (1157) Art. 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. (n) Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. (n) Art. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has paid, except



that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. (1158a) Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a) Art. 1238. 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 the payment is in any case valid as to the creditor who has accepted it. (n) Art. 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of Article 1427 under the Title on "Natural Obligations." (1160a) Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. (1162a) Art. 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him.

Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases:

(1) If after the payment, the third person acquires the creditor's rights;

(2) If the creditor ratifies the payment to the third person;

(3) If by the creditor's conduct,

the debtor has been led to believe that the third person had authority to receive the payment. (1163a)

Art. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. (1164) Art. 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. (1165) Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than that which is due. Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. (n) Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration. (1167a) Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall govern. (1168a) Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments.

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter.



(1169a) Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170) Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. (n) Art. 1251. Payment shall be made in the place designated in the obligation.

There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted.

In any other case the place of payment shall be the domicile of the debtor.

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

These provisions are without prejudice to venue under the Rules of Court. (1171a)

SUBSECTION 1. - Application of Payments

Art. 1252. He who has various debts of the same kind in favor of one and the same creditor may declare at the time of making the payment to which of them the

same must be applied. Unless the parties so stipulate or when the application of payment is made by the party for whose benefit the term has been constituted application shall not be made as to debts which are not yet due. If the debtor accepts from the creditor a receipt in which an application of the payment is made the former cannot complain of the same unless there is a cause for invalidating the contract. (1172a) Art. 1253. If the debt produces interest payment of the principal shall not be deemed to have been made until the interests have been covered. (1173) Art. 1254. When the payment cannot be applied in accordance with the preceding rules or if application can not be inferred from other circumstances the debt which is most onerous to the debtor among those due shall be deemed to have been satisfied If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. (1174a)

SUBSECTION 2. - Payment by Cession

Art. 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall be governed by special laws. (1175a)

SUBSECTION 3. - Tender of Payment and

Consignation Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Consignation alone shall produce the same effect in the following cases:



(1) When the creditor is absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the payment at the time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more persons claim the same right to collect; (5) When the title of the obligation has been lost. (1176a) Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation. The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. (1177) Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases.

The consignation having been made, the interested parties shall also be notified thereof. (1178) Art. 1259. The expenses of consignation, when properly made, shall be charged against the creditor. (1178) Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation.

Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. (1180)

Art. 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released. (1181a)

SECTION 2. - Loss of the Thing Due

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) Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. (n) Art. 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. (n) 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) 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) 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) 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) Art. 1269. The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third persons by reason of the loss. (1186) Payment or Performance

Means delivery of money and the performance in any other manner, of an obligation

Also means non-performance Requisites of a Valid Payment

1. capacity of the person paying 2. capacity of the person receiving the

payment 3. delivery of the full amount or the full

performance of the prestation 4. propriety of the time, place and

manner of payment 5. acceptance of the payment by the

creditor

Indebtedness Deemed Paid - when full amount has been

delivered, or - service has been rendered - payment must be in full or the

performance be complete unless otherwise stipulated to extinguish the indebtedness or prestation

Substantial compliance

When in good faith has attempted to perform the contract or prestation, but failed to make a full and complete performance

Obligation deemed fully complied -when the oblige accepts performance, knowing its incompleteness or irregularity and without expressing any protest or objection

- based on the principle of estoppel

Persons from whom the creditor must accept payment

1. Debtor himself or his legal representative

2. Any person who has an interest in the obligation (like a guarantor)

3. A 3rd person who has no interest in the obligation when there is stipulation that he can make payment

o Person who pays the obligation should have the necessary legal capacity to effect such payment (Art. 1239)

Note: Creditor may refuse payment by 3rd person Effect of payment by 3rd person

Without knowledge or against the will – recovery is only up to the extent or the amount of the debt at the time of the payment; defense that may be availed only by the debtor

With knowledge – rights of reimbursement and subrogation

Subrogation – juridical act of putting somebody into the place of the creditor by virtue of which the former is enabled to exercise all the rights and actions pertaining to the creditor If third person does not intend to be reimbursed by the debtor, the presumption arises that such payment is a donation. Therefore, the debtor’s consent is necessary. If consent is not secured, rules stated in Arts. 1236 and 1237 shall apply but as far as the creditor who accepted it, payment is valid. Payor must have the free disposal of the thing paid. If not, payment is not valid. To Whom Payment Must Be Made

1. The person in whose favour the obligation has been constituted

2. His successor in interest 3. Any person authorized to receive it

– by law or by the creditor at the



time when payment is due and not when the obligation was constituted

Effect of payment to unauthorized persons in obligation to give: General Rule: Not valid, even though made in good faith. Payment made to the Incapacitated Creditor and Third Person Exception to the general rule that payment to unauthorized persons not valid though made in good faith:

Payment made to a third person, provided that it has redounded to the benefit of the creditor.

Benefit to the creditor is presumed in the

following cases: a. If after the payment, the third

person acquires the creditor’s rights (Subrogation)

b. If the creditor ratifies the payment to the third persons (Ratification)

c. If by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive the payment (Estoppel)

Payment to the possessor of the credit, made in good faith – will release the debtor In obligations to give, payment to incapacitated person is valid when:

a. The incapacitated has kept the amount or thing paid or delivered.

b. Payment has been beneficial to the incapacitated person (Art. 1241)

Panganiban v Cuevas (7 Phil 477)

Digested by: Marian Camille Chavez Facts: Salvador Panganiban owns a camarin, divided into 5 apartments, and a lot. On December 10, 1897, he sold and transferred it to Francisco Gonzales for P1,300. On the deed of sale, it was

stipulated that the vendor receives the right to repurchase it within 6 months. Failure to do so will make the vendee the absolute owner after the payment of an additional P200. On May 1898, Panganiban attempted to effect the repurchase; however, he was not able to do so as the revolution broke out. Eventually, the revolutionary government seized the property and re-sold it to Panganiban for the same price. Meanwhile, on August 13, 1900, Gonzales disposed the said property to Agustin Cuevas, for the same price and the same stipulation. Cuevas was given judicial possession of the property in an ex-parte proceedings, Panganiban being absent when the notice of ejectment was served. On October 12, 1900, Panganiban filed a complaint for recovery of the said property. Cuevas contended that: (1) both parties were bound by the terms of the contract, (2) no deposit has been made, (3) the fact that Panganiban was absent from the town, that the property was resold by the revolutionary government would not change the essence of the question. Issue: Was Panganiban able to successfully repurchase the property? Held: No, he was not able to. However, he may repurchase the property from Cuevas. The payment made by Panganiban to the revolutionary government of P1,300 pesos should have been paid to Gonzalez to redeem the property. The revolutionary government may have seized the property, but it did not acquire the title to it. Therefore, Article 1164 of the Civil Code, "a payment made in good faith to the person who is in possession of the credit shall release the debtor," is not applicable in this case. Ratio: The supreme court of Spain, in a judgment rendered on the 28th of February, 1896, said: "The payment of the debt in order to extinguish the obligation must be made to the person or persons in whose favor it was incurred or to his or their duly authorized agent. It follows, therefore, that



the payment made to a third person, even through error and in good faith, shall not release the debtor of the obligation to pay and will not deprive the creditor of his right to demand payment. If it becomes impossible to recover what was unduly paid, any loss resulting therefrom shall be borne by the deceived debtor, who is the only one responsible for his own acts unless there is a stipulation to the contrary or unless the creditor himself is responsible for the wrongful payment." Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt

- not valid - unless otherwise stipulated,

extrajudicial expenses required by the payment shall be for the account of the debtor (Art. 1247).

General rule: creditor shall be paid only what has been stipulated Dation in payment

- alieanation by the debtor of a particular property in favour of his creditor, with the latter’s consent, for the satisfaction of the former’s money obligation to the latter, with the effect of extinguishing the said money obligation

- form of novation - shall be govered by law of sales - elements of dation in payment

1) existence of a money obligation

2) alienation to the creditor of a property by the debtor with the consent of the former

3) satisfaction of the money obligation of the debtor

When obligation is to deliver an indetereminate or generic thing, the quality is not stated

- only the ordinary kind or category of said thing should be delivered

Extrajudicial expenses for payment – account of debtor Judicial cost – rules of court shall govern

Partial performance of obligation can be refused by creditor, unless there is an express agreement Rule in monetary obligations

1. Must be made in the currency stipulated; if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

2. Delivery of promissory notes payable to order or bills of exchange or other mercantile documents shall not produce the effect of payment except: a. When they have been cashed or

credited; or b. When through the fault of the

creditor they have been impaired.

Note: The impairment of the negotiable instrument through the fault of the creditor contemplated by Art. 1249 is applicable ONLY to a document executed by a THIRD PERSON and delivered by the debtor to the creditor and does not apply to instruments executed by debtor himself and delivered to the creditor. Legal Tender: Such currency which may be used for the payment of all debts, whether private or public. Legal tender in the Philippines would be all notes and coins issued by the Bangko Sentral Circular No. 537:

1. 1-Peso, 5-Peso and 10-Peso coins: in amounts not exceeding P1,000.00

2. 25 centavo coin or less: in amounts not exceeding P100.00

RA 8183 provides that all monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. The parties may agree that the obligation or transaction be settled in other currency at the time of payment.

CF Sharp v. Northwest (381 SCRA 314)

Digested by: Marian Camille Chavez



Facts: Northwest Airlines, through its Japan Branch, authorized C.F. Sharp and Co., Inc to sell its transport tickets by virtue of an International Passenger Sales Agency Agreement. For failure to remit the proceeds of the ticket sales, Northwest Airlines filed a collection suit against C.F. Sharp before the Tokyo District Court. On January 29, 1981, C.F. Sharp was ordered to pay ¥83, 158, 195 and damages for the delay at 6% per annum from August 28, 1980 (the filing of the complaint) until payment is completed.

Northwest Airlines sought to enforce the said decision with the Regional Trial Court of Manila. The case was dismissed, but on review, the petition was partly granted as C.F. Sharp was only relieved from the claims for attorney’s fees, litigation expenses, and exemplary damage.

The trial court then modified its order of a writ of execution as the payment had to be at the exchange rate prevailing on January 29, 1981, plus 6% per annum until May 19, 1983; and from said date until full payment, 12% per annum (6% by way of damages and 6% interest) until the satisfaction of the entire obligation.

On certiorari, the Court of Appeals found C.F. Sharp still liable to pay additional interest aside from the 6% interest, although such was lowered from 12% to 6% per annum. Also, it ruled that the amount’s peso equivalent should not be the rate on the date of the foreign judgment, but the prevailing rate at the time of payment.

Issue: Should the conversion rate of C.F. Sharp’s liability be the prevailing rate at the time of payment in its peso equivalent?

Held: Yes, it should be.

First, Art. 1250 of the Civil Code is not applicable in this case because it is only when there is an official declaration of the existence of an extraordinary inflation or deflation that the rule on the value of the currency during the establishment of the obligation as the basis of payment becomes applicable.

Second, R.A. 529 (An Act to Assure Uniform Value to Philippine Coin and Currency) provides that stipulations on the satisfaction of obligations in foreign currency are void. This does not provide for the rate of exchange for the payment of foreign currency obligations acquired after its enactment, but in a number of cases, the court held that the rate of exchange for the conversion in peso equivalent should be the prevailing rate at the time of payment.

Ratio: The repeal of R.A. No. 529 by R.A. No. 8183 has the effect of removing the prohibition on the stipulation of currency other than Philippine currency, such that obligations or transactions may now be paid in the currency agreed upon by the parties. Just like R.A. No. 529, however, the new law does not provide for the applicable rate of exchange for the conversion of foreign currency-incurred obligations in their peso equivalent. It follows, therefore, that the jurisprudence established in R.A. No. 529 regarding the rate of conversion remains applicable. Thus, in Asia World Recruitment, Inc. v. National Labor Relations Commission, the Court, applying R.A. No. 8183, sustained the ruling of the NLRC that obligations in foreign currency may be discharged in Philippine currency based on the prevailing rate at the time of payment. The wisdom on which the jurisprudence interpreting R.A. No. 529 is based equally holds true with R.A. No. 8183. Verily, it is just and fair to preserve the real value of the foreign exchange- incurred obligation to the date of its payment.

Extraordinary inflation or deflation Requisites:

1. There must be a decrease or increase in the purchasing power of the currency which is unusual or beyond the common fluctuation in the value of the currency;

2. Such decrease or increase could not have been reasonably foreseen or which was manifestly beyond the contemplation of the parties at the time the obligation was established.

Applies ONLY to contractual

obligations



There must be a declaration of such extraordinary inflation or deflation by the Bangko Sentral. Without such declaration, the creditors cannot demand an increase, and debtors a decrease, of what is due to or from them (Ramos v. CA, GR No. 119872, July 7, 1997 and Mobil Oil Phils. V. CA, GR No. 103072, August 20, 1993). Place of Payment

1. Place stipulated by the parties. 2. If there is no stipulation and the

obligation is to deliver a determinate thing, payment shall be made at the place where the thing might be at the time the obligation was constituted.

3. In any other case, the payment shall be made at the domicile of the debtor.

Note: If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. Art. 1251 governs unilateral obligations. Reciprocal obligations are governed by special rules. Application of Payment – Designation of the debt to which the payment must be applied when the debtor has several obligations of the same kind in favour of the same creditor.

Requisites:

1. There must be only one debtor and only one creditor;

2. There must be two or more debts of the same kind;

3. All the debts must be due except if there is stipulation to the contrary OR application of payment is made by the party for whose benefit the term has been constituted (Art. 1196 and Art. 1792); and

4. Amount paid by the debtor is insufficient to cover the total amount of all the debts.

- If the debt produces interests, payment of the principal shall not be deemed to have been made until the interests have been covered

- applies only in the absence of an agreement to the contrary

- merely directory and not mandatory

Magdalena Estates v Rodriguez (18 SCRA 967)

Digested by: James Aris Bordeos Facts: Antonio A. Rodriguez and Herminia C. Rodriguez, appellants, bought from Magdalena Estates, Inc., the appellee, a parcel of land in Quezon. The appellants had an unpaid balance of P5,000.00 for the purchase of the said parcel of land. In line with this, the appellants executed a promissory note. In the said instrument, the appellants jointly and severally promised to pay the appellee sum of FIVE THOUSAND PESOS, with interest at the rate of 9% per annum, within sixty (60) days from January 7, 1957. On the same day, the appellants executed with the Luzon Surety Co., Inc. a bond in the favour of the appellee

The obligation of the appellants became due and demandable on June 20, 1958. Pursuant to the bond executed, the Luzon Surety Co., Inc. paid to the appellee the sum of P5,000.00. However, the appellee subsequently demanded from the appellants the amount of P655.89, the alleged accumulated interests on the principal of P5,000.00. When the appellants refused to pay, the appellee started suit in the Municipal Court of Manila. It ruled in their favour. The appellants appealed to the Court of First Instance of Manila. It affirmed the lower court decision.

Issues:1. Was there a waiver or condonation on the interest due?

2. Was there novation?

Held: 1. No. Articles 1252 to 1254 of the Civil Code do not apply to a person whose obligation as a mere surety is both contingent and singular.

2. No. Novation by presumption has never been favored.

Ratio: "It is very clear in the promissory note that the principal obligation is the balance of



the purchase price of the parcel of land, which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc. undertook "to pay the amount of P5,000.00 representing balance of the purchase price of a parcel of land. . . ." The appellee did not protest nor object when it accepted the payment of P5,000.00 because it knew that that was the complete amount undertaken by the surety as appearing in the contract. The liability of a surety is not extended, by implication, beyond the terms of his contract. It is for the same reason that the appellee cannot apply a part of the P5,000.00 as payment for the accrued interest."

"Appellants are relying on Article 1253 of the Civil Code, but the rules contained in Articles 1252 to 1254 of the Civil Code apply to a person owing several debts of the same kind of a single creditor. They cannot be made applicable to a person whose obligation as a mere surety is both contingent and singular; his liability is confined to such obligation, and he is entitled to have all payments made applied exclusively to said application and to no other. Besides, Article 1253 of the Civil Code is merely directory, and not mandatory. We cannot now say that there was a waiver or condonation on the interest due."

2. "The rule is settled that novation by presumption has never been favored. To be sustained, it needs to be established that the old and new contracts are incompatible in all points, or that the will to novate appears by express agreement of the parties or in acts of similar import."

"An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by changing only the terms of payment and adding other obligations not incompatible with the old one, or wherein the old contract is merely supplemented by the new one. The mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no 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. In the instant case, the surety bond is not a new and separate contract but an accessory of the promissory note.

Rules on Application of Payment o Debtor has a choice;

indicated at the time of making the payment

o If the debtor does not apply, the creditor may designate which debt is paid by specifying in the receipt

o If the creditor did not apply or if application is void, debt which is the most onerous, is the one satisfied

o Debts due of the same nature, payment shall be applied proportionately

o Must conform to the general rules on payment (Arts 1232-1251)

Payment by Cession - special form of payment whereby the debtor assigns/abandons ALL of his property for the benefit of his creditors in order that from the proceeds thereof the latter may obtain payment of their credits.

Requisites:

1. Plurality of debts; 2. Partial or relative insolvency of

the debtor; and 3. Acceptance of the cession by

the creditors.

Kinds of Payment by Cession: 1. Contractual 2. Judicial (governed by

Insolvency Law) a. Voluntary b. Involuntary

Dation in Payment

Payment by Cession

One creditor Plurality of creditors

Debtor not necessarily in state of financial difficulty

Debtor must be partially or relatively insolvent

Thing delivered is considered as

Universality of property of debtor



equivalent of performance. Extinguishes obligation to the extent of the value of the thing delivered as agreed upon, proved or implied from the conduct of the creditor

is what is ceded. Merely releases debtor for net proceeds of things ceded or assigned, unless there is contrary intention

Does not involve all properties of debtor

Involves all the properties of the debtor

Creditor becomes owner of property of debtor

Creditor does not become the owner

Tender of Payment and Consignation

Tender of Payment: Manifestation of the debtor to the creditor of his decision to comply immediately with his obligation; preparatory act and extrajudicial in character.

Consignation: Deposit of the object of the obligation in a competent court in accordance with the rules prescribed by law, after refusal or inability of the creditor to accept the tender of payment; principal act and judicial in character.

Special Requisites of Consignation:

1. Existence of a valid debt which is due

2. Tender of payment by the debtor; creditor’s refusal without just cause to accept it

3. Previous notice of consignation to person interested in the fulfilment of the obligation, in order to give the creditor the opportunity to reconsider his unjustified refusal and to accept payment to avoid consignation and the subsequent litigation.

4. Consignation – amount due placed at the disposal of the court

5. Subsequent notice of consignation to enable the creditor to withdraw the goods or money deposited;

o It would be unjust to make the creditor suffer the risk of deterioration, depreciation or loss of such goods or money by reason of lack of knowledge of the consignation

Consignation must be first announced to the creditor – to give the creditor the opportunity to accept the tender of payment and avoid unnecessary litigation Tender of Payment – voluntary act of the debtor whereby he offers to the creditor for acceptance the immediate performance of the former’s obligation to the latter Consignation – act of depositing the object of the obligation with the court or competent authority after the creditor has unjustifiably refused to accept the same

- to avoid the performance of an obligation becoming more onerous to the debtor by reason of causes not imputable to him

Tender of payment is an antecedent of consignation; act preparatory to the consignation Instances where consignation shall produce the effects of payment without prior tender of payment:

1. Creditor is absent or unknown, or does not appear at the place of payment

2. Creditor is incapacitated to receive the payment at the time it is due

3. When without just cause, the creditor refuses to give a receipt

4. When two or more persons claim the right to collect

5. When the title of the obligation has been lost

Effects of consignation

1. If the creditor accepts the thing or amount deposited without contesting the validity or efficacy of the consignation, the obligation is cancelled/extinguished.

2. If the creditor contests the validity of the consignation or if



the creditor is not interested or unknown or is not absent, the result is a litigation. If during the trial, the plaintiff-debtor is able to establish that all the requisites of consignation has been complied with, the obligation is extinguished.

Torcuator v Bernabe

(459 SCRA 439) Digested by: Chantal Chua

Facts: Spouses Salvador bought a parcel of land in Ayala Alabang Village, Muntinlupa, Metro Manila. The sale is subject to the following conditions: “(a) that the lot-buyer shall deposit with Ayala Corporation a cash bond (about P17,000.00 for the Salvadors) which shall be refunded to him if he builds a residence thereon within two (2) years of purchase, otherwise the deposit shall be forfeited; (b) architectural plans for any improvement shall be approved by Ayala Corporation; and (c) no lot may be resold by the buyer unless a residential house has been constructed thereon (Ayala Corporation keeps the Torrens title in their (sic) possession.)" The Salvadors soon sold the parcel of land to the Bernabes. They also executed a special power of attorney authorizing the Bernabes to construct a residential house on the said land and to transfer the title of said property in their names. The Bernabes, however, contracted to sell the same parcel of land to the Torcuators. In view of the third condition of the Ayala Alabang, “the parties agreed to cause the sale between the Salvadors and the Bernabes cancelled, (in favor of (a) a new deed of sale from the Salvadors directly to the Torcuators; (b) a new Irrevocable Special Power of Attorney executed by the Salvadors to the Torcuators in order for the latter to build a house on the land in question; and (c) an Irrevocable Special Power of Attorney from the Salvadors to the Bernabes authorizing the latter to sell, transfer and convey, with power of substitution, the subject lot.” However, the deed of sale was never consummated nor was payment ever effected. Thus, “the Torcuators commenced the instant action against the Bernabes and Salvadors for Specific Performance or Rescission with Damages.”

Issue: Does sending of letter expressing intention to pay a valid tender of payment? Held: No. For there to be a valid payment, there must be an actual offer of the amount or actual delivery of the thing. Ratio: "Mere sending of a letter by the vendee expressing the intention to pay without the accompanying payment is not considered a valid tender of payment. Consignation of the amount due in court is essential in order to extinguish the obligation to pay and oblige the vendor to convey title. Even assuming that the agreement was a contract of sale, respondents may not be compelled to deliver the property and execute the deed of absolute sale. In cases such as the one before us, which involve the performance of an obligation and not merely the exercise of a privilege or right, payment may be effected not by mere tender alone but by both tender and consignation. Hence, absent a valid tender of payment and consignation, petitioners are deemed to have failed to discharge their obligation to pay." When consignation is properly made, creditor bears the expenses Effect of valid consignation – court will order the cancellation of obligation upon motion duly filed by the debtor Effect of improper consignation – obligation stays Effect of dismissal of the consignation case – attempted consignation will have not favourable effect upon the debtor Effect of withdrawal of thing or sum deposited after acceptance or judicial approval of consignation

a. Creditor loses every preference which he may have over the thing

b. Solidary co-debtors, guarantors and sureties are released

c. Solidary debtors are released only from their solidary liability but not from



their shares of their obligation

Section 2: Loss of the Thing Due Total loss of a determinate obligation to give (NCC 1262)- Obligation is extinguished if the thing is lost or destroyed without the fault of the debtor and before he has incurred in delay. Loss of the thing

- When it perishes or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered.

- According to Tolentino, it extends to causes which render impossible the performance of the prestation

If the debtor is at fault, the obligation to deliver the lost determinate thing is converted into an obligation to indemnify for damages. If the thing is generic, even if it is lost or destroyed, the obligation is not extinguished.

Republic vs. Grijaldo G.R. No. L-20240, December 31, 1965

Digested by: Bryan O’neal Cua Facts: Accused in this case, Jose Grijaldo, obtained 5 loans from the Bank of Taiwan in Bacolod city with the following amounts on the following dates on June 1, 1943, P600.00; on June 3, 1943, P159.11; on June 18, 1943, P22.86; on August 9, 1943, P300.00; on August 13, 1943, P200.00, with all of them not bearing any due dates. To secure the payment of the loans the appellant executed a chattel mortgage on the standing crops on his land, Lot No. 1494 known as Hacienda Campugas in Hinigiran, Negros Occidental. By virtue of vesting order P-4 dated 1-21-46 and under the “trading with the enemy act,” the US got the assets of the Bank of Taiwan Ltd., which was then given to the Philippines by the effect of the transfer agreement between the 2 countries dated 7-20-54. On 9-29-54, the Republic, as represented by the head of the Board of Liquidators made a written extrajudicial demand to Grijaldo for the payment of the 5 loans he took out with the aggregate amount of P889.64 and a 6% per annum interest of P2377.23 as of 12-31-59.

The lower court decided against Grijaldo and during the appeal to the SC he died. His heirs Manuel, Jacinto and Ruben all surnamed Lagtapon as well as Anita Aguilar were made to substitute in the proceedings, they contend the following: That the republic has no cause of action against Jose Grijaldo, that the action has already prescribed and that the court a quo erred in saying the appellant needed to pay P2377.23. Held: They also maintain that since the chattel mortgage was for the crops growing on the land, its destruction during the war extinguishes their obligation to pay such. SC said: The obligation of the appellant under the five promissory notes was not to deliver a determinate thing namely, the crops to be harvested from his land, or the value of the crops that would be harvested from his land. Rather, his obligation was to pay a generic thing - the amount of money representing the total sum of the five loans, with interest. The transaction between the appellant and the Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money. "By a contract of (simple) loan, one of the parties delivers to another ... money or other consumable thing upon the condition that the same amount of the same kind and quality shall be paid." (Article 1933, Civil Code) The obligation of the appellant under the five promissory notes evidencing the loans in questions is to pay the value thereof; that is, to deliver a sum of money - a clear case of an obligation to deliver, a generic thing. Article 1263 of the Civil Code provides: In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. The chattel mortgage on the crops growing on appellant's land simply stood as a security for the fulfillment of appellant's obligation covered by the five promissory notes, and the loss of the crops did not extinguish his obligation to pay, because the account could still be paid from other sources aside from the mortgaged crops. General rule: Loss of a determinate thing through fortuitous event shall extinguish the obligation. Exceptions:



1. Law provides otherwise 2. Stipulation 3. Nature of the obligation requires

assumption of risk 4. Obligation to deliver a specific thing

arises from a crime 5. Loss is partly due to the fault of the

debtor 6. Occurs after the debtor incurred in

delay 7. Debt proceeds from a criminal

offense 8. Liability of a bailee, depositary,

officious manager 9. Acceptance in bad faith of undue

payment 10. Obligor to deliver the same thing to

two or more persons with different interest

11. Obligation to deliver a generic thing Partial loss General rule: Partial loss does not extinguish the obligation. Exception: It is of great importance that is almost equivalent to a total loss or destruction. Rule if the thing is in debtor’s possession (NCC 1265) General rule: Presumption of fault of debtor, unless there is a proof to the contrary. Exception: Earthquake, flood, storm or other natural calamity. Impossibility of performance in obligation to do (NCC 1266)- When the obligation becomes legally or physically impossible without the fault of the debtor, obligor is released from the obligation. Natural Impossibility

Impossibility in Fact

Consist of the nature of the thing to be done and not the inability of the party to do so.

In the absence of the object’s inherent impossibility, improbable or out of the power of the obligor.

Contract is void Does not render the contract void.

Relative impossibility Doctrine of Unforeseen Events (NCC 1267)- When the service has become so difficult as

to be manifestly beyond the contemplation of the parties, the court should be authorized to release the obligor in whole or in part.

- The intention of the parties should govern and if it appears that the service turns out to be so difficult as to have been beyond their contemplation, it would be doing violence to the intention to hold the obligor still responsible.

- It is not a requirement under NCC 1267 that the contract be for future service with future unusual change.

Principle of Subjective Impossibility- When there is no physical or legal loss but the object of the obligation belongs to another, the performance by the debtor of the obligation undoubtedly becomes impossible. Failure of the performance is imputable to the debtor. Thus, the debtor must indemnify the creditor for the damages suffered by the latter (Tolentino). Loss on Reciprocal Obligations First view: If an obligation is extinguished by the loss of the thing or impossibility of performance through fortuitous events, the counter-prestation is also extinguished. The debtor is released from liability but he cannot demand the prestation which has been stipulated for his benefit. He who gives nothing has no reason to demand anything (Tolentino). Second view: The loss or impossibility of performance must be due to the fault of the debtor. In this case, the injured party may ask for rescission under NCC 1191 plus damages. If the loss or impossibility was due to a fortuitous event, the other party is still obliged to give the prestation due to the other (J.B.L. Reyes). Rule if obligation arises from criminal offense (NCC 1268) General rule: Debtor shall not be exempted from payment of the price whatever may be the cause for the loss. Exception: When the thing having been offered by the debtor to the person who should receive it, the latter refused without justification. Note: The offer referred in NCC 1268 (extinguishment of the obligation through



loss by fortuitous event) should not be confused with consignation (payment of the obligation). Section 3: Condonation or Remission of the Debt Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly.

One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. (1187) Art. 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.

If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the debt. (1188) Art. 1272. Whenever 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, unless the contrary is proved. (1189) Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force. (1190) Art. 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. (1191a)

Condonation or Remission of the Debt

- An act of liberality by virtue of which the oblige, without receiving any price or equivalent, renounces the enforcement of the obligation, as a result of which it is extinguished in its entirety or in that part of aspect of the same to which the remission refers.

- It is the gratuitous abandonment by the creditor of his right; a form of donation.

- Acceptance by the debtor is required because liberality of a person cannot be imposed upon another.

Requisites:

1. Gratuitous 2. Accepted by the obligor 3. Obligation is demandable 4. Parties have the legal capacity 5. Not inofficious 6. Must comply with the forms of

donation (NCC 748-749) Note: Whether express or implied, the extent of remission or condonation shall be governed by the rules regarding inofficious donation. Abandonment of a credit- If the debtor does not accept the remission but does not pay, and the creditor does not enforce the payment, the abandonment will result in the prescription of the credit. The debtor received the gain not by remission but by prescription. Note: Remission is never presumed, it must be established by clear, strong, and convincing evidence. Dismissal of complaint against one, in case of several debtors, has the effect of condonation to that person. Delivery of a private document- If the creditor voluntarily delivers the private document evidencing the credit to the debtor, there is a presumption that he renounces the right of action against the latter for the collection of the said credit (NCC 1271). When such private document



is found in possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved (NCC 1272). Note: Limited only to private documents (promissory note), and not to public documents evidencing credits because a Notary Public also has a copy of that.

Velasco vs. Masa G.R. No. L-3717 March 5, 1908 Digested by: Bryan O’neal Cua

Facts: On December 2, 1902, Felix Velasco filed a complaint to have Martin Masa pay the amount of P2,804 that the latter owed him with interest of 12% per annum from 7-1-1899 until such has been paid. Petitioner says that it was agreed upon by him and Masa that the said loan was to be paid on the same date of the following year and that such was put into a private instrument that was duly signed by the debtor. Now, Velasco claims that Masa taking advantage of the prevailing situation of the revolution in their area coerced and tricked Velasco’s wife into giving him possession of the said private instrument while he was in jail in Antique. He later filed his claim before the provost court for the robbery of the said document, but, as said court considered that it had no jurisdiction in the premises, the plaintiff presented an information to the Court of First Instance, a certified copy of whose decision is annexed; and that between the plaintiff and the defendant interest at the rate of 12 per cent had been agreed upon, which was to be added to the principal at the end of the year if the defendant was unable to pay the same. For his defense, Masa claims that such an instrument was not for the said amount but for only P1,000, also he says that the instrument bearing the agreement was voluntarily given to him by Velasco’s wife through a certain Luis Ocseña and that such was done as per the instructions of Felix himself. The Lower court rendered the decision favouring Masa, hence the current appeal. Issue: Given that the return of the Private Instrument bearing the agreement between the two parties was voluntary; does this extinguish the obligation to pay by the

debtor? Was the return of such an instrument voluntary in the first place? Held: Yes on both questions. The SC held that there was no showing that the possession of Masa of the disputed document was done through coercion and trickery, in fact the court finds no reason to discredit the testimony of the witnesses for the defense, and in the same light the arguments presented by the prosecution finds no support as to proof. As such the obligation to pay by Masa is thereby also extinguished. The Court goes further by stating relevant portions of the law: remission may be made either expressly or by implication. ART. 1188. The surrender, made voluntarily by a creditor to his debtor, of a private instrument proving a credit, implies the renunciation of the action which the former had against the latter. ART. 1189. Whenever the private instrument from which the debt appears should be in the possession of the debtor, it shall be presumed that the creditor delivered it of his own will, unless the contrary is proven. The doctrine established by the supreme court of Spain, when applying the above-mentioned articles of the Civil Code, confirms the rule laid down. Among others, the court in the decision of the 19th of October, 1897, states that -In order that the presumption juris tantum established by this article (1189) may be applicable, it is necessary as the preceding one (1188) provides, that the delivery of the private document proving the credit, made by the creditor to the debtor, be a voluntarily act of the former. The SC further states that: Article 1250 of the Civil Code provides: Presumptions established by law exempt those favored thereby from producing any further proof. And article 1251 of the same code reads: Presumptions established by law may be destroyed by proof to the contrary, except in the cases in which it is expressly prohibited. If the remission refers to the principal obligation, all the accessory obligations are extinguished. However, if remission refers



only to the accessory obligation, the principal obligation subsists (NCC 1273).

Section 4. - Confusion or Merger of Rights

Art. 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. (1192a) Art. 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation. (1193) Art. 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. (1194) CONFUSION

- The merger of the characters of the creditor and the debtor in one and the same person by virtue of which the obligation is extinguished.

- This is because the person becomes both a creditor and debtor to himself, and it is nonsensical for a person to push and pursue a claim against his own self.

Requisites:

1. Merger in the same person 2. Who is also the principal debtor and

creditor 3. Complete and definite meeting of all

qualities of creditor and debtor in the obligation or in the part affected by the merger

Effects of confusion/merger (NCC 1276-1277) Instance Extent of

Extinguishment Takes place in the person of either the principal creditor or debtor

Entire obligation

Subsidiary creditor No extinguishment

or subsidiary debtor (i.e. guarantor)

of principal obligation, only substitution of creditor or debtor

In one of the joint debtors

Principal obligation is extinguished up to the share which corresponds to him

In one of the solidary debtors

Entire obligation is extinguished. But the debtor in whom confusion took place may claim reimbursement from co-debtors for their corresponding shares.

Section 5. – Compensation

Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195) 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. (1196)

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. (1197) Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. (n) Art. 1282. The parties may agree upon the compensation of debts which are not yet due. (n) 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. (n) 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. (n) 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. (1198a) 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. (1199a) Art. 1287. Compensation shall not be proper when one of the debts arises from

a depositum or from the obligations 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. (1200a) Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense. (n) 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. (1201) 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. (1202a) COMPENSATION

- Mode of extinguishing in the concurrent amount of the obligation of those persons who are reciprocally debtors and creditors of each other.

Requisites:

1. Two parties are principal creditors and debtors of each other except in cases of a guarantor (NCC 1280)

2. Both debts must consist in some sum of money, or if the things due are fungibles (consumables), they must be of the same kind and quality

3. Both debts must be due, except if there is voluntary compensation (NCC 1282) or the parties have agreed to compensate even if not yet due (NCC 1280)

4. Both debts must be liquidated and demandable

5. No retention or controversy commenced by 3rd persons over either of the debts and



communicated in due time to the debtor

6. Must not be prohibited by law Kinds of obligations:

A. As to cause 1. Legal- by operation of law (NCC

1286/1289) 2. Conventional or Voluntary- the

parties are mutual debtors and creditors (NCC 1282)

3. Judicial- takes place by a judgment of the court when there is a counterclaim (NCC 1283)

4. Facultative- when it is claimed by one of the parties who has the right to object to it but waives his objection

B. As to effect 1. Total- debts to be compensated

are equal in amount 2. Partial- debts are not equal in

amount Compensation Confusion Two persons, who in their own right, are creditors and debtors of each other

Only one person in whom the qualities of debtor and creditor are merged

There must be at least two obligations

There is only one obligation

Compensation Payment Takes effect by operation of law

Takes effect by act of the parties

Capacity to give and acquire is not necessary

Capacity to give and act is essential

Permits partial extinguishment of obligation

Complete and indivisible extinguishment only

Compensation Counterclaim Two debts must consist in money or if fungibles, same kind and quality

Not necessary

Both debts must be liquidated

Not necessary

Need not be pleaded since it takes effect by operation of law

Must be pleaded to be effective

Rights of guarantor to set-up compensation (NCC 1280)- The guarantor, in case of payment of debt is demanded from him, may set up compensation, not only from what the creditor owes him, but also for what the creditor owes the principal debtor. Rules in case of rescissible or voidable debts (NCC 1284)- These may be compensated against each other before they are judicially rescinded or avoided. Effects of assignment of rights (NCC 1285): Consent/Knowledge of Debtor

Effects

With consent of debtor

Debtor cannot set-up compensation unless he reserved his right to compensation

With knowledge but without consent of debtor

Debtor may set-up compensation prior to the assignment but not subsequently ones

Without knowledge May set-up compensation of all credits which he may have against the assignor and which may have become demandable, before he was notified of the assignment

Reason: After compensation has taken place and one of the extinguished debts is assigned, the assignment is ineffective because there is nothing more to assign unless there is an excess, which, if there is consent from the debtor, constitutes subrogation of a third person in the rights of creditor. Debts which cannot be compensated (NCC 1286-1287):

1. Arising from contracts of depositum 2. Arising from contracts of

commodatum 3. Claims for support due by gratuitous

title



4. Arising from criminal offenses 5. Obligations in favour of the

government (e.g. taxes, fees, duties, etc.)

Facultative compensation- that which can be set up only at the option of the creditor when legal compensation cannot take place because of want of some legal requisites for the benefit of the creditor. The latter can renounce his right to oppose the compensation and he himself can set it up. It differs from conventional compensation because it is unilateral while the latter depends upon the agreement of both parties (Tolentino).

SECTION 6. – 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. (1203)

Art. 1292. In order that an obligation may be extinguished by another which substitute 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. (1204) 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. (1205a) 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 obligations shall not give rise to any liability on the part of the original debtor. (n) 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 the delegated his debt. (1206a) 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. (1207) 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. (n) 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. (1208a) 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. (n) 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. (1209a) Art. 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person. (n) 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. (1210a)

Art. 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. (1212a) 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. (1213) NOVATION

- It is the substitution or change of an obligation by another, resulting in its extinguishment or modification, either by changing its object or principal conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor.

- 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 (NCC 1291)

Requisites:

1. Previous valid obligation 2. Capacity of the contracting parties

to the new contract 3. Intent to novate (animus novandi) 4. Substantial difference between the

old and new obligation (especially for implied novation)

5. Validity of the new obligation Two-fold purpose:

1. Extinguish original obligation

2. Creation of a new obligation Kinds of novation:

A. As to its essence 1. Objective/Real- changing the

object or principal conditions 2. Subjective/Personal-

substitution of debtor or by subrogation of the rights of a creditor

3. Mixed- combination B. As to its form/constitution

1. Express- when it is declared in unequivocal terms that the old obligation is extinguished by a new one which substitutes the same

2. Implied- when the old and new are incompatible with each other on every point

C. As to their origin 1. Legal- by operation of law 2. Conventional- by agreement of

the parties D. As to the presence or absence of

condition 1. Pure- creation of a new

obligation is not subject to any condition

2. Conditional- subject to a condition

Note: Novation is never presumed, it must be clearly proved. Novation by presumption is not favoured. Test of incompatibility- Whether or not the old and new obligations can stand together, each having its own independent existence. If they can stand together, there is no incompatibility, hence, no novation. If they cannot stand together, there is incompatibility; consequently, there is novation. Changes that breed in incompatibility must be essential in nature and not merely incidental (NCC 1292). But if it is an express novation, formalities are required (i.e. that it be declared in unequivocal terms).

California Bus Line Inc v. State Investment House, Inc.

G.R. No. 147950. December 11, 2003 Digested by: Dino De Leon



Facts: There were two deals: (1) In 1979, Delta Motors Corporation applied for a loan from respondent State Investment House Inc. SIHI agreed, and Delta eventually owed SIHI P24,010,269.32, (2) Meanwhile, CBLI bought 35 buses from Delta and issued 16 promissory notes. CBLI defaulted, there was a need to restructure payment schemes. There was a new agreement (1st compromise) entered into: (1) daily remittance instead of monthly remittance, (2) In case of default of CBLI, Delta Motors will take over management and operation of CBLI, (3) Increased the interest rate and added a documentation fee and restructuring fee. CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to threaten CBLI with the enforcement of the management takeover clause. Court granted the petition on account of the fraudulent disposition of CBLI of its assets. Because CBLI defaulted on its payments, Delta also had difficulty paying SIHI. Eventually, Delta assigned 5 of the 15 promissory notes of CBLI to SIHI which had a total value of P16,152,819.80 inclusive of interest at 14% per annum. SIHI demanded CBLI to remit the payments due on the five promissory notes directly to it. Thereafter, Delta and CBLI entered into a compromise agreement (2nd Compromise) wherein CBLI agreed that Delta would exercise its right to extrajudicially foreclose on the chattel mortgages over the 35 bus units. Following this, CBLI vehemently refused to pay SIHI the value of the five promissory notes, contending that the 1st and 2nd compromise agreements were in full settlement of all its obligations to Delta including its obligations under the promissory notes. SIHI subsequently filed a case to collect the amount of the 5 promissory notes. Issues: (1) Did the 1st Compromise novate the five promissory notes Delta assigned to SIHI? (2) Did the 2nd compromise agreement supersede and/or discharge the subject five promissory notes? Held: No. Novation which may be effected either expressly or impliedly. Obviously, there’s no express novation: “In this case, the attendant facts do not make out a case of novation. The compromise Delta and CBLI executed,

shows that the parties did not expressly stipulate that the restructuring agreement novated the promissory notes” Is there implied novation? The test of incompatibility is whether the two obligations can stand together, each one having its independent existence. The incompatibility must take place in any of the essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be merely modificatory in nature and insufficient to extinguish the original obligation. “It is clear from the foregoing that the restructuring agreement, instead of containing provisions “absolutely incompatible” with the obligations of the judgment, expressly ratifies such obligations in paragraph 8 and contains provisions for satisfying them. There was no change in the object of the prior obligations. The restructuring agreement merely provided for a new schedule of payments and additional security giving Delta authority to take over the management and operations of CBLI in case CBLI fails to pay installments equivalent to 60 days. Where the parties to the new obligation expressly recognize the continuing existence and validity of the old one, there can be no novation” Having previously assigned the five promissory notes to SIHI, Delta had no more right to compromise the same. As a result of the assignment, Delta relinquished all its rights to the subject promissory notes in favor of SIHI. This had the effect of separating the five promissory notes from the 16 promissory notes. From that time, CBLI’s obligations to SIHI embodied in the five promissory notes became separate and distinct from CBLI’s obligations in eleven (11) other promissory notes that remained with Delta. So the 2nd agreement only settles CBLI’s obligations insofar as the 11 promissory notes are concerned. Moral: An agreement to extend payment schemes and add new obligations don’t necessarily novate the earlier obligations.



Novation of a criminal liability: - Novation may be allowed to avoid

criminal liability as long as it occurs prior to the filing of a criminal action.

- But it is not a ground prescribed by the Revised Penal Code for the extinguishment of a criminal liability.

Objective Novation (NCC 1291, par. 1)- According to Castan, objective novation is effected by:

1. Changing the cause 2. Changing the object 3. Changing the principal or essential

conditions Requisites of objective novation:

1. New obligation expressly declared that the old is extinguished, or

2. New obligation is on every point incompatible with the old one

Note: A change in the interest rate is merely collateral agreement between the creditor and principal debtor that did not affect the surety. The agreement to pay the additional interest was an additional burden upon the debtor only. It did not, in anyway, affect the original contract. Thus, despite the compounding of the interest, the liability of the surety remains only up to the original compounded interest. The grant of a 45-day credit extension does not novate the contract as it merely modifies the contract by extending the time for payment. The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old changes only the terms of the payment, adds other obligations not incompatible with the old ones or the new contract merely supplements the old contract. If a subsequent contract is designed to novate a previous contract and not all parties to the original contract consented to or are made parties in the subsequent contract, there can be no novation. Novation by substitution of debtors (NCC 1293)- A subjective/personal novation consists in the substitution of a new debtor in place of the original debtor.

Forms of novation by substitution of debtors:

1. Expromision- effected with the consent of the creditor at the instance of the new debtor even without the consent or even against the will of the old debtor (beneficial reimbursement) Requisites:

a. Initiative for substitution must emanate from the new debtor

b. Consent of the creditor to the substitution

c. Old debtor must be released from the obligation

2. Delegacion- effected with the

consent of the creditor at the instance of the old debtor (delegante), with the concurrence of the new debtor (delegado) (reimbursement and subrogation) Requisites: a. Initiative for substitution must

emanate from the old debtor b. Consent of the new debtor c. Acceptance by the creditor d. Old debtor must be released

from his obligation Rights of new debtor:

1. Expromision a. Substitution with the new

knowledge and consent of the original debtor and payment made by the new debtor with or without knowledge and consent of original debtor

i. Reimbursement from the original debtor of the entire amount paid

ii. Subrogation in all the rights of the creditor

b. Substitution without the knowledge and consent of the original debtor and payment is made by the new debtor without the knowledge and consent of the original debtor.



i. Reimbursement from the original debtor only insofar as the payment has been beneficial to such debtor

ii. No subrogation 2. Delegacion- Since substitution was

effected with the consent of all parties, the new debtor can demand reimbursement from the original debtor of the entire amount which he has paid as well as compel the creditor to subrogate him to all of his rights

Note: The mere fact that the creditor receives a guaranty or accepts payment from a 3rd person who agrees to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute novation, and the creditor can still enforce the obligation against the original debtor. If the older debtor is not released, there is no novation; the 3rd person becomes merely a co-debtor, surety or co-surety. Effect of insolvency or non-fulfillment by new debtor (NCC 1294-1295) 1. Expromision

a. Tolentino- it shall not revive the original debtor’s liability to the creditor whether the substitution is effected with or without the knowledge or against the will of the original debtor.

b. Jurado- if the substitution was effected with the knowledge and consent of the original debtor, it shall revive the original debtor’s liability to the creditor

2. Delegacion- the right of the creditor can no longer be revived except in the following cases:

a. Insolvency already existing and of the public knowledge at the time when the original debtor delegated his debt

b. Insolvency was already existing and known to the original debtor when he delegated his debt

Note: A change in the incidental elements of, or an addition of such elements to an

obligation, unless otherwise expressed by the parties, will not result in its extinguishment Effects of novation upon accessory obligations (NCC 1296)- When the principal obligation is extinguished in consequence of a novation, accessory obligation may subsist only insofar as they may benefit third persons who did not give consent. Effect if the new obligation is void (NCC 1297)- The original one shall subsist, unless the parties intended that the former relation is also extinguished in any event. Effect of invalidity of the old obligation (NCC 1298)- The novation is void if the original obligation was void, except:

1. When the annulment may be claimed only by the debtor

2. When the ratification validates the act which are voidable

NCC 1296 has no application to novation effected by subrogating a third person to the rights of the creditor. Such is regulated by NCC 1303-1304. Effects of condition in novation:

1. If the original obligation was subject to suspensive/resolutory condition, the new obligation shall be under the same condition, unless otherwise stipulated (NCC 1299)

2. If the old and new obligation are subject to different conditions:

a. If the conditions can stand together:

i. Both are fulfilled- new obligation becomes demandable

ii. Only the condition affecting the old obligation is fulfilled- old obligation is revived while the new loses its force

iii. Only the condition affecting the new obligation is fulfilled- there is no novation since the requisite of a



previous valid and effective obligation would be lacking

b. If the conditions are incompatible- the effect is to extinguish the old obligation so that the new obligation remains and whose demandability/effectivity depend upon the fulfilment/non-fulfillment of the condition affecting it

Novation by subrogation

- A personal novation effected by subrogating a 3rd person in the rights of the creditor

Forms of novation by subrogation:

1. Conventional- takes place by agreement of the original creditor, the third person substituting the original creditor, and the debtor (NCC 1301)

2. Legal- takes place by operation of law

Conventional Subrogation

Assignment of Rights

Governed by NCC 1300-1304

Governed by NCC 1624-1627

Debtor’s consent is required

Not required

Has the effect of extinguishing the obligation and giving rise to a new one

Has the effect of transmitting the rights of the creditor to another person without modifying/extinguishing the obligation

Defects/vices in the old obligation are cured

Not cured

Effects arises from the moment of novation/subrogation

As far as the debtor is concerned, arises from the moment of notification

Legal subrogation (NCC 1302) General rule: Not presumed Exceptions:

1. When a creditor pays another creditor who is preferred, without 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 fulfilment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share

Effects of subrogation (NCC 1303-1304)

1. Total subrogation- transfer to the person subrogated the credit with all the rights the original creditor has against the debtor or 3rd persons

a. Accessory obligations are not extinguished; the person subrogated acquires all the rights the original creditor had against third person and the rule is absolute with respect to legal subrogation. In conventional subrogation, accessory obligations may be increased or reduced upon the agreement of the parties

2. Partial subrogation- A creditor, to whom partial payment has been made, may exercise his right for the remained, and he shall be preferred to the person who has been subrogated in his place.

TITLE II – CONTRACTS

CHAPTER 1

GENERAL PROVISIONS 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) 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)

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)

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)

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)

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)

Art. 1313. Creditors are protected in cases of contracts intended to defraud them. (n)

Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. (n)

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. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the object of the obligation. (n)

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)

I. Meaning A. The definition given by the article is

inaccurate. (1) a contract cannot be confined to only two persons because a party to a contract may be more than two, as when there are five sellers and five buyers; (2) the definition only partakes of one of the parties performing an obligation in a contract, but there are contracts requiring the fulfillment of reciprocal obligations, such as contracts of sale; (3) the definition only pertains to the object of a contract as “to give” and “to do”, it failed to include a negative prestation which is “not to do”.

B. The suggested definition – a contract is a meeting of the minds between two or more parties, where one party binds himself with respect to the other, or where both binds themselves reciprocally in favor of one another, to fulfill a prestation to give, to do, or not to do.

II. Stages in Making a Contract



A. There are 3 stages in a contract: a. Conception or Generation –

this is where the parties being their initial negotiation for the formation of a contract

b. Perfection or Birth – here is where the meeting of the minds of the parties occur, with respect to the object, cause or consideration and other terms and conditions of the contract

c. Consummation or Fulfillment – this is the last stage, where the parties perform their obligations under the perfected contract, which has the effect of terminating the contract

III. Classification of Contracts A. According to their names

a. Nominate – a contract given a particular name or denomination by law

b. Innominate – not given a particular name and not regulated by special provisions of law; discussed fully under Art. 1307

B. According to their subject matter a. Contracts covering things –

contracts like sale, pledge, deposit

b. Contracts covering services – contract such as that of carriage, agency, deposit

c. Contracts covering transmissible rights or credits – contracts such as usufruct and assignment of credit

C. According to their formation or perfection

a. Consensual – perfected by mere consent

b. Real – contracts which require delivery to be perfected

c. Formal – contracts which require compliance with formalities required by law to be perfected

D. According to their cause

a. Onerous – contracts providing exchange of valuable considerations

b. Gratuitous–contracts where one receives something without giving any equivalent of compensation

c. Remunerative – where one party gives something in consideration of a previous or past deed.

E. According to the viniculum produced of the party or parties obligated

a. Unilateral – only one party is bound to fulfill an obligation

b. Bilateral – both parties have bound themselves reciprocally

F. According to the certainty of fulfillment

a. Commutative – contracts where the parties contemplate the assured fulfillment of the terms and conditions of the contract

b. Aleatory – fulfillment of the contracts depends on the happening of an event, which may or may not come.

G. According to completion of performance

a. Executed – those already completed when entered into

b. Executor – the prestations promised by the parties are yet to be fulfilled at some future time

H. According to the dependence of one contract to another

a. Principal – those that can exist themselves alone

b. Accessory – those which cannot exist without a principal contract

c. Preparatory – those entered into for the creation of another contract

I. According to the number of persons actually participating in the contract

a. Ordinary – those where two or more parties are represented by different persons



b. Auto-contracts – those where two opposite parties are represented by one and the same person

J. According to the dignity accorded by law

a. Institutional – those contracts given special dignity by law

b. Ordinary – those which are not institutional

K. According to the freedom of bargain a. Ordinary – where both

parties are placed on equal footing in negotiating

b. Contracts of adhesion – where a contract has already been drafted already by one of the parties and the other is left with only the choice whether to accept or not to accept

L. According to the evidence need to prove their existence

a. Contracts covered by the Statute of Frauds – those which are required to be written

b. Contracts which can be proved by oral or parol evidence – those contracts such as a lease for a period of less than one year, or of a sale where there was already full or partial payment

M. According to the personalities of the parties

a. Personal – those contracts where the person of the parties is essential

b. Impersonal – those contracts where the person of the parties are not essential

N. According to the manner the consent is given

a. Express – where the consent of the parties are expressly given in writing or verbally

b. Implied – opposite of express; deducible from the acts of the parties

c. Presumed – contracts where consent was not

given by the parties but are presumed by law

IV. Basic Legal Principles

Governing Contracts Freedom to stipulate – this will be

explained thoroughly in Art. 1306 Obligatory force of contracts –

obligations arising from contracts have the force of law between the parties and should be complied with in good faith

Mutuality of contracts – this will be explained thoroughly in Art. 1308

Relativity of contracts – this will be explained thoroughly in Art. 1311

Perfection by mere consent of contracts –this will be explained thoroughly in Art. 1315

Principle of Free Stipulation – parties have the right to negotiate and agree on any stipulations, clauses, terms and conditions as they deem convenient; this right is both statutory and constitutional Limitations on the Principle of Free Stipulation – stipulations established by the parties must not be contrary to: 1) law; 2) morals; 3) good customs; 4) public order; 5) public policy. Innominate contracts are those not given any names or designations.

Under the Roman law, innominate contracts are given the classification as follows: 1) Do ut des (I give that you may give); 2) Do utfacio(I give that you may do); 3) Faciout des (I do that you may give); 4) Facioutfacias(I do that you may do). Innominate contracts are governed by the following: 1) Stipulations of the parties;2) Provisions of Title 1 (Obligations) and Title II (Contracts) of the Civil Code;3) Rules governing the most analogous nominate contracts;4) Customs of the place Principle of Mutuality of Contracts–The contract binds both the contracting parties. This I based on the essential equality of the parties.



UCPB v. Spouses Beluso G.R. No. 159912, August 17, 2007

Digested by: Dino De Leon Facts: The UCPB granted the spouses Beluso a Promissory Note Line under a Credit Agreement. The spouses Beluso constituted other than their promissory notes, a real estate mortgage over parcels of land as additional security for the obligation. In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to 34%. The spouses, however, failed to make any payment of their obligations with the bank. Spouses Beluso filed a petition for the annulment, accounting and damages against UCPB. Issue: Is UCPB authorized to unilaterally fix the interest rates? Held:No. A promissory note which grants the creditor the power to unilaterally fix the interest rate means that the promissory note does not contain a clear statement in writing of the finance charge. Such provision is illegal not only because it violates the provisions of the Civil Code on mutuality of contracts but also because it violates the Truth in Lending Law. Ratio: Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. “We applied this provision in Philippine National Bank v. Court of Appeals, where we held: In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and

void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.” Rule on Validity or Compliance – The validity or compliance with the contract cannot be left to the will of one of the contracting parties. Contract cannot have any stipulation authorizing one of the contracting parties: 1) to determine whether the contract shall be valid; 2) to determine whether the contract shall be fulfilled. 3rd person may, however, be authorized to determine the performance or fulfillment of the contract (Art. 1309), but not of its validity. When the contract expressly provides that one of the contracting parties is authorized to cancel the same and the party given this right subsequently cancelled the contract, the agreement is just being fulfilled, and the mutuality of the contract is not violated. Performance here pertains to the fulfillment of the obligation and not the execution of the contract, in the latter, only the contracting parties may have direct participation. This is also the same when the parties opt to submit themselves to arbitration, with respect to differences in the performance of the contract, which is valid.

Principle of Relativity of Contracts – contracts are only binding only upon the parties, their assigns, or heirs (P-A-H) What is involved here are only transmissible rights Test whether a right is transmissible is “whether acts stipulated in a contract require the exercise of special knowledge, genius,



skill, taste, ability, experience, judgment, discretion, integrity, or other personal qualification of one or both parties the agreement is of a personal nature, and terminates on the death of the party who is required to render such service.” EXCEPTIONS: 1) Parties only (by stipulation); 2) Affects/ involves/ binds third persons

Second exception is further subdivided into: (D-A-R-D-I)

Stipulation Pour Autrui (Art. 1311); Requisites are (S-I-P-A-C) Stipulation Incidental NOT! Part Agent NOT! Conferred clearly Induces a person to violate a creditor (Art. 1314); Also referred to as “interference in contractual relations” – requisites are (M-I-K-E-V)

I. Malice II. Interference III. Knowledge IV. Existence of contract V. Valid

Everett Steamship Corporation vs. CA G.R. No.122494, October 8, 1998

Digested by: Jan Emmanuel del Castillo Facts: Respondent Hernandez Trading Co. Inc. imported from Maruman Trading Company, Ltd., its supplier based Inazawa, Aichi, Japan, 3 crates consisting of bus spare parts. These crates were shipped to Manila on board the vessel ADELFAEVERETTE owned by Everett Orient Lines. On arrival at Manila, one of the crates was declared to be missing. Respondent Hernandez Trading then asked Petitioner Everett Co. to pay for the value of the lost cargo amounting to Y1, 552,500.00 (yen), as shown in the Invoice No. MTM-941. Everett Co. refused to pay the whole amount and instead offered to pay the amount stipulated under Clause 18 of the bill of lading which is limited only to Y100,000.00 (yen) as payment for the

liability of petitioner. Private respondent Hernandez Trading rejected the offer. Private Respondent Hernandez Trading then filed a case for collection of the amount lost. The trial court rendered a decision in favour of the private respondents and this was affirmed by the Court of Appeals. Thus, this instant petition. Issues: Is the petitioner liable for the actual value and not the maximum value recoverable under the bill of lading? Is private respondent, as consignee, who is not a signatory to the bill of lading bound by the stipulations thereof? Held:

1. YES. The Petitioner is only liable for the maximum value recoverable under the bill of lading.

2. YES. Private Respondents are still bound by the stipulations of the bill of lading The decision of the Court of Appeals is hereby REVERSED and SET ASIDE.In fine, the liability of petitioner for the loss of the cargo is limited to One Hundred Thousand (Y100,000.00) Yen, pursuant to Clause 18 of the bill of lading.. Ratio: 1. Clause 18 of the covering bill of lading: 18. All claims for which the carrier may be liable shall be adjusted and settled on the basis of the shipper's net invoice cost plus freight and insurance premiums, if paid, and in no event shall the carrier be liable for any loss of possible profits or any consequential loss. The carrier shall not be liable for any loss of or any damage to or in any connection with, goods in an amount exceeding One Hundred thousand Yen in Japanese Currency (Y100,000.00) or its equivalent in any other currency per package or customary freight unit (whichever is least) unless the value of the goods higher than this amount is declared in writing by the shipper before receipt of the goods by the carrier and inserted in the Bill of Lading and extra freight is paid as required. (Emphasis supplied)



Pertinent provisions that is applicable as to this case: Art. 1749. A stipulation that the common carrier's liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding. Art. 1750. A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods is valid, if it is reasonable and just under the circumstances, and has been freely and fairly agreed upon. Pursuant to the afore-quoted provisions of law, it is required that the stipulation limiting the common carrier's liability for loss must be "reasonable and just under the circumstances, and has been freely and fairly agreed upon." The above stipulations are reasonable and just. In the bill of lading, the carrier made it clear that its liability would only be up to One Hundred Thousand (Y100,000.00) Yen. However, the shipper, Maruman Trading, had the option to declare a higher valuation if the value of its cargo was higher than the limited liability of the carrier. Considering that the shipper did not declare a higher valuation, it had itself to blame for not complying with the stipulations. 2. In Sea-Land Service, Inc. vs. Intermediate Appellate Court (supra), it was held that even if the consignee was not a signatory to the contract of carriage between the shipper and the carrier, the consignee can still be bound by the contract.

Kauffman vs. PNB

42 Phil 182 September 29, 1921 Digested by: Jan Emmanuel del Castillo

Facts: George A. Kauffman, was the president of Philippine Fiber and Produce Company engaged in the exportation of hemp from the Philippines. He was also holding majority of the capital stock. Kauffman was based in New York and was entitled to receive dividends. He then instructed Wicks, the treasurer of the

company, to go to the exchange department of PNB where he requested a telegraphic transfer of the money to Kauffman. PNB agreed with such request and asked for additional charges for the transaction. Wicks then issued a check to PNB and when accepted, informed their representative in New York. The representative of then sent a message suggesting the possibility of withholding Kauffman’s money in view of his reluctance to accept certain bills of the company. PNB then agreed with this and sent another message to its agency in New York to withhold the payment as suggested. In the meantime, Wicks notified Kauffman that the money has been wired to his account so upon arrival, however, he was refused to receive the payment. Hence, petition. Issue: Whether or not Kauffman has a right of action against PNB? Held: YES. It is a stipulation pour autrui . Ratio: Should the contract contain any stipulation in favor of a third person, he may demand its fulfilment, provided he has given notice of his acceptance to the person bound before the stipulation has been revoked. (Art. 1257, par. 2, Civ. Code.) In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action is clear enough; for it is undeniable that the bank's promise to cause a definite sum of money to be paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the paragraph above quoted; and the circumstances under which that promise was given disclose an evident intention on the part of the contracting parties that the plaintiff should have the money upon demand in NYC. The recognition of this unqualified right in the plaintiff to receive the money implies in our opinion the right in him to maintain an action to recover it. It will be noted that under the paragraph cited a third person seeking to enforce compliance with a stipulation in his favor must signify his acceptance before it has been revoked. In this case the plaintiff clearly signified his acceptance to the bank by demanding payment; and although PNB



had already directed its NY agency to withhold payment when this demand was made, the rights of the plaintiff cannot be considered to as there used, must be understood to imply revocation by the mutual consent of the contracting parties, or at least by direction of the party purchasing he exchange. Legniti vs. Mechanics, etc. Bank (130 N.E. Rep., 597), decided by CA of NYC on March 1, 1921, it was held that, by selling a cable transfer of funds on a foreign country in ordinary course, a bank incurs a simple contractual obligation, and cannot be considered as holding the money which was paid for the transfer in the character of a specific trust. Thus, it was said, "Cable transfers, therefore, mean a method of transmitting money by cable wherein the seller engages that he has the balance at the point on which the payment is ordered and that on receipt of the cable directing the transfer his correspondent at such point will make payment to the beneficiary described in the cable. All these transactions are matters of purchase and sale create no trust relationship."

ASSOCIATED BANK vs. COURT OF APPEALS and LORENZO SARMIENTO .

G.R. No. 123793 June 29, 1998 Digested by: Jose Joven Paulo Espinosa

Facts: Associated Banking Corporation and Citizens Bank and Trust Company merged to form just one banking corporation known as Associated Citizens Bank, the surviving bank. On or about March 10, 1981, the Associated Citizens Bank changed its corporate name to Associated Bank by virtue of the Amended Articles of Incorporation. On September 7, 1977, the Sarmiento executed in favor of Associated Bank a promissory note whereby the former undertook to pay the latter the sum of P2,500,000.00 payable on or before March 6, 1978. As per said promissory note, the defendant agreed to pay interest at 14% per annum, 3% per annum in the form of liquidated damages, compounded interests, and attorney's fees, in case of litigation equivalent to 10% of the amount due. The

defendant, to date, still owes plaintiff bank the amount of P2,250,000.00 exclusive of interest and other charges. Despite repeated demands the defendant failed to pay the amount due. In his defense Sarmiento is saying, the promissory note was executed in favor of Citizens Bank and Trust Company. The Court of Appeals held that the Associated Bank had no cause of action against Lorenzo Sarmiento Jr., since said bank was not privy to the promissory note executed by Sarmiento in favor of Citizens Bank and Trust Company (CBTC). The court ruled that the earlier merger between the two banks could not have vested Associated Bank with any interest arising from the promissory note executed in favor of CBTC after such merger. Issues:

1. In a merger, does the surviving corporation have a right to enforce a contract entered into by the absorbed company subsequent to the date of the merger agreement, but prior to the issuance of a certificate of merger by the Securities and Exchange Commission?

2. Is the promissory note a contract pouratrui? Held: 1. The fact that the promissory note was executed after the effectivity date of the merger does not militate against petitioner. The agreement itself clearly provides that all contracts — irrespective of the date of execution — entered into in the name of CBTC shall be understood as pertaining to the surviving bank, herein petitioner. Since, in contrast to the earlier aforequoted provision, the latter clause no longer specifically refers only to contracts existing at the time of the merger, no distinction should be made. The clause must have been deliberately included in the agreement in order to protect the interests of the combining banks; specifically, to avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a due obligation. Thus, although the subject promissory note names CBTC as the payee, the reference to CBTC in the note shall be construed, under the very provisions of the merger agreement, as a reference to petitioner bank, "as if such reference [was a]



direct reference to" the latter "for all intents and purposes." Stipulation Pour Autrui is one in favor of a third person who may demand its fulfillment, provided he communicated his acceptance to the obligor before its revocation. An incidental benefit or interest, which another person gains, is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. The following are requisites for such contract: (1) the stipulation in favor of a third person must be a part of the contract, and not the contract itself; (2) the favorable stipulation should not be conditioned or compensated by any kind of obligation; and (3) neither of the contracting parties bears the legal representation or authorization of the third party. The "fairest test" in determining whether the third person's interest in a contract is a stipulation pourautrui or merely an incidental interest is to examine the intention of the parties as disclosed by their contract. The promissory note had no stipulation at all that would even resemble a provision in consideration of a third person. The instrument itself does not disclose the purpose of the loan contract. It merely lays down the terms of payment and the penalties incurred for failure to pay upon maturity. It is patently devoid of any indication that a benefit or interest was thereby created in favor of a person other than the contracting parties. Article 1312 is one of the exceptions to the general rule of Relativity Concept of Real Right – one which binds the property over which it is created or exercised Examples are mortgage constituted on a titled property and duly registered, lease of a parcel of land for more than one year which is also duly registered.

Real rights, if recorded, are binding against third persons even if they did not participate in the said contracts. Article 1313 is also an exception to the principle of relativity. When a debtor is found to have alienated his property to defraud his creditors, his creditors may file an action for rescission of the said contracts.

o Action is known as “accion pauliana”

Such acts of a debtor may constitute a crime punished under the Revised Penal Code, namely, Fraudulent Insolvency. Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. (n) Article 1314 is also one of the exceptions to the principle of relativity, referred to as, “interference with contractual relations” Third party who caused the interference may be liable for damages, but only to the same extent as to the liability of the person he induced. Both inducer and the party induced are solidarily liable to the injured party. Malice is an essential requisite to hold the intermeddler liable. The requisites for interference with contractual relations are (M-I-K-E-V) as stated above. Article 1315 refers to consensual contracts which are perfected by mere consent of the parties – this signifies that there has already been a meeting of the minds between the parties with respect to the terms and conditions agreed upon. A contract is the law between the parties, as such, parties are bound by its stipulations, the parties would then be responsible for all the consequences of the contract, and since it has been perfected, it cannot simply be disregarded.



Article 1316 refers to the perfection of real contracts, which has the same requisites as that of a consensual contract, only, it is necessary for the object of the obligation to be delivered in order for the contract to be perfected. The enumeration in the article is not complete as it failed to include – contract of carriage and loans or mutuum – which are also real contracts, and therefore require delivery in order to be perfected. Delivery is required in order for the other party to exercise his duties under the contract. In order for a person to contract in the name of another, such person must comply with any of the following: 1) authority to contract in the name of another; or 2) has the right or duty to represent another. Non-compliance renders the contract entered into as unenforceable. Can be ratified expressly or impliedly by the person being represented. Ratification validates the contracts – contract is no longer defective – from the moment it was constituted. Ratification may only be done before the contract is revoked. Person who contracted without authority would be liable to the person he contracted with, representing another.

CHAPTER 2 ESSENTIAL REQUISITES

GENERAL PROVISIONS Art. 1318. There is no contract unless the following requisites concur: • (1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract; �(3) Cause of the obligation which is established. (1261)

• SECTION 1. - Consent

Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (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. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. (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)

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

• (1) Unemancipated minors; (2) Insane or demented persons, and deaf-



mutes who do not know how to write. (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) Art. 1329. The incapacity declared in Article 1327 is subject to the modifications determined by law, and is understood to be without prejudice to special disqualifications established in the laws. (1264)

Art. 1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. (1265a)

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. (1266a)

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

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

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

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

force is employed.

There is intimidation when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to give his consent.

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

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)

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)

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)

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)

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)

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

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

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)

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)

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)

SECTION 2. - Object of Contracts 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)

Art. 1348. Impossible things or services cannot be the object of contracts. (1272)

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)

SECTION 3. - 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) Art. 1351. The particular motives of the parties in entering into a contract are different from the cause thereof. (n)

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)

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)

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. 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)

Article 1318 applies only to consensual contractswhich require only the three elements namely:

A. Consent



B. Object C. Cause

C. W. ROSENSTOCK, as administrator of

the estate of H. W. ELSER v.,EDWIN BURKE.

G.R. No. 20732 Digested by: Jose Joven Paulo Espinosa

Facts: The defendant Edwin Burke owned a motor yacht, known as Bronzewing. H. W. Elser, at the beginning of the year 1922, began negotiations with the defendant for the purchase thereof. The plaintiff proposed to the defendant to make a voyage on board the yacht to make an advantageous sale. But as the yacht needed some repairs to make it seaworthy for this voyage, and as, on the other hand, the defendant said that he had no funds to make said repairs, the plaintiff paid almost all their amount. It has been stipulated that the plaintiff was not to pay anything for the use of the yacht. The cost of those repairs was P6,972.21, which was already paid by the plaintiff, plus P1,730.84 due to the Cooper Company which still remains unpaid, plus P832.93, due to the plaintiff, which also remains unpaid. The plaintiff never accepted the offer of the defendant for the purchase of the yacht contained in the letter of option of February 12, 1922. The defendant, after an interview with Mr. Avery held on the same day, answered the plaintiff that he had arrived at an agreement with Mr. Avery about the sale of the yacht to the plaintiff for P80,000 payable as follows: P5,000 each month during the first six months and P10,000 thereafter until full payment of the price, the yacht to be mortgaged to secure payment thereof. On the 5th of the same month of April the plaintiff sent the defendant another letter, telling him that in view of the attitude of Mr. Avery as to the loan of P20,000 in connection with the installation of a new engine in the yacht, it was impossible for him to take charge of the boat and he made delivery thereof to the defendant. On the 8th of the same month of April the defendant answered the plaintiff that as he had accepted, with the consent of the Asia Banking Corporation, through Mr. Avery, the

offer for the purchase of the yacht made by the plaintiff in his letter of the 3d of April, he made demand on him for the performance thereof. The plaintiff brings this action against the defendant to recover the sum of P6,139.28, the value of the repairs made on the yacht which he had paid for. The Cooper Company was admitted to intervene in this action and claims in turn its credit of P1,730.84 for the repairs made on the yacht, the amount of which has not as yet been paid. Issue: Whether or not it is a contract of sale valid and binding against the plaintiff? Held: NO, Our conclusion is that the letter of the plaintiff of April 3, 1922, was not a definite offer and that the plaintiff is bound to pay the amount of the repairs of the yacht in exchange for the use thereof. Ratio: As was seen, this letter begins as follows: "In connection with the yacht Bronzewing, I am in position and am willing to entertain the purchase of it under the following terms . . . ." The whole question is reduced to determining what the intention of the plaintiff was in using that language. The word "entertain" applied to an act does not mean the resolution to perform said act, but simply a position to deliberate for deciding to perform or not to perform said act.Taking into account only the literal and technical meaning of the word "entertain," it seems to us clear that the letter of the plaintiff cannot be interpreted as a definite offer to purchase the yacht, but simply a position to deliberate whether or not he would purchase the yacht. It was but a mere invitation to a proposal being made to him, which might be accepted by him or not. The only thing the plaintiff wanted in connection with this yacht was that the defendant should procure its sale, naturally with some profit for himself. The appeal of the defendant raises the question as to who must pay the repairs made on the yacht. But it having been the plaintiff who ordered and made these repairs, and in view of the fact that he was not obliged to pay anything for the use of the yacht. It seems strange that the defendant should accept liability for the amount of



these repairs, leaving their extent entirely to the discretion of the plaintiff.

Batañgan v. Cojuangco GR No.: L-224 May 31, 1974

Digested by: Ken Gador

Facts: Cojuangco bought the property of Batañgan and she is willing to resell it to Batañgan for the same amount in which it was purchased at the auction sale, that is, for P1,508.28, provided that it be on cash. Subsequently, Batañgan lawyer sent Cojuangco a letter with three postal money orders for P800, stating that he was remitting that amount in behalf of his client. Cojuangco rejected the amount given by Batañgan’s lawyer. She said that she had not had any agreement. Batañgan’s lawyer then sent to Cojuangco’s lawyer the same money orders, but it was also rejected. Issue: Is there a concurrence of the minds of the parties on the object and cause, which will constitute a contract? Held: No. There is a difference between the amount agreed by the parties and the amount actually paid. If there is a reduction of the price agreed upon, the offeror must first assent to the modification. In this case Rationale: The substantial variance between the amount in the offer and the amount tendered not only made the purported acceptance inoperative but "put an end to the negotiations without forming a contract unless the party making the offer agreed to the suggested modification." (17 C.J.S., 383.) Otherwise, as the trial judge aptly observed, "promisors would be tied to their promises indefinitely and would not be able to dispose of the property involved" in the promise or offer. In addition, the promisor would be placed in a position where he would always lose without anything to gain. The promisee could wait until judgment is rendered and accepted the offer of compromise if the judgment happened to be more onerous to him.

Laudico v. Arias

GR No. 16530 March 31, 1922 Digested by: Ken Gador

Facts: Arias on his behalf and of his co-owners wrote a letter to Laudico offering to lease their building to Arias. Subsequently, Laudico sent a letter to Arias stating that he accepts the offer. One of the agreements agreed upon by the parties is that Arias can withdraw the offer any time before the acceptance. The moment that Laudico sent the acceptance letter, Arias’ already sent his letter of withdrawal. When Arias sent the letter of withdrawal, he had not yet received the letter of acceptance. Issue: Whether or not the contract of lease was perfected? Held: No, Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. Rationale: Under article 1262, paragraph 2, of the Civil Code, an acceptance by letter does not have any effect until it comes to the knowledge of the offerer. Therefore, before he learns of the acceptance, the latter is not yet bound by it and can still withdraw the offer. Consequently, when Mr. Arias wrote Mr. Laudico, withdrawing the offer, he had the right to do so, inasmuch as he had not yet receive notice of the acceptance. And when the notice of the acceptance was received by Mr. Arias, it no longer had any effect, as the offer was not then in existence, the same having already been withdrawn. There was no meeting of the minds, through offer and acceptance, which is the essence of the contract. While there was an offer, there was no acceptance, and when the latter was made and could have a binding effect, the offer was then lacking. Though both the offer and the acceptance existed, they did not meet to give birth to a contract.

II. Consent (Art. 1319) A. Offer a. Offeror can control offer

Place, Manner, Time of acceptance (Art. 1321)

b. Offer through agent is valid (Art. 1322)



c. Death, Civil Interdiction, Insanity, Insolvency (DCII) renders offer ineffective (Art. 1323)

d. Withdrawal of offer (Art. 1324)

Sanchez v. Rigos No. L-25494, June 14, 1972

Digested by: Aleli Guinto Facts: Nicolas Sanchez and SeverinaRigos executed an instrument entitled “Option to Purchase” wherein Mrs. Rigos agreed, promised and committed to sell to Mr. Sanchez a parcel of land for the amount of P1,510 within two years from the date of the instrument, with the understanding that the said option shall be deemed terminated and elapsed if Mr. Sanchez shall fail to exercise his right to buy the property within the stipulated period. Mrs. Rigos agreed and committed to sell and Mr. Sanchez agreed and committed to buy. But there is nothing in the contract to indicate that her agreement, promise and undertaking is supported by a consideration distinct from the price stipulated for the sale of the land. Mr. Sanchez has made several tenders of payment in the said amount within the period before any withdrawal from the contract has been made by Mrs. Rigos, but were rejected nevertheless. Issue: Can an accepted unilateral promise to sell without consideration distinct from the price be withdrawn arbitrarily? Held: No. An accepted promise to sell is an offer to sell when accepted becomes a contract of sale. Ratio: "Since there may be no valid contract without a cause or consideration, the promisor is not bound by his promise and may, accordingly, withdraw it. Pending notice of its withdrawal, his accepted promise partakes, however, of the nature of an offer to sell which, if accepted, results in a perfected contract of sale."

"This view has the advantage of avoiding a conflict between Articles 1324 – on the general principles on contracts – and 1479 – on sales – of the Civil Code. Article 1324. When the offeror 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 consideration, as something paid or promised. Article 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 promissory if the promise is supported by a consideration distinct from the price." "The Court is of the considered opinion that it should, as it hereby reiterates the doctrine laid down in the Atkins, Kroll and Co. case, and that, insofar as inconsistent therewith, the view adhered to in the Southwestern Sugar & Molasses Co. case should be deemed abandoned or modified." J. Antonio concurring "I fully agree with the abandonment of the view previously adhered to in Southwestern Sugar & Molasses Co. vs. Atlantic Gulf and Pacific Co. (97 Phil 249) which hold that an option to sell can still be withdrawn, even if accepted, if the same is not supported by any consideration, and the reaffirmance of the doctrine in Atkins, Kroll & Co., Inc. v. CuaHianTek (102 Phil 948), holding that “an option implies xxx the legal obligation to keep the offer (to sell) open for the time specified;” that it could be withdrawn before acceptance, if there was no consideration for the option, but once the “offer to sell” is accepted, a bilateral promise to sell and to buy ensues, and the offeree ipso facto assumes the obligations of a purchaser. In other words, if the option is given without a consideration, it is a mere offer to sell, which is not binding until accepted. If, however, acceptance is made before a withdrawal, it constitutes a binding contract of sale. The concurrence of both



acts – the offer and the acceptance – could in such event generate a contract." "While the law permits the offerror to withdraw the offer at any time before acceptance even before the period has expired, some writers hold the view, that the offeror cannot exercise this right in an arbitrary or capricious manner. This is upon the principle that an offer implies an obligation on the part of the offeror to maintain it for such length of time as to permit the offeree to decide whether to accept or not, and therefore cannot arbitrarily revoke the offer without being liable for damages which the offeree may suffer. A contrary view would remove the stability and security of business transactions." Business ads are mere invitations (Art. 1325)

A. Ads for bidders are simply invitation to make proposals. (Art. 1326)

B. Acceptance (Art. 1319, 1320)

a. Absolute b. Known c. Express/ Implied

C. Incapacity to give consent to

contracts -> VOIDABLE Mere restriction upon the exercise of the right to enter into a contract.

1. Unemancipated minors (Art. 1327) 2. Insane/ demented (Art. 1329),

except lucid interval (Art. 1328) 3. Deaf mutes- illiterate (Art. 1327) 4. Drunk/ hypnotized (Art. 1328) ->

Voidable

Special Disqualification – Restricted to contract by law Restriction on the right itself. -> VOID

C. Vices of Consent

a. Mistake (Art. 1330-1334)

b. Mistake of Fact: Mistake incurred because of : Nature of contract Object

Substance of the thing quality of the conditions

of the thing Identity and the qualification

of the person The quantity of the thing

where quantity is the main reason of the contract.

c. Mistake of Law: Mistake incurred in regards to the legal effect of the contract.

Tan v. Mandap GR No. 150925, May 27, 2004

Digested by: Aleli Guinto Facts: Dioniso Mandap, Sr., 64 years old and has long been suffering from diabetes, was legally separated with his wife and lived with DioritaDojoles. He was totally blind and crippled when he sold his properties to Dojoles’ sister Elenita and her husband Crispulo Vasquez, which later on were sold to spouses James and Florence Tan. The children of Dionisio with his legal wife filed an action for nullification of sale and cancellation of titles, alleging that the sale by their father was fictitious, without any consideration and the consent of their father was vitiated due to his physical infirmities. Issues: 1. Was the sale between DionisioMandap, Sr. and the Vasquez spouses valid?

5. Was the sale between the Vasquez spouses and the Tan spouses valid?

Held: No. When one of the parties is unable to read and fraud and undue influence are alleged, the person enforcing the contract must show that the terms have been fully explained to the former. Nothing on record shows that this was complied with. Hence, the presumption of fraud and undue influence was not rebutted. No. Since the sale to the Vasquez spouses is void, they hold no valid title of the parcels of land to sell to the Tan spouses. Rationale: "At the time DionisionMandap, Sr., purportedly sold the lots in question to



the Vasquez spouses, he was already totally blind and paralyzed. He could not possibly have read the contents of the deeds of sale. He could not have consented to a contract whose terms he never knew nor understood. It cannot be presumed Mandap, Sr. knew the contents of the deeds of sale disposing of his properties. Article 1332 of the Civil Code is applicable in these circumstances, to wit: Art. 1332. When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former." "As the party seeking to enforce the contract, the petitioners should have presented evidence showing that the terms of the deeds of sale to the Vasquez spouses were fully explained to Mandap, Sr., But the petitioners failed to comply with the strict requirements of Article 1332, thereby casting doubt on the alleged consent of the vendor." "It is true that he who alleges a fact bears the burden of proving it. However, since fraud and undue influence are alleged by respondents, the burden shifts to petitioners to prove that the contents of the contract were fully explained to Mandap, Sr. Nothing, however, appears on record to show that this requirement was complied with. Thus, the presumption of fraud and undue influence was not rebutted." 2. "The sale in favor of the Vasquez spouses is void. Hence, it follows that the sale to petitioners is also void, because petitioners merely stepped into the shoes of the Vasquez spouses. Since the Vasquezes as sellers had no valid title over the parcel of land they sold, petitioners as buyers thereof could not claim that the contract of sale is valid."

Woodhouse vs. Halili G.R. No. L-4811 - July 31, 1953

Digested by: Oilie Haulo Facts: On November 29, 1947, Woodhouse entered into a partnership agreement with

Halili. The partnership has the following provisions: (1) Organize a partnership for the bottling and distribution of Mission soft drinks; (2) Woodhouse will act as industrial partner or manager and Halili will act as capitalist; (3) Woodhouse was to secure the Mission Soft Drinks franchise for and in behalf of the proposed partnership; and lastly, (4) Woodhouse was to receive 30 per cent of the net profits of the business. The contract which was originally should have been a corporation, was finally signed by Woodhouse on December 3, 1947. Prior to the partnership agreement, Woodhouse was given a thirty days option on exclusive franchise from Mission Dry Corporation. On December 10, 1947 a franchise agreement between the Mission Dry Corporation and Halili and/or Woodhouse was entered granting Halili of the exclusive right, license and authority to produce, bottle, distribute and sell Mission beverages in the Philippines. On the first week of February 1948 operations begun. When the plant was already in operation Woodhouse demanded Halili to execute the partnership papers. Since Halili has continuously made delays, Woodhouse then filed a compliant for the execution of the contract of partnership, an accounting of the profits and a share of 30 per cent and damages amounting to P200,000. As a counter argument, Halili answered that his consent to the agreement was secured by the false representation of Woodhouse that he was the owner, or was about to become owner of an exclusive bottling franchise. Moreover, the franchise was secured and given to him and not to Woodhouse. He further asserted that it was Woodhouse who failed to carry out the undertakings of the contract. Woodhouse also failed to contribute to the exclusive franchise to the partnership. In return, he asked for a counterclaim for P200,000 as damages. Issues: Did Woodhouse falsely represent himself to have the exclusive franchise for bottling of Mission Soft drinks in the Philippines? Can the parties annul the agreement to form a partnership, if such false representation exists?



Held: 1. Yes, there is false representation. The acts and statements prior to the agreement are essential and relevant to the case. His own letter and testimonies showed that he Woodhouse made the representation. The first draft of the agreement that the counsel of Woodhouse prepared expressly states that Woodhouse had the exclusive franchise. From the statements “ … and the manager is ready and willing to allow the capitalist to use the exclusive franchise” and “… In the event of the dissolution or termination of the partnership… the franchise from Mission Dry Corporation shall be reassigned to the Manager… ”, it can be seen that the conclusion that Halili believed or was made to believe that Woodhouse was the grantee of an exclusive franchise. 2. No, because the false representation was only an incidental fraud (doloincidente) distinguished to causal fraud (dolocausante). The Court has held that in order that fraud may vitiate consent, it must be the causal (dolocausante), not merely the incidental (doloincidente), inducement to the making of the contract. By pretending that he had the exclusive franchise and promising to transfer it to defendant, he obtained the consent of Halili to give the 30 per cent profit. This is the doloincidente because it was used to get the Halili’s consent to a bigger share in the profits, an incidental matter in the agreement. Ratio: “We now come to the legal aspect of the false representation. Does it amount to a fraud that would vitiate the contract? It must be noted that fraud is manifested in illimitable number of degrees or gradations, from the innocent praises of a salesman about the excellence of his wares to those malicious machinations and representations that the law punishes as a crime. In consequence, article 1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the causal fraud, which may be a ground for the annulment of a contract, and the incidental deceit, which only renders the party who employs it liable for damages. This Court had held that in order that fraud may vitiate consent, it must be the causal (dolocausante), not merely the incidental (dolocausante), inducement to the making of

the contract. (Article 1270, Spanish Civil Code; Hill vs. Veloso, 31 Phil. 160.) The record abounds with circumstances indicative that the fact that the principal consideration, the main cause that induced defendant to enter into the partnership agreement with plaintiff, was the ability of plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for the partnership. The original draft prepared by defendant's counsel was to the effect that plaintiff obligated himself to secure a franchise for the defendant. Correction appears in this same original draft, but the change is made not as to the said obligation but as to the grantee. In the corrected draft the word "capitalist"(grantee) is changed to "partnership." The contract in its final form retains the substituted term "partnership." The defendant was, therefore, led to the belief that plaintiff had the exclusive franchise, but that the same was to be secured for or transferred to the partnership. The plaintiff no longer had the exclusive franchise, or the option thereto, at the time the contract was perfected. But while he had already lost his option thereto (when the contract was entered into), the principal obligation that he assumed or undertook was to secure said franchise for the partnership, as the bottler and distributor for the Mission Dry Corporation. We declare, therefore, that if he was guilty of a false representation, this was not the causal consideration, or the principal inducement, that led plaintiff to enter into the partnership agreement.”

Azarraga vs. Gay G.R. No. L-29449- December 29, 1928

Digested by: Oilie Haulo Facts: On January 17, 1921, Azarraga sold two parcels of land to Gay for the lump sum of P47,000, payable in installments. The agreement showed that a payment of P5,000 upon signing the contract; P20,000 upon delivery of the Torrens title to the first parcel by the vendor to the purchaser, P10,000 upon delivery of Torrens title to the second parcel by the vendor to the purchaser; and lastly the sum of P12,000 one year after the delivery of the Torrens title to the second parcel.



On March 1921, Torrens title to the second parcel was delivered to Gay, however, she failed to pay both the P10,000 as agreed and the P12,000 one year after having received the Torrens title to the second parcel. As a defense, Gay admits that she bought the two parcels of land but alleges that the Azarrage misrepresented leading her to believe that the second parcel of land contained 98 hectares but in fact it was only 60 hectares thus induced her to pay the price of P47,000 for the two parcels of land. Now she avers that she is entitled to a reduction in the price of the two parcels in proportion to the area lacking which ought to be reduced to P38,000. Issue: Was there any fraud in the circumstances leading Gay to agree on the contract? Held: No because Gay had the ample time and opportunity to verify the condition of the land which she purchased. Azarrage did not prevent her from investigating. The facts showed that Gay knew that area was only about 70 hectares because she received the deed by which Azurraga acquired the land from the original owner, CrispuloBeramo which states that fact. Even if he did make such false representations, she still accepted such representations at her own risk and she is the only one responsible for the consequences of her inexcusable credulousness. Ratio: “The defendant had ample opportunity to appraise herself of the condition of the land which she purchased, and the plaintiff did nothing to prevent her from making such investigation as she deemed fit, and as was said in Songco vs. Sellner, supra, when the purchaser proceeds to make investigations by himself, and the vendor does nothing to prevent such investigation from being as complete as the former might wish, the purchaser cannot later allege that the vendor made false representations to him. (National Cash Register Co. vs. Townsend, 137 N. C., 652; 70 L. R. A., 349; Williamson vs. Holt, 147 N. C., 515.) The same doctrine has been sustained by the courts of the United States in the following cases, among others: Misrepresentation by a vendor of real property with reference to its area are not

actionable, where a correct description of the property was given in the deed and recorded chain of title, which the purchaser's agent undertook to investigate and report upon, and the vendor made on effort to prevent a full investigation." (Shappirio vs. Goldberg, 48 Law. ed., 419.) "One who contracts for the purchase of real estate in reliance on the representations and statements of the vendor as to its character and value, but after he has visited and examined it for himself, and has had the means and opportunity of verifying such statements, cannot avoid the contract on the ground that they were false or exaggerated." (Brown vs. Smith, 109 Fed., 26.)”

Songco v. Sellner G.R. No. 11513 December 4, 1917

Digested by: Ana Victoria Hernandez Facts: In December, 1915, Sellner was the owner of a farm in Pampanga which is contiguous to the farm of Songco. Both farms had sugar cane ready to be cut. Sellner wanted to mill his cane in Dinalupijan, but the owners of it were not sure if they can mill his cane. Sellner got an information that the said central will mill Songco’s cane and so he bought the latter’s sugar cane for the agreed sum of 12,000. He then executed three promissory notes of 4,000 each; two of which were paid. Songco instituted an action to recover upon the third promissory note, a judgment was rendered in favour of Songco. Sellner appealed saying that the promissory note was obtained through false and fraudulent representation. According to Sellner, Songco estimated that his cane would produce 3,000 piculs when it should only be 2,017 piculs. Issue: Should Sellner still pay the remaining 4,000? Holding: Yes, Sellner was bound to pay the price stipulated. He should have investigated on his own. Ratio: “It is not every false representation relating to the subject matter of a contract which will render it void. It must be as to matters of fact substantially affecting the buyer’s interest, not as to matters of opinion, judgment, probability, or expectation. When



the purchaser undertakes to make an investigation of his own, and the seller does nothing to prevent his investigation from being as full as he chooses to make it, the purchaser cannot afterwards allege that the seller made misrepresentations.” “We think the court below committed no error in refusing to award damages upon this ground, as such damages were remote and speculative.”

Hill v. Veloso G.R. No. 9421 July 24, 1915 Digested by: Ana Victoria Hernandez

Facts: On December 30, 1910, MaximinaVeloso, wife of Manuel TioCuana, and Domingo Franco executed and signed a document which stated that they are acknowledging that they have received goods from La Cooperative Filipino. They promised to pay jointly and severally to Michael & Co., S. en C. the sum of 6,319 with interest on such part of said principal as may remain unpaid at the end of each month at the rate of 1 and ½ per cent until the principal have been completely paid. A promissory note was then indorsed to L.L Hill on January 1911. 2,000 have been paid already and Hill brought an action to recover the remaining 4,319.33. Defendant’s answer alleged that Franco (deceased) suggested to them the necessity to execute in Atty. Levering’s behalf a document in which it should be set forth that the defendants would pay the said lawyer in his capacity as guardian to the minor children of a certain Ricablanca. They also said that sometime in 1910 Franco made them sign a blank paper and they complied with the belief that it was for their obligation to pay Atty. Levering. They also alleged that they never had any transaction with Michael & Co., S. en C and did not receive any kind of goods. The CFI Cebu absolved Velasco, thus Hill appealed. Issue: Should Velasco pay what was stated in the promissory note? Holding: Yes, assuming that the defense given be true, by the recognition of the signature of the promissory note, the document became completely effective,

unless there is proof of some exception permitted by law. Ratio: “If she said this in 1912, it cannot be maintained that in 1910, on being required to recognize and pay the debt of 8,000 she consented to sign a document in blank recognizing the debt and binding herself to pay it to Levering as the then guardian of the minor children of Rica Blanca. What would have been natural and logical in that then, as in 1912, she would have refused to execute said obligation in writing in favour of Levering as she did reject it on January 18, 1912.” “Domingo Franco is not one of the contracting parties who may have deceitfully induced the other contracting party Michael & Co to execute the contract… The active subject and party of the first part of the promissory note in question is Michael & Co and the passive subject and party of the second part are Veloso and Franco… They are both but one single contracting party in contractual relation with or against Michael & Co.” Simulation (Art. 1345- 1346) Absolute – contract is void Relative – not void as long as it is not

contrary to Laws, morals, good customs, public order or public policy.

Object (Art. 1347) Allowed:

a) Within the commerce of man (Art. 1347)

b) Transmissible rights (Art. 1347) c) Services (Art. 1347) d) Exceptional- future inheritance (Art.

1347) Not allowed

a) Future inheritance- except those

authorized by law (Art. 1347) b) Impossible things (Art. 1348) c) Impossible services (Art. 1348) d) Indeterminate thing (Art. 1349)

Cause Kinds

a) Onerous (Art. 1350) - the prestation or promise of a thing or service by the other



b) Remunerative (Art. 1350) - the service or benefit which is remunerated

c) Gratuitous (Art. 1350) - the mere liberality of the benefactor

Motives not equal to cause (Art. 1351) Ineffective (Art. 1352) False cause (Art. 1353) – if the statement is false, its void Presumption (Art. 1354)

a) Lawful b) Existing

Lesion/ inadequacy (Art. 1355)

a) Not invalid b) Unless FMU (fraud, mistake, undue

influence)

CHAPTER 3 FORM OF CONTRACTS

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) 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)

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)

Vda. De Espiritu vs. CFI Of Cavite G.R. No. L-30486 October 31, 1972

Digested by: Pauline Grace Intal

Facts: On October 20, 1964, Maria San Miguel Vda. de Espiritu (petitioner) filed a complaint against Anastacia Topacio et al. (respondents) alleging that in 1948, the latter had verbally sold to her two parcels of land for P3,000. Such was thereafter delivered to her along with the titles; however, no deed of sale was executed. Topacio et al. promised to do so after the titles were transferred to their names by their predecessors in interest. But even after repeated demands from the petitioner, the defendants failed to comply with what was required of them. In their answer, Topacio et al. said that the transaction was not a sale but merely a contract of antichresis wherein the petitioner had loaned an amount of P1,500 to them; in exchange, they had to deliver to her the lands in question and their corresponding titles as security plus the right to collect the income from such properties. Aside from this, Topacio et al. also said that the action of the petitioner had prescribed, the same having accrued in 1948. The lower court ruled for the respondents.



Issue: Has the action to compel the private respondents to execute the deed of sale prescribed? Held: Yes, it has. Contrary to petitioner’s contention that the action is imprescriptible under Section 38 of Act 190 or the Code of Civil Procedure, such action has indeed prescribed because the Civil Code has repealed such provision. Under the Civil Code, only the following actions do not prescribe: (1) to demand a right of way, regulated in Article 649 and (2) to bring an action to abate a public or private nuisance", which are actions involving public policy. At any rate, the contract entered into by the parties in this case takes the form of an oral contract, which cannot be considered unenforceable by the Statute of Frauds because such contract has already been consummated by the delivery of the lands and the titles to her. Article 1145 of the civil code enumerates the actions that must be commenced within 6 years, and an action upon an oral contract is one of them. And since the cause of action occurred in 1948, and the case was filed in 1964, the action has indeed prescribed. Contracts under the Statute of Frauds cannot be proved without the presentation of a written agreement, unless one of the parties waived the need for that by not objecting to the presentation of oral evidence OR has already received any benefits from such contract (in this case, the lands and the titles had already been delivered to the petitioner- hence, the contract is not considered unenforceable under the Statute of Frauds even though it takes the form of an oral contract). Contracts may be of any form, provided that the essential requisites for their validity are present. Ratio: “In a broad sense, at least, the nature of petitioner's action may be said to be one founded on an oral contract, which, to be sure, cannot be considered as among those rendered unenforceable by the statute of frauds, for the simple reason that it has already been, from petitioner's own point of view, almost fully consummated by the delivery of the lands and the corresponding titles to her. Consequently, respondents are

right in maintaining that the applicable provision here is Article 1145 which reads thus: ART. 1145. The following actions must be commenced within six years: (1) Upon an oral contract; In either case, since the cause of action of petitioner accrued in 1948 and the present suit was instituted in 1964 or sixteen years later, and none of the interrupting circumstances enumerated in Article 1155 has been shown to have intervened, it is unquestionable that petitioner's action filed in the court below has already prescribed.” General rule: Contracts shall be obligatory in whatever form they may have been entered into, provided all essential requisites for their validity are present. Exceptions:

A. When the law requires that the contract be in a certain form to be valid (1357-1358)

B. When the law requires that the contract be in a certain form to be enforceable (See Statue of Frauds). The contract if valid but the right to enforce cannot be exercises; need ratification to be enforceable.

C. When the law requires that a contract be in some form for convenience of the parties; needed only to bind third parties (1356). - ex: public documents needed for the ff:

a. contracts w/c object is creation, transmission or reformation of real rights over immovable

b. cession, repudiation,

renunciation of hereditary rights/CPG

c. power to administer property for another d. cession of action of rights proceeding from an act appearing in a public inst.



e. all other documents where amount involved is in excess of 500 ( must be written even private documents).

Kinds of formalities required by law: A. Those required for the validity of

contracts: a. Contracts which must appear in

writing

Art 748 Donation of movable or personal property whose value exceeds 500 pesos Art 1874 Sale of piece of land through an agent Art 1956 Agreements regarding payment of interest in contracts of loan Art 2134 Contract of antichresis amount of principal of the interest

b. Contracts which must appear in

a public document

Art 749 Donation of immovable

Art 1771 and 1773 Partnership where immovable property or real rights are contributed to the common funds

Art 1358 See nos. 1, 3 , 4 of the said article

c. Contracts which must registered

Art 2140: Chattel Mortgage Cattle Registration act sale or

transfer of large cattel

B. Those required not for the validity, but to make the contracts effective as against third persons such as those covered by Article 1357 and 1358.

C. Those required for the purpose of proving existence of the contract, such as those under the Statute of Frauds in Article 1403.

Articles 1357-1358 do not require

the execution of the contracts either in a public or private document in order to validate it but only to insure efficacy, so that after

its existence has been admitted, the party bound may be compelled to execute the necessary document.

CHAPTER 4:

REFORMATION OF INSTRUMENTS

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.

Art. 1360. The principles of the general law on the reformation of instruments are hereby adopted insofar as they are not in conflict with the provisions of this Code.

Art. 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed.

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.

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.

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.

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.

Art. 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation. 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.

Art. 1369. The procedure for the reformation of instrument shall be governed by rules of court to be promulgated by the Supreme Court.

Jayme vs. Alampay G.R. No. L-39592 January 28, 1975 Digested by: Gallard Kevin Labares

Facts: The spouses loaned from their family friend, Ong the sum of P16,500 on and as a security, they mortgaged the land that they have in Bacolod City, Lot 270-A for their loan. However they did not know that the stipulations of the contract were different from that of the couple’s understanding. The contract apparently was a deed of sale and not of mortgage. The reason was that they trusted Ong, who was a family friend and because they were in dire need of money, they did not expect that they are actually entering into a deed of absolute sale. The couples now pray for a reformation of the contract since the amount of P16500 was undervalued for them to sell their property. The couple has also offered to pay their balance to Ong but he has refused to accept

payment. Ong now raises the defense of prescription saying that their time to act has already passed, the trial courts dismissed the couple’s claim hence this appeal. This complaint was filed on November 29, 1972. Issue: Is the couple entitled to a reformation of the contract of sale? Has their time of action already prescribed? Held: They are entitled to the reformation and recovery of the title and their time of action has not prescribed. Ratio: “Petitioners' action for reformation and recovery of title was brought on November 29, 1972 less than eight years after execution of the questioned deed on December 24, 1964 and had therefore not prescribed. Respondent's counter-theory that the questioned contract was in truth and reality a bona fide sale is clearly a matter of defense, which was yet to be established at the trial and could not be availed of at the pre-trial stage to dismiss the case as if it were already a proven fact, contrary to the very allegations of fact of the complaint which petitioners must be given an opportunity and their day in court to establish. Respondent court's other ground for dismissal, to wit, that the existing P100.00-mortgage of the property in favor of Jose del Castillo (whom the parties have conceded to be a mortgagee in good faith) constitutes an impediment to petitioners' action as an innocent party's "undisputed rights ... would be impaired and prejudiced" is clear error. It is obvious that the mortgagee's rights over the property are recognized but that would in no way defeat petitioners' action for reformation and recovery of title to the property. If petitioners prevail, they simply would recover the title to the property, subject to the mortgage thereon in favor of del Castillo or as prayed for by them, respondent may be duly sentenced "to deliver title to the plaintiffs free from any encumbrances including the mortgage to defendant del Castillo" which merely means that respondent would in such case be obliged and sentenced to discharge del Castillo's mortgage credit (which mortgage



loan he obtained after all for his own exclusive benefit). ACCORDINGLY, judgment is hereby rendered setting aside the dismissal order of June 10, 1974 and remanding the case to respondent court for trial and adjudication on the merits. Without pronouncement as to costs. SO ORDERED.”

SMB vs. Law Union G.R. No. L-14300 January 19, 1920 Digested by: Kevin Gallard Labares

Facts: Properties of Henry Harding was destroyed by fire, thus the insurance policies are now being collected from Law Union and Rock Insurance Company and “Filipinas” Compania de Seguros, in the amount of 7500 php each. The party that was insured is the San Miguel Brewery and not the defendants. D. P. Dunn mortgaged the said properties to secure the amount of 10,000 php and in this contract he assured that the properties will be fully insured and the contract allowed him to collect some of the proceeds from the insurance policy to pay for the remaining balance in case an incident may occur against the property. Antonio Brias then secured another 15,000 php worth of insurance and when the agent inquired to who the property belonged to, no answer was given. Harding, the new owner now claims proceeds from the insurance policies to be used as fulfillment of the mortgaged property. When Dunn sold the property to Harding, it was only the property that was sold and not the insurance policies. Issue: Can reformation be granted so that the one who contracted the mortgaged may also receive proceeds from the insurance policy? Held: No, Harding is not entitled to any proceeds from the policy, the contract cannot be reformed. Ratio: “We have before us a contract from which by mistake, material stipulations have been omitted, whereby the true intent and meaning of the parties are not fully or accurately expressed. There was a definite concluded agreement as to insurance, which, in point of time, preceded the

preparation and delivery of the policy, and this is demonstrated by legal and exact evidence, which removes all doubt as to the sense and undertaking of the parties. In the agreement there has been a mutual mistake, caused chiefly by that contracting party who now seeks to limit the insurance to an interest in the property less than that agreed to be insured. The written agreement did not effect that which the parties intended. That a court of equity can afford relief in such a case, is, we think, well settled by the authorities. (Smell vs. Atlantic, etc., Ins. Co., 98 U.S., 85, 89; 25 L. ed., 52.) But to justify the reformation of a contract, the proof must be of the most satisfactory character, and it must clearly appear that the contract failed to express the real agreement between the parties. (Philippine Sugar Estates Development Company vs. Government of the Philippine Islands, 62 L. ed., 1177, reversing Government of Philippine Island vs. Philippine Sugar Estates Development Co., 30 Phil. Rep., 27.) In the case now before us the proof is entirely insufficient to authorize the application of the doctrine state in the foregoing cases, for it is by means clear from the testimony of Brias — and none other was offered — that the parties intended for the policy to cover the risk of the owner in addition to that of the mortgagee. It results that the defendant Harding is not entitled to relief in any aspect of the case.

Ong Chua v Carr G.R. No. L-29512 January 17, 1929

Digested by: Paula Betina Lucero Facts: Henry Teck owned Lots Nos. 136 and 137 and the house on lot No. 132. His wife, Magdalena Lim, owned lot No. 135. the spouses sold the property in question to the plaintiff, Ong Chua around June 20, 1923. On June 17, 1923, Ong Chua executed a public document granting to Magdalena Lim the right to repurchase lot 135 for the sum of P6,500 within four years from that date. On June 20, 1923, he executed another public document in which he agreed to sell



lots Nos. 136, 137, and the house on lot 132 to Henry E. Teck for the sum of P13,500 at any time within four years from date. Note that neither one of the documents was placed on record with the register of deeds. July, 1925- Edward Carr was referred to Ong Chua by a certain Atty. Moore to purchase the lots in question since he is interested in acquiring coconut lands. Ong Chua stated to Moore that he consented to sell the properties to Carr on the condition that the sale should be subject to the rights and for the reconveyance to the Teck spouses and that said rights were to be respected by the vendee. July, 1926- Teck offered to repurchase the property in question thereupon demanded of Carr the reconveyance of the property. Carr, however, refused to do so, claiming that he had an absolute title to said property. It was then that Ong Chua learned that no rights of the spouses were mentioned in the deed. Issue: Is Ong Chua entitled to the property, which in turn will be reconveyed to Teck and Lim? Held: Yes. Reformation will be given "where there is a mistake on one side and fraud or unfair dealing on the other" (Devlin) Ratio: Ong Chua was unfamiliar with the English language in which the deed was written, and it was natural for him to believe in the actions of Carr, with whom he has previous business relations with. Carr’s conduct constitutes fraud and was calculated to obtain an unfair advantage over the plaintiff when he harassed Moore to give him the deed prematurely.

Reformation- a remedy by means of which a written instrument is made or construed so as to express or conform to the real intention of parties when some error or mistake has been committed.

I. Reasons for reformation of instruments:

A. Equity dictates the reformation of instrument in order that the true

intention of the contracting parties may be expressed. Unjust and inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties.

B. Court does not attempt to make a new contract for the parties, but only to make the instrument express their real agreement

C. Statute of Frauds is no impediment to the reformation of the instrument

II. Requisites:

A. Meeting of the mind of the parties B. Their true intention is not

expressed in the instrument C. Failure to express true intention is

due to mistake, fraud, inequitable conduct or accident

D. Clear and convincing proof of mistake, accident, relative simulation, fraud or inequitable conduct

In reformation the action presupposes a valid and existing contract between the parties and the document or instrument did not correctly express the terms of the agreement. On the other hand, in annulment the contract was not validly entered into as when their minds did not meet or if the consent was vitiated.

Reformation gives life to the contract by making the instrument conform to the true intention of the parties while annulment involves complete nullification of the contract.

III. Causes for reformation:

A. Mutual- instrument includes something which should not be there or omit what should be there. Requirements:

a. Mutual mistake of the

parties (Art. 1361) b. Mistake of fact (Art. 1363) c. Clear and convincing d. Causes failure of

instrument to express true intention



B. Unilateral Requirements:

a. One party was mistaken b. One party acted fraudulently or

inequitably c. Concealment of the knowledge

that the agreement did not state their real intention

d. Party in good faith may ask for reformation

C. Mistake of third persons due to negligence, ignorance, lack of skill, bad faith of drafter, clerk or typist.

D. Those specified by law in order to avoid frustration of true intent (see articles 1361, 1363 and 1364).

IV. Instances when there can be no reformation

A. Oral contracts B. Article 1366- there shall be no

reformation in the following cases a. Simple donations inter vivos

wherein no condition is imposed

b. Wills c. When the real agreement is

void

Implied ratification (Art. 1367)- when one of the parties has brought an action to enforce an instrument, he cannot subsequently ask for its reformation

V. Who may ask for reformation

A. Mutual mistake (Article 1368)- either party or successor in interest

B. Mistake by one (Article 1362)- injured party, heirs or assigns.

CHAPTER 5 INTERPRETATION OF

CONTRACTS

Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall

control. If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. (1281)

Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (1282)

Art. 1372. However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree. (1283)

Art. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. (1284)

Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. (1285)

Art. 1375. Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract. (1286)

Art. 1376. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established. (1287)

Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. (1288)

Art. 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in



favor of the greatest reciprocity of interests.

If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void. (1289)

Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts. (n)

I. Primacy of Intention

I. The literal meaning of the words used in a written contract controls when the terms used are clear and leave no doubt upon the real intention of the parties.

II. Courts may not read into it any other intention that would contradict its plain import.

III. What is not found in the writing is considered waived and abandoned.

IV. If alleged and proved that the intention is another, there can be no other evidence of the terms of the contract other than the contents in the writing.

V. When doubt exists in the execution of the contract, the least transmission of rights and interest shall prevail if the contract is gratuitous, and if onerous, the doubt is to be settled in favor of the greatest reciprocity of interest.

VI. When words used appear to contradict the intentions, the intention prevails.

VII. The real agreement of the parties may be proved as against the terms of the written agreement, pursuant to the Parol Evidence.

VIII. Mutual intent- in determining the intention of the parties, it is the mutual intent and not only the intent of one of the parties which the court should look into. Contemporaneous and subsequent acts will also be considered.

In determining the intention of the parties, the language used is primordial.

Conduct of the parties before and after will be considered by the judge.

In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.

Also take note of the usage and customs of the place

General terms are not necessarily comprehensive or distinct/different from those agreed on

They shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree.

When a stipulation may be interpreted in several ways, the meaning most adequate to make it legally effectual should be followed.

If in 2 interpretations, one is valid and the other is not, the valid one will be adopted.

Literal meaning is the most adequate interpretation to render the contract effectual

When general and specific provisions are inconsistent, the specific should govern

Bundalian vs. CA G.R. No. L-55739 June 22, 1984 Digested by: Paula Betina Lucero

Facts: July 1, 1975- petitioners purchased 3 parcels of land (3,328 sq.m) for P499,200.00 located at San Juan, Rizal from Deceased Agapita Sarao Vda. de Virata July 2, 1975- the petitioners sold to the private respondents the said parcels of land for the same amount of P499,200.00, subject to terms and conditions. The said contract was denominated as Deed of Sale with Right to Repurchase. One of the terms and conditions was that the repurchase price would escalate month after month, depending on when repurchase would be effected.



It was also stipulated in the same contract that the vendor shall have the right to possess, use, and build on, the property during the period pending redemption. August 26, 1976- the petitioners filed in a petition before the CFI of Rizal to declare the Deed of Sale with Right to Repurchase and the portion in the deed regarding accelerated repurchase price be declared null and void for being usurious. August 27, 1976- the private respondents, in turn, filed a petition for the consolidation of ownership on the ground that "more than a year has elapsed since the execution of the Deed of Sale with Right to Repurchase by the vendor.”Respondents argue that the vendor has lost all his rights to avail himself of the right to consolidate ownership of the property subject of the Deed of Sale. (Art.1607 in relation to Art. 1616, NCC) Issue: May the deed of sale with right to repurchase be counted as equitable mortgage? Held: Yes, it is considered as equitable mortgage. Its purpose is to secure the return of the money invested with substantial profit or interest, a common characteristic of loans. Ratio: The contract was one of "loan guaranteed by a mortgage" rather than a conditional sale because of the acknowledgement of the vendor to retain possession of the land. Indeed, there can be no question that petitioner Jose R. Bundalian remained legally in possession of the subject property. The increase per month in the alleged redemption price is shows that the transaction was really intended by the parties to be a mortgage.

German and Co v Donaldson, Sim and Co.

L-439 November 11, 1901 Digested by: Jerika Everly Marquez

Facts: Max Leonard Tornow is the sole owner of a business running in Berlin and Manila named German & Co. He appointed Fernando Kammerzell as the manager of

the business through an instrument executed in Berlin, Germany. The instrument was then authenticated by a notary with the required formalities by the domestic laws. It conferred the authority to “exact payment” of sums of money due for freight under a charter party “by legal means.” On the other hand, the defendants claim that the power vested upon Kammerzell was invalid since the power for suits must be contained in a public instrument. They also argue that it only includes acts of administration and that in order to execute any other acts, an express commission is required. Issue: Does the power vested on Kammerzell include the power to recover a sum of money? Held: Yes, Kammerzell has the power to recover the sum of money by filing a suit. It cannot be interpreted that the principal intended to withhold from his agent a power necessary for effective management in the absence of a clear language. Ratio: But whether regarded as an act of strict ownership or not, it appears to be expressly and specially authorized by the clause conferring the power to "exact the payment" of sums of money "by legal means." This must mean the power to exact the payment of debts due the concern by means of the institution of suits for their recovery. If there could be any doubt as to the meaning of this language taken by itself, it would be removed by a consideration of the general scope and purpose of the instrument in which it occurs. (See Civil Code, art. 1286.) The main object of the instrument is clearly to make Kammerzell the manager of the Manila branch of the plaintiff's business, with the same general authority with reference to its conduct which his principal would himself possess if he were personally directing it. It can not be reasonably supposed, in the absence of very clear language to that effect, that it was the intention of the principal to withhold from his agent a power so essential to the efficient management of the business entrusted to his control as that to sue for the collection of debts.



In interpretation of ambiguities in a contract, the usage or custom of the place where the contract was executed will be considered. The usage and custom may be used to fill the omission of such stipulations.

I. Usage- repetition of acts II. Custom- law or general rule which

arises from such repetition III. Must be proved as a fact according to

the rules of evidence A. Must be alleged in pleadings B. Must be proved by evidence

either by testimony or by documents of its existence

C. EXCEPTION- court may take judicial notice of a custom if there is already a decision rendered by the same court and had been affirmed on appeal and is final and executor

IV. If the evidence is insufficient to establish the existence of the custom, the alleged custom is considered non-existent

V. If it is proved, it is presumed that the person whose acts are the subject of the controversy acted in accordance with the custom of the place where the acts were performed and not with the customs of the place where the court is located

A. Applies if there are different customs in said places.

Kinds of Customs:

A. General Customs- customs which prevail throughout the country and become the law of the country, their existence to be determined by the court.

a. in trade and business, one which has long been followed in all cases by all in the same business and same territory, and has been long established

B. Local Customs- prevail only in some particular district or locality or in some city, country or town

C. Particular Customs- nearly the same, being such as affects only the inhabitants of some particular district

a. If the customs and usages are general, they may be proved even if not specifically pleaded. If it is a local one, they must be pleaded.

Andreas vs. Bank of the Philippine Islands

GR No. 23836 September 9, 1925 Digested by; Jerika Everly Marquez

Facts: H. R. Andreas, plaintiff, applied to the Bank of Philippine Islands, defendant for a foreign credit amounting to any sums not exceeding five thousand and fifty pounds. This is to enable him to purchase coal in Sydney, Australia for the purpose of shipping to Manila. The plaintiff wrote a request for foreign credit which was addressed to the defendant. The request included the provisions of negotiating the draft. The drafts were promptly paid by the plaintiff to the defendant. It also included the ¼ of the one per cent commission specified in the contract. However, the defendant also charged the plaintiff an interest rate of nine per cent per annum on the amount of each draft negotiated. In the Australian custom, the interest was already added in the price of the coal and was made part of the amount of the drafts the plaintiff is paying the defendant. Hence, there is no need for the Bank of New Whales to require or exact another 9 percent interest. The plaintiff argues that at the time of the payment of such interest, he did not know or understand the banking arrangements. He was then informed that the Bank of New Whales never received any portion of the said interest. Hence, the plaintiff is demanding for refund. The lower court favoured the plaintiff asking the defendant to give the amount being claimed with legal interest from the date of filing of the complaint. Issue: Is the defendant entitle to the interest of the money being paid by the plaintiff? Held: No, such interest charges should have been specified and provided for in the



contract. Also, making interest charges relied upon established custom and usage should be alleged as a separate defense. Ratio: If a custom be general in character, and therefore presumed to be known by the parties, the rule is that such custom may be proved without being specially pleaded. This is particularly true when a general custom is offered in evidence to throw light upon a contract, the terms of which are obscure, and which is dependent upon evidence of such general custom to make it plain. If, on the other hand, the custom be local in character, the party who proposes to rely upon it should aver it in his pleadings, and a local custom or usage applying to a special or particular class of business may not be proven to explain even the ambiguous terms of a contract, unless the existence of such custom or usage is pleaded. . . . The application which the plaintiff signed in the nature of a "request for foreign credit" was accepted by the defendant, and in legal effect it became the written contract between the parties, and it is in writing, and nothing whatever is said about the payment of interest to the defendant. If it had been the purpose and intent of the defendant to collect and receive the interest in question, it should have been specified and provided for in the contract, and if in the making of such interest charges the defendant relied upon an established usage and custom, it should have alleged that fact as a further and separate defense, and the existence of them would then become a question of fact. It is contended that the plaintiff, having paid the interest charges to the defendant, has ratified the payment, and for such reason he is now estopped to recover the money. That would be true if he had paid such charges with a full knowledge of all the facts. Party who draws up a contract where there are obscure terms shall not be favored in the interpretation

Drafters must take extra care with the choice of words or terms.

Contract of Adhesion- document where the terms are prepared by only one party while

the other party merely affixes his signature signifying his admission thereto.

A. not invalid per se and not entirely prohibited

B. binding as ordinary contracts as being a take it or leave it contract

C. prohibited when other party is completely deprived of the opportunity to bargain on equal footing

D. any obscurity should be construed against the drafter

Government of the Philippine Islands vs. Derham Brothers

G.R. No. 11904. October 9, 1917 Digested by: Othello Mendoza, II

Facts: Derham Brothers negotiated with the Director of Lands to secure from the Government a lease covering the Luneta Fill. Derham Brothers addressed to the Director the terms under which Derham would take the property. Paragraph 4 of the terms provides: "The rental and taxes to commence upon the grading to the official line and grade and metalling thereof of the roadway of the streets of the three blocks on the south, east and the west, contiguous to said property, and the grading to the official line and grade and metalling the roadway thereof of the street on the north of said property to its entire length. This provision is made as it is absolutely necessary that we have a direct outlet for our proposed building." The contract called for the metalling of the roadway of some streets but the width of the roadway was not specified. Derham took possession of the premises and executed an assignment to the International Banking Corporation wherein they transferred their right to receive from the Government the lease to the premises when it should be formally executed. The Government instituted an action to recover a judgment against Derham for the use and occupation of the premises since July 31, 1912 and to compel the bank to execute the premises' lease.



Issue: How should paragraph 4 of the terms be construed? Held: The expression "roadway of the street" does not contemplate that the roadway should cover the width of the entire street. It does not take into account the part of the street which is or might be assigned for pedestrian use. It cannot be insisted that the street is incomplete within the meaning of the contract. Derham Brothers is bound by the qualifications of their offer. Ratio: A contracting party is bound by that interpretation of an ambiguous provision which he knows the other party has adopted; and on the other hand, if it was a counterproposal, Derham Brothers accepted it by taking possession of the property in pursuance of said proposal. Fieldmen's Insurance Co.. Inc. v. Vda. de

Songco G.R. No. L-24833. September 23, 1968.

Digested by: Othello Mendoza, II FACTS: Federico, a private jeepney owner, paid a premium to Fieldmen's Insurance and was issued a Common Carriers Accident Insurance Policy covering his vehicle. Upon payment of the corresponding premium, the company extended its coverage. During the effectivity of the policy, the vehicle while being driven by Federico's son collided with a car. Federico and his son died as a result while the other passengers sustained physical injuries of varying degrees. Issue: Did the insurance company incur any legal liability under the Common Carriers Accident Insurance Policy issued to Federico? Held: Yes. Fieldmen's Insurance is not allowed to escape liability under a common carrier insurance policy under the pretext that what was insured was a private vehicle and not a common carrier, issued upon the agent's insistence who discounted Federico's fears that his private vehicle might not fall within its terms. Ratio: Ambiguities or obscurities must be strictly interpreted against the party that caused them. This rigid application of the

rule on ambiguities has become necessary in view of current business practices. The courts cannot ignore that nowadays monopolies, cartels and concentration of capital, endowed with overwhelming economic power, manage to impose upon parties dealing with them cunningly prepared 'agreements' that the weaker party may not change one whit, his participation in the 'agreement' being reduced to the alternative to 'take it or leave it' labeled since Raymond Saleilees 'contracts by adherence', in contrast to those entered into by parties bargaining on an equal footing, such contracts call for greater strictness and vigilance on the part of the court of justice with a view to protecting the weaker party from abuses and imposition, and prevent their becoming traps for the unwary. (Citing Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd.).

If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void. (1289)

Applies to 2 kinds of doubts:

I. On the incidental circumstances under the first paragraph

II. Doubts on the principal object of the contract under the second paragraph

Rules on doubts on incidental circumstances

If gratuitous, the least transmission of rights and interest shall prevail

If onerous, doubt shall be construed in favor of the greatest reciprocity of interests

Doubts on the principal object of the contract which cannot be determine the intentions makes the contract void.

Language of a writing is to be interpreted according to its legal meaning it bears in the place of execution, unless parties intend otherwise.



In construction of an instrument, the intention of the parties is to be pursued Terms of a writing are presumed to have been used in their primary and general acceptation, but evidence is admissible to show that they have a local, technical, or otherwise peculiar signification, and were so used and understood in the particular instace, in which case the agreement must be construed accordingly. When the instrument partly written and other is in a printed form, and are inconsistent, the written one is controlling.

CHAPTER 6 RESCISSIBLE CONTRACTS

Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290) Art. 1381. The following contracts are rescissible:

• (1) 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; (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; �(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; �(4) 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; �(5) All other contracts specially declared by law to be subject to rescission. (1291a)

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)

Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. (1294)

Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n)

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)

Art. 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)

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)

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)

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. Rescissible Contracts

I. Definition A. One which contains all the

essential requisites of a contract which makes it valid, but by reason of injury or damage to either of the contracting parties or to third persons, such as creditors may be rescinded.

B. An action to rescind or an accion pauliana must be of last resort, availed only after all other legal remedies gave been exhausted

II. Characteristics A. It has all the elements of a valid

contract B. It has a defect consisting in an

injury to one of the contracting parties or third person, generally in the form of economic damage or lesions, fraud, and alienation of property subject of case in tort without the consent of the litigants or of the court

C. It is valid and effective until rescinded

D. It can be attacked only directly, either by one of the contracting parties or by an affected third person, who is injured or defrauded by the contract

E. It is susceptible of convalidation only by prescription. Ratification proper does not apply.

Distinction between Rescission in Article 1191 and Rescission Proper in Article 1381 Basis Rescission

in Art. 1191 Rescission Proper in Art. 1381

1. Nature It is a principal action retaliatory in character

It is a subsidiary remedy.

2. Ground/s for rescission

The only ground is non-performance of one’s obligation/s or what is incumbent upon him.

There are five grounds to rescind a rescissible contract enumerated in Art. 1381. Nonperformance by the other party is not important.

3. Applicabilty

It applies only to reciprocal obligations.

It appeals to both unilateral and reciprocal obligations.

4. Person who can institute the action

Only a party to the contract may demand fulfilment or seek the rescission (cancellation) of the contract.

Even third person who is prejudiced by the contract may demand the rescission of the contract.

5. Fixing of a period

Court may fix a period or grant extension of time for the fulfilment of the obligation.

Court cannot grant extension of time for fulfilment of the obligation.

6. Purpose

Its purpose it to cancel the contract.

Its purpose is to seek reparation for the damage or injury caused, thus allowing partial rescission of a



contract. Rescission by Mutual Consent is not rescission proper Art. 1381 This “mutual backing out” from the contract is loosely referred to as “mutual rescission”. However, it is not a rescission proper because it is not based on any of the grounds of rescission stated in Art. 1381 and 1382 but based on the will of the parties who are withdrawing from their contract. Requisites For An Action For Rescission • The contract subject of the action must

be a rescissible one, that is, it must be one of those mentioned in Arts. 1381 and 1382.

• The plaintiff must have no other recourse to obtain reparation for the damages he suffered except the rescission of the contract (Art. 1383). It must be noted, the actions is only subsidiary.

• The plaintiff must be able to return whatever he is obliged to restore, if the action would be sustained (Art.1385)

• The object/s of the contract must not have legally passed unto the ownership or possession of a third person who is acting in good faith (Art. 1385).

• The action must be brought within the prescription period, that is within (4) years from the accrual of the cause of the action (Art. 1389).

Right to rescind may be noted in the Certificate of Title Direct action is needed to attack a rescissible contract, indirect attack is not allowed. Term “Rescission” under 1381 is different from rescission under Art. 1191 and 1592

A. In Articles 1191 and 1592, the rescission is a principal action which seeks the resolution or cancellation of the contract while in Art. 1381, the action is a subsidiary one limited to cases or rescission for lesion as enumerated in

said article. (Iringan v. CA 366 SCRA 41)

B. Rescission in 1191 and 1592 is ten years from the time the right of action accrues, whereas, the action for rescission under 1381 is four years.

Rescissible Contracts Due to Economic Lesion or Damage of More than 25% of the value of the thing

C. Contracts entered by guardians whenever the wards whom they represent suffer a lesion by more than ¼ of the value of the thing disposed can be rescinded.

D. If guardian alienates properties of the ward without judicial approval the contract is “unenforceable” for lack of authority.

Contracts Undertaken Deliberatley in Fraud of Creditors

E. The fraudulent intent must be proved. Without the needed proof establishing the fraudulent intent the contract cannot be rescinded.

Badges of Fraud

F. In determining whether or not a certain conveyance is fraudulent, the question is whether the conveyance was a bona fide transaction or merely a trick or contrivance to defeat creditors.

Accion Pauliana Requisites

G. The plaintiff asking for rescission has a credit prior to the alienation.

H. The debtor has made a subsequent contract conveying a patrimonial benefit to a third person

I. The creditor has no other legal remedy to satisfy his claim

J. The act being impugned is fraudulent



K. The third person who received the property conveyed, if it is by onerous title, has been accomplice in the fraud.

Accion Pauliana is incapable of pecuniary estimation, Jurisdiction is with the Regional Trial Court –the court of general jurisdiction.

Basis Accion Pauliana

Action to Declare Nullity of Absolutely Simulated Contract

1. Nature There is a true alteration of property

There is no alienation of property but only pretension of alienation

2. Purpose To set aside a contract validly entered into

To declare the inexistence of the absolutely simulated contract which prejudices the rights of a third person and/or is intended contrary to law, morals, good customs, public order or public policy.

3. Possibility of satisfaction of claim

Satisfaction of plaintiff’s claim is not possible except through the rescission.

Non-satisfaction of plaintiff’s claim is not required

4. Creditors who can pursue the case

Only creditors prior to the alienation may file the case

All creditors, whether before or after the simulation may file the action.

Alienation of Thing/s Under Litigation A. It is said to be under litigation when the

summons and complaint – seeking the rescission of the contract involving the property had been received by the debtor who alienates it.

B. For the protection of the rights of the

complaining creditor, he should cause the registration f a “Notice of Lis Pendens” if real property is inovolved.

C. If the property is personal, the creditor may apply for issuance of Writ of Attachment.

Violation of Right of First Refusal

A. A contract of sale entered into in violation of right of first refusal if another person is rescissible (Conculada v. CA, 367 SCRA 164)

Applicability; Payments: – What is rescissible are the payments for obligation which are not yet due. State of Insolvency – understood in its vulgar and not technical sense; a person is considered insolvent when it is impossible for him to fulfill his obligations because of financial constraints. Requisites of Action for Rescission Under Article 1382

A. Payment or payments were made by the debtor to a creditor

B. Payment or payments were made while the debtor is in state of insolvency

C. Obligations paid were not yet due and demadable

Nature of Action For Rescission, Only Subsidiary It is necessary to exhaust all other legal means to obtain reparation. Otherwise, the action will not prosper. This is a condition precedent.

Persons Allowed to Institute the Action

A. Parties who suffered economic lesion B. The affected creditor C. Others authorized by law



Extent of Rescission I. The primary purpose of rescission is

reparation for the damage or injury suffered either by a contracting party or by a third person.

II. Partial Rescission is allowed

Applicability of Mutual Restitution I. “It can be carried out only when he

who demands rescission can return whatever he may be obliged to restore.”

II. Not applicable in cases where creditors are rescinding the fraudulent contracts executed by their debtors in favour of other persons.

III. In case the complaining party cannot return whatever he may have obliged to restore his case may be dismissed.

IV. If the property has already been alienated in favour of a third person, such as by way of sale, and he is in good faith, the transfer of property to him shall be respected.

V. But if the transferee in good faith received the thing gratuitously from the debtor he is obliged to return it

VI. Only the particular creditor/s who instituted the action shall will be benefited by the rescission allowed by the court.

Goldenrod v. Court of Appeals G.R. No. 126812. November 24, 1998

Digested by: Ma. Cristina Mojica Facts: Barretto & Sons (later known as Barretto Realty) owned 43 parcels of land in Quiapo, Manila. These properties were mortgaged to UCPB to pay a loan. But since Barretto failed to pay, the properties were foreclosed. Goldenrod, on seeing Barretto’s dilemma, made an offer to Barretto that it would buy the properties. It also offered to pay off the remaining balance of Barretto's loan with UCPB and it paid Barretto PHP 1million as part of the purchase price. The remaining balance would be paid once Barretto had consolidated the titles of the lots. However, on the date that Goldenrod was supposed to pay UCPB for the loan,

Goldenrod asked for an extension. UCPB agreed. However, when the extension date arrived, Goldenrod asked for another extension and this time, UCPB refused. Meanwhile, Barretto had successfully consolidated the lot titles incurring expenses in the process of doing so. Goldenrod informed Barretto & Sons (later known as Barretto Realty), that it would not be able to push through with their agreement. It asked Barretto to return the PHP 1 Million. However, Barretto, although he received the message, did not give in to Goldenro's rescission. Instead, it sold the property that was part of their agreement to Asiaworld. In Court, Barretto Realty argued that the amount should be forfeited in their favor because it was Goldenrod that did not comply with the terms of their contract. Issue: Should Goldenrod be paid back the PHP 1 Million? Held: Yes. Barretto was ordered by the Court to pay Goldenrod the P1 million back because 1) Goldenrod has decided to rescind the sale, 2) the transaction was called off and 3) the property was sold to a third person. Ratio: According to Article 1385 of the Civil Code, rescission creates the obligation to return the things which were the object of the contract together with the FRUITS and INTEREST. By virtue of the extrajudicial rescission of the contract to sell by petitioner (Goldenrod), without opposition from the respondent (Barretto), who in turn, sold it to a 3rd person, as the vendor, Barretto had the obligation to return the earnest money of PHP 1 million plus legal interest from the date it received notice of rescission from Goldenrod. Not to do so would be unjust enrichment to the prejudice of Goldenrod.

Rescission will not prosper when property had already been legally transferred to a third person. The transfer will be respected if it is acquired in good faith. However, transferee in good faith who acquired the property gratuitously is not fully protected.



Persons who caused the loss are persons liable for indemnity for damages.

Only the particular creditor or creditors who instituted the action will be benefited.:

Contracts entered into by guardians and representatives which have been approved by the court, cannot be the subject of rescission.

Lack of opposition is deemed waiver of the right to rescind.

I. Fraud A. Is deception. B. It consists of any means or ways,

usually through insidious words or machinations perpetrated by one of the contracting parties, by reason which , the other party is persuaded to enter into a contract.

Note: When a person acts, he is presumed to be acting in good faith Certain Alienations of Property Considered Fraudulent

A. Alienation by gratuitous title- a debtor donating his property without reserving sufficient property to pay all his pre-existing debts.

B. Alienation by onerous title- when made by persons against whom some judgement has been rendered in any instance or some writ of attachment has been issued.

Cabaliw v. Sadorra G.R. No. L-25650, June 11 1975 Digested by: Ma. Cristina Mojica

Facts: Isidora Cabaliw was the 2nd wife of Benigno Sadorra. The two got married on March 15 1915 and during their marriage, the bought 2 parcels of land in Nueva Ecija. They also had a daughter- Soledad Sadorra. Years later, the marriage turned sour and Benigno Sadorra ABANDONED his wife Isidora. This led to the latter filing an action in court for SUPPORT. The Court ruled in her favor, and Benigno was ordered to pay her P75 a month. However, Benigno did not pay and instead SOLD their property

to his son-in-law, Soterro Sadorra (the husband of his daughter from his 1st marriage). The transaction was done without Isidora's consent. Prior to the sale to Soterro, Soterro already knew that there was a judgment rendered against his father-in-law but proceeded to buy the property anyway. When Isidora found out, she instituted an action in Court (along with her daughter) to recover the properties.

Issue: Is there a presumption of fraud?

Held: Yes. Benigno alienated his property despite there being a court judgment against him. The court ordered a partition of the remaining unsold lands between Isidora, Sotero and the children of Benigno from his first marriage.

Ratio: (Article 1387) Alienations by onerous title are presumed fraudulent when made by persons against whom some judgment has been rendered or some writ of attachment has been issued. Benigno was ordered by the Court to pay Isidora support and he failed to do so. Instead, he sold his properties to his son-in-law. The close relationship between Benigno and his son-in-law, Soterro, is a BADGE of FRAUD. Soterro knew about the judgment against Benigno but proceeded to purchase the properties anyway. He cannot be said to be a purchaser in good faith. The presumption of fraud is not overcome by the fact that the transactions were all made in the nature of public instruments (the deeds of sale) between Soterro and Benigno. Finally, the properties sold were CONJUGAL PROPERTY. Thus, they cannot be sold without Isidora's consent. Requisites To Overcome Statutory Presumption of Fraud

A. Conveyance in good faith must be proven

B. Conveyance must be sufficient and valuable consideration



Note: The design to defraud creditors may be proved in any other manner recognized by law on evidence.

Alpuerto v. Perez Pastor and Roa GR NO. 12794, October 14, 1918

Digested by: Reannah Reonal Facts: Three parcels of property formerly belonged to Juan Llenos and two of the parties in this case are interested with such property. The plaintiff, Alpuerto, is the one in possession of the properties under a contract of sale with pacto de recto. The defendant, Perez, on the other hand, is the purchaser at a public sale under an execution directed at Llenos. The plaintiff asks the court to make a declaration that the plaintiff is the owner of the land in full and absolute dominion and prays that the sale of property to defendant be declared null and void. As for the defendant, he claims that the transaction by which the plaintiff claims to have acquired title is simulated and that the supposed conveyance was effected for the purpose of defrauding the defendant as the creditor. The plaintiff then submitted a document which purports to be a contract of sale with the privilege of repurchase. It has been executed on July 3, 1912 but it was not acknowledge under a notary until December 3, 1914. However, it was noted by the court that at the time of the said sale there was already a long litigation being made (pending for two years) regarding the action of defendant to sought or recover money from Juan Llenos and that Alpuerto being the son in law have knowledge of it from the beginning Issue: Who is the rightful owner of the land? Held: the defendant Perez. The sale to the plaintiff is considered void because of the suspicious circumstances attending the alleged transaction which raised the presumption of fraud, even part from the presumption expressed in Article 1297 of the Civil Code and that the purchaser did not satisfactorily proved that he was a purchaser in good faith. The secrecy of the purported sale and the relationship of kinship existing

between the parties are noted as circumstances indicative of collusion Ratio: The coexistence of numerous badges of fraud in the conveyance of property, made by a person against whom an action is pending, is held as to create a presumption of fraud sufficiently strong enough to justify declaring the sale void. Article 1291 subsection 3 states that generally a contract executed in fraud of creditors are subject to rescission, the burden of proof is upon the person who assails the transaction to show that the transfer was fraudulent; though it should here be remembered that proof on this point may be accomplished by the aid of presumptions, as in other cases. Pascuala Abaya v. Roberto Enriquez Jr., Gliciera Enriquez, Artemio P. Jongco and

Nera Jongco L-8988, May 17, 195

Digested by: Reannah Reonal Facts: This is an appeal from the decision of the court which found that the sale of the parcel of land in question to have been made in good faith and dismissing, therefore, the complaint, as well as the counterclaims. Issue: Whether or not the sale should be rescinded against the defendants? Held: No, since there is no evidence that the Jongcos acted in bad faith. Ratio: where the judgment rendered against the defendant, in an action in personam, has not been entered into the records of the register of deeds, relative to an immovable belonging to the judgment debtor, the subsequent sale of the property, by the latter should not be rescinded upon the ground of fraud, unless the complicity of the buyer in fraud imputed to said vendor is established by other means than the presumption of fraud in Article 1297 of the Spanish Civil Code. Note: A rescissible contract, until finally rescinded, is a valid contract. It cannot be attacked collaterally.



Badges of Fraud To determine whether or not a certain conveyance is fraudulent, it must be proven that it prejudiced the right of creditors.

Circumstances showing badges or marks of fraud:

I. Consideration paid for the conveyance is inadequate.

II. Transfer made by a debtor after suit has been filed and while it is pending against him

III. Sale on credit made by an insolvent debtor

IV. The presence of evidence of large indebtedness or complete insolvency of the debtor

V. Transfer of all or nearly all of the debtor’s property especially when insolvent or financially embarrassed

VI. Transfer is made between father and son and any of the above circumstances is present.

VII. The failure of the buyer to take exclusive possession of all the property he had purchased from the seller.

A transferee in bad faith will be liable to return the property to the creditor who had successfully institute a complaint for rescission. If restitution is not possible, the transferee in bad faith will be liable to pay indemnity to the suing creditor for damages the latter suffered by reason of alienation. If the first transferee is in bad faith, the liability of the second transferee will now depend upon his good faith or bad faith. Prescriptive Period

Prescriptive period within to file rescissory action is four years.

Notes: A. The liability of the transferee in bad

faith is solidary with that of the transferring debtor as both of them are guilty of fraud.

B. They may also be criminally liable for “fraudulent insolvency”—any person who shall abscond with his property to the prejudice of his creditors.

CHAPTER 7 VOIDABLE CONTRACTS

Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: • (1) Those where one of the parties is

incapable of giving consent to a contract; (2) 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) Art. 1391. The action for annulment shall be brought within four years.

This period shall begin:

• In cases of intimidation, violence or undue 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) Art. 1392. Ratification extinguishes the action to annul a voidable contract. (1309a)

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)



Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. (1313)

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)

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)

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)

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)

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)

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. Voidable Contract Definition

• One which has all the essential elements of a valid contract, except that the element of consent is vitiated or weakened either by the incapacity of one of the contracting parties, or by mistake, violence, intimidation, undue influence or fraud

• One in which the essential requisites for validity under Article 1318 of the Civil Code are vitiated by want of capacity, error, violence, intimidation, undue influence, or deceit (Francisco vs. Herrera, 392 SCRA 317)

Status of Voidable Contract

• Valid and obligatory between the parties before its final annulment

• May only be attacked directly , either by an action for that purpose (annulment) or by seeking its annulment in a counterclaim and not merely by way of special or affirmative defense

• Binding unless annulled by a proper action in court

Ratification • An act by virtue of which efficacy is

given to a contract or obligation which suffers from a vice of curable nullity

• Voidable contracts are susceptible of ratification

• If not assailed within four years from the time the cause of action for annulment has accrued, the contract is said to have been convalidated by prescription.

o Therefore, it is no longer subject to attack



Voidable Contracts Distinguished from Void Contracts Basis Voidable

Contracts Void Contracts

1. Nature of defect

Consent of one of the parties is vitiated.

Consent is absent or is lacking. Presence of other defects will also render a contract void (Art. 1409).

2. Effectivity Effective and binding until annulled.

Ineffective because it does not exist in contemplation of the law.

3. Susceptibility to consolidation

Susceptible of consolidation by ratification or by prescription.

Not susceptible to consolidation by ratification or by prescription (Art. 1409).

4. Prescriptibility of action for its

Action for annulment prescribes.

Action or defense based on its inexistence or absolute nullity does not prescribe (Art. 1410).

5. Waiver of defect

Defect may be waived.

Right to set up the defense of illegality cannot be waived (Art. 1409, last par.).

Damage Not Essential To Render A Contract Voidable

• The contracts enumerated in Article 1390 are voidable even if no damage is suffered by any of the contracting parties. The same could be annulled just the same (Fule vs. CA, 286 SCRA 698 [1998])

Voidable Contract Distinguished From Rescissible Contract

Basis Voidable Contract

Rescissible Contract

1. Nature of defect

Defect is intrinsic. There is a vice of consent which vitiates consent.

Defect is external. It consists in damage or prejudice suffered by one of the contracting parties or a third person like a creditor.

2. Effect of damage or prejudice

Whether there is damage or not, contract is voidable.

If there is no damage or prejudice, contract cannot be rescissible.

3. Basis of defect

Annulability of the contract is based on law.

Rescissibility of the contract is based on equity.

4. Predominance of public interest

Public interest predominates.

Private interest predominates.

5. Susceptibility to ratification

It is susceptible to ratification.

Not susceptible to ratification.

6. Sanction It is a sanction.

It is not a sanction but a remedy.

7. Persons who can assail contract

Only parties to the contract can assail it.

Third persons who are affected my assail it.

8. Nature of action pursuable

Action is a principal action.

Action is subsidiary.

Remedy of Annulment Distinguished from Other Remedies in Attacking Defective Contracts

• The remedy of annulment applies to voidable contracts (Art. 1390);

• The remedy of rescission applies to rescissible contracts (Art. 1380);

• The remedy of declaration of nullity applies to void or inexistent contracts (Art. 1409).



For an accurate denomination of the complaint and proper allegations of ultimate facts therein, the differences of the avoid remedies or actions must be strictly considered. Defenses

• The defendant may put up the defense of annulability or relative nullity of a voidable contract and the absolute nullity of a void or inexistent contracts.

• In the better case, the action or defense for the declaration of the inexistence of the contract does not prescribe (Art. 1410).

Applicability of Article 1391 L. Applies only to the parties in

the contract M. It does not apply to third

persons when the law allows them to question the validity of a contract (Guinoo vs. CA, 97 Phil, 235).

Prescription of Action for Annulment

• Actions prescribe by the mere lapse of time fixed by law (Art. 1139).

• One of the grounds for extinguishing obligations (Art. 1231).

• Failure to pursue an action within the period prescribed by law will have the effect of extinguishing the action.

• After the action has prescribed, the contract could no longer be set aside

• When the contract is voidable at most, the four-year prescriptive period under Article 1391 applies

Time of Reckoning of the Four-Year Period Depends on the kind of defect vitiating the consent:

• If the vice consists in (a) intimidation, (b) violence or (c) undue influence, the reckoning begins from the cessation of such vice.

• If it consists in (a) mistake or (b) fraud, the reckoning beings from the discovery thereof.

• If it consists in the incapacity of the contracting party (like minority or

insanity) who is under guardianship, the reckoning beings from the cessation of the guardianship.

• Fraud Thru Public Instruments Involving Lands Registered Under the Torrens System; Special Reckoning Period

• With regard to fraudulent conveyances registered with Registry of Property, the prescriptive period is counted not from the actual knowledge of the fraud by the plaintiff but the from the registration of the public document with the said Registry

• The act of registration is a notice to the whole world

o It is the operative act which binds registered lands under the Torrens System

• Hence the period of prescription begins not from the discovery of the fraud bt from the registration of the fraudulent instrument

Confirmation, Ratification And Recognition, (Or Acknowledgment); Concepts; Distinctions

• Confirmation – previously used to refer to the act of curing a voidable contract of its vice or defects

• Ratification – originally used exclusively to refer to the act by which a contract entered into by someone in behalf of another without authority or in excess of authority is cured of its vice or defect by the subsequent act or conduct of the latter.

• Recognition or acknowledgment – used to refer to an act whereby a defect of proof in the contract is cured no more distinction between the three terms

o all referred to as ratification Concept of Ratification

• An act or means by virtue of which efficacy is given to a contract which suffers from a vice of curable nullity (8 Manresa 665)

o Concept covers voidable contracts

• Act of curing the defect of lack of authority or defect due to excess of authority of the party who entered



into the contract in the name of another without the latter’s authorization

o The concept specifically refers to unforceable contracts (Arts. 1405 and 1407).

Coverage of the Term Ratification Made Broader

• Ratification now covers both the ideas of confirmation and acknowledgment

• It may be defined as “the validation of a transaction otherwise without validity or partly valid”

Requisites of Ratification

• The contract is a voidable one (Art. 1390)

• The confirmation is made by the injured contracting party.

• The confirming party has full knowledge of the vice or defect of the contract.

• The cause of voidability should have already ceased or disappeared at the time of the ratification

o Otherwise, if the cause of voidability is still present, the act of confirmation would also suffer from the very vice or defect it is attempting to cure

Note: These requisites will be applicable to the ratification of unenforceable contracts except that the ratifying person need not be the one who had directly participated in the act which is the object of the ratification. Forms of Ratification

• Express – takes place when the desire of the innocent party to convalidate the contract, or his waiver or renunciation of his right to annul the contract is clearly manifested verbally or formally in writing.

• Tacit or Implied – takes places when the innocent party will full knowledge of the vice which renders the contract voidable, and the same having ceased already, he executed act/s or displayed a conduct which necessarily implies his intention to

waive his right to annul the contract (Art. 1393).

Effect of Lapse of Time

• an injured party in a contract who remained silent for a certain period of time is deemed to have ratified such a contract a contract

• a voidable contract if not questioned within the prescriptive period of the action for annulment remains valid and effective

Effects of Ratification • The contract is purged or cleansed

of its defects from the moment of its constitution or establishment. The validation is retroactive to the day of its creation.

• Corrolarily, there being a convalidated contract which is clean, any action for its annulment is extinguished

• An annullable contract may be rendered perfectly valid by ratification, which can be express or implied

Right to Ratify is a Transmissible Right The right to ratify, if not exercised by the proper party during his lifetime, may be exercised by his heirs it being a transmissible right Effect of Lack of Ratification

• A defective contract like a voidable one, if not ratified, remains valid until annulled

• Within the prescriptive period for the filing of an action for annulment, the contract is open to assailment

• An unenforceable contract if not ratified remains ineffective and cannot be enforced

Void Contracts, Not Ratifiable

• Void contracts cannot be ratified because in the contemplation of the law, they do not exist (Art. 1410)

• Only existing contracts, though defective, may be ratified.

Contracts Entered into by Incapacitated Persons May be Ratified by their Guardians



• The guardian of those incapacitated to consent to a contract may effect the ratification of the defective contract (Art. 1394 and 1407)

• If the incapacitated persons become capacitated or regained their capacity, they may themselves ratify their defective contracts

Conformity of the Party Who Has No Right to Bring an Action for Annulment, Not Needed

• It is the innocent party who has the prerogative to annul or not a voidable contract

• The one who caused the vice of consent personally or through a third person is not allowed to file a case of annulment because of the principle that “he who comes to court, must come with clean hands,” and “a guilty party is not allowed to benefit from his own wrong”

• Thus, no need to require the conformity of the said contracting guilty party before the innocent party may ratify the defective contract

o To require such conformity as a condition precedent, the guilty party can scheme a way to back out of the contract by just refusing to give his conformity

o Absurdity will then result which cannot be the contemplation of the law

Consequences Of Ratification.- Oneof the conse-quences of ratification

of the contract is its legal purifica- tion and its being made as a regular and untainted contract.

The cleansing of the voidable contract retroacts to the time of its constitution (Art. 1396).

Action for annulment of the contract based on its original curable defects can no longer prosper after its due ratification or confirmation (Tang Ah Chan vs. Gonzalez, 52 Phil. 180).

Exception ToThe Effect Of Retroactivity.- The rule of retroactivity shall not

prejudice the rights of innocent third persons for that will result in injustice which is not the intention of the law.

In case of doubt in the interpretation of laws it is presumed that the lawmaking body intended right and justice to prevail (Art. 10).

Persons Who Can Institute Action For Annulment

• Only by persons who are parties bound either principally or subsidiarily by the contract and who are innocent of the act or acts constituting the reason for the voidability or annullability of the contract.

• The plaintiff must be persons with interest in the contract

JOSEPH N. WOLFSON vs. THE ESTATE OF FRANCISCO MARTINEZ, deceased

G.R. No. L-5970; October 13, 1911 Digested by: Danilo Rico, Jr.

Facts: There was a contract agreement between Mariano Yap-Tuangco and Attys. Joseph N. Wolfson and BasilioRegalado y Mapa where their service fees for prosecuting the case of Mariano is 50% of whatever amount might be obtained in the judgment. When Judge Sweeney decided the case, he ordered the deceased Francisco Martinez to pay P12, 000 in favor of Mariano. BasilioMapa assigned his interest in said contract to Wolfson so, Mariano in fulfillment of the cotract for value received, sold and transferred and delivered to Wolfson all his right, title and interest in the saidjudgment. The estate of the Martinez filed a case invoking that the contract between Maraiano and Wolfson was null and void because lawyers are prohibited from purchasing the property and rights of their clients which may be the object of the litigation under Art. 1459 of the Civil Code. Issue: Could a contract be attacked for being null and void by a third person? Held: No, the estate of Martinez cannot attack the contract between Mariano and Wolfson because he is a third party to the contract and was not bound by the said instrument either principally or subsidiarily in accordance with Art. 1302 (now Art. 1397) of the Civil Code. Action for annulment may be



instituted only be persons who are parties bound either principally or subsidiarilly by the contract. The petitioners must be persons with interest in the contract. Ratio: "Considering the question from the point of view of the civil law, the view taken by the code, we must limit ourselves to classifiying as void all acts done contrary to the express prohibition of the statute. Now then: As the code does not recognize such nullity by the mere operation of law, the nullity of the acts hereinbefore referred to must be asserted by the person having the necessary legal capacity to do so and decreed by a competent court." (Manresa, Spanish Civil Code, vol. 10, p. 108.) Manresa, Spanish Civil Code, vol. 8, p. 737 commenting on Art. Art. 1302 (now Art. 1397) of the Civil Code: "Two different requisites are required to confer the necessary capacity for the exercise of such action. With each of the said requisites the two paragraphs of this section deal separately. The first requisite is that the plaintiff must have an interest in the contract. The second is that the victim and not the party responsible for the defect is the person who must assert the same."

Meaning Of Principal and Subsidiary Liability A. The liability of the principal party is

principal liability and that of a subsidiary party is subsidiary liability.

B. Illustration: The principal debtor is principally bound to the creditor while the guarantor is only subsidiarily bound.

C. The guarantor becomes liable only if the debtor has no property to answer for his obligation and only after all proper remedies against the debtor had been resorted to but failed (See Art. 2058).

Contract Between Capacitated And Incapacitated Persons.-

A. Where the contract is between a person who has full civil capacity and one who has no capacity to give consent to a contract such as a minor or an insane person, the former cannot invoke the incapacity of the latter to set aside the contract

B. He who comes to court must come with clean hands.

Effect if Minor Is The One Guilty Of Vices Of Consent.- A. If it is the minor who is guilty of the

vices of consent, can he invoke his minority to set aside the contract?

a. According to Gasperi (1 Gasperi 686), for having employed illicit means to make or induce the other party to enter into the contract with him, the reason for conferring him the privilege of annulling the contract ceases.

b. Hence, he must not be allowed to employ his own fault or wrong as the very basis to set aside the contract.

c. Thus, in the case of Mercado vs. Espiritu, 37 Phil. 215,

the Supreme Court held that the sale of land effected by minors who have passed the age of puberty and adolescence and nearing the adult age, and pretending actively in the contract, that they are of age when in truth they are not, were not permitted to excuse themselves from complying with their obligations under the contract.

They cannot seek the annulment of the contract based on the rules of estoppel (Rule 131, Section 2 [a], RRC).

d. Subsequently, in the case of Young vs. Tecson, the Supreme Court held that

a minor can never be guilty of estoppel because he is not liable for his conduct or act.

e. But in 1950, in the cases of Sian Suan and Chiao vs. Alcantara, 85 Phil. 669 and Hermosa, Jr.



vs. Zobel (104 Phil. 769) the Supreme Court changed its stand and reiterated its ruling in the Mercado case (37 Phil. 215).

f. More recently, however, in the case of Braganza vs. Villa Abrille, 105 Phil. 456, the Supreme Court held that

if the misrepresentation as to the age of the minors is active meaning, the minors specifically stated in the deed that they were of legal age, they will be estopped from annulling their contract based on their minority.

But, if the misrepresentation as to the minors' age is just passive meaning, there is failure to disclose their minority, they may be allowed to annul the contract.

ROSARIO L. DE BRAGANZA, ET AL., vs. FERNANDO F. DE VILLA ABRILLE

G.R. No. L-12471; April 13, 1959 Digested by: Danilo Rico, Jr.

Facts: Rosario L. de Braganza and her sons Rodolfo (18yrs old) and Guillermo (16yrs old) borrowed from the defendant Fernando Villa Abrille P70,000 in the form of Japanese military notes. They promised in writing to pay him P10, 000 in legal currency of the Philippine Island 2 years after the war plus 2% per annum. Since payment has not been made, Villa Abrille sued them but the petitioners invoked the defense of minority of Rodolfo and Guillermo when they signed the promissory note. Issue: Can Rodolfo and Guillermo be held liable? Held: No, if the misrepresentation as to the age of the minors is active or they specifically stated in the deed that they were of legal age, they will be estopped from annulling the contract. But if the

misrepresentation is passive or from the minors' failure to disclose their minority in the same promissory note they signed, it does not follow as a legal proposition, that they will not be permitted thereafter to assert it. They had no juridical duty to disclose their inability or minority. However, they 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 minority, they shall make restitution if 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. Ratio: According to CorpuzJurisSecundum, 43 p. 206: "...Some authorities consider that a false representation as to age including a contract as part of the contract and accordingly hold that it cannot be the basis of an action in tort. Other authorities hold that such misrepresentation may be the basis of such an action, on the theory that such misrepresentation is not a part of, and does not grow out of, the contract, or that the enforcement of liability for such misrepresentation as tort does not constitute an indirect of enforcing liability on the contract. 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. Also, in 27 American Jurisprudence, p. 819: "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."

Development Bank of the Philippines v.

Court of Appeals No. L-28774, February 28, 1980 Digested by: Darwin Perry Rubio

Facts: On October 20, 1955, the Development Bank of the Philippines (DBP) bought 91,188.30 square meters of land, consisting of 159 lots, in the proposed Diliman Estate Subdivision, West Triangle, Quezon City, of the People’s Homesite and Housing Corporation (PHHC). However,



notwithstanding the sale of the lots to DBP, Lots 2 and 4, which form part of said 159 lots, were still sold by PHHC to the spouses Honesto and Elisa Nicandro, for which, on November 6, 1958, 2 deeds of sale were issued to them by PHHC. Upon learning of PHHC’s previous transaction with DBP, the spouses filed a complaint against DBP and the PHHC before the Court of First Instance – Rizal (CFI), to rescind the sale of Lots 2 and 4 by PHHC in favor of DBP. After trial, the CFI held that the sale of Lots 2 and 4, to DBP is null and void, for being in violation of Section 13 of the DBP Charter. On appeal by DBP, the Court of Appeals (CA) affirmed the decision of the CFI. Still not contented, DBP appealed the decision of the CA before the Supreme Court. Issue: Do the spouses possess the legal personality to question the legality of the sale? Held: Yes. It cannot be denied that the spouses stand to be prejudiced by reason of their payment in full of the purchase price for the same lots which had been sold to DBP by virtue of the transaction in question. Ratio: The general rule is that the action for the annulment of contracts can only be maintained by those who are bound either principally or subsidiarily by virtue thereof. There is, however, an exception to the rule. The (Supreme) Court in Teves v. People's Homesite and Housing Corporation (23 SCRA 1141) held that "a person who is not obliged principally or subsidiarily in a contract may exercise an action for nullity of the contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show the detriment which could positively result to him from the contract in which he had no intervention." I. Applicability

A. The Article applies only if the con-tract had been consummated.

B. If the contract has not been performed yet, it is understood, there is no obligation to restore as nothing had been received by the parties.

II. Duty Of Mutual Restitution A. If the obligation has been annulled,

the contracting parties shall restore

to one another what they have received by virtue of the contract. This duty of mutual restitution covers: a. The return of things received

together with the fruits or the value thereof.

b. The return of the subject matter with interest at the legal rate (Art. 2209).

Municipality of Cavite v. Hilaria Rojas and

TiungSiuko No. 9069, March 31, 1915

Digested by: Darwin Perry Rubio Facts: The municipal council of Cavite by resolution No. 10, dated July 3, 1907, leased to the Hilaria Rojas some 70 or 80 square meters of Plaza Soledad, on condition that she pay rent quarterly in advance according to the schedule fixed in Ordinance No. 43, series of 1903 and that she obligate herself to vacate said land within sixty days subsequent to notification to that effect. Upon such notification, however, she refused to vacate the land, thus forcing the municipality to file a complaint before the Court of First Instance – Cavite (CFI) to order her to vacate the land. After a hearing of the case, wherein both parties submitted parol and documentary evidence, the CFI dismissed the complaint. Aggrieved, the municipality appealed the decision before the Supreme Court. Issues: (1) Is the contract valid?

(2) What are the obligations of the parties?

Held: (1) No. Article 1271 of the Old Civil Code, prescribes that everything which is not outside the commerce of man may be the object of a contract, and plazas and streets are outside of this commerce. (2) Hilaria Rojas must restore and deliver possession of the land described in the complaint to the municipality of Cavite, which in its turn must restore to her all the sums it may have received from her in the nature of rentals just as soon as she restores the land improperly leased.



Ratio: “Communal things that cannot be sold because they are by their very nature outside of commerce are those for public use, such as the plazas, streets, common lands, rivers, fountains, etc.” ANDREA DUMASUG, plaintiff -appellee, vs.

FELIX MODELO, defendant-appellant. G.R. No. L-10462 March 16, 1916 Digested by: Maria Patricia Salas

Facts: Dumusug filed a complaint to CFI praying that the sale sale of her carabao and 2 parcels of land to defendant Modelo be nullified because her consent was obtained in fraud. Modelo made her believe that the document was only an acknowledgment of Dumusug's loan from Modelo for P101 for the work Modelo had done in connection with 2 actions brought by Dumusug to recover her land. Dumusug found out that she was defrauded 3 months after she signed such document when Modelo, against her will got her properties by intimidation and force. She also stated that she only signed one contract. Modelo'sdefense is that Dumusug owed her P333 because he was the one who paid for the expense of Dumusug's travel to Cebu twice as well as the witness brought by Dumusug to Cebu. Issue: Is the document presented by Modelo showing the sale of Dumusug's carabao and parcels of land valid? Held: No, because the statements of MOdelo are incredible. First, Modelo said he also paid for the travel expenses of the witness of Dumusug but this is not possible since the case where he helped Dumusug reached only at the filing of the demurer, meaning the suit was scarcely commenced. The only expense she could have incurred were attorney's fees of P80 and her travel to Cebu twice for one day each. Ratio: It is, then, perfectly evident that the document Exhibit 1, by means of which defendant made himself the owner of the properties in question is not the instrument of debt which Andrea Dumasug had signed, and if it is the same one its contents were not duly and faithfully explained to plaintiff in the act of its execution. In either case, the consent said to have been given by Andrea Dumasug in said document Exhibit 1 is null

and void, as it was given by mistake (arts. 1265 and 1266, Civil Code). This error invalidates the contract, because it goes to the very substance of the thing which was the subject matter of said contract, for, had the maker thereof truly understood the contents of said document, she would neither have accepted nor authenticated it by her mark. The consent given by plaintiff being null and void, the document Exhibit 1 is consequently also null, void, and of no value or effect. Article 1303 of the Civil Code is therefore, applicable, which prescribes that: "When the nullity of an obligation has been declared, the contracting parties shall restore to each other the things which have been the object of the contract with their fruits, and the value with its interest."

THE PHILIPPINE TRUST COMPANY, as Guardian of the Property of the minor,

MARIANO L. BERNARDO, Petitioner, vs. SOCORRO ROLDAN, FRANCISCO

HERMOSO, FIDEL C. RAMOS and EMILIO CRUZ, Respondents.

G.R. No. L-8477. May 31, 1956 Digested by: Maria Patricia Salas

Facts: 17 parcels of land was inherited by Mariano Bernardo from his deceased father. Being a minor, he is under his step mother, Socorro Roldan who is his legal guardian. Socorro, in a motion asked from the court the authority to sell the 17 parcels of land for the sum of 14,700 to Dr. Fidel Ramos who is her brother in law. The purpose of the sale is to invest the money in a residential house which the minor desired to have. The motion of Socorro was eventually granted by the court. A day after the sale to Ramos, he executed in favor of Socorro a deed of conveyance covering the same 17 parcels for the sum of 15,000 and Socorro sold 4 parcels to Cruz. Subsequently, Philippine Trust Company replaced Socorro as guardian and now PTC wants nullify the previous sale. CFI upheld the sale saying that there was no proof that Ramos was a mere intermediary as prohibited by Article 1459 of the Civil Code. The Court of Appeals affirmed the judgment adding that the minor knew of the particulars of the transaction. Issue: Should the sale be nullified for being against the law?



Held: Yes Ratio: General doctrine that guardianship is a trust of the highest order, and the trustee cannot be allowed to have any inducement to neglect his ward’s interest and in line with the court’s suspicion whenever the guardian acquires the ward’s property 1 we have no hesitation to declare that in this case, in the eyes of the law, Socorro Roldan took by purchase her ward’s parcels thru Dr. Ramos, and that Article 1459 of the Civil Code applies. She acted it may be true without malice; there may have been no previous agreement between her and Dr. Ramos to the effect that the latter would buy the lands for her. The temptation which naturally besets a guardian so circumstanced, necessitates the annulment of the transaction, even if no actual collusion is proved (so hard to prove) between such guardian and the intermediate purchaser. This would uphold a sound principle of equity and justice from both the legal and equitable standpoints these three sales should not be sustained: the first two for violation of article 1459 of the Civil Code; and the third because Socorro Roldan could pass no title to Emilio Cruz. The annulment carries with is (Article 1303 Civil Code) the obligation of Socorro Roldan to return the 17 parcels together with their fruits and the duty of the minor, through his guardian to repay P14,700 with legal interest. Strangers Are Not Covered By The Article.-

A. Strangers to the contract cannot avail themselves of the benefit of mutual restitution under the Article (Govern- ment of P.l. vs. Wagner, 54 Phil. 132).

B. Innocent third parties, who are not privies to the contract cannot be obliged to restore (Cagayan Valley Tobacco Co. vs. Molina Martell, 41 Phil. 294).

Article Speaks Of Annulment Of "Obligation" And Not Of "Contract."-

A. The Article uses the phrase "annulment of obligation" instead of “annulment of contract” because of the possibility that a contract may cover several prestations which are divisible.

B. Some may be voided, but others may be retained.

Obligations To Render Service.- A. If services had already been

rendered, and the obligation was annulled, damages, if suffered, may be recovered using as basis of estimation, the value of the services rendered (Art. 1398, last par.).

B. The last paragraph of the Article refers to obligation "to do" or "not to do" while the first paragraph refers to "obligation to give."

Rule Of Mutual Restitution Is Not Absolute.-

A. Because of the recognized principle of unjust enrichment in our legal system, if and when the application of mutual restitution will result in an unjust enrichment of one party at the expense of another, the rule of mutual restitution must give way.

B. Illustration: a. If a piece of land is leased for

one year, with the land delivered and rent paid in advance for the full period, and then the contract is annulled after four months, the mutual restitution cannot be total.

b. The lessee has to return the land, but the lessor should not be obliged to return the full amount of rent received by him but only the rent corresponding to the unexpired eight months.

c. To make the lessor return the rent (assuming it to be reasonable in amount) for the four months during which the lessee was in the possession and enjoyment of the land, would constitute unjust enrichment on the part of the lessee and undue prejudice to the lessor.

d. Rationale:



a. The rent is not a consideration for the land. but for the use and enjoyment thereof; hence, even if the land is restored to the lessor, the lessee had already received the benefit from the past use and enjoyment thereof

C. Damages May Be Imposed Upon The Party Guilty Of The Act/ s Which Constitute The Reason And Cause For The Annulment Of The Contract.- a. It is but just and fair that the

party guilty of the vices of consent like fraud (which is presumed to be deliberate) which constitute the reasons for the void ability of the contract, be penalizedwith damages as indemnity for the injuries suffered by the innocent party.

b. Articles 19, 20 and 21 of the Code justify the imposition of reasonable damages

Meaning Of "Except In Cases Provided By Law."_

A. With the annulment of the contract, there must be restoration of things received with their fruits, and the price with interest-except in cases provided by law.

B. Insofar as fruits are concerned, the rules on possession must be applied, particularly, Articles 544 and 549.

Rule Of Compensation Is Applicable.

If the contracting parties have reciprocal prestations which consist of sum of money or fungible thing of same kind compensation will take place by operation of law to the concurrent amount (Art. 1290).

Incapacitated OrDisadvantaged Person Is Generally Favored By Law; No Restoration Is Required Of Him; Exclusive Exception.-

A. Article24 of the Code provides: Art. 24. In all contractual, property or other relations, when one of the parties is at a disadvantage on account of his moral dependence,

ignorance, indigence, mental weakness, tender age or other handicap, the courts must be vigilant for his protection (New Civil Code).

B. This is anchored on the doctrine of parenspatriae:

'The doctrine refers to the inherent power and authority of the state to provide protection of the person and property of a sovereign power of guardianship over persons under disability.

C. Thus, the state is considered the parenspatliae of minors

Exception: However, to balance things, where the minor had received something by virtue of a contract, which is voidable solely and exclusively because of his incapacity, he must make a restoration insofar as he has been benefited by the thing or price received by him. If he did not benefit, he has no duty to make restoration.

D. The observation of the Supreme Court in UySoo Urn vs. Tan Unchuan, 38 Phil. 552, stressed the strong tendency of modern decisions regarding the limit on the ex-emption of infancy to the principle upon which the disability proceeds.

E. If the nullity of the contract, however, is due to other reasons the general rule of mutual restitution in Article 1398 shall apply. Illustrations:

1. Two minors, together with their mother. borrowed money during the Japanese occupation from Villa Abrille.

The money was used for the support of the minors.

While the promissory note signed by the minors promising to pay P10,000.00 in Philippine currency 2 years after the



cessation of the hostilities x xx.

is voidable and annulled by the Court. the minors were required to return the money they received from the Villa Abrille as they profited by the use thereof.

2. If the incapacitated person has still in his possession the property he received by itself is a benefit, which obliges him to return the same and not squander it.

If he does not return or he squanders, that is tantamount to implied ratification of the defective contract.

In which case, the contract will then be cleansed of all its defects from the moment of its constitution (UySoo Lim vs. Tan Unchuan, 38 Phil. 552).

Rule With Respect To The Capacitated Party.-

A. Whether or not the capacitated party has benefited from what he received from a minor, he must return the same

B. Except: a. when he received the thing from

the minor in the performance of the latter's natural obligation, and what had been received had been spent or consumed in good faith (Art. 1427).112

b. The reason is that the minor cannot recover what he had paid in fulfillment of a natural obligation (Art. 1423).

Effect When Thing Was Lost Through The Fault Of Defendant-Obligor.-

A. The Article will not apply if the thing ordered to be returned which is determinatewas

destroyed or got lost without the fault of the debtor.

B. Example: A determinate thing supposed to be re-turned got lost due to a fortuitous event. The debtor should not be made liable for the loss of the thing.

A. Consequences: I. If the thing is lost due to a

fortuitous event, the debtor is not liable to make restitution because he cannot restore the thing which no longer exists.

II. Neither can he be compelled to substitute the lost thing with its value because he is not liable for the loss.

III. To compel him to do so will be unfair.

IV. Since the party debtor was still legally considered as the owner of the thing at the time of the loss, he must suffer the consequences but he will not be required to make restitution.

V. Corollarily, the creditor cannot be compelled to make restitution because the debtor could not fulfill what is incumbent upon him.

VI. Ultimately, Art. 1402 shall apply. VII. There is no other way of

reconciling the different related Articles. a. The rule is different if the thing

was lost through the fault of the obligor.

b. In which case, he is obliged to return the fruits received; return the value of the

thing at the time of loss; and

to pay 6% interest per annum on the value of the thing (Art. 2209).

B. Illustration: c. A contract was entered into

between Dumasug and Modelo. d. The contract was annulled. e. The subject matter or object of

the contract is a plow carabao which died while in the possession of Modelo.

f. The Court held: "With respect to the plow carabao that died while in defendant's possession, the



value of which is P120.00, defendant is obliged pursuant to the provision of Art. 1307 (now Art. 1400) to pay and deliver to plaintiff the value of said animal, with interest as an indemnity for the detriment caused to its owner."

Article 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)

I. Applicability.- A. The Article applies when the

object of the contract is lost due to the fraud or fault of the creditor himself.

B. Accordingly his complaint must be dismissed.

C. The creditor has no cause of action because he himself caused the loss of the thing.

D. It is absurd to require the debtor to return a thing which got lost due to the fault of the creditor himself.

E. Even without the Article, this principle in Art. 1401 is understood and universally recognized because of the maxim "he who comes to court must come with clean hands."

II. Action For Annulment Can

Prosper Despite The Loss Of The Thing if Plaintiff Is Not At Fault.-

A. The action for annulment of the contract can prosper even if the object of the contract had been lost as long as the loss is not attributable to the plaintiff.

B. After all, if the case is won, the thing will be substituted by its value in money with legal interest.

C. However, the law says, the ground for annulment must be the incapacity of anyone of the contracting parties."

D. There seems to be no difference, if the ground would be any of the vices of consent committed by the defendant. T

E. he reason and principle involved are the same.

F. Naturally, however, if the loss is due to the "fraud or fault" of the plaintiff himself the loss of the thing will bar the complaint because the plaintiff cannot benefit from his fault or wrong.

G. Further, if the thing was destroyed due to fortuitouSevent, the action is extinguished unless the defendant has incurred in delay (Art. 1262) or is a possessor in bad faith (Art. 552).

H. Whether the loss of the thing happened during the incapacity of the plaintiff or "after he acquired capacity,":"just the same, the action for annulment will be extinguished under the first paragraph of the article because he was at fault.

Other Causes For Extinguishment Of The Action For Annulment.-

The action may also be extinguished by prescription of the action or by ratification (confirmation).

I. Duty Of Restitution Is Mutual.- A. After the case had been decided

and the court has required the parties to restore what they received from each other a. No one can file a Motion for

Execution to implement the decision unless he himself has first restored what he is bound to return.

b. In case neither party takes the initiative the best solution is to make a simultaneous delivery in court of what is incumbent upon them.

c. The inability to make restitution may apply to both parties.

B. If one cannot restore what he is bound to return, he cannot compel



the other to comply what is incumbent upon the latter. To require so is obviously unfair.

CHAPTER 8 UNEFORCEABLE CONTRACTS

Art. 1403. The following contracts are unenforceable, unless they are ratified:

1. Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers;

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.

3. Those where both parties are incapable of giving consent to a contract.

Art. 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of this Book. Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them.

Art. 1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357.

Art. 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated.

If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception.

Art. 1408. Unenforceable contracts cannot be assailed by third persons. �



---------- Introduction ---------- Unenforceable Contracts are those contracts which cannot be enforced by action or complaint in court, unless they have been ratified by the party or parties who did not give their consent thereto. They are midway between void and voidable contracts. Kinds of Unenforceable Contracts:

(1) Those entered into in the name of another person by one who has no authority or who acted beyond his powers;

(2) Those who do not comply with the Statute of Frauds; and

(3) Those where both parties are incapable of giving consent to a contract.

Distinctions/Differences Similarities In the first kind, there is lack of consent on the part of the person in whose name the contract was entered into; In the second kind, there is no written proof whatever by which the contract may be proved; and In the third kind, while there is consent, the same is absolutely vitiated because both parties are incapable of giving their consent to the contract.

They cannot be enforced or pursued in court; They can be ratified, which means, they can be convalidated and become enforceable in court; and They cannot be attacked or assailed by third persons. The remedy of the third person is against the “agent” who acted without authority or acted beyond his authority.

Unauthorized Contracts –

Old Civil Code New Civil Code They were considered special void contracts which could be ratified. They are different

They are now grouped together with those contracts that do not comply with the Statute of

from the void and inexistent contracts which are not susceptible to ratification.

Frauds. They are now subject to voluntary ratification.

Statute of Frauds is descriptive of those statutes which require certain classes of contracts to be in writing. It does not deprive the parties of the right to contract with respect to the matters therein involved, but merely regulates the formalities of the contract necessary to render it enforceable. Its basic purpose is to prevent fraud and not to encourage its commission. It applies only to executor (not executed) contracts – It cannot be invoked in contracts which had been already executed whether partially or completely. If a contract is among those covered by the Statute but not done in writing, such deficiency does not make the oral contract invalid or void – it merely renders the action for specific performance ineffective. It can be invoke in two kinds of cases:

(1) In complaints for specific performance where the defendants may frustrate the actions by showing that the contracts in issue are among those covered by Article 1403(2) and are not evidenced by any written agreement, note or memorandum; and

(2) In complaints for damages for violation of the contract.

If there is no enforceable contract, naturally, there can be no basis for damages grounded on violation thereof. In proving total or partial payment or performance of the contract itself, the plaintiff is allowed to present oral evidence



to prove the total or partial payment or performance. It is a rule of exclusion – it is not concerned with the weight of the evidence but only with its admissibility.

Rosencor Dev. Corp. v. Inquing G.R. No. 140479 March 8, 2001 Digested by: Kimberly Rae Sison

Facts: Paterno Inquing, Irene Guillermo and Frederico Bantugan are the lessees since 1971 of a two-story residential apartment owned by spouses Faustino and Cresencia Tiangco. The lease was not covered by any contract. The lessees were verbally granted by the lessors the pre-emptive right to purchase the property if ever they decide to sell the same. Upon the death of the spouses Tiangcos, the heirs also verbally promised to the lessees the same pre-emptive right. In June 1990, the lessees received a letter from Atty. Aguila demanding that they vacate the premises so that the demolition of the building be undertaken. They also received from Eufrocina de Leon, representative of the heirs, a letter offering to sell them the property they were leasing for P2,000,000.00. The lessees offered to buy the property for P1,000,000.00, however, no answer was given. In November 1990, Rene Joaquin (Rosencor) came to the leased apartment introducing himself as the new owner. The lessees then asked De Leon why she had disregarded the pre-emptive right she and the late Tiangco spouses promised to them. They also learned that the property was sold to Joaquin/Rosencor for only P726,000, and that the offer of De Leon to sell them the property came only after the sale with Rosencor has been consummated. They then offered to reimburse De Leon of the P726,000.00 and an additional P274,000.00 to complete their P1,000,000.00 offer. When the offer was refused, they filed the present action. Issue: Does a right of first refusal have to be in writing in accordance with the Statute of Frauds in order to be enforceable? Held: No. A right of first refusal is not among those which are enumerated in the list of contracts covered by the Statute of Frauds.

Ratio: A right of first refusal is not among those listed as unenforceable under the Statute of Frauds. Furthermore, the application of Article 1403, par. 2(e) of the New Civil Code presupposes the existence of a perfected, albeit unwritten, contract of sale. A right of first refusal, such as the one involved in the instant case, is not by any means a perfected contract of sale of real property. At best, it is a contractual grant, not of the sale of the real property involved, but of the right of first refusal over the property sought to be sold. It is thus evident that the statute of frauds does not contemplate cases involving a right of first refusal. As such, a right of first refusal need not be written to be enforceable and may be proven by oral evidence. The note, memorandum, or writing – as a required in Article 1403(2) – may consist of any kind of writing showing the intention of the parties. It should contain the following details:

(1) Names of the parties; (2) Terms and conditions of

the agreement; (3) Description of the

subject matter for the proper identification thereof;

(4) Place and date of the making of the agreement; and

(5) Signature/s of the parties who are assuming the obligation.

The Six Contracts Mentioned in Article 1403(2):

(1) An agreement not to be performed within one year. • To be enforceable,

contracts which by their terms are not to be performed within one year from the execution thereof, must be in writing.



• The one year period is counted from the perfection of the contract and not from the day the performance of the contract is to begin.

• If the contract is silent as to its period of performance, the same is not covered by the Statute of Frauds.

(2) A special promise to answer for the debt, default, or miscarriage of “another.”

• Special promise does not refer to the original or independent promise of the debtor to his own creditor – it refers rather to a collateral promise such as a contract of guaranty where the guarantor answers for the liability of the principal debtor if the latter fails to comply with his obligation.

• At least three parties are involved: the debtor, the creditor and the promisor.

(3) An agreement made in consideration of marriage other than a mutual promise to marry.

• The agreement may be one entered into by reason of marriage such as a marriage settlement and donations propter nuptias.

• The term “in consideration of marriage” should read “by reason of marriage” because the cause of a donation propter nuptias is not the marriage but the liberality of the giver.

• Testimonial evidence is admissible to prove a “mutual promise to marry” in an action for actual damages based on the breach of the promise.

(4) An agreement for the sale of goods, chattels, or things in action, at a price less than P500.00.

• The writing, note or memorandum must be signed by the person charged or by his representative.

• The signature of the seller is dispensed with, if the sale was effected at an auction sale.

• The law did not say “public” auction – hence, private auctions are included as the law made no distinction.

(5) An agreement for leasing for a period of more than one year, or for the sale of real property or of an interest therein.

• If the lease is exactly for one year, it is enforceable even if not in writing – it must be for more than one year to require its reduction to writing.

• An oral agreement to sell a parcel of land is unenforceable – however, if there has been already a payment made or delivery, it is taken out of the coverage of the Stature of Frauds.

• The partition of inherited property need not be embodied in a public document so as to be



effective as regards the heirs that participated therein, because it is not legally deemed a conveyance of real property.

• Interest in real property refers to any claim or right on a real property such as voluntary easement, usufruct, right of a mortgage of real estate, right of a transferee of a co-owner’s share over real property.

(6) A representation as to the credit of a third person.

• Representation is an assurance given by a person as to the good of a third person – In effect, a contractual relation is established between two persons because of the representation.

• In guaranty, there is a promise to answer for the debt of another, whereas, in representation there is merely an assurance that somebody has a certain amount of credit to influence the supposed creditor to give or grant a favour to the supposed debtor.

• In guaranty, the guarantor participates directly in the contract, whereas, in representation the one making the representation does not take part in the contract proper.

Cruz v. JM Tuason and Co., Inc G.R. No L-23749 April 29, 1977 Digested by: Kimberly Rae Sison

Facts: In 1952 the defendants JM Tuason and Co., Inc and Gregorio Araneta, Inc. availed of Faustino Cruz’s services as intermediary in a civil case between the defendants and the Deudors to work for the amicable settlement of a civil case. The civil case involved 50 quinones of land of which 3,000 square meters of land was occupied by Cruz and was promised to him by the defendants "within ten years from and after date of signing of the compromise agreement", as consideration for his services. However, 10 years after the amicable settlement has been reached, the defendants refused to convey to Cruz the 3,000 square meters of land promised to him. Issue: Is the claim of Faustino Cruz over the 3,000 square meters of land unenforceable under the statute of frauds? Held: No. The statute of frauds does not apply to an alleged contract whereby one party agreed to deliver a parcel of land to another in consideration of the latter’s acting as intermediary to effect a compromise agreement in a civil action. Ratio: It is elementary that the Statute refers to specific kinds of transactions and that it cannot apply to any that is not enumerated therein. And the only agreements or contracts covered thereby are the following: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; (2) Those 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 for 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.

(3) Those where both parties are incapable of giving consent to a contract. (Art. 1403, civil Code.) In the instant case, what appellant is trying to enforce is the delivery to him of 3,000 square meters of land which he claims defendants promised to do in consideration of his services as mediator or intermediary in effecting a compromise of the civil action, Civil Case No. 135, between the defendants and the Deudors. In no sense may such alleged contract be considered as being a "sale of real property or of any interest therein." Indeed, not all dealings involving interest in real property come under the Statute. Moreover, appellant's complaint clearly alleges that he has already fulfilled his part of the bargains to induce the Deudors to amicably settle their differences with defendants as, in fact, on March 16, 1963,

through his efforts, a compromise agreement between these parties was approved by the court. In other words, the agreement in question has already been partially consummated, and is no longer merely executory. And it is likewise a fundamental principle governing the application of the Statute that the contract in dispute should be purely executory on the part of both parties thereto. Laws that govern unauthorized contracts:

• Article 1317; and • Articles 1868 to 1932.

The ratification of an unauthorized contract has the effect of cleansing the contract from all its defects from the moment it was constituted. Unenforceable contracts may be ratified in two ways:

(1) Failure to object to the presentation of oral evidence – this is tantamount to a waiver; and

(2) Acceptance of benefits under these contracts – this is equivalent to waiver or estoppels.

If the oral contract was reduced into writing by the party charged, such exercise is called recognition – it is an express ratification of the contract. If the contract is enforceable under the Statute of Frauds because it is duly evidenced by a writing, note or memorandum, but it cannot be registered because it is not in a public instrument, the party concerned may compel the opposite party to formalize it in the proper form required by law. If the latter refuses, the court will issue the necessary order to that effect. If despite the order, the concerned party continues to refuse to execute the contract, the Court may authorize the Deputy Clerk of Court to execute the document in behalf of the refusing party.



The article applies only when the contract involved is both valid and enforceable.

When both contracting parties to the purported contract are not capacitated to give consent, the contract is unenforceable – however, it may be ratified:

(1) If ratification is only on the side of one of the contracting parties, that is, by the parent or guardian, the contract is transformed into a voidable contract on the part of the party who did not ratify.

(2) If ratification is made by both sides, that is, by the parents or guardians, the contract is validated from its inception.

As the defense of the Statute of Frauds is personal to the availing party in the contract, it cannot be set up as a defense by strangers to the transaction.

CHAPTER 9 VOID AND INEXISTENT

CONTRACTS 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;

2. Those which are absolutely simulated or fictitious;

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;

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.

These contracts cannot be ratified. Neither can the right to set up the

defense of illegality be waived. Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise. (1305)

Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed:

1. When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking;

2. When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply his promise. (1306)

Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment. Art. 1414. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has



been caused to a third person. In such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or property.

Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands allow recovery of money or property delivered by the incapacitated person.

Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designated for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.

Art. 1417. When the price of any article or commodity is determined by statute, or by authority of law, any person paying any amount in excess of the maximum price allowed may recover such excess.

Art. 1418. 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. 1419. 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. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.

Art. 1421. The defense of illegality of contract is not available to third persons whose interests are not directly affected.

Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.

Article 1409 provides for the second

type of void contracts. The first type of void contracts refer to Article 1318

An inexistent contract is one, which lacks one or more of the essential elements of a contract, that is, it lacks any, some or all of the following elements: consent, object or cause.

Salient Characteristics of Void or Inexistent Contracts:

1. Generally, they produce no civil effects either in favor of or against anyone

2. They are not susceptible to ratification

3. The right to set up the defense of their inexistence or absolute nullity cannot be waived

4. The action or defense for the declaration of the inexistence of the contract does not prescribe

5. The defense of illegality of contracts cannot be invoked by 3rd persons whose interest are not directly affected

6. No action is needed to set them aside because their nullity exist ipso jure. However, if there has been performance already, the intervention of the court is necessary to declare its nullity and decree the restitution of what has been given by virtue thereof.

7. Parties to a void agreement cannot expect the aid of the law- the courts leave them as they are, because they are deemed in pari delicto or in equal fault

8. They cannot give rise directly to another contract

Spouses Rongavilla v. CA

G.R. No. 83974 | August 17, 1998 Digested by: Justin Sucgang

Facts: Private respondents Dela Cruz sisters were the aunts of the petitioner Dolores Rongavilla. They borrowed P2,000 from the Rongavillas to have their dilapidated rooftop repaired.



-A month later, the petitioners went back to their aunts to have them sign a contract. Taking advantage of their lack of education (the Dela Cruz sisters were spinsters and just earned their livelihood as embroiderers), they were made to believe that such document, typewritten in english, was just for the “acknowledgment” of their debt. -After the lapse of four years, petitioners asked their aunts to vacate the land subject to litigation (located in Manuyo, Las Pinas) claiming that she and her husband were the new owners. After verifying with the Registry of Deeds, the aunts were surprised that what they have signed was actually a deed of sale.

Their land title was cancelled and the ownership was transferred to their nephews. The land was mortgaged with the Cavite Development Bank.

-Both the trial court and the Court of Appeals ruled in favour of the aunts and had the contract declared void and inexistent for:

Lack of consent. “A careful analysis and meticulous evaluation of the evidence on record has convinced the Court that the sale of their property to the defendants was farthest from the plaintiffs' minds. The Court believes that when plaintiffs voluntarily signed the document which turned out to be a deed of sale, they were misled by defendant Dolores Rongavilla and her sister Juanita Jimenez into believing that what they signed was a document acknowledging the loan of P2,000.00 extended them by said defendant.” Want of consideration. “The Deed of Absolute Sale (Exh. "1") mentions a consideration of P2,000.00. Three years after the alleged sale, the same property was mortgaged by defendant spouses with the Cavite Development Bank for P40,000.00. Clearly enough, the gross inadequacy and unconsciounableness [sic] of the consideration deters the Court from subscribing to defendants' theory that plaintiffs sold the property to them. It is more reasonable to assume that the amount of

P2,000.00 mentioned in the deed refers to the loan defendants extended to plaintiffs for the same amount.”

Issue: Was the deed of sale void and inexistent? Held: Yes. The whole question would boil down to one of credibility between two camps. Ratio: Despite the petitioners' insistence that the deed of sale is presumed valid and, being registered, could not be disturbed anymore, we however find their arguments and ratiocination less than persuasive. While petitioners would not want the deed of sale to be impugned, they themselves contradict the recitals therein. On the vital point of consideration, they and their witnesses, namely Juanita Jimenez and Atty. Arcadio Espiritu repeatedly declared that the true consideration paid for the sale of the land was not P2,000 as stated in their own Exhibit "1", the Deed of Sale, but in fact P7,800.00. By their own testimony, the petitioners are pictured as not exactly averse to bending the truth, particularly the purported consideration. Sadly, the irony of it is that while they claimed they were regularly paying taxes on the land in question they had no second thoughts stating at the trial and later on appeal that they had resorted to doctoring the price stated in the disputed Deed of Sale, allegedly "to save on taxes". That admission surely opens the door to questions on the integrity, genuineness and veracity of said public instrument.Thus, the trial court could not be said to err in asserting that "while it is true that public documents are presumed genuine and regular under the provisions of the Rules of Court, this presumption is a rebuttable presumption which may be overcome by clear, strong and convincing evidence."

The nullity of void or inexistent contract is permanent and fixed and the same cannot be cured by ratification

A contract, which does not exist in the eyes of the law cannot be confirmed or ratified



If a new contract had been entered into, and at the time of its execution the cause of the nullity of the first contract had already ceased, the new and second contract is valid, although its effect will not retroact to the date of the first contract.

A void of contract is inexistent from the beginning and the right to set up the defense of its illegality cannot be waived.

If the contract is absolutely simulated, it is void for absolute lack of consent. If the contract is merely relatively simulated, the inteded contract is binding provided no 3rd person is prejudiced and is not intended for any purpose contrary to law, morals, good customs, public order or public policy.

Not all contracts between family members are fictitious because, by itself, consangunity is not proof of simulation.

Marin v. Adil

G.R. No. L-47986 | July 16, 1984 Digested by: Justin Sucgang

Facts: The parties were first cousins. The private respondent brothers Armadas, residing in Janiuay, Iloilo were expecting to inherit some lots in General Santos, Cotabato from their uncle. Meanwhile, Marin, who resided in Koronadal, Cotabato had hereditary rights in the estates of her parents in Janiuay, Iloilo. -The executed a deed of exchange: “That both parties hereto hereby acknowledge that the exchange contained herein operates to their individual and mutual benefit and advantage, for the reason that the property being ceded, transferred, conveyed and unclaimed by one party to the other is situated in the place where either is a resident resulting in better administration of the aforementioned properties.” -But the expected land in Gen. Santos City was adjudicated to Soledad, sister of Marin. So, the Armadas and other heirs sued Soledad for claiming to be the sole heir of their uncle, but ended in a compromise where the Armadas were awarded two lots. -The problem arose because Marin waived, renounced and quitclaimed her share in her

parents’ estate in favour of her another sister Aurora. Hence, she cannot anymore fulfil her obligations in her signed deed of exchange with the Armadas. The Armadas then filed an instant rescisorry action against Marin. Issue: Did Armadas’ action prescribe? Held: No. The action to declare contracts void and inexistent does not prescribe (NCC 1410). Ratio: Marin never inherited from her parents.

Her conduct showed that she considered herself not bound by it. Five years after that deed, or on November 14, 1968, she agreed to convey to her sister, Aurora Provido-Collado, her interest in two lots in January in payment of her obligation amounting to P1,700. Then, in the extra-judicial partition of her parents' estate on June 25, 1977 (where the instant case for rescission was already pending), her share with a total area of 9,010 square meters, was formally adjudicated to Aurora. It was stated therein that Mrs. Marin "has waived, renounced and quit-claimed her share" in favor of Aurora. As already stated, that share was supposed to be exchanged for the two lots in General Santos City which the Armadas received in 1976 after a pestiferous litigation.

-It is evident from the deed of exchange that the intention of the parties relative to the lots, which are the objects of the exchange, cannot be definitely ascertained. We hold that this circumstance renders the exchange void or inexistent (Art. 1378, 2nd par. and Art. 1409 [6], Civil Code). -It should be noted that in paragraph 7 of Mrs. Marin's answer with affirmative defense she avers therein that her 1968 agreement with her sister means that she would convey her properties to the latter (Aurora) when the Armadas should be "adjudged to be without rights or interests to any properties in General Santos City" (p. 47, Rollo of L-



49018). Such a qualification is not found in her agreement with her sister. -Because of that impossibility, the Armadas could rescind extrajudicially the deed of exchange (Art. 1191 Civil Code; 4 Tolentino, civil Code, 1973 Ed., pp. 171-172). If Mrs. Marin should sue the Armadas, her action would be barred under the rule of exceptio non adimpleti contractus (plaintiff is not entitled to sue because he has not performed his part of the agreement). Distinctions Between Void and Rescissible Contracts Basis Void

Contracts Rescissible Contracts

1. Nature of defect

The defect is inherent in the contract itself

The defect is in its effects, which is either against one of the parties or a 3rd person

2. Interest served

Nullity is a matter of law and public interest

It is based on equity and is more a matter of private interest

3. Consequences when no action is filed

There are no legal effects even if no actiion is filed to set it aside

Contracts remains valid if no action is filed. It produces legal effects

4. Prescription Action to declare its nullity does not prescribe

Action to rescind contract prescribes within 4 years

Distinction Between Void and Voidable Contracts Basis Void

Contracts Voidable Contracts

1. Cause of defect

Absence of essential element/s of a contract

Consent is vitiated or there is incapacity to give consent

2. Effect It has no effect even if not set aside because it is non-existent

It is a valid contract until it is set aside

3. Ratification

It cannot be ratified

It can be ratified

4. Against whom can nullity be set up

Its nullity can be set up against any person asserting right arising from it, and his successors in interest not protected by law

Its nullity can be set up only against a party thereto

5. Prescription

Action to declare nullity of contract does not prescribe

Action to annul contract prescribes within 4 years.

Distinctions Between Void and Unenforceable Contracts Basis Void

Contracts Unenforceable Contracts

1. Status There is no contact at all

There is a contract but which cannot be enforced

2. Ratification

It is not subject to ratification

It is subject to ratification

3. Attack by 3rd persons

It can be assailed by 3rd persons whose interests are directly affected

It cannot be assailed by 3rd persons

4. Causes Causes of nullity are those enumerated in article 1409

Cause of unenforceability are enumerated in Article 1403

Action to declare the inexistence of a contract is imprescriptible



Defense that a contract is null and void can be put up anytime A void contract remains void when even if no court has declared its inecxistentce or illegality. However, there are certain contracts the nullity of which is apparent on their faces. And considering that there is a presumption of regularity of contracts, it is the better part of prudence that the interested party should go to court first to avoid inconvenience or to avoid taking the law into his own hands when the other party refuses to restore what he had received out of the void contract. Laches is the failure or neglect, for an unreasonable length of time, to do that which by exercising due diligence could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, waranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it. The prevailing doctrine that the right to have declared void ab initio may be barred by laches although not barred by prescription is MWSS v. CA Mertopolitan Waterworks and Sewerage

System (MWSS) vs CA G.R. No. 126000 Oct 7 1998

Digested by: Michael Vincent Uy

Facts: Petitioner MWSS leased around 128 hectares of its land to respondent CHGCCI for 25 years and renewable for another 15 years and allowing the latter to exercise a right of first refusal should the subject property be made open for sale. Pursuant to Letter of Instruction No. 440 issued on July 29 1976 by then Pres. Marcos directed petitioner MWSS to negotiate the cancellation of the MWSS-CHGCCI lease agreement for the disposition of the subject property. Upon being informed that petitioner MWSS and respondent CHGCCI had already agreed in principle on the purchase of the subject property, President expressed his approval of the sale. The Board of Trustees of petitioner MWSS then passed a Resolution 36-83 ,approving the sale of the subject propert in favor of respondent SILHOUETTE, as assignee of respondent CHGCCI at the

appraised value given by Asian Appraisal Co. The MWSS- SILHOUTTE sales agreement eventually pushed through. Afterwards, respondent SILHOUTTE sold to Ayala 67 hectares Almost a decade later , petitioner MWSS on March 26 1993 filed an action against all respondents seeking the declaration of nullity of the MWSS- SILHOUTTE sales agreement and all subsequent conveyance. On the other hand, respondent Ayala defenses were (1) prescription,(2) laches (3) waiver/estoppels/ratification (4) no cause of action (5) non-joinder of indispensible parties. The trial court dismisses the complaint on grounds of prescription, laches, estoppels and non-joinder of indispensable parties and was affirmed by the CA. Issue: Is the contract of sale void or voidable Held: Yes, the contract was not void but only voidable. The petitioner admits that it consented to the sale of the property with the qualification that such consent was allegedly unduly influenced by then President Marcos. The vitiation of MWSS’s consent does not make the sale null and void ab initio. A contract where consent is given through mistake, violence, intimidation, undue influence or fraud is voidable. If the contract is voidable, the prescription period is 4 years under Art 1391 of the New Civil Code. In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases and in case of mistake or fraud, from the time of the discovery of the same time.

Ratio: As noted by both lower courts, petitioner MWSS admits that it consented to the sale of the property, with the qualification that such consent was allegedly unduly influenced by the President Marcos. Taking such allegation to be hypothetically true, such would have resulted in only voidable contracts because all three elements of a contract, still obtained nonetheless. The alleged vitiation of MWSS' consent did not make the sale null and void ab initio. Thus, "a contract where consent is given through mistake, violence, intimidation, undue influence or fraud, is voidable" . Contracts "where consent is vitiated by mistake, violence, intimidation, undue influence or



fraud" are voidable or annullable . These are not void as — Concepts of Voidable Contracts. — Voidable or anullable contracts are existent, valid, and binding, although they can be annulled because of want of capacity or vitiated consent of the one of the parties, but before annulment, they are effective and obligatory between parties. Hence, it is valid until it is set aside and its validity may be assailed only in an action for that purpose. They can be confirmed or ratified. As the contracts were voidable at the most, the four year prescriptive period under Art. 1391 of the New Civil Code will apply. This article provides that the prescriptive period shall begin in the cases of intimidation, violence or undue influence, from the time the defect of the consent ceases", and "in case of mistake or fraud, from the time of the discovery of the same time". Hypothetically admitting that President Marcos unduly influenced the sale, the prescriptive period to annul the same would have begun on February 26, 1986 which this Court takes judicial notice of as the date President Marcos was deposed. Prescription would have set in by February 26, 1990 or more than three years before petitioner MWSS' complaint was failed. However, if petitioner MWSS' consent was vitiated by fraud, then the prescriptive period commenced upon discovery. Discovery commenced from the date of the execution of the sale documents as petitioner was party thereto. At the least, discovery is deemed to have taken place on the date of registration of the deeds with the register of Deeds as registration is constructive notice to the world. Given these two principles on discovery, the prescriptive period commenced in 1983 as petitioner MWSS actually knew of the sale, or, in 1984 when the agreements were registered and titles thereafter were issued to respondent SILHOUTTE. At the latest, the action would have prescribed by 1988, or about five years before the complaint was instituted.

Elements of Laches: 1. Conduct on the part of the

defendant or one under whom he claims, giving rise to the situation complained of

2. Delay in aserting complaint’s right after he had knowledge of the defendant’s conduct and after he has an opportunity to sue

3. Lack of knowledge or notice on the part of the defendant that the complaint would assert the right on which he bases his suit

4. Injury or prejudiced to the defendant in the event relief is accorded to the complainant. Unlike estoppel, laches as an equitable defense usually bars only the equitbale enforcement of a right but not the right itself. It is an affirmative defense and the burden of proving it rests on the defendant.

The doctrine of laches is inapplicable when the claim was filed within the prescriptive period set forth under the law. If a contract is void because of the nullity of the cause or object and it happens that the transaction constitutes a criminal offense, both parties are in pari delicto, they shall have no cause of action against each other. To make Article 1411 applicable the following requisites must be present:

1. The contract entered into by the contracting parties is null and void and nullity arises from the illegality of the cause or object of the contract. Illegality of motives is different

2. The transaction agreed in the contract constitutes a crime

3. The contracting parties are in part delicto, that is, the fault of one party is more or less equal or equivalent to the fault of the other party.

The consequences of pari delicto in Article 1411:

1. The parties shall have no action against each other

2. Both parties shall be prosecuted criminally for their crime

3. The things or price of the contract may be confiscated by the State in



accordance with Article 45 of the RPC, which is made applicable.

Article 1411 will apply even if there is no in pari delicto situation provided one of the contracting parties is guilty of the act, which made the ocntract unlawful. The innocent party may claim what he has given to the party and is not bound to comply with his promise. In Article 1411, the nullity of contract arises from the illegality of the cause or object. In Article 1412, the act does not constitute a criminal offense. The rules to follow under article 1412:

1. If both parties are in pari delicto, they cannot recover what they had given under the contract; moreover, they cannot demand the performance of the undertaking or promise of the other party.

2. If only one of the contracting parties is at fault, the one at fault cannot recover what he has given under the contract; further, he cannot demand the fulfillment of the promise of the other. On the other hand , the one who is not at fault, may demand the return of what he has given without any obligation to comply with his promise or undertaking to the other.

The priciple of pari delicto non oritur acto is not absolute. The excetion, is that if the parties are not equally gulity. In this case the principle will not apply. The law will give relief to the party who is the more excusable than the other. With regards to Article 1413 it should be noted that the usury law was suspended by Circular No. 905, series of 1982 of the Central Bank. A party in an unlawful contract may repudiate the contract provided the purpose/s for which the contract was constituted had not yet been accomplished, or before any damage has been caused to a 3rd person. After the accomplishment of the purpose/s of the illegal contract, the parties could not longer repudiate the act already performed. It is just too late to invoke the benefits accorded under the article. The

parties will face the consequences of their act. The party who entered into an illegal contract is not capacitated to give his consent, he may be allowed to recover the money or property he had delivered by reason thereof. The recovery, however, will be allowed only if the interest of justice so demands. When a law is merely prohibitive, and designed to protect the plaintiff, the latter may be allowed, if public policy is enhanced, to recover what he has paid or delivered to the other party. When by universally recgnized standards, an act or contract is by its very nature bad, improper, immoral or contrary to conscience, said act or contract is set to be illegal per se. Illegal per se contracts are forbidden because of public interest.

Ras v Sua G.R. No. L-23302 Sept 25 1968 Digested by: Michael Vincent Uy

Facts: Alejandro Ras filed a complaint to secure recovery of possession of a parcel of land which he leased to the spouses Ramon and Estela Sua. He alleged that on Feb 25 1958, he leased the land which he acquired from National Abaca and Other Fibers Corporation to the defendants because he was in need of money. He was unaware of the provisions of RA 477. He leased it for 3 years for a consideration of P2500; that under the contract, the lessees assumed the obligation to pay the government the yearly installments when they fall due as well for the taxes for the duration of lease which was later on extended for 10 yrs; that the lessees failed to pay the taxes on the land and the installments duet to NAFCO and when the defendant refused to pay the said dues. The defendant spouses denied the allegation move for the dismissal of the case on the ground that the cause of action has prescribed and that plaintiff was not able to prove his case. They contend that since the plaintiff’s action which is for rescission of contract under art 1191 of the civil code, prescribed in 4 years; that since the contract of lease was entered into on Feb 25 1958,



the present action commenced on May 6 1963 was already barred by prescription The lower court ruled in favor of the plaintiff that not only there had been a violation of the court by defendants’ failure to pay the taxes on the land but also the lease of the property was prohibited under Sec. 8 of RA 477. Defendants instituted an appeal reiterating the claim that the cause of action in this case is barred by prescription. Issue: Has the plaintiff’s cause of action already prescribed? Held: No, the cause of action imprescriptible because it violates the law which is RA 477. Ratio: For the purpose of resolving this issue of prescription raised by appellants, there is no need for the distinction. Whether the case was filed to rescind or to annul the lease would not improve appellants' position, which we find to be untenable. For while it is true that the original lease agreement (Exhibit C) was executed on 25 February 1958, whereas the case was instituted on 6 May 1963, or more than 4 years thereafter, yet it also appears that the contracts of lease (Exhibits D, E, F and G) subsequently entered into by the parties uniformly contain the following provisions, to wit: NOW, THEREFORE, in consideration of the herein premises and the amount of ONE THOUSAND PESOS, Philippine Currency, paid by the Lessee to the Lessor, the Lessor extends and grants in favor of the lessee extension of two (2) more years of the lease contract they entered which extension shall take effect on 2 April 1961 and terminates on 2 April 1963; The parties also agree to incorporate as part of this amended and extended lease contract all the stipulations, namely, numbers 1 to 5 of the contract of lease they entered in 25 February 1958. (Exhibit D); with the only difference that in Exhibit E, the consideration was P400.00 and the contract (to extend the lease period) was to "take effect on 2 April 1963 and terminates on 2 April 1964"; Exhibit F, executed on 29 July 1960, was for P600.00, to "take effect on 2

April 1964 and terminates on 2 April 1966; and Exhibit G, executed on 26 January 1962, was for P600.00, to "take effect on 2 April 1966 and terminates on 2 April 1968." In other words, these contracts Exhibits D, E, F and G did not just modify the original lease by extending the period originally agreed upon. By themselves, they constitute individual contracts, distinct from the agreement of 25 February 1958, each to be effective within the period specifically mentioned therein. Thus, the lifetime of Exhibit D was only from 2 April 1961 to 2 April 1963; Exhibit E, from 2 April 1963 to 2 April 1964; Exhibit F, from 2 April 1964 to 2 April 1966; and Exhibit G, from 2 April 1966 to 2 April 1968. It follows, therefore, that even were the actions filed on 6 May 1963 be treated as one for rescission, insofar as Exhibits F and G are concerned, the cause of action still subsists. It is for this reason that the lower court annulled only these two contracts yet unenforced. Of course, there is stronger ground for affirming the ruling of the court below if the action were considered as one for annulment of the agreement as one prohibited by law. The right to seek the declaration of the inexistence of a contract, for being in violation of law, is imprescriptible. Article 1417 applies only if there is a law or regulation issued by competent authority fixing the maximum price for the sale of any article or commodity. The aim of the law is to prevent profiteering, which is inimical to the interest of the people. Any payment made in excess of the maximum limit is recoverable. Employees are required to observe not more than eight-hour labor work each day of employment under the eight-hour labor law. They are entitled to additional compensation for services rendered beyond the time limit. If laborer has agreed to receive a wage lower than the minimum wage fixed by law, he is not barred from recovering the deficiency. Such contract or agreement is void under the minimum wage law. Article 1420 applies only if there are several stipulations, terms, or conditions in the contract. If some of the stipulations are illegal and others are valid, the latter if seperable from the former shall be effective and enforceable.



The rule of divisibility or seperability can’t apply in 2 situations:

1. When the contract by its nature requires indivisibility

2. When the parties intended the contract to be entire or indivisible.

In cae of doubt on whether the terms of a contract are indivisible or divisible, the same will be presumed as divisible. Under the principle of relativity of contracts only the parties, their assigns and heirs are bound. The reason is that such contracts do not determine the rights and obligations of 3rd persons who are not privies thereto. They can’t produce any effects insofar as 3rd persons are conscerned. However, there are exceptions to the rule. Article 1421 clearly implies that 3rd persons may be allowed to put up the defense of illegality of contracts if their interests are directly affected. If not, they cannot invoke the illegality of a contract. Article 1422 speaks of 2 contracts. The first one is illegal or unlawful. This illegal contract is superseded by another contract between the same parties. As the latter contract is the direct result of the illegal contract, it is also void and inexistent.

Spouses ANTONIO and LUZVIMINDA GUIANG v Court of Appeals and Gilda

Corpuz G.R. No. 125172 June 26, 1998

Digested by: Victor Reynaldo Ang Facts: Judie and Gilda Corpuz were legally married on December 24, 1968. While his wife was away and without her consent, Judie Corpuz sold half of their conjugal peoperty specifically their residence and the lot on which it stood. The Guiangs who bought the property from Judie Corpuz then entered into a compromise agreement with Gilda Corpuz with the help of the Barangay office. Issue: Is the sale merely voidable? If so, is the compromise valid? Held: No. Both the contract of sale and the amicable settlement (compromise) are void. Ratio: By the specific provision of the law [Art. 1390, Civil Code] therefore, the Deed to

Transfer of Rights (Exh. "A") cannot be ratified, even by an "amicable settlement". The participation by some barangay authorities in the "amicable settlement" cannot otherwise validate an invalid act. Moreover, it cannot be denied that the "amicable settlement (Exh. "B") entered into by plaintiff Gilda Corpuz and defendent spouses Guiang is a contract. It is a direct offshoot of the Deed of Transfer of Rights (Exh. "A"). By express provision of law, such a contract is also void. Thus, the legal provision, to wit: Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent. (Civil Code of the Philippines). Neither can the "amicable settlement" be considered a continuing offer that was accepted and perfected by the parties, following the last sentence of Article 124. The order of the pertinent events is clear: after the sale, petitioners filed a complaint for trespassing against private respondent, after which the barangay authorities secured an "amicable settlement" and petitioners filed before the MTC a motion for its execution. The settlement, however, does not mention a continuing offer to sell the property or an acceptance of such a continuing offer. Its tenor was to the effect that private respondent would vacate the property. By no stretch of the imagination, can the Court interpret this document as the acceptance mentioned in Article 124. Simply put, the sale of a conjugal property requires the consent of both the husband and the wife. The absence of the consent of one renders the sale null and void, while the vitiation thereof makes it merely voidable. The nullity of the contract of sale is premised on the absence of Gilda Corpuz’s consent. To constitute a valid contract, the Civil Code requires the concurrence of the following elements: (1) cause, (2) object, and (3) consent



TITLE III 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. 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.

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.

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)

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.

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.

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. Article 1423 Obligations may be:

Civil Natural

Give a right of action to compel their performance

Do not grant a right of action to enforce their performance, BUT if fulfilled spontaneously, one cannot recover what he had delivered (Art. 1424).

Basis:

- Not based on positive law but derived from reason and nature

- equity and natural law - good conscience and its

compliance depends on the morality of a person

Requisites of Natural Obligations A.) Judicial tie between two parties B.) Tie is not based on law but on the

conscience of man

Natural Obligations vs Moral Obligations Natural Obligations Moral Obligations Juridical tie previously existed between the parties but due to certain

No juridical tie



intervening causes they are unenforceable in courts Voluntary fulfillment by the debtor is legal fulfillment with legal effect

Performance is pure act of liberality which comes from blood, affection or benevolence

Within the domain of law

Within the domain of morals

Produces legal effect when fulfilled

Does not produce legal effect

Natural Obligations vs Civil Obligations Natural Obligations Civil Obligations Not based on positive law but on equity and natural law

Arise from law, contracts, quasi-contracts, delicts and quasi-delicts

Cannot be enforced in court because obligee has no right of action to compel its performance

Enforceable in courts because oblige has right of action to compel performance

Conversion of natural obligation to civil obligation

1.) Novation 2.) Confirmation or ratification

Other natural obligations: a.) Support given to unrecognized

illegitimate children b.) Interest voluntarily paid for the use

of money even if not agreed upon c.) Support given to relatives which are

not made by law d.) Indemnification given to a woman

who was seduced, although the accused was not convicted

Effects of payment by third party (Article 1425)

a.) If with consent, the third party must be reimbursed for what he had paid in addition to what they agreed upon

b.) If without consent or against the will, third person can only recover insofar as the payment has been beneficial to the debtor, if there is not benefit, third person must suffer the loss.

RA 6809 modified Art. 1426 and 1427 – from between18-21 years, legal age had been reduced to 18 years Effect of partial performance (Article 1428)

a.) If legally susceptible of confirmation or ratification:

It is converted into civil obligation hence what has been paid cannot be recovered.

b.) If not legally susceptible of confirmation or ratification:

Can be the basis of a cause of action for recovery of what has been delivered since it was not converted into a legal obligation.

TITLE IV ESTOPPEL

Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. Art. 1432. The principles of estoppel are hereby adopted insofar as they are not in conflict with the provisions of this Code, the Code of Commerce, the Rules of Court and special laws.

Art. 1433. Estoppel may be in pais or by deed.

Art. 1434. When a person who is not the owner of a thing sells or alienates and delivers it, and later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer or grantee.



Art. 1435. If a person in representation of another sells or alienates a thing, the former cannot subsequently set up his own title as against the buyer or grantee.

Art. 1436. A lessee or a bailee is estopped from asserting title to the thing leased or received, as against the lessor or bailor.

Art. 1437. When in a contract between third persons concerning immovable property, one of them is misled by a person with respect to the ownership or real right over the real estate, the latter is precluded from asserting his legal title or interest therein, provided all these requisites are present:

• (1) There must be fraudulent representation or wrongful concealment of facts known to the party estopped; (2) The party precluded must intend that the other should act upon the facts as misrepresented; �(3) The party misled must have been unaware of the true facts; and �(4) The party defrauded must have acted in accordance with the misrepresentation.

Art. 1438. One who has allowed another to assume apparent ownership of personal property for the purpose of making any transfer of it, cannot, if he received the sum for which a pledge has been constituted, set up his own title to defeat the pledge of the property, made by the other to a pledgee who received the same in good faith and for value. Art. 1439. Estoppel is effective only as between the parties thereto or their successors in interest.

A legal concept that precludes a person from denying or asserting anything to the contrary to that which has been, in contemplation of law, established as the truth either by acts of judicial or legislative officers, or by his own deed or representations either express of implied (19 Am. Jur. 601)

Applies only to questions of fact and not of law

Based on moral rights and natural justice

Elements of Estoppel (FIK): 1. There is false representation or

concealment of material facts 2. Intent to influence another

person 3. Knowledge, actual or

constructive, of the real facts Representation must be plain and

clear. It cannot be based on mere doubtful inferences.

Promissory Estoppel o Definition o Essential Elements(PID):

1. Presence of a promise 2. Said promise induced

another person to do an action

3. Presence of a detrimental result

When estoppels cannot apply: 1. When it is against the

government 2. When it is against a Municipality

or City 3. When it validates unlawful acts 4. When it is raised on the ground

of ignorance of the law 5. In probate proceedings

A person who sells and delivers a thing that is not his thereafter the buyer acquires thing, the former can’t deny the validity of the sale.

TERMINAL FACILITIES AND SERVICES CORPORATION v. PHILIPPINE PORTS AUTHORITY and PORT MANAGER, and PORT DISTRICT OFFICER OF DAVAO

CITY GR. NOS. 135639 and 135826- February

27, 2002 Digested by: Bon Jeffrey Caluag

Facts: TEFASCO, a domestic corporation, engaged in the business of providing port and terminal facilities,



arrastre, stevedoring and other port-related services. Around 1975, TEFASCO submitted a proposal to the Philippine Ports Authority to construct a specialized terminal complex with port facilities and provide port services in Davao City. PPA accepted the proposal which was approved by the committee it created to study it. Resolution No. 7 was passed accepting the project proposal. Through a letter dated 7 May 1976, PPA stipulated the “Terms and Conditions of PPA Board Approval of the Project Proposal”. Long after TEFASCO have gone to the infrastructure work, the PPA passed Resolution No. 50 requiring TEFASCO, without asking for one, to submit an application for construction permit and thus imposing significant changes in the contract. This was complied with by TEFASCO. Two years after the facilities completed and the operation started, PPA again issued another permit, which includes the provisions for ten percent (10%) government share out of arrastre and stevedoring gross income and one hundred percent (100%) wharfage and berthing charges. TEFASCO repeatedly asked PPA for extensions to pay these additional obligations and for reduction in the rates. But the PPA's response was final and non-negotiable statements of arrears and current accounts and threats of business closure in case of failure to pay them. After which, the parties executed a Memorandum of Agreement (MOA) which provides the acknowledgement of TEFASCO on the share of the government on arrastre and stevedoring income and the reduction of which from 10% to 6%. PPA on the other hand, promised to issue the necessary permits for TEFASCO’s port activities.

TEFASCO complied with the MOA and paid the accrued and current government share. However, TEFASCO later sued PPA seeking for refund of the government shares and payment of damages. RTC ruled in favor of TEFASCO but was later modified by the Court of Appeals. TEFASCO prays for the reinstatement of the Trial Court’s order while PPA seeks to set aside the award of actual damages. Issue: Should PPA be held liable for the payment of damages and reimburse the collected government share and be estopped from creating changes to terms and conditions of the contract? Held: YES. The Court finds the additional terms and conditions passed by PPA besides those stated in Resolution no.7 and the letter on May 7, 1976 is unreasonable and the said resolution and letter should be the only source of obligation between the parties. Such conditions were already followed by TEFASCO thus making it late for PPA to change rules of engagement. Likewise the collection of wharfage dues and berthing charges are void for failure to comply with Sec. 19, P.D. No. 857 as amended. Also, the collection of government share is not valid as such exaction does not exist in the contract and hence is not a binding prestation between TEFASCO and PPA. Lastly, the Memorandum of agreement is invalid for want of consent and consideration. Thus, PPA should be estopped from making changes and breaking the stipulated terms and conditions exclusively contained in their committee report, resolution, letter and its enclosure.



Rationale: “The record shows that PPA made express representations to TEFASCO that it would authorize and support its port project under clear and categorical terms and conditions of an envisioned contract. TEFASCO complied with its obligation which ultimately resulted to the benefit of PPA. And the PPA accepted the project as completed and authorized TEFASCO to operate the same. Under these circumstances, PPA is estopped from reneging on its commitments and covenants as exclusively contained in the inter-agency committee report, PPA Resolution No. 7 and PPA letter dated May 7, 1976 and its enclosure.” “PPA has not cited - nor have we found - any law creating the TEFASCO Port as a national port or converting it into one. Hence, following case law, we rule that PPA erred in collecting berthing fees from vessels that berthed at the privately funded port of petitioner TEFASCO.” “We stress that the cause of the contract between TEFASCO and PPA was, on the part of the former, to engage in the business of operating its privately owned port facilities, and for the latter, to decongest port traffic in Davao City and concomitantly to enhance regional trade. The records of the project acceptance made by PPA indicate that the contract was executed not to earn income for PPA or the government as justification for the subsequent and unfair imposition of government share in the arrastre and stevedoring gross income of TEFASCO. Hence this charge was obviously an after-thought conceived by PPA only after the TEFASCO port had already begun its

operations. The sharing scheme only meant that PPA would piggy back unreasonably on the substantial investment and labor of TEFASCO. As the scheme was subsequently stipulated on percentage of gross income, it actually penalized TEFASCO for its hand work and substantial capital expenditures in the TEFASCO port and terminal.” “What was clearly stated in the terms and conditions appended to PPA Resolution No. 7 was for TEFASCO to pay and/or secure from the proper authorities "all fees and/or permits pertinent to the construction and operation of the proposed project." The government share demanded and collected from the gross income of TEFASCO from its arrastre and stevedoring activities in TEFASCO's wholly owned port is certainly not a fee or in any event a proper condition in a regulatory permit. Rather it is an onerous "contractual stipulation" which finds no root or basis or reference even in the contract aforementioned.”

FRANCEL REALTY CORPORATION v. COURT OF APPEALS AND FRANCISCO

T. SYCIP G.R. No. 117051 January 22, 1996

Digested by: Pauline Grace Intal

Facts: Francel Realty Corporation executed a Contract to Sell to Francisco Sycip a property (townhouse) in Bacoor, Cavite. The Contract states that: in case Sycip fails to pay two or more instalments, the obligation will become due and demandable; Francel Realty would be able to take possession of the property again; Sycip would vacate the property



without need for a judicial order; and that the payments made would be considered as rentals for use of the property in question. Sycip was not able to pay since October 30, 1990 despite demands made until September 26, 1992; he also refused to vacate the premises. Consequently, Francel Realty filed an action in the MTC of Bacoor to compel Sycip to vacate the premises, pay the monthly rental from the time he failed to do so, and pay attorney’s fees and expenses of litigation. In his answer, Sycip claims that he stopped paying the monthly dues because the townhouse sold to him was in a defective condition. He also claims that he had filed a complaint for “”unsound real estate business practice” in the Housing and Land Use Regulatory Board (HLURB). He prayed for payment of moral and exemplary damages. The MTC ruled that the answer was filed beyond 10 days after the service of summons. Later on, however, it dismissed the complaint for lack of jurisdiction, saying that it was the HLURB who had jurisdiction over it. It also ordered Francel Realty to pay Sycip moral and exemplary damages, attorney’s fees and other costs. Issue: Does the MTC have jurisdiction over the complaint? Is the award of damages justified?

Held: No, it does not have jurisdiction over the complaint. This case is not a simple one which arose from the failure of a lessee to pay the rents or comply with the conditions of the lease agreement. Sycip has a right to stop paying monthly amortizations IF it was proven that Francel Realty had, indeed, failed to develop the

property according to the approved plans. Hence, the case essentially involves the question of whether or not Francel Realty had developed the property properly and consequently, has a right to claim payment from Sycip. Since the latter had already filed a case with HLURB, the petitioner’s recourse should have been to file a counterclaim in the HLURB.

The award of damages was erroneous. According to the rules of procedure, a party may only file a counterclaim if the court has jurisdiction to entertain the claim. Hence, Sycip’s counterclaim for damages should not have been awarded, given that the court never had jurisdiction over Francel Realty’s claim from the beginning.

Ratio: “Petitioner's complaint is for unlawful detainer. While generally speaking such action falls within the original and exclusive jurisdiction of the MTC, the determination of the ground for ejectment requires a consideration of the rights of a buyer on installment basis of real property. Indeed private respondent claims that he has a right under P.D. No. 957, §23 to stop paying monthly amortizations after giving due notice to the owner or developer of his decision to do so because of petitioner's alleged failure to develop the subdivision or condominium project according to the approved plans and within the time for complying with the same. The case thus involves a determination of the rights and obligations of parties in a sale of real estate under P.D. No. 957, Private respondent has in fact filed a complaint against petitioner for unsound real estate business practice with the HLURB.



This is, therefore, not a simple case for unlawful detainer arising from the failure of the lessee to pay the rents, comply with the conditions of a lease agreement or vacate the premises after the expiration of the lease. Since the determinative question is exclusively cognizable by the HLURB, the question of the right of petitioner must be determined by the agency. Accordingly, we hold that the MTC correctly held itself to be without jurisdiction over petitioner's complaint. But it was error for the MTC to grant private respondent's counterclaim for damages for expenses incurred and inconveniences allegedly suffered by him as a result of the filing of the ejectment case. Pursuant to Rule 6, §8 a party may file a counterclaim only if the court has jurisdiction to entertain the claim. Otherwise the counterclaim cannot be filed.” ________________________________

METROMEDIA TIMES CORPORATION and/or ROBINA GOKONGWIE-

PE, Petitioner, vs. JOHNNY PASTORIN, respondent.

G.R. No. 154295. July 29, 2005 Digested by: Maria Patricia Salas

Facts: Pastorin was employed by Metormedia to collect receivables from dealers of petitioner’s newspapers. He received a termination letter due to his tardiness but he was not dismissed die to the intervention of the labor union which he was a member. Subsequently, he obtained a loan from one of the dealers, De Manuel, whom he dealt with. Of the 9,000 load he

got, Pastorin only paid 1,125. De manuel wrote a letter to Metromedia asking for help to collect the remainder of his loan from Pastorin. De Manuel said that Pastorin has stopped collecting his dues from him when failed to pay his loan. Metromedia suspended Pastorin for 4 days for violating company policy and ordered his transfer to Traffic and Order Department of Metromedia. After the Pastroin stopped reporting for work and sent a letter to the company stating his refusal to accept the transfer. Pastorin filed for constructive dismissal which was decided in his favor. Metromedia appealed with the NLRC raising as a ground the lack of jurisdiction of the Labor Arbiter over the complaint. The NLRC reversed the labor arbiter on the ground that the latter had no jurisdiction over the case. The Court of Appeals reversed the NLRC on the ground that active participation of Metromedia and with his failure to object to the jurisdiction of the court is tantamount to an invocation of that jurisdiction and a willingness to abide by the resolution of the case and will bar Metromedia from later on impugning the court or body's jurisdiction. Issue: Is Metromedia stopped from questioning the jurisdiction of the labor arbiter first time in the appeal before the NLRC? Held: No because a jurisdiction is conferred by law and lack of jurisdiction may be questioned at any time even on appeal especially in this where jurisdiction of the labor arbiter was questioned as early as during appeal before the NLRC



Ratio: “Estoppel cannot be invoked to prevent this Court from taking up the question of jurisdiction, which has been apparent on the face of the pleadings since the start of litigation before the Labor Arbiter. It is well settled that the decision of a tribunal not vested with appropriate jurisdiction is null and void” “That the jurisdiction of a court over the subject matter of the action is a matter of law and may not be conferred by consent or agreement of the parties. The lack of jurisdiction of a court may be raised at any stage of the proceedings, even on appeal” If any fault is to be imputed to a party taking such course of action, part of the blame should be placed on the court which shall entertain the suit, thereby lulling the parties into believing that they pursued their remedies in the correct forum. Under the rules, it is the duty of the court to dismiss an action `whenever it appears that court has no jurisdiction over the subject matter.' Estoppel does not apply to confer jurisdiction to a tribunal that has none over a cause of action. Where it appears that the court or tribunal has no jurisdiction, then the defense may be interposed at any time, even on appeal or even after final judgment. Moreover, the principle of estoppel cannot be invoked to prevent this court from taking up the question of jurisdiction

MANILA LODGE NO. 761, BENEVOLENT

AND PROTECTIVE ORDER OF THE ELKS, INC vs. THE HONORABLE COURT

OF APPEALS, CITY OF MANILA, and TARLAC DEVELOPMENT

CORPORATION, G. R. No. L-41001; September 30, 1976

Digested by: Danilo Rico, Jr. Facts: Act No. l360 which authorized the City of Manila to reclaim a portion of Manila Bay. The reclaimed area was to form part of

the Luneta extension and "Shall be the property of the City of Manila". It was later amended by Act No. 1657 which authorize the City of' Manila either to lease or to sell the portion set aside as a hotel site. Some portion of the reclaimed area was sold to to the Manila Lodge No. 761, Benevolent and Protective Order of Elks of the U.S.A. (BPOE). Later on, the BPOE sold the land together with all the improvements to the Tarlac Development Corporation (TDC) on installment basis. A year after, the City of Manila was favored by the court of Manila on its petition for the reannotation of its right to repurchase the property after fifty years. From this order TDC and BPOE appealed to the Supreme Court. Issues: 1) Is the reclaimed area a patrimonial property of the City of Manila and not a park or plaza? 2) Is the City of Manila estopped from questioning the validity of the sale it executed conveying the subject property to the BPOE? Held: 1) The legislative intent is that it is of public dominion and so intended for public use for the following reasons: 1) it was granted by the legislature; 2) the reclaimed area is an extension to the Luneta in the City of Manila and was formerly a part of the Manila Bay open for public use; 3) Act 1360 authorized the lease or sale is only the northern portion of the reclaimed area but the subject property is the southern portion; 5) Article 344 of the Civil Code of Spain provides that property of public use includes park or plaza. 2) No, the sale of July 13, 1911 executed by the City of Manila to Manila Lodge was certainly a contract prohibited by law.



Moreover, estoppel cannot be urged even if the City of Manila accepted the benefits of such contract of sale and the Manila Lodge No. 761 had performed its part of the agreement. Estoppel cannot be applied to validate a contract entered into by a Municipality over which it has no power to make. To apply estopel though the Municipality has accepted the benefits of the contract would enable the Municipality to do indirectly what it cannot do directly. Ratio: "...the Government is never estopped by mistakes or errors on the pan of its agents, and estoppel does not apply to a municipal corporation to validate a contract that is prohibited by law or its against Republic policy." "The sale of the subject property executed by the City of Manila to the Manila Lodge No. 761, BPOE, was void and inexistent for lack of subject matter. It suffered from an incurable defect that could not be ratified either by lapse of time or by express ratification. The Manila Lodge No. 761 therefore acquired no right by virtue of the said sale. Hence to consider now the contract inexistent as it always has seen, cannot be, as claimed by the Manila Lodge No. 761, an impairment of the obligations of contracts, for there was it, contemplation of law, no contract at all. The principles of estoppel are grounded in American jurisprudence. It is incorporated in this Code for the purpose of enhancing the Philippine laws. Estoppel applies as suppletory to the Civil Code, Code of Commerce & Rules of Court. Kinds of Estoppel:

I. Estoppel by deed (technical estoppel)

2 Kinds of Estoppel by Deed a. Estoppel by Deed Proper

This bars an individual from denying the facts in written in a contract which he signed.

b. Estoppel by Record This bars an individual from denying

the facts in a record, may it be judicial or legislative

E.g. decisions made by a competent court cannot be denied. It is already final and executory.

c. Estoppel by Court Record This bars an individual from raising

questions regarding issues wherein already resolved (res judicata)

Called estoppel by judgment or

direct estoppels by judgment.

This also bars an individual from raising questions regarding issues that are not yet resolved but have been decided in another case because of their relation to the matter at hand.

Called collateral estoppels by

judgment 1. Estoppel in pais (equitable

estoppel)

Arises from one’s acts, representations or admissions or by one’s own silence. Includes all forms of estoppel not arising from record, deed, or written instrument. Requisites of a party stopped-FAR (Kalalo v. Luz 34 SCRA 337): 1. Presence of a false representation/

concealment of facts 2. Such conduct was acted upon by the

other party 3. Knowledge of the real facts

Requisites of a party invoking estoppel-PUG (Kalalo v. Luz 34 SCRA 337): 1. No knowledge/unaware of real facts 2. Believed in good faith



3. Action or inaction based thereon of such character as to change the position or status of the party claiming estoppel, to his injury, detriment or prejudice.

LUIS LLACER v.FRANCISCO MUÑOZ DE

BUSTILLO and MARTIN ACHAVAL G.R. No. L-3677 December 23, 1908

Digested by: Jan Emmanuel del Castillo Facts: A certain parcel of land and house standing on the same used to be owned by Faustino Llacer and Maria Prollamante up until their death which ownership were then passed on to the children. A claim of ownership was then raised by Francisco Muñoz de Bustillo and on the other portion of the land, Martin Achaval was alleged to have been illegally occupying that area. Luis Llacer then filed a complaint against them. Francisco Muñoz de Bustillo then stated that he had acquired the land from Faustino Llacer and Pio Balana. Luis Llacer alleged that the defendant could not have acquired title over the disputed property at the time he allegedly bought the same from plaintiff’s father in 1877, as the latter had obtained his title to it only in 1881. Maxima Narito then intervened saying she also has interest in the land. Lower court ruled in favour of Luis Llacer, the heir. Issue: WON Luis Llacer is estopped to claim ownership on the said land? Held: YES. Estoppel by deed, that "when a person who is not the owner of a thing sells or alienates and delivers it and later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer or grantee" (Art. 1435, Civil Code) The judgment of the lower court by which the plaintiff, Luis Llacer, is declared to be the owner of the land in question, is hereby reversed. Ratio: The plaintiff in his brief undertakes to show that the defendant had not obtained title to the land in question, by virtue of Exhibits 7 and 8, by the fact that his father had not obtained title to a portion of the said

land until 1881, or some years after the alleged deed of Antonio Muñoz. Exhibit F and the note to Exhibit B seem to support this contention. Granting, however, that he did not obtain a portion of the land until some years after he had sold such land to Antonio Mu ¤ oz, this subsequent acquisition of the land would have the effect of making his conveyance of the same to Muñoz valid No question was raised with reference to the claim that the land which Antonio Muñoz originally acquired in the manner above indicated, and which subsequently became the property of Francisco Muñoz de Bustillo, now belongs to Francisco Muñoz‚ hijos. With reference to the house claimed by Maxima Narito situated upon said land, the lower court found that said house belonged to the said Maxima Narito.

HERNAEZ v.HERNAEZ GR 10027 November 13, 1915

Digested by: Danna Magnolia Bongon Facts: Through a sale in November 6, 1901, Domingo Hernaez y Espinosa conveyed all his hereditary rights to his son Vicente Hernaez y Tuazon. Consequently, Domingo once again sold his hereditary rights to the Montelibanos in February 27, 1907. Such transaction was done with the knowledge and in connivance of Vicente. The Montelibanos were directed to believe that the owner of the hereditary rights was Domingo when in fact it was already owned by Vicente. Issue: Is Vicente entitled to assert his right over the property? Held: No. He is estopped from claiming his right over the property. The law protects third persons who are buyers in good faith.



Rationale: “Bigelow on Estoppel (p. 607) says: “. . . it is now a well-established principle that where the true owner of property, for however short a time, holds out another, or, with knowledge of his own right, allows another to appear as the owner of or as having full power of disposition over the property, the same being in the latter's actual possession, and innocent third parties are thus led into dealing with such apparent owner, they will be protected.”

Cristobal v. Gomez

G.R. No. L-27014 October 5, 1927 Digested by: Chantal Chua

Facts: Epifanio Gomez sold the property with pacto de retro to Yangco. It was stipulated that the property is redeemable within five years. When the period to redeem expired, Yangco extended it. In order to redeem the land, Epifanio asked Banas for a loan. Banas agreed, with the condition that Epifanio’s brother, Marcelino, and sister, Telesfora, be responsible for the loan. As such, Marcelino and Telesfora entered into a “private partnership in participation.” The said agreement stipulated that the property “redeemed will be placed in the name of Marcelino and Telesfora, the income, rent, and produce of the property would go to the two and that the property shall be returned to their brother as soon as the capital employed have been covered.” A year or so later, Epifanio died. He left Paulina Cristobal and their four children. Marcelino continued to have possession over the property. He improved on it and earned from it. He had acquired exclusive rights over the property when Telefesfora conveyed her interest to him. Marcelino sold said property to Banas, with pacto de retro, redeemable within five years. He redeemed it from Banas. Paulina and the heirs instituted this action to recover the property from Marcelino. They contend that the capital had already been paid by the fruits he had earned from it. Thus, it should be returned to them. The

lower court granted the petition and this is Marcelino’s appeal. Marcelino submitted a notarial document emitted on December 31, 1904, by Epifanio. Therein, Epifanio certifies that Marcelino had requested him to draw up a notarial act showing the properties of which Marcelino was known to be the true owner: including the lot in Bacoor, being the parcel C described in the complaint. Marcelino relies upon this instrument as proving title in him, contendeding that Epifanio and his successors are estopped from claiming said lot. Issue: Are the heirs of Epifanio estopped from claiming the property? Held: No. Estoppel may not be invoked by a person party to the collusion, by reason that he could not have been misled. Ratio: It is true that we have here the written admission of Epifanio Gomez would have been estopped from asserting ownership in himself. Nevertheless, it is clear enough this document executed by Epifanio, in conclusion with his brother Marcelino, was merely laying the basis of a scheme to defeat Yangco's rights under his contract of purchase of 1891, or perhaps to defeat other creditors of Epifanio, — a plot which, in view of subsequent occurrences, they did not attempt to carry into effect. No estoppel can be invoked by Marcelino or his successors, based upon this document, for the reason that he was not misled by the false statement contained therein.

ANUNCIACION NARABAL DE NILO, GIL NILO, FELICISIMO NILO, FILEMON

NILO, ET AL., petitioners, vs.

HON. HONORIO ROMERO, Judge of the Court of First Instance of Davao, Br. Ill and the CITY of DAVAO,respondents.

G.R. No. L-15195 March 29, 1961 Digested by: Jose Joven Paulo Espinosa

Facts: On September 7, 1955, Fausto Nilo, filed with the CFI of Davao, Civil Case No. 1708, against the City of Davao, represented by the City Engineer, to recover



payment for the use as road way, of a part of his land by the defendant City. The City of Davao, thru its Special Counsel, answering the complaint interposed the affirmative defense of prescription of action, pursuant to See. 43, No. 3, of Act No. 190, limiting the filing of the action to four (4) years. On same date, plaintiff filed a motion to declare defendant in default and that the period to file answer expired on October 3, 1955, whereas the same was actually filed on October 7, 1955. The defendant City of Davao, thru the City Attorney A. L. Noel, filed a "Petition for Relief from Judgment", alleging for the first time, that the trial court acquired no jurisdiction over the defendant City of Davao, because it was not the City Engineer, but the City Mayor, who is under the law (Charter of the City of Davao), the right official to represent the City, and who should have been served with summons (Comm. Act No. 51); that after defendant was declared in default, the plaintiffs filed an Amended Complaint, without serving copy thereof to the defendant; and that the Republic of the Philippines should have been included as a party, the subject matter of the complaint being a national highway. The petition was opposed by plaintiffs, claiming that the court validly acquired jurisdiction over the defendant City of Davao, the City Engineer being an alter ego of the City Mayor and that Special Counsel Medialdea of the defendant entered his appearance On December 16, 1958, the lower court entered an Order believing that it has not acquired jurisdiction since it was the City Mayor who must duly served with summons not the City Engineer. Issues: Whether or not the court has lost jurisdiction because the defendant has been erroneously represented? Held:NO, The appearance of the City Attorney for and in behalf of the City of Davao constituted a voluntary appearance,

sufficient in law to confer upon the court jurisdiction over it. If defendant City believed that it was wrongly represented, its City Attorney should have filed a motion to dismiss, base on such ground. Unfortunately, however, he did not. The doctrine of estoppel now operates against respondent City of Davao. The erroneous designation of representative, when the defendant itself is named, to our belief, not sufficient to set aside the proceedings had in the case. Taking into account the actuation of the defendant City of Davao, assisted by its Special Counsel and/or City Attorney, and the judicial pronouncements on the subject, we see no reason why the technical error in procedure obtaining in the present, can be a sufficient ground to invalidate the default proceedings. No serious arguments can be offered to debut the fact that the default judgment had already become final and executory.

TITLE V TRUSTS

CHAPTER 1

GENERAL PROVISIONS

Art. 1440. A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the benefit of another person is known as the trustee; and the person for whose benefit the trust has been created is referred to as the beneficiary. Art. 1441. Trusts are either express or implied. Express trusts are created by the intention of the trustor or of the parties. Implied trusts come into being by operation of law.

Art. 1442. The principles of the general law of trusts, insofar as they are not in conflict with this Code, the Code of Commerce, the Rules of Court and special laws are hereby adopted. Trust is a fiduciary relationship created by agreement or by law where the trustor of the property has the equitable title while the legal title is vested in another (trustee)



Trust is the legal relationship between one having an equitable ownership in property and another person owning the legal title to such property, the equitable ownership of the former entitling him to the performance of certain duties and the exercise of certain powers by the latter. Trust relationship may be express or implied. The legal title is usually in the name of the trustee while the equitable title is in the name of the beneficiary. The parties in a trust are:

1. trustor who establishes the trust 2. trustee the one in whom the

confidence is reposed as regards the property for the benefit of another person

3. beneficiary is the person for whose benefit the trust is created

*the beneficiary may be the trustor himself, in which case, only two persons will be involved. Trust Compared with Stipulaiton Pour Autrui Basis Trust Stipulation

Pour Autrui 1. Origin It can arise

either by virtue of a contract or by legal provision

It can arise only by virtue of a contract and never by operation of law

2. Object The object of a trust is always a specific property, whether real or personal, including an undivided interest therein as in co-ownership or choses in action

The object of a stipulation pour atrui could either be specific property or other things

3. Form It is either express or implied. It continues to exist unless

It is always express, and must be accepted by the 3rd

repudiated person before the grant stipulated in his favor is mutually revoked by the parties

Distinctions Between Express Trust and Implied Trust Basis Express

Trust Implied Trust

1. Creation Created by the intention of the trustor or of the parties

Created or arises by operation of law

2. Manner of Creation

Created by the direct and positive acts of the parties, by some writing, deed, or by words, either expressly or impliedly, envincing an intention to create a trust

It is merely deducible from the nature of the transaction

3. Proof needed when immovable or interest therein is involved

If the express trust involves an immovable property, it cannot be proved by parol evidence

It can be proved by parol evidence

4. Prescription of action

It is impresciptible unless the trust has been repudiated

It is prescriptable. After 10 years from registration of the title, the action is barred. Exception: When the plaintiff or person enforcing the trust is in possession of



the property, action is imprescriptible.

5. Acquisition by prescription

Property cannot be acquired by prescription because the possession of the trustee is not adverse

Property can be acquired by prescription.

CHAPTER 2 EXPRESS TRUST

Art. 1443. No express trusts concerning an immovable or any interest therein may be proved by parol evidence. Art. 1444. No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended.

Art. 1445. No trust shall fail because the trustee appointed declines the designation, unless the contrary should appear in the instrument constituting the trust.

Art. 1446. Acceptance by the beneficiary is necessary. Nevertheless, if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be presumed, if there is no proof to the contrary.

Definition: “Our Civil Code defines an express trust as one created by the intention of the trustor or of the parties, and an implied trust as one that comes into being by operation of law. Express trusts are those created by the direct and positive acts of the parties, by some writing or deed or will or by words evidencing an intention to create a trust. On the other hand, implied trusts are those which, without being expressed, are deducible from the nature of the transaction by operation of law as matters of equity, in dependently of the particular intention of the parties. Thus, if the intention to establish a trust is clear, the trust is express; if the intent

to establish a trust is to be taken from circumstances or other matters indicative of such intent, then the trust is implied. From these and from the provisions of paragraph 8 of the complaint itself, We find it clear that the plaintiffs alleged an express trust over an immovable, especially since it is alleged that the trustor expressly told the defendants of his intention to establish the trust. Such a situation definitely falls under Article 1443 of the Civil Code.” (Cuaycong v. Cuaycong, G.R. No. L-21616, December 11, 1967)

Parol Evidence – oral or verbal evidence

"To create a trust by will the testator must indicate in the will his intention so to do by using language sufficient to separate the legal from the equitable estate, and with sufficient certainty designate the beneficiaries, their interest in the trust, the purpose or object of the trust, and the property or subject matter thereof. Stated otherwise, to constitute a valid testamentary trust there must be a concurrence of three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3) a certain or ascertain object; statutes in some jurisdictions expressly or in effect so providing." (Lorenzo v. Posadas, G.R. No. L-43082, June 18, 1937) Philippine Air Lines, Inc. v. Heald Lumber

Company No. L-11497, August 16, 1957

Digested by: Darwin Perry Rubio

Facts: Lepanto Consolidated Mines chartered a helicopter belonging to Philippine Air Lines, Inc. (PAL) to make a flight from Nichols Field Airport to the former's camp at Mankayan, Mountain Province. The helicopter, however, failed to reach its destination for the reason that, it collided with Heald Lumber’s tramway steel cables somewhere in Ampusungan, Mankayan, Mt. Province, resulting in its destruction and the death of Capt. Gabriel Hernandez, the pilot, and Lt. Rex Imperial, the first officer. As a result of the crash, the insurance companies paid PAL a total indemnity of P120,000. Nevertheless, it sustained additional damages totalling P103,347.82 which were not recovered by the insurance. Thereafter, PAL commenced an action before the Court of First Instance – Baguio (CFI) to recover from Heald Lumber:



(a) the sum of P120,000 paid by the insurance companies as indemnity for the loss of the helicopter and the death of Capt. Hernandez and Lt. Imperial; and (b) the sum of P103,347.82 representing consequential and moral damages which it had incurred as a result of the loss of the helicopter and the death of the officers. The CFI, acting on a Motion to Dismiss submitted by Heald Lumber, ordered PAL to amend its complaint on the ground that in its first cause of action, the real parties in interest are the insurance companies concerned so that PAL should either delete this allegation or bring in the insurance companies as parties plaintiff. Aggrieved, PAL appealed the decision before the Supreme Court.

Issue: Is PAL the real party in interest with respect to the claim for P120,000.00?

Held: No. Under Article 2207 of the Civil Code, if a property is insured and the owner receives the indemnity from the insurer, the insurer is deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one entitled to recover the deficiency.

Ratio: “It is insisted that despite the subrogation of the insurer to the rights of the insured, the latter can still bring the action in its name because the subrogation vests in the latter the character of a trustee charged with the duty to pay to the insurer so much of the recovery as corresponds to the amount it had received as a partial indemnity. This cannot be true in this jurisdiction, for before a person can sue for the benefit of another under a trusteeship, he must be "a trustee of an express trust" (Section 3, Rule 3, Rules of Court). Thus, under this provision, "in order that a trustee may sue or be sued alone, it is essential that his trust should be express, that is, a trust created by the direct and positive acts of the parties, by some writing, deed, or will or by proceedings in court. The provision does not apply in cases of implied trust, that is, a trust which may be inferred merely from the acts of the parties or from other circumstances" (Moran, Comments on the Rules of Court, Vol. I, 1952 Ed., p. 35).”

Extinguishment of an Express Trust

1. Accomplishment of its aims 2. Expiration of the term 3. Mutual agreement of all parties 4. Happening of the resolutory

condition, if applicable 5. Total loss of the object 6. Annulment or Rescission 7. Court declaration 8. Merger of the rights of the trustor

and the trustee 9. Prescription

Amerol v. Bagumbaran

No. L-33261, September 30, 1987 Digested by: Katrina Calugay

Facts: Liwalug Datomanong (erroneously surnamed Amerol in this case) seeks to recover possession or reconveyance of the land known as Lot No. 524, alleging that Molok Bagumbaran obtained his free patent through fraud. According to him, he was the one who first filed an application for free patent (September 1953) and despite Bagumbaran’s knowledge of his application, he later applied for the same on December 1954. It was Bagumbaran’s application that was given due course thus Free Patent No. V-19050 was issued to him on August 1955 by authority of President Ramon Magsaysay.

Bagumbaran answered by alleging that he has been in good faith in applying for the free patent. He also said that even if Datomanong’s claims are true, his action to order the reconveyance of the land has already prescribed, the prescription being four years from the time of the issuance of the Original Certificate of Title in Bagumbaran’s name.

The lower court found fraud on the part of Bagumbaran. However, it still ruled in his favor on the ground of prescription.

Issue: Can Datomanong have the land reconveyed to his favor?

Held: Yes. From the facts presented by the parties, the court found out that indeed, Bagumbaran obtained the patent and the Original Certificate of Title through fraud. He misrepresented himself to be the actual possessor of the property when in fact he is



fully aware that Datomanong is in actual possession of the property and has been introducting several improvements when he filed his application.

An implied trust is created whenever a property is acquired through mistake or fraud, as in this case. By the fraudulent act of Bagumbaran, he is deemed to hold the title of the property in trust and for the benefit of Datomanong.

Also, despite the issuance of a Torrens Certificate of Title to Bagumbaran, the same can still be cancelled and the property can still be reconveyed to the rightful owner. The prescription period is not four years, but ten years as provided in the law. Since the period between 1955 (the date of iissucance of the Original Certificate of title) and 1964 (the date when an action for reconveyance was filed) is less than ten years, the action has not prescribed yet.

The court ordered the reconveyance of the Original Certificate of Title in favor of Datomanong.

Ratio: “In this case, the land in question was patented and titled in respondent's name by and through his false pretenses. Molok Bagumbaran fraudulently misrepresented that he was the occupant and actual possessor of the land in question when he was not because it was Liwalug Datomanong. Bagumbaran falsely pretended that there was no prior applicant for a free patent over the land but there was — Liwalug Datomanong. By such fraudulent acts, Molok Bagumbaran is deemed to hold the title of the property in trust and for the benefit of petitioner Liwalug Datomanong. Notwithstanding the irrevocability of the Torrens title already issued in the name of respondent, he, even being already the registered owner under the Torrens system, may still be compelled under the law to reconvey the subject property to Liwalug Datomanong. After all, the Torrens system was not designed to shield and protect one who had committed fraud or misrepresentation and thus holds title in bad faith. Further, contrary to the erroneous claim of the respondent, 9 reconveyance does not work to set aside and put under

review anew the findings of facts of the Bureau of Lands. In an action for reconveyance, the decree of registration is respected as incontrovertible. What is sought instead is the transfer of the property, in this case the title thereof, which has been wrongfully or erroneously registered in another person's name, to its rightful and legal owner, 10 or to one with a better right. That is what reconveyance is all about.”

Marquez vs Court of Appeals GR No. 125715 December 29, 1998 Digested by: Jerika Everly Marquez

Facts: Rafael Marquez, Sr. and Felicidad Marquez acquired a parcel of land located at San Juan Del Monte, Rizal wherein they had their conjugal home built. 30 years after Felicidad died intestate, Rafael executed an “Affidavit of Adjudication” for the sole ownership of the property in question. Rafael Marquez, Sr. then executed a “Deed of Donation Inter Vivos” of the property to three of his children.

The petitioners, in this case, then demanded for their shares over the property. Efforts to settle the dispute were unavailing since the defendants ignored the demands of the petitioners. A complaint for Reconveyance and Partition with Damages was filed by the petitioners. They claim that the respondents only took advantage of the current condition and age of their father. The petitioners further argue that the documents were executed with fraud. On the other hand, private respondents claim that the petitioner’s action has already prescribed. IT should have been filed four years from the date of the discovery of fraud.

The trial court rendered a decision in favour of the petitioners. On the other hand, Court of Appeals reversed the decision of the trial court. The petitioner’s Motion for Reconsideration was denied. Hence, this petition.

Issue: Has the action for reconveyance already prescribed?

Held: No, an action for reconveyance based on implied or constructive trust prescribes in 10 years.



Ratio: In this regard, it is settled that an action for reconveyance based on an implied or constructive trust prescribes in ten years from the isuance of the Torrens title over the property. For the purpose of this case, the prescriptive period shall start to run when TCT No. 33350 was issued, which was on June 16, 1982. Thus, considering that the action for reconveyance was filed on May 31, 1991, or approximately nine years later, it is evident that prescription had not yet barred the action.

To bolster the foregoing position, the Court of Appeal's reliance on Gerona v. de Guzman, is misplaced. InAmerol v. Bagumbaran, we ruled that the doctrine laid down in the earlier Gerona case was based on the old Code of Civil Procedure which provided that an action based on fraud prescribes within four years from the date of discovery. However, with the effectivity of the present Civil Code on August 30, 1950, the provisions on prescriptive periods are now governed by Articles 1139 to 1155. Since implied or constructive trusts are obligations created by law then the prescriptive period to enforce the same prescribes in ten years.

Pedrano v. Heirs of Benedicto Pedrano G.R. No. 159666 December 4, 2007 Digested by: Gallard Kevin Labares

Facts: This is a case of a family feud over a lot, Lot 6416 and Lot 6409-A. The lot was previously owned by a Dr. Isidro Hynson before it was sold to the mother of the complainant, Romana Pedrano. The son says that he bought the lot for 30,000 php from his mother payable on December 1982. Since the land had no titles, they were subject to cadastral proceedings which then allocated Lot 6416 to the mother and lot 6409 to the son. The heirs of Benedicto Pedrano say that the sale was never complied with and that the 30,00 php was never paid for the lot and in the deed of sale from Dr. Hynson his name was replaced by Romana’s name but still she allowed her son to occupy the said lot and they were unaware that he asked for a cadastral proceeding to entitle the land to himself and insists that he did pay the balance for the land and as a defense he says that the action was already 14 years prescribed. The

RTC ruled in favour of the son but was overturned by the CA because it was not Art. 1146 that should be applied but rather Art. 1456 of the civil code, the CA also said that he did not have enough evidences to prove that he did purchase the land because the deed of sale explicitly states that it was Romana who purchased it. The CA also stated that implied trust has already ceased and now he is under obligation to return the property to defendats.

Issue: Was there implied trust of the property to Romana’s son in this case?

Held: Yes, there was implied trust.

Ratio: “What is clear in the aforecited deed of sale is that the late Romana was the buyer of Lot No. 6416 from Dr. Hynson; that petitioner was to pay Romana PhP 30,000 for it; and that he had until December 31, 1982 to do so. Petitioner claims he did but offers no proof of payment although he occupied the land. While it is incumbent for petitioner to present proof that he indeed paid it, he had not presented any. Under these facts and even if we concede that the sale was perfected, still petitioner failed to perform his obligation to pay the consideration of PhP 30,000 to Romana. Since petitioner failed to comply with what is incumbent upon him, the injured parties (respondents as heirs of Romana) may choose between fulfillment and rescission of the sale under Art. 1191 of the Civil Code. Respondents chose rescission. Thus, the juridical tie between the parties is invalidated and it leaves the parties with their respective property rights relating to Lot No. 6416 before the celebration of the December 22, 1981 Deed of Sale.

What remains therefore is the undisputed March 15, 1965 Deed of Sale with Romana as the buyer. Petitioner’s possession of Lot No. 6416, owned by his parents, was an implied trust constituted upon petitioner. The CA is correct in applying Art. 1456 on implied trust to this case.

“Art. 1456 provides, If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a



trustee of an implied trust for the benefit of the person from whom the property comes."

CHAPTER 3 IMPLIED TRUST

Art. 1447. The enumeration of the following cases of implied trust does not exclude others established by the general law of trust, but the limitation laid down in Article 1442 shall be applicable. Art. 1448. There is an implied trust when property is sold, and the legal estate is granted to one party but the price is paid by another for the purpose of having the beneficial interest of the property. The former is the trustee, while the latter is the beneficiary. However, if the person to whom the title is conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, no trust is implied by law, it being disputably presumed that there is a gift in favor of the child.

Art. 1449. There is also an implied trust when a donation is made to a person but it appears that although the legal estate is transmitted to the donee, he nevertheless is either to have no beneficial interest or only a part thereof.

Art. 1450. If the price of a sale of property is loaned or paid by one person for the benefit of another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust arises by operation of law in favor of the person to whom the money is loaned or for whom its is paid. The latter may redeem the property and compel a conveyance thereof to him.

Art. 1451. When land passes by succession to any person and he causes the legal title to be put in the name of another, a trust is established by implication of law for the benefit of the true owner.

Art. 1452. If two or more persons agree to purchase property and by common consent the legal title is taken in the

name of one of them for the benefit of all, a trust is created by force of law in favor of the others in proportion to the interest of each.

Art. 1453. When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated.

Art. 1454. If an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance of the property to him.

Art. 1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong.

Art. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes.

Art. 1457. An implied trust may be proved by oral evidence. IMPLIED TRUSTS A. Meaning An implied trust is one that is DEDUCTIBLE from the nature of the transaction as a matter of intent or which is superinduced on the transaction by operation of law as a matter of equity, INDEPENDENTLY OF A PARTICULAR INTENTION OF THE PARTIES. Enumerated cases of implied trusts are NOT exclusive. The limitation that trusts should not be in conflict with the Civil Code, the Code of Commerce, the Rules of Court and special laws are applicable.



When a disqualified alien purchased land in the Philippines and placed the property in the name of a dummy to circumvent the law, NO TRUST IS CREATED.

Albert F. Kiel vs. Estate of PS Sabert G.R. No. L-3717

Digested by: Bryan O’Neal Cua Facts: Petitioner in the case is asking the court to secure from the estate of the deceased P20,000 resulting from a legal right granted to him by the CFI and escalated to this court. In 1907, Kiel and Milfeil commenced to work on public lands known as Parang Plantaion Company in the province of Cotobato, having taken over the interest of Milfeil, Kiel by the 1910’s had P.S. Sabert enter in to an agreement to provide capital for the endeavor with him as the manager. Such was that the true intention of the partners was to acquire the property in Sabert’s name as Kiel was a german and hence incapable of owning the land himself. From 1910 -1917, the duo worked on the development of the land until the War broke out and Kiel was sent back to Germany. On August 16, 1919, five persons, including P. S. Sabert, organized the Nituan Plantation Company, with a subscribed capital of P40,000. On April 10, 1922, P. S. Sabert transferred all of his rights in two parcels of land situated in the municipality of Parang, Province of Cotabato, embraced within his homestead application No. 21045 and his purchase application No. 1048, in consideration of the sum of P1, to the Nituan Plantation Company. A letter dated 6-6-1918 from Sabert addressed to Kiel contained the intentions of the former to settle what he apparently owes to the partnership with the latter, but before any settlement between the two can be reached Sabert died. Issue: Does a trust form from the partnership of Kiel and Sabert over the land? Held: No; however he is entitled to his share of the value of the improvements made upon such land, such belonging to the partnership they had. Ratio: The court explains that in this case no trust can arise in the ownership of the land in question. Kiel being an alien is

disqualified from purchasing lands in the Philippines and to circumvent such laws, he had the land placed in the name of a dummy to which describes the role of Sabert in their partnership. The court further elaborates: A trust will not be created when, for the purpose of evading the law prohibiting one from taking or holding real property, he takes a conveyance thereof in the name of a third person. Furthermore: As we have already intimated, we do not think that Kiel is entitled to any share in the land itself, but we are of the opinion that he has clearly shown his right to one-half of the value of the improvements and personal property on the land as to the date upon which he left the plantation. Such improvements and personal property include buildings, coconut palms, and other plantings, cattle and other animals, implements, fences, and other constructions, as well as outstanding collectible credits, if any, belonging to the partnership. The value of these improvements and of the personal property cannot be ascertained from the record and the case must therefore be remanded for further proceedings. When the purchaser paid for the price, but the legal title (or estate) is granted to another, there is an implied trust. The purchaser has the beneficial interest in the property and is therefore the beneficiary. The one to whom the title or estate is conveyed to is the trustee. BUT, if the title is conveyed to a legitimate or illegitimate child, there is no trust implied by law. PRESUMPTION: The property is a gift in favour of the child. No need to follow formalities of donation. Purchase money resulting trust: is another term for implied trust. Elements of Purchase Money Resulting Trust/Implied Trust: 1) There is an actual payment of money,

property, service or an equivalent (valuable consideration).



2) Such consideration must be furnished by the alleged beneficiary.

Note: The burden of proving the evidence of a trust is on the party asserting its existence. The elements must be satisfied.

Thomson v. CA G.R. No. 116631

Digested by: Dino De Leon

Facts: Petitioner Marsh Thomson (Thomson) was the Executive Vice-President and, later on, the Management Consultant of private respondent, the American Chamber of Commerce of the Philippines, Inc. (AmCham) for over ten years, 1979-1989. While petitioner was still working with private respondent, his superior, A. Lewis Burridge, retired as AmCham's President. Before Burridge decided to return to his home country, he wanted to transfer his proprietary share in the Manila Polo Club (MPC) to petitioner. However, through the intercession of Burridge, private respondent paid for the share but had it listed in petitioner's name. When petitioner's contract of employment was up for renewal in 1989, he notified private respondent that he would no longer be available as Executive Vice President after September 30, 1989. Still, the private respondent asked the petitioner to stay on for another six (6) months. Petitioner indicated his acceptance of the consultancy arrangement with a counter-proposal in his letter dated October 8, 1989, indicating among others, Retention of the Polo Club share, subject to my reimbursing the purchase price to the Chamber, or one hundred ten thousand pesos (P110,000.00). AMCHAM rejected the counter proposal of Thomson. On April 5, 1990, private respondent, through counsel sent a letter to the petitioner demanding the return and delivery of the MPC share which "it (AmCham) owns and placed in your (Thomson's) name." Failing to get a favorable response, private respondent filed on May 15, 1990, a complaint against petitioner praying, inter alia, that the Makati Regional Trial Court render judgment ordering Thomson "to

return the Manila Polo Club share to the plaintiff and transfer said share to the nominee of plaintiff." RTC awarded the ownership of the MPC shares to Thomson and ordered him to pay AmCham 300,000.00. In said decision, the trial court awarded the MPC share to defendant (petitioner now) on the ground that the Articles of Incorporation and By-laws of Manila Polo Club prohibit artificial persons, such as corporations, to be club member. CA awarded the ownership, on the other hand to AmCham saying: Issue: Who is the rightful owner of the Manila Polo Club Shares? Held: AmCham is the rightful owner of the MPC Shares. Ratio: The beneficiary of a trust has beneficial interest in the trust property, while a creditor has merely a personal claim against the debtor. In trust, there is a fiduciary relation between a trustee and a beneficiary, but there is no such relation between a debtor and creditor. While a debt implies merely an obligation to pay a certain sum of money, a trust refers to a duty to deal with a specific property for the benefit of another. If a creditor-debtor relationship exists, but not a fiduciary relationship between the parties, there is no express trust. However, it is understood that when the purported trustee of funds is entitled to use them as his or her own (and commingle them with his or her own money), a debtor-creditor relationship exists, not a trust. In the present case, as the Executive Vice-President of AmCham, petitioner occupied a fiduciary position in the business of AmCham. AmCham released the funds to acquire a share in the Club for the use of petitioner but obliged him to "execute such document as necessary to acknowledge beneficial ownership thereof by the Chamber". A trust relationship is, therefore, manifestly indicated. Moreover, petitioner failed to present evidence to support his allegation of being merely a debtor when the private respondent paid the purchase price of the



MPC share. Applicable here is the rule that a trust arises in favor of one who pays the purchase money of property in the name of another, because of the presumption that he who pays for a thing intends a beneficial interest therein for himself. Although petitioner initiated the acquisition of the share, evidence on record shows that private respondent acquired said share with its funds. Petitioner did not pay for said share, although he later wanted to, but according to his own terms, particularly the price thereof. While private respondent paid the purchase price for the share, petitioner was given legal title thereto. Thus, a resulting trust is presumed as a matter of law. The burden then shifted to the transferee to show otherwise, that it was just a loan. Such resulting trust could have been rebutted by proof of a contrary intention by a showing that, in fact, no trust was intended. Petitioner could have negated the trust agreement by contrary, consistent and convincing evidence on rebuttal. However, on the witness stand, petitioner failed to do so persuasively. Turning now to the other issue, the petitioner contends that the Articles of Incorporation and By-laws of Manila Polo Club prohibit corporate membership. However, private respondent does not insist nor intend to transfer the club membership in its name but rather to its designated nominee. Therefore, there is no violation of the MPC by-laws.

Castro v. Castro G.R. No. 36199.

Digested by: Othello Mendoza, II

Facts: A parcel of land formerly belonged to the deceased Mariano. His daughter Maximiana is married to Vicente Castro. They produced six children: Jose (the eldest), Vicente, Manuel, Consolacion, Maria and Pedro. Vicente (Maximiana's son) is already dead but was survived by his four minor children. Mariano's heirs divided the land. The subject land in this case has been assigned to Maximiana. She was aided by Jose in bringing portions of the property back into a state of cultivation.

Maximiana died. At that time, Jose was the only one of her children who was of age. He assumed the administration of the land. He also acted as representative of all Maximiana's children. He registered the land in his sole name. Jose's uncle Manuel assented to this scheme and aided his nephew in obtaining the registration of the property, in the belief that Jose was acting for all the heirs. He alleged that he had acquired the land by inheritance from his mother Maximiana. He now claims that he had taken possession of the property in his own right, prior to his mother's death, by virtue of an assignment of the property made to him by his mother, acting in concert with her brothers and sisters. Issue: Are Jose's brothers and sister and the deceased Vicente's minor children entitled to shares of a parcel of land issued in the name of Jose? Held: Yes. When Jose procured the land registration in his name, he was acting in a trust capacity and as representative of all his brothers and sisters. As consequence, he is now holding the registered title in a trust capacity. The plaintiffs are entitled to their several pro rata shares. Ratio: One who acquires a Torrens title in his own name to property which he is administering for himself and his brothers and sisters as heirs in common by descent from a common ancestor may be compelled to surrender to each of his co-heirs his appropriate share; and a proceeding for partition is an appropriate remedy by which to enforce this right. A donation made to a person (donee) is also an implied trust. The donee may not have any beneficial interest. Even if he has, it may be only on a part of the whole property. The payor of a property (for the benefit of another), and the conveyance of the property was made to the payor (to secure the payment of debt), there is a trust established. The beneficiary may go after the payor to redeem the property and he can compel conveyance of the property to himself. This is a CONSTRUCTIVE TRUST. To prevent unjust enrichment. Land inherited by an heir can be registered in the name of another.



De Jesus v. De Jesus GR No. L-16553

Digested by: Ken Gador Facts: Melecio de Jesus died. His wife, Ines Alejandrino, became the administratrix of his estate. She later on filed an inventory of Melecio's estate. Subsequently, Melecio's sister, Eusebia, filed a verified claim against the estate for Php 7,585.84. Instead, Ines, Eusebia and Cirilio entered into a stipulation of facts wherein Ines recognized that Eusebia and Cirilio are co-owners of Melecio's certain property, and that said property was registered in the sole name of Melecio only in trust for all the co-owners. Due to the stipulation of facts, Eusebia waived her claim. Both agreements were approved by the probate court. Subsequently, Ines was replaced by her son, Leon, in the administration of Melecio's estate. Both mother and son, subsequently, filed a petition in the lower court, seeking to annul the stipulations entered into by Ines, Eusebia and Cirilio. The grounds upon by the mother and son relied on were: 1. lack of jurisdiction from the probate court, 2. Lack of the requisite notices to all the interested parties, specifically the heirs of Melecio. Eusebia and Cirilio moved to dismiss the complaint. The lower court ruled against the mother and son. Issue: Does the probate court have jurisdiction to approve the agreement?

Held: Yes, the probate court has jurisdiction Ratio: The probate court has jurisdiction to act on and approve the stipulation in question, not only as an incident to its power to exclude any property from the inventory of the estate of Melecio, but under Section 9, Rule 90 of the Rules of Court. Said provision permits the probate court, whenever the deceased in his lifetime held real property in trust of another person, to authorize the executor or administrator to deed such property to the person or persons for whose age and benefit it was so held.

There being no controversy between the former administratrix (Ines) and the defendants, that the latter and Melecio owns the property in question as co-owners and that it was registered in Melecio's name only

in trust for all the co-owners, there was no need to file a separate action in an ordinary court to establish the common ownership of the parties over said properties. On the contentions raised by the plaintiffs regarding the failure to deliver notices to the heirs, the SC said that it can't determine if the notices were indeed given. That is why, the case was remanded to the trial court. Purchasers of a property can place the legal title in the name of one them. The purchasers are co-owners. If there is no agreement, their shares are presumed equal.

Uy Aloc v Cho Jan Ling G.R. No. 5333

Digested by: Ana Victoria Hernandez Facts: A number of Chinese merchants raised a fund to purchase a land and erected a building to be used as a club house. The subscribers organized themselves but they did not have regular articles of association and was not registered in any commercial registry thus they are not a legal entity. It was agreed that they will place the name of Cho Jan Ling in the title of the property. Ling agreed to hold the property as an agent. He collected 25, 000 in rents for which he failed to account and when he was compelled to do so he alleged that he bought the said property with his own money. The trial court made Ling accountable to the rents received. Issue: Should Ling be accountable to the rents amounting to 25, 000? Held: Yes, the plaintiffs are entitled to relief. Ratio: “In the case at bar we think that the evidence clearly discloses not only that the funds with which the property in question was purchased were furnished by the members of the association, but that Cho Jan Ling, in whose name it was registered, received and holds the property as agent and trustee of the association; that on at least one occasion he admitted the beneficial ownership to be in the association; and that while the legal registered title is in his name the beneficial ownership is in the association.”



“The legal title of the holder of the registered title is not questions; it is admitted that the members of the association voluntarily obtained the inscription in the name of Cho Jan Ling, they have no right to have it cancelled,… but they maintain and we think that they rightly maintain that he holds it under an obligation, both expressed and implied, to deal with it exclusively for the benefit of the members of the association and subject to their will.” There is also an implied trust when property conveyed to a person is committed to hold or transfer it to another. When there is an absolute conveyance of property to secure the performance of an obligation and once the obligation is fulfilled, the grantor may demand reconveyance of the property to himself. (Like a sale of repurchase).

Escobar vs. Locsin G.R. No. 48309

Digested by: Martin Angelo Millete Facts: Eusebia Escobar is the owner of a lot in Nueva Ecija. She acquired the said lot from Pablo Ringor in 1914 by way of donation propter nuptias. Being illiterate, she sought the help of one Domingo Sumangil to help her claim the lot in question in the cadastral proceedings. However, Sumangil claimed the lot for himself. Due to the breach of trust committed, Ramon Locsin, the special administrator of the estate of Juana Ringor to which the lot in question is a part of, assigned the land to Sumangil’s estate. In lieu of such, Escobar files a petition before the Supreme Court, asking for the reconveyance of the lot in question. Issue: May Sumangil be ordered to convey the land to Escobar? Held: Yes, Sumangil may be ordered to convey the lot to Escobar. Clearly, he committed a breach of trust reposed unto him by Escobar, who was illiterate and sought his help in the cadastral proceedings. Ratio: “A trust — such as that which was created between the plaintiff and Domingo Sumangil — is sacred and inviolable. The Courts have therefore shielded fiduciary

relations against every manner of chicanery or detestable design cloaked by legal technicalities. The Torrens system was never calculated to foment betrayal in the performance of a trust.” The fiduciary can use trust funds in purchasing property in his name. But the conveyance was made to a third person. Prevents unjust enrichment on the part of the fiduciary.

Camacho v. Municipality of Baliuag

G. R. No. 9363 Digested by: Maria Corazon Baluyut

Facts: There are lots owned by the municipal government of being occupied as a school and as the municipal building. When the central government claimed the land and ordered for its sale (via an auction), herein plaintiff Albino Camacho’s bid of P 300 was accepted and the title was issued to him and was subsequently registered in 1896. However after the sale the municipality continued to occupy and collect rent from the said lots. Camacho claims that he had lost his documents of the title during the revolution and that his attorney was the one who returned it to him. In the testimony of Father Prado (the parish priest of the municipality during the period in question) during the time when the insular government directed a sale, he chose Camacho to appear at the auction and bid for the property, and that Camacho purchased the land with Father Prado’s money. When Camacho received the title he turned them over to Father Prado who kept it in his possession until he was obliged to leave the municipality. Many other witnesses testified that Camacho was just a representative of either the municipality or of Father Prado. Even the tenants testified that when they would pay the rent it was always paid to the municipality and not to Camacho. Issue: Is Camacho the holder of the land for and on behalf of the municipality or is he the owner? Held: The court simply absolved the defendant from the complaint. The defendant municipality does not ask for a cancellation of the deed. The deed is relied upon to supplement the oral evidence



showing that the title to the land is in the defendant. The proper procedure in such a case, so long as the rights of innocent third persons have not intervened, is to compel a conveyance to the rightful owner. This ought and can be done under the issues raised and the proof presented in the case at bar. If the property is acquired through mistake or fraud, the one who acquired it is

considered to be a trustee of an implied trust, for the benefit of the real owner. Not applicable to violation of conditions of a donation.



CIVIL LAW BAR EXAMINATION QUESTIONS (Obligations & Contracts)

2010

A. What is the difference between “guaranty” and “suretyship”?

2009

A. Sarah had a deposit in a savings account with Filipino Universal Bank in the amount of five million pesos (P5,000,000.00). To buy a new car, she obtained a loan from the same bank in the amount of P1,200,000.00, payable in twelve monthly installments. Sarah issued in favor of the bank post-dated checks, each in the amount of P100,000.00, to cover the twelve monthly installment payments. On the third, fourth and fifth months, the corresponding checks bounced.

B. The bank then declared the whole obligation due, and proceeded to deduct the amount of one million pesos (P1,000,000.00) from Sarah’s deposit after notice to her that this is a form of compensation allowed by law. Is the bank correct? Explain. (4%).

C. Rosario obtained a loan of P100,000.00 from Jennifer, and pledged her diamond ring.

The contract signed by the parties stipulated that if Rosario is unable to redeem the ring on due date, she will execute a document in favor of Jennifer providing that the ring shall automatically be considered full payment of the loan.

D. Is the contract valid? Explain. (3%)

E. Will your answer to [a] be the same if the contract stipulates that upon failure of

Rosario to redeem the ring on due date, Jennifer may immediately sell the ring and appropriate the entire proceeds thereof for herself as full payment of the loan? Reasons. (3%)

2008

A. Eduardo was granted a loan by XYZ Bank for the purpose of improving a building which XYZ leased from him. Eduardo, executed the promissory note (”PN”) in favor of the bank, with his friend Recardo as co-signatory. In the PN, they both acknowledged that they are “individually and collectively” liable and waived the need for prior demand. To secure the PN, Recardo executed a real estate mortgageon his own property. When Eduardo defaulted on the PN, XYZ stopped payment of rentals on the building on the ground that legal compensation had set in. Since there was still a balance due on the PN after applying the rentals, XYZ foreclosed the real estate mortgage over Recardo’s property. Recardo opposed the foreclosure on the ground that he is only a co-signatory; that no demand was made upon him for payment, and assuming he is liable, his liability should not go beyond half the balance of the loan. Further, Recardo said that when the bank invoked compensation between the reantals and the amount of the loan, it amounted to a new contract or novation, and had the effect of extinguishing the security since he did not give his consent (as owner of the property under the real estate mortgage) therto.

a. Can XYZ Bank balidly assert legal compensation? (2%) b. Can Recardo’s property be foreclosed to pay the full balance of the loan?

(2%) c. Does Recardo have basis under the Civil Code for claiming that the original

contract was novated? (2%)



B. AB Corp. entered into a contract with XY Corp. whereby the former agreed to construct the research and laboratory facilities of the latter. Under the terms of the contract, AB Corp. agreed to complete the facility in 18 months, at the total contract price of P10 million. XY Corp. paid 50% of the total contract price, the balance to be paid upon completion of the work. The work stated immediately, but AB Corp. later experienced work slippage because of labor unrest in his company. AB Corp.’s employees claimed that they are not being paid on time; hence, the work slowdown. As of the 17th month, work was only 45% completed. AB Corp. asked for extension of time, claiming that its labor problems is a case of fortuitous event, but this was denied by XY Corp. When it became certain that the contruction could not be finished on time, XY Corp. sent written notice cancelling the contract, and requiring AB Corp. to immediately vacate the premises.

a. Can the labor unrest be considered a fortuitous event? (1%) b. Can XY Corp. unilaterrally and immediately cancel the contract? (2%) c. Must AB Corp. return the 50% downpayment? (2%)

2007

A. What are “obligations without an agreement”? Give five examples of situations giving rise to this type of obligations?

B. A deposit made in compliance with a legal obligation is:

a. an extrajudicial deposit; b. a voluntary deposit; c. a necessary deposit; d. a deposit with a warehouseman; e. letters a and b.

C. A contract of antichresis is always:

a) a written contract; b) a contract with a stipulation that the debt will be paid through receipt of the

fruits of an immovable; c) involves the payment of interests, if owing; d) all of the above; e) letters a and b.

Note: no specific questions on obligations and contracts have been found in the 2006 bar exam 2005

A. Marvin offered to construct the house of Carlos for a very reasonable price of P900,000.00, giving the latter 10 days within which to accept or reject the offer. On the fifth day, before Carlos could make up his mind, Marvin withdrew his offer.

a) What is the effect of the withdrawal of Marvin’s offer? (2%) b) Will your answer be the same if Carlos paid Marvin P10,000.00 as

consideration for that option? Explain. (2%) c) Supposing that Carlos accepted the offer before Marvin could communicate

his withdrawal thereof? Discuss the legal consequences. (2%)

B. Bernie bought on installment a residential subdivision lot from DEVLAND. After having faithfully paid the installments for 48 months, Bernie discovered that



DEVLAND had failed to develop the subdivision in accordance with the approved plans and specifications within the time frame in the plan. He thus wrote a letter to DEVLAND informing it that he was stopping payment. Consequently, DEVLAND cancelled the sale and wrote Bernie, informing him that his payments are forfeited in its favor.

a) Was the action of DEVLAND proper? Explain. (2%) b) Discuss the rights of Bernie under the circumstances. (2%) c) Supposing DEVLAND had fully developed the subdivision but Bernie failed to pay further installments after 4 years due to business reverses. Discuss the rights and obligations of the parties. (2%)

C. Under a written contract dated December 1, 1989, Victor leased his land to Joel for a period of five (5) years at a monthly rental of P1,000.00, to be increased to P1,200.00 and P1,500.00 on the third and fifth year, respectively. On January 1, 1991, Joel subleased the land to Conrad for a period of two (2) years at a monthly rental of P1,500.00. On December 31, 1992, Joel assigned the lease to his compadre, Ernie, who acted on the belief that Joel was the rightful owner and possessor of the said lot. Joel has been faithfully paying the stipulated rentals to Victor. When Victor learned on May 15, 1992 about the sublease and assignment, he sued Joel, Conrad and Ernie for rescission of the contract of lease and for damages.

a) Will the action prosper? If so, against whom? Explain. (2%) b) In case of rescission, discuss the rights and obligations of the parties. (2%)

D. Before he left for Riyadh to work as a mechanic, Pedro left his Adventure van with Tito, with the understanding that the latter could use it for one year for his personal or family use while Pedro works in Riyadh. He did not tell Tito that the brakes of the van were faulty. Tito had the van tuned up and the brakes repaired. He spent a total amount of P15,000.00. After using the vehicle for two weeks, Tito discovered that it consumed too much fuel. To make up for the expenses, he leased it to Annabelle.

Two months later, Pedro returned to the Philippines and asked Tito to return the van. Unfortunately, while being driven by Tito, the van was accidentally damaged by a cargo truck without his fault.

a) Who shall bear the P15,000.00 spent for the repair of the van? Explain. (2%) b) Who shall bear the costs for the van's fuel, oil and other materials while it was with Tito? Explain. (2%) c) Does Pedro have the right to retrieve the van even before the lapse of one year? Explain. (2%) d) Who shall bear the expenses for the accidental damage caused by the cargo truck, granting that the truck driver and truck owner are insolvent? Explain. (2%)



BIBLIOGRAPHY

Pineda, E. (2000). Civil Code of the Philippines: Obligations and Contracts (9th edition). Quezon City: Central.

Tolentino, A. (1990). Obligations and Contracts (Book IV). Quezon City: Central.

Cases

Abaya v. Enriquez, 101 Phil. 1210 Agoncillo v. Javier, 30 Phil. 124 Alpuerto v. Perez Pastor, 38 Phil. 785 Amerol v.Bagumbaran, 154 SCRA 397 Andreas v. BPI, 47 Phil. 795 Associated Bank v. CA, 291 SCRA 513 Azarraga v. G ay, 52 Phil. 599 Batangan v. Cojuangco, 78 Phil. 481 Berg v. M agdalena Estate, 92 Phil. 110 Bishop ofJaro v. De La Pena, 26 Phil.144 Braganza v.De Villa Abrille, 105 Phil.456 Bundalian v. CA, 129 SCRA 645 Cabaliw v.Sadorra, 64 SCRA 310 California Bus v.State Investment, 418 SCRA 297 Camacho v. M un. of Baliw ag, 28 Phil. 466 Cannu v.Galang, 459 SCRA 80 Castro v. Castro, 57 Phil. 675 CFSharp& Co.v. Northwest,381SCRA314 China Bankinhg v.CA, 327 SCRA 378 Compania G eneral v. Araza, 7 Phil. 455 Cosmic Lumber v. M anaois, 106 Phil. 1015 Cristobal v. G omez, 50 Phil. 810 Cruzv.JM TuasonandCo.,Inc.,76SCRA543 DBP v.CA, 96 SCRA 342 De Jesus v.De Jesus, 113 Phil.528 Dumasug v. M odelo, 34 Phil. 252 Escobar v. Locsin, 74 Phil. 86 Everett Steamship v. CA, 297 SCRA 496 Fieldman’s Ins.v. Vda.de Songco, 25 SCRA 70 Francel Realty v. Sycip, 469 SCRA 431 German & Co.v.Donaldson, 1 Phil.63 Goldenrod v.CA, 299 SCRA 141 Government v.Derham Bros., 36 Phil.960 Grace Park Eng.v.Dimaporo, 107 SCRA 266 Guiang v. CA, 291 SCRA 383 Gutierrez v. Gutierrez, 56 Phil. 177 H ernaez v. H ernaez, 32 Phil. 214 Hill v. Veloso, 31 Phil.160 Jayme v. Alampay, 62 SCRA 131 Kauffman v.PNB, 42 Phil.182 Kiel v. Estate of PS Sabert, 46 Phil. 193 Labayan v. Talisay, 52 Phil. 440 Lambert v. Fox, 26 Phil. 588 Laudico v. Arias, 43 Phil. 270 Legarda v. Miailhe, 88 Phil. 637 Llacer v. M unoz, 12 Phil. 328 Magdalena Estates v.Rodriguez, 18 SCRA 967



Manila Lodge v. CA, 73 SCRA 162 Marin v. Adil, 130 SCRA 406 Marquez v.CA, 300 SCRA 655 Medel v.CA, 299 SCRA 481 Metromedia v. Pastoria, 465 SCRA 335 Muller v.Muller, 500 SCRA 65 Mun.ofCavite v. Rojas, 30 Phil.602 MWSS vs CA, 297 SCRA 287 Nilo v. Romero, 1 SCRA 926 Ong Chua v. Carr, 53 Phil. 975 PAL v. H eald Lumber, 101 Phil. 1031 Panganiban v. Cuevas, 7 Phil. 477 Pedrano v. Heirs ofBenedicto Pedrano, 539 SCRA 401 Phil.Trust Co. v.Roldan, 99 Phil.393 Ras v. Sua, 25 SCRA 153 Republic v.Grijaldo, 15 SCRA 681 Rios v. Palma, 49 Phil. 7 Rivera v.Del Rosario, 419 SCRA 626 Rongavilla v. CA, 294 SCRA 289 Rosencor Dev.Corp.v.Inquing, 354 SCRA 119 Rosenstock v. Burke, 46 Phil.217 Sanchezv.Rigos, 45 SCRA 368 Sing Juco v. Sunyantung, 43 Phil. 589 Siy v.CA, 138 SCRA 536 SMBv. Law Union& RockIns.,40Phil.674 Songco v. Sellner, 37 Phil. 254 Stabilization Inc.v.Relloraza, 97 Phil.153 Tan v. Mandap, 429 SCRA 712 Terminal Facilities v. Philippine Ports Authority, 378 SCRA 82 Thomson v. CA, 298 SCRA 280 Torcuador v.Bernabe, 459 SCRA 439 UCPB v.Buluso, 530 SCRA 567 Uy Aloc v. Cho Jan Ling, 19 Phil. 202 Valencia v. RFC, 103 Phil.444 Vda. de Espiritu v.CFIofCavite, 47 SCRA 354 Velasco v. M esa, 10 Phil. 279 Velez v.Ramas, 40 Phil.787 Wolfson v. Estate of M artinez, 20 Phil. 340 Woodhouse v.Halili, 93 Phil.526

oblicon reviewer 2010

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