Oblicon Reviewer

OBLIGATIONS
AND
CONTRACTS
Block
B2014
Finals
Reviewer
Prof. Solomon Lumba
TABLE
CONTENTS
OF
CIVIL OBLIGATIONS
General
What is an obligation?.........................................................................2
Sources
of
Obligation.
.2
Duties of Obligor...
.5
Kinds of Obligations
Pure and Conditional.
14
Obligations
with
a
Period..19
Alternative..
.24
Joint
and
Solidary26
Divisible
and
Indivisible.
.28 Obligations with a Penal Clause..
.29
Extinguishment of Obligations
Payment
or
Performance.
.31
Loss
of
the
Thing
Due..34 Condonation or
Remission..35 Confusion or
Merger
of
Rights....37
Compensations.
..37
Novation.
.42
Prescription
47
Agreement.
53
Difficulty.
.54
Impossibility...
..55
Other Performance Excuses
Volenti Non Fit Injuria55
Fortuitous
Event..
.56
NATURAL OBLIGATIONS
What is a natural obligation?....................................................58
CONTRACTS
General
What is a contract?.............................................................................60
Kinds
of
contracts.
..69
Stipulation
Pour
Autrui.
..75
Tortious Interference
77
Essential Requisites
Consent....
.81
Object.
....87
Cause...
88
Reformation of Instruments
Defective Contracts
Rescissible..
.90
Voidable.
..96
Unenforceable..
.101
Void
104
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Page 1 of 106
CIVIL OBLIGATIONS
I. GENERAL
What is an obligation?
Art. 1156. An obligation is a juridical necessity to give, to do, or not to do.
JURIDICAL NECESSITY juridical tie; connotes that in case of noncompliance, there
will be legal sanctions.
-An obligation is nothing more than the duty of a person (obligor) to satisfy a
specific demandable claim of another person (obligee) which, if breached, is
enforceable in court.
-A contract necessarily gives rise to an obligation but an obligation does not
always need to have a contract.
KINDS OF OBLIGATION
A. From the viewpoint of sanction (a)CIVIL OBLIGATION that defined in Article 1156; an obligation, if not fulfilled when
it becomes due and demandable, may be enforced in court through action; based on
law; the sanction is judicial due process
(b)NATURAL OBLIGATION defined in Article 1423; a special kind of obligation which
cannot be enforced in court but which authorizes the retention of the voluntary
payment or performance made by the debtor; based on equity and natural law. (i.e.
when there is prescription of duty to pay, still, the obligor paid his dues to the obligee
the obligor cannot recover his payment even there is prescription) the sanction is
the law, but only conscience had originally motivated the payment.
(c) MORAL OBLIGATION the sanction is conscience or morality, or the law of the
church.
B. From the viewpoint of subject matter REAL OBLIGATION the obligation to give
PERSONAL OBLIGATION the obligation to do or not to do (e.g. the duty to paint a
house or to refrain from committing a nuisance)
C. From the affirmativeness and negativeness of the obligation POSITIVE OR AFFIRMATIVE OBLIGATION the obligation to give or to do
NEGATIVE OBLIGATION the obligation not to do (which naturally includes not to
give)
D. From the viewpoint of persons obliged - sanction -
UNILATERAL where only one of the parties is bound

BILATERAL where both parties are bound
- may be: (b.1) reciprocal
(b.2) non-reciprocal where performance by one is non-dependent upon
performance by the other
ELEMENTS OF AN OBLIGATION
ACTIVE SUBJECT (Creditor / Obligee) the person who is demanding the

performance of the obligation;
PASSIVE SUBJECT (Debtor / Obligor) the one bound to perform the
prestation or to fulfill the obligation or duty;
PRESTATION (to give, to do, or not to do) object; subject matter of the
obligation; conduct required to be observed by the debtor;
Requisites of Prestation / Object:
licit (if illicit, it is void)
possible (if impossible, it is void)
determinate or determinable (or else, void)
pecuniary value
INJURY wrongful act or omission which causes loss or harm to another
DAMAGE result of injury (loss, hurt, harm)
d) EFFICIENT CAUSE the JURIDICAL TIE which binds the parties to the
obligation; source of the obligation.
Art. 1423. Obligations are civil or natural. Civil obligations give a right of action
to compel their performance. Natural obligations, not being based on positive
law but on equity and natural law, do not grant a right of action to enforce their
performance, but after voluntary fulfillment by the obligor, they authorize the
retention of what has been delivered or rendered by reason thereof. Some
natural obligations are set forth in the following articles.
What are the sources of obligations?

Art. 1157. Obligation arises from (1) law; (2) contracts; (3) quasicontracts;
(4) acts or omissions punished by law; (5)quasi-delicts.
(1) LAW (Obligation ex lege) imposed by law itself; must be expressly or
impliedly set forth and cannot be presumed
- [See Article 1158]
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CONTRACTS (Obligation ex contractu) arise from stipulations of the

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

disregarded; the original terms and stipulations should be considered valid and
subsisting for the parties to fulfill.
Art. 1160. Obligations derived from quasi-contracts shall be subject to
the provisions of chapter 1, title 17 of this book.
QUASI-CONTRACT juridical relation resulting from lawful, voluntary and
unilateral acts by virtue of which, both parties become
bound to each other, to the end that no one will be unjustly enriched or
benefited at the expense of the other. (See Article 2142)
NEGOTIORUM GESTIO juridical relation which takes place when somebody
voluntarily manages the property affairs of another without the knowledge or consent
of the latter; owner shall reimburse the gestor for necessary and useful expenses
incurred by the latter for the performance of his function as gestor.
SOLUTIO INDEBITI something is received when there is no right to demand it and
it was unduly delivered through mistake; obligation to return the thing arises on the
part of the recipient. (ex. storekeeper gives excess change, you have the obligation
to return the excess)
Art. 1161. Civil obligations arising from criminal offenses shall be governed
by the penal laws, subject to the provisions of Article 2177, and of the
pertinent provisions of Chapter 2, Preliminary in Human Relations, and of
Title 18 of this book, regulating damages.
Governing rules:
Pertinent provisions of the RPC and other penal laws subject to Art 2177 Civil
Code [Art 100, RPC Every person criminally liable for a felony is also civilly liable]
Chapter 2, Preliminary title, on Human Relations ( Civil Code )
Title 18 of Book IV of the Civil Code on damages

- Every person criminally liable for a felony is also criminally liable (art. 100, RPC)
CRIMINAL LIABILITY INCLUDES:
RESTITUTION restoration of property previously taken away; the thing itself
shall be restored, even though it be found in the possession of a third person who
has acquired it by lawful means, saving to the latter his action against the proper
person who may be liable to him.
REPARATION OF THE DAMAGE CAUSED court determines the amount of
damage: price of a thing, sentimental value, etc.
INDEMNIFICATION FOR CONSEQUENTIAL DAMAGES includes damages suffered
by the family of the injured
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parta or aa a taara parson aa raason oa taa aramaa

Effect of acquittal in criminal case:
when acquittal is due to reasonable doubt no civil liability
when acquittal is due to exempting circumstances there is civil liability
when there is preponderance of evidence there is civil liability

Art. 1162. Obligations derived from quasi-delicts shall be governed by
the provisions of chapter 2, title 17 of this book, and by special laws.
Art. 2176. Whoever by act or omission causes damage to another, there
being fault or negligence, is obliged to pay for the damage done. Such fault
or negligence, if there is no pre-existing contractual relation between the
parties, is called a quasi-delict and is governed by the provisions of this
Chapter.
Art. 2180. The obligation imposed by Article 2176 is demandable not only
for one's own acts or omissions, but also for those of persons for whom
one is responsible.
QUASI-DELICT (culpa aquiliana) an act or omission by a person which causes
damage to another giving rise to an obligation to pay for the damage done, there
being fault or negligence but there is no pre-existing contractual relation between
parties.
- Requisites:
omission
negligence
damage caused to the plaintiff

direct relation of omission, being the cause, and the damage, being the effect
no pre-existing contractual relations between parties

Fault or Negligence consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the
circumstances of the person, time, and of the place.
Obligations derived from quasi delicts are also applicable for persons for whom one
is responsible such as:
father / in case unavailable, mother for their minor children
guardians
employers for their employees

owners / managers of establishments for their employees
the state through its special agent
teachers / heads of establishments of arts and trades for students in their

custody
Requisites of liability
there exists a wrongful act or omission imputable to the defendant by reason

of his fault or negligence
there exists a damage or injury which must be proved by the person claiming
recovery
there must be a direct causal connection or a relation of cause and effect

between the fault or negligence and the damage or injury, or that the fault or
negligence be the cause of the damage or injury.
RULE 111 - Prosecution of Civil Action
Section 1. Institution of criminal and civil actions.
When a criminal action is instituted, the civil action for the recovery of civil
liability arising from the offense charged shall be deemed instituted with the
criminal action unless
offended party waives the civil action
reserves the right to institute it separately
institutes the civil action prior to the criminal action.
SAGRADA ORDEN v NACOCO J. Labrador
-FACTS: Alien Property Administration had the control and administration of the
property by express provision of the law. Theres no agreement b/w the APA and
NACOCO to pay rentals on the property. Previous occupant also did not pay rentals.
- HELD: No crime since NACOCO entered the premises since it occupied the property
with the permission of the APA. Also, no contract or obligation between APA and Taiwan
Tekkosho. Therefore, APA occupied the property IN
GOOD FAITH.
FGU INSURANCE v SARMIENTO J. Vitug

- FACTS: Insured company got into an accident. FGU Insurance had to pay for the
damages as a result of the accident. They now seek to recover from the trucking
company, the other party in the accident.


HELD: A private hauler is not a common carrier and it was not proven that
the driver was negligent.
FGU is the subrogee of the rights and interests of Concepcion industries so it

had a right to seek reimbursement for the amount it had paid to the latter from the
trucking corporation. However, the liability arose from a contract. A breach upon the
contract confers upon the injured party a valid cause for recovering that which had
been lost or suffered.
Failure in the compliance of an obligation, in this case the delivery of goods,

gives rise to a presumption of lack of care and corresponding liability on the part of
the contractual obligor.
Driver may not be held liable since he was not a party to the contract of carriage
between petitioners principal and defendant. But, civil action may be filed against him
based on culpa aquiliana. Negligence must be proved first.
-Kinds of Interest:
Expectation interest - the interest of a party to a breached contract in receiving
the benefit of the bargain by being put in a position as good as that which would
have resulted had the contract been performed. It is based on the actual value the
contract would have had to the injured party if the contract had been performed.
- you pay 1 peso for a car that that should have been delivered. Person did not
deliver car. He owes you 1 peso for the car not delivered.
Reliance interest - the interest of a party to a breached contract in being
compensated for detriments suffered (as expenses incurred) in reliance on the
agreement
Reliance damages protect a party's reliance interest. Neal spent $100 in
reliance on the contract, which constituted Neal's reliance interest.
Since reliance damages equal to the value of the reliance interest of the injured
party, Matt owes Neal $100. This puts Neal in the same economic position as if the
contract never happened.
- another example would also be buying mags for a car which was not delivered
Restitution interest - interest in having restored to him any benefit that he has
conferred on the other party....
Example: A, a social worker, promises B to render personal services to C in return for
B's promise to educate A's children. B repudiates the contract after A has rendered
part of the services. A can get restitution from B for the services, even though they
were not rendered to B, because they conferred a benefit on B.
COCA COLA v. CA
J. Davide Jr.
FACTS: Proprietress of a school canteen found foreign substances in the

softdrinks she sells at her canteen.
HELD: Liability for quasi delicts may exist even with a contract if the
nature that breaks the contract may also be a tort. Existence of a contract does
not preclude the action for quasi delicts
LRTA v NAVIDAD
J. Vitug
FACTS: Man and guard had an altercation. Man fell on the railway tracks of
LRT just as the train was approaching. He died.
HELD: Agency can never be liable if guard is not liable. Agency may be liable
if guard is liable except if it establishes that it exercised extraordinary diligence in
choosing employees. Obligation is based on quasi delict.
LRTA is a common carrier so carrier is presumed to be at fault upon proof of

the injury. Burden shifts on the carrier to prove that the injury is due to an
unforeseen event or force majeure.
LRTAs liability is the contract of carriage and its obligation to indemnify the
victim arises from the breach of that contract by reason of its failure to exercise the
high diligence required of the common carrier.
LG FOODS v AGRAVIADOR
J. Garcia
FACTS: Boy died after being hit by the van of the petitioners. The driver who
was driving the van and an employee of the petitioners killed himself.
HELD: Civil liability arising from the criminal act. Judgement is required.
Since driver killed himself, Art 2180 was used (for persons for whom one was
responsible). LG foods is principally liable. It was sufficiently alleged that the death
of the son was caused by the drivers negligence. LG foods impliedly admitted the
action for quasi delicts by using the defense that they exercised extraordinary
diligence to choose its employees.
What are the duties of the obligor in obligations to give?
To take care of the thing with the diligence of a good father of a family
Art. 1163. Every person obliged to give something is also obliged to take
care of it with the proper diligence of a good father of a family, unless the
law or the stipulation of the parties requires another standard of care.

Page 5 of 106

Speaks of an obligation to care of a DETERMINATE thing (that is one which
is specific; a thing identified by its individuality) which an obligor is supposed to
deliver to another.
Reason: the obligor cannot take care of the whole class/genus
DUTIES OF DEBTOR:
Preserve or take care of the things due.
DILIGENCE OF A GOOD FATHER a good father does not abandon his family, he is
always ready to provide and protect his family; ordinary care which an average
and reasonably prudent man would do.
Defined in the negative in Article 1173

ANOTHER STANDARD OF CARE extraordinary diligence provided in the
stipulation of parties.
FACTORS TO BE CONSIDERED diligence depends on the nature of obligation and
corresponds with the circumstances of the person, time, and place.
Art. 1173. The fault or negligence of the obligor consists in the

omission of that diligence which is required by the nature of the
obligation and corresponds with the circumstances of the persons, of
the time and of the place. When negligence shows bad faith, the
provisions of Articles 1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be
observed in the performance, that which is expected of a good father of
a family shall be required. (1104a)
FRAUD
Negligence
There is deliberate intention to There is no deliberate intention

cause
to
damage.
cause damage.
Liability cannot be mitigated.
Liability may be mitigated.
Waiver for future negligence
Waiver for future fraud is void. may be
allowed in certain cases:
- This provision provides for a negative definition of proper diligence of a good
father of a family
DILIGENCE the attention and care required of a person in a given situation and
is opposite of negligence.
NEGLIGENCE consists in the omission of that diligence which is required by the
nature of the particular obligation and corresponds with the circumstances of the
persons, of the time, and of the place.
KINDS of DILIGENCE:
DILIGENCE OF A GOOD FATHER a good father does not abandon his family,
he is always ready to provide and protect his family; ordinary care which an average
and reasonably prudent man would do.
Diligence required by the law governing the particular obligation
Diligence stipulated by the parties

To deliver the thing
Art. 1169. Those obliged to deliver or to do something incur in delay from
the time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that
delay may exists:
-When the law or obligation so expressly declares;
-When from the nature of the contract, time us the essence and
motivating factor for its establishment;
-When demand would be useless (prestation is impossible);
-In reciprocal obligations, from the moment one of the parties fulfills his
obligation;
-When the debtor admits he is in default
ORDINARY DELAY mere failure to perform an obligation at the appointed time.
LEGAL DELAY (DEFAULT) tantamount to non-fulfillment of the obligation and arises
after an extrajudicial or judicial demand was made upon the debtor.
KINDS OF DEFAULT :
a) MORA SOLVENDI delay on the part of the debtor to fulfill his obligation;
REQUISITES:
failure of the obligor to perform obligation on the DATE agreed upon;
demand (judicial/extrajudicial) by the creditor;
failure to comply with such demand

EFFECTS:
debtor liable for damages and interests
debtor liable for the loss of a thing due to a fortuitous event

KINDS:
mora solvendi ex re default in real obligations (to give)
mora solvendi ex persona default in personal obligations (to do)

Page 6 of 106
MORA ACCIPIENDI delay on the part of the creditor to accept the

performance of the obligation;
Effects:
1. creditor liable for damages
2. creditor bears the risk of loss of the thing
3. debtor not liable for interest from the time of creditors delay
4. debtor release himself from the obligation
COMPENSATIO MORAE delay of the obligors in reciprocal obligation.

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

constructive. (Art. 1477)
- The remedy of the buyer when there is no delivery despite demand is to file a
complaint for SPECIFIC PERFORMANCE AND DELIVERY because he is not yet the
owner of the property before the delivery.
ACTUAL DELIVERY actual delivery of a thing from the hand of the grantor to the
hand of the grantee (personally), or manifested by certain possessory acts executed
by the grantee with the consent of the grantor (realty).
FRUITS:
NATURAL spontaneous products of the soil, the young and other products of
animals;
INDUSTRIAL produced by lands of any cultivation or labor;
CIVIL those derived by virtue of juridical relation.

Art. 725. Donation is an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another, who accepts it.
Art. 1165. When what is to be delivered is a determinate thing, the creditor

may compel the debtor to make delivery.
If the thing is indeterminate or generic, he may ask that the obligation be
complied with at the expense of the debtor. If the obligor delays or has
promised to deliver the same thing to two or more persons who do not
have the same interest, he shall be responsible for any fortuitous event
until he has effected the delivery.
*This provision applies to an obligation to give.
DETERMINATE THING
something which is susceptible of particular designation or specification;
obligation is extinguished if the thing is lost due to fortuitous events.
Article 1460: a thing is determinate when it is particularly designated and

physically segregated from all others of the
same class.
INDETERMINATE THING
something that has reference only to a class or genus;
obligation to deliver is not so extinguished by fortuitous events.

REMEDIES FOR FAILURE OF DELIVERY (determinate thing)
1. Complaint for specific performance an action to compel the fulfillment of the

obligation.
2. Complaint for rescission of the obligation action to rescind
3. Complaint for damages action to claim for compensation of damages
suffered

Page 7 of 106
as a aanaral rulaa no parson saall aa rasponsaala aor taosa avants waaaa aoula not aa aorasaana or waaaaa
taouaa aorasaana ara anavataalaa axaapta aa an aasas axprassla spaaaaaaa aa taa law
aa waan at as stapulataa aa taa partaas
aa waan taa natura oa taa oalaaataon raquaras assumptaon oa rasa
an anaatarmanata taana aannot aa oaaaat oa aastruataon aa a aortuatous avant aaaausa aanus navar parasaasa
Art. 1477. The ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof. (n)
To deliver the fruits of the thing

Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall
acquire no real right over it until the same has been delivered to him.
Art. 441. To the owner belongs:
The natural fruits;
The industrial fruits;
The civil fruits. (354)
Art. 442. Natural fruits are the spontaneous products of the soil, and the young and other products of animals.
Industrial fruits are those produced by lands of any kind through cultivation or labor.
Civil fruits are the rents of buildings, the price of leases of lands and other property and the amount of perpetual or life
annuities or other similar income. (355a)
Art. 443. He who receives the fruits has the obligation to pay the expenses made by a third person in their production, gathering, and
preservation. (356)
Art. 444. Only such as are manifest or born are considered as natural or industrial fruits.
To deliver the accessions and accessories of the thing

Art. 1166. The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though
they may not have been mentioned.
ACCESSIONS fruits of the thing or additions to or improvements upon the principal

-those which are naturally or artificially attached to the thing ACCESSORIES things included with the principal for the latters
embellishment, better use, or completion
When does right to fruits arise? from the time the obligation to deliver arises -Conditional from the moment the condition happens
With a term/period upon the expiration of the term/period
Simple from the perfection of the contract
Art. 445. Whatever is built, planted or sown on the land of another and the improvements or repairs made thereon, belong to
the owner of the land, subject to the provisions of the following articles.
Art. 447. The owner of the land who makes thereon, personally or through another, plantings, constructions or works with the
materials of another, shall pay their value; and, if he acted in bad faith, he shall also be obliged to the reparation of damages. The
owner of the materials shall have the right to remove them only in case he can do so without injury to the work constructed, or
without the plantings, constructions or works being destroyed. However, if the landowner acted in bad faith, the owner of the
materials may remove them in any event, with a right to be indemnified for damages.
Art. 459. Whenever the current of a river, creek or torrent segregates from an estate on its bank a known portion of land and transfers it
to another estate, the owner of the land to which the segregated portion belonged retains the ownership of it, provided that he removes
the same within two years.
To pay for damages in case of fraud, negligence, delay or contravention of tenor

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
When the obligation or the law expressly so declare; or
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

Page 8 of 106
the service is to be rendered was a controlling motive for the

establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered
it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is
incumbent upon him. From the moment one of the parties fulfills his
obligation, delay by the other begins. (1100a)
Art. 1170. Those who in the performance of their obligations are guilty
of fraud, negligence, or delay, and those who in any manner contravene
the tenor thereof, are liable for damages. (1101)
FRAUD (dolo) deliberate intentional evasion of the faithful fulfillment of an
obligation;
NEGLIGENCE (culpa or fault) voluntary act or omission of diligence, there being
no malice, which prevents the normal fulfillment
of an obligation;
DELAY (mora) default or tardiness in the performance of an obligation after it has
been due and demandable;
CONTRAVENTION OF TERMS OF OBLIGATION (violation) violation of terms and
conditions stipulated in the obligation; this must
not be due to a fortuitous event.
Art. 1171. Responsibility arising from fraud is demandable in
obligations. Any waiver of an action for future fraud is void. (1102a)
all
INCIDENTAL FRAUD (applicable provisions are Arts. 1170 & 1344) committed in the
performance of an obligation already
existing because of a contract; incidental fraud obliges the person employing it to
pay damages.
CAUSAL FRAUD (Art. 1338) employed in the execution of contract in order to
secure consent; remedy is annulment because of
vitiation of consent.
Art. 1172. Responsibility arising from negligence in the performance of
every kind of obligation is also demandable, but such liability may be
regulated by the courts, according to the circumstances. (1103)
Courts discretion because:
negligence depends upon the circumstances of a case good or bad faith of the
obligor may be considered as well as the conduct or misconduct of the obligee;
it is not as serious as fraud.
Negligence lack of foresight or knowledge
Imprudence lack of skill or precaution
TEST OF NEGLIGENCE
Did the defendant, in doing the alleged negligent act, use the reasonable care
and caution which an ordinary prudent man would
have used in the same situation?
Art. 1173. The fault or negligence of the obligor consists in the omission
of that diligence which is required by the nature of the obligation and
corresponds with the circumstances of the persons, of the time and of
the place. When negligence shows bad faith, the provisions of Articles
1171 and 2201, paragraph 2, shall apply.
Two Types of Negligence:
Culpa
Aquiliana
Basis
(Quasi
Delict)
Definition
Negligence between
parties
not
so
related by
Culpa Contractual
(Breach of Contract)
Negligence in the
performance of
contractual
pre-existing contract obligation
Direct, substantive
Nature of Negligence and
Incidental to the
independent
performance of the
obligation
Complete
and
Good Father of the
proper
Not complete and
family defense
defense (parents,
proper defense in the
guardians,
selection
of
employers)
employees
There is presumption
Presumption of
No presumption
of
negligence by the
negligence
injured party must
fact
prove negligence of
the
that the contract was
defendant
breached. Must show
that they are not
negligent and breach
was caused by
fortuitous events.

Page 9 of 106
Ex, Bus with passengers bumps a car. A was a passenger of the bus. B was the
driver of the car. There is culpa contractual with regards to A and the bus driver
and culpa aquiliana with regards to the car driver and bus driver.
Question: Does the employer still have to prove extraordinary diligence in choosing
his employees in an action for culpa aquiliana if it was proven that the driver was not
negligent? NO!
Art. 2199. Except as provided by law or by stipulation, one is entitled to an
adequate compensation only for such pecuniary loss suffered by him as he
has duly proved. Such compensation is referred to as actual or
compensatory damages.
Art. 2200. Indemnification for damages shall comprehend not only the
value of the loss suffered, but also that of the profits which the obligee
failed to obtain. (1106)
Art. 2201. In contracts and quasi-contracts, the damages for which the
obligor who acted in good faith is liable shall be those that are the natural
and probable consequences of the breach of the obligation, and which the
parties have foreseen or could have reasonably foreseen at the time the
obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the
non-performance of the obligation. (1107a)
Art. 2202. In crimes and quasi-delicts, the defendant shall be liable for all
damages which are the natural and probable consequences of the act or
omission complained of. It is not necessary that such damages have been
foreseen or could have reasonably been foreseen by the defendant.
Art. 2216. No proof of pecuniary loss is necessary in order that moral,
nominal, temperate, liquidated or exemplary damages, may be adjudicated.
The assessment of such damages, except liquidated ones, is left to the
discretion of the court, according to the circumstances of each case.
Art. 2217. Moral damages include physical suffering, mental anguish,

fright, serious anxiety, besmirched reputation, wounded feelings, moral
shock, social humiliation, and similar injury. Though incapable of
pecuniary
computation, moral damages may be recovered if they are the proximate

result of the defendant's wrongful act for omission.
Art. 2221. Nominal damages are adjudicated in order that a right of
the plaintiff, which has been violated or invaded by the defendant,
may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him.
Art. 2224. Temperate or moderate damages, which are more than nominal
but less than compensatory damages, may be recovered when the court
finds that some pecuniary loss has been suffered but its amount can not,
from the nature of the case, be provided with certainty.
Art. 2226. Liquidated damages are those agreed upon by the parties to
a contract, to be paid in case of breach thereof.
Art. 2229. Exemplary or corrective damages are imposed, by way of
example or correction for the public good, in addition to the moral,
temperate, liquidated or compensatory damages.
Kinds of Damages MENTAL
MORAL - Moral damages include physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation,
and similar injury. Though incapable of pecuniary computation, moral damages may
be recovered if they are the proximate result of the defendant's wrongful act for
omission. Includes sentimental value of property EXEMPLARY - Exemplary or
corrective damages are imposed, by way of example or correction for the public
good, in addition to the moral, temperate, liquidated or compensatory damages.
NOMINAL - Nominal damages are adjudicated in order that a right of the plaintiff,
which has been violated or invaded by the defendant, may be vindicated or
recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered
by him.
TEMPERATE - Temperate or moderate damages, which are more than nominal but
less than compensatory damages, may be recovered when the court finds that some
pecuniary loss has been suffered but its amount can not, from the nature of the
case, be provided with certainty.
ACTUAL / Compensatory - adequate compensation only for such pecuniary loss
suffered by him as he has duly proved
| Baldueza | Buena | Calderon | Cardenas | Eguico | Flordeliza | Mendoza | Navarro | Velasco | Page
10 of 106
LIQUIDATED - Liquidated damages are those agreed upon by the parties to a

contract, to be paid in case of breach thereof.
ARRIETA v. NATIONAL RICE
J. Regala
Source of obligation: contract
failure of the opening of the letter of credit was the cause for the breach of contract
it is clear that what singularly delayed the opening of the stipulated letter of credit
and which, in turn, caused the cancellation of the allocation in Burma, was the inability of the
appellant corporation to meet the condition importation by the Bank for granting the same.
liability and culpability arises from the willful and deliberate assumption of
contractual obligations even as it was well aware of its financial incapacity to undertake the
prestation
NARIC knew the bank requirements for opening a letter of credit and that it could not
meet its requirement. Despite that, it still continued with the bidding. Hence , it must be
similarly held to have bound itself to answer for all and every consequences that would result
from the representation. aptly observed by the trial court.
Those who in the performance of their obligation are guilty of fraud, negligence,
or delay, and those who in any manner contravene the tenor thereof, are liable in
damages.
The NARIC would also have this Court hold that the subsequent offer to substitute
Thailand rice for the originally contracted Burmese rice amounted to a waiver by the appellee
of whatever rights she might have derived from the breach of the contract. We disagree.
Waivers are not presumed, but must be clearly and convincingly shown, either by express
stipulation or acts admitting no other reasonable explanation.
damages were based on estimates , cost studies, and evidence. Award should be
in Philippine peso. Exchange rate is to be when the obligation was incurred.
CATHAY PACIFIC v VAZQUEZ

J. Davide
Source of obligation: contract of carriage
breach of contract of carriage -> upgrading the seats from business class
to first class is a breach of contract
breach of contract - failure without legal reason to comply with the terms of a
contract.*5+ It is also defined as the *f+ailure, without legal excuse, to perform
any promise which forms the whole or part of the contract

By insisting on the upgrade, Cathay breached its contract of carriage with the
Vazquezes even when the Vasquezs waived their privilege in not taking the
upgraded seats
the upgrading of the seats were not in bad faith. Bad faith is defined as a
dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach
of a known duty through some motive or interest or ill will that partakes of the nature
of fraud
there was no bad faith since the Vasquez spouses were not induced by deceit
in upgrading their seats and it was not for a devious or evil purpose.
overbooking the business class section was not in bad faith since it is in
accordance with law (Section 3 of the Economic Regulation No. 7 of the Civil
Aeronautics Board)
there are no moral damages since it requires the following:

(1) there must be an injury clearly sustained by the claimant, whether physical, mental or
psychological; (2) there must be a culpable act or omission factually established; (3) the
wrongful act or omission of the defendant is the proximate cause of the injury sustained
by the claimant; and (4) the award for damages is predicated on any of the cases stated
in Article 2219 of the Civil Code.
- Moral damages predicated upon a breach of contract of carriage may only be

recoverable in instances where the carrier is guilty of fraud or bad faith or where the
mishap resulted in the death of a passenger.[ Where in breaching the contract of
carriage the airline is not shown to have acted fraudulently or in bad faith, liability for
damages is limited to the natural and probable consequences of the breach of the
obligation which the parties had foreseen or could have reasonably foreseen. In such
a case the liability does not include moral and exemplary damages. Nominal
damages is applicable since it deals with the right of the spouses.
PLEASANTVILLE v CA
J. Panganiban
there was good faith in Kee building the properties in the disputed lot.
Good faith consists in the belief of the builder that the land he is building on is
his and his ignorance of any defect or flaw in his title. And as good faith is presumed,
petitioner has the burden of proving bad faith on the part of Kee. At the time he built
improvements on Lot 8, Kee believed that said lot was what he bought from
petitioner. He was not aware that the lot delivered to him was not Lot 8. Thus, Kees
good faith. Petitioner failed to prove otherwise.
Kees contract violation -> only applicable in contractual breach
11 of 106

provision on contract of sale regarding erosion is not applicable to the
negligence of the sellers agent.
waiver to contract away rights to recover damages from negligence is

contrary to public policy and is not allowed.
principal is responsible for the acts of the agent, done within the scope of his
authority, and should bear the damage caused to third persons. cause of the issue
was the agents negligence.
Holding of the CA would unjustly enrich KEE:

a. If Eldred Jardinico decides to appropriate the improvements and, thereafter,
remove these structures, the third-party defendants shall answer for all demolition
expenses and the value of the improvements thus destroyed or rendered useless;
b. If Jardinico prefers that Kee buy the land, the third-party defendants shall answer
for the amount representing the value of Lot 9 that Kee should pay to
Jardinico.
Kee and Jardincio has already amicably settled through their deed of sale their rights
and obligations with regards to Lot 9.
What are the duties of the obligor in obligations to do? To do it
To shoulder the cost if someone else does it To undo
what has been poorly done
Art. 1167. If a person obliged to do something fails to do it, the same shall
be executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor
of the obligation. Furthermore, it may be decreed that what has been
poorly done be undone. (1098)
To pay for damages in case of fraud, negligence, delay or contravention of tenor
Art. 1169. Those obliged to deliver or to do something incur in delay from
the time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order
that delay may exist:
(1) When the obligation or the law expressly so declare; or
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
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
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

corresponds with the circumstances of the persons, of the time and of the
place. When negligence shows bad faith, the provisions of Articles 1171
and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed
in the performance, that which is expected of a good father of a family
shall be required. (1104a)
(See annotations above)
What are the duties of the obligor in obligations not to do? Not to do
what should not be done
To shoulder the cost to undo what should not have been done
Art. 1168. When the obligation consists in not doing, and the obligor does
what has been forbidden him, it shall also be undone at his expense. (1099a)
12 of 106
* This provision applies to an obligation to do.

THREE SITUATIONS:
a) Debtors failure to perform an obligation
creditor may do the obligation, or by another, at the expense of the debtor;recover damages
Performance was contrary to the terms agreed upon - order of the court to
undo the same at the expense of the debtor
Performance in a poor manner - order of the court to undo the same at
the expense of the debtor

To pay damages
Art. 1170. Those who in the performance of their obligations are
guilty of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages. (1101)
Art. 2201. In contracts and quasi-contracts, the damages for which the
obligor who acted in good faith is liable shall be those that are the
natural and probable consequences of the breach of the obligation, and
which the parties have foreseen or could have reasonably foreseen at the
time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall
be responsible for all damages which may be reasonably attributed to
the non-performance of the obligation. (1107a)
Art. 2202. In crimes and quasi-delicts, the defendant shall be liable for all
damages which are the natural and probable consequences of the act or
omission complained of. It is not necessary that such damages have been
foreseen or could have reasonably been foreseen by the defendant.
To pay for damages in case of fraud, negligence, delay or contravention of

tenor
Art. 1169. Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands from them
the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order

that delay may exist:
When the obligation or the law expressly so declare; or
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
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
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


corresponds with the circumstances of the persons, of the time and of
the place. When negligence shows bad faith, the provisions of Articles
1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be

observed in the performance, that which is expected of a good father of
a family shall be required. (1104a)
(see annotations above)
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II. Kinds of Obligations

A. Pure and Conditional Obligations
What is a pure obligation?
Art. 1179. Every obligation whose performance does not depend upon a
future or uncertain event, or upon a past event unknown to the parties,
is demandable at once.
Every obligation which contains a resolutory condition shall also be
demandable, without prejudice to the effects of
the happening of the event.
What is a conditional obligation?
Art. 1181. In conditional obligations, the acquisition of rights, as well as
the extinguishment or loss of those already acquired, shall depend upon
the happening of the event which constitutes the condition.
PURE OBLIGATION an obligation which does not contain any condition or term
upon which the fulfillment is made to depend;
immediately demandable by the creditors and the debtor cannot be excused from
not complying with his prestation.
CONDITIONAL OBLIGATION an obligation which depends upon a future or uncertain
event, or upon a past event unknown to the contracting parties.
an obligation subject to a condition.
an event which is not uncertain but must necessarily happen cannot be a

condition; the obligation will be considered as one with a term
past event cannot be called a condition but rather, a basis of the contract.
Even when unknown to the parties, a past event is not a condition.
it is not the fact stated which serves as a condition but the proof of such fact;
the contract or obligation arises, not when the vent happened or the fact came into
existence , which would be in the past, but when the proof of such fact or event is
presented, which would be the future.
Resolutory Condition the happening of such extinguishes rights already
existing; obligation is treated as if it never came into existence
cannot be enforced against a 3rd party as it is a personal right which he can

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

to make the restitution being considered the debtor
- mutual restitution happens not just for the object and the price but also for the
fruits and the interests
Suspensive Condition happening of such gives rise to an obligation
What is a resolutory condition?
Art. 1179. Every obligation whose performance does not depend upon a
future or uncertain event, or upon a past event unknown to the parties,
is demandable at once.
Every obligation which contains a resolutory condition shall also be
demandable, without prejudice to the effects of
the happening of the event.
Art. 1190. When the conditions have for their purpose the extinguishment
of an obligation to give, the parties, upon the fulfillment of said conditions,
shall return to each other what they have received.
In case of the loss, deterioration or improvement of the thing, the
provisions which, with respect to the debtor, are
laid down in the preceding article shall be applied to the party who is
bound to return.
As for the obligations to do and not to do, the provisions of the second
paragraph of Article 1187 shall be observed
as regards the effect of the extinguishment of the obligation.
-Refers to the fulfillment of a resolutory condition.
-When the resolutory condition happened, the obligation is considered as if it did
not exist.
-The parties are bound to return or restore whatever they have received from each
other reciprocal restitution
-Donation by reason of marriage if the marriage does not happen, such
donation should be returned to the donor.
-Loss, deterioration and improvement governed by 1189.
-In obligations to do and not to do, the courts shall determine, in each case, the
retroactive effect of the condition that has been complied with.
What is a potestative condition?
Art. 1182. When the fulfillment of the condition depends upon the sole will
of the debtor, the conditional obligation shall be void. If it depends upon
chance or upon the will of a third person, the obligation shall take effect in
conformity with the provisions of this Code.
14 of 106
Art. 1308. The contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them. (1256a)
Art. 1309. The determination of the performance may be left to a third
person, whose decision shall not be binding until it has been made known
to both contracting parties. (n)
Art. 1310. The determination shall not be obligatory if it is evidently

inequitable. In such case, the courts shall decide what is equitable under
the circumstances. (n)
Potestative condition one which depends upon the will of one of the
contracting parties
Casual condition depends exclusively upon chance or other factors and not
upon the will of the contracting parties
Mixed condition one which depends upon the will of one of the contracting parties
and other circumstances, including the will of a third person
Kinds of Potestative Condition

1.) Simple presupposes not only a manifestation of will but also the
realization of an external act (if you sell your house)
does not prevent the formation of a valid obligation
it is subject in part to contingencies over which debtor has no control
2.) Purely Potestative depends solely and exlusively upon the will ( if I like it or if
I deem it proper)
destroys the efficacy of the legal tie;
it is only when the potestative condition depends exclusively upon the will
of
the debtor that the conditional obligation is void. It is valid if it depends partly on
the will of the debtor and the 3rd person,
dependence on the debtor illusory obligations obligation is void but is
applicable only when the condition is suspensive and cannot apply to resolutory
conditions
potestative and resolutory = may be valid
mixed conditions = valid
if dependent on a 3rd person who cannot be compelled to carry it out, and it
is found by the court that the obligor has done all in his power to comply with the
obligation, the other party may be ordered to comply with his part of the contract
NAGA TELEPHONE v CA
J. Nocon
cause of action one sided contract, petitioners use of the telephone
posts caused damage
cause of action no payment for usage of telephone posts despite
demands or private respondent
cause of action poor service which caused damages
Respondents answered:
not sufficient COA , barred by prescription, estoppel, their usage could
not have caused the deterioration
petitioners refused to comply with private respondents demands , it was
probably because what is due to them from private respondent is more than its
claim against them.
telephone
service
had
been
categorized
by
the
National
Telecommunication Corporation (NTC) as "very high" and of "superior quality.

Issue of the applicability of Art 1267 of the NCC - we agree with respondent
court that the allegations in private respondent's complaint and the evidence it has
presented sufficiently made out a cause of action under Article 1267. We, therefore,
release the parties from their correlative obligations under the contract. However, our
disposition of the present controversy does not end here. We have to take into account
the possible consequences of merely releasing the parties therefrom: petitioners will
remove the telephone wires/cables in the posts of private respondent, resulting in
disruption of their service to the public; while private respondent, in consonance with
the contract will return all the telephone units to petitioners, causing prejudice to its
business. We shall not allow such eventuality. Rather, we require, as ordered by the
trial court: 1) petitioners to pay private respondent for the use of its posts in Naga City
and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other
places where petitioners use private respondent's posts, the sum of ten (P10.00) pesos
per post, per month, beginning January, 1989; and 2) private respondent to pay
petitioner the monthly dues of all its telephones at the same rate being paid by the
public beginning January, 1989. The peculiar circumstances of the present case, as
distinguished further from the Occea case, necessitates exercise of our equity
jurisdiction.
Issue of prescription - Article 1144 of the New Civil Code provides, inter alia, that
an action upon a written contract must be brought within ten (10) years from the time
the right of action accrues. Clearly, the ten (10) year period is to
15 of 106
be reckoned from the time the right of action accrues which is not necessarily the
date of execution of the contract. This was when contract was studied since it was
disadvantageous (1982) , 10 years have not yet elapsed.
Issue of Potestation - petitioners allege that there is nothing purely potestative

about the prestations of either party because petitioner's permission for free use of
telephones is not made to depend purely on their will, neither is private respondent's
permission for free use of its posts dependent purely on its will.
Petitioners' allegations must be upheld in this regard. A potestative condition is a

condition, the fulfillment of which depends upon the sole will of the debtor, in
which case, the conditional obligation is void. 19 Based on this definition,
respondent court's finding that the provision in the contract, to wit:
(a) That the term or period of this contract shall be as long as the party of the
first part (petitioner) has need for the electric light posts of the party of the
second part (private respondent) . . ..
is a potestative condition, is correct. However, it must have overlooked the
other conditions in the same provision, to wit:
. . . it being understood that this contract shall terminate when for any reason
whatsoever, the party of the second part (private respondent) is forced to stop,
abandoned (sic) its operation as a public service and it becomes necessary to
remove the electric light post (sic);
which are casual conditions since they depend on chance, hazard, or the will of a
third person. In sum, the contract is subject to mixed conditions, that is, they
depend partly on the will of the debtor and partly on chance, hazard or the will of
a third person, which do not invalidate the aforementioned provision.
POLOTAN v CA J. Romero
Soutce of obligation contract

PAYMENT OF CHARGES . . . The Cardholder agrees to pay interest per annum at
3% plus the prime rate of Security Bank and Trust Company. . . . Provided that if
there occurs any change in the prevailing market rates the new interest rate shall
be the guiding rate of computing the interest due on the outstanding obligation
without need of serving notice to the Cardholder other than the required posting
on the monthly statement served to the Cardholder.
The Cardholder hereby authorizes Security Diners to correspondingly increase the

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

public policy and those prohibited by law shall annul the obligation
which depends upon them. If the obligation is divisible, that part thereof
which is not affected by the impossible or unlawful condition shall be
valid.
The condition not to do an impossible thing shall be considered as not

having been agreed upon.
16 of 106
Question: A promised B to give his car if B can hold the sun. Can B demand the
fulfillment of the donation?
Art. 727. Illegal or impossible conditions in simple and remuneratory
donations shall be considered as not imposed.
- impossibility may be physical or juridical
-physical if contrary to the laws of nature. Juridical if contrary to law, morals, good
customs, public policy and order
intention determines if the act is illicit
impossibility must exist at the time of the creation of the obligation
illogical conditions is the logical impossibility in an obligation although the

condition is not impossibility (I will deliver to you my house if it is destroyed)
divisible obligations part not affected by the impossible or unlawful

obligation shall be valid
negative impossible conditions considered to have been agreed upon. Does

not need to wait upon the conditions.
When are conditions deemed fulfilled?
Art. 1184. The condition that some event happen at a determinate time
shall extinguish the obligation as soon as the time expires or if it has
become indubitable that the event will not take place. (1117)
Positive condition refers to the fulfillment of an event or performance of an act
Negative condition refers to the non-fulfillment or non-performance of an act.
POSITIVE SUSPENSIVE CONDITION
The obligation is extinguished:
As soon as the TIME EXPIRES without the event taking place;
As soon as it has become certain that the EVENT WILL NOT TAKE PLACE
although the time specified has not yet expired.
Where no period stated 2nd paragraph of 1185 is applicable
Art. 1185. The condition that some event will not happen at a determinate
time shall render the obligation effective from the moment the time
indicated has elapsed, or if it has become evident that the event

cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such
time as may have probably been contemplated, bearing in mind the
nature of the obligation. (1118)
1184 (Positive Suspensive)
A obliges himself to give B
some
money if B recites on or before
June
30
A liable if B recites on or before
June
30
A is not liable if B recites after
June 30
1185 (Negative Suspensive)

A obliges himself to give B some
money if B will not recite on
June 30
A is not liable if B recites on
June 30
A is liable if B did not recite on
June
30
Art. 1186. The condition shall be deemed fulfilled when the

obligor voluntarily prevents its fulfillment. (1119)
This provision speaks of the DOCTRINE OF CONSTRUCTIVE FULFILLMENT

Requisites
intent of the obligor to prevent the fulfillment of the condition
actual prevention of compliance
when the act (voluntary), did not have for its purpose the prevention of the
condition, this article is not applicable
if in preventing the fulfillment of the condition, the debtor acts pursuant to

a right, the condition will not be deemed as fulfilled
when the condition is resolutory but not dependent on the will of the debtor,
and he unjustifiably provokes or produces the condition, which would not have
happened without his doing so, uit will be considered as not having been fulfilled
and there will be no extinguishment of rights.
Does the fulfillment of a condition have retroactive effect?
Art. 1187. The effects of a conditional obligation to give, once the condition
has been fulfilled, shall retroact to the day of the constitution of the
obligation. Nevertheless, when the obligation imposes reciprocal prestations
upon the parties, the fruits and interests during the pendency of the
condition shall be deemed to have been mutually compensated. If the
obligation is unilateral, the debtor shall appropriate the fruits and interests
received, unless from the nature and circumstances of the obligation it
should
17 of 106
be inferred that the intention of the person constituting the same was
different.
In obligations to do and not to do, the courts shall determine, in each case, the
retroactive effect of the condition that has been complied with.
moment of the creation of the conditional obligation and the fulfillment of the
suspensive condition, the creditor enforce the obligation , right is a mere expectancy
cause of action for the enforcement of the obligation accrues, and the period
of prescription of the action has to be computed from that moment
effects retroact to when the obligation was created
increase in value which the thing may acquire before the happening of the
suspensive condition, inures to the benefit of the creditor
right to the fruits of the thing is not within the principle of retroactivity of
conditional obligations
in obligations to do or not to do, the courts shall determine the retroactive

effect of the fulfillment of the conditions
Common question: A promised to give B his house if B passes the bar. Before the
results of the bar came out, A sold his car to C. Is the sale valid? Can B obtain the
rentals for the house from the time they had an agreement to when the condition
was fulfilled?
Validity of sale: determine if the buyer was in good faith and if the house has
already been delivered. B may take action against A for damages.
Rentals and Fruits: B cannot obtain the rentals / fruits as the fruits will remain with
the owner before the condition was fulfilled. Fruits not within the principle of
retroactive effect of the fulfillment of the conditions.
Can rights be acquired prior to the fulfillment of a condition?
Art. 1181. In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition. (1114)
Can payment prior to the fulfillment of a condition be recovered?
Art. 1188. The creditor may, before the fulfillment of the condition, bring
the appropriate actions for the preservation of his right.
The debtor may recover what during the same time he has paid by mistake
in case of a suspensive condition.
Actions available to the creditor:
to prevent the loss or deterioration of the things which are the objects of the
obligation by enjoining or restraining acts of alienation or destruction by the debtor
himself or by third persons
to prevent concealment of the debtors properties which constituted the

guaranty in case of non performance of the obligation
to demand security if the debtor becomes insolvent
to compel the acknowledgment of the debtors signature on a private

document or the execution of the proper public documents for registration so as to
affect 3rd persons
to register the deeds of sale or mortgages evidencing the contract
to set aside fraudulent alienations made by the debtor
to interrupt the period of prescription by actions against adverse possessors

of the things which are the objects of the obligations
if payment was made with knowledge of the condition, there is an implied

waiver of the condition , cannot be recovered
Rights of the DEBTOR entitled to recover what has been paid by mistake prior to
the happening of the suspensive condition.
Who is liable if the thing that is the object of an obligation to give is lost prior to the
fulfillment of a suspensive condition?
Who is liable if the thing that is the object of an obligation to give is lost after the
fulfillment of a suspensive condition?
Art. 1189. When the conditions have been imposed with the intention of
suspending the efficacy of an obligation to give,
the following rules shall be observed in case of the improvement, loss
or deterioration of the thing during the
pendency of the condition:
If the thing is lost without the fault of the debtor, the obligation shall
be extinguished;
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;
When the thing deteriorates without the fault of the debtor, the
impairment is to be borne by the creditor;
18 of 106
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;
If the thing is improved by its nature, or by time, the improvement
shall inure to the benefit of the creditor;
If it is improved at the expense of the debtor, he shall have no other
right than that granted to the usufructuary (right to enjoy products he
does not own).
- applicable to a determinate thing only, not a generic thing
LOSS
debtor without fault obligation is extinguished
debtor with fault obligation to pay damages
DETERIORATION
debtor without fault impairment is to be borne by the creditor
debtor with fault creditor chooses: rescission of obligation, fulfillment,
indemnity
IMPROVEMENT
by nature or time improvement: inure to the benefit of the creditor
at the expense of the debtor granted to the usufructuary
B. Obligations with a Period
What is an obligation with a period?
Art. 1193. Obligations for whose fulfillment a day certain has been fixed,
shall be demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate
upon arrival of the day certain.
A day certain is understood to be that which must necessarily come,
although it may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is
conditional, and it shall be regulated by the rules of the preceding Section.
Term space of time which exerting an influence on the obligations as a

consequence of the juridical act, suspends their demandability or determines their
extinguishment
Differences from condition

as to fulfillment condition is uncertain , period must necessarily come
whther on a date known before hand or at a time which cannot be
predetermined
influence on the obligation condition gives rise / extinguishes an obligation,

period only has an effect on their demandability or performance
as to time period refers to the future while condition may refer to a past
event unknown to the parties
will of debtor condition which depends exclusively on the will of the debtor
annuls the obligation , period left to the debtors will merely empowers the court to
fix such period
Requisites of a period future, certain, possible
Kinds of terms
According to source legal, voluntary, judicial
Definite or indefinite
Express or tacit
Suspension of a period it only relieves the parties from the fulfillment of their
respective obligations during that time
Who is liable if the thing is that is the object of an obligation to give is lost prior to
the arrival of the period?
Art. 1194. In case of loss, deterioration or improvement of the thing
before the arrival of the day certain, the rules in Article 1189 shall be
observed.
LOSS
debtor without fault obligation is extinguished
debtor with fault obligation to pay damages
DETERIORATION
debtor without fault impairment is to be borne by the creditor
debtor with fault creditor chooses: rescission of obligation, fulfillment,
indemnity
IMPROVEMENT
by nature or time improvement: inure to the benefit of the creditor
at the expense of the debtor granted to the usufructuary
When is the court authorized to set a period?
Art. 1197. If the obligation does not fix a period, but from its nature and
the circumstances it can be inferred that a period was intended, the
courts may fix the duration thereof.
19 of 106
The courts shall also fix the duration of the period when it depends upon
the will of the debtor.
In every case, the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties. Once
fixed by the courts, the period cannot be changed by them.
Art. 1180. When the debtor binds himself to pay when his means permit
him to do so, the obligation shall be deemed to be one with a period,
subject to the provisions of Article 1197.
- only refers to the period , not the obligation itself JUDICIAL
PERIOD period designated by the court.
CONTRACTUAL PERIOD period fixed by the parties in their contract. Court

will fix a period:
When no period is mentioned, but it is inferable from the nature and

circumstances of the obligation that a period was
intended by the parties.
When the period is dependent upon the will of the debtor.

-If the obligation does not state and intend a period, the court is not authorized to fix
a period.
-The court must fix the duration of the period to prevent the possibility that the
obligation may never be fulfilled or to cure
a defect in a contract whereby it is made to depend solely upon the will of one of the
parties.
Court cannot fix the period:
If there is a period agreed upon by the parties and it has already lapsed or
expired.
From the very moment the parties give their acceptance and consent to the
period fixed by the court, it
becomes a law governing their contract.
INDICATIONS OF A TERM OR PERIOD: When the
debtor binds himself to pay -when his means
permit him to do so -little by little
-as soon as possible -from time to time
-as soon as I have the money -in partial

payment
-when in the position to pay
ARANETA v PHILIPPINE SUGAR ESTATE DEVELOPMENT

J. J.B.L. Reyes
J. M. Tuason & Co., Inc., owner of the Sta. Mesa Heights Subd., sold a portion thereof
through Gregorio Araneta, Inc. (GAI), for the sum of P430,514, to Phil.
Sugar Estates Devt Co., Ltd (PSEDC).
Stipulated in their contract of purchase & sale w/ mortgage:

that the buyer will build on the parcel of land the Sto Domingo church &convent;
while the seller for its part will construct streets on the NE & NW & SW sides of the
land herein sold so that the latter will be a block surrounded by streets on all 4 sides;
& the street on the NE side shall be named Sto. Domingo Ave.
PSEDC finished the construction of the church & convent, but GAI, w/c began
constructing the streets, is unable to finish the construction of the street in the NE
side because a certain third party who has been physically occupying a middle part
thereof, refused to vacate the same
Hence, PSEDC filed its complaint against J. M. Tuason & Co., Inc., & GAI in the CFI,
seeking to compel the latter to comply w/ their obligation &/or to pay damages in
the event they failed or refused to perform said obligation.
Both defendants answered the complaint. GAIs principal defense was that the action
was premature since its obligation to construct the streets in question was w/o a
definite period w/c needs to be fixed 1st by the court in a proper suit for that purpose
before a complaint for specific performance will prosper.
Issues having been joined in trial, CFI (May 31, 60) dismissed plaintiff's
complaint, upholding defenses interposed by GAI
Plaintiff moved to reconsider & modify above decision, praying that court fix
period w/in w/c defendants will comply w/ their obligation
GAI opposed said motion. But CFI granted plaintiff's MFR & amending the
dispositive portion of the decision of May 31, 60, to read as follows:
"WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta,
Inc., a period of Two (2) Years from notice hereof, within which to comply with its
obligation under the contract, Annex A"
20 of 106
GAI filed MFR but CFI denied. GAI appealed to the CA, contending that the relief
granted, i.e., fixing of a period, was not justified by the pleadings & not supported
by the facts submitted at the trial of the case in court below & that the relief
granted in effect allowed a change of theory after the submission of the case for
decision
CA upheld the CFI decision. Hence this petition for review by certiorari to the
SC
WON CFI may fix a period in the same pleading by PSEDC
NO. When GAI pleaded in its answer that the contract w/ PSEDC gave GAI
"reasonable time w/in w/c to comply with its obligation to construct & complete the
streets", what the answer put in issue was not whether the court should fix the time
of performance, but WON the parties agreed that the petitioner should have
reasonable time to perform its part of the bargain.
If the contract so provided, then there was a period fixed, a "reasonable time";
all that the court should have done was to determine if that reasonable time
had already elapsed when suit was filed. If it had passed, then the court should
declare that petitioner had breached the contract, as averred in the complaint,
fix the resulting damages. On the other hand, if the reasonable time had not
yet elapsed, the court perforce was bound to dismiss the action for being premature.
But in no case can it be logically held that under the plea above quoted, court
intervention to fix the period for performance was warranted, for Art. 1197 is
precisely predicated on the absence of any period fixed by the parties
Granting that the court shouldve found that no reasonable time/no period at all had
been fixed, still the complaint not having sought that the Court should set a period,
the court couldnt proceed to do so unless the complaint was first amended; for the
orig. decision is clear that the complaint proceeded on the theory that the period for
performance had elapsed already, that the contract had been breached & defendant
was already answerable in damages.
Granting further that it lay within the Court's power to fix the period of performance,
still the amended decision is defective in that no basis is stated to support the
conclusion that the period should be set at 2 yrs after finality of the judgment. Art.
1197 is clear that the period cannot be set arbitrarily.
All that TC's amended decision says in this respect is that "the proven facts
precisely warrant the fixing of such a period", a statement manifestly insufficient
to explain how the 2 year period given to petitioner herein was arrived at.
Art. 1197, CC involves a 2-step process.
Court must 1st determine that "the obligation does not fix a period" (or that the
period is made to depend upon the will of the debtor), "but from the nature & the
circumstances it can be inferred that a period was intended" (Art. 1197, pars. 1&2)
Secondly, it must decide what period was "probably contemplated by the
parties"
Ultimately, the Court can not fix a period merely because in its opinion it is or should
be reasonable, but must set the time that the parties are shown to have intended.
In this connection, contract shows that the parties were fully aware that the land
described therein was occupied by squatters, because the fact is expressly
mentioned therein. As the parties must have known that they could not take the law
into their own hands, but must resort to legal processes in evicting the squatters,
they must have realized that the duration of the suits to be brought would not be
under their control nor could the same be determined in advance. The parties must
have thus intended to defer the performance of the obligations under the contract
until the squatters were duly evicted, as contended by the GAI
CA objected that it would render the date of performance indefinite. Yet, the
circumstances admit no other reasonable view; & this very indefiniteness is what
explains why the agreement did not specify any exact periods or dates of
performance.
Holding: Reversed; Time for the performance is fixed at the date that all the
squatters on affected areas are finally evicted therefrom
CPU v CA
J. Bellosillo
21 of 106
Iloilo, in 1939, Don Ramon Lopez by a deed of donation donated Lot No. 3174-B-1 of
the subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which Transfer
Certificate of Title No. T-3910A to CPU.
The deed of donation came with 3 annotations on the land:
1.should be used for a medical college with all its buildings as part of the
curriculum;
shouldnt be sold, transferred, conveyed to any third party, or encumbered.
should be called "RAMON LOPEZ CAMPUS and it be written in a cornerstone.

Any net income from the land or its parks shall be in a fund to be known as the
"RAMON LOPEZ CAMPUS FUND" used for improvements of the campus and its
building/s.
After 50 years(May 31,1989), the heirs of the donor, filed a suit, asking for
annulment of donation, reconveyance and damages against CPU alleging that since
1939 the donee allegedly didnt comply with the conditions, and tried to exchange
the land for another land owned by the Natl Housing Authority.
CPU answered that it didnt try to use or exchange the land contrary to the
conditions, and any action after 50 years has already prescribed.
RTC held that CPU failed to comply with the conditions so the donation is
declared null and void. The land is ordered to be reconveyed.
CA affirmed that the conditions were resolutory(breach terminates rights making the
donations revocable) but declared that the conditions didnt have time limits so the
case is remanded for time determination.
SO, CPU petitioned the supreme court alleging that the CA erred the certificate title
to be onerous obligation, and resolutory condition, that prescription does not deserve
disquisition and remanding to the RTC the determination of time to fulfill the medical
college condition. Issues
WON the obligation was onerous. YES
Clearly, the annotations in the deed of donation from Don Ramon, proves that he
imposes
these
obligations.
Therefore,
these
obligations
are
onerous
considerations(one executed for a valuable consideration which is considered to be
en equivalent of the donation itself).
Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights,
as well as the extinguishment or loss of those already acquired, shall depend upon
the happening of the event which constitutes the condition.
Thus, when a person donates land to another on the condition that the latter would
build upon the land a school, the condition imposed was not a condition precedent or
a suspensive condition but a resolutory one. Only after the donee didnt fulfill the
conditions will the rights be revoked. which brings us to the prescription
WON there is prescription. NO
The time from which the cause of action accrued for the revocation of the
donation and recovery of the property donated cannot be specifically determined
in the instant case. There being no stipulations in the deed, the time for the
fulfillment of the conditions lay in the will of the donee and prevented the statute
of limitations to affect
in this case.
And to compute for the time from which the cause of action accrued, it begins with
the expiration of a reasonable period and opportunity for petitioner to fulfill what has
been charged upon it by the donor.
And in this case, no exact time can really be surely stipulated in the deed,
considering the laws on construction, educational institutions etc. beyond the
control of the donee.
Thus, when the obligation does not fix a period but from its nature and
circumstances it can be inferred that a period was intended, the general rule
provided in Art. 1197 of the Civil Code applies, which provides that the courts may
fix the duration thereof because the fulfillment of the obligation itself cannot be
demanded until after the court has fixed the period for compliance therewith and
such period has arrived.
And yet, Art. 1197 cant be applied because the courts think that 50 years was enough
time for them to fulfill the conditions. CPU has slept on its obligations.
What applies is Art. 1191, when an obligor cant comply with what is expected of him, the
obligee may seek rescission unless the court fixes a period for a just
22 of 106
cause. In this case, there is no just cause, to fix a period would be mere
technicality and would only result to a multiplication of suits.
Then the court said that since this is a gratuitous donation(contradiction, see
dissent) the court affirms the decision of the RTC and modifies that of the CA, CPU
is ordered to reconvey the property to the heirs.
Davide, J. dissenting (Modal Conditions in donations Important)
He agrees its an onerous obligation, but he sees the contradiction when the
ponente called it a gratuitous donation in the end.
He makes a distinction between conditions on the laws of obligation and donation
as different(Tolentino). The conditions spoken does not refer to uncertain events on
which the birth or extinguishment of a juridical relation as with conditional
obligations.
What we have in this case is modal condition, which requires a prestation.The
conditions Don Ramon made, are actually obligations. They are not resolutory
because the moment the obligations are fulfilled, the rights are not extinguished(in
fact strengthened).
The Parks(footnote in the original case) case do not apply here. Instead what
applies is the Barretto v City of Manila. Where the court said in cases where there
is no fixed period for the conditions, Art. 1197 applies. Don Ramon wouldnt have
intended for his land to be idle.
He also points out that Osmena v Rama doesnt apply here because in that case it is
the debtor who made the promise to do, thats why time was in his will to comply. So
here applying Parks and De Luna v Abrigo, even actions for revocation of donations
prescribe too. And the Art.1144 applies that the prescription of an action upon a
written contract which is what a deed of an onerous donation is, is 10 years from
the time the cause of action accrues. And the time must be determined by the
courts by virtue of Art. 1197.
Accion Pauliana (rescission) - Creditors have the right to set aside or revoke acts
which the debtor may have done to defraud them. All acts of the debtor which
reduce his patrimony in fraud of his creditors, whether by gratuitous or onerous
title, can be revoked by this action.
Accion Subrogata - Action which the creditor may exercise in place of the
negligent debtor in order to preserve or
recover for the patrimony of the debtor the product of such action, and then obtain
therefrom the
satisfaction of his own credit
When is the obligation immediately demandable prior to the arrival of the period?
Art. 1198. The debtor shall lose every right to make use of the period:
When after the obligation has been contracted, he becomes insolvent,
unless he gives a guaranty or security for the debt;
When he does not furnish to the creditor the guaranties or securities
which he has promised;
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;
When the debtor violates any undertaking, in consideration of which the
creditor agreed to the period;
When the debtor attempts to abscond (depart in a sudden and secret
manner)
The period is disregarded and the obligation becomes pure and immediately
demandable: [IGIVA]
[I] When debtor becomes i nsolvent ;
-The insolvency need not be judicially declared. It is sufficient that debtor could not
pay his debts due to lack of
money or funds.
[G] When the debtor does not furnish g uaranties or securities;
[I] When guaranties or securities given have been i mpaired or have
disappeared ;
If security was lost through debtors fault - impairment
If security was lost through fortuitous event disappearance
Ex. House was sold by A to B on an installment basis per month based on a period.
House became the mortgage (guaranty). A fire destroyed the house and it was
established that there was not negligence involved and it was a fortuitous event. In
the quiz, the accepted answer was that the obligation was extinguished due to
fortuitous events. However if we apply 1998, the period can no longer be used and A
can claim the whole amount (shall lose every right to use the period) unless debtor
gives a new guaranty equally satisfactory.
23 of 106
[V] When debtor v iolates an undertaking ;

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

December 5. B may compel A to make the payment before December 5, but A may
not compel B to receive the payment before December 5 (B will benefit from the
interests that will accrue before December 5).
The creditor may have reasons other than the maturity of interest, thats why,
unless the creditor consents, the debtor has no right to accelerate the time of
payment even if the premature tender includes an offer to pay the principal and
interest in full.
C. Alternative Obligations
Kinds of obligations that has many possible prestations to fulfil in order to
extinguish the obligation.
Obligations that require a debtor to perform completely one of the several
prestations provided as options in the stipulations of the contract.
o The prestations must be lawful and possible. (CC1200)
Fulfilment of one of the provided prestations extinguishes the obligation.
Partial fulfilment of any number of the provided prestations does not
fulfil the obligation. The creditor cannot be compelled to accept part of
one and part of another prestation. (CC1199)
The prestation to be fulfilled is dependent on whom the right to choose is
given. In default, the right to choose is given to the debtor. (CC1200)
The choice must be communicated before it becomes effective. The
choice will only produce effects upon communication. (CC1201)
o Until the choice is communicated, the person with the right to choose
can change his mind.
When an alternative obligation ceases? > What happens to the
obligation?
o When only one choice is practicable. (CC1202)
o When the choice has been communicated. (CC1201) (CC1205)
24 of 106
Right to choose vested on the debtor

If through the acts of the creditor, the debtor cannot make a choice
according to the terms of the obligation, the debtor
may rescind with damages (CC1203)
Effect of Loss or Impossibility before the choice has been
communicated:
Fortuitous event: One or Debtor may choose among
some of
the
remaining prestations what
the prestations are lost or
to
became impossible
fulfil
Fortuitous event: All except Debtor must fulfil the
one
remaining
prestation
~
obligation
of the prestations are lost or becomes
became impossible
simple
Fortuitous
event:
All Obligation is extinguished
prestations
(See:
are
lost
or
became
impossible
Fortuitous Event)
Debtors fault: One or some Debtor may choose among
of
the
to
became impossible
fulfil
Debtors fault: All except Debtor must fulfil the
one of
remaining
prestation
became impossible
Debtors
fault:
All Debtor must pay creditor
prestations are
the
price of the last prestation
lost or became impossible
that
was
lost
or
became
impossible,
without prejudice to the
creditors right to damages
Right to choose vested on the creditor
communicated: (CC1204)(CC1205)
Fortuitous event: One or Creditor may choose among
some of
the
the
became impossible
debtor will fulfil
Fortuitous event: All except Debtor must fulfil the
one
remaining
of the prestations are lost or prestation
became impossible
Fortuitous
event:
All Obligation is extinguished
prestations
(See:
are
lost
or
became
impossible
Fortuitous Event)
Debtors fault: One or some Creditor may choose among
of
became impossible
the
the
debtor fulfil OR the price of
one
of the prestation/s lost due
to
the debtors fault plus

creditors
rights to damages
Debtors fault: All except Creditor may choose that
one of
the
debtor fulfil the remaining
prestation OR the price of
became impossible
one of
the prestations lost due to
the
debtors fault plus creditors
rights to damages
Debtors
fault:
All Creditor may choose the
prestations are
price of
one of the prestations lost
lost or became impossible
due
to the debtors fault plus
creditors rights to damages
Right to choose vested on Third Person
The choice shall not be binding until it has been made known to both
contracting parties (CC1309)
communicated: Same rules as when the choice is by the creditor.
Generic Obligations v Alternative Obligations:
Generic Obligations: prestations must fall on things of the
same kind.
Alternative Obligations: prestations may be of different quality, kind
and quantity.
Alternative Obligations v Facultative Obligations:
Alternative Obligations:
Obligations that require a debtor to perform completely one of the
several prestations provided as options in the stipulations of the
contract.
The right to choose the alternative prestation may

be granted to the creditor or a third person.
Facultative Obligations:
Obligations when only one prestation has been provided in the

stipulations of the contract but the debtor may render another in
substitution. (CC1206)
The substitution is always at the discretion of the debtor.
25 of 106
D. Joint and Solidary Obligations

Kinds of obligations that differ in the proportion in which the debtor is liable and/or
the creditor may rightfully claim. These are the kinds of obligation with many
subjects, either active or passive.
Joint Obligation v Solidary Obligation:
Joint Obligation: Obligations that exist between several persons,
whether creditors or debtors, among whom the
benefit or the burden of the obligation is divided.

Solidary Obligation: Obligations that are those in which there being
concurrence of several debtors or several creditors, each creditor is
given the right to demand, and each debtor is bound to perform the
obligation in its entirety.
A mere concurrence of two or more creditors or two or more debtors in one
obligation does not imply solidarity or the obligation. There is a presumption
against solidarity of obligations. (CC1207)
Solidary obligation exists only when:
It is expressly stated in the stipulation of the contract.

The law or the nature of the obligation requires solidarity.
Joint Obligations
Requisites of a Joint Obligation:
Subject:
Must be more than one (either creditors, debtors or both)
Shares in the demandability or the liability in the obligation:
Presumed equal in share unless the law, nature or wording of the

obligation shows the contrary (CC1208)
Shares are considered distinct from one another, subject to the rules
on multiplicity of suits. (CC1208)
Effects of a Joint Obligation:

Divisible prestation:
Creditors may individually and independently demand and compel

performance of his share of the
credit.
Indivisible prestation: (CC1209)
A creditors right may only be prejudiced by the collective acts of

all the creditors.
The debt may be enforced only by proceeding against all

debtors.
But consequential damages are charged

exclusively to the joint debtor who was responsible
for the breach.
Multiplicity of Subjects
Each joint creditor can only demand his share of the credit.
Each joint debtor can only be required to pay his share of the debt.
Solidary Obligations
Requisites of a Solidary Obligation:
Subject:
Must be more than one (either creditors, debtors or
both)
Unity of prestation:
Each solidary creditor can collect the entire obligation. (Mutual

Agency of creditors)
Each solidary debtor can be compelled to pay or perform the entire
obligation. (Mutual Guaranty
among debtors)
Distribution among solidary parties:
Accounting between creditors for the share of each.
Contribution between debtors for the share of each.

Each creditor may only collect and each debtor may
only be held liable until the extent that the liability is still not
paid.
Kinds of Solidarity based on subjects
Active: Solidarity of Creditors
Passive: Solidarity of Debtors
Kinds of Solidarity based on uniformity of conditions
Uniform: Same terms and conditions for all.
Varied: With different periods and/or conditions for
each. (CC1211)
Effects of a Solidary Obligation:
Active: On debtors
Each creditor can collect the entire debt or extinguish it.

(CC1215)
26 of 106
Debtors may pay any one of the solidary creditors but if applicable,
payment must be given to the creditor making demand. (CC1214)
Novation: any compensation, confusion or remission made by any of the
solidary creditors shall extinguish the obligation. (CC1215)
Active: On co-creditors
The creditors who may have executed any of the acts that will extinguish
the obligation shall be liable to the other co-creditors for the share in the
obligation corresponding to them. (CC1215)
Each of the solidary creditors may do whatever is useful to the other cocreditors but not anything that may prejudice the latter. (CC1212)
A solidary creditor may not assign his rights without the consent of the others
(CC1213)
Passive: On creditors
Each debtor is bound to perform the whole obligation. (CC1207)

Demand against one or some of the debtors shall not bar subsequent
demands to other debtors to the extent that the debt has not been fully
collected. The creditor may pursue charges against one, some or all of the
solidary debtors simultaneously. (CC1216)
If two or more solidary debtors offer to pay, the creditor may choose which
offer to accept. (CC1217)
Payment by one of the solidary debtors extinguishes the obligation to the
extent of the payment. (CC1217)
If the thing was lost or if the prestation has become impossible without
fault of the solidary debtors before demand of the
creditor, the obligation shall be extinguished.

(CC1221)
If there was fault on the part of any one of the debtors, all
shall be responsible to the creditor. This is without
prejudice to the other debtors action against the negligent
debtor. (CC1221)
Passive: On co-debtors
The solidary debtor who made the payment may claim from
his co-debtors their share of the obligation. (CC1217)
But no share can be collected if the payment made by one
of the solidary debtor was made after the obligation has
prescribed or became illegal. (CC1218)
If a solidary debtor paid the obligation before the remission
of the debt of one debtor was done, the latter is still liable
to the former who made the payment to the extent of
payment made to the latters behalf. (CC1219)
Insolvency of one of the solidary debtors passes the
liability to the others in proportion to the debt of each.
(CC1217)
Defenses that the debtors may raise:
Nature of the obligation:
Prescription
Illegality
Nullity ab initio
Suspensive condition or period
Former payment
Compensation
Release
Compromise
Personal defenses:
o
Incapacity
Vice of consent
Personal to other co-debtors:
27 of 106
The debtor may avail of such defense to the extent of the other debtors (the
one with excuse) liability.
(CC1222)
Ronquillo v Court of Appeals (G.R. L-55138; September 28, 1984) Facts:

Ernesto Ronquillo was one of the 4 people who has a debt of P117,498.98 from
Antonio So. The debtors, including Ronquillo entered a compromise agreement
with So and the other creditors that the debt will be reduced to P110,000 and that
the debtors promised to pay P55,000 first then P55,000 again after 6 months and
each debtors bind themselves to pay individually and jointly. Ronquillo offered
to pay So P13,750 as his share in the
P55,000 but So did not want to accept such payment because So is demanding
for the whole P55,000 debt. When the whole P110,000 was due, Ronquillo was
offering to pay P27,500 but So filed a case and it was held that Ronquillos
furniture would be sold to fulfil the remaining P82,500 of the obligation.
Ronquillo filed the current action to prevent the sale of his properties.
Issue: WoN Ronquillo can be held liable for the whole P110,000 debt to So?
Held: Yes, according to Justice Cuevas, the phrase individually and jointly
liable means solidarily liable. It is because the word individually is
synonymous to collectively, separately, and/or distinctively. A person who
is individually liable is liable for a several obligation which binds oneself to the
whole obligation which is equivalent to being solidarily liable.
Philippine National Bank v Independent Planters Association (G.R. L-28046;
May 16, 1983)
Facts: During the pendency of a case of PNB against solidary debtors, one of
the debtors Valencia died and the lower court dismissed the case due to
Valencias death.
Issue: WoN the court loses jurisdiction to proceed with the case against
surviving defendants if one of the solidary debtors died?
Held: No, Justice Plana stated that as provided in CC1216, the

creditor may pursue charges against any one, some or all of the
debtors simultaneously as long as the liability still exists. The choice
of who to file charges against is given on the creditor according to
the protection of his rights and his convenience. Therefore, death of
one solidary debtor does not bar the creditor from pursuing charges
against surviving debtors.
E. Divisible and Indivisible Obligation
The kinds of obligations which, by reason of their purpose are susceptible of
being executed by parts or fractions.
Indivisible Obligation
Obligation which are not susceptible of being executed by parts or
fractions.
Divisible Obligation
Obligations which are susceptible of being executed by parts or
fractions.
Solidary
Indivisible
By
the Arises from the tie binds Arises from the nature of
Source
the
the
parties,
debtors
or
creditors
nature of the thing or
prestation due
By
the
Parties
Requires at least two
Can exist between one
creditors and debtors
creditor and one debtor
By
the Solidary debtor answers
Effects
to
Breach by one indivisible
the creditor for the debtor does not make
breach of
the codebtor liable for such
his co-debtor
breach
The liability is not understood to have been paid unless the thing or service
in which the obligation consists has been completely delivered or rendered.
(CC1233)
Unless otherwise stipulated (or provided by law), the creditor cannot be
compelled to accept partial performance, nor the debtor required
to make partial payments. (CC1248)

Exceptions:
Obligations partly liquidated (CC1248)
Instalment contracts (CC1720)
28 of 106
In case of partial illegality, and the obligation is divisible, legal

stipulations are enforceable (CC1420)
There may be no recovery quantum meruit (in proportion) unless there is

substantial performance. (CC1234)
Effect of two or more debtors or creditors in an indivisible obligation: o Joint
Indivisible
The creditor must proceed must proceed against all debtors.

Breach converts the original obligation into an obligation to pay
the value.
Indemnity for damages is recoverable only from the guilty debtor.
(CC1224)
No mutual agency of co-debtors exists.
Solidary Indivisible
Each debtor may be required to pay the whole. (CC1207)

Breach of one is breach of all. (CC1221)
Obligations with a Penal Clause

Penal Clause is an example of accessory stipulation that is placed in the contract
order to compel the complete performance of the obligation. Penal clauses does not
take into consideration the actual damages that the creditor will suffer and is
usually in excess of the standard damages.
Liquidated Damages v Penal Clauses:
Liquidated Damages:
Stipulated to fix the amount of recoverables in case of breach.

Bears relation to the damages resulting from the breach.
Penal Clauses:
Stipulated to stimulate or induce performance by the debtor.
May bear no relation to the damages resulting from the breach.
Penal Clauses are strictly construed against the creditor due to the nature
of the stipulation.
Kinds of Penal Clauses:
By its effect:
Subsidiary when only penalty may be enforced.
Complementary when both the principal obligation
and the penalty may be enforced.

By the source:
Conventional provided by agreement.
Legal provided by law.
By the purpose:
Punitive where damages may be collected in addition to the

penalty.
Reparatory where the penalty substitutes indemnification for
damages.
Characteristic of a penal clause:

Accessory Obligation:
Nullity of the principal obligation carries with it that of the penal clause.
(CC1230)
Nullity of the penal clause does not involve the nullity of the principal
obligation. (CC1230)
Requisites for the enforcement of a penal clause

Breach of the principal obligation must be chargeable to the debtor.
(CC1226)
In case of fortuitous event, penalty is not collectible. Unless it was

expressly stated otherwise.
In case that the breach was due to creditors acts, penalty is also not
collectible.
Penalty may not be enforced if it is contrary to law.
Penalty may not be enforced if both parties commit culpable breach of

reciprocal obligations.
Principal obligation must be due and demandable.

The debtor cannot be exempted from performing or paying the obligation
by satisfying the penalty, unless expressly stipulated. (CC1227)
Penalty is not a substitute for performance.
The penalty shall be reduced equitably by a court:
When there is partial performance. (CC1229)
o When the penalty is iniquitous or unconscionable. (CC1229)
When allowed by CC2215:
Where the plaintiff himself has contravened the terms of the contract
Where the plaintiff has derived some resulting benefit
29 of 106
Where exemplary damages are to be awarded, that the defendant acted

upon the advice of counsel
Where the loss would have resulted in any event
Where the defendant has tried his best to minimize the loss or injury
(CC2215)(CC2203)
The creditor cannot collect other damages in addition to the penalty, except:
o If the obligor refuses to pay the penalty. (CC2209)
o If the obligor is guilty of fraud in the fulfilment of the
obligation. (CC1171)(CC1226) o If it is expressly
stipulated.
Country Bankers Insurance Corporation v Court of Appeals (G.R.

85161; September 9, 1991)
Facts: Oscar Ventanilla Enterprises Corporation (OVEC), as lessor and
Enrique Sy as lessee, entered into a lease agreement of 3 theaters in
Cabanatuan City for 6 years. After 2 years, OVEC made demands for
repossession due to Sys arrears in the monthly payments as well as the nonpayment of tax. Sy and OVEC agreed to a penal clause that the remaining
deposit will be forfeited, without prejudice to any other obligation still owing,
in the event of termination or cancellation of the agreement by reason of
lessees violation of the terms and conditions of the agreement. Now, Sy still
owes P100,000 to OVEC and Sy is claiming that the P100,000 should be taken
from the remaining deposit of P290,000.
Issue: WoN the damage of P100,000 to OVEC by Sy should be taken from

the remaining deposit of P290,000 of Sy to OVEC?
Held: No, Justice Medialdea stated that the stipulation that the remaining
deposit will be forfeited in case of termination of the agreement by reason
of the lessees acts is a penal clause that is validly entered into by the
parties. Also, OVEC was able to prove that the damage was reasonable
and was really incurred by OVEC therefore, aside from the penal clause,
such P100,000 damages may also be recovered by OVEC from Sy. The
obligee may recover from the obligor not only the penalty but also the
damages resulting from the non-
fulfillment or defective performance of the principal obligation.

Makati Development Corporation v Empire Insurance Company (G.R. L21780; June 30, 1967)
Facts: Makati Development Corporation sold to Rodolfo
Andal a lot with a special condition that Andal shall commence and
complete at least 50% of the construction of his residence in the property
within 2 years after the sale or else, the bond of P12,000 made by Andal with
Empire Insurance Company as surety would be forfeited. Andal did not build a
house but instead sold the house to Juan Carlos but until the deadline in
March 31, 1961, no house was built. But by the end of April 1961, more than
the required construction was already finished. The lower court in hearing the
case lowered the P12,000 to P1,500 because on March 31, 1961, the property
was already fenced and walls were already standing which indicates partial
fulfilment of the condition.
Issues: WoN the lower court erred in lowering the penalty from P12,000 to
P1,500?
Held: No, Justice Castro held that partial fulfilment of the obligation is a
reasonable ground for the courts to mitigate the penalties stipulated by the
parties. It was also held that such penal stipulations shall be strictly construed
against the enforcement in its entirety of the indemnification, where it is clear
from the contract that the amount or character of the indemnity is fixed
without regard to the probable damages which might be anticipated as a
result of a breach of the terms of the contract, or, in other words, where the
indemnity provided for is essentially a mere penalty having for its object the
enforcement of compliance with the contract. Due to the substantial
fulfilment of the obligation, it is only correct for the courts to reduce the
penalty.
30 of 106
EXTINGUISHMENT OF OBLIGATIONS
A. Payment or Performance
When is an obligation paid?
Payment means: (a) Delivery of money, (b) Performance in any other
manner of an obligation [A1232]
Payment should be completely delivered or rendered [A1233]
But if substantially performed in good faith, debtor may recover as
though there had been a strict and complete fulfillment [A1234]
When creditor accepts incomplete or irregular performance knowingly,
without protest or objection, obligation is deemed fully complied with.
[A1235]
Payment to creditor after debtor has been judicially ordered to retain the debt
(garnishment) shall NOT be valid [A1243]
Debtor cannot compel creditor to receive a different thing, although the thing
may be of the same value as, or more valuable than that which is due.
[A1244]
When obligation is to deliver a determinate
or generic thing, whose quality and
circumstances have not been stated
Creditor cannot demand a thing of superior quality

o Debtor cannot deliver a thing of inferior quality
Purpose of obligation and other circumstances shall be taken into
consideration. [A1246]
Payment shall be made: (a) in the currency stipulated, or (b) that which is the
legal tender in the Philippines (Philippine Peso)
Mercantile documents (e.g., promissory notes payable to order, bills of
exchange) produce the effect of payment only when they have been
cashed. [A1249]
Extraordinary inflation or deflation

Value of the currency at the time of
the establishment of the obligation shall be the basis for payment
TELENGTAN v US LINES J. Garcia
Facts: Telengtan is a domestic corporation doing business under the name and style
La Suerte Cigar & Cigarette Factory. Respondent US Lines is a foreign corporation
engaged in the business of overseas shipping.
On December 15, 1978, the provisions of Far East Conference Tariff No. 12 were
made applicable to Philippine containerized cargo. After that date,
consignees who fail to take delivery of their containerized cargo within the 10-day
free period are liable to pay demurrage charges.
US Lines filed suit against petitioner alleging that between the years 1979 and 1980,
goods belonging to petitioner loaded on containers aboard respondents vessels
arrived in Manila from US ports. After the 10-day free period, petitioner still failed to
withdraw its goods.
Telengtan said that it has never entered into a contract nor signed an agreement to
be bound by any rule on demurrage. It likewise maintains that absent an obligation
to pay respondent who made no proper or legal demands in the first place, there is
justifiable reason to refuse payment. It also said that upon arrival of the vessels, it
presented the Bills of Lading and demanded the delivery of all goods, only to be
informed that respondent already unloaded the goods. It contends that respondent
violated its contractual obligation to deliver when, instead of delivering the goods to
the petitioner as consignee, it deposited the same in bonded warehouse/s.
Issue: WON Telengtan is liable for the demurrage charges
Held:
Petitioner is at fault when it did not take delivery of the goods prompting the
respondent to store it in bonded warehouses.
The withdrawal of goods from the ship was with authority of the Bureau of
Customs
Bill of Lading indicates that if the consignee does not take possession
or delivery of the goods as soon as the goods are at the disposal of the
consignee for removal, the goods shall be at their own risk and
expense, delivery shall be considered complete
Extraordinary inflation or deflation exists when there is an unusual increase or
decrease in the purchasing power of the Philippine peso which is beyond the
common fluctuation in the value of said currency, and such increase or
decrease could not have been reasonably foreseen or was manifestly beyond
the contemplation of the parties at the time of the establishment of the
obligation.
There should be an official pronouncement or declaration by competent

authorities of the existence of extraordinary inflation or deflation during a
given period.
Article 1250, as couched
General Rule: The value of the peso at the time of the

establishment of the obligation shall control and be the
basis of payment of the contractual obligation
31 of 106
Exception: Agreement to the contrary
It is only when there is a contrary agreement that

extraordinary inflation will make the value of the currency at
the time of payment, not at the time of the establishment of
the obligation.
NOTES from Sir Lumbas discussion:
There was allegedly an extraordinary devaluation of the peso when Ninoy Aquino was
assassinated
Should be computed as to the time when obligation is constituted
But in this case, evidence was not sufficiently established that inflation was
extraordinary
Example of evidence that may be used: NEDAs pronouncements of extraordinary
inflation
Is payment by an incapacitated person valid?

NO. Payment by an incapacitated person shall not be valid because the
payor should have FREE DISPOSAL OF THE THING DUE AND CAPACITY TO
ALIENATE IT. [A1239]
Is partial payment allowed?
NO. The creditor cannot be compelled to receive partial prestations and
the debtor is not required to make partial payments.
Exception: Express stipulation to the contrary.
Note: Sir Lumba cited Article 2226 (liquidated damages). I think what he is trying to
tell us is that when there is partial payment, it is already considered a breach of the
contract, and thus liquidated damages can now be demanded from the violator.
Where should payment be made?
Payment shall be made:
In the place designated in the obligation
If no express stipulation and the thing to be delivered is a
determinate thing, payment shall be made wherever the thing
might be at the moment the obligation was constituted
Domicile of the debtor [A1251]
If the debtor changes his domicile in bad faith or after he has incurred in delay,
additional expenses shall be borne by him. [A1251]
Rule 4 Sections 1-3

Venue of real actions
court which has jurisdiction over the area of real property involved
Venue of personal actions
Where the plaintiff or any of the principal plaintiffs reside
Where the defendant or any of the principal defendants reside
Where non-resident defendant can be found
Venue of actions against non-residents
Where plaintiff resides
Where property is situated
To whom should the obligation be paid?
Payment shall be made to:
The person in whose favor the obligation has been constituted
His successor in interest
Any person authorized to receive it. [A1240]
Payment to an incapacitated person shall be valid if: o He has
kept the thing delivered
o Insofar as the payment has been beneficial to him
Payment to a third person is valid if it has redounded to the benefit of the
creditor. There is no need to prove benefit if:
o After the payment, the third person acquires the creditors
rights
o If the creditor ratifies the payment to the third person
o If by the creditors conduct, the debtor has been led to believe that the
third person had authority to receive the payment. [A1241]
Payment made in good faith to any person in possession of the credit (e.g.,
holder of a promissory note payable to bearer) shall release the debtor.
[A1242]
Payment to creditor by debtor after debtor is judicially ordered to retain the
debt (garnishment) shall NOT be valid. [A1243]
Does a third person have the right to pay for another?
NO. The creditor is not bound to accept payment or performance by a
third person who has no interest in the fulfillment of the obligation.
Exception: stipulation to the contrary
32 of 106
What are the rights of a third person who is able to pay for another?
Beneficial Reimbursement/ Right to reimbursement
If he has paid without the knowledge or against the will of the debtor,
he can recover only insofar as the payment has been beneficial to the
debtor [A1236]
He cannot compel creditor to subrogate him in his rights [A1237]
Exception:
Article 1302
Legal Subrogation
Assignment of credit
Subrogation
If he had paid with the consent of the debtor, he may demand from the
debtor what he has paid [A1236]
Payment made by a third person who does not intend to be reimbursed by the
debtor is deemed to be a donation, which requires the debtors consent. BUT
payment is valid as to the creditor who accepted it. [A1238]
Done emus accept the donation personally *A745+
When there are several debts, to which should payment be applied?
Declaration of debtor at the time of making the payment
General Rules:
Application shall not be made as to debts which are not yet

due
Exception: Stipulation to the contrary and when the
obligation is for the benefit of one of the parties
If debtor accepts a receipt from creditor, he cannot complain

of the creditors choice as to the application of payment
[A1252]
If debt produces interest, payment of the principal shall not

be deemed to have been made until the interests have been
covered. [A1253]
When application cannot be inferred or payment cannot be
applied, the debt which is most onerous to the debtor, among
those due, shall be deemed to have been satisfied. [A1254]
Distinguish cession from dacion en pago.

Dation en Pago
Payment by Cession
Property is alienated to the
creditor in satisfaction
of a
debt in money
Transfers the ownership over
the thing alienated to

the
creditor
May totally extinguish the
obligation and release

the
debtor
Cession of only some specific
thing
Transfer is in favor of one
creditor
debt
to
satisfy
Ceding or assigning the
property of the debtor

to his
creditors in payment of
his
debts
Only the possession and
administration (not the

ownership)
are
transferred
to the creitors
BUT
with
the
authorization
to convert the property
into
cash
Only extinguishes the credits
to the extent of the

amount
realized
from
the
properties
assigned
Involves all the property of
the debtor
Transfer is in favor of various
creditors
LO v KJS ECO-FORMWORK SYSTEM PHIL. INC. J.

Ynares-Santiago
Facts: Lo ordered equipments from respondents worth 540,225. He paid
150,000 as down payment. The balance was payable in ten monthly
installments. Lo was able to pay the first two monthly installments but not
anymore in succeeding installments.
Petitioner and respondents executed a Deed of Assignment where petitioner
assigned to respondent his receivables in the amount of 335,462 (which I think,
was his loan balance from respondent) from JRC.
When respondent tried to collect the credit from JRC, it refused claiming that Lo
was also indebted to him (thus, there was compensation).
Petitioner argues that his obligation was extinguished with the execution of
Deed of Assignment of credit. Respondent presented the testimony of its
employee that JRC refused to honor the assignment of credit because it claimed
that petitioner had an outstanding indebtedness to it.
Issue: WON the obligation was extinguished by the assignment of credit
33 of 106
Held:
An assignment of credit is an agreement by virtue of which the owner of a
credit, known as the assignor, by a legal cause, such as sale, dacion en pago,
exchange or donation, and without the consent of the debtor, transfers his
credit and accessory rights to another, known as the assignee, who acquires
the power to enforce it to the same extent as the assignor could enforce it
against the debtor
In dacion en pago, as a special mode of payment, the debtor offers another
thing to the creditor who accepts it as equivalent of payment of an
outstanding debt.
The undertaking really partakes in one sense of the nature of sale, that
is, the creditor is really buying the thing or property of the debtor,
payment for which is to be charged against the debtors debt.
As such, THE VENDOR IN GOOD FAITH SHALL BE
RESPONSIBLE, FOR THE EXISTENCE AND LEGALITY OF THE

CREDIT AT THE TIME OF THE SALE BUT NOT FOR THE
SOLVENCY OF THE DEBTOR.
It may be said that assignment of credit, which is in the nature of a sale of

personal property, produced the effects of a dation in payment which may
extinguish the obligation.
Because of its nature as a sale, the vendor is bound by certain warranties. (see
above all caps)
Because the obligation was already extinguished by compensation, the

credit does no longer exist, thus causing a breach in the obligation. By
warranting the existence of the credit, petitioner is deemed to have
ensured the performance thereof.
If the creditor refuses to accept payment, is there payment?

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

payment
When he is incapacitated to receive payment at the time it is due
When, without just case, he refuses to give a receipt
When two or more persons claim the same right to collect
When the title of the obligation has been lost.
What is the procedure for consignation?
Tender of payment to the creditor
Unjust refusal of creditor
Debtor should announce the notice of consignation to the persons interested
in the fulfillment of the obligation
NOTE: Lack of notice does not invalidate the consignation it simply makes the
debtor liable for the expenses
Deposit of the thing due at the disposal of judicial authority

Prove the tender of payment to the judicial authority
NOTE: at this stage, consignation has been duly made
Debtor may now ask the judge to order the cancellation of the obligation
Notice of acceptance of consignation
Before the creditor has accepted the consignation OR
Before a judicial declaration that he consignation has been properly made,
Debtor may withdraw the thing or sum deposited In other
words, obligation is still in force.
If, the consignation having been made, the creditor should authorize the
debtor to withdraw the same, he shall lose every preference which he may
have over the thing. The co-debtors, guarantors and sureties shall be
released.
Consignation is always judicial.
B. Loss of the Thing Due
What are the requisites in order for loss of the thing to extinguish the
obligation?
Obligation consists in the delivery of a determinate thing
The determinate thing is lost or destroyed without the fault of the debtor,
and before he has incurred in delay
When the thing is lost in the possession of the debtor, it shall be presumed
that the loss was due to his fault
34 of 106
EXCEPT: (a) when there is proof to the contrary, or (b)

earthquake, flood, storm or other natural calamities.
When
loss of a thing does not extinguish an obligation

Law
Stipulation
When the nature of the obligation requires the assumption of risk
(insurance policies)
Obligation to deliver a generic thing
When the debt arose from a criminal offense
When there was delay, fraud, negligence or the obligation was
done in contravention of the tenor thereof
When the substitute prestation is lost in facultative obligations
NOTE: not exclusive
Will partial loss extinguish the obligation?

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

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

Article 900: surviving spouse in a marriage in articulo mortis
Surviving spouse and illegitimate parents
Rates
Legitimate
children
alone
of estate, divided equally
Legitimate Children
Share equal to that of one child

Surviving Spouse
(1LC)
One Legitimate Child
Surviving Spouse
Legitimate Children
Each will get of share of 1LC

Illegitimate Children
( LC)
Legitimate Children
LC
Surviving Spouse
1LC
One Legitimate Child
Illegitimate Child
LC
Surviving Spouse
Legitimate
Parents
Alone
Legitimate Parents
Legitimate Parents
Surviving Spouse
Legitimate Parents
1/
Surviving Spouse
8
Surviving
Spouse
alone
1/
Surviving Spouse
3
1/
Illegitimate Child
3
Surviving Spouse
Illegitimate Parents

Illegitimate
alone
Illegitimate
alone
children
parents
Relevant Provisions Article 745
The done must accept the donation personally, or through an authorized

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

The delivery of a private document evidencing a credit, made voluntarily by
the creditor to debtor
When the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it
voluntarily
The renunciation of the principal debt shall extinguish the accessory

obligations
BUT the waiver of the accessory obligations shall leave the principal debt in
force
Pledge: presumed to have been remitted when the thing pledged is found
in the possession of the debtor, or of a third person who owns the thing.
TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC. v CA J.

Bidin
Facts: Petitioner and respondent Bank entered into a loan agreement evinced by
four promissory notes, a real estate mortgage over three parcels of land and a
chattel mortgage over petitioners stock and inventories.
When petitioner failed to pay, they restructured the loan, and three new
promissory notes were executed by Trans-Pacific.
The mortgaged parcels of land were sold and the proceeds were given to the bank
to be applied against Trans-Pacifics restructured loan.
Respondent bank returned the duplicate original copies of the three promissory notes
with the word PAID stamped thereon. However, respondent bank still demanded
from Trans-Pacific the payment of 492,100 representing accrued interest.
Respondent bank said that the promissory notes were erroneously released.
Issue: WON petitioner has indeed paid in full its obligation to respondent bank.
Held:
Article 1271: The delivery of a private document evidencing a credit, made
voluntarily by the creditor to the debtor, implies the renunciation of the action
which the former had against the latter
This is a presumption, not of payment, but of the renunciation of the credit.
The presumption is not conclusive but merely prima facie. If there be no
evidence to the contrary, the presumption
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stands. Conversely, the presumption loses its legal efficacy in the face
of proof or evidence to the contrary.
There was no proof that the amounts paid by petitioner were inclusive of
interest.
In this case, the court finds sufficient justification to overthrow the

presumption of payment by the delivery of the documents evidencing
petitioners indebtedness, the letters of admission and counsel-induced
recalcitrance.
Presumption that interest is paid before principal obligation is rebuttable.
D. Confusion or Merger of Rights

What is confusion or merger?
It is the meeting in one person of the characters of the creditor and
debtor. [A1275]
Requisites:
Must take place between the creditor and the principal debtor
o Same obligation must be involved
Must be total
Merger benefits the guarantors.
Merger of characters of creditor and guarantor DOES NOT extinguish the
obligation [A1276]
Does not extinguish a joint obligation except as regards the share
corresponding to the creditor or debtor in whom the two characters concur.
[A1277]
Compensation
What are the requisites of compensation?
Art. 1278. Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other.
De Leon: Compensation is the extinguishment to the concurrent amount of the debts
of two persons who, in their own right, are reciprocally principal debtors and
creditors of each other.
The object of compensation is the prevention of unnecessary suits and payments
thru the mutual extinction by operation of law of concurring debts.
Art. 1279. In order that compensation may be proper, it is necessary:
That each one of the obligors be bound principally, and that he be at

the same time a principal creditor of the other;
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;
That the two debts be due;
That they be liquidated and demandable;
That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor.
Requisites of Legal Compensation:
That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
Examples:
A owes B P10,000, with C as guarantor. B owes C P10,000. There will be
no compensation between B and C because while B is principally liable
to C, C is merely subsidiarily liable to B. Hence, C can demand payment
from B.
A owes B P10,000. B owes A P10,000, the latter as guardian or
administrator.
There will be no compensation. In this case, A is personally liable to B,
while B is not principally liable to A. The real creditor of B is the ward
under guardianship or the estate under administration. A is creditor of B in
a representative capacity.
A owes B and C P10,000. B and C are partners in Partnership P.
Partnership P owes A P10,000.
A cannot set up compensation because B and C are not
principally liable to A.
Both debts consist in a sum of money, or of consumable things of the same
kind and quality
Examples:
A owes B P10,000. B owes A an electric range worth P10,000.
No compensation will take place.
A owes B 10 sacks of wagwag rice. B owes A any 10 sacks of rice.
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There can be no legal compensation in this case because of lack of

identity of the kind and quality of the rice due.
However, compensation can be claimed by B since he can deliver any kind of rice.
It would be the same as if B received 10 sacks of
wagwag rice from A and then returned the same to A in payment of his
debt. But A cannot set up compensation if opposed by B. This is an example
of facultative compensation.
A owes B P10,000. B owes A P10,000 or a cow.
There can be no legal compensation because B may prefer to deliver a
cow.
But if the right of choice belongs to A, compensation will take place.
The two debts are due or demandable Notes:
When the obligation is payable on demand, the obligation is not yet due
where no demand has not been made.
A debt that has prescribed is no longer demandable and consequently, cannot be
compensated, unless the compensation has taken place before the lapse of the
period of prescription.
Natural obligations are not legally demandable.

Examples:
A owes B P10,000 due today. B owes A P10,000 payable upon receipt from
A of notice to pay. A owes C a judgment debt of P10,000.
Since Bs obligation appear to be payable on demand, in the absence of
demand made by A, the obligation of B is not yet due. Without compensation
having taken place, B remains indebted to A for P10,000. This obligation of B
may be garnished in favor of C to satisfy As judgment debt.
A owes B P10,000 due today. B owes A P10,000 due next month.
Compensation cannot take place as the debts are not due on the same
date. However, if A has not yet paid B on the date that the obligation of B
becomes due, there will be compensation on that date. If the debt of B is
subject to a suspensive condition which has not yet happened, there can also
be no compensation.
The two debts are liquidated.
A debt is liquidated if the amount thereof is known or can be

determined by a simple computation.
Examples:
A owes B P10,000. B owes A the share of the latter in a business the
amount of which is still to be ascertained.
Compensation will not take place as the debt of B is not
liquidated. If part of the debt of B has been liquidated, compensation
takes place with respect to that part without waiting for the
liquidation of the rest.
D has a savings account with Bank B, which bank extended to D a loan.
Ds loan has become demandable. His savings account is also
demandable anytime. B has the right to compensate or off-set Ds
outstanding loan with his deposit account.
No retention or controversy has been commenced by a third person. There is
said to be retention when the credit of one of the parties is subject to the
satisfaction of the claim of third person, while a controversy exists when a
third person claims he is the creditor of one of the parties.
The retention or controversy commenced by a third person must be
communicated in due time to the debtor. By in due time means the period
before legal compensation is supposed to take place, considering that legal
compensation operates so long as the requisites concur even without any
conscious intent on the part of the parties. A controversy that is
communicated to the parties after that time may no loner undo the
compensation that had taken place by force of law. Example:
A owes B P10,000. B owes A P10,000. B also owes C P10,000.
C causes the garnishment of the credit of B against A and notifies A not to
pay B P10,000 as C has a better right to the said amount.
B may not owe C but the latter claims that he and not B is the creditor of A.
In this case, compensation cannot take place between A and in view of a
controversy commenced by C, a third person. In the meantime, the
compensation is suspended.
If C loses the case, compensation shall be deemed to have taken place as of
the date the requisites for legal compensation concurrent.
Art. 1282. The parties may agree upon the compensation of debts which
are not yet due.
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This is the exception to requisite no. 3 under Art. 1279, viz., that only debts which
are due and demandable can be compensated.
Voluntary or conventional compensation includes any compensation which
takes place by agreement of the parties even if all the requisites for legal
compensation are not present. The absence of mutual creditor-debtor relation cannot
negate the conventional compensation.
The only requisites are:
Each of the parties has the right to disposed of the credit he seeks to
compensate
They agree to the mutual extinguishment of their credits
What are the kinds of compensation?
Art. 1281. Compensation may be total or partial. When the two debts are
of the same amount, there is total compensation.
Total compensation results when the two debts are of the same amount.
If they are of different amounts, compensation is total as regards the
smaller debt, and partial only with respect to the larger debt.
Kinds of Compensation:
By its effect or extent:
Total
Partial
By its cause or origin:
Legal when it takes place by operation of law when all the
requisites are present even without the knowledge of the parties.
Conventional or voluntary when it takes place by agreement
of the parties.
Judicial when it takes place by order from a court in a litigation. (This
is actually a form of legal or voluntary compensation, when declared by
courts by virtue of an action by on of the parties.)
Facultative when it can be set up only by one of the parties.
When will compensation not take place?
Art. 1286. Compensation takes place by operation of law, even though the
debts may be payable at different places, but there shall be an indemnity
for expenses of exchange or transportation to the place of payment.
Example:
A owes B $1,000 payable in New York. B owes A P45,000 (equivalent amount)

payable in Manila.
If A claims compensation, he must pay for the expenses of exchange.
Art. 1290. When all the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the creditors and debtors
are not aware of the compensation.
Compensation occurs automatically by mere operation of law
From the moment all the requisites mentioned in Article 1279 concur, legal
compensation takes place automatically even in the absence of agreement
between the parties and even against their will, and extinguishes reciprocally
both debts as soon as they exist simultaneously, to the amount of their
respective sums.
Full legal capacity of parties not required
As it takes place by mere operation of law, and without any act of the parties,
it is not required that the parties have full legal capacity to give or to receive,
as the case may be.
Art. 1285. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the assignor
was notified by the debtor at the time he gave his consent, that he reserved his right
to the compensation.
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to the
cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set
up the compensation of all credits prior to the same and also later ones until he
had knowledge of the assignment.
Where compensation has taken place before assignment
When compensation takes effect by operation of law or automatically, the debts are
extinguished to the concurrent amount. If subsequently, the extinguished debt is
assigned by the creditor to a third person, the debtor can raise the defense of
compensation with respect to the debt. It is well-settled that the rights of the
assignee are not any greater than the rights of the assignor since the assignee is
merely substituted in the place of the assignor. Example:
A owes B P3,000 due yesterday. B owes A P1,000 due also yesterday.
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Both debts are extinguished up to the amount of P1,000. Hence, A still owes B
P2,000 today.
Now, if B assigns his right to C, the latter can collect only P2,000 from A. However, if A
gave his consent to the assignment before it was made or subsequently (par. 1), A loses
the right to set up the defense of compensation. So A will be liable to C for P3,000 but he
can still collect the P1,000 owed by B. In other words, the compensation shall be deemed
not to have taken place.
Where compensation has taken place after assignment

Assignment with the consent of debtor
A owes B P3,000 due November 15. B owes A P1,000 due November
B assigned his right to C on November 1 with the consent of A. On

November 15, A cannot set up against C, the assignee, the
compensation which would pertain to him against B, the assignor. In other

words, A is liable to C for P3,000 but he can still collect the P1,000 debt of B.
However, if A, while consenting to the assignment, reserved his right to the
compensation, he would be liable only for P2,000 to C.
Assignment with the knowledge but without the consent of debtor A owes B
P1,000 due November 1. B owes A P2,000 due November
A owes B P1,000 due November 15.
A assigned his right to C on November 12. A notified B but the latter did not
give his consent to the assignment. How much can C collect from B?
B can set up the compensation of debts on November 10 which was before
the cession on November 12. (par. 2) There being partial compensation, the
assignment is valid only up to the amount of P1,000.
But B cannot raise the defense of compensation with respect to the debt of
A due on November 15 which has not yet matured. So, on November 12, B
is liable to C for P1,000. Come November 15, A will be liable for his debt of
P1,000 to B.
Assignment without knowledge of the debtor
In the preceding example, let us suppose that the assignment was made
without the knowledge of B who learned of the assignment only on November
16.
In this case, B can set up the compensation of credits before and after the
assignment. The crucial time is when B acquired knowledge of the assignment
and not the date of the assignment. If B learned of the assignment after the
debts had already matured, he can raise the defense of compensation;
otherwise, he cannot.
Class discussion
In other words, the debtor can always set up compensation to extinguish his
obligation prior to the debtors knowledge of the assignment, unless the debtor
consents to the assignment.
Art. 1287. Compensation shall not be proper when one of the debts
arises from a depositum or from the obligation of a depositary or of a
bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim
for support due by gratuitous title, without prejudice to the provisions of
paragraph 2 of Article 301.
Art. 1288. Neither shall there be compensation if one of the debts consists
in civil liability arising from a penal offense.
Where one of the debts arises from a depositum
A deposit is constituted from the moment a person receives a thing
belonging to another with the obligation of safely keeping it and of
returning the same. Note: A bank deposit is not a depositum as defined in
the Civil Code. It is really a loan which creates the relationship of debtor
and creditor.
*Article 1962. A deposit is constituted from the moment a person receives
a thing belonging to another, with the obligation of safely keeping it and of
returning the same. If the safekeeping of the thing delivered is not the
principal purpose of the contract, there is no deposit but some other
contract.
Example:
A owes B P10,000. B, in turn owes A the amount of P10,000 representing the
value of a ring deposited by A with B, which B failed to return.
In this case, B, who is the depositary, cannot claim legal compensation even if
A fails to pay his obligation. The remedy of B is to file an action against A for
the recovery of the amount of P10,000.
40 of 106
The relation of the depositary to the depositor is fiduciary in character since it is

based on trust and confidence. Bs claim for compensation against A would
involve a breach of that confidence.
B A can set up his deposit by way of compensation against Bs credit.
This is an example of facultative compensation. The benefit granted by law is
available only to A, as depositor, and can be waived by him.
Where one of the debts arises from a commodatum Commodatum is a gratuitous
contract whereby one of the parties
delivers to another something not consumable so that the latter may use the
same for a certain time and return it.
*Article 1935. The bailee in commodatum acquires the use of the thing loaned
but not its fruits; if any compensation is to be paid by him who acquires the use,
the contract ceases to be a commodatum.
Example:
In the preceding example, if B borrowed the ring of A, B cannot refuse to return
the ring on the ground of compensation because no compensation can take place
when one of the debts arises from a commodatum.
The purpose of the law is to prevent a breach of trust and confidence on the part of
the borrower (or depositary in a depositum).
A, however, can assert compensation of the value of the ring against the credit
of B.
Where one of the debts arises from a claim for support due by gratuitous title
Support comprises everything that is indispensable for sustenance, dwelling,
clothing, medical attendance, education and transportation, in keeping with the
financial capacity of the family.
Examples:
A donates to B an allowance of P1,000 a month for five years for the latters
support. However, previous to the donations, B already owed A P10,000
which was due and unpaid.
In this case, A cannot say to B, Inasmuch as you owe me P10,000, I will not
pay your allowance for ten months.
Similarly, if A is the father of B, a minor, who under the law is entitled to be
supported by A, and B owes A P10,000, A cannot compensate his obligation to
support B by what B owes him because the right to receive support cannot be
compensated with
what the recipient (B) owes the obligor (A). However, if A failed to
support B for some months, the support in arrears may be compensated
with the debt of B. Compensation can take place because B no longer
needs the support in arrears as he was able to exist even without the
support of A during those months.
Where one of the debts consists in civil liability arising from a penal offence
Example:
A owes B P1,000. B stole the ring of A worth P1,000. Here,
compensation by B is not proper.
But A, the offended party, can claim the right of compensation. The
prohibition in Article 1288 pertains only to the accused by not to the victim
of the crime.
Art. 1283. If one of the parties to a suit over an obligation has a claim for
damages against the other, the former may set it off by proving his right
to said damages and the amount thereof.
Compensation may also take place when so declared by a final judgment of a court
in a suit (judicial compensation). A party may set off his claim for damages
against his obligation to the other party by proving his right to said damages and
the amount thereof.
Both parties must prove their respective claims. In the absence from both parties on
their claims, offsetting is improper. The right to offset may exist but the question of
how much is to be offset is factual in nature.
Art. 1284. When one or both debts are rescissible or voidable, they may
be compensated against each other before they are judicially rescinded or
avoided.
Example:
A owes B P10,000. Subsequently, A, through fraud, was able to make B sign a
promissory note that B is indebted to A for the same amount.
The debt of A is valid but that of B is voidable. Before the debt of B is nullified, both
debts may be compensated against each other if all the requisites for legal
compensation are present.
Suppose Bs debt is later on annulled by the court, is A still liable considering that
compensation had already taken place? Yes. The effect of annulment is retroactive.
It is the same as if there had been no compensation.
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Can third parties set up compensation?

Art. 1280. Notwithstanding the provisions of the preceding article, the
guarantor may set up compensation as regards what the creditor may
owe the principal debtor.
This is an exception to the general rule that only the principal debtor can set up
against his creditor what the latter owes him.
Although the guarantor is only subsidiarily, not principally, bound, he is given the
right to set up compensation. The reason is that the extinguishment of the principal
obligation as a consequence of compensation carries with it the accessory obligation
such as guaranty.
Note: Here, what are compensated against each other are the principal debts of the
principal debtor and principal creditor to each other. No debt of the guarantor to the
creditor is involved.
If there are several debts, which shall be compensated?
Art. 1289. If a person should have against him several debts which are
susceptible of compensation, the rules on the application of payments
shall apply to the order of the compensation.
Follow rules of application in Articles 1252 to 1254. Example:
A is indebted to B in the amount of:
P1,000 without interest due today
P1,000 with interest of 12% due also today
P1,000 with interest of 10% due yesterday B owes A
P1,000 due today.
For purposes of the application of payment, A is the debtor. He must specify to B
which of the three debts should be compensated. If he fails to inform B, then the
latter should apply the compensation to the second obligation of A, namely, the
obligation bearing the 12% interest because it is the most onerous obligation.
F. Novation
What is novation?
Art. 1291. Obligations may be modified by:
Changing their object or principal conditions;
Substituting the person of the debtor;
Subrogating a third person in the rights of the creditor.
Novation Novation is the total or partial extinction of an obligation through the
creation of a new one which substitutes it. It is the substitution or change of an
obligation by another, which extinguishes or modifies the first.
Art. 1292. In order that an obligation may be extinguished by another which

substitutes the same, it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on every point
incompatible with each other.
Requisites of novation
Four essential requisites, namely:
The existence of a previous valid obligation;
The intention or agreement and capacity of the parties to extinguish or modify
the obligation;
The extinguishment or modification of the obligation; and
The creation or birth of a valid new obligation.
Novation with respect to criminal liability
Novation is not a mode of extinguishing criminal liability. It may prevent the rise of
criminal liability as long as it occurs prior to the filing of the criminal information in
court. In other words, novation does not extinguish criminal liability but may only
prevent its rise.
Novation not presumed
While as a general rule, no form of words or writing is necessary to give effect to a
novation, it must be clearly and unmistakably established by express agreement or by
the acts of the parties, as novation is never presumed.
Ways of effecting conventional novation

There are only two (2) ways which indicate the presence of novation and thereby
produce the effect of extinguishing an obligation by another which substitutes the
same.
By the express agreement of the parties or acts of equal or equivalent import
By the irreconcilable incompatibility of the two obligations with each
other in every material respect. This can take place even in the absence
of an express agreement.
Effect of modification of original obligation
Slight modifications and variations when made with the consent of the parties,
they do not abrogate the entire contract and the rights and obligations of the
parties thereto, but the original contract continues in force except as the altered
terms and conditions of the obligation are considered to be the essence of the
obligation itself. This is especially true where the original contract expressly
provides that such modifications and alterations may be made.
The following are not changes which involve principal conditions:
A promise by the debtor to pay an extra rate of interest
42 of 106
Mere extension of the term (period) for payment or performance is not a

novation
Addition of a new obligation (guaranty) not inconsistent with the old one
Where surety subsequently made an agreement with the creditor to be
bound also as principal
Mere reduction of the amount due
Acceptance of partial payment
Material deviations or changes where the original contract is deviated from in

material respects so that the object or principal condition cannot reasonably
be recognized as that originally contracted for, the original contract should be
treated as abandoned.
Matute v Hernandez (1938) 66 Phil 68
The increase in the price of meat allowed the petitioner by the Acting Purchasing
Agent undoubtedly constitutes a novation of the contract of December 24, 1936
entered into between the Government and petitioner after a public bidding had been
held [for that December 24, 1936 contract].
The price of the supply of meat to the Government was one of the principal
conditions of the contract. Therefore, in order that the renewal [novation of the
contract] thereof may be valid it was necessary to comply with Executive Order No.
16.
In this case, no public bidding, as required by the Executive Order for contracts of
public service, occurred to increase the price of the meat. The other requirements in
the Executive Order, i.e. consultation and approval by the Auditor-General and the
Secretary of Justice aside from the Secretary of the Department concerned, were
also lacking.
Novation did not take place.
Broadway Centrum v Tropical (1993) 224 SCRA 302
The sole issue confronting [the Court] is whether or not the letter-agreement dated
20 April 1982 had novated the Contract of Lease of 28 November 1980. Broadway
Centrum is the lessor, while Tropical is the lessee. Tropical insists that the letteragreement novated the contract, while Broadway believes otherwise.
The 20 April 1982 letter-agreement provided for the provisional and temporary
agreement to a reduction of monthly rentals. It further contained that this
provisional agreement should not be interpreted as amendment to the lease contract
entered into between the parties.
If objective novation is to take place, it is essential that the new obligation expressly
declare that the old obligation is to be extinguished, or that new obligation be on
every point incompatible with the old one. The will to novate, whether totally or
partially, must appear by express agreement of the parties, by their acts which are
too clear and unequivocal to be mistaken.
It is entirely clear to the court that the letter-agreement of 20 April 1982 did not
extinguish or alter the obligations of respondent Tropical and the rights of petitioner
Broadway under their lease contract dated 28 November 1980. Clearly, the
reduction of the monthly rentals was only provisional and temporary, as agreed to
by both parties. This was not to persist for the rest of the life of the Contract of
Lease.
Novation did not take place.
What is expromision?
Art. 1293. Novation which consists in substituting a new debtor in the place
of the original one, may be made even without the knowledge or against
the will of the latter, but not without the consent of the creditor. Payment
by the new debtor gives him the rights mentioned in Articles 1236 and
1237. Expromision
This takes place when a third person of his own initiative and without the
knowledge or against the will of the original debtor assumes the latters obligation
with the consent of the creditor. It is essential that the old debtor be released from
his obligation; otherwise, there is no expromision. Novation is never presumed;
thus, the mere fact that the creditor receives a guaranty or accepts payment from
a third person who has agreed to assume the obligation, when there is not
agreement that the first debtor shall be released from responsibility, does not
constitute a novation, and the creditor can still enforce the obligation against the
original debtor.
Art. 1294. If the substitution is without the knowledge or against the will
of the debtor, the new debtors insolvency or non-fulfillment of the
obligation shall not give rise to any liability on the part of the original
debtor.
In expromision, the new debtors insolvency or non-fulfillment of the obligation will
not revive the action of the creditor against the old debtor whose obligation is
extinguished by the assumption of the debt by the new debtor. Remember that in
expromision, the replacement of the old debtor is not made at his own initiative.
What is delegacion?
Art. 1295. The insolvency of the new debtor, who has been proposed by the
original debtor and accepted by the creditor, shall not revive the action of the
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latter against the original obligor, except when said insolvency was already
existing and of public knowledge, or known to the debtor, when he
delegated his debt.
Delegacion
This takes place when the creditor accepts a third person to take the place of the
debtor at the instance of the latter. The creditor may withhold approval. The new
debtor is entitled to reimbursement and subrogation under Article 1297.
Article 1295 only speaks of insolvency. Hence, in delegacion, if the non-fulfillment of
the obligation is due to other causes, the old debtor is not liable. The general rule is
that the old debtor is not liable to the creditor in case of the insolvency of the new
debtor.
The exceptions are:
The said insolvency was already existing and of public knowledge (although
it was not known to the old debtor) at the time of the delegacion.
The insolvency was already existing and known to the debtor (although it
was not of public knowledge) at the time of the delegacion.
Article 1302. It is presumed that there is legal subrogation:
(2) When a third person, not interested in the obligation, pays with the
express or tacit approval of the debtor.
Example:
A owes B P1,000. C pays B with the express or implied consent of A. In this
case, C will be subrogated in the rights of B.
What is the effect of novation on accessory obligations?
Art. 1296. When the principal obligation is extinguished in consequence of
a novation, accessory obligations may subsist only insofar as they may
benefit third persons who did not give their consent.
The above article follows the general rule that the extinguishment of the
principal obligation carries with it that of the accessory obligations.
It provides, however, an exception in the case of an accessory obligation created
in favor of a third person which remains in force unless said third person gives his
consent to the novation. This is so because a person should not be prejudiced by
the act of another without his consent.
What is the effect if the new obligation is void?

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

contemplates full substitution such that it places the party subrogated in the shoes
of the creditor, and he may use all means which the creditor could employ to
enforce payment.
Conventional Subrogation
It takes place by express agreement of the original parties (the debtor and the
original creditor) and the third person (the new creditor). Conventional subrogation
must be clearly established in order that it may take place.
Art. 1301. Conventional subrogation of a third person requires the consent
of the original parties and of the third person.
The consent of all the parties is an essential requirement.
Art. 1303. Subrogation transfers to the person subrogated the credit will
all the rights thereto appertaining, either against the debtor or against
third persons, be they guarantors or possessors of mortgages, subject to
stipulation in a conventional subrogation.
The effects of conventional subrogation are subject to the stipulation of the parties,
as contrasted to the effects of legal subrogation as provided in Article 1303, which
may not be modified by agreement.
What is legal subrogation?
Art. 1302. It is presumed that there is legal subrogation:
When a creditor pays another creditor who is preferred, even
without the debtors knowledge;
When a third person, not interested in the obligation, pays with the
express or tacit approval of the debtor;
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 latters share.

Legal Subrogation
It takes place without agreement but by operation of law. Legal subrogation is not
presumed except in the cases expressly provided by law (Art. 1302).
Art. 1303. Subrogation transfers to the person subrogated the credit will
all the rights thereto appertaining, either against the debtor or against
third persons, be they guarantors or possessors of mortgages, subject to
stipulation in a conventional subrogation.
The effect of legal subrogation is to transfer to the new creditor the credit and all the
rights and actions that could have been exercised by the former creditor either
against the debtor or against third persons, be they guarantors or mortgagors.
Simply stated, except only for the change in the person of the creditor, the obligation
subsists in all respects as before the novation.
The effect of legal subrogation as provided in Article 1303 may not be modified by
agreement.
What is partial subrogation?
Art. 1304. A creditor, to whom partial payment has been made, may
exercise his right for the remainder, and he shall be preferred to the person
who has been subrogated in his place in virtue of the partial payment of the
same credit.
The creditor to whom partial payment has been made by the new creditor remains a
creditor to the extent of the balance of the debt. In case of insolvency of the debtor,
he is given a preferential right under the above article to recover the remainder as
against the new creditor.
Example:
D is indebted to C for P10,000. X pays C P6,000 with the consent of D. There is
here partial subrogation as to the amount of P6,000. C remains the creditor with
respect to the balance of P4,000. Thus, two credits subsist. In case of insolvency of
D, C is preferred to X, that is, he shall be paid from the assets of D ahead of X.
Distinguish subrogation from assignment of credit.
Art. 1624. An assignment of credits and other incorporeal rights shall
be perfected in accordance with the provisions of Article 1475.
*Article 1475. The contract of sale is perfected at the moment there is a meeting of
minds upon the thing which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of contracts.
Art. 1626. The debtor who, before having knowledge of the assignment,
pays his creditor shall be released from the obligation.
Art. 1627. The assignment of a credit includes all the accessory rights, such
as a guaranty, mortgage, pledge or preference.
Art. 1628. The vendor in good faith shall be responsible for the existence
and legality of the credit at the time of sale, unless it should have been
sold as doubtful; but not for the solvency of the debtor, unless it has been
so expressly stipulated or unless the insolvency was prior to the sale and of
common knowledge.
Even in these cases he shall only be liable for the price received and
for the expenses specified in No. 1 of Article 1616.
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The vendor in bad faith shall always be answerable for the payment of all
expenses, and for damages.
*Article 1616. The vendor cannot avail himself of the right of repurchase
without returning to the vendee the price of the sale, and in addition:
(1) The expenses of the contract, and any other legitimate payments made by
reason of the sale;
Art. 1629. In case the assignor in good faith should have made himself
responsible for the solvency of the debtor, and the contracting parties
should not have agreed upon the duration of the liability, it shall last for
one year only, from the time of the assignment if the period had already
expired.
If the credit should be payable within a term or period which has
not yet expired, the liability shall cease one year after the maturity.
Art. 1213. A solidary creditor cannot assign his rights without the
consent of the others.
Conventional Subrogation and Assignment of Credit Distinguished
Conventional
Subrogation
Assignment of Credit
A credit is extinguished and There is a transfer of same
another
credit
appears, which the new creditor which belonged to another and
which, upon being transferred,
claims as his own
is not
extinguished
The consent of the debtor is
required
The consent of the debtor is not
so that it may fully produce
legal
required, his knowledge thereof
effects
affecting only the validity of the
payment he might make. What
the
law requires is merely notice to
the
debtor as the assignment takes
effect
only from the time he has
knowledge
thereof.
Its effects begin from the time The effects with respect to the
of
debtor
begin
from
the
date
of
novation itself, that is, from the notification
moment all the parties have
given
their consent
The nullity or defects of the The nullity or defects of the
previous
obligation
are not remedied, because only
obligation may be cured by the the
correlative
right
of
the
novation
obligation is
transmitted
Class discussion
Article 1301 does not require payment for conventional subrogation to take place.
What is required is the consent of all parties. On the other hand, in Article 1302
(2), payment is necessary for legal subrogation to take place.
Licaros v Gatmaitan (2001) 362 SCRA 548
The threshold issue for the determination of [the] Court is whether the Memorandum
of Agreement between petitioner and respondent is one of assignment of credit or
one of conventional subrogation. This matter is determinative of whether or not
respondent became liable to petitioner under the promissory note considering that
its efficacy is dependent on the Memorandum of Agreement, the note being merely
an annex to the same memorandum.
Petitioner Licaros invested his funds with the Anglo-Asean Bank, an offshore bank,
but had difficulty retrieving not only the interests or profits, but even the very
investments he had put. Respondent Gatmaitan, a reputable banker and investment
manager, voluntarily offered to assume the payment of Anglo-Aseans indebtedness
to Licaros subject to certain terms and conditions. A Memorandum of Agreement was
executed and notarized to this effect. A promissory note was appended to the
Memorandum of Agreement representing the amount.
Contained in the Memorandum is the stipulation:
WHEREAS, the parties herein have come to an agreement on the nature, form and
extent of their mutual prestations which they now record herein with the express
conformity of the third parties concerned.
Hence, included in the signatories of the Memorandum of Agreement is Anglo-Asean,
as Conforme. The document, however, remained unsigned by the bank. Gatmaitan
was unable to collect from Anglo-Asean, resulting in the nonfulfillment of his promise
to pay Licaros the amount stated in his promissory note.
Licaros contends that he has a right to collect from Gatmaitan regardless of the
outcome of Gatmaitans efforts.
[The Court] agrees with the finding of the Court of Appeals that the Memorandum of
Agreement was in the nature of a conventional subrogation which requires the consent
of the debtor, Anglo-Asean Bank, for its validity.
The Memorandum stipulated that there should be express conformity of the third
parties concerned, this third party admittedly being Anglo-Asean Bank. The
consent of the third party being required by the Memorandum, the agreement
therefore is one of conventional subrogation, and not of assignment of credit.
46 of 106
Conventional subrogation requires the agreement among the three parties

concerned. On the other hand, in assignment of credit, a creditor may validly
assign his credit and its accessories without the debtors consent.
The intention of the parties to treat the Memorandum of Agreement as
embodying a conventional subrogation is shown not only by the whereas
clause but also by the signature space reserved for the signature of a
representative of Anglo-Asean Bank as conforme.
The Memorandum of Agreement embodies a contract for conventional subrogation
and in such a case, the consent of the original parties and the third person is
required. The absence of such conformity by Anglo-Asean Bank prevented the
Memorandum of Agreement from becoming valid and effective. No conventional
subrogation took place.
G. Prescription
Prescription the acquisition or loss of a right by the lapse of time based on
negligence or presumed abandonment
Art. 1106. By prescription, one acquires ownership and other real rights
through the lapse of time in the manner and under the conditions laid down
by law.
In the same way, rights and conditions are lost by prescription. (1930a)
Distinguish between acquisitive and extinctive prescription.
Acquisitive - the acquisition of a right by the lapse of time through adverse
possession/ usurpation
Rationale: based on the assertion by a usurper of an adverse right for such a long
time as to give rise to the presumption that the owner has given up such right
Extinctive the loss of a right of action by the lapse of time
Rationale based on the probability that the alleged right never existed or has been
extinguished. To protect vigilant and not one who sleeps on his rights
When will prescription not run?
Art. 1109. Prescription does not run between husband and wife, even
though there be a separation of property agreed upon in the marriage
settlements or by judicial decree.
Neither does prescription run between parents and children, during the
minority or insanity of the latter, and between guardian and ward during
the continuance of the guardianship. (n)
Rationale: influence or affection may often prevent one bringing an action
against the other anyway.
Exception: prescription runs between husband and wife who are legally
separated
Art. 1113. All things which are within the commerce of men are susceptible
of prescription, unless otherwise provided. Property of the State or any of
its subdivisions not patrimonial in character shall not be the object of
prescription. (1936a)
That which is not subject to appropriation cannot be acquired by prescription
Art. 1136. Possession in wartime, when the civil courts are not open, shall
not be counted in favor of the adverse claimant.
Art. 1154. The period during which the obligee was prevented by a
fortuitous event from enforcing his right is not reckoned against him. (n)
Can prescription be waived? Yes
Art. 1112. Persons with capacity to alienate property may renounce
prescription already obtained, but not the right to prescribe in the future.
Prescription is deemed to have been tacitly renounced when the
renunciation results from acts which imply the abandonment of the right
acquired. (1935)
Renunciation is unilateral, it does not require the acceptance of the person
benefitting
However, renunciation in advance is void; an agreement based on waiving future
prescription is nonbinding. Waiving of prescription by those without capacity or
by ones representatives is nonbinding.
Distinguish between ordinary and extraordinary prescription.
Art. 1117. Acquisitive prescription of dominion and other real rights may be
ordinary or extraordinary.
Ordinary acquisitive prescription requires possession of things in good faith
and with just title for the time fixed by law. (1940a)
Requisites of prescription:
Capacity to acquire by prescription
The thing is capable of acquisition by prescription
Possession of the thing under certain conditions
Lapse of time provided by law
While the first two are common of all prescriptions the latter two vary as to WON
the prescription is ordinary or extraordinary.
Ordinary prescription requires
Good faith possession
Just title
Possession for a period of time fixed by law
MOVABLES
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Art. 1132. The ownership of movables prescribes through uninterrupted

possession for four years in good faith.
The ownership of personal property also prescribes through uninterrupted
possession for eight years, without need of any other condition.
With regard to the right of the owner to recover personal property lost or of
which he has been illegally deprived, as well as with respect to movables
acquired in a public sale, fair, or market, or from a merchant's store the
provisions of Articles 559 and 1505 of this Code shall be observed. (1955a)
Art. 1133. Movables possessed through a crime can never be
acquired through prescription by the offender. (1956a)
IMMOVABLES
Art. 1134. Ownership and other real rights over immovable property are
acquired by ordinary prescription through possession of ten years.
(1957a) Art. 1137. Ownership and other real rights over immovable also
prescribe through uninterrupted adverse possession thereof for thirty
years, without need of title or of good faith. (1959a)
When the title is void (e.g. oral donation of real property) he may acquire
ownership under the provision of this article.
Art. 559. The possession of movable property acquired in good faith is
equivalent to a title. Nevertheless, one who has lost any movable or has
been unlawfully deprived thereof may recover it from the person in
possession of the same.
If the possessor of a movable lost or which the owner has been unlawfully
deprived, has acquired it in good faith at a public sale, the owner cannot
obtain its return without reimbursing the price paid therefor. (464a)
Art. 1505. Subject to the provisions of this Title, where goods are sold by a
person who is not the owner thereof, and who does not sell them under
authority or with the consent of the owner, the buyer acquires no better
title to the goods than the seller had, unless the owner of the goods is by
his conduct precluded from denying the seller's authority to sell.
Nothing in this Title, however, shall affect:
The provisions of any factors' act, recording laws, or any other provision of
law enabling the apparent owner of goods to dispose of them as if he were
the true owner thereof;
The validity of any contract of sale under statutory power of sale or under
the order of a court of competent jurisdiction;
Purchases made in a merchant's store, or in fairs, or markets, in
accordance with the Code of Commerce and special laws. (n)
Art. 719. Whoever finds a movable, which is not treasure, must return it to
its previous possessor. If the latter is unknown, the finder shall
immediately
deposit it with the mayor of the city or municipality where the finding
has taken place.
The finding shall be publicly announced by the mayor for two
consecutive weeks in the way he deems best.
If the movable cannot be kept without deterioration, or without expenses
which considerably diminish its value, it shall be sold at public auction
eight days after the publication.
Six months from the publication having elapsed without the owner having
appeared, the thing found, or its value, shall be awarded to the finder.
The finder and the owner shall be obliged, as the case may be, to
reimburse the expenses. (615a)
Art. 720. If the owner should appear in time, he shall be obliged to pay, as
a reward to the finder, one-tenth of the sum or of the price of the thing
found. (616a)
Art. 526. He is deemed a possessor in good faith who is not aware that
there exists in his title or mode of acquisition any flaw which invalidates it.
He is deemed a possessor in bad faith who possesses in any case contrary
to the foregoing.
Mistake upon a doubtful or difficult question of law may be the basis of
good faith. (433a)
Art. 1127. The good faith of the possessor consists in the reasonable belief
that the person from whom he received the thing was the owner thereof,
and could transmit his ownership. (1950a)
Art. 1128. The conditions of good faith required for possession in Articles
526, 527, 528, and 529 of this Code are likewise necessary for the
determination of good faith in the prescription of ownership and other real
rights. (1951)
Good faith
The well founded belief that the grantor is the owner.It is the belief in the
validity, and not merely ignorance of a defect.
The belief must be continuous
Any other defect will invalidate the title, and when there is no just title there can
be no prescription
Good faith is always presumed, the burden of proof rests on those claiming
otherwise.
There is a presumption that the possession continues to be enjoyed in the same
character in which it was acquired, until the contrary is
proven.
Art. 308. Who are liable for theft. Theft is committed by any person who,
with intent to gain but without violence against or intimidation of persons
48 of 106
nor force upon things, shall take personal property of another without
the latter's consent.
Theft is likewise committed by:
Any person who, having found lost property, shall fail to deliver the same
to the local authorities or to its owner;
Any person who, after having maliciously damaged the property of
another, shall remove or make use of the fruits or object of the
damage caused by him; and
Any person who shall enter an inclosed estate or a field where trespass is
forbidden or which belongs to another and without the consent of its
owner, shall hunt or fish upon the same or shall gather cereals, or other
forest or farm products.
Art. 536. In no case may possession be acquired through force or
intimidation as long as there is a possessor who objects thereto. He who
believes that he has an action or a right to deprive another of the holding
of a thing, must invoke the aid of the competent court, if the holder should
refuse to deliver the thing. (441a)
Art. 537. Acts merely tolerated, and those executed clandestinely and
without the knowledge of the possessor of a thing, or by violence, do not
affect possession. (444)
In what concept must be the possession for prescription to run?
Art. 1118. Possession has to be in the concept of an owner, public, peaceful
and uninterrupted. (1941)
Art. 1119. Acts of possessory character executed in virtue of license or by
mere tolerance of the owner shall not be available for the purposes of
possession. (1942)
Concept of owner
necessary for possession
vs license: a positive act of owner in favor of a holder
vs tolerance: passive acquiescence by owner of acts of another which are
contrary to former.
Public - manifest and visible to all, the opposite of clandestine, there is the presumption
that the public and the owner are aware of the possession. Peaceful acquired and
maintained without violence whether physical or moral. Except that force may be used
to repel an unlawful physical invasion. Uninterrupted continuous, there must be no act
of deprivation of enjoyment of the thing by a third person or other act which interrupts
prescription. Interruption is a positive act of a third person. Uninterruption is distinct from
discontinuity, since the former is a positive act of a third person while the latter is a
negative act of the possessor.
Art. 541. A possessor in the concept of owner has in his favor the legal
presumption that he possesses with a just title and he cannot be obliged to
show or prove it. (448a)
How is prescription interrupted?
Art. 1120. Possession is interrupted for the purposes of prescription,
naturally or civilly. (1943)
Effect of interruption all the benefits acquired so far from the possession cease,
when it resumes the time lapsed will start anew.
Interruption is the opposite of suspension where in the past period is included in the
computation of the total time lapsed.
Art. 1121. Possession is naturally interrupted when through any cause it
should cease for more than one year.
The old possession is not revived if a new possession should be exercised
by the same adverse claimant. (1944a)
Art. 1122. If the natural interruption is for only one year or less, the time
elapsed shall be counted in favor of the prescription. (n)
Art. 1123. Civil interruption is produced by judicial summons to the
possessor. (1945a)
Art. 1124. Judicial summons shall be deemed not to have been issued and
shall not give rise to interruption:
If it should be void for lack of legal solemnities;
If the plaintiff should desist from the complaint or should allow the
proceedings to lapse;
If the possessor should be absolved from the complaint.
In all these cases, the period of the interruption shall be counted for the
prescription. (1946a)
In civil interruption, the effect of the recovery of the possession is that the period of
interruption is included in the computation of the prescription. Technically then, it is
as if there was no interruption and that the possession was continuous.
Art. 1125. Any express or tacit recognition which the possessor may make
of the owner's right also interrupts possession. (1948)
The recognition of the possessor of the owners rights will interrupt possession.
However, the declaration of a 3 rd person that the holder is not the owner will not
interrupt possession.
Art. 1126. Against a title recorded in the Registry of Property, ordinary
prescription of ownership or real rights shall not take place to the prejudice
49 of 106
of a third person, except in virtue of another title also recorded; and the
time shall begin to run from the recording of the latter.
As to lands registered under the Land Registration Act, the provisions of
that special law shall govern. (1949a)
Recorded titles as to third persons
Third persons are those who acquire their rights subsequently, relying on the
registration of ownership in the registry. They cannot be prejudiced by a period of
possession prior to their acquisition. This will apply provided that the following
conditions are met:
acquisition is by onerous title
acquisition is from one who, accdg to the registry, can transmit the title
acquisition is registered
That the third person has no knowledge of the prescription. Registered lands
adverse possession may not be allowed to defeat the owners right to possession of
lands registered under the Torrens system, nor will it run against the owners
hereditary successors. But laches may be set up as to registered lands.
Art. 1127. The good faith of the possessor consists in the reasonable belief
that the person from whom he received the thing was the owner thereof,
and could transmit his ownership. (1950a)
Art. 1129. For the purposes of prescription, there is just title when the
adverse claimant came into possession of the property through one of the
modes recognized by law for the acquisition of ownership or other real
rights, but the grantor was not the owner or could not transmit any right.
(n)
Art. 1130. The title for prescription must be true and valid. (1953)
For prescription to run, the title must be just, true, valid, and proved.
The purpose of just title is the transmission of ownership which would have
transferred ownership if the grantor had really been the owner. The defect is cured by
prescription.
e.g. sale, donation, and dation transfer ownership. But lease, loan, and deposit do
not transfer ownership and therefore do not give rise just title
A true title is one that actually exists, as opposed to a simulated title which cannot be
the basis of prescription. A false title is one which does not exist but is believed to
exist. It will be sufficient of the mistake of fact is with regards to acts of a third
person. If the mistake refers to the act of the possessor himself, it will be considered
insufficient.
e.g purchasing from an insane party with knowledge of the vendors incapacity will
render the title insufficient. But purchasing without such knowledge of the incapacity
will render the title sufficient.
Valid title the title should be sufficient to transfer right if the grantor had been the
owner. Void titles are insufficient and cannot give rise to prescription. Voidable titles
are sufficient so long as it has not been annulled. For titles with suspensive condition,
prescription only runs from the fulfillment of such a condition. For titles with
resolutory conditions, prescription begins at once without prejudice to the fulfillment
of the condition
Art. 1131. For the purposes of prescription, just title must be proved; it is
never presumed. (1954a)
Proof of title: required for purpose of prescription. It is an exception to 541 which
refers to an existing fact of possession. This article refers to the acquisition of right of
ownership. Since a new right is sought to be created, the law becomes more exacting
How is prescription computed?
Art. 1138. In the computation of time necessary for prescription the
following rules shall be observed:
The present possessor may complete the period necessary for prescription
by tacking his possession to that of his grantor or predecessor in interest;
It is presumed that the present possessor who was also the possessor at a
previous time, has continued to be in possession during the intervening
time, unless there is proof to the contrary;
The first day shall be excluded and the last day included. (1960a)
Tacking means adding the period of possession of the predecessor to that of the
successor. Tacking of possession requireds:
The present possessor must have obtained it from previous possessor
There must be privity between them
Tacking is only possible with succession, usurpers cannot tack
Different characteristics of possession: from good to bad faith and vice versa When
the possession of the predecessor is in good faith and that of the successor is in bad
faith, tacking is permitted. The period of possession in good faith is computed in the
proportion that the period of extraordinary prescription bears to that of ordinary
prescription.
When the possession of the predecessor is in bad faith and that of the successor is in
good faith then tacking does not apply for ordinary prescription. However, if the period of
the predecessor is so long as to be beneficial to the successor, he may claim tacking for
extraordinary prescription.
Art. 544. A possessor in good faith is entitled to the fruits received before
the possession is legally interrupted.
Natural and industrial fruits are considered received from the time they are
gathered or severed.
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Civil fruits are deemed to accrue daily and belong to the possessor in good
faith in that proportion. (451)
What is the prescriptive period to recover movables and immovable?
Movables 8 years
Immovables 30 years
Art. 1140. Actions to recover movables shall prescribe eight years from the
time the possession thereof is lost, unless the possessor has acquired the
ownership by prescription for a less period, according to Articles 1132, and
without prejudice to the provisions of Articles 559, 1505, and 1133. (1962a)
Art. 1141. Real actions over immovables prescribe after thirty years.
This provision is without prejudice to what is established for the acquisition
of ownership and other real rights by prescription. (1963)
LOSS OF POSSESSION
Art. 555. A possessor may lose his possession:
By the abandonment of the thing;
By an assignment made to another either by onerous or gratuitous title;
By the destruction or total loss of the thing, or because it goes out of
commerce;
By the possession of another, subject to the provisions of Article 537, if the
new possession has lasted longer than one year. But the real right of
possession is not lost till after the lapse of ten years. (460a)
When is prescription interrupted?
Art. 1155. The prescription of actions is interrupted when they are filed
before the court, when there is a written extrajudicial demand by the
creditors, and when there is any written acknowledgment of the debt by
the debtor. (1973a)
Filing in court interruption of extinctive prescription commences upon the docketing
and continues during the pendency of the action. Upon dismissal, the prescription
runs anew. However, when an action is filed and the plaintiff desists in the
prosecution, the action is deemed never to have commenced.
Written extrajudicial demand must be in writing, verbal demand is insufficient.
Written acknowledgement of debt may be express or implied in writing. May be
made by an agent or legal representative. However, acknowledgement of a debt
after the prescription has expired does not amount to a renunciation of a prescription
already acquired. Partial payment does not interrupt prescription because although it
can be considered an acknowledgment of a debt, as long as it is not in writing, there
will be no interruption.
Other causes which do not interrupt prescription:

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

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

Pajunar v CA (1989) 175 SCRA 464
In 1980, petitioner Pajunar learned that the disputed female mestisa carabao was in the
possession of private respondent Eluna, the latter possessing the carabao after
bartering this male cow to a third person Enopio in 1969.
The prescription issue is whether or not the carabao belonged to private respondent,
him being in possession of the carabao for more than 10 years. The possession in
good faith for four (4) years is not applicable, neither can possession in bad faith of
eight (8) years benefit respondents, for when the owner of a movable has lost or has
been illegally deprived of his property he can recover the same without need to
reimburse the possessor, as provided in Art. 559 of the Civil Code.
Neither can Art. 716 of the Civil Code apply, for this article evidently refers to a
possessor in good faith.
From the records it is clear that although the animal was branded ART in her front
and hind legs at the time she was acquired by respondent Eluna, said respondent did
not or could not register the transfer to him in accordance with Section 529 of the
Revised Administrative Code (which says that registration is necessary to validity of
transfer of cattle.)
The records show that respondents did not comply with this requirement.
Respondents are not possessors in good faith, as a possessor in good faith is one
not aware that there exists in his title or more of acquisition any flaw which
invalidates it.
Petitioners are the owners of the carabaos (the mestisa carabao and its
offsprings) in question.
Cajuigan v Natividad (1910) 14 Phil 734
Plaintiff Cajuigan is the administrator of the estate of Capricho and Morales. It
appears that three carabaos are in the possession of defendant Natividad. Plaintiff
commenced the action to recover the carabaos from the defendant, the carabaos
being part of the estate of the decedents.
The decedents had debts to the defendant worth P486.94. Upon death of the
decedents intestate, Sotero Morales, the first administrator, delivered the disputed
carabaos to the defendant to satisfy his claim.
The new administrator, plaintiff Cajuigan, now wants to recover the said carabaos,
contending that the first administrator had no authority to pay the claim of Natividad
against the estate, without the express permission of the court. He also contends that
it was the duty of the defendant, if he had a claim
52 of 106
against the estate in question, to have presented it to the committee

appointed for the purpose of allowing claims.
Both contentions are valid.
It is not disputed, however, by the plaintiff, that the carabaos were turned over to
Natividad by the first administrator, Sotero Morales, and accepted by Natividad in
good faith, believing that the carabaoes had been turned over to him in part payment
of his claim against the said estate.
Can an administrator maintain an action to recover personal property belonging to an
estate, which has been in the possession of the defendant for a period of more than
four years, he possessing the same in good faith?
The court held in the negative. The Code of Procedure in Civil Actions provides that
an action for the recovery of personal property shall be limited to four years. The
right of the plaintiff to recover the carabaos in question, therefore, cannot be
sustained.
*Article 1955 of the (Old) Civil Code provides that The ownership of personal
property in prescribes by uninterrupted possession in good faith, for a period of
three years.
Tan v CA (1991) 195 SCRA 355
This petition stems from an action of petitioner Tan for the reconveyance of shares
of stock against the Central Bank.
During the Martial Law regime, Continental Bank was ordered to close by the
Central Bank Monetary Board, due to the insolvency of the bank. Thereafter,
petitioner was arrested and during detention in 1977, he executed certain
agreements transferring and assigning shares of stock in Continental Bank to three
corporations. Petitioner alleged that the transfer was due to fraud.
In 1987, petitioners filed a case of reconveyance of shares of stock.
The question is whether or not any action for reconveyance has nevertheless
prescribed, on the basis of provisions governing reconveyance.
The rule anent prescription on recovery of movable (shares of stock in this case)
is expressed in Article 1140 of the Civil Code.
It is evident that the petitioners had at most eight years within which to pursue a
reconveyance, reckoned from the loss of the shares in 1977, when the petitioner Tan
executed the various agreements in which he conveyed the same in favor of three
corporations.
Since the complaint was filed in 1987, ten years more or less after the petitioners
transferred the shares in question, it is clear that the petitioners have come to
court too late.
*The Court+ cannot accept the petitioners contention that the period during which
authoritarian rule was in force had interrupted prescription and that the
same began to run only on February 25, 1986, when the Aquino government too
power. It is true that under Art. 1154:
Article 1154. The period during which the obligee was prevented by a
fortuitous event from enforcing his right is not reckoned against him.
fortuitous events have the effect of tolling the period of prescription.
However, it cannot be say, as a universal rule, that the period from September 21,
1972 to February 25, 1986, involves force majeure. This claim should be taken on a
case-to-case basis.
*The Court+ is convinced, from petitioner Tans very behavior (of instituting actions
in court that did not involve the conveyance of shares), that his detention was not an
impediment to a judicial challenge, and the fact of the matter was that he was
successful in obtaining judicial assistance. Under these circumstances, [the Court]
cannot declare detention, or authoritarian rule for that matter, as a fortuitous event
insofar as he was concerned, that interrupted prescription.
Prescription was not interrupted. Tans action came too late.
H. Agreement
Saura vs. DBP
Facts:
Saura applied to Rehabilitation Finance Corporation (RFC), before its conversion
into DBP, for an industrial loan of P500,000 to be used as follows:
P250,000.00 for the construction of a factory building (for the manufacture
of jute sacks);
P240,900.00 to pay the balance of the purchase price of the jute mill machinery
and equipment; and - P9,100.00 as additional working capital.
The jute mill machinery had already been purchased by Saura on the strength of
a letter of credit extended by the Prudential Bank and Trust Co. and that to
secure its release without first paying the draft, Saura, Inc. executed a trust
receipt in favor of the said bank.
RFC passed Resolution No. 145 approving the loan application for P500,000.00, to
be secured by a first mortgage on the factory building to be constructed, the
land site thereof, and the machinery and equipment to be installed.
It appears, however, that despite the formal execution of the loan agreement the
reexamination contemplated in Resolution No. 736 proceeded. In a meeting of
the RFC Board of Governors on June 10,
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1954, at which Ramon Saura, President of Saura, Inc., was present, it was
decided to reduce the loan from P500,000.00 to P300,000.00.
Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted.
The request was denied by RFC.
Saura, Inc. took exception to the cancellation of the loan and informed RFC that
China Engineers, Ltd. "will at any time reinstate their signature as co-signer of
the note if RFC releases to us the P500,000.00 originally approved by you.".
RFC passed Resolution No. 9083, restoring the loan to the original amount of
P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign
the promissory notes jointly with the borrower-corporation," but with the
following proviso:
xx
That the raw materials (kenaf) needed by the borrowercorporation to carry out its operation are available in the immediate
vicinity;
xx
However, Saura stated that according to a special study made by the Bureau of
Forestry "kenaf will not be available in sufficient quantity this year or
probably even next year;"
Saura requested RFC to cancel the mortgage. RFC executed the deed of
cancellation and delivered it to Ramon F. Saura himself as president of Saura,
Inc.
Almost 9 years after the mortgage in favor of RFC was cancelled at the request of
Saura, Inc., the latter commenced the present suit for damages, alleging
failure of RFC (as predecessor of the defendant DBP) to comply with its
obligation to release the proceeds of the loan applied for and approved,
thereby preventing the plaintiff from completing or paying contractual
commitments it had entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there
was a perfected contract between the parties and that the defendant was
guilty of breach.
Issue: WON there was a perfected contract between Saura and DBP
WON Saura is entitled to damages
Held:
There was undoubtedly offer and acceptance in this case: the application of Saura,
Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and
the corresponding mortgage was executed and registered. But this fact alone falls
short of resolving the
basic claim that the defendant failed to fulfill its obligation and the plaintiff
is therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the
assumption that the factory to be constructed would utilize locally grown raw
materials, principally kenaf. Evidently Saura, Inc. realized that it could not
meet the conditions required by RFC stated that local jute "will not be able in
sufficient quantity this year or probably next year," and asking that out of the
loan agreed upon the sum of P67,586.09 be released "for raw materials and
labor." This was a deviation from the terms laid down in Resolution No. 145
and embodied in the mortgage contract, implying as it did a diversion of part
of the proceeds of the loan to purposes other than those agreed upon.The
action thus taken by both parties was in the nature cf mutual desistance
what Manresa terms "mutuo disenso" 1 which is a mode of extinguishing
obligations. It is a concept that derives from the principle that since mutual
agreement can create a contract, mutual disagreement by the parties can
cause its extinguishment.
Dispositive: Judgment appealed from is reversed and the complaint dismissed, with
costs against the plaintiff-appellee.
I. Difficulty
What is clausula rebus sic stantibus?
Art. 1267. When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be
released therefrom, in whole or in part. (n)
Occena vs. Jabson
Facts:
Tropical Homes, Inc. filed a complaint for modification of the terms and conditions
of its subdivision contract with petitioners (landowners of a 55,330 square
meter parcel of land in Davao City) alleging that due to the increase in price
of oil and its derivatives and the concomitant worldwide spiraling of prices,
further performance by the plaintiff under the contract, will result in situation
where defendants would be unjustly enriched at the expense of the plaintiff;
will cause an iniquitous distribution of proceeds from the sales of subdivided
lots in manifest actually result in the unjust and intolerable exposure of
54 of 106
plaintiff to implacable losses, all such situations resulting in an

unconscionable, unjust and immoral situation contrary to and in violation of
the primordial concepts of good faith, fairness and equity which should
pervade all human relations.
Petitioners moved to dismiss the complaint principally for lack of cause of action,
and upon denial thereof and of reconsideration by the lower court elevated
the matter on certiorari to respondent Court of Appeals.
CA set aside the preliminary injunction previously issued by it and dismissed
petition.
Hence, the petition at bar wherein petitioners insist that the worldwide increase in
prices cited by respondent does not constitute a sufficient cause of action for
modification of the subdivision contract.
Issue: WON the Court should grant the petition

Held:
While respondent court correctly cited in its decision the Code Commission's
report giving the rationale for Article 1267 of the Civil Code, it misapplied
the same to respondent's complaint.
Respondent's complaint seeks not release from the subdivision contract but that
the court render judgment modifying the terms and Conditions of the
Contract.
The cited article does not grant the courts this authority to remake, modify or
revise the contract or to fix the division of shares between the parties as
contractually stipulated with the force of law between the parties, so as to
substitute its own terms for those covenanted by the parties themselves.
Respondent's complaint for modification of contract manifestly has no basis
in law and therefore states no cause of action. Under the particular
allegations of respondent's complaint and the circumstances therein averred,
the courts cannot even in equity grant the relief sought.
Dispositive: The resolution of respondent appellate court is reversed and the petition for
certiorari is granted and private respondent's complaint in the lower court is ordered
dismissed for failure to state a sufficient cause of action.
Naga Telephone vs. CA, supra
J. Impossibility
What is the effect of impossibility?
Art. 1266. The debtor in obligations to do shall also be released when the
prestation becomes legally or physically impossible without the fault of
the obligor. (1184a)
IV. Other Performance Excuses
K. Violenti Non Fit Injuria
What is violenti non fit injuria?
Art. 1174. Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall be responsible for those
events which could not be foreseen, or which, though foreseen, were
inevitable. (1105a)
Latin: "to a willing person, no injury is done" or "no injury is done to a person
who consents"
General Rule: No liability for fortuitous event.
Exceptions: The debtor is responsible for a fortuitous event in the ff. cases:
o When expressly declared by law (such as when the possessor is in
bad faith or is in default).
o When expressly declared by stipulation or contract.
o When the nature of the oblig requires the assumption of risk (Doctrine
of Created Risk)
Essential characteristics of a fortuitous event
o The cause must be independent of the will of the debtor
o Impossibility of foreseeing or impossibility of avoiding it, even if
foreseen.
o The occurrence must be such as to render it impossible for the debtor to
fulfil his obligation in a normal manner.
Loss in a shipwreck
o As a general rule, the loss of the ship due to a fortuitous event should
be borne by the owner; the loss of the cargo, by their owners, unless
the captain lacked skill or there was malice or negligence.
Loss because of an act of government
55 of 106
In case there is a law, it shall be considered as an act of sovereign power

and therefore, whatever loss incurred can be attributed to a force
majeure and certainly the State cannot complain of a loss caused by
itself.
Combination of fortuitous event and negligence
If the fortuitous event was the proximate cause, the oblig is

extinguished.
If the negligence was the proximate cause, the oblig is not extinguished
converted to a monetary oblig for damages.
L. Fortuitous Event
What are the acts of God?
Art. 1174- refer to 104
Art. 1262. An obligation which consists in the delivery of a determinate
thing shall be extinguished if it should be lost or destroyed without the
fault of the debtor, and before he has incurred in delay.
When by law or stipulation, the obligor is liable even for fortuitous events,
the loss of the thing does not extinguish the obligation, and he shall be
responsible for damages. The same rule applies when the nature of the
obligation requires the assumption of risk. (1182a)
Examples of instances when the law requires liability even in the case of a
fortuitous event:
o When the debtor is in default (mora)
o
When the debtor has promised to deliver the same thing to two or
more persons (parties) who do not have the same interest o When
the oblig arises from a crime
o When a borrower (of an object) has lent the thing to another who is not a
member if his own household.
o When the thing loaned has been delivered with appraisal of the value, unless
there is a stipulation exempting the borrower from
responsibility in case of a fortuitous event.

When the payee in solutio indebiti is in bad faith
An act of God has been defined as an accident, due directly and exclusively to natural
causes without human intervention, which by no amount of foresight, pains or
care, reasonably to have been expected, could have been prevented. (1 Corpus
Juris 1174). (Nakpil and Sons vs.
CA)
The principle embodied in the act of God doctrine strictly requires that the act
must be one occasioned exclusively by the violence of nature and all human
agencies are to be excluded from creating or entering into the cause of the
mischief. When the effect, the cause of which is to be considered, is found to
be in part the result of the participation of man, whether it be from active
intervention or neglect, or failure to act, the whole occurrence is thereby
humanized, as it were, and removed from the rules
applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).

The negligence of the defendant and the third-party defendants petitioners was
established beyond dispute both in the lower court and in the Intermediate
Appellate Court. Defendant United Construction Co., Inc. was found to have
made substantial deviations from the plans and specifications. and to have
failed to observe the requisite workmanship in the construction as well as to
exercise the requisite degree of supervision; while the third-party defendants
were found to have inadequacies or defects in the plans and specifications
prepared by them. As correctly assessed by both courts, the defects in the
construction and in the plans and specifications were the proximate causes
that rendered the PBA building unable to withstand the earthquake of August
2, 1968. For this reason the defendant and third-party defendants
cannot claim exemption from liability. (Decision, Court of Appeals, pp. 3031).
In any event, the relevant and logical observations of the trial court as
affirmed by the Court of Appeals that "while it is not possible to state with
certainty that the building would not have collapsed were those defects
not present, the fact remains that several buildings in the same area
withstood the earthquake to which the building of the plaintiff was
similarly subjected," cannot be ignored.
Art. 1221. If the thing has been lost or if the prestation has become
impossible without the fault of the solidary debtors, the obligation shall be
extinguished.
If there was fault on the part of any one of them, all shall be responsible to
the creditor, for the price and the payment of damages and interest,
without prejudice to their action against the guilty or negligent debtor.
56 of 106
If through a fortuitous event, the thing is lost or the performance has

become impossible after one of the solidary debtors has incurred in delay
through the judicial or extrajudicial demand upon him by the creditor, the
provisions of the preceding paragraph shall apply. (1147a)
Loss because of a fortuitous event after defaultthere will be liability because of
the default.
When will force majeure not extinguish an obligation?
Art. 1268. When the debt of a thing certain and determinate proceeds from
a criminal offense, the debtor shall not be exempted from the payment of
its price, whatever may be the cause for the loss, unless the thing having
been offered by him to the person who should receive it, the latter refused
without justification to accept it. (1185)
Even for fortuitous event, the oblig is not extinguished.
Exception: When the creditor (the offended party in the crime) is in mora
accipiendi.
Art. 1265. Whenever the thing is lost in the possession of the debtor, it
shall be presumed that the loss was due to his fault, unless there is proof
to the contrary, and without prejudice to the provisions of article 1165. This
presumption does not apply in case of earthquake, flood, storm, or other
natural calamity. (1183a)
The presumption of fault does not apply in the case if a natural calamity.
Although fire is not a natural calamity, if a tenant is able to prove that the fire
caused in his apartment was purely accidental, he is not liable.
Art. 1165. When what is to be delivered is a determinate thing, the creditor,
in addition to the right granted him by Article 1170, may compel the debtor
to make the delivery.
If the thing is indeterminate or generic, he may ask that the obligation be

complied with at the expense of the debtor.
If the obligor delays, or has promised to deliver the same thing to two or
more persons who do not have the same interest, he shall be responsible
for any fortuitous event until he has effected the delivery. (1096)
Effect of fortuitous event
o Specific oblig- extinguished by a fortuitous event of act of God o
Generic oblig- never extinguished by fortuitous event
Two instances where a fortuitous event does not exempt (3 rd par) o If the
obligor delays
o If the obligor is guilty of bad faith
National Power Corporation vs. CA
Facts:
The private respondents, owners of different parcels of land in Angat and
Norzagaray, Bulacan, suffered extensive damage to and lose of their
properties as a result of the inundation.
Demands for the payment thereof having been rejected by the petitioners, the
private respondents filed with the RTC, an action for damages against the
petitioners.
Petitioners said that they took all the necessary precautions in anticipation of
the typhoon, exercised due care in the maintenance and operation of the
Angat Hydro-electric plant and sent out early written warnings. They further
rely on the defense of force majeure, and aver that there exists no causal
relation between the alleged damages and losses suffered by the plaintiffs.
RTC rendered its decision against the petitioners.
Appellate court affirmed the findings of the trial court on the negligence
of the petitioners.
Issue: WON the petitioners should be liable for damages
Held:
Petition must be dismissed because the losses and damages sustained by the
private respondents had been proximately caused by the negligence of the
petitioners, although the typhoon which preceded the flooding could be
considered as a force majeure.
Petitioners cannot be heard to invoke the act of God or force majeure to escape
liability for the loss or damage sustained by the private respondents since
they, the petitioners, were guilty of negligence. This event then was not
occasioned exclusively by an act of God or force
57 of 106
majeure; a human factor - negligence or imprudence - had intervened. The

effect then of the force majeure in question may be deemed to have, even if
only partly, resulted from the participation of man. Thus, the whole occurrence
was thereby humanized, as it were, and removed from the rules applicable to
acts of God.
To exempt the obligor from liability under Article 1174 of

Civil
and
natural
obligs
distinguished
o
Voluntary
the Civil Code, for a breach of an obligation due to an "act
fulfilment
defined
of God," the following must concur: (a) the cause of the
Voluntary
fulfilment means that the debtor complied with the
breach of the obligation must be independent of the will
of
same even if he knew that he could have been legally forced
the debtor; (b) the event must be
Dispositive: The instant petition is hereby DENIED, with costs against the
petitioners.
Nakpil and Sons vs. CA
Facts:
The private respondent (Philippine Bar Association) hired the services of the
petitioner to make the plans and specifications for the construction of their
office building.
The building was completed by the contractor but subsequently, an earthquake
struck causing its partial collapse and damage.
After the protracted hearings, the Commissioner eventually submitted his report
with the findings that while the damage sustained by the PBA building was
caused directly by the earthquake whose magnitude was estimated at 7.3

they were also caused by the defects in the plans and specifications prepared
by the third-party defendants' architects, deviations from said plans and
specifications by the defendant contractors and failure of the latter to observe
the requisite workmanship in the construction of the building and of the
contractors, architects and even the owners to exercise the requisite degree
of supervision in the construction of subject building.
Plaintiff commenced this action for the recovery of damages arising from the
partial collapse of the building against United Construction, Inc. and its
President and General Manager Juan J. Carlos as defendants. Plaintiff alleges
that the collapse of the building was accused by defects in the construction,
the failure of the contractors to follow plans and specifications and violations
by the defendants of
the terms of the contract.
Issue: WON the petitioner is liable for damages in this case
Held:
either unforseeable or unavoidable; (c) the event must be such as to render

it impossible for the debtor to fulfill his obligation in a normal manner; and
(d) the debtor must be free from any participation in, or aggravation of the
injury to the creditor.
It has been held that when the negligence of a person concurs with an act of God
in producing a loss, such person is not exempt from liability by showing that
the immediate cause of the damage was the act of God. To be exempt from
liability for loss because of an act of God, he must be free from any previous
negligence or misconduct by which that loss or damage may have been
occasioned.
The negligence of the defendant and the third-party defendants petitioners was
established beyond dispute both in the lower court and in the Intermediate
Appellate Court. Defendant United Construction Co., Inc. was found to have
made substantial deviations from the plans and specifications. and to have
failed to observe the requisite workmanship in the construction as well as to
exercise the requisite degree of supervision; while the third-party defendants
were found to have inadequacies or defects in the plans and specifications
prepared by them.
The relevant and logical observations of the trial court as affirmed by the Court
of Appeals that "while it is not possible to state with certainty that the
building would not have collapsed were those defects not present, the fact
remains that several buildings in the same area withstood the earthquake to
which the building of the plaintiff was similarly subjected," cannot be
ignored.
NATURAL OBLIGATIONS
Distinguish civil and natural obligations.
Art. 1423. Obligations are civil or natural. Civil obligations give a right of action
to compel their performance. Natural obligations, not being based on positive
law but on equity and natural law, do not grant a right of action to enforce their
performance, but after voluntary fulfillment by the obligor, they authorize the
retention of what has been delivered or rendered by reason thereof. Some
natural obligations are set forth in the following articles.
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to do so. In case of partial voluntary fulfilment, there has not yet been
created a legal oblig.
Undue payment distinguished from natural oblig
If I pay a debt that has prescribed
Not knowing it has prescribed, I can recover on the ground of

undue payment.
Knowing that it has prescribed, I cannot recover for this would be
a case of a natural oblig.
No juridical tie in moral obligs
While there is a juridical tie in natural obligs, there is none in moral obligs.
Example of other natural obligs
Obligation to pay interest for use of money, even if not agreed upon in writing.
Duty to support natural or spurious children (even if not recognized

voluntarily or by judicial compulsion and even if there is a judgment
denying recognition).
Giving material and financial assistance to children upon their marriage.
Conversion of moral obligs to civil obligs
Moral obligs may be converted into

Acknowledgement of a prescribed debt
civil
obligs.
Ex.
Art. 1424. When a right to sue upon a civil obligation has lapsed by
extinctive prescription, the obligor who voluntarily performs the contract
cannot recover what he has delivered or the value of the service he has
rendered.
Effect of extinctive prescription- By virtue of extinctive prescription, a right to
property has been lost. Hence, the existence of the Article.
Art. 1425. When without the knowledge or against the will of the debtor, a
third person pays a debt which the obligor is not legally bound to pay
because the action thereon has prescribed, but the debtor later voluntarily
reimburses the third person, the obligor cannot recover what he has paid.
Payment with debtors consent- If payment is made with the consent of the
debtor, a civil oblig arises.
Art. 1426. When a minor between eighteen and twenty-one years of age
who has entered into a contract without the consent of the parent or
guardian,
after the annulment of the contract voluntarily returns the whole thing or
price received, notwithstanding the fact the he has not been benefited
thereby, there is no right to demand the thing or price thus returned.
Art. 1427. When a minor between eighteen and twenty-one years of age,
who has entered into a contract without the consent of the parent or
guardian, voluntarily pays a sum of money or delivers a fungible thing in
fulfillment of the obligation, there shall be no right to recover the same
from the obligee who has spent or consumed it in good faith. (1160A)
Contract by MinorsNo annulment yet
o Generally, annulment requires mutual restitution. Here, the oblige who has
spent or consumed the object in good faith is not
required to restore.
o Good faith of the oblige must be present at the time of the
spending or consuming.
o Note that the majority age today is 18. And fungible here really means
consumable.
Art. 1428. When, after an action to enforce a civil obligation has failed the
defendant voluntarily performs the obligation, he cannot demand the
return of what he has delivered or the payment of the value of the service
he has rendered.
Winner in an action to enforce a civil obligationHere the defendant may have
realized that he should have lost the case, instead of winning it, this the
existence of the Article.
Art. 1429. When a testate or intestate heir voluntarily pays a debt of the
decedent exceeding the value of the property which he received by will or
by the law of intestacy from the estate of the deceased, the payment is
valid and cannot be rescinded by the payer.
Rule in case of payment of debts beyond value of the decedents estate
o Heirs inherit obligs only to the extent of the value of the inheritance.
This is the reason for the Article, coupled with the basis for the natural
oblig.
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Art. 1430. When a will is declared void because it has not been executed in
accordance with the formalities required by law, but one of the intestate
heirs, after the settlement of the debts of the deceased, pays a legacy in
compliance with a clause in the defective will, the payment is effective and
irrevocable.
Payment of legacies despite the fact that the will is void
o If the will is void, the legacy would also be void and the deceased is
considered to have died without a will. This is the reason for the existence
of this Article.
Analogous cases
o By analogy, all alienations defective for lack of proper formalities may be
included under Art. 1430.
CONTRACTS
V. General
What is a contract?
Art. 1305. A contract is a meeting of minds between two persons whereby
one binds himself, with respect to the other, to give something or to render
some service. (1254a)
Contract, defined
A contract, from the Latin contractus and from the French contract, is
a juridical convention manifested in legal form, by virtue of which, one or
more persons (or parties) bind themselves in favour of another or others,
or reciprocally, to the fulfilment of a prestation to give, to do, or not to do.
Elements of a contract
Essential elements (without them a contract cannot exist)
Consent
Subject matter
Cause or consideration
Form (some contracts)
Delivery (some contracts)
Natural elements (those found in certain contracts and presumed to exist,

unless the contrary has been stipulated)
Warranty against eviction and against hidden defects in the contract of sale
Accidental elements (various particular stipulations that may be agreed

upon by the contracting parties in a contract. They are called accidental
because they may be present or absent, depending upon whether or not the
parties have agreed upon them)
Stipulation to pay credit
Stipulation to pay interest

Designation of the particular place for delivery or payment
Classification of contracts
Acc to perfection or formation
Consensual (perfected by mere consent; ex. Sale)
Real (perfected by delivery; ex. Depositum, pledge, commodatum)
Formal or solemn (where special formalities are essential before the

contract may be perfected; ex. A donation inter vivos of real property
requires for its validity a public instrument)
Note: Donation is sometimes considered a contract even if Art. 712 states
that a donation is a mode of transferring
of real rights.
Acc to cause or equivalence of the value of prestations
Onerous- where
consideration
there
is
an
interchange
of
equivalent
valuable
Gratuitous or lucrative- this is FREE, thus one party receives no equivalent

prestation except a feeling that one has been generous or liberal
Remunerative- (one where one prestation is given for a benefit or service
that had been rendered previously)
Acc to importance or dependence of one upon another
Principal- contract may stand alone by itself; ex. Sales, lease
Accessory- depends for its existence upon another contract; ex. Loan; here the
principal contract is one of loan.
Acc to the parties obligated
Unilateral- one of the parties has an oblig; ex. Commodatum (like the borrowing
of a bicycle)
Bilateral (or synalagmatic)- both parties are required to
render reciprocal prestatioons; ex. Sale

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

partnership, sale, agency, deposit
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Innominate (contraltos innominados)- not given any special

name; ex. do ut des meaning I give that you may give
Acc to the risk of fulfilment
Commutative- parties contemplate a real fulfilment, therefore, equivalent

values are given; ex. Sale, lease
Aleatory- fulfilment is dependent upon chance, thus the values may vary because
of the risk or chance
Acc to the time of performance of fulfilment
Executed- one contemplated at the time the contract is entered into, that is,
the oblig are complied with at this time; ex. Sale of property which has
already been delivered, and which has already been paid for
Executory- one where the prestations are to be complied with at some future
time; ex. A perfected sale, where the property has not yet been delivered and
where the price has not yet been given
Acc to subject matter
Contracts involving things (like sale)
Contracts involving rights or credits (provided these are transmissible, like a

contract of usufruct or assignment of credits)
Contracts involving services (like agency, lease of services, a contract of common
carriage, a contract of carriage <simple
carriage>)
Acc to obligs imposed and regarded by the law
Ordinary- like sale, the law considers this as an ordinary contract

Institutional- like the contract of marriage; the law considers marriage as an inviolable
social institution
Acc to the evidence required for its proof
Those requiring merely oral or parol evidence

Those requiring written proof; ex. Contracts enumerated
under the Stature of Frauds

Acc to the number of persons actually and physically entering into the contracts
Ordinary- where two parties are represented by different persons; ex. Sale
Auto-contracts- where only one person represents two opposite parties, but in
different capacities; ex. An agent
representing his principal sells a specific car to himself, as a buyer

Acc to the number of persons who participated in the drafting of the contract
Ordinary- (like a ordinary sale)
Contract of adhesion- (like one prepared by a real estate company for the
sale of real estate; or one prepared by an insurance company)
Acc to the nature of the contract
Personal
Impersonal
Stages of a contract
Preparation (or conception or Generacion)Here the parties are progressing with

their negotiations; they have not yet arrived at
any definite agreement, although there may have been a preliminary

offer and bargaining.
Perfection (or birth)Here the parties have at long last came to a definite
agreement, the elements of definite subject matter and valid cause have
been accepted by mutual consent.
Consummation (or death or termination)Here the terms of the contract are

performed, and the contract may be said to have been fully executed.
Parties to a contract
The law speaks of a meeting of minds between two persons. The meeting of the
minds really refers to two parties. If at the time of supposed perfection, one of
the parties had already previously died, there can be no meeting of the minds;
hence no contract.
Basic principles or characteristics of a contract
Freedom (or liberty) to stipulate (provided not contrary to law, morals,

good customs, public order, or public policy)
Obligatory force and compliance in good faith
Perfection by mere consent (consensuality) as a rule
Both parties are mutually bound
Relatively (Generally, it is binding only between the parties, their assign and
heirs)
Co-existence of a contract with a quasi-delict (tort)
The existence of a contract between the parties does not constitute a bar
to the commission of a tort by one against the other and the consequent
recovery of damages.
Legal effects of a contract
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The legal effects of a contract are determined by extracting the intention of the
parties from the language they used and from their contemporaneous and
subsequent acts. This principle gains more force when third parties are
concerned. To require such persons to go beyond what is clearly written in the
document is unfair and unjust. They cannot possibly delve into the
contracting parties minds and suspect that something is amiss when the
language of the instrument appears clear and unequivocal.
What is pacta sunt servanda?

Art. 1159. Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith. (1091a)
Latin: "agreements must be kept"
Obligations ex-contractu
o While obligs arising from a contract have the force of law between the
parties, this does not means that the law is inferior to contracts. This is so
because before a contract can be enforced, it must first be valid and it
cannot be valid if it is against the law. Moreover, the right of the parties to
stipulate is limited. Hence,
Art. 1306, CC says: the contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order or public policy.
Meaning of the article
o The article means that neither party may unilaterally and upon his own
exclusive volition, escape his obligs under the contract, unless the other party
assented thereto, or unless for causes sufficient in
law and pronounced adequate by a competent tribunal.

o Compliance in good faith means that we must not interpret not by the
letter that killeth but by the spirit that giveth life.
The right to enter into contracts
o The right to enter into lawful contracts constitute one of the liberties of the
people of the State. If that right be struck down or arbitrarily interfered
with, a substantial impairment of constitutional rights would result.
Nevertheless, in contracts where public interest is involved the
government has a right to intervene for the protection of the whole.
Differences between an obligation and a contract
o An oblig is the result of a contract. Hence, while a contract, if valid, always

results in obligs, not all obligs come from contracts. A
contract always presupposes a meeting of the minds, this is not

necessarily true for all kinds of oblig.
Be it not, however, from another viewpoint that a contract may itself be

the result of an oblig.
The so-called innominate contractsno express name
Do ut desI give that you may give

o Do ut faciasI give that you may do o Facio ut des
I do that you may give o Facio ut faciasI do that
you may do
Art. 1315. Contracts are perfected by mere consent, and from that moment
the parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law. (1258)
This article stresses the CONSENSUALITY OF CONTRACTS (or perfection by mere
consent)
How contracts are perfected
o Consensual contracts- by mere consent (this is the general rule);
ex. Contract of sale
o Real contracts- perfected by delivery; ex. Deposit and pledge o Formal
or solemn contracts- here a special form is required for
perfection; ex. A simple donation inter vivos of real property, to be valid
and perfected must be in a public instrument
Perfection of consensual contracts
o Consensual contracts are perfected from the moment there is
agreement (consent) on the subject matter and the cause or
consideration
Consequences of perfection
o
The parties are bound to the fulfilment of what has been expressly
stipulated and compliance thereof must be in good faith

o The parties are also bound to all the consequences which, acc to their
nature may be in keeping with good faith, usage and law.
Ang Yu vs. CA
Facts:
Plaintiffs (Ang Yu) are tenants or lessees of residential and commercial spaces
owned by defendants (Bobby Cu Unjieng) in Binondo, Manila.
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They have occupied said spaces since 1935 and have been religiously paying
the rental and complying with all the conditions of the lease contract.
Defendants informed plaintiffs that they are offering to sell the premises and are
giving them priority to acquire the same; that during the negotiations, Bobby
Cu Unjieng offered a price of P6-million while plaintiffs made a counter offer
of P5-million; that plaintiffs thereafter asked the defendants to put their offer
in writing to which request defendants acceded.
In reply to defendant's letter, plaintiffs wrote them asking that they specify the
terms and conditions of the offer to sell.
Since defendants failed to specify the terms and conditions of the offer to sell and
because of information received that defendants were about to sell the
property, plaintiffs were compelled to file the complaint to compel defendants
to sell the property to them.
Defendants filed their answer denying the material allegations of the complaint and
interposing a special defense of lack of cause of action.
The court dismissed the complaint on the ground that the parties did not agree
upon the terms and conditions of the proposed sale, hence, there was no
contact of sale at all.
The Cu Unjieng spouses executed a Deed of Sale transferring the property in
question to Buen Realty and Development Corporation. Buen Realty, as the new
owner of the subject property, wrote to the
lessees demanding the latter to vacate the premises. In its reply, it stated
that Buen Realty and Development Corporation brought the property
subject to the notice of lis pendens.
Issue: WON there was a perfected contract between Ang Yu and Cu Unjieng
Held:
Until the contract is perfected, it cannot, as an independent source of obligation,
serve as a binding juridical relation. In sales, particularly, to which the topic
for discussion about the case at bench belongs, the contract is perfected
when a person, called the seller, obligates himself, for a price certain, to
deliver and to transfer ownership of a thing or right to another, called the
buyer, over which the latter agrees.
When the sale is not absolute but conditional, such as in a "Contract to Sell"
where invariably the ownership of the thing sold is retained until the
fulfillment of a positive suspensive condition (normally, the full payment of
the purchase price), the breach of the condition will
prevent the obligation to convey title from acquiring an obligatory force.

An unconditional mutual promise to buy and sell, as long as the object is made
determinate and the price is fixed, can be obligatory on the parties, and
compliance therewith may accordingly be exacted.
An accepted unilateral promise which specifies the thing to be sold and the price
to be paid, when coupled with a valuable consideration distinct and separate
from the price, is what may properly be termed a perfected contract of option.
This contract is legally binding, and in sales, it conforms with the second
paragraph of Article 1479 of the Civil Code.
Even on the premise that such right of first refusal has been decreed under a
final judgment, like here, its breach cannot justify correspondingly an
issuance of a writ of execution under a judgment that merely recognizes its
existence, nor would it sanction an action for specific performance without
thereby negating the indispensable element of consensuality in the
perfection of contracts. 11 It is not to say, however, that the right of first
refusal would be inconsequential for, such as already intimated above, an
unjustified disregard thereof, given, for instance, the circumstances
expressed in Article 19 of the Civil Code, can warrant a recovery for damages.
The final judgment, it must be stressed, has merely accorded a "right of first
refusal" in favor of petitioners. The consequence of such a declaration entails
no more than what has heretofore been said. In fine, if, as it is here so
conveyed to us, petitioners are aggrieved by the failure of private
respondents to honor the right of first refusal, the remedy is not a writ of
execution on the judgment, since there is none to execute, but an action for
damages in a proper forum for the purpose.
Regino vs. Pangasinan
Facts:
Petitioner Khristine Rea M. Regino was a first year computer science student at
Respondent Pangasinan Colleges of Science and Technology (PCST). Reared in
a poor family, Regino went to college mainly through the financial support of
her relatives. During the second semester of school year 2001-2002, she
enrolled in logic and statistics subjects under Respondents Rachelle A.
Gamurot and Elissa Baladad, respectively, as teachers.
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Financially strapped and prohibited by her religion from attending dance

parties and celebrations, Regino refused to pay for the tickets.She was
then disallowed to take the examinations.
Petitioner filed a Complaint for damages against PCST, Gamurot and Baladad.
RTC dismissed the Complaint for lack of cause of action.
Issue: WON she has a cause of action against PCST
Held:
In Alcuaz v. PSBA, the Court characterized the relationship between the school
and the student as a contract, in which "a student, once admitted by the
school is considered enrolled for one semester." Two years later, in Non v.
Dames II, the Court modified the "termination of contract theory" in Alcuaz by
holding that the contractual relationship between the school and the student
is not only semestral in duration, but for the entire period the latter are
expected to complete it." Except for the variance in the period during which
the contractual relationship is considered to subsist, both Alcuaz and Non
were unanimous in characterizing the school-student relationship as
contractual in nature.
The terms of the school-student contract are defined at the moment of its
inception -- upon enrolment of the student. Standards of academic
performance and the code of behavior and discipline are usually set forth in
manuals distributed to new students at the start of every school year. Further,
schools inform prospective enrollees the amount of fees and the terms of
payment.
In the present case, PCST imposed the assailed revenue-raising measure
belatedly, in the middle of the semester. It exacted the dance party fee as a
condition for the students' taking the final examinations, and ultimately for its
recognition of their ability to finish a course. The fee, however, was not part of
the school-student contract entered into at the start of the school year. Hence,
it could not be unilaterally imposed to the prejudice of the enrollees.
Such contract is by no means an ordinary one. In Non, we stressed that the
school-student contract "is imbued with public interest, considering the high
priority given by the Constitution to education and the grant to the State of
supervisory and regulatory powers over all educational institutions".
Non vs. Dames

Facts:
Petitioner students of Mabini Colleges were not allowed to re-enroll because they
participated in student mass actions against their school the preceding
semester.
Petitioners continued their rally picketing, even though without any renewal
permit, physically coercing students not to attend their classes, thereby
disrupting the scheduled classes and depriving a great majority of students of
their right to be present in their classes
The lower court considered that in signing their enrollment forms, they waived
the privilege to be re-enrolled. The Mabini College reserves the right to deny
admission of students xxx whose activities unduly disrupts or interfere with
the efficient operation of the college xxx.
Judge Dames decision considering these facts said that what the students
assert is a mere privileges not a legal right. Respondent Mabini College is
free to admit or not to admit the petitioners for re-enrollment in view of the
academic freedom enjoyed by the school.
Issue: WON schools can deny admission to students on the ground of
termination of contract
Held:
In Alcuaz, it was said that enrollment is a written contract for one semester
and contracts are respected as the law between the contracting parties.
At the end of each semester, the contract is deemed terminated.
However, this case is not a simple case about a school refusing re-admission.
The refusal to readmit or to re-enroll petitioners was decided upon and
implemented by school authorities as a reaction to student mass actions
Permissible limitations on student exercise of constitutional rights within the
school. Constitutional freedom of free speech and assembly also are not
absolute. However, imposition of disciplinary sanctions requires observance of
procedural due process and penalty imposed must be proportionate to the
offense committed. (procedural due process: right to be informed in writing,
right to answer the charges, right to be informed of the charges against them,
right to adduce evidence, and for this evidence to be duly considered)
The nature of contract between a school and its students is not an ordinary
contract but is imbued with public interest. The Constitution
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allows the State supervisory and regulatory powers over all educational
institutions. According to par 107 and 137 of the respondent schools
manual, a student is enrolled not just for one semester but for the entire
period necessary for the student to complete his/her course. BP Blg. 232
gives the students the right to continue their course up to graduation.
School said most of them had failing grades anyway. In answer students say they
are graduating students and if there are any deficiencies these do not
warrant non-readmission. Also there are more students with sores
deficiencies who are re-admitted. And some of the petitioners had no failing
marks.
The court held that the students were denied due process in that there was no
due investigation. In fact it would appear from the pleadings that the
decision to refuse them re-enrollment because of failing grades was a mere
afterthought.
Discipline may be warranted but penalty should be commensurate to the
offense committed with due process.
Dispositive: Petition GRANTED. Orders of RTC ANNULED. Mabini College ordered to
readmit and allow reenrollment of petitioners, without prejudice to its taking the
appropriate action, if shown that they have failed to satisfy the school's prescribed
academic standards.
What is freedom of contract?
Art. 1306. The contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy.
(1255a)
Principle of Freedom
o The free entrance into contracts generally without restraint is one of the
liberties guaranteed to the people. However, the constitutional prohibition
against impairment of contractual obligs refers only to contracts which are
not legal, not to void or inexistent ones.
Limitations on the nature of the stipulations o The law
o Moral
o Good customs
o Public order
Public policy
Limitations imposed by law
The contractual stipulations must not be contrary to mandatory

and prohibitive laws. Directory and suppletory laws need not be complied
with, since these are either discretionary or merely supply the omissions of
the parties.
Contracts must respect the law, for the law forms part of the contract.
Indeed the provisions of all laws are understood to be incorporated in the
contract.
Limitations imposed by morals
Morals deal with right and wrong and with human conscience.
Limitations imposed by good customs
Good customs are those that have received for a period time practical and
social confirmation. Acc to the Code Commission, good customs and morals
overlap each other; but sometimes they do not.
Limitations imposed by public order
Public order deals with the public weal and includes public safety.
Limitations imposed by public policy
Public policy, which varies according to the culture of a particular

country, is the public social and legal interest in private law. It is said to be
the manifest will of a State.
A contract is contrary to public policy if it has a tendency to injure the public,

is against the public good or contravenes some established interest of society
or is inconsistent with sound policy and good morals or tends clearly to
undermine the security of individuals rights.
Designation of the name of a contract
The parties generally may agree on any contract but the name
that they give to it should not be controlling for a contract is what the parties
intended it to be not what they call it.
This is because a contract must be judged by its character, its nature and its
legal qualifications. The courts will therefore look not so much at the form of the
transaction as at its substance.
Section 10, Art. III, 1987 Constitution. No law impairing the obligation of
contracts shall be passed.
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Republic vs. PLDT

Facts:
PLDT contracted an agreement with RCA Communications for connecting calls to
and from RCA to Philippines and vice versa. Later, the agreement extended
to radio and telephone messages to and from European and Asiatic
countries.
Later, PLDT made known the termination of the agreement, complying with the
24-month notice agreement.
Created in 1947, the Bureau of Telecommunication set up a Government
telephone system by renting trunk lines from PLDT. In doing so, the Bureau
has agreed to abide by the rules and regulations of PLDT, which includes the
prohibition for public use that which was furnished for private use. In 1948,
the Bureau extended service to the general public.
In 1958, after the termination of the contract of RCA and PLDT, the Bureau
entered into an agreement with RCA for a joint overseas telephone service.
PLDT then complained that the Bureau was violating their agreement as the
latter was using PLDT's trunk lines for public use and not just private. PLDT
then gave notice that if these actives continued they would be disconnecting
the service. When no reply was received, PLDT pulled the plug on the Bureau.
The Bureau proposed an interconnecting agreement but the negotiations
failed.
The Bureau prayed for a judgment commanding PLDT to execute an agreement
allowing it to use PLDT's facilities, as well as a writ of preliminary injunction
to restrain PLDT from severing existing as well as restoring those already
severed.
Lower court directed PLDT to reconnect. PLDT filed its answer denying any obligation
it has to the Bureau, as well as assailing the jurisdiction of the CFI. PLDT also
claimed that the Bureau was engaged in commercial telephone operations which
was in excess of its authority.
Court then said that it could not compel the parties to enter into agreement; that
under EO 94, establishing the Bureau, said Bureau is not limited to government
services, nor was it guilty of fraud, abuse,
of misuse of PLDT's poles, as well as declared the injunction permanent.
Complaint was dismissed, hence this appeal.
Issue: WON the parties could be compelled to enter into a contract

Held:
The parties cannot be coerced to enter into a contract where no agreement had
between them as to the principal terms and conditions
of the contract. Freedom to stipulate such terms and conditions is of the

essence of our contractual system, and by express provision of the statute, a
contract may be annulled if tainted by violence, intimidation or undue
influence.
But the court has apparently overlooked that while the Republic may not compel
the PLDT to celebrate a contract with it, Republic may, in the exercise of the
sovereign power of eminent domain, require the telephone company to
permit interconnection of the government telephone system and that of the
PLDT, as the needs of the government service may require, subject to the
payment of just compensation to be determined by the court.
However, no cogent reason appears why the said power may not be availed of to
impose only a burden upon the owner of condemned property, without loss of
titled and possession. The beneficiary of the interconnecting service would be
the users of both telephone systems, so that the condemnation would be for
public use.
Dispositive: Decision of CFI AFFIRMED except in so far as it dismisses the petition of
the Republic to compel the PLDT to continue servicing the Government telephone
system upon such terms, and for a compensation.
Ollendorf vs. Abrahamson

Facts:
Plaintiff Ollendorf and defendant Abrahamson made and entered into Contract of
Agreement. The first part hereby agrees to employ the defendant and the
party of the second obliges himself to work for the plaintiff within the period
of two years.
Defendant obligates and binds himself to devote his entire time, attention,
energies and industry on the promotion of the furtherance of the business
and interest of the party. Failure on the said duty shall entitle the plaintiff to
discharge and dismiss the defendant.
The second part of the contract further binds the party that he will not enter
whether directly or indirectly to engage in a similar or competitive business.
Under the term of this agreement, the plaintiff left the employment due to
illness and went to U.S.
Some months after his departure for the US, defendant returns to Manila as the
Manager of the Philippine Underwear Company. Defendant admits that both
firms turn out the same class of goods
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and those they are exported to the same market. The only difference
between the two companies is the method of doing the finishing work- the
manufacture of the embroidered material into finished garments.
Ollendorf commenced the action to prevent, by injunction, any further breach of that
part of defendant's contract of employment by plaintiff.
Lower court granted a preliminary injunction.

Issue: WON the contract of employment is void
Held:
A contract by which an employee agrees to refrain for a given length of time
after the expiration of the term of his employment, from engaging in a
business competitive with that of his employer is not void as being restraint
of trade, if the restraint imposed is no greater in restraint imposed is no
greater than that which is necessary to afford a reasonable protection to the
employer.
The only limitation upon the freedom of contractual agreement is that the pacts
established shall not be contrary to law, morals, or public order. The industry
of counsel has failed to discover any direct expression of the legislative will
which prohibits such a contract as that before us. It certainly is not contrary to
any moral precept.
The validity of restraints upon trade or employment is to be determined by the
intrinsic reasonableness of the restrictions in each case, rather than by any
fixed rule, and that such restrictions may be upheld when not contrary to the
public welfare and not greater than is necessary to afford a fair and
reasonable protection to the party in whose favor it is imposed.
The restraint imposed upon defendant by his contract is not unreasonable. The
public policy which allows a person to obtain employment on certain terms
understood by and agreed to by him, and to repudiate his contract,
conflicts with and must, to avail the defendant, for some sufficient reason,
prevail over, the manifest public policy, which as a rule holds to his bond.
Star Paper vs. Simbol
Facts:
Respondents Simbol, Comia and Estrella were all regular employees of the
company.
Simbol met Alma, also an employee of the company. When they got married,
Simbol resigned pursuant to the company policy of the ban of spouses
working in the same company.
Comia also resigned after being advised of the policy.
Estrella got herself pregnant by Zuniga, a co-worker who was married. She opted
to resign from the company.
The respondents each signed a Release and Confirmation Agreement. They
stated that they have no money and property accountabilities in the
company and that they release the latter of any claim or demand of
whatever.
Respondents offer a different version of their dismissal. Simbol and Comia allege
that they did not resign voluntarily; they were compelled to resign in view of
an illegal company policy.
Estrella alleged that Zuniga misrepresented himself himself as a married but
separated man. After she got pregnant, she discovered that he was not
separated. She then severed her relationship with him to avoid dismissal. She
met an accident which required her to recuperate for 21 days. When she
returned to work, she was denied entry. She was directed to proceed to the
personnel office where one of the staff handed her a memorandum stating
that she is dismissed for immoral conduct.
Respondents filed a complaint for unfair labor practice, constructive dismissal,
separation pay and attorney's fees.
The labor arbiter dismissed the complaint for lack of merit.
NLRC affirned the decision.
CA reversed decision of NLRC.
Issue: WON the policy of the employer banning spouses from working in the same
company violates the rights of the employee
Held:
The policy of petitioners prohibiting close relatives from working in the same
company takes the nature of an anti-nepotism employment policy.
Unlike in our jurisdiction where there is no express prohibition on marital
discrimination, there are 20 statutes in the US prohibiting marital
discrimination. In other statutes, they rule that unless the employer can
prove that the reasonable demands of the business require a distinction
based on marital status and there is no better available or acceptable
policy which would better accomplish the business purpose, an employer
may not discriminate against an
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employee based on the identity of the employer's spouse. This is known

as the bonafide qualification exception.
We do not find a reasonable business necessity in the case at bar. Petitioners'
sole contention that the company did not just want to have two or more of its
employee related between the third degree by affinity/consanguinity is lame.
It is significant to note that respondents were hired after they were found fit
for the job, but were asked to resign when they married a co-employee.
Petitioners failed to establish that the marriage of its employees could be
detrimental to its business operations.
The failure of petitioners to prove a legitimate business concern in imposing the
questioned policy cannot prejudice the employee's right to be free from
arbitrary discrimination based upon stereotypes of married persons working
together in one company.
The absence of a statute expressly prohibiting marital discrimination in our
jurisdiction cannot benefit the petitioners. The protection given to labor in our
jurisdiction is vast and extensive that we cannot prudently draw inferences
from the legislature's silence that married persons are not protected under our
Constitution and declare valid a policy based on a prejudice or stereotype.
Heirs of Espiritu vs. Landrito
Facts:
Spouses Landrito loan from Spouses Espiritu the amount of P350,000 payable in 3
month. To secure the loan, the spouses Landrito executed a mortgage over a
lot in favor Spouses Espiritu. From the P350,000 that the Landritos were
supposed to receive P17,500 was deducted as interest for the first month
which was equivalent to 5% of the principal debt and P7,500 was further
deducted as service fee.
After three months, when the debt became due and demandable, the Spouses
Landritos were unable to pay the principal and had not been able to make
any interest payments other than the amount initially deducted from the
proceeds of the loan.
The loan agreement was extended and was restructured in such a way that the
unpaid interest became part of the principal, thus increasing the principal to
P385,000.
Due to the continued inability of the Spouses Landritos to settle their obligations
with the Spouses Espiritu, the loan was renewed, three more times until the
principal reached P874,125.
The debt remained unpaid and as a consequence the Spouses Espiritu foreclosed
the mortgaged property. During the auction sale, the property was sold to the
Spouses Espiritu as the lone bidder.
The Spouses Landrito failed to redeem the property although they alleged that
they negotiated for the redemption of the property. While the negotiated price
for the land started at P1,595,392, it was allegedly increased by the Spouses
Espiritu from time to time. Spouses Espiritu increased the amount demanded
to P2.5M and gave them until July, 1992 to pay said amount. However, they
found out that on June 24, 1992, the spouses Espiritu had already executed an
Affidavit of Consolidation of Ownership and registered the mortgged property
in their name and that the TCT was already issued in the name of Spouses
Espiritu.
Spouses Landrito, represented by their son Zoilo Landrito, filed an action for
annulment or reconveyance of title with damages against Spouses Espiritu.
Trial court dismissed the complaint and upheld the validity of the foreclosure
sale.
CA reversed the decision. Hence, this instant petition.
Issue: WON the interest rates imposed are unreasonable
Held:
The real Estate Mortgage executed between the parties specified that the
"principal indebtedness shall earn interest at a legal rate". The agreement
contained no other provision on interest or any fees or charges incident to the
debt. The total interest and charges amounting to P559,125 on the original
principal of P350,000 was accumulated two years and one month. The records
fail to show any computation on how much interest was charged and what
other fees were imposed. Not only did lack of transparency that characterized
the agreements, the interest rates and the service charged imposed, at an
average 6.39% per month are excessive.
The omission of the Spouses Espiritu in specifying in the contract the interest
rate which was actually imposed, in contravention of the law, manifested bad
faith.
Stipulation authorizing iniquitous or unconscionable interests are contrary to
morals if not against the law. The debt due is to be considered without the
stipulation of the excessive interest. A legal interest of 12% per annum will
be added in place of the excessive interest formerly imposed.
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Since the Spouses Landrito, the debtors, were not given an opportunity to settle
their debt, at the correct amount and without the iniquitous interest imposed,
no foreclosure proceedings may be instituted. The foreclosure sale conducted
upon their failure to pay should be nullified since the amount demanded was
overstated.
Macalinao vs. BPI

Facts:
Macalinao was an approved cardholder of BPI Mastercard. She made some
purchases through the use of the said credit card and defaulted in paying for
said purchases.
She subsequently received a demand letter from BPI.
Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit
and BPI Mastercard, the charges or balance remaining unpaid after the payment
due date indicated on the monthly Statement of Accounts shall bear interest at
the rate of 3% per month and an additional penalty fee equivalent to another 3%
per month.
For failure of Macalinao to settle her obligations, BPI filed with the MeTC a
complaint for a sum of money against her and her husband. In said complaint,
BPI prayed for the payment of the amount of P154,608.78 plus 3.25% finance
charges and late payment charges equivalent to 6% of the amount due.
For failure to file their answer, MeTC ruled in favor of BPI.
Macalinao appealed in the RTC which affirmed the decision. CA also affirmed,
hence this petition.
Issue: WON the stipulated interest rate was unscionable, and iniquitous
Held:
In its complaint, BPI originally imposed the interest and penalty charges at the
rate of 9.25% per month or 111% per annum. This was declared
unconscionable by the lower courts for being clearly excessive and was thus
reduced to 2% per month or 24% per annum. CA modified to 3% per month
and 36% per annum.
The interest rate and penalty charge of 3% per month should be equitably
reduced to 2% per annum.
Even if the Terms and Conditions contain the stipulated 3% interest rate, such
stipulation is void for being contrary to morals, if not against the law. Since
the stipulation on the interest rate is void, it is as if there was no express
contract. Hence, the court may reduce the interest as reason and equity
demand.
The records would reveal that Macalinao made partial payments to BPI, in
addition to the unconscionable interest rate. Under these circumstances, the
Court finds it equitable to reduce the interest rate in line with the prevailing
jurisprudence and in accordance with Art. 1229 of the Civil Code.
What are the kinds of contracts?
Art. 1307. Innominate contracts shall be regulated by the stipulations of
the parties, by the provisions of Titles I and II of this Book, by the rules
governing the most analogous nominate contracts, and by the customs of
the place. (n)
Nominate
Innominateno express name
o Governing rules for innominate contracts
Stipulations
Titles I and II of Book IV- Obligations and Contracts
Rules on the most analogous nominate contracts
Customs of the place
4 kinds of innominate contracts
Do ut des (I give that you may give)
Do ut facias (I give that you may do)

Facio ut des (I do that you may give)
Facio ut facias (I do that you may do)
Consensual
This article stresses the CONSENSUALITY
perfection by mere consent)
How contracts are perfected
o
OF
CONTRACTS
(or
Consensual contracts- by mere consent (this is the general rule); ex.

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

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

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

(consent) on the subject matter and the cause or
consideration
Consequences of perfection
The parties are bound to the fulfilment of what has been expressly
stipulated and compliance thereof must be in good faith
The parties are also bound to all the consequences which, acc to their
nature may be in keeping with good faith, usage and law.
Art. 1475. The contract of sale is perfected at the moment there is a

meeting of minds upon the thing which is the object of the contract and
upon the price.
From that moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of contracts.
(1450a)
Solemn
Art. 1356. Contracts shall be obligatory, in whatever form they may have
been entered into, provided all the essential requisites for their validity are
present. However, when the law requires that a contract be in some form in
order that it may be valid or enforceable, or that a contract be proved in a
certain way, that requirement is absolute and indispensable. In such cases,
the right of the parties stated in the following article cannot be exercised.
(1278a)
Generally, form is not required- It is enough that there be consent, subject
matter, and cause. This rule applies however to consensual contracts.
Formal contracts (Solemn contracts) require a certain specified form, in

addition to consent, subject matter and cause. Ex. Donation must be in
a public instrument
Real contracts require delivery to be valid as a real contract even as
between the parties, in addition to consent, subject matter and cause.
When form is important
For validity- this is true in formal or solemn contracts

For enforceability- this is true for the agreements enumerated under the
Statute of Frauds, but of course this requirement may be waived by
acceptance of benefits (partial) or by failure to object to the presentation
of oral (parol) evidence.
For convenience- this is true for the contracts enumerated for example under Art.
1385, CC.
Example of formal contracts
If the form is not complied with, Art. 1457 cannot be availed of.
Donations of real property- require a public instrument
Donations of personal property- require a written contract or document if the

donation exceeds P500
Stipulation to pay interest on loans, interest for the use of the money- must be
in writing
Transfer of large cattle- requires the transfer of the certificate of registration
Sale of land thru an agent- authority of the agent must be in writing
Contracts of antichresis- principal loan and interest if any must be
specified in writing
Art. 1357. If the law requires a document or other special form, as in the
acts and contracts enumerated in the following article, the contracting
parties may compel each other to observe that form, once the contract has
been perfected. This right may be exercised simultaneously with the action
upon the contract. (1279a)
Right of one party to compel the other to execute the necessary form
The article applies only when form is needed only for convenience, not
for validity or enforceability
In other words, before the contracting parties may be compelled to

execute the needed form, it is essential that the contract be:
Perfected
Enforceable under the State of Frauds
Art. 1358. The following must appear in a public document:
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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;
The cession, repudiation or renunciation of hereditary rights or of those of
the conjugal partnership of gains;
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;
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)
Form for convenience
The necessity for the public document in the contract enumerated here
is only for convenience, not for its validity or enforceability.
Formal requirements are for the benefit of 3 rd parties. Noncompliance does not adversely affect the validity of the contract
not the contractual rights and obligs of the parties.

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

of another;
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
five
pesos, unless
a price not less than
hundred 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
entry is made by the auctioneer
made by auction and
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.
The Statute of Frauds
Purpose- to prevent fraud and not to encourage the same. Thus, certain
agreements are required to be in writing so that they may be enforced.
How the Statue of Frauds prevents fraud
Since memory is many times unreliable, oral agreements may

sometimes result in injustice. To aid human memory, to prevent the
commission of injustices due to faulty memory, to discourage
intentional misrepresentations, are the principal aims of the Statute of
Frauds.
Some basic and fundamental principles concerning the Statue of Frauds

(General Rules of Application)
The Statute of Frauds applies only to executory contracts (contracts

where no performance has yet been made) and not partially or
completely executed (consummated contracts). If oral evidence will
not be allowed to prove an agreement where one party has performed
his oblig, unfairness would result. Indeed, oral or parol evidence may
be introduced to prove partial performance. If documentary or written
evidence would still be required for the proof of partial performance,
the precise evil sought to be avoided by the Statute of Frauds would
be
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present, namely one who has received some benefits would be allowed to
defraud the grantor thereof.
The Statute of Frauds cannot apply if the action is neither for damages because of
the violation of an agreement nor for the specific performance of said agreement.
The Statute of Frauds is exclusive, that is, it applies only to the agreements or
contracts enumerated therein.
The defense of the Statute of Frauds may be waived.

The Statute of Frauds is a personal defense, that is, a contract infringing it
cannot be assailed by 3rd persons.
Contracts infringing the Statute of Frauds are not void; they are merely
unenforceable.
The Statute of Frauds is a Rule of Exclusion, i.e., oral evidence might be
relevant to the agreements enumerated therein and might therefore be
admissible were it not for the fact that the law or the statute excludes said
oral evidence.
The Statute of Frauds does not determine the credibility or weight of
evidence. It merely concerns itself with the admissibility thereof.
The Statute of Frauds does not apply if it is claimed that the contract does
not express the true agreement of the parties. As long as the rule or real
agreement is not covered by the Statute of Frauds, it is proved by oral
evidence.
Express trust concerning real property
It will be observed that while the Statute of Frauds makes no mention of it, still
under Art. 1443, no express trusts concerning an immovable or any interest
therein may be proved by parol (oral) evidence. Hence, we can safely
conclude that the Statute of Frauds also applies to such express
(conventional) trust.
Meaning of formal requirements of sufficient memorandum
Our SC has held that no particular form of language or instrument is necessary to

constitute a memorandum or note in writing under the Statute of Frauds; any
document or writing under the contract or for another purpose, which complies
with all the statutory requirements of the statute as to contents and signature,
may be considered as sufficient memorandum or note.
Thus, the memorandum may be written in pencil or in ink; it may

be filled in or in printed form. It does not have to be contained in a
single instrument, nor, when contained in two or more papers,
need each paper be sufficient as to contents and signature to
satisfy the Statute. If there are two or more writings which are
properly connected, they may be considered together; omissions
in one may be supplied or clarified by the other, and their
sufficiency will depend as to WON when construed together, they
are able to satisfy the requirement of the Statute of Frauds as to
signature.
Rule on authority of the agent to sell land or any interest therein
Under the CC, when a sale of a piece of land or any interest

therein is through an agent, the authority of the latter shall be in
writing; otw, the sale shall be void (not unenforceable).
Oral promise to put in writing
An oral promise to put in writing an agreement that is covered

by the Statute is itself unenforceable.
The 3rd kind of unenforceable contract
The 3rd kind of unenforceable contract is one where both parties

are incapacitated to give consent.
Real
Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are
not perfected until the delivery of the object of the obligation. (n)
Perfection of real contracts
Real contracts require consent, subject matter, cause or consideration

and DELIVERY.
Real contracts referred to are
Deposit
Pledge
Commodatum- a loan where the identical object must be
returned.
Future real contracts as consensual contracts
72 of 106
A contract to make a deposit, to make a pledge, or to make a
commodatum is a consensual contract. After delivery, the contract

becomes a real contract.
The contract of carriage
The contract to carry (at some future time) is consensual and is perfected
by mere consent.
The contract of carriage is a real contract, for not until the carrier is
actually used can we consider the contract perfected, that is, til the
moment of actual use, the carrier cannot be said to have already
assumed the oblig of a carrier.
Art. 1962. A deposit is constituted from the moment a person receives a

thing belonging to another, with the obligation of safely keeping it and of
returning the same. If the safekeeping of the thing delivered is not the
principal purpose of the contract, there is no deposit but some other
contract. (1758a)
Art. 1963. An agreement to constitute a deposit is binding, but the deposit
itself is not perfected until the delivery of the thing. (n)
Art. 2085. The following requisites are essential to the contracts of pledge
and mortgage:
That they be constituted to secure the fulfillment of a principal obligation;
That the pledgor or mortgagor be the absolute owner of the thing pledged
or mortgaged;
That the persons constituting the pledge or mortgage have the free
disposal of their property, and in the absence thereof, that they be legally
authorized for the purpose.
Third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property. (1857)
Art. 2087. It is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor. (1858)
Art. 2088. The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to the contrary is
null and void. (1859a)
Art. 2093. In addition to the requisites prescribed in Article 2085, it is
necessary, in order to constitute the contract of pledge, that the thing
pledged be placed in the possession of the creditor, or of a third person by

common agreement. (1863)
Art. 1934. An accepted promise to deliver something by way of
commodatum or simple loan is binding upon parties, but the commodatum
or simple loan itself shall not be perfected until the delivery of the object of
the contract. (n)
Art. 1935. The bailee in commodatum acquires the used of the thing loaned
but not its fruits; if any compensation is to be paid by him who acquires the
use, the contract ceases to be a commodatum. (1941a)
Ang Yu, supra
BPI Investment Corporation vs. CA
Facts:
Frank Roa obtained a loan from Ayala Investment and Development Corporation
(AIDC), predecessor of BPIIC for the construction of a house. Said house and
lot were mortgaged to AIDC to secure the loan.
Roa sold the house and lot to private respondents ALS and Litonjua for P850,000.
They paid P350,000 in cash and assumed the P500,000 balance of Roa's
indebtedness with AIDC. The latter, however was not willing to extend the old
interest rate to private respondents and proposed to grant them a new loan.
On March 1981, private respondents executed a mortgage deed containing
the AIDC stipulations.
ALS and Litonjua updated Roa's arrearages by paying BPIIC reducing ROA's
principal balance to P457,204 which, in turn, was liquidated when BPIIC
applied thereto the proceeds of private respondents' loan of P500,000.
On September 13, 1982, BPIIC released to private respondents P7,146.87,
purporting to be what was left of their loan after full payment of Roa's
loan.
BPIIC instituted foreclosure proceedings against private respondents on the ground
that they failed to pay mortgages indebtedness.
ALS and Litonjua filed civil case against BPIIC maintaining that they should not
be made to pay the amortization before the actual release of the P500,000
loan in August and September 1982.
Lower court rendered judgment in favor of ALS and Litonjua.
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CA affirmed decision, hence this petition. Issue: WON a

contract of loan is a consensual contract
Held:
A loan contract is not a consensual contract but a real contract. It is perfected
only upon the delivery of the object of the contract.
A perfected consensual contract can give rise to an action for damages. However,
said contract does not constitute the real contract of loan which requires the
delivery of the object of the contract for its perfection and which gives rise to
obligations only on the part of the borrower.
In the case, the loan contract between BPI and ALS & Litonjua was perfected only
on Sept. 1982, the date of the second release of the loan. Following the
intentions of the parties on the commencement of the monthly amortization
private respondents' obligation to pay commenced only on Oct. 13, 1982, a
month after the perfection of the contract.
The decision binds the parties only after it is made known to both.
Effect of stipulation regarding arbitration
o If in a contract, there is a stipulation for arbitration and one party, in case
of dispute, refuses to submit the matter to arbitration, the aggrieved
party whose goes to court to request it to order the other party to submit
the matter to arbitration, should not anymore present to the court the
merits of the disputed matters. The decision on said merits will be up to
the arbitrator. The only function of the Court in this case would be to
decide WON the parties should proceed to arbitration.
Art. 1182. When the fulfillment of the condition depends upon the sole will
of the debtor, the conditional obligation shall be void. If it depends upon
chance or upon the will of a third person, the obligation shall take effect in
conformity with the provisions of this Code. (1115)
What is the principle of mutuality?

Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them. (1256a)
Mutuality of contracts
o Both parties are bound. The principle is based on the essential equality
of the parties. It is repugnant to bind one party and yet leave the other
free.
Consequences of mutuality
o A party cannot revoke or renounce a contract without the consent of the other,
nor can it have it set aside on the ground that he had
made a bad bargain.

o When the fulfilment of the condition depends upon the sole will of the
debtor, the conditional oblig is void if the condition is suspensive. If
resolutory, the oblig is valid. Hence, it is all right for the contract to
expressly give to one party the right to cancel the same. This is because
when the contract is thus cancelled, the agreement is really being
fulfilled.
Art. 1309. The determination of the performance may be left to a third

person, whose decision shall not be binding until it has been made known
to both contracting parties. (n)
Who can demand enforcement of contract?

Art. 1311. Contracts take effect only between the parties, their assigns and
heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of the property he
received from the decedent.
If a contract should contain some stipulation in favor of a third person, he
may demand its fulfillment provided he communicated his acceptance to
the obligor before its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person. (1257a)
Principle of relativity
o Contracts are generally effective only between the parties, their assigns
and their heirs.
Exceptions to the principle of relativity (refer to Paras p576-583)
o Where the oblig arising from the contract are not transmissible by
their nature, by stipulation or by provision of law.
o Where there is a stipulation pour autrui (a stipulation in favour of
a third party)
o Where a 3rd person induces another to violate his contract.
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Where, in some cases, 3rd persons may be adversely affected by a

contract where they did not participate.
Mandarin villa can be faulted for it's cashier's refusal to

accept de Jesus' BANKARD credit card. Mandarin Villa is
affiliated with BANKARD as shown in the Agreement entered
into by petitioner and BANKARD.
Where the law authorizes the creditor to sue on a contract entered

into by his debtor.
Discussion of the general rule
Contracts take effect only between the parties, their assigns and
heirs and therefore, generally, its terms cannot determine the rights of 3 rd
persons. The revocation, for example of a deed of sale is not conclusive on
those individuals who are parties thereto. However, a person who takes
advantage of a contract, although he
is not a signatory thereto, can properly be bound by the terms thereof. He

cannot take advantage of a contract when it suits him to do so and reject
its provision when he thinks otw.
Reasons for the rule Res inter alios acta aliis neque nocet prodest. (The
act, declaration or omission of another, cannot affect another, except as
otw provided by law or agreement).
Strangers, thereof, cannot generally demand the enforcement of a

contract.
Heirs are bound to respect the contracts entered into by their
predecessors in interest in view of their privity of interest with such
predecessor.
o
He must be a compulsory or forced heir for the simple reason that the
deceased could do with the property whatever he desired as long as
he respects the rights of his compulsory heirs.
Can 3rd parties have personality to assail a contract?

Art. 1313. Creditors are protected in cases of contracts intended to defraud
them. (n)
This article represents another instance when an outsider can in a
sense interfere with anothers contract.
What is a stipulation pour autrui?
Art. 1311. Contracts take effect only between the parties, their assigns and
heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of the property he
received from the decedent.
If a contract should contain some stipulation in favor of a third person, he

may demand its fulfillment provided he communicated his acceptance to
the obligor before its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person. (1257a)
Mandarin Villa vs. CA
Facts:
Clodualdo de Jesus, a practicing lawyer and businessman, hosted a dinner for his
friends at the petitioner's restaurant the Mandarin Villa Seafoods Village.
After dinner the waiter handed to him the bill in the amount of P2,658.50.
Private respondent offered to pay the bill through his credit card issued by
BANKARD. This card was accepted by the waiter who immediately proceeded to
the restaurant's cashier for card verification. Ten minutes later, however, the
waiter returned and audibly informed private respondent that his credit card had
expired.
Private respondent remonstrated that said credit card had yet to expire on
September 1990, as embossed on its face.
Private respondent and two of his guests approached the restaurant's cashier
who again passed the credit card over the verification computer. The same
information was produced, i.e., CARD EXPIRED. Private respondent and his
guests returned to their table and at this juncture, Professor Lirag, another
guest, uttered the following remarks: "Clody, may problema ba? Baka
kailangang maghugas na kami ng pinggan?"
Private respondent left the restaurant and got his BPI Express Credit Card from
his car and offered it to pay their bill. This was accepted and honored by the
cashier after verification.
De Jesus filed a suit for damages.
Lower Court renderd decision directing Mandarin Villa and BANKARD to pay
jointly and severally.
Upon appeal, CA found Mandarin solely responsible for damages. Issue: WON de Jesus is
entitled for damages
Held:
75 of 106
Petitioners are not parties to the contract of sale between

their principals and NHA. They are mere agents of the
owners of the land subject of the sale. As agents, they
only render some service or do something in
representation or on behalf of their principals. The
rendering of such service did not make them parties to the
While private respondent may not be a party to the agreement, a stipulation in

the said agreement conferred a favor upon the private respondent, a holder
of the credit card. This stipulation is a stipulation pour autrui. Respondent
may demand its fulfillment provided his acceptance to the petitioner before
its revocation. Private respondent's offer to pay by means of BANKARD credit
card constitutes not only an acceptance but also an explicit communication of
his acceptance to the obligor.
Also, the record shows that petitioner posted a logo inside Mandarin Seafood
Village stating that "Bankard is accepted". This representation is conclusive
upon the petitioner which it cannot deny or disprove as against the private
respondent, the party relying thereon. Petitioner, therefore, cannot disclaim its
obligation to accept private respondent's BANKARD credit card without
violating the equitable principle of estoppel.
Uy vs. CA
Facts:
Petitioners William Uy and Rodel Roxas are agents authorized to sell 8 parcels of
land by the owners. They offered to sell the lands to National Housing
Authority to be utilized and developed as a housing project.
NHA Board passed Resolution No. 1632 approving acquisition of said lands. The
parties executed a series of Deeds of Absolute Sale. Of the 8 parcels of lands,
only 5 were paid for by the NHA because of a report by DENR that the
remaining area is not suitable for a housing project.
NHA issued another resolution cancelling the sale over the 3 parcels of land.
Petitioners filed before RTC a Complaint for Damages against NHA and its General
Manager Balao.
RTC rendered a decision declaring the cancellation of the contract to be
justified.
CA reversed decision.
Issue: WON the agents are real parties-in-interest
Held:
of sale executed in behalf of the latter. Since a contract may be violated only by
the parties thereto as against each other, the real parties-in-interest, either as
plaintiff or defendant, in an action upon that contract must, generally, either be
parties to said contract.
Also, petitioners have not shown that they are assignees of their principals to the
subject contracts. While they alleged that they made advances and that they
suffered loss of commissions, they have not established any agreement
granting them the right to receive payment and out of the proceeds to
reimburse for advances and commissions before turning the balance over to
the principals.
It does not appear that petitioners are beneficiaries of a stipulation pour autrui
under the second paragraph of Article 1311 of the Civil Code. Indeed, there
is no stipulation in any of the Deeds of Absolute Sale clearly and
deliberately conferring a favor to any third person.
The fact that an agent who makes a contract for his principal will gain or suffer
loss by the performance or nonperformance of the contract by the principal
or by the other party thereto does not entitle him to maintain an action on
his own behalf against the other party for its breach. An agent entitled to
receive a commission from his principal upon the performance of a contract
which he has made on his principals account does not, from this fact alone,
have any claim against the other party for breach of the contract, either in
an action on the contract or otherwise. An agent who is not a promisee
cannot maintain an action at law against a purchaser merely because he is
entitled to have his compensation or advances paid out of the purchase price
before payment to the principal.
As petitioners are not parties, heirs, assignees, or beneficiaries of a stipulation pour
autrui under the contracts of sale, they do not, under substantive law, possess the
right they seek to enforce. Therefore, they are not the real parties-in-interest in
this case. Petitioners not being the real parties-in-interest, any decision rendered
herein would be pointless since the same would not bind the real parties-ininterest.
Baluyot vs. CA
Facts:
Petitioners Timoteo Baluyot, Jaime Benito, Benigno Eugenio, Rolando Gonzales, and
Fortunato Fulgencio are residents of Barangay Cruz-na-Ligas and members of The
Cruz-na-Ligas Homesite Association, Inc.
76 of 106
On March 13, 1992, petitioners filed a complaint for specific performance and
damages against private respondent University of the Philippines before the RTC.
The complaint was later on amended to include private respondent Quezon City
government as defendant.
Plaintiffs and their ascendants have been in open, peaceful, adverse and
continuous possession in the concept of an owner since memory can no
longer recall of that parcel of riceland known as Sitio Libis, Barrio Cruz-naLigas.
In 1979, the UP Board of Regents approved the donation of about 9.2 ha directly
to the residents of Brgy. Krus na Ligas. Despite the willingness of UP to
proceed with the donation, execution of the legal instrument to formalize it
failed because of the unreasonbale demand of the residents for an area
bigger than 15.8 ha.
UP backed-out from the arrangement to donate directly to the Association,
instead it resumed to negotiate the donation thru Quezon City Government.
QC Government immediately prepared the groundworks, however, UP under
President Abueva had failed to deliver the certificate of title covering the
property to the donated to enable QC Government to register the said Deed of
Donation so that corresponding of title be issued under its name.
UP continuously refused despite requests from the QC Government.
Upon expiration of the period of 18 months, UP through Pres. Abueva issued
Administrative Order No. 21 declaring the deed of donation revoked and the
donated property be reverted to UP.
Trial Court ruled that petitioners did not have a cause of action for specific
performance on the ground that the deed of donation had already been
revoked.
Upon appeal, CA ordered the dismissal of the civil case.
Issue: WON the petitioners have a cause of action
Held:
While, admittedly, petitioners were not parties to the deed of donation, they
anchor their right to seek its enforcement upon their allegation that they are
intended beneficiaries of the donation to the Quezon City government. Art.
1311, second paragraph, of the Civil Code.
If a contract should contain some stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a person
is not sufficient. The contracting parties
must have clearly and deliberately conferred a favor upon a third person.
Specific paragraphs of the complaint are sufficient to bring petitioners
action based on Art. 1311.
The contention of the respondents, based on the finding of the trial court, that the
donation has already been revoked has no merit. The trial court's ruling on
this point was made in connection with petitioners' application for a writ of
preliminary injunction to stop respondent from ejecting petitioners. The trial
court denied injunction on the ground that the donation had already been
revoked and therefore petitioners had no clear right to be protected. It is
evident that the trial court's ruling on this question was only tentative, without
prejudice to the final resolution of the question after the presentation by the
parties of their evidence.
Dispositive: Reviewed decision REVERSED and the case REMANDED to trial court for
trial on the merits.
Can a contract create a real right?
Art. 1312. In contracts creating real rights, third persons who come into
possession of the object of the contract are bound thereby, subject to the
provisions of the Mortgage Law and the Land Registration Laws. (n)
This article constitutes one of the exceptions to the general rule that a contract
binds only the parties.
A real right binds the property over which it is exercised.
Ownership and other real rights over property are acquired and transmitted
by law, by donation, by estate and intestate succession, and in
consequence of certain contracts, by tradition.
They may also be acquired by means of prescription. (609a)
Art. 415. The following are immovable property:
(10) Contracts for public works, and servitudes and other real rights over
immovable property. (334a)
What is tortuous interference?
Art. 1314. Any third person who induces another to violate his contract
shall be liable for damages to the other contracting party. (n)
77 of 106
Rule if contract is violated thru inducement of 3rd person

o This article gives an instance when a stranger to a contract can be sued in
view of his unwarranted interference. Whoever is injured may properly sue
for damages.
Gilchrist vs. Cuddy
Facts:
Cuddy was the owner of the film Zigomar. He rented it to Gilchrist for a week for
P125.
A few days prior to this, Cuddy sent the money back to Gilchrist saying that he
had made other arrangements with his film. The other arrangement was the
rental to Espejo and his partner for P350 for the week and the injunction was
asked by Gilchrist against these parties.
The Court issued mandatory injunction ordering Cuddy to deliver the film to Gilchrist
and an ex parte preliminary injunction restraining
Espejo and partner from receiving and exhibiting film until further orders
from the court.
Issue: WON Espejo and his partner were liable for interfering with the contract
between Gilchrist and Cuddy
Held:
It is said that the ground on which the liability of a third party for interfering with
a contract between others rests, is that the interference was malicious. The
contrary view, however, is taken by the Supreme court of the United States.In
Angle vs. Railway, the only motive for interference was the desire to make a
profit to the injury of one of the parties of the contract. There was no malice in
the case beyond the desire to make an unlawful gain to the detriment of one
of the contracting parties.
In the case at bar, the only motive for the interference was a desire to make a
profit. There was no malice beyond this desire, but this fact does not relieve
them of the legal liability for interference with that contract and causing its
breach.
The liability of the appellants arises from unlawful acts and not from contractual
obligations, as they were under no such obligations to induce Cuddy to violate his
contract with Gilchrist to violate his contract with Gilchrist. Art. 1902 of the Civil
Code provides that a person whi, by act or omission, causes damage to another
when there is fault or negligence, shall be obliged to repair the damage so done.
But the fact that the appellant's interference was actionable did not of itself
entitle Gilchrist to sue out an injunction against them. The allowance of the
remedy must be justified under Sec. 164 of the Code of Civil Procedure. There
is nothing in Sec. 164 that before an injunction may issue, the strangers must
know the identity of both parties. Courts usually grant an injunction where the
profit of the injured person are derived from his contractual relations with a
large and indefinite number of individuals. Injunction against further
interference with the contract was properly issued.
Daywalt vs. La Corporacion
Facts:
Teodorica Endencia executed a contract where she obligated herself to convey
to Daywalt, a tract of land.
It was agreed that a deed should be executed as soon as the title is perfected in
the proceedings of the Court of Land Registration and a Torrens title
procured therefore in Endencia's name.
A decree recognizing the right of Endencia as owner was entered in said court
but the Torrens title certificate was not issued until later.
The parties made a new contract with a view to carrying their original agreement
into effect. The second was not immediately carried into effect for the reason
that the Torrens certificate was not yet obtainable.
The parties entered into another agreement, replacing the old.
The Torrens certificate was in time issued to Endencia but in the course of the
proceedings, it was found that the area of the tract in the contract was
about 1,248 ha instead of 452 ha as stated in the contract.
La Corporacion de los Padres de Recoletos was at this time the owner of a
property immediately adjacent to the land which Endencia had sold to
Daywalt.
Fr. Sanz, its representative whom Endencia is well acquainted with, was aware of
the 1st and 2nd contract. When the Torrens certificate was finally issued,
Endencia delivered it for safekeeping to the corporation where it was taken
to Manila where it remained in the custody of Labarga.
When La Corporacion sold the San Jose estate, some cattle were removed to the
estate of the corporation immediately adjacent to the property which the
plaintiff had purchased from Endencia.
78 of 106
As Endencia still retained possession of said property, Father Sanz entered into
an arrangement with her where large number of cattle belonging to the
corporation were pastured upon said land.
Tek Hua Trading Co, through its managing partner,

So Pek Giok, entered into lease agreements with
lessor DCCSI.
The contract each had a one-year term. They provided
that should the lessee continue to occupy the premises
after the term, the lease shall be on a month-to-month
basis.
Daywalt sought to recover from corporation damages for the use and occupation
of the land by reason of pasturing the cattle.
Daywalt alleged that, by interfering in the performance of the contract in question
and obstructing him in his effort to secure the certificate of title to the land,
the corporation made itself a co-participant with Endencia in the breach of the
contract.
Issue: WON the corporation will be liable for the damage through collusion with
the Endencia
Held:
Fr. Labarga and his associate believed in good faith that the contract could not
be enforced and that Endencia would be wronged if it should be carried into
effect.
Whatever may be the character of the liability which a stranger to a contract may
incur by advising or assisting one of the parties to evade performance, there is
one proposition upon which all must agree. A stranger cannot become more
extensively liable in damages for the non-performance of the contract than the
party in whose behalf he intermeddles. To hold the stranger liable for damages in
excess of those that could be recovered against the immediately party to the
contract would lead to results at once grotesque and unjust.
If a party enters into contract to go for another upon a journey to a remote and
unhealthful climate, and a third person with a bona fide purpose of benefiting
the one who is under contract to go dissuades him from the step, no action will
lie. But if the advice is not disinterested and the persuasion is used for the
indirect purpose of benefiting the defendant at the expense of the plaintiff, the
intermedler is liable if his advice is taken and the contract broken.
So Ping Bun vs. CA
Facts:
When the contract expired, the parties did not renew the contracts, but Tek hua
continued to occupy the premises.
Tek Hua was dissolved. Later, the original members of Tek Hua formed Tek Hua
Enterprising Corp.
When So Pek Giok, managing partner of Tek Hua Trading died, his son So Ping Bun,
occupied the warehouse for his own textile business.
Tiong, president of Tek Hua, sent a letter demanding So Ping Bum to vacate the
premises.
So Ping Bun refused and instead requested formal contracts. DCCSI acceded to
the request.
Private respondents filed a petition for injunction for the nullification of the lease
contracts between DCCSI and petitioner with damages.
Trial court ruled in favor of the respodents. Upon appeal, the Court of Appeals
affirmed. Hence, this petition.
Issue: WON So Ping Bun is liable for tortuous interference of contract
Held:
A duty which the law of torts is concerned with is respect for the property of
others, and a cause of action ex delicto may be predicated upon an unlawful
interference by one person of the enjoyment by the other of his private
property. In the present case, petitioner's Trendsetter Marketing asked DCCSI
to execute lease contracts in its favor, and as a result petitioner deprived
respondent corporation of the latter's property right. This was a clear case of
tortuous interference.
Section 1314 of the Civil Code categorically provides that "Any third person who
induces another to violate his contract shall be liable for damages to the other
contracting party". While lack of malice precludes damages, it does not relieve
the interferer of the legal liability for entering into contracts and causing
breach of existing ones. The respondent appellate court correctly confirmed
the permanent injunction and nullification of the lease contracts between
DCCSI and Trendsetter Marketing without awarding damages. The injunction
saved the respondents from further damage or injury caused by petitioner's
interference.

Lacson
Tayag
vs.
Facts:
Respondents
Angelica
Tiotuyco Vda.
de
Lacson,
and
her
children
Amancia,
Antonio,
Juan, and
Teodosia,
all
surnamed
Lacson,
were the
Page 79 of 106
registered owners of three parcels of land. The properties, which were

tenanted agricultural lands, were administered by Renato Espinosa for the
owner.
A group of original farmers/tillers,individually executed in favor of the petitioner
separate Deeds of Assignment in which the assignees assigned to the
petitioner their respective rights as tenants/tillers of the landholdings
possessed and tilled by them for and in consideration of P50.00 per square
meter. The petitioner was also granted the exclusive right to buy the property
if and when the respondents, with the concurrence of the defendants-tenants,
agreed to sell the property. In the interim, the petitioner gave varied sums of
money to the tenants as partial payments, and the latter issued receipts for
the said amounts.
The petitioner called a meeting of the defendants-tenants to work out the
implementation of the terms of their separate agreements. However, the
defendants-tenants, through Joven Mariano, wrote the petitioner stating that
they were not attending the meeting and instead gave notice of their
collective decision to sell all their rights and interests to Lacson, as
tenants/lessees, over the landholding to the respondents.
The petitioner filed a complaint with the RTC against the defendants-tenants, as
well as the respondents, for the court to fix a period within which to pay the
agreed purchase price of P50.00 per square meter to the defendants, as
provided for in the Deeds of Assignment. The petitioner also prayed for a writ
of preliminary injunction against the defendants and the respondents therein.
The defendants-tenants Tiamson, et al., alleged in their answer with counterclaim
for damages, that the money each of them received from the petitioner were in
the form of loans, and that they were
deceived into signing the deeds of assignment.

Issue: WON the respondent is liable for tortuous interference for inducing the
defendants-tenants to violate the deeds of assignment
Held:
For Art. 1314 to apply, the pleader is burdened to prove the following:
(1) the existence of a valid contract; (2) knowledge by the third person of the
existence of the contract; and (3) interference by the third person in the
contractual relation without legal justification.
Where there was no malice in the interference of a contract, and the impulse behind
ones conduct lies in a proper business interest rather than in wrongful motives, a
party cannot be a malicious interferer.
Where the alleged interferer is financially interested, and such interest motivates
his conduct, it cannot be said that he is an officious or malicious intermeddler.
Even if the respondents received an offer from the defendants-tenants to assign and
transfer their rights and interests on the landholding, the respondents cannot be
enjoined from entertaining the said offer, or even negotiating with the
defendants-tenants. The respondents could not even be expected to warn the
defendants-tenants for executing the said deeds in violation of P.D. No. 27 and
Rep. Act No. 6657. Under Section 22 of the latter law, beneficiaries under P.D. No.
27 who have culpably sold, disposed of, or abandoned their land, are disqualified
from becoming beneficiaries.
From the pleadings of the petitioner, it is quite evident that his purpose in having the
defendants-tenants execute the Deeds of Assignment in his favor was to acquire
the landholding without any tenants thereon, in the event that the respondents
agreed to sell the property to him. The petitioner knew that under Section 11 of
Rep. Act No. 3844, if the respondents agreed to sell the property, the defendantstenants shall have preferential right to buy the same under reasonable terms and
conditions.
Under Section 12 of the law, if the property was sold to a third person without the
knowledge of the tenants thereon, the latter shall have the right to redeem the
same at a reasonable price and consideration. By assigning their rights and
interests on the landholding under the deeds of assignment in favor of the
petitioner, the defendants-tenants thereby waived, in favor of the petitioner, who
is not a beneficiary under Section 22 of Rep. Act No. 6657, their rights of
preemption or redemption under Rep. Act No. 3844. The defendants-tenants
would then have to vacate the property in favor of the petitioner upon full
payment of the purchase price. Instead of acquiring ownership of the portions of
the landholding respectively tilled by them, the defendants-tenants would again
become landless for a measly sum of P50.00 per square meter.
The petitioners scheme is subversive, not only of public policy, but also of the letter
and spirit of the agrarian laws. That the scheme of the petitioner had yet to take
effect in the future or ten years hence is not a justification. The respondents may
well argue that the agrarian laws had been violated by the defendants-tenants
and the petitioner by the mere execution of the deeds of assignment. In fact, the
petitioner has implemented the deeds by paying the defendants-
80 of 106
tenants amounts of money and even sought their immediate implementation

by setting a meeting with the defendants-tenants. In fine, the petitioner
would not wait for ten years to evict the defendants-tenants. For him, time is
of the essence.
VI. Essential Requisites
A. Consent
When is there consent? When there is a meeting of the offer and the
acceptance upon the thing and the cause
Art. 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute. A qualified
acceptance constitutes a counter-offer.
Acceptance made by letter or telegram does not bind the offerer except
from the time it came to his knowledge. The contract, in such a case, is
presumed to have been entered into in the place where the offer was made.
(1262a)
Consent concurrence of the minds of the parties on the OBJECT and the CAUSE
which are to constitute the contract
Note: Where there is merely an offer by one party without an acceptance by the
other, there is no consent. As Sir Lumba says, a contract is a promise to a promise.
Ex. I will deliver the car if I want to. No Contract
I will sell you the car if I am able to purchase it. No Contract
Elements of Consent:
Plurality of subjects
Capacity
Intelligence and Free will
Express or tacit manifestation of the will
Conformity of the internal will and its manifestation
Forms of Consent:
Express
Implied
Note: In quasi-contracts, there is what is called presumptive consent.
OFFER unilateral proposition which one party makes to the other for the celebration
of a contract. It must be
Definite distinguished from mere communications indicating that a party is

disposed to enter into a certain contract, or inviting the other to make an offer
Ex. I will give you my watch if you buy it for P1, 500 as
opposed to
I am in position and willing to entertain the purchase of this watch under
the following conditions
Complete Sufficient clearness of the kind of contract intended and definitely
stating the conditions of the contract
Intentional Must be made with seriousness, not for fun or in jest, or out of
courtesy, or as an example in teaching
Note: ACCEPTANCE must be unequivocal and unconditional, and shall be without any
variation whatsoever.
Mere amplification of the offer must be understood as an acceptance of the
original offer, plus a new offer which is contained in the amplification.
However, it is the consent of the original offeror that controls.
Ex. X offers to sell 5 kilos of mandarin oranges for P20 per kilo. Y answers that
he is buying and adds 3 kilos more to be bought at the same price. The first
offer for 5 kilos is already accepted and the other 3 is subject to the
acceptance of X.
Unless the offeror knows of the acceptance, there is no meeting of the minds
between the parties, no real concurrence of the offer and acceptance.
Ex. Letter, Telegram, Telephone
Art. 1320. An acceptance may be express or implied. (n)
Art. 1321. The person making the offer may fix the time, place, and manner
of acceptance, all of which must be complied with. (n)
The offeror has the right to prescribe the conditions of the acceptance (time,
place and manner), and when reasonable must ALL be complied with.
An offer with a period lapses upon the termination of the period.
An acceptance which is not made in the manner prescribed by the offeror is
not effective, but constitutes a counter-offer which the offeror may accept.
81 of 106
What is the cognition theory?

contract. The offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.
(1262a) Art. 1322. An offer made through an agent is accepted from the
time acceptance is communicated to him. (n)
When the intermediary has no power to bind either the offeror or the offeree, then
he is not an agent. In this case, acceptance only occurs when he in turn
communicates acceptance to the offeror.
Malbarosa v. CA [April 30, 2003] Ponente:
Justice Callejo Sr.
Facts: Petitioner Malbarosa was the president and general manager of

Philtectic Corp., a company belonging to respondent SEADC.
Sometime in January 1990, petitioner expressed through a letter addressed to Senen
Valero, Vice-Chairman of respondent company, his desire to leave the company and
requesting that his 1989 incentive compensation be paid to him. On March 14, 1990,
respondent through Valero signed a letter-offer stating that petitioner was entitled to
a compensation of P251,057.67 and that the amount be satisfied as consisting of: the
car valued at P220,000 and the membership in the Architectural center valued at
around P60,000. Respondent required that if the petitioner agreed to the offer, he
should affix his signature at the bottom of the page.
On March 16, 1990, Da Costa met with petitioner and handed him the original copy of
the March 14 Letter-offer. Petitioner was dismayed when he read what he was about
to get. Petitioner refused to sign the letter-offer and said that he would review it.
Despite the lapse of more than two weeks, respondent had not received the original
letter with petitioners signature. Respondent decided to withdraw its offer.
On April 4, 1990, Philtectic wrote the petitioner withdrawing the March 14 Letter-offer
and demanding petitioner return the car and his membership certificate. Petitioner
wrote Philtectic informing them that he cant comply with the demand as he already
accepted the offer when he affixed on March 28, 1990 his signature on the original.
Respondent filed a complaint in court to recover the property but petitioner was able
to recover the possession through the filing of the counter-bond. He
adduced evidence that he had called Da Costas office on March 29 in order to

communicate his acceptance but it was the telephone receptionist who answered.
She testified in court that she relayed the message to Da Costa and he merely
nodded.
Trial Court: No perfected contract over the March 14 Letter-offer due to failure to
notify acceptance on petitioners part
Court of Appeals: Affirmed with modification by allowing the payment of the rental of
the car at the rate of P1000.00 per day
Issues:
Whether or not a contract exists between parties by virtue of petitioners
acceptance of the Letter-offer.
Whether or not there was an effective withdrawal by respondent of said
letter-order.
Held: There is no contract between the parties. Withdrawal of respondent is valid.
Petition is dismissed and CA decision affirmed.
Ratio:
Under Article 1318 of the CC, the essential requisites of a contract are: 1) consent of
contracting parties; 2) Object certain which is the subject matter of the contract;
and 3) Cause of the obligation which is established.
Under Article 1319 of the NCC, the consent by a party is manifested by the meeting
of the offer and the acceptance upon the thing and the cause which are to constitute
the contract. The acceptance must be absolute, unconditional, and without variance
of any sort from the offer.
The acceptance of an offer must be made known to the offeror. Unless the offeror
knows of the acceptance, there is no meeting of minds of the parties. The contract is
perfected only from the time an acceptance of an offer is made known to the offeror.
An acceptance which is not made in the manner prescribed by the offeror is
not effective but constitutes a counter-offer which the offeror may accept
or reject. The contract is not perfected if the offeror revokes or withdraws
its offer and the revocation or withdrawal is the first to reach the offeree.
In the present case, respondent required petitioner to affix his signature at the
bottom of the page to show acceptance, thus foreclosing other forms of acceptance.
Upon receipt, petitioner refused to act on it saying he needed time to decide. No
contract was perfected.
82 of 106
Despite petitioners claim that he signed the documents on March 28, way before
respondents withdrawal of the offer on April 4, still the letter of the petitioner
accepting the offer was received on April 7. By then, respondent had already
withdrawn its offer. Indubitably, there was no contract perfected by the parties.
It must also be underscored that there was no time frame fixed by respondent for
petitioner to accept or reject its offer. When the offeror had not fixed a period
for offeror to accept the offer, and the offer is made to a person present,
the acceptance must be made immediately. The respondent had the option to
withdraw or revoke the offer.
As regards the effectiveness of the withdrawal, the Court held that implicit in the
authority given to Philtectic Corporation to demand for and recover from the
petitioner the subject car and to institute the appropriate action against him to
recover possession of the car is the authority to withdraw the respondent's March
14, 1990 Letter-offer. It cannot be argued that respondent authorized Philtectic
Corporation to demand and sue for the recovery of the car and yet did not authorize
it to withdraw its March 14, 1990 Letter-offer to the petitioner. Besides, when he
testified, Senen Valero stated that the April 4, 1990 letter of Philtectic Corporation to
the petitioner was upon his instruction and conformably with the resolution of the
Board of Directors of the respondent.
When is there an offer? An offer is a unilateral proposition which one party makes
to the other for the celebration of a contract.
It must be:
Definite distinguished from mere communications indicating that a party is
disposed to enter into a certain contract, or inviting the other to make an offer
Ex. I will give you my watch if you buy it for P1, 500 as
opposed to
I am in position and willing to entertain the purchase of this watch under
the following conditions
Complete Sufficient clearness of the kind of contract intended and definitely
stating the conditions of the contract
Intentional Must be made with seriousness, not for fun or in jest, or out of
courtesy, or as an example in teaching
Art. 1325. Unless it appears otherwise, business advertisements of things

for sale are not definite offers, but mere invitations to make an offer. (n)
General Rule: Business advertisements of things for sale are not definite offers.
Exception: When the offer is stated with the necessary specification of essential
elements leading to the future contract
Ex. For immediate sale: 500 sq. m. lot at No. 859 Espana Street,
Manila for P25,000 cash
Art. 1326. Advertisements for bidders are simply invitations to make
proposals, and the advertiser is not bound to accept the highest or lowest
bidder, unless the contrary appears. (n)
Art. 1340. The usual exaggerations in trade, when the other party had
an opportunity to know the facts, are not in themselves fraudulent. (n)
Tolerated Fraud (Dolus Bonus) practice has come to tolerate such false
affirmations as advertisements or testimonies minimizing the defects of the thing,
exaggerating its good qualities, and giving it qualities that it does not have
These do NOT give rise to an action for damages, either because of their
insignificance or because the stupidity of the victim is the real cause of his
loss.
Can an offer be withdrawn? YES
Art. 1324. When the offerer has allowed the offeree a certain period to
accept, the offer may be withdrawn at any time before acceptance by
communicating such withdrawal, except when the option is founded upon a
consideration, as something paid or promised. (n)
General Rule: When the offeror has stated a fixed period for acceptance, the offeree
may accept at any time until such period expires.
However, the law permits the offeror to withdraw the offer at any time before
acceptance, even before the period of acceptance has expired so long as he has
allowed the offeree sufficient opportunity, depending upon the circumstances
and the nature of the proposed contract, to decide upon his course of action and
communicate his reaction. Otherwise, the offeror shall be held liable for damages.
Option Contract a preparatory contract in which one party grants to the other, for a
fixed period and under specified conditions, the power to decide whether or not to
enter into a principal contract. The grant must be exclusive and must be supported
by an independent consideration.
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Art. 1479. A promise to buy and sell a determinate thing for a price certain
is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a
price certain is binding upon the promissor if the promise is supported by
a consideration distinct from the price. (1451a)
This article is NOT inconsistent with Art. 1324. If the option is not supported by
any independent consideration distinct from the price certain, the offer can
still be withdrawn even if the offer is already accepted.
Sanchez v. Rigos [June 14, 1972]
Ponente: C.J. Concepcion
Facts: On April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina Rigos
executed an instrument entitled Option to Purchase where the latter agreed,
promised and committedto sell to the former a parcel of land situated in San Jose,
Nueva Ecija for P1, 510. It was further stipulated that the option shall be deemed
terminated if Sanchez fails to exercise his right to buy the property within 2 years.
Within the same period, Sanchez attempted to make several tenders of payment of
P1, 510 to no avail because Rigos rejected the same. Because of this, the former
deposited said amount with the CFI of Nueva Ecija and commenced an action for
specific performance and damages against the latter. The CFI rendered judgment for
Sanchez.
Issue: Whether or not the offer can still be withdrawn after Sanchez notified Rigos
of his acceptance of the option within the period agreed upon
Held: No.
Ratio: If the option is given without a consideration, it is a mere offer of a contract of
sale which is not binding until accepted. If, however, acceptance is made before a
withdrawal, it constitutes a binding contract of sale even though the option was not
supported by sufficient consideration.
The option did not impose upon Sanchez the obligation to purchase her property. The
instrument is not a contract to buy and sell; it is a mere option as evinced by the title
of the document itself.
Moreover, Art. 1324, CC provides the general rule regarding offer and acceptance
that, when the offerrer gives to the offeree a certain period to accept, the offer may
be withdrawn at any time before acceptance except when the option is founded
upon consideration. In other words, if the option is given without a consideration, it is
a mere offer of a contract of sale which is not binding until accepted. If, however,
acceptance is made before a withdrawal, it constitutes a binding contract of sale
even though the option was not supported by a sufficient consideration. The
concurrence of both
actsthe offer and the acceptancegenerates a contract if there was none

existing before.
Antonio, J., concurring: While the law permits the offeror to withdraw the offer at
any time before acceptance even before the period has expired, the offeror cannot
exercise this right in an arbitrary or capricious manner for the reason that a contrary
view would remove the stability and security of business transactions. Since Sanchez
had offered P1, 510 before any withdrawal from the contract has been made by
Rigos, a bilateral reciprocal contract to sell and to buy was generated.
Ang Yu v. CA [Supra]
P.U.P. v. CA [November 14, 2001] Ponente: J.
Bellosillo
Facts: In 1965, Firestone leased 2.9 hectares of National Development
Corporations land in Manila for a period of 10 years, renewable for another 10 years
under the same terms and conditions. Firestone constructed several buildings on the
lot. 3 years later, Firestone entered into another contract for the use of the
prefabricated warehouses and was agreed to be co-extensive with the earlier
contract. Firestone entered into a similar contract with NDC in 1974. The contracts
were to expire on 1978.
Firestone requested for an extension of the lease and the parties adopted a
resolution for its extension. One of the conditions added was that in the event
NDC "with the approval of higher authorities, decide to dispose and sell these
properties including the lot, priority should be given to the LESSEE"
On 22 December 1978, in pursuance of the resolution, the parties entered into a
new agreement for a ten-year lease of the property, renewable for another ten (10)
years, expressly granting FIRESTONE the first option to purchase the leased
premises in the event that it decided "to dispose and sell these properties including
the lot.
In 1988, FIRESTONE informed NDC latter through several letters and telephone calls
that it was renewing its lease over the property. NDC did not take any action. Rumors
circulated that NDC will sell the land to PUP.
FIRESTONE instituted an action for specific performance to compel NDC to sell the
leased property in its favor and likewise prayed for the issuance of a writ of
preliminary injunction to enjoin NDC from disposing of the property pending the
settlement of the controversy.
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Memorandum Order 24 conveyed that property from NDC to PUP which cancelled
NDCs obligation of P57 M. PUP then increased the rentals and demanded that the
occupants of the property vacate it immediately.
Lower court decision ordered PUP to sell to FIRESTONE the "2.6 hectare leased
premises or as may be determined by actual verification and survey of the actual size
of the leased properties where plaintiff's fire brick factory is located" at P1,500.00 per
square meter considering that, as admitted by FIRESTONE, such was the prevailing
market price thereof. FIRESTONE could exercise its option to purchase the property
until 2 June 1999 inasmuch as the 22 December 1978 contract embodied a covenant
to renew the lease for another ten (10) years at the option of the lessee as well as an
agreement giving the lessee the right of first refusal. CA affirmed the decision.
Issues:
Whether or not the transfer of the land from NDC to PUP was one for a sale or
was a mere paper transfer
Whether or not FIRESTONE can rightfully invoke its right of first refusal Held: The
transfer of land from NDC to PUP was one for sale. FIRESTONE has availed and
existing right of first refusal as lessee of the premises. The preponderance of
evidence shows that NDC sold to PUP the whole NDC compound, including the leased
premises, without the knowledge much less consent of private respondent
FIRESTONE which had a valid and existing right of first refusal. All three (3) essential
elements of a valid sale, without which there can be no sale, were attendant in the
disposition and transfer of the property from NDC to PUP consent of the parties,
determinate subject matter, and consideration therefor.
Consent to the sale is obvious from the prefatory clauses of Memorandum Order No.
214 which explicitly states the acquiescence of the parties to the sale of the property.
Furthermore, the cancellation of NDC's liabilities in favor of the National Government
in the amount of P57,193,201.64 constituted the "consideration" for the sale. The
conduct of petitioner PUP immediately after the transaction is in itself an admission
that there was a sale of the NDC compound in its favor which are the acts of
ownership in ordering the land to be vacated.
In the instant case, the right of first refusal is an integral and indivisible part
of the contract of lease and is inseparable from the whole contract. The
consideration for the right is built into the reciprocal obligations of the
parties. The stipulation is part and parcel of the contract of lease making the
consideration for the lease the same as that for the option.
It is a settled principle in civil law that when a lease contract contains a right of first
refusal, the lessor is under a legal duty to the lessee not to sell to anybody at any
price until after he has made an offer to sell to the latter at a certain price and the
lessee has failed to accept it. 39 The lessee has a right that the lessor's first offer
shall be in his favor.
The option in this case was incorporated in the contracts of lease by NDC for the
benefit of FIRESTONE which, in view of the total amount of its investments in the
property, wanted to be assured that it would be given the first opportunity to buy
the property at a price for which it would be offered. Consistent with their
agreement, it was then implicit for NDC to have first offered the leased premises of
2.60 hectares to FIRESTONE prior to the sale in favor of PUP. Only if FIRESTONE
failed to exercise its right of first priority could NDC lawfully sell the property to
petitioner PUP.
When does an offer become ineffective?
Incapacity of either party before acceptance (Death, Civil Interdiction, Insanity,
or Insolvency)
Lack of authority of offeror
Absence of any of the essential requisites
No acceptance/ Rejection of the offer
Time, manner and place of acceptance not complied with
Withdrawal of offer before acceptance
Art. 1323. An offer becomes ineffective upon the death, civil interdiction,
insanity, or insolvency of either party before acceptance is conveyed. (n)
The contract is not yet perfected at any time before acceptance is conveyed. The
disappearance or loss of capacity of either party before acceptance before
perfection prevents the contractual tie from being formed.
Art. 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.
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A contract entered into in the name of another by one who has no authority
or legal representation, or who has acted beyond his powers, shall be
unenforceable, unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by the other
contracting party. (1259a)
If the contract is entered into in behalf of another who has not authorized it, such
contract is not valid and binding upon him unless he ratifies the transaction.
Art. 1318. There is no contract unless the following requisites concur:
Consent of the contracting parties;
Object certain which is the subject matter of the contract;
Cause of the obligation which is established. (1261)
contract. The offer must be certain and the acceptance absolute. A qualified
acceptance constitutes a counter-offer.
(1262a)
Art. 1320. An acceptance may be express or implied. (n)
Art. 1321. The person making the offer may fix the time, place, and manner
of acceptance, all of which must be complied with. (n)
Art. 1322. An offer made through an agent is accepted from the time
acceptance is communicated to him. (n)
Art. 1324. When the offerer has allowed the offeree a certain period to
accept, the offer may be withdrawn at any time before acceptance by
communicating such withdrawal, except when the option is founded upon a
consideration, as something paid or promised. (n)
Art. 1325. Unless it appears otherwise, business advertisements of things
for sale are not definite offers, but mere invitations to make an offer. (n)
Art. 1326. Advertisements for bidders are simply invitations to make

proposals, and the advertiser is not bound to accept the highest or lowest
bidder, unless the contrary appears. (n)
Mindanao Terminal v. Confesor [May 5, 1997]
Ponente: J. Mendoza
Facts: Mindanao Terminal and Brokerage Service, Inc., and respondent Associated
Labor Unions, entered into a collective bargaining agreement for a period of five (5)
years, starting on August 1, 1989, and ending July 31, 1994. On the 3 rd year, the
parties met for a renegotiation which eventually resulted in a deadlock.
On December 18, 1992, as a result of a conference called by the NCMB, the Union
and the Company went back to the bargaining table and agreed on wage increase,
VL / SL, hospitalization benefits, 13th month pay, signing bonus and seniority. Thus,
as the Med-Arbiter noted in the record of the January 14, 1993 conference, "the
issues raised by the notice of strike had been settled and said notice is thus
terminated."
But no sooner had he stated this than the Company claimed that the wage increases
which it had agreed to give to the employees should be creditable as compliance with
future mandated wage increases. In addition, it maintained that such increases
should not be retroactive. Mediation proved to be futile. The Secretary of Labor
assumed jurisdiction over the issue and ordered that the wage increases for the
fourth and fifth years of the CBA were not to be credited as compliance with future
mandated increases. In addition, the fourth year wage increase was to be retroactive
to August 1992 and was to be implemented until July 31, 1993, while the fifth year
wage increase was to take effect on August 1, 1993 until the expiration of the CBA.
The company sought reconsideration but was denied hence this petition for
certiorari, alleging grave abuse of discretion on the part of respondent Secretary
of Labor.
Issue: Whether or not the parties have reached an agreement or a contract on the
CBA
Held: Yes. Even without any written evidence of the CBA made by the parties, a
valid agreement existed from the moment the minds of the parties met on all
matters they set out to discuss.
Ratio:
The two terms, "agreement" and "contract," are indeed similar, although the former is
broader than the latter because an agreement may not have all the elements of a
contract. As in the case of contracts, however, agreements may
86 of 106
be oral or written. Hence, even without any written evidence of the Collective
Bargaining Agreement made by the parties, a valid agreement existed in this case
from the moment the minds of the parties met on all matters they set out to discuss.
Art. 1315 of the Civil Code states that contracts are perfected by mere consent, and
from that moment, the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law. The Secretary of Labor
found that "as early as January 14, 1993, well within the six (6) month period
provided by law, the Company and the Union have perfected their agreement." 7 The
claim of petitioner to the contrary notwithstanding, this is a finding of an
administrative agency which, in the absence of evidence to the contrary, must be
affirmed.
What is the effect of simulated consent? Void if absolute simulation, Can be valid if
it is relatively simulated
Art. 1345. Simulation of a contract may be absolute or relative. The former
takes place when the parties do not intend to be bound at all; the latter,
when the parties conceal their true agreement. (n)
Simulation defect in declaration. It is a declaration of a fictitious will, deliberately
made by agreement of the parties, in order to produce, for purposes of deception, the
appearance of a juridical act which does not exist or is different from that which was
really executed.
Absolute Simulation (Simulados) the parties do not have any intention of being
bound by any contract
Ex. A deed of absolute sale of land, stating that possession has been transferred and
the price paid, when in reality there has been no agreement of sale between the
parties.
Relative Simulation (Disimulados) the parties have an agreement which they
conceal under the guise of another contract. There are two juridical acts involved:
Ostensible act contract that the parties pretend to have executed
Hidden act the true agreement between the parties
Ex: A deed of sale of a piece of land is executed by parties to conceal their true
agreement which is a donation
Note: If the concealed or hidden act is lawful, it is enforceable if the essential
requisites are present.
Art. 1346. An absolutely simulated or fictitious contract is void. A relative
simulation, when it does not prejudice a third person and is not intended for
any purpose contrary to law, morals, good customs, public order or

public policy binds the parties to their real agreement. (n)
The nullity of an absolutely simulated contract is based on want of true
consent where the parties do not have any intent to be bound at all. It is
generally fraudulent and for the purpose of injuring third persons.
If the purpose of the contract is licit, then the parties may prove the simulation in
order to recover what may have already been given. If it has an illegal object, please
see Arts. 1411 and 1412 under Void Contracts.
The relatively simulated contract is valid, except when it prejudices third
persons or has an illicit purpose.
B. Object (Prestation)
What can be the object of a contract?
Things within the commerce of men
Transmissible rights
Licit things
Determinate things
Possible things
Art. 1347. All things which are not outside the commerce of men, including
future things, may be the object of a contract. All rights which are not
intransmissible may also be the object of contracts.
No contract may be entered into upon future inheritance except in cases
expressly authorized by law.
All services which are not contrary to law, morals, good customs, public
order or public policy may likewise be the object of a contract. (1271a)
Requisites of Object:
Within the commerce of man
Licit
Possible
Determinate as to its kind
Things outside the commerce of man those things which are not susceptible of
appropriation or private ownership, and are not transmissible
Ex. Perpetual servitude or slavery, Personal rights (marital authority), Public offices,
Right of suffrage, Property pertaining to public dominion (roads, plazas, rivers),
Sacred things
Art. 1348. Impossible things or services cannot be the object of contracts.
(1272)
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Impossible Things not susceptible of existing, or are outside the commerce of men,
or personal services beyond the ordinary power of man.
Note: The impossibility must be actual and contemporaneous with the making of the
contract.
Kinds of Impossibility:
Absolute or Objective nobody can perform it. Effect:
Contract is nullified
Relative or Subjective it cannot be performed due to special conditions or
qualifications of the debtor
Effect: If permanent, contract is nullified
If temporary, contract is not nullified
Art. 1349. The object of every contract must be determinate as to its
kind. The fact that the quantity is not determinate shall not be an
obstacle to the existence of the contract, provided it is possible to
determine the same, without the need of a new contract between the
parties. (1273)
Determinate as to its kind or species Ex. A horse,
Carabao, a book
Not determinate as to its kind or species Ex.
Something, an animal
What is the status of a contract with an unlawful object? Void or Inexistent
Art. 1409. The following contracts are inexistent and void from the
beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy;
Those whose cause or object did not exist at the time of the transaction;
Those whose object is outside the commerce of men; C.

Cause
What is the cause of contracts?
Art. 1350. In onerous contracts the cause is understood to be, for each
contracting party, the prestation or promise of a thing or service by the
other; in remuneratory ones, the service or benefit which is remunerated;
and in contracts of pure beneficence, the mere liberality of the benefactor.
(1274)
Onerous Contracts cause is the prestation Remuneratory Contracts
cause is the service rendered
Contract of Pure Beneficence essentially a donation where cause is the generosity

or liberality of the benefactor
Art. 1354. Although the cause is not stated in the contract, it is presumed
that it exists and is lawful, unless the debtor proves the contrary. (1277)Art.
1350
Unless the contrary is proved, a contract is presumed to have a good and

sufficient consideration. The presumption, however, applies only when no
cause is stated in the contract.
Differentiate motive from cause.
Art. 1351. The particular motives of the parties in entering into a contract
are different from the cause thereof. (n)
CAUS
E
MOTIVE
Objecti intrins
juridic Psychological, individual or
ve,
ic
and al
personal
reason for the existence of purpose of a party to a
the
contract
contract itself
Objective of a party inPersons reason for wanting to
entering into
get
the contract
such objective
Always the same for each
kind of
Differs with each person
contrac
t
Essenti requisit whic
Does not affect the validity
al
e
h
affects or
validity or enforceability of a
contract
existence of a contract
What is the status of a contract with an unlawful cause? Void
Art. 1352. Contracts without cause, or with unlawful cause, produce no
effect whatever. The cause is unlawful if it is contrary to law, morals,
good customs, public order or public policy. (1275a)
Ex. An agreement to resume concubinage which had been interrupted by quarrels
Art. 1409. The following contracts are inexistent and void from the
beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy;
(3) Those whose cause or object did not exist at the time of the
transaction;
What is the status of a contract with a false cause? Void, if not founded upon
another licit cause
Art. 1353. The statement of a false cause in contracts shall render them
void, if it should not be proved that they were founded upon another
cause which is true and lawful. (1276)
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VII. Reformation of Instruments

When may a contract be reformed? When equity demands it and only when the
true intention of the parties is not expressed in the document or instrument
Art. 1359. When, there having been a meeting of the minds of the parties
to a contract, their true intention is not expressed in the instrument
purporting to embody the agreement, by reason of mistake, fraud,
inequitable conduct or accident, one of the parties may ask for the
reformation of the instrument to the end that such true intention may be
expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting
of the minds of the parties, the proper remedy is not reformation of the
instrument but annulment of the contract.
Requisites of Reformation:
Meeting of the minds upon the contract
Instrument or document evidencing the contract does not express the true
agreement of the parties
Due to mistake, fraud, inequitable conduct or accident
Upon reformation of an instrument, the effect relates back to the time of its
original execution, especially as between the parties.
Note: The statute of frauds is no impediment to the reformation of an
instrument.
Art. 1362. If one party was mistaken and the other acted fraudulently or
inequitably in such a way that the instrument does not show their true
intention, the former may ask for the reformation of the instrument.
Where one party to an instrument has made a mistake and the other knows it and
conceals the truth from him, such as when one party is illiterate and the other party
fails to correct his mistake, then this is sufficient ground for reformation.
The mistake of one party must refer to the content of the instrument, not the subject
matter or principal conditions of the contract.
Art. 1363. When one party was mistaken and the other knew or believed
that the instrument did not state their real agreement, but concealed that
fact from the former, the instrument may be reformed.
Art. 1364. When through the ignorance, lack of skill, negligence or bad faith
on the part of the person drafting the instrument or of the clerk or typist,
the
instrument does not express the true intention of the parties, the courts
may order that the instrument be reformed.
This article refers to mistake committed by the clerk or typist. Ex.
Typographical errors
Art. 1365. If two parties agree upon the mortgage or pledge of real or
personal property, but the instrument states that the property is sold
absolutely or with a right of repurchase, reformation of the instrument
is proper.
Rule 130 - Sec. 9 PAROL EVIDENCE RULE
Evidence of written agreements. When the terms of an agreement have been
reduced to writing, it is considered as containing all the terms agreed upon
and there can be, between the parties and their successors in interest, no
evidence of such terms other than the contents of the written agreement.
However, a party may present evidence to modify, explain or add to the
terms of written agreement if he puts in issue in his pleading:
(a)An intrinsic ambiguity, mistake or imperfection in the written
agreement; (b)The failure of the written agreement to express the true
intent and agreement of the parties thereto;
(c)The validity of the written agreement; or
(d)The existence of other terms agreed to by the parties or their successors
in interest after the execution of the written agreement.
The term "agreement" includes wills. (7a)
When may a contract not be reformed?
Simple donations inter vivos wherein no condition is imposed
Wills
Real agreement is void
Action to enforce instrument is instituted
Art. 1366. There shall be no reformation in the following cases:
Simple donations inter vivos wherein no condition is imposed;
Wills;
When the real agreement is void.
Rationale: An action to reform a written instrument is in the nature of an action for
specific performance and requires a valuable consideration, something that is lacking
in wills and donations.
Art. 1367. When one of the parties has brought an action to enforce
the instrument, he cannot subsequently ask for its reformation.
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Rationale: Reformation and an action to enforce instrument are inconsistent

remedies, the latter being an affirmance of the written contract. An action to
enforce the instrument necessarily entails ratification of the same.
Those which are entered into by guardians whenever the

wards whom they represent suffer lesion by more than
one fourth of the value of the things which are the object
thereof;
Those agreed upon in representation of absentees, if
the latter suffer the lesion stated in the preceding
number;
Those undertaken in fraud of creditors when the latter
cannot in any other manner collect claims due them;
Those which refer to things under litigation if they have
been entered into by the defendant without the
knowledge and approval of the litigants or of competent
judicial authority;
All other contracts specially declared by law to
be subject to rescission. (1291a)
Distinguish the actions for reformation and annulment?

Art. 1359. When, there having been a meeting of the minds of the parties
to a contract, their true intention is not expressed in the instrument
purporting to embody the agreement, by reason of mistake, fraud,
inequitable conduct or accident, one of the parties may ask for the
reformation of the instrument to the end that such true intention may be
expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a
meeting of the minds of the parties, the proper remedy is not
reformation of the instrument but annulment of the contract.
REFORMATION
Presupposes
a
existing contract
between the parties
valid
ANNULMENT
No real and valid contract was
made
Only the document signed

by them
does not correctly express
their
agreement
Gives life to the contract
upon
certain corrections
Minds of the parties did not

meet, or
consent was vitiated
Effect is complete nullification
of the
contract
Do third parties have personality to file an action for reformation? YES

Art. 1368. Reformation may be ordered at the instance of either party or
his successors in interest, if the mistake was mutual; otherwise, upon
petition of the injured party, or his heirs and assigns.
Who may file action:
Mutual Mistake
Either party
Successors interest
One party is at fault
Injured party
Heirs or assigns of injured party
third person, and which for equitable reasons may be set aside even if it is valid.
(Tolentino)
When are contracts rescissible?
Art. 1380. Contracts validly agreed upon may be rescinded in the cases
established by law. (1290)
Rescission A remedy granted by law to the contracting parties and even to third
persons, to secure the reparation of damages caused to them by a contract, by
means of the restoration of the restoration things to their condition prior to the
celebration of said contract. (Tolentino, quoting
Manresa)
Relief for the protection of one of the contracting parties AND third persons from all
injury and damages the contract may cause OR protect some incompatible and
preferent right created by the contract.
Implies a contract which, even if initially valid, produces a lesion or pecuniary
damage to someone.
Set asides the act or contract for justifiable reasons of equity.
Grounds for rescission can only be for legal cause.
Voidable contracts may also be rescinded.
KINDS OF RESCISSIBLE CONTRACTS
Art. 1381. The following contracts are rescissible:
VIII. Defective Contracts

A. Rescissible
a contract that has caused a particular damage to one of the parties or to a

1 and 2) Contracts entered into by GUARDIANS for their wards, or trustees or
administrators for the ABSENTEES, are rescissible if the party represented
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suffers lesion of by more than one-fourth of the value of the things which are
objects of the contract.
Lesion injury which one of the parties suffers by virtue of a contract which is
disadvantageous to him. (Tolentino)
EXCEPTION: Article 1386. Rescission referred to in Nos. 1 and 2 of Article 1381
shall not take place with respect to contracts approved by the courts. (1296a)
* As a rule, guardians cannot enter into contracts involving a disposition of the

ward's property without approval of the guardianship court since a guardian is only
authorized to manage the estate. Therefore, the contracts contemplated by Article
1381 are contracts entered into by the guardians for the ward which would not
require court approval i.e. contracts which constitute mere acts of administration.
3) Contracts in Fraud of Creditors
Accion Pauliana the rescissory action to set aside contracts in fraud of
creditors
Article 1177. The creditors, after having pursued the property in possession
of the debtor to satisfy their claims, may exercise all the rights and bring all the
actions of the latter for the same purpose, save those which are inherent in his
person; they may also impugn the acts which the debtor may have done to
defraud them. (1111)
Requisites of Accion Pauliana:
that the plaintiff asking for recission has a credit prior to the alienation, although
demandable later.
that the debtor has made a subsequent contract conveying a patrimonial benefit
to a 3rd person.
that the creditor has no other legal remedy to satisfy his claim, but would benefit
by the recission of the conveyance to the 3rd person.
that the act being impugned is fraudulent.
that the 3rd person who received the property conveyed, if it is by onerous title, has
been an accomplice in the fraud.
* It must be shown that the conveyance was fraudulent or with intent to
prejudice creditors of the party making the conveyance.
* The fraud may be established by presumption, under Article 1387, or from

evidence, independently of such presumption.
*Without proof of fraudulent intent, the contract cannot be rescinded.
GENERAL RULE:
Credit must be existing at the time of the fraudulent alienation, even if it is not yet
due.
At the time the accion pauliana is brought, the credit must already be due
EXCEPTIONS:
Accion pauliana can also be brought in the following cases:
The alienation is prior to the credit and the debtor purposely and in bad faith
deprives himself of the ability to meet the consequences of obligations he intends to
incur in the future.
Parties who may appear to have become creditors after the alienation, but may be
considered as having a prior right.
Those whose claims were acknowledged by the debtor after the

alienation, but the origin of which antedated the alienation.
Those who become subrogated, after the alienation, in the rights of creditors
whose credits were prior to the alienation.
TEST of FRAUD:
The test as to whether or not conveyance is fraudulent is, does it prejudice the
rights of creditors?
Both elements must be present else a conveyance may be set aside as to
creditors
Founded on good consideration
made with bona fide intent
Good consideration - creditor is not prejudiced because the property was
merely replaced or substituted.
BADGES OF FRAUD (INDICIA OF FRAUD):
fictitous/ insufficient consideration
conveyance is after suit is filed and while it is pending
sale on credit by insolvent debtor
evidence of insolvency or large indebtedness
transfer of all or nearly all of debtor's property
transfer is between father and son when some of above is present
91 of 106
g) failure of vendee to take exclusive possession of the property

4) Things under litigation, without knowledge and approval of litigant or of
competent judicial authority.
EXAMPLE: In a suit of replevin, where a plaintiff seeks to recover personal property from
the defendant, the latter, during the pendency of the suit, cannot sell in bad faith the
property being litigated to any third person. If he does and the transferee also acts in
bad faith, the contract is rescissible. (Sta.
Maria)
5) Provided for by law to be subject to rescission
Articles 1526, 1534, 1538, 1539, 1542, 1556, 1560, 1567 and 1659
Art. 1355. Except in cases specified by law, lesion or inadequacy of cause
shall not invalidate a contract, unless there has been fraud, mistake or
undue influence. (n)
GENERAL RULE:
Lesion or inadequacy of cause will not subject the contract to rescission.
EXCEPTION:
Those mentioned in Article 1381, or if attended by fraud, mistake or undue
influence.
Art. 1382. Payments made in a state of insolvency for obligations to whose

fulfillment the debtor could not be compelled at the time they were
effected, are also rescissible. (1292)
Where a debtor transfers property to a creditor in payment of a debt which has not
yet matured, at a time when the debtor is insolvent, and when the consideration for
the transfer was grossly inadequate, compared to the actual value of the property
transferred, the transfer is fraudulent and may be set aside by creditors prejudiced
thereby.
* insolvency law: all payments made by debtor after the mere filing of insolvency will
not be rescissible, but will be void under the insolvency law.
Art. 1189. When the conditions have been imposed with the intention of
suspending the efficacy of an obligation to give, the following rules shall
be observed in case of the improvement, loss or deterioration of the
thing during the pendency of the condition:
(4) If it deteriorates through the fault of the debtor, the creditor may
choose between the rescission of the obligation and its fulfillment, with
indemnity for damages in either case;
* Prior to the fulfillment of a suspensive condition, If the object of the prestation
deteriorates through the fault of the debtor, the creditor could choose to rescind
the contract with damages.
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with Articles 1385 and 1388
and the Mortgage Law. (1124)
Rescission Art 1380 Distinguished from Resolution Art 1191
1191
Similarities
Who may
demand
1380
1 Presupposes contracts validly entered into and

. existing
2
. Mutual restitution when declared proper
Only by a party to the 1.
Party
to
the
contract
contract
suffering lesion
2. Third parties
prejudiced by the
contract

Non-performance
tacit
(implied Various reasons of

equity
provided
by
the
condition in reciprocal
grounds,
mainly
economic
obligations)
injury
or lesions
Grounds
Scope
Judicial
of Court
sufficiency of
Control
Kind of
Obligation
determines
Sufficiency of reason
does not affect right
reason to justify
to
extension
of
time
to ask for rescission
perform
(cannot
obligation
be refused if all the
(whether slight or casual requisites
are
breach)
satisfied)
Only to reciprocal
Even when contract

is
fully fulfilled
applicable to
Character
Unilateral, reciprocal
Principal Remedy
Secondary/
Subsidiary
Art. 1203. If through the creditor's acts the debtor cannot make a choice
according to the terms of the obligation, the latter may rescind the
contract with damages. (n)
* In alternative obligation, if the debtor is has been prevented from making a
choice due to the fault of the creditor, the debtor can ask for the rescission of the
contract with damages.
Art. 1192. In case both parties have committed a breach of the obligation, the
liability of the first infractor shall be equitably tempered by the courts. If it
cannot be determined which of the parties first violated the contract, the same
shall be deemed extinguished, and each shall bear his own damages. (n)
in pari delicto (in equal fault) both parties are equally at fault, the court may
deem the contract extinguished if it cannot determine who is the first infractor.
EFFECTS OF RESCISSION
Art. 1385. Rescission creates the obligation to return the things which were
the object of the contract, together with their fruits, and the price with
its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of
the contract are legally in the possession of third persons who did not act
in bad faith.
In this case, indemnity for damages may be demanded from the
person causing the loss. (1295)
In restitution, the parties, shall be placed in the same position where they were
before they entered into the assailed contract. The objective is to restore the parties
to their original position. Not only should the parties return the object subject of the
rescissible contract but also the fruits or interest if any. If the object of the contract
cannot be restored because of loss, damages may be claimed from the person
responsible for the loss. (Sta. Maria)
A party cannot rescind the and at the same time retain the consideration, or part of
the consideration, received under the contract. One cannot have the benefits of
rescission without assuming its burdens.
When things, which are the object of a contract ,is legally in the possession of a third
person who acquired them in good faith, rescission cannot take place.
EXTENT OF RESCISSION
Art. 1384. Rescission shall be only to the extent necessary to cover
the damages caused. (n)
* The extent of the revocation is only to the amount of the prejudice suffered by the
creditor who instituted the action for rescission. As to the excess, the alienation is
maintained.
Who may bring action for rescission?
The creditor injured by the contract
The heirs of the creditor injured by the contract.
The creditors of the creditor injured by the contract by virtue of the right granted
by Article 1177 (accion subrogatoria)
PRESUMPTIONS OF FRAUD
Art. 1387. All contracts by virtue of which the debtor alienates property by
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Under Art. 1191, the power to rescind obligations is

implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between
gratuitous title are presumed to have been entered into in fraud of
creditors, when the donor did not reserve sufficient property to pay all
debts contracted before the donation.
Alienations by onerous title are also presumed fraudulent when made by
persons against whom some judgment has been issued. The decision or
attachment need not refer to the property alienated, and need not have
been obtained by the party seeking the rescission.
In addition to these presumptions, the design to defraud creditors may be
proved in any other manner recognized by the law of evidence. (1297a)
Applies only when the there has been in fact an alienation or transfer or transfer.
Rebuttal by evidence that conveyance was made:
in good faith
for a sufficient cause
Art. 1388. Whoever acquires in bad faith the things alienated in fraud of
creditors, shall indemnify the latter for damages suffered by them on
account of the alienation, whenever, due to any cause, it should be
impossible for him to return them.
If there are two or more alienations, the first acquirer shall be liable first,
and so on successively. (1298a)
PRESCRIPTIVE PERIOD
Art. 1389. The action to claim rescission must be commenced within
four years.
For persons under guardianship and for absentees, the period of four
years shall not begin until the termination of the former's incapacity, or
until the domicile of the latter is known. (1299)
* prescriptive period begins to run after the aggrieved party has unsuccessfully
exhausted all possible remedies to enforce the obligation or to recover what has
been lost.
UNIVERSAL FOOD v CA, G.R. No. L-29155; May 13, 1970

FACTS:
That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented
a formula for the manufacture of a food seasoning (sauce) derived from
banana fruits popularly known as MAFRAN sauce.
Due to lack of sufficient capital to finance the expansion of the business, in 1960,
said plaintiff secured the financial assistance of Tirso T. Reyes who, after a
series of negotiations, formed with others defendant Universal Food
Corporation eventually leading to the execution on May 11, 1960 a "Bill of
Assignment".
Conformably with the terms and conditions, plaintiff Magdalo V. Francisco, Sr.
was appointed Chief Chemist and plaintiff Victoriano V. Francisco was
appointed auditor and superintendent. Since the start of the operation of
defendant corporation, plaintiff Magdalo V. Francisco, Sr., when preparing the
secret materials inside the laboratory, never allowed anyone, not even his
own son, or the President and General Manager Tirso T. Reyes, of defendant,
to enter the laboratory in order to keep the formula secret to himself.
Thereafter, however, due to the alleged scarcity and high prices of raw materials,
on November 28, 1960, Secretary-Treasurer Ciriaco L. de Guzman of defendant
issued a Memorandum, that only Supervisor Ricardo Francisco should be
retained in the factory and that the salary of plaintiff Magdalo V. Francisco, Sr.,
should be stopped for the time being until the corporation should resume its
operation.
Plaintiff Magdalo V. Francisco, Sr. received his salary as Chief Chemist in the
amount of P300.00 a month only until his services were terminated on
November 30, 1960.
Due to these successive memoranda, without plaintiff Magdalo V. Francisco, Sr.
being recalled back to work, the latter filed the present action on February
14, 1961.
About a month afterwards, in a letter dated March 20, 1961,
defendant, thru its President and General Manager, requested said plaintiff to
report for duty, but the latter declined the request because the present action
was already filed in court
ISSUE: WON Franscisco can rescind the contract
HELD: Yes
RATIO:
94 of 106
fulfillment and rescission of the obligation, with payment of damages in

either case.
The general rule is that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental breach as would
defeat the very object of the parties in making the agreement. The question of
whether a breach of a contract is substantial depends upon the attendant
circumstances. The dismissal of the respondent patentee Magdalo V.
Francisco, Sr. as the permanent chief chemist of the corporation is a
fundamental and substantial breach of the Bill of Assignment. He was
dismissed without any fault or negligence on his part. Thus, apart from the
legal principle that the option to demand performance or ask for rescission
of a contract belongs to the injured party, the fact remains that the
respondents-appellees had no alternative but to file the present action for
rescission and damages.
MAGDALENA ESTATE v MYRICK, G.R. No. 47774, March 14, 1941
FACTS:
Magdalena Estate, Inc. sold to Louis Myrick lots No. 28 and 29 of Block 1, Parcel 9
of the San Juan Subdivision, San Juan, Rizal. Their contract of sale provides
that the Price of P7,953 shall be payable in 120 equal monthly installments of
P96.39 each on the second day of every month beginning the date of
execution of the agreement.
In pursuance of said agreement, the vendee made several payments amounting to
P2,596.08, the last being due and unpaid was that of May 2, 1930. By reason of
this, the vendor, through its president, notified the vendee that, in view of his
inability to comply with the terms of their contract, said agreement had been
cancelled, relieving him of any further obligation thereunder, and that all amounts
paid by him had been forfeited in favor of the vendor. To this communication, the
vendee did not reply, and it appears likewise that the vendor
thereafter did not require him to make any further disbursements on account
of the purchase price.
ISSUE: Was the petitioner authorized to forfeit the purchase price paid?
HELD: No.
RATIO:
The contract of sale contains no provision authorizing the vendor, in the event of
failure of the vendee to continue in the payment of the stipulated monthly
installments, to retain the amounts paid to him on account of the purchase
price. The claim therefore, of the petitioner that it has the right to forfeit said sums in
its favor is untenable. Under Article 1124 of the Civil Code, however, he may choose
between demanding the fulfillment of the contract or its resolution. These remedies
are alternative and not cumulative, and the petitioner in this case, having elected to
cancel the contract cannot avail himself of the other remedy of exacting
performance. As a consequence of the resolution, the parties should be restored, as
far as practicable, to their original situation which can be approximated only be
ordering the return of the things which were the object of the contract, with their
fruits and of the price, with its interest, computed from the date of institution of the
action.
U.P. v DELOS ANGELES, G.R. No. L-28602
FACTS:
On November 2, 1960, UP and ALUMCO entered into a logging agreement whereby the
latter was granted exclusive authority to cut, collect and remove timber from the Land
Grant for a period starting from the date of agreement to December 31, 1965, extendible
for a period of 5 years by mutual agreement.
On December 8, 1964, ALUMCO incurred an unpaid account of P219,362.94.

Despite repeated demands, ALUMCO still failed to pay, so UP sent a notice to
rescind the logging agreement. On the other hand, ALUMCO executed an
instrument entitled Acknowledgment of Debt and Proposed Manner of
Payments. It was approved by the president of UP, which stipulated the
following:
3. In the event that the payments called for are not sufficient to liquidate the
foregoing indebtedness, the balance outstanding after the said payments have
been applied shall be paid by the debtor in full no later than June 30, 1965.
5. In the event that the debtor fails to comply with any of its promises, the Debtor
agrees without reservation that Creditor shall have the right to consider the Logging
Agreement rescinded, without the necessity of any judicial suit ALUMCO continued its
logging operations, but again incurred an unpaid account. On July 19,1965, UP
informed ALUMCO that it had, as of that date, considered rescinded and of no further
legal effect the logging agreement, and that UP had already taken steps to have
another concessionaire take over the logging operation. ALUMCO filed a petition to
enjoin UP from conducting the bidding. The lower court ruled in favor of ALUMCO,
hence, this appeal.
ISSUE: Can petitioner UP treat its contract with ALUMCO rescinded, and may
disregard the same before any judicial pronouncement to that effect?
95 of 106
HELD: Yes.
RATIO:
In the first place, UP and ALUMCO had expressly stipulated that upon default by the
debtor, UP has the right and the power to consider the Logging Agreement of
December 2, 1960 as rescinded without the necessity of any judicial suit. As to such
special stipulation and in connection with Article 1191 of the Civil Code, the Supreme
Court, stated in Froilan vs. Pan Oriental Shipping Co:
There is nothing in the law that prohibits the parties from entering into agreement that
violation of the terms of the contract would cause cancellation thereof, even without court
intervention. In other words, it is not always necessary for the injured party to resort to
court for rescission of the contract.
Voidable or Annullable
a contract in which the consent of one party is defective, either because of want
of capacity or because it is vitiated, but which contract is valid until set aside by a
competent court. -Tolentino
KINDS OF VOIDABLE OR ANNULLABLE CONTRACTS
Art. 1390. The following contracts are voidable or annullable, even
though there may have been no damage to the contracting parties:
Those where one of the parties is incapable of giving consent to a contract;
Those where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud.
These contracts are binding, unless they are annulled by a proper action in court.
They are susceptible of ratification. (n)
There may have been be no damage to the contracting parties
want of capacity
vitiated consent
CHARACTERISTICS OF VOIDABLE CONTRACTS

Their defect consists in the vitiation of consent of one of the contracting
parties
They are binding until they are annulled by a competent court
They are susceptible of convalidation by ratification or by prescription
MERCADO v ESPIRITU, G.R. No. L-11872; December 1, 1917

FACTS:
Margarita Espiritu, the mother of the plaintiffs, on May 25, 1894 sold to Luis Espiritu, her
brother, a portion of her land for P2000 which she acquired from her father, Lucas
Espiritu. On 1896/1897 however, Margarita died and she left to her children Domingo and
Josefa 12 hectares of land in Bulacan. The widower, Wenceslao Mercado, as the
administrator of the property of his children sold under pacto de retro on May 14, 1901 a
parcel of land worth P375 to Luis to "cover his children's needs". And this amount being
insufficient he successively borrowed from said Luis Espiritu other sums of money
aggregating a total of p600, but later, on May 17, 1910, the plaintiffs, alleging themselves
to be of legal age, executed, with their sisters ratifying said sale under pacto de retro of
the land that had belonged to their mother, effected by their father in favor of Luis
Espiritu for the sum of p2600. Because of the past revolution, official documents like birth
certificates were burned. It is important to note that Wenceslao kept a personal journal
which states that the plaintiffs were indeed minors upon the sale of the land in 1894. So,
on May 20, 1901, a notarized deed of the land is procured by Wenceslao in his name and
the name of his children (who allege that they were minors at the time) and at the same
time, proves that a portion of the land in question was sold to Luis in 1894.
By 1904, Wenceslao died, his children files for the annulment of the sale
Luis Espiritu, who also died, so the case is filed against his son, Jose Espiritu.
ISSUES:
Whether or not the plaintiffs were minors at the date of the sale in 1894.
Whether or not the plaintiffs can ask for the nullification of the sale due to their
minority.
HELD:
There are insufficient facts to prove the plaintiffs' minority
No. Minors were held liable because of active misrepresentation.

RATIO:
The statement made by one of the adult parties of said deed, in reference to
certain notes made in a book or copybook of a private nature, which she said
their father kept during his lifetime and until his death, is not sufficient to
prove the plaintiffs minority on the date of the execution of the deed.
The courts, in their interpretation of the law, have laid down the rule that the sale of
real estate, made by minors who pretend to be of legal age, when in fact they are
not, is valid, and they will not be permitted
96 of 106
to excuse themselves from the fulfillment of the obligations contracted by

them, or to have them annulled in pursuance of the provisions of Law 6, title
19, of the 6th Partida; and the judgment that holds such a sale to be valid
and absolves the purchaser from the complaint filed against him does not
violate the laws relative to the sale of minors' property, nor the juridical rules
established in consonance therewith.
BRAGANZA v DE VILLA ABRILLE, G.R. No. L-12471; April 13, 1959
FACTS:
Petitioners received from Villa Abrille, as a loan, on October 30, 1944 P70,000 in
Japanese war notes and in consideration thereof, promised in writing (Exhibit
A) to pay him P10,000 "in legal currency of the P. I. two years after the
cessation of the present hostilities or as soon as International Exchange has
been established in the Philippines", plus 2 % per annum.
Because payment had not been made, Villa Abrille sued them in March
1949.
Defendants claimed to have received P40,000 only instead of P70,000 as plaintiff
asserted. They also averred that Guillermo and Rodolfo were minors when they
signed the promissory note Exhibit A.
The Court of Appeals found them liable pursuant to the following reasoning:
. . . . These two appellants did not make it appears in the promissory note that they
were not yet of legal age. If they were really to their creditor, they should have
appraised him on their incapacity, and if the former, in spite of the information
relative to their age, parted with his money, then he should be contended with the
consequence of his act. But, that was not the case. Perhaps defendants in their desire
to acquire much needed money, they readily and willingly signed the promissory
note, without disclosing the legal impediment with respect to Guillermo and Rodolfo.
When minor, like in the instant case, pretended to be of legal age, in fact they were
not, they will not later on be permitted to excuse themselves from the fulfillment of
the obligation contracted by them or to have it annulled. (Mercado, et al. vs. Espiritu,
37 Phil., 215.)
ISSUE: WON Rodolfo and Guillermo Braganza could be legally bound by their
signatures in Exhibit A? No!
RATIO:
The Mecado case cited in the decision under review is different because
the document signed therein by the minor specifically stated he was of age; here
Exhibit A contained no such statement. In other words, in the Mercado case, the
minor was guilty of active misrepresentation; whereas in this case, if the minors
were guilty at all, which we doubt it is of passive (or constructive)
misrepresentation.
In order to hold infant liable, however, the fraud must be actual and not
constructure. It has been held that his mere silence when making a contract as
to age does not constitute a fraud which can be made the basis of an action of
decit.
The fraud of which an infant may be held liable to one who contracts with him in the
belief that he is of full age must be actual not constructive, and mere failure of the
infant to disclose his age is not sufficient.
Upon the other hand, these minors may not be entirely absolved from monetary
responsibility. In accordance with the provisions of Civil Code, even if their
written contact is unenforceable because of non-age, they shall make restitution
to the extent that they have profited by the money they received. (Art. 1340)
There is testimony that the funds delivered to them by Villa Abrille were used for
their support during the Japanese occupation. Such being the case, it is but fair
to hold that they had profited to the extent of the value of such money.
Wherefore, as the share of these minors was 2/3 of P70,000 of P46,666.66, they
should now return P1,166.67.3 Their promise to pay P10,000 in Philippine
currency, (Exhibit A) can not be enforced, as already stated, since they were
minors incapable of binding themselves. Their liability, to repeat, is presently
declared without regard of said Exhibit A, but solely in pursuance of Article 1304
of the Civil Code.
INCAPABLE OF GIVING CONSENT
Article 234. (Family Code). Emancipation takes place by the attainment
of majority. Unless otherwise provided, majority commences at the age
of twenty-one years. Emancipation also takes place:
By the marriage of the minor; or
By the recording in the Civil Register of an agreement in a public
instrument executed by the parent exercising parental authority and
the minor at least eighteen years of age. Such emancipation shall be
irrevocable. (397a, 398a, 400a, 401a)
Art. 1327. The following cannot give consent to a contract:
Unemancipated minors;
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Insane or demented persons, and deaf-mutes who do not know how to

write. (1263a)
Art. 1328. Contracts entered into during a lucid interval are valid. Contracts
agreed to in a state of drunkenness or during a hypnotic spell are voidable.
(n)
minors
deaf-mutes who cannot write
insane
imbeciles or demented
under civil interdiction
hypnotized
intoxicated
VITIATED CONSENT
a) MISTAKE
Art. 1331. In order that mistake may invalidate consent, it should refer to
the substance of the thing which is the object of the contract, or to those
conditions which have principally moved one or both parties to enter into
the contract.
Mistake as to the identity or qualifications of one of the parties will
vitiate consent only when such identity or qualifications have been the
principal cause of the contract.
A simple mistake of account shall give rise to its correction. (1226a)
Art. 1333. There is no mistake if the party alleging it knew the doubt,
contingency or risk affecting the object of the contract. (n)
Mistake should refer to the substance of the thing which is the object of the contract,
or those conditions which principally induced the parties to enter into a contract.
Conditions must not be mere incidents to the consideration.
b) VIOLENCE and INTIMIDATION
Art. 1335. There is violence when in order to wrest consent, serious

or irresistible force is employed.
There is intimidation when one of the contracting parties is compelled by a
reasonable and well-grounded fear of an imminent and grave evil upon his
person or property, or upon the person or property of his house,
descendants or ascendants, to give his consent.
To determine the degree of intimidation, the age, sex and condition of
the person shall be borne in mind.
A threat to enforce one's claim through competent authority, if the claim
is just or legal, does not vitiate consent. (1267a)
Art. 1336. Violence or intimidation shall annul the obligation, although it
may have been employed by a third person who did not take part in the
contract. (1268)
The violence must be serious and irresistible.
The duress or intimidation must be more than the general feeling of fear.
There must be acts or instances of such nature and magnitude as to have, of
themselves, inflicted fear or terror upon the subject thereof that his execution of the
questioned deed or act cannot be considered voluntary.
c) UNDUE INFLUENCE
Art. 1337. There is undue influence when a person takes improper advantage
of his power over the will of another, depriving the latter of a reasonable
freedom of choice. The following circumstances shall be considered: the
confidential, family, spiritual and other relations between the parties, or the
fact that the person alleged to have been unduly influenced was suffering from
mental weakness, or was ignorant or in financial distress. (n)
Undue influence is unrighteous, illegal and designed to perpetrate wrong. The party
influenced must be deceived by some false representation, stratagem or by coercion,
physical or moral.
Not all influence is prohibited by law. Solicitations and entreaties, fair argument
and persuasion, or appeals to the emotions or affections will not amount to undue
influence unless they overcome the will of the person and take away his ability to
act as a free agent.
98 of 106
d) FRAUD
Art. 1338. There is fraud when, through insidious words or machinations
of one of the contracting parties, the other is induced to enter into a
contract which, without them, he would not have agreed to. (1269)
* Generally, fraud, either at law or in equity, is a false representation of a material
fact made by word or conduct with knowledge of its falsehood or in reckless disregard
of its truth, in order to induce and actually inducing another to act thereon to his
injury.
Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as
when the parties are bound by confidential relations, constitutes fraud. (n)
* The mere fact that one of the parties has superior knowledge of the value of the
property subject of the transaction than the other party does not per se constitute
fraud. There is only fraud when a legal or equitable duty is imposed upon the
dominant party to reveal certain facts material to the transaction or where there is a
confidential relationship between the parties.
Art. 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does not signify fraud, unless
made by an expert and the other party has relied on the former's special
knowledge. (n)
Other party must know that he is an expert.
Other party relied on the opinion based on that knowledge
Art. 1342. Misrepresentation by a third person does not vitiate consent,
unless such misrepresentation has created substantial mistake and the
same is mutual. (n)
* Where both parties gave consent to a contract due to a substantial mistake caused
by a third party, the contract can be annulled.
Art. 1343. Misrepresentation made in good faith is not fraudulent but may
constitute error. (n)
Every fraud is a misrepresentation, but not every misrepresentation is

fraudulent.
Misrepresentation may be made without knowledge of its falsity and therefore
completely done in good faith. In such a case, it would constitute a mistake.
Art. 1344. In order that fraud may make a contract voidable, it should be
serious and should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.

(1270)
Must not be in pari delicto
Must not be dolo incidente which is accidental and collateral fraud
Must be dolo causante which refers to the very cause why the other party entered
into the contract
WHO MAY AND MAY NOT INSTITUTE AN ACTION FOR ANNULMENT
Art. 1397. The action for the annulment of contracts may be instituted by
all who are thereby obliged principally or subsidiarily. However, persons
who are capable cannot allege the incapacity of those with whom they
contracted; nor can those who exerted intimidation, violence, or undue
influence, or employed fraud, or caused mistake base their action upon
these flaws of the contract. (1302a)
Who May:
All who are obliged principally or subsidiarily
Interest in the contract there must be legal capacity by being bound to the contract
either principally or subsidiarily
victim and not party responsible for the defect he who comes to the court must
come with clean hands (clean hands doctrine)
Who May Not:
Capable parties cannot allege the incapacity of those with whom they
contracted
Parties who exerted intimidation, violence or undue influence or employed fraud or
caused mistake
third person who is stranger to the contract. UNLESS he can prove that the contract
prejudiced his rights with respect to one of the contracting parties, he
99 of 106
may ask for annulment e.g. guarantors and sureties.

PRESCRIPTIVE PERIOD
Art. 1391. The action for annulment shall be brought within four years.
This period shall begin:
In cases of intimidation, violence or udue influence, from the time
the defect of the consent ceases.
In case of mistake or fraud, from the time of the discovery of the
same.
And when the action refers to contracts entered into by minors or other
incapacitated persons, from the time the guardianship ceases. (1301a)
Period shall begin:
Intimidation, violence or undue influence- from the time consensual defect

ceases
Mistake or fraud- from the time of discovery of the same
Incapacity- from the time guardianship ceases
Extinctive prescription shall apply not only to action for annulment, but also the the
defense of nullity
applies to parties to the contract, but not to third parties.
OTHER INSTANCES WHERE AN ACTION FOR ANNULMENT IS EXTINGUISHED
Art. 1392. Ratification extinguishes the action to annul a voidable
contract. (1309a)
* Ratification the act of curing the defect which made the contract annullable
Art. 1393. Ratification may be effected expressly or tacitly. It is understood
that there is a tacit ratification if, with knowledge of the reason which
renders the contract voidable and such reason having ceased, the person
who has a right to invoke it should execute an act which necessarily implies
an intention to waive his right. (1311a)
Art. 1394. Ratification may
incapacitated person. (n)
be
effected
by
the
guardian
of
the
Art.1395. Ratification does not require the conformity of the contracting

party who has no right to bring the action for annulment. (1312)
* Ratification is a unilateral act. It is usually done by the injured party and not by the
party causing the injury. The consent of the injuring party is not required because
such party normally desires the effectivity of the contract anyway from its inception.
Art. 1396. Ratification cleanses the contract from all its defects from
the moment it was constituted. (1313)
* Ratification transforms the contract completely as one without infirmity. This curing
effect retroacts to the day when the contract was entered into. Hence, upon
ratification, it is as if the contract has never been visited by any infirmity or defect at
all.
Art. 1401. The action for annulment of contracts shall be extinguished
when the thing which is the object thereof is lost through the fraud or
fault of the person who has a right to institute the proceedings.
If the right of action is based upon the incapacity of any one of the
contracting parties, the loss of the thing shall not be an obstacle to the
success of the action, unless said loss took place through the fraud or fault
of the plaintiff. (1314a)
It is a rule that no one can come to court with unclean hands. Hence, the injured
party lost the thing which is the object of the obligation by his fault, he cannot seek
the annulment of the contract as such right will be considered extinguished.
However, if the party is one who is incapacitated, the mere fact that the thing which
is the object of the obligation has been lost, the incapacitated person is not obliged
to make any restitution except when it has benefited him.
EFFECT OF ANNULMENT
Art. 1398. An obligation having been annulled, the contracting parties shall
restore to each other the things which have been the subject matter of the
contract, with their fruits, and the price with its interest, except in cases

Page 100 of 106
provided by law.
In obligations to render service, the value thereof shall be the basis
for damages. (1303a)
* When the annulment of the contract has been decreed, the contracting parties
must be returned to their original position. Hence, whatever has been given must
be returned to the giver.
Art. 1399. When the defect of the contract consists in the incapacity of one
of the parties, the incapacitated person is not obliged to make any
restitution except insofar as he has been benefited by the thing or price
received by him. (1304)
* However, the law states that when the defect of the contract consists in the
incapacity of one of the parties, the incapacitated person is not obliged to make any
restitution except insofar as has been benefited by the thing or price received by
him.
Art. 1400. Whenever the person obliged by the decree of annulment to
return the thing can not do so because it has been lost through his fault, he
shall return the fruits received and the value of the thing at the time of the
loss, with interest from the same date. (1307a)
* When the object to be returned cannot be returned because it was lost by the
person obliged to return it due to fault of the said person, the value of the object, its
fruits, and interest shall be given instead to satisfy the order of restitution.
Art. 1402. As long as one of the contracting parties does not restore what
in virtue of the decree of annulment he is bound to return, the other
cannot be compelled to comply with what is incumbent upon him. (1308)
* Restitution requires the return by the parties of what each has received from the
other. If one of them cannot restore to the other what he has received from the said
other, such other person cannot be compelled to return what he, in turn, has
received. (However, Article 1399)
Unenforceable Contracts
Contracts that cannot be enforced unless ratified in the manner provided

by law
Occupies an intermediate ground between voidable and void contracts
Unenforceable
Rescissible & Voidable

With legal effects unless
Legal Effect
No legal effect unless set
aside by a competent
ratified
court
Defectivenes Nearer to absolute Farther
from
absolute
s
nullity
nullity
Kinds of Unenforceable Contracts
Unauthorized contracts (Art. 1403, 1)
Those that fail to comply with the Statute of Frauds (Art. 1403, 2)
Those where both parties are incapable of giving consent to a contract
(Art. 1403, 3)
Unauthorized contracts: contracts entered into by a person for and in the
name of another, without authority to do so.
An unauthorized contract may be ratified, expressly or impliedly, by the
person on whose behalf it has been executed, before it is revoked by the
other contracting party (Art. 1317).
The agent assumes personal liability until it is ratified.
If the agent contracts in the name of the principal, exceeding the scope of his
authority, and the other party is aware of the limits of the powers granted
by the principal, and the principal does not ratify the contract, it shall be
void. However, the agent is liable if he undertook to secure the principal's
ratification (Art. 1898).
Contracts not in compliance with the Statute of Frauds: contracts which
are not put into writing as required by law
Statute of frauds: It is descriptive of laws, statutes or provisions
requiring certain agreements to be in writing before they can be
enforced in a judicial action
Purpose: To prevent fraud and perjury in the enforcement of
obligations
Effect: Only makes ineffective the action for specific performance
General rules of application:
o It applies only to executory contracts and not to partially or
completely executed contracts.
It applies exlusively to actions for specific performance of the
contract or for damages.

Page 101 of 106
It applies only to the agreements or contracts enumerated in Art.

1403, 2.
The defense of the Statute of Frauds may be waived.
The Statute of Frauds is a personal defense. A contract infringing it
cannot be assailed by third persons (Art. 1408).
The Statute of Frauds is only concerned with the admissibility of
evidence, not the credibility or weight thereof.
An agreement not covered by the Statute of Frauds is provable

by oral evidence.
Required Note or Memorandum by the Statute of Frauds (may be in one

writing or in separate ones)
The names of the parties

o The terms and conditions of the agreement
A description of the subject matter sufficient to render it capable of
identification
o The date and place of the making of the agreement
The signature of the party assuming the obligation
Exception: sale by auction
The amount and kind of property sold

The terms of the sale
The price
The names of the purchasers and persons on whose
account the sale is made
6 Agreements Covered by the Statute of Frauds (Art. 1403, 2)

An agreement that by its terms is not to be performed within a year
from the making thereof
o Only full or complete performance by one side will take the case out
of the operation of the Statute
A special promise to answer for the debt, default, or miscarriage of
another
o Subsidiary or collateral promise to pay, contract of guaranty
An agreement made in consideration of marriage other than a mutual
promise to marry
o Marriage settlements, donations propter nuptias
An agreement for the sale of goods, chattels, or things in action, at a price not
less than five hundred pesos
o In separable contracts, each article is taken separately, and the
application of the Statute depends upon its price.
Exceptions: partial payment, buyers acceptance of part of the

goods
An agreement for the leasing for a longer period than one year, or for the sale
of real property or of an interest therein
Lease of real property for more than one year
Sale of real property, regardless of price

A representation as to the credit of a third person
Not a guaranty for there is no promise to answer for anothers debt;

only an assurance by a person who does not take part in the
contract proper
Under Art. 1443, the Statute of Frauds also applies to express trusts
concerning an immovable or any interest therein.
Contracts where both parties are incapable of giving consent:
Upon ratification by one party, the unenforceable contract is converted to a
voidable one.
Ratification of Unenforceable Contracts
Mere lapse of time does not ratify an unenforceable contract.
Unenforceable
Contract
Ratification
Express or implied, by the
Unauthorized
person
on whose behalf the contract
has
been executed
Infringing the Statute of
Frauds
Failure to object to the
presentation of oral evidence
to
prove the contract OR
Acceptance of benefit under
the
contracts
Both parties are incapacitated Express or implied,
Voidable if by the parent or
the
guardian of one of the parties
Valid if by the parents or the
guardians of both parties
Ortega v. Leonardo (1958) Facts:
Ortega was occupying a parcel of land in San Andres, Malate. The said land was
assigned by the Government to the Rural Progress Administration. As occupant, she
asserted her right to purchase the land. Leonardo asserted the similar right,

Page 102 of 106
alleging occupancy of the same land. He promised Ortega that he would sell to her a
portion of the lot if she would desist from pressing her claim. There were conditions
given by Leonardo. Ortega must: 1) pay for the surveying and subdivision of the Lot;
and 2) continue holding the lot as tenant by paying a monthly rental of P10.00 until
said portion shall have been segregated and the purchase price fully paid. Upon
Leonardos acquisition of the title, Ortega fulfilled all the conditions. She tendered to
him the purchase price which the latter refused to accept.
Issue: WON their oral agreement to sell the piece of land is covered by the
Statute of Frauds
Held:
No. The contract has been partially performed by Ortega. Partial payment of the purchase
price alone is not sufficient to constitute partial performance. However, in the case at bar,
there were several circumstances indicating partial performance: 1) relinquishment of
rights, 2) continued possession, 3) building of improvements on the land, 4) tender of
payment, 5) surveying of the lot at
Ortegas expense, 6) payment of rentals. None of these would separately suffice, but
the combination of relinquishment, survey and tender, is more than enough.
Babao v. Perez (1957) Facts:

Celestina Perez owned a parcel of land in San Juan, Batangas. Her niece married
Santiago Babao. Babao and she entered into a verbal agreement. Babao would
improve the land by leveling and clearing all the forest trees, and by planting crops.
He would also act as the administrator of the land, with all expenses at his cost.
Perez, in turn, would convey to him or to his wife half of the land, together with all
the improvements thereon. Babao left 50 of 156 hectares unimproved. A few days
before Perez died, she sold 127 ha. of the land in question. This deprived Babao of
possession and administration of the land.
Issue: WON the alleged verbal agreement falls within the prohibition of the
Statute of Frauds
Held:
Yes. The alleged verbal agreement appears to be one with terms of non-performance
within one year. In such case, all that is required is complete performance within one year
by one party. Nothing less than full performance by one party will suffice. Babao,
therefore, did not fully comply with the alleged contract. Also, the agreement cannot be
considered as a sale of real property
or of an interest therein, which could accept the partial performance of Babao. It is

because such an oral agreement must not be vague and ambiguous for it to be
enforceable on the ground of partial performance. It must be clear and definite. In
this case, the agreement did not specify the number of hectares to be planted with
coconuts, rice, corn or other crops. A witness even testified to the vagueness and
ambiguity of the agreement. Therefore, Babao cannot recover half of the land by
virtue of the oral agreement. His oral evidence was submitted in violation of the
Statute of Frauds.
Cabague v. Auxilio (1952) Facts:

Auxilio and his daughter promised marriage to Cabagues son on the condition that
the Cabagues would improve the Auxilios house and spend for the wedding feast
and the needs of the bride. Relying on the other partys promise, the Cabagues made
the improvement and spent P700. The Auxilios, however, refused to fulfill their part.
Issue: WON their oral transaction may be proved in court
Held:
No. The transaction actually involves two kinds of agreements. One is the lovers
mutual promise to marry. The other is an agreement made upon consideration of the
marriage. Cabagues son may sue the girl for damages by reason of breach of their
mutual promise to marry. But Cabague cannot sue anyone for the other agreement.
It cannot be enforced because it was covered by the Statute of Frauds oral
evidence is not admissible to prove an agreement made upon the consideration of
marriage, other than a mutual promise to marry.
Litonjua v. Fernandez (2004) Facts:

Two brokers offered to sell parcels of land in San Pablo City to the Litonjuas. They
arranged to meet Fernandez who was representing the owners of the said land. It was
agreed that the Litonjuas would purchase the land, and such sale would be finalized on a
certain date. This did not take place because Fernandez was encountering some problems
with the tenants. The Litonjuas demanded the finalization of the transaction, the
execution of the Deed of Absolute Sale, and the turnover of the subject properties. In
reply, Fernandez wrote a letter denying her agreement to sell the land. She also said that
because of the

Page 103 of 106
problem with the tenants, the sale would not push through anymore. They would no
longer be selling the property until all the problems had been settled.
Issue: WON Fernandez letter to Litonjua is a sufficient note or memorandum

required by the Statute of Frauds
Held:
No. The letter revealed a consistent denial of having a commitment to sell the
properties. There was no perfected contract of sale or contract to sell. There was
even no evidence to show that the owners of the land authorized Fernandez to sell
their properties. The application of the Statute of Frauds presupposes the existence
of a perfected contract. However, the required note or memorandum must contain
the essential elements of the contract expressed with certainty: 1) all the essential
terms and conditions of the sale of the properties; 2) an accurate description of the
property subject of the sale; and, 3) the names of the owners of the properties. This
was not the case in the letter sent by Fernandez to the Litonjuas. Fernandez and the
owners, then, could not be held liable in the action for specific performance with
damages.
D. Void
Contracts which have no force and effect from the very beginning, as if it had
never been entered into
Characteristics of Void Contracts
The action or defense for their declaration as inexistent does not

prescribe (Art. 1410).
The right to set up the defense of illegality cannot be waived (Art. 1409), and
may be considered on appeal even if not raised in the trial court.
The defense of illegality of contracts is not available to third persons whose
interests are not directly affected (Art. 1421).
Cannot give rise to a contract; a contract which is the direct result of a
previous illegal contract is also void and inexistent (Art. 1422)
Generally produces no effect
No action for annulment is necessary, because the nullity exists ipso jure; a
judgment of nullity would be merely declaratory
Cannot be ratified (Art. 1409)
Technically, the action to annul a void or inexistent contract does not

prescribe. Nonetheless, it may be barred by laches.
Void Contract
Rescissible Contract
Defect inherent in the contract Defect in their effects, either to
itself
one of
the parties or a third party
Nullity a matter of law and Nullity based on equity and
public
more a
interest
matter of private interest
No legal effects even if no Remains valid and produces all
action is
its
effects if no action is taken to
taken to set it aside
set it
aside
Action to declare nullity never
Action to rescind prescribes
prescribes
Void Contract
Cannot be ratified
Generally,
effects
are
not
produced at
all
Ordinarily, the defect is that
public
policy is militated against
Void from the very beginning so
generally, no action is required
to set
it aside, unless the contract has
already been performed
Cannot be cured by prescription
Defense may be availed of by
anybody
whose
interest
is
directly
affected
Referred to as absolute nullity
Void Contract
Cannot be ratified
Voidable Contract
May be ratified
Produces effects until annulled
The defect is due to incapacity
or
vitiated consent
Valid until annulled
May be cured by prescription

Defense may be invoked only
the
parties,
principally
subsidiarily
liable, or their successors
interest
and privies
Referred to as relative
conditional
nullity
by
or
in
or
Unenforceable Contract
May be ratified
There is a contract but it cannot
No contract at all
be
enforced by a court action
Can be assailed by anybody Cannot be assailed by third
directly
parties
affected

Page 104 of 106
7 Kinds of Void and Inexistent Contracts (Art. 1409)

Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy
o Restricts the freedom to contract
Those which are absolutely simulated or fictitious
If relatively simulated, the hidden or intended contract is generally

binding.
Those whose cause or object did not exist at the time of the transaction
But there can be valid contracts involving future property, e.g. sale
of future or after-acquired property
Those whose object is outside the commerce of men
Those which contemplate an impossible service
Those where the intention of the parties relative to the principal object of
the contract cannot be ascertained
Those expressly prohibited or declared void by law
On Labor:
When the law fixes, or authorizes the fixing of the maximum number of hours of
labor, and a contract is entered into whereby a laborer undertakes to work
longer than the maximum thus fixed, he may demand additional
compensation for service rendered beyond the time limit (Art. 1418).
When the law sets, or authorizes the setting of a minimum wage for laborers, and a
contract is agreed upon by which a laborer accepts a lower wage, he shall be
entitled to recover the deficiency (Art. 1419).
Cui v. Arellano (1961) Facts:

Cui was enrolled in the College of Law of Arellano University up to the first semester
of his senior year. All the time, he was awarded scholarship grants for scholastic
merit. He was made to sign the following contract or agreement: In consideration of
the scholarship granted to me by the University, I hereby waive my right to transfer
to another school without having refunded to the University (defendant) the
equivalent of my scholarship cash. His semestral tuition was returned to him at the
end of the semester. Capistrano, his uncle was the dean and legal counsel of the said
college. But he left to accept the deanship and chancellorship of the College of Law of
Abad Santos University. Cui could not pay his tuition in Arellano University, and so he
enrolled for the last semester
of his fourth year law in Abad Santos University where he subsequently graduated.
For his application to take the bar exam, he requested his transcript of records from
Arellano University. The latter refused. Cui was asked to pay back the tuition refunded
to him, totaling P1,033.87. He paid the amount under protest. The Bureau of Private
Schools previously issued a memorandum on the subject of scholarship. It upheld
Cuis right to secure his transcript of records without being required to refund.
Issue: WON the contract signed by Cui, waiving his right to transfer to another
school without refunding to Arellano the equivalent of scholarships, is valid
Held:
No. The stipulation in question is contrary to public policy, and hence, null and void.
The memorandum issued merely incorporates a sound principle of public policy.
Scholarships are awarded in recognition of merit, and not to keep outstanding
students in school to bolster its prestige. The practice of awarding scholarships to
attract students and keep them in school is not good customs nor has it received
some kind of social and practical confirmation. Scholarships are granted not to
attract and to keep brilliant students in school for propaganda, but to reward merit
or help gifted students in whom society has an established interest.
Saura v. Sindico (1960) Facts:

Saura and Sindico were contesting for nomination as the official candidate of the
Nacionalista party in the congressional elections. They entered into a written
agreement containing a pledge that no one of them shall either run as a rebel or
independent candidate after losing in said convention. Saura was chosen as the
Nacionalista Partys candidate. Sindico, however, still filed her certificate of
candidacy for the same office. Hence, this suit for the recovery of damages for
breach of contract.
Issue: WON the written agreement was null and void
Held:
Yes. Certain rights of individuals, which the law and public policy have deemed wise
to exclude from the commerce of man, may not be the object of contracts. These
include political rights inferred upon citizens, i.e., right to vote, right to present ones
candidacy to the people and be voted to public office. Such rights may not be
bargained for they are conferred for the public good and interest. The action for
damages by Saura cannot be entertained because it would result in limiting the
choice of the electors to only those persons selected by a small group or party
bosses.

Page 105 of 106
Effects of Declaration of Nullity

If the act in which the unlawful or forbidden cause consists constitutes a criminal
offense: (Art. 1411)
If both parties are in pari delicto: no action against each other

and both shall be prosecuted
If only one of the parties is at fault: the innocent one may claim
what he/she has given and shall not be bound to comply with his
promise
If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense: (Art. 1412)
If both are in pari delicto: cannot recover and cannot

demand performance against each other
If only one of the parties is at fault: the innocent one may claim
what he/she has given and shall not be bound to comply with his
promise
When else may recovery be allowed?
By the debtor: interest paid in excess of the interest allowed by

the usury laws, with interest thereon from the date of the payment
(Art. 1413)
By the party repudiating the contract: the money paid or property
delivered for an illegal purpose, when the purpose has not been
accomplished or there was no damage caused to a third person yet,
ONLY IF it will further public interest, as will be decided by the
courts (Art. 1414)
By the incapacitated person: money or property paid or delivered

in an illegal contract (Art. 1415)
By the plaintiff: money or property paid or delivered in a merely
prohibited agreement (not illegal per se), and that prohibition is for
his/her protection, ONLY IF public policy will be enhanced (Art.
1416)
By a purchaser: amount in excess of the maximum price, when there is
a statute determining the price of any article or commodity (Art. 1417)
Yu Bun Guan v. Ong (2001)
Facts:
Ong and Guan were married according to Chinese rites. Using her personal funds,
Ong purchased a parcel of land in Rizal, and registered it under her name. Using their
conjugal funds, the couple purchased a house and lot, registered in their names.
Guan abandoned his wife and three children. But before they got separated, Ong was
convinced by Guan to execute a Deed of Sale of her property in Rizal to him. In
return, Guan promised to construct a commercial building for their children. The
consideration for the simulated sale was a Deed of Absolute Sale to be executed in
favor of their children and that he would pay the loan he obtained. Guan did not pay
the consideration of P200,000 for the sale. Ong kept the new TCT to insure that Guan
would do what he promised.
Issue: WON the in pari delicto principle applies to absolutely simulated or
fictitious contracts
Held:
No. A deed of sale, where the stated consideration has not been paid, is null and
void. The sale in this case was absolutely simulated, thus, void. When the nullity
arises from the illegality of the consideration or the purpose of the contract,
recovery to the guilty parties is denied. But it is different with inexistent contracts
such as the simulated sale between Guan and Ong. In this case, Ong was not in pari
delicto with Guan. The contract was fictitious due to the lack of consideration. The
land in Rizal may be recovered by Ong who purchased the land using her personal
funds. The transfer certificate of title was cancelled, there being no legal basis for its
issuance.

Page 106 of 106

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OBLIGATIONS

| Baldueza | Buena | Calderon | Cardenas | Eguico | Flordeliza | Mendoza | Navarro | Velasco |

UNILATERAL where only one of the parties is bound

ACTIVE SUBJECT (Creditor / Obligee) the person who is demanding the

licit (if illicit, it is void)

possible (if impossible, it is void)

determinate or determinable (or else, void)

What are the sources of obligations?

| Baldueza | Buena | Calderon | Cardenas | Eguico | Flordeliza | Mendoza | Navarro |

CONTRACTS (Obligation ex contractu) arise from stipulations of the

FALSIFICATION OF A VALID CONTRACT only the unauthorized insertions will be

Chapter 2, Preliminary title, on Human Relations ( Civil Code )

Title 18 of Book IV of the Civil Code on damages

| Baldueza | Buena | Calderon | Cardenas | Eguico | Flordeliza | Mendoza | Navarro

parta or aa a taara parson aa raason oa taa aramaa

when acquittal is due to reasonable doubt no civil liability

when acquittal is due to exempting circumstances there is civil liability

when there is preponderance of evidence there is civil liability

damage caused to the plaintiff

no pre-existing contractual relations between parties

father / in case unavailable, mother for their minor children

employers for their employees

the state through its special agent

teachers / heads of establishments of arts and trades for students in their

there exists a wrongful act or omission imputable to the defendant by reason

there must be a direct causal connection or a relation of cause and effect

FGU INSURANCE v SARMIENTO J. Vitug

| Baldueza | Buena | Calderon | Cardenas | Eguico | Flordeliza | Mendoza | Navarro |

FGU is the subrogee of the rights and interests of Concepcion industries so it

Failure in the compliance of an obligation, in this case the delivery of goods,

FACTS: Proprietress of a school canteen found foreign substances in the

LRTA is a common carrier so carrier is presumed to be at fault upon proof of

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Defined in the negative in Article 1173

Art. 1173. The fault or negligence of the obligor consists in the

There is deliberate intention to There is no deliberate intention

Diligence required by the law governing the particular obligation

Diligence stipulated by the parties

failure of the obligor to perform obligation on the DATE agreed upon;

demand (judicial/extrajudicial) by the creditor;

failure to comply with such demand

debtor liable for damages and interests

debtor liable for the loss of a thing due to a fortuitous event

mora solvendi ex re default in real obligations (to give)

mora solvendi ex persona default in personal obligations (to do)

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MORA ACCIPIENDI delay on the part of the creditor to accept the

COMPENSATIO MORAE delay of the obligors in reciprocal obligation.

a right enforceable only against a definite person or group of persons.

Ownership is transferred by delivery which could be either actual or

INDUSTRIAL produced by lands of any cultivation or labor;

CIVIL those derived by virtue of juridical relation.

Art. 1165. When what is to be delivered is a determinate thing, the creditor

something which is susceptible of particular designation or specification;

obligation is extinguished if the thing is lost due to fortuitous events.

Article 1460: a thing is determinate when it is particularly designated and

something that has reference only to a class or genus;

obligation to deliver is not so extinguished by fortuitous events.

1. Complaint for specific performance an action to compel the fulfillment of the

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To deliver the fruits of the thing

Art. 441. To the owner belongs:

The natural fruits;