Bar Notes by Prof. Rbfaller: Prof. Rolando B. Faller

NOTES IN OBLIGATIONS AND CONTRACTS
Prof. Rolando B. Faller
OBLIGATIONS
Nature and Concept
1. Right and obligation are legal terms with specific legal meaning. A right is a claim or title to
an interest in anything whatsoever that is enforceable by law. An obligation is defined in the Civil
Code as a juridical necessity to give, to do or not to do. For every right enjoyed by any person, there
is a corresponding obligation on the part of another person to respect such right. (Makati Stock
Exchange, Inc. v. Campos, G.R. No. 138814, April 16, 2009)
2. An obligation imposed on a person, and the corresponding right granted to another, must be
rooted in at least one of these five sources. The mere assertion of a right and claim of an obligation
in an initiatory pleading, whether a Complaint or Petition, without identifying the basis or source
thereof, is merely a conclusion of fact and law. A pleading should state the ultimate facts essential
to the rights of action or defense asserted, as distinguished from mere conclusions of fact or
conclusions of law. (Makati Stock Exchange, Inc. v. Campos, G.R. No. 138814, April 16, 2009)
3. A provision forfeiting payments already made was held to be valid, provided the parties
clearly agree on it. (Daleon v. Tan, G.R. No. 186094, August 23, 2010)
Breach of Obligations
4.
Bar Notes By Prof. RBFaller
Breach of obligation is the failure, without legal excuse, to perform any promise which forms
the whole or part of the obligation. (Nakpil vs. Manila Towers Development Corp., 502 SCRA 470
[2006]
5. In this jurisdiction, the following requisites must be present in order that the debtor may be in
default: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance judicially or extrajudicially. (J Plus
Asia Development Corporation v. Utility Assurance Corporation, G.R. No. 199650, June 26,
2013)
6. A demand is only necessary in order to put an obligor in a due and demandable obligation in
delay, which in turn is for the purpose of making the obligor liable for interests or damages for the
period of delay. Thus, unless stipulated otherwise, an extrajudicial demand is not required before a
judicial demand, i.e., filing a civil case for collection, can be resorted to. (Autocorp Group v. Intra
Strata Assurance Corporation, G.R. No. 166662, June 27, 2008)
7. A provision on waiver of notice or demand has been recognized as legal and valid in Bank of
the Philippine Islands v. Court of Appeals, wherein [the Court] held:
The Civil Code in Article 1169 provides that one incurs in delay or is in default from the
time the obligor demands the fulfillment of the obligation from the obligee. However, the
law expressly provides that demand is not necessary under certain circumstances, and
one of these circumstances is when the parties expressly waive demand. Hence, since
the co-signors expressly waived demand in the promissory notes, demand was
unnecessary for them to be in default.
(Spouses Agner v. BPI Family Savings Bank, Inc., G.R. No. 182963, June 03, 2013)
8. In reciprocal obligations, as in a contract of sale, the general rule is that the fulfillment of the
parties' respective obligations should be simultaneous. Hence, no demand is generally necessary
because, once a party fulfills his obligation and the other party does not fulfill his, the latter
automatically incurs in delay. But when different dates for performance of the obligations are fixed,
the default for each obligation must be determined by the rules given in the first paragraph of the
present article, that is, the other party would incur in delay only from the moment the other party
demands fulfillment of the former's obligation. Thus, even in reciprocal obligations, if the period for
the fulfillment of the obligation is fixed, demand upon the obligee is still necessary before the obligor
can be considered in default and before a cause of action for rescission will accrue. (Solar Harvest,
Inc. v. Davao Corrugated Carton Corp., G.R. No. 176868, July 26, 2010)
9. Unless demand is proven, one cannot be held in default. It is only when demand to pay is
made and subsequently refused that respondents can be considered in default and petitioner
obtains the right to file an action to collect the debt or foreclose the mortgage. (Development Bank
of the Philippines v. Spouses Licuanan, G.R. No. 150097, February 26, 2007)
10. Demand is generally necessary even if a period has been fixed in the obligation. And default
generally begins from the moment the creditor demands judicially or extra-judicially the performance
of the obligation. Without such demand, the effects of default will not arise. (Philippine Export and
Foreign Loan Guarantee Corporation v. V.P. Eusebio Construction, Inc., G.R. No. 140047, July
13, 2004)
11. Fraud or malice (dolo) has been defined as a "conscious and intentional design to evade the
normal fulfillment of existing obligations" and is, thus, incompatible with good faith. (Spouses
Tumibay v. Spouses Lopez, G.R. No. 171692, June 03, 2013)
12. Bar Notes By Prof. RBFaller

It is true that mere silence is not in itself concealment. Concealment which the law denounces
as fraudulent implies a purpose or design to hide facts which the other party sought to know. Failure
to reveal a fact which the seller is, in good faith, bound to disclose may generally be classified as a
deceptive act due to its inherent capacity to deceive. Suppression of a material fact which a party is
bound in good faith to disclose is equivalent to a false representation. Moreover, a representation is
not confined to words or positive assertions; it may consist as well of deeds, acts or artifacts of a
nature calculated to mislead another and thus allow the fraud-feasor to obtain an undue advantage.
(Guinhawa v. People, G.R. No. 162822, August 25, 2005)
13. The test to determine the existence of negligence in a particular case may be stated as
follows: did the defendant in committing the alleged negligent act, use reasonable care and caution
which an ordinarily prudent person in the same situation would have employed? If not, then he is
guilty of negligence. (Perla Compania de Seguros, Inc. v. Spouses Sarangaya, G.R. No. 147746,
October 25, 2005)
14. The negligence of the obligor in the performance of the obligation renders him liable for
damages for the resulting loss suffered by the obligee. Fault or negligence of the obligor consists in
his failure to exercise due care and prudence in the performance of the obligation as the nature of
the obligation so demands. (Crisostomo v. Court of Appeals, G.R. No. 138334, August 25, 2003)
Force majeure/fortuitous event
15. This article (Art. 1267), which enunciates the doctrine of unforeseen events, is not, however,
an absolute application of the principle of rebus sic stantibus, which would endanger the security of
contractual relations. The parties to the contract must be presumed to have assumed the risks of
unfavorable developments. It is, therefore, only in absolutely exceptional changes of circumstances
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that equity demands assistance for the debtor. (So v. Food Fest Land, Inc., G.R. No. 183628, April
07, 2010)
16. A real estate enterprise engaged in the pre-selling of condominium units is concededly a
master in projections on commodities and currency movements, as well as business risks. The
fluctuating movement of the Philippine peso in the foreign exchange market is an everyday
occurrence, hence, not an instance of caso fortuito. (Megaworld Globus Asia, Inc. v. Tanseco,
G.R. No. 181206, October 09, 2009)
17. Broadly speaking, force majeure generally applies to a natural accident, such as that caused
by a lightning, an earthquake, a tempest or a public enemy. Hence, fire is not considered a natural
disaster or calamity. (Edgar Cokaliong Shipping Lines, Inc. v. UCPB General Insurance
Company, Inc., G.R. No. 146018, June 25, 2003)
18. Be that as it may, it is settled that an accident caused either by defects in the automobile or
through the negligence of its driver is not a caso fortuito that would exempt the carrier from liability
for damages. (Yobido v. Court of Appeals, G.R. No. 113003, October 17, 1997)
19. Where the contract between the parties stipulated that in the event of a fortuitous event, the
period provided in the contract for the delivery of certain products shall be suspended, the Supreme
Court ruled that the period of time (6 years) when the contract was suspended cannot be deducted
from the term of the contract because to add the said years upon the resumption of the contract
would in effect be an extension of the contract.(Victorias Planters Association, Inc. vs. Victorias
Milling Co., 97 Phil 318)
Remedies for Breach of Obligations

It is thus apparent that an action to rescind, or an accion pauliana, must be of last resort,
availed of only after the creditor has exhausted all the properties of the debtor not exempt from
execution or after all other legal remedies have been exhausted and have been proven futile.
(Metropolitan Bank and Trust Company v. International Exchange Bank, G.R. No. 176008,
August 10, 2011)
Different Kinds of Obligations
21. It is a condition precedent. The non-compliance of a suspensive condition is not a breach,

casual or serious, but simply an event which prevented the obligation from acquiring obligatory force.
(Buot vs. CA, 357 SCRA 846 [2001])
22. In a Contract to Sell, the payment of the purchase price is a positive suspensive condition,
the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of
the vendor to convey title from acquiring an obligatory force. It is one where the happening of the
event gives rise to an obligation. Thus, for its non-fulfillment there will be no contract to speak of,
the obligor having failed to perform the suspensive condition which enforces a juridical relation. In
fact with this circumstance, there can be no rescission of an obligation that is still non-existent, the
suspensive condition not having occurred as yet. Emphasis should be made that the breach
contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply with an obligation
already extant, not a failure of a condition to render binding that obligation. (Cheng vs. Genato,
1998)
23. The disputed stipulation in the lease contract: "for as long as the defendant needed the
premises and can meet and pay said increases" is a purely potestative condition because it leaves
the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee. It is
likewise a suspensive condition because the renewal of the lease, which gives rise to a new lease,
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depends upon said condition. It should be noted that a renewal constitutes a new contract of lease
although with the same terms and conditions as those in the expired lease. It should also not be
overlooked that said condition is not resolutory in nature because it is not a condition that terminates
the lease contract. The lease contract is for a definite period of three (3) years upon the expiration
of which the lease automatically terminates. (Lao Lim vs. Court of Appeals, 191 SCRA 150)
24. Moreover, even if this significant detail is to be ignored, the mere intention to prevent the
happening of the condition or the mere placing of ineffective obstacles to its compliance, without
actually preventing fulfillment is not sufficient for the application of Art. 1186. Two requisites must
concur for its application, to wit: (1) intent to prevent fulfillment of the condition; and, (2) actual
prevention of compliance. (Spouses Bonrostro v. Spouses Luna, G.R. No. 172346, July 24, 2013)
25. Article 1186 enunciates the doctrine of constructive fulfillment of suspensive conditions,
which applies when the following three (3) requisites concur, viz.: (1) The condition is suspensive;
(2) The obligor actually prevents the fulfillment of the condition; and (3) He acts voluntarily.
Suspensive condition is one the happening of which gives rise to the obligation. It will be irrational
for any Bank to provide a suspensive condition in the Promissory Note or the Restructuring
Agreement that will allow the debtor-promissor to be freed from the duty to pay the loan without
paying it. (Lim v. Development Bank of the Philippines, G.R. No. 177050, July 01, 2013)
Reciprocal Obligations/Rescission
26. Consequently, even if the right to rescind is made available to the injured party, the obligation
is not ipso facto erased by the failure of the other party to comply with what is incumbent upon him.
The party entitled to rescind should apply to the court for a decree of rescission. The right
cannot be exercised solely on a party's own judgment that the other committed a breach of the
obligation. The operative act which produces the resolution of the contract is the decree of the court
and not the mere act of the vendor. Since a judicial or notarial act is required by law for a valid
rescission to take place, the letter written by respondent declaring his intention to rescind did not
operate to validly rescind the contract. (EDS MANUFACTURING, INC., vs. HEALTHCHECK
INTERNATIONAL, INC.,G.R. No. 162802. October 9, 2013)
27. "Resolution," the action referred to in Article 1191 of the Civil Code, is based on the
defendant's breach of faith, a violation of the reciprocity between the parties. As an action based on
the binding force of a written contract, therefore, rescission (resolution) under Article 1191
prescribes in 10 years. Article 1144 of the Civil Code provides that an action upon a written contract
must be brought within 10 years from the time the right of action accrues. (Heirs of Paclit v.
Spouses Belisario, G.R. No. 189418, June 20, 2012)
28. Article 1191 of the NCC is clear that "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
respondent can not be deprived of his right to demand for rescission in view of the petitioner's failure
to abide with item nos. 2 and 3 of the agreement. This remains true notwithstanding the absence of
express stipulations in the agreement indicating the consequences of breaches which the parties
may commit. To hold otherwise would render Article 1191 of the NCC as useless. (Villamar v.
Mangaoil, G.R. No. 188661, April 11, 2012)
29. Articles 1191 of the Civil Code does not thus apply to a contract to sell since there can be no
rescission of an obligation that is still non-existent, the suspensive condition not having occurred. In
other words, the breach contemplated in Article 1191 is the obligor's failure to comply with an
obligation already extant, like a contract of sale, not a failure of a condition to render binding that
obligation. (Sta. Lucia Realty & Development, Inc. v. Uyecio, G.R. No. 176217, August 13, 2008)
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30. Indeed, mutual restitution is required in all cases involving rescission. But when it is no longer
possible to return the object of the contract, an indemnity for damages operates as restitution. The
important consideration is that the indemnity for damages should restore to the injured party what
was lost. (Coastal Pacific Trading, Inc. v. Southern Rolling Mills, Co., Inc., G.R. No. 118692,
July 28, 2006)
31. Under settled doctrine, nonpayment is a resolutory condition that extinguishes the transaction
existing for a time and discharges the obligations created thereunder. The remedy of the unpaid
seller is to sue for collection or, in case of a substantial breach, to rescind the contract. These
alternative remedies of specific performance and rescission are provided under Article 1191 of the
Civil Code. (Soliva v. Intestate Estate of Villalba, G.R. No. 154017, December 8, 2003)
Obligations with a Period
32. And under Art. 1306 of the Code, the parties may establish stipulations mutually acceptable
to them for as long as such are not contrary to law, morals, good customs, public order, or public
policy. And where a determinate period for a contract's effectivity and expiration has been mutually
agreed upon and duly stipulated, the lapse of such period ends the contract's effectivity and the
parties cease to be bound by the contract. (Manila International Airport Authority v. Olongapo
Maintenance Services, Inc., G.R. Nos. 146184-85, January 31, 2008)
33. It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court
must first 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 and the circumstances it can be inferred that a
period was intended" (Art. 1197, pars. 1 and 2). This preliminary point settled, the Court must then
proceed to the second step, and decide what period was "probably contemplated by the parties"
(Do., par. 3). So that, 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. As the
record stands, the trial Court appears to have pulled the two-year period set in its decision out of
thin air, since no circumstances are mentioned to support it. Plainly, this is not warranted by the Civil
Code.
In this connection, it is to be borne in mind that the contract shows that the parties were fully aware
that the land described therein was occupied by squatters, because the fact is expressly mentioned
therein (Rec. on Appeal, Petitioner's Appendix B, pp. 12-13). 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 conclusion is thus forced that the
parties must have intended to defer the performance of the obligations under the contract until the
squatters were duly evicted, as contended by the petitioner Gregorio Araneta, Inc. (Gregorio
Araneta, Inc. vs. Phil. Sugar Estates Dev’t Co., 20 SCRA 330)
Joint and Solidary Obligations
34. An instrument which begins with "I", "We", or "Either of us" promise to pay, when signed by
two or more persons, makes them solidarily liable. Also, the phrase "joint and several" binds the
makers jointly and individually to the payee so that all may be sued together for its enforcement, or
the creditor may select one or more as the object of the suit. (Astro Electronics Corp. v. Philippine
Export and Foreign Loan Guarantee Corporation, G.R. No. 136729, September 23, 2003)
35. The Court of Appeals is correct insofar as it held that when the spouses are sued for the
enforcement of the obligation entered into by them, they are being impleaded in their capacity as
representatives of the conjugal partnership and not as independent debtors. Hence, either of them
may be sued for the whole amount, similar to that of a solidary liability, although the amount is
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chargeable against their conjugal partnership property. Thus, in the case cited by the Court of
Appeals, Alipio v. Court of Appeals, the two sets of defendant-spouses therein were held liable for
P25,300.00 each, chargeable to their respective conjugal partnerships. (Spouses Carandang v.
Heirs of de Guzman, G.R. No. 160347, November 29, 2006)
36. There is solidary liability only when the obligation expressly so states, when the law so
provides or when the nature of the obligation so requires. (Malayan Insurance v. Philippines First
Insurance, G.R. No. 184300, July 11, 2012)
37. Solidary liability cannot be presumed but must be established by law or contract. Article 1207
of the Civil Code pertinently states that "there is solidary liability only when the obligation expressly
so states, or when the obligation requires solidarity." (Gonzales v. Philippine Commercial and
International Bank, G.R. No. 180257, February 23, 2011)
38. These Civil Code provisions establish that in case of concurrence of two or more creditors or
of two or more debtors in one and the same obligation, and in the absence of express and
indubitable terms characterizing the obligation as solidary, the presumption is that the obligation is
only joint. It thus becomes incumbent upon the party alleging that the obligation is indeed solidary
in character to prove such fact with a preponderance of evidence. (Escaño v. Ortigas, Jr., G.R.
No. 151953, June 29, 2007)
39. If a solidary debtor pays the obligation in part, he can recover reimbursement from the co-
debtors only in so far as his payment exceeded his share in the obligation. This is precisely because
if a solidary debtor pays an amount equal to his proportionate share in the obligation, then he in
effect pays only what is due from him. If the debtor pays less than his share in the obligation, he
cannot demand reimbursement because his payment is less than his actual debt. (Republic Glass
Corporation v. Qua, G.R. No. 144413, July 30, 2004)
40.
It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction
of the whole obligation from any or all of the debtors. It is up to the former to determine against
whom to enforce collection. (Garcia v. Llamas, G.R. No. 154127, December 08, 2003)
Obligation with a Penal Clause
41. A penalty clause, expressly recognized by law, is an accessory undertaking to assume

greater liability on the part of the obligor in case of breach of an obligation. It functions to strengthen
the coercive force of obligation and to provide, in effect, for what could be the liquidated damages
resulting from such a breach. The obligor would then be bound to pay the stipulated indemnity
without the necessity of proof on the existence and on the measure of damages caused by the
breach. It is well-settled that so long as such stipulation does not contravene law, morals, or public
order, it is strictly binding upon the obligor. (J Plus Asia Development Corporation v. Utility
Assurance Corporation, G.R. No. 199650, June 26, 2013)
42. In obligations with a penal clause, the penalty generally substitutes the indemnity for
damages and the payment of interests in case of non-compliance. Usually incorporated to create
an effective deterrent against breach of the obligation by making the consequences of such breach
as onerous as it may be possible, the rule is settled that a penal clause is not limited to actual and
compensatory damages. (Heirs of Manuel Uy Ek Liong v. Castillo, G.R. No. 176425, June 05,
2013)
43. Article 1226 of the Civil Code further provides that if the obligor refuses to pay the penalty,
such as in the instant case, damages and interests may still be recovered on top of the penalty.
Damages claimed must be the natural and probable consequences of the breach, which the parties
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have foreseen or could have reasonably foreseen at the time the obligation was constituted.
(Continental Cement Corp. v. Asea Brown Boveri, Inc., G.R. No. 171660, October 17, 2011)
44. "Penalty fee" is entirely different from "bank charges". The phrase "bank charges" is normally
understood to refer to compensation for services. A "penalty fee" is likened to a compensation for
damages in case of breach of the obligation. (Spouses Viola v. Equitable PCI Bank, G.R. No.
177886, November 27, 2008)
45. The enforcement of the penalty can be demanded by the creditor only when the non-
performance is due to the fault or fraud of the debtor. The non-performance gives rise to the
presumption of fault; in order to avoid the payment of the penalty, the debtor has the burden of
proving an excuse — the failure of the performance was due to either force majeure or the acts of
the creditor himself. (Development Bank of the Philippines v. Go, G.R. No. 168779, September
14, 2007)
46. As a general rule, courts are not at liberty to ignore the freedoms of the parties to agree on
such terms and conditions as they see fit as long as they are not contrary to law, morals, good
customs, public order or public policy. Nevertheless, courts may equitably reduce a stipulated
penalty in the contracts in two instances: (1) if the principal obligation has been partly or irregularly
complied with; and (2) even if there has been no compliance if the penalty is iniquitous or
unconscionable in accordance with Article 1229 of the Civil Code. (Florentino v. Supervalue, Inc.,
G.R. No. 172384, September 12, 2007)
47. The essence or rationale for the payment of interest, quite often referred to as cost of money,
is not exactly the same as that of a surcharge or a penalty. A penalty stipulation is not necessarily
preclusive of interest, if there is an agreement to that effect, the two being distinct concepts which
may separately be demanded. What may justify a court in not allowing the creditor to impose full
surcharges and penalties, despite an express stipulation therefor in a valid agreement, may not
equally justify the nonpayment or reduction of interest. Indeed, the interest prescribed in loan
financing arrangements is a fundamental part of the banking business and the core of a bank's
existence. (Ligutan v. Court of Appeals, G.R. No. 138677, February 12, 2002)
Payment or Performance
48. The creditor's possession of the evidence of debt is proof that the debt has not been
discharged by payment. A promissory note in the hands of the creditor is a proof of indebtedness
rather than proof of payment. In an action for replevin by a mortgagee, it is prima facie evidence that
the promissory note has not been paid. Likewise, an uncanceled mortgage in the possession of the
mortgagee gives rise to the presumption that the mortgage debt is unpaid. (Spouses Agner v. BPI
Family Savings Bank, Inc., G.R. No. 182963, June 03, 2013)
49. Conversely, the principle of substantial performance is inappropriate when the incomplete
performance constitutes a material breach of the contract. A contractual breach is material if it will
adversely affect the nature of the obligation that the obligor promised to deliver, the benefits that the
obligee expects to receive after full compliance, and the extent that the non-performance defeated
the purposes of the contract. (International Hotel Corporation v. Joaquin, Jr., G.R. No. 158361,
April 10, 2013)
50. Under Art. 1235 of the Civil Code, the obligation is deemed fully complied with when an
obligee accepts the performance thereof knowing its incompleteness or irregularity, and without
expressing any protest or objection. An obligee is deemed to have waived strict compliance by an
obligor with an obligation when the following elements are present: (1) an intentional acceptance of
the defective or incomplete performance; (2) with actual knowledge of the incompleteness or defect;
and (3) under circumstances that would indicate an intention to consider the performance as
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complete and renounce any claim arising from the defect.(Hanjin Heavy Industries and
Construction Co. v. Dynamic Planners and Construction Corp., G.R. Nos. 169408 & 170144,
April 30, 2008)
51. A person entering into a contract has a right to insist on its performance in all particulars,
according to its meaning and spirit. But if he chooses to waive any of the terms introduced for his
own benefit, he may do so. When the obligee accepts the performance, knowing its incompleteness
or irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with. (Empire East Land Holdings v. Capitol Industrial Construction Groups, Inc.,
G.R. No. 168074, September 26, 2008)
52. Petitioners' invocation of Article 1236 of the Civil Code does not help them. They cannot deny
their indebtedness to respondent on the basis of said Article since the payment advanced by
respondent on petitioners' behalf redounded to their benefit and Divinia never objected to it when
she came to learn of it. It is thus immaterial that Divinia was unaware of respondent's action for the
law ultimately allows recovery to the extent that the debtors-petitioners were benefited. (Publico v.
Bautista, G.R. No. 174096, July 20, 2010)
53. In general, a payment in order to be effective to discharge an obligation, must be made to

the proper person. Thus, payment must be made to the obligee himself or to an agent having
authority, express or implied, to receive the particular payment. Payment made to one having
apparent authority to receive the money will, as a rule, be treated as though actual authority had
been given for its receipt. Likewise, if payment is made to one who by law is authorized to act for
the creditor, it will work a discharge. The receipt of money due on a judgment by an officer authorized
by law to accept it will, therefore, satisfy the debt. (Spouses Dela Cruz v. Concepcion, G.R. No.
172825, October 11, 2012)

Dacion en pago
54. As a dation in payment, the assignment of credit operates as a mode of extinguishing the
obligation; the delivery and transmission of ownership of a thing (in this case, the credit due from a
third person) by the debtor to the creditor is accepted as the equivalent of the performance of the
obligation. (Spouses Serfino v. Far East Bank and Trust Company, Inc., G.R. No. 171845,
October 10, 2012)
55. Dation in payment extinguishes the obligation to the extent of the value of the thing delivered,
either as agreed upon by the parties or as may be proved, unless the parties by agreement —
express or implied, or by their silence — consider the thing as equivalent to the obligation, in which
case the obligation is totally extinguished. (Tan Shuy v. Spouses Maulawin, G.R. No. 190375,
February 08, 2012)
56. Corollary thereto, 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. In order that
there be a valid dation in payment, the following are the requisites: (1) There must be the
performance of the prestation in lieu of payment (animo solvendi) which may consist in the delivery
of a corporeal thing or a real right or a credit against the third person; (2) There must be some
difference between the prestation due and that which is given in substitution (aliud pro alio); (3)
There must be an agreement between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that due. The undertaking
really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or
property of the debtor, payment for which is to be charged against the debtor's debt. As such, the
vendor in good faith shall be responsible, for the existence and legality of the credit at the time of
the sale but not for the solvency of the debtor, in specified circumstances.
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Like in all contracts, the intention of the parties to the dation in payment is paramount and controlling.
The contractual intention determines whether the property subject of the dation will be considered
as the full equivalent of the debt and will therefore serve as full satisfaction for the debt. "The dation
in payment extinguishes the obligation to the extent of the value of the thing delivered, either as
agreed upon by the parties or as may be proved, unless the parties by agreement, express or
implied, or by their silence, consider the thing as equivalent to the obligation, in which case the
obligation is totally extinguished." (Luzon Development Bank v. Enriquez, G.R. No. 168646,
January 12, 2011)
57. To be sure, the Dation in Payment has no express warranties relating to existing contracts to
sell over the assigned properties. As to the implied warranty in case of eviction, it is waivable and
cannot be invoked if the buyer knew of the risks or danger of eviction and assumed its
consequences. (Luzon Development Bank v. Enriquez, G.R. No. 168646, January 12, 2011)
Payment in foreign currency/value of currency
58. There is no legal impediment to having obligations or transactions paid in a foreign currency
as long as the parties agree to such an arrangement. In fact, obligations in foreign currency may be
discharged in Philippine currency based on the prevailing rate at the time of payment.
(Development Bank of the Philippines v. Court of Appeals, G.R. No. 138703, June 30, 2006)
59. Inflation has been defined as the sharp increase of money or credit, or both, without a
corresponding increase in business transaction. There is inflation when there is an increase in the
volume of money and credit relative to available goods, resulting in a substantial and continuing rise
in the general price level. In a number of cases, this Court had provided a discourse on what
constitutes extraordinary inflation, thus:

Extraordinary inflation exists when there is a decrease or increase in the purchasing power of the
Philippine currency which is unusual or 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. (Almeda v.
Bathala Marketing Industries, Inc., G.R. No. 150806, January 28, 2008)
60. For extraordinary inflation (or deflation) to affect an obligation, the following requisites must
be proven: (a). that there was an official declaration of extraordinary inflation or deflation from the
Bangko Sentral ng Pilipinas (BSP); (b). that the obligation was contractual in nature; and (c). that
the parties expressly agreed to consider the effects of the extraordinary inflation or deflation.
(Equitable PCI Bank v. Ng Sheung Ngor, G.R. No. 171545, December 19, 2007)
61. The existence of extraordinary inflation must be officially proclaimed by competent

authorities, and the only competent authority so far recognized by this Court to make such an official
proclamation is the BSP. (Citibank, N.A. v. Sabeniano, G.R. No. 156132, February 06, 2007)
62. Lest it be overlooked, Article 1250 of the Code, as couched, clearly provides that 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, unless there is "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 obligation, the basis for payment. (Telengtan
Brothers & Sons, Inc. v. United States Lines, Inc., G.R. No. 132284, February 28, 2006)
Application of payment
63. Additionally, in contracts involving installment payments with interest chargeable against the
remaining balance of the obligation, the creditor is duty-bound to inform the debtor of the amount of
9
interest that falls due, and that he is applying the installment payments to cover said interest. Without
notifying the debtor, the creditor cannot apply the payments to the interest and then later on hold
the debtor in default for nonpayment of installments on the principal. (Orix Metro Leasing and
Finance Corporation v. M/V "Pilar-I", G.R. No. 157901, September 11, 2009)
64. Indeed, the debtor's right to apply payment has been considered merely directory, and not
mandatory, following this Court's earlier pronouncement that "the ordinary acceptation of the terms
'may' and 'shall' may be resorted to as guides in ascertaining the mandatory or directory character
of statutory provisions." (Premiere Development Bank v. Central Surety & Insurance Company
, G.R. No. 176246, February 13, 2009)
65. Verily, the debtor's right to apply payment can be waived and even granted to the creditor if
the debtor so agrees. (Premiere Development Bank v. Central Surety & Insurance Company,
G.R. No. 176246, February 13, 2009)
Tender of Payment and Consignation
66. Tender of payment is but a preparatory act to consignation. It is the manifestation by the
debtor of a desire to comply with or pay an obligation. If refused without just cause, the tender of
payment will discharge the debtor of the obligation to pay but only after a valid consignation of the
sum due shall have been made with the proper court. (Allandale Sportsline, Inc. v. The Good
Development Corporation, G.R. No. 164521, December 18, 2008)
67. Mere sending of a letter by the vendee expressing the intention to pay without the
accompanying payment is not considered a valid tender of payment. (San Lorenzo Development
Corp. v. Court of Appeals, G.R. No. 124242, January 21, 2005)

Settled is the rule that tender of payment must be made in legal tender. A check is not legal
tender, and therefore cannot constitute a valid tender of payment.( Abalos v. Macatangay, Jr.,
G.R. No. 155043, September 30, 2004)
69. Consignation is the deposit of the proper amount with a judicial authority, before whom the
debtor must establish compliance with the following mandatory requirements: (1) there was a debt
due; (2) the consignation of the obligation had been made because the creditor to whom tender of
payment was made refused to accept it, or because he was absent or incapacitated, or because
several persons claim to be entitled to receive the amount due, or because the title to the obligation
has been lost; (3) previous notice of the consignation had been given to the person interested in the
performance of the obligation; (4) the amount due was placed at the disposal of the court; and (5)
after the consignation had been made, the person interested was notified thereof. Failure to prove
any of these requirements is enough ground to render a consignation ineffective. (Allandale
Sportsline, Inc. v. The Good Development Corporation, G.R. No. 164521, December 18, 2008)
70. Consignation and tender of payment must not be encumbered by conditions if they are to
produce the intended result of fulfilling the obligation. (Spouses Rayos v. Reyes, G.R. No. 150913,
February 20, 2003)
Loss of the thing due
71. Under the law on obligations and contracts, the obligation to give a determinate thing is
extinguished if the object is lost without the fault of the debtor. And per Art. 1192 (2) of the Civil
Code, a thing is considered lost when it perishes or disappears in such a way that it cannot be
recovered. (Osmeña III v. Social Security System of the Philippines, G.R. No. 165272,
September 13, 2007)
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72. Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not extinguish the obligation." If the obligation is
generic in the sense that the object thereof is designated merely by its class or genus without any
particular designation or physical segregation from all others of the same class, the loss or
destruction of anything of the same kind even without the debtor's fault and before he has incurred
in delay will not have the effect of extinguishing the obligation. This rule is based on the principle
that the genus of a thing can never perish. Genus nunquan perit. An obligation to pay money is
generic; therefore, it is not excused by fortuitous loss of any specific property of the debtor. (Gaisano
Cagayan, Inc. v. Insurance Company of North America, G.R. No. 147839, June 08, 2006 )
Compensation
73. Agreements for compensation of debts or any obligations when the parties are mutually
creditors and debtors are allowed under Art. 1282 of the Civil Code even though not all the legal
requisites for legal compensation are present. Voluntary or conventional compensation is not limited
to obligations which are not yet due. The only requirements for conventional compensation are (1)
that each of the parties can fully dispose of the credit he seeks to compensate, and (2) that they
agree to the extinguishment of their mutual credits. (Traders Royal Bank v. Castañares, G.R. No.
172020, December 06, 2010)
74. Legal compensation requires the concurrence of the following conditions: (1) That each one
of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due;
(4) That they be liquidated and demandable; (5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in due time to the debtor.
75.
(Mondragon Personal Sales, Inc. v. Sola, Jr., G.R. No. 174882, January 21, 2013)
A claim is liquidated when the amount and time of payment is fixed. If acknowledged by the
debtor, although not in writing, the claim must be treated as liquidated. When the defendant, who
has an unliquidated claim, sets it up by way of counterclaim, and a judgment is rendered liquidating
such claim, it can be compensated against the plaintiff's claim from the moment it is liquidated by
judgment. We have restated this in Solinap v. Hon. Del Rosario where we held that compensation
takes place only if both obligations are liquidated. (Lao v. Special Plans, Inc., G.R. No. 164791,
June 29, 2010)
76. However, it is settled that legal compensation under Article 1279 of the Civil Code cannot
take place between an agent of the principal creditor on one hand, and the principal debtor on the
other, where the agent holds funds of the principal debtor. (United Planters Sugar Milling Co., Inc.
(UPSUMCO) v. Court of Appeals, G.R. No. 126890, July 11, 2007)
77. Concededly, the Civil Code lists compensation as one of the modes of extinguishing the
obligations of persons who, in their own right, are creditors and debtors of each other. Compensation
may be legal or conventional. Legal compensation takes place ipso jure when all the requisites of
law are present, as opposed to conventional or voluntary compensation, which occurs when the
parties agree to the mutual extinguishment of their credits or to compensate their mutual obligations
even in the absence of some of the legal requisites. (Mavest (U.S.A.) Inc. v. Sampaguita Garment
Corp., G.R. No. 127454, September 21, 2005)
Novation
78. Novation is not a ground under the law to extinguish criminal liability. Article 89 (on total
extinguishment) and Article 94 (on partial extinguishment) of the Revised Penal Code list down the
various grounds for the extinguishment of criminal liability. Not being included in the list, novation is
11
limited in its effect only to the civil aspect of the liability, and, for that reason, is not an efficient
defense in estafa. This is because only the State may validly waive the criminal action against an
accused. The role of novation may only be either to prevent the rise of criminal liability, or to cast
doubt on the true nature of the original basic transaction, whether or not it was such that the breach
of the obligation would not give rise to penal responsibility, as when money loaned is made to appear
as a deposit, or other similar disguise is resorted to. (Degaños v. People, G.R. No. 162826, October
14, 2013)
79. To begin with, the cause in a contract of lease is the enjoyment of the thing; in a contract of
deposit, it is the safekeeping of the thing. They thus create essentially distinct obligations that would
result in a novation only if the parties entered into one after the other concerning the same subject
matter. (RCJ Bus Lines, Inc. v. Master Tours and Travel Corp., G.R. No. 177232, October 11,
2012)
80. Well-settled is the rule that, with respect to obligations to pay a sum of money, the obligation
is not novated by an instrument that expressly recognizes the old, changes only the terms of
payment, adds other obligations not incompatible with the old ones, or the new contract merely
supplements the old one. (Philippine National Bank v. Soriano, G.R. No. 164051, October 03,
2012)
81. The indispensability of a prior contractual relation between the complainant and the accused
as requisite for the application of novation in criminal cases was underscored in People v. Tanjutco.
In that case, the accused, who was charged with Qualified Theft, invoked People v. Nery to support
his claim that the complainant's acceptance of partial payment of the stolen funds before the filing
of the Information with the trial court converted his liability into a civil obligation thus rendering
baseless his prosecution. The Court rejected this claim and held that unlike in Nery, there was, in

that case, no prior "contractual relationship or bilateral agreement, which can be modified or altered
by the parties," (Social Security System v. Department of Justice, G.R. No. 158131, August 08,
2007)
82. This Court first recognized the possibility of applying the concept of novation to criminal cases
in People v. Nery, involving a case for Estafa. In that case, the Court observed that although novation
is not one of the means recognized by the Revised Penal Code to extinguish criminal liability, it may
"prevent the rise of criminal liability or to cast doubt on the true nature of the original basic
transaction," provided the novation takes place before the filing of the Information with the trial court.
(Social Security System v. Department of Justice, G.R. No. 158131, August 08, 2007; (I)
People v. Nery, G.R. No. L-19567, February 5, 1964)
83. In Di Franco v. Steinbaum, the appellate court ruled that as to the consideration necessary
to support a contract of novation, the rule is the same as in other contracts. The consideration need
not be pecuniary or even beneficial to the person promising. It is sufficient if it be a loss of an
inconvenience, such as the relinquishment of a right or the discharge of a debt, the postponement
of a remedy, the discontinuance of a suit, or forbearance to sue. (Aquintey v. Spouses Tibong,
G.R. No. 166704, December 20, 2006; (I) Di Franco v. Steinbaum, 177 S.W. 2d 697)
84. In Young v. CA, this Court ruled that a change in the incidental elements of, or an addition of
such element to, an obligation, unless otherwise expressed by the parties will not result in its
extinguishment. (California Bus Lines, Inc. v. State Investment House, G.R. No. 147950,
December 11, 2003; (C) Young v. Court of Appeals, G.R. No. 83271, May 8, 1991)
CONTRACTS
Autonomy of Contract
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85. The freedom to contract is not absolute; all contracts and all rights are subject to the police
power of the State and not only may regulations which affect them be established by the State, but
all such regulations must be subject to change from time to time, as the general well-being of the
community may require, or as the circumstances may change, or as experience may demonstrate
the necessity. (Goldenway Merchandising Corporation v. Equitable PCI Bank, G.R. No.
195540, March 13, 2013)
86. It is a long established doctrine that the law does not relieve a party from the effects of an
unwise, foolish or disastrous contract, entered into with all the required formalities and with full
awareness of what she was doing. Courts have no power to relieve parties from obligations
voluntarily assumed, simply because their contracts turned out to be disastrous or unwise
investments. (Toledo v. Hyden, G.R. No. 172139, December 08, 2010)
87. Verily, a lawyer's compensation for professional services rendered are subject to the
supervision of the court, not just to guarantee that the fees he charges and receives remain
reasonable and commensurate with the services rendered, but also to maintain the dignity and
integrity of the legal profession to which he belongs. (Municipality of Tiwi v. Betito, G.R. No.
171873, July 09, 2010)
88. Finally, in Consulta v. Court of Appeals, [the Court] considered a non-involvement clause in
accordance with Article 1306 of the Civil Code. While the complainant in that case was an
independent agent and not an employee, she was prohibited for one year from engaging directly or
indirectly in activities of other companies that compete with the business of her principal. [The Court]
noted therein that the restriction did not prohibit the agent from engaging in any other business, or
from being connected with any other company, for as long as the business or company did not
compete with the principal's business. Further, the prohibition applied only for one year after the

termination of the agent's contract and was therefore a reasonable restriction designed to prevent
acts prejudicial to the employer. (Tiu v. Platinum Plans Phil., Inc., G.R. No. 163512, February 28,
2007; (I) Consulta v. Court of Appeals, G.R. No. 145443, March 18, 2005)
89. However, in Del Castillo v. Richmond, [the Court] upheld a similar stipulation as legal,
reasonable, and not contrary to public policy. In the said case, the employee was restricted from
opening, owning or having any connection with any other drugstore within a radius of four miles from
the employer's place of business during the time the employer was operating his drugstore. [The
Court] said that a contract in restraint of trade is valid provided there is a limitation upon either
time or place and the restraint upon one party is not greater than the protection the other
party requires. (Tiu v. Platinum Plans Phil., Inc., G.R. No. 163512, February 28, 2007)
90. The duty of the court is confined to the interpretation of the agreement that the contracting
parties have made for themselves without regard to its wisdom or folly as the court cannot supply
material stipulations or read into the contract words which it does not contain. (Limpo v. Court of
Appeals, G.R. No. 144732, February 13, 2006)
Mutuality of Contract
91. Basic is the rule that there can be no contract in its true sense without the mutual assent of
the parties. If this consent is absent on the part of one who contracts, the act has no more efficacy
than if it had been done under duress or by a person of unsound mind. Similarly, contract changes
must be made with the consent of the contracting parties. The minds of all the parties must meet as
to the proposed modification, especially when it affects an important aspect of the agreement. In the
case of loan contracts, the interest rate is undeniably always a vital component, for it can make or
break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it produces no
binding effect. (Philippine Savings Bank v. Spouses Castillo, G.R. No. 193178, May 30, 2011)
13
92. Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality of
contracts. It provides that "the contract must bind both the contracting parties; its validity or
compliance cannot be left to the will of one of them." This binding effect of a contract on both parties
is based on the principle that the obligations arising from contracts have the force of law between
the contracting parties, and there must be mutuality between them based essentially on their
equality under which it is repugnant to have one party bound by the contract while leaving the other
free therefrom. The ultimate purpose is to render void a contract containing a condition which makes
its fulfillment dependent solely upon the uncontrolled will of one of the contracting parties. (Manila
International Airport Authority v. Ding Velayo Sports Center, G.R. No. 161718, December 14,
2011)
93. Escalation clauses are not void per se. However, one "which grants the creditor an unbridled
right to adjust the interest independently and upwardly, completely depriving the debtor of the right
to assent to an important modification in the agreement" is void. Clauses of that nature violate the
principle of mutuality of contracts. Article 1308 of the Civil Code holds that a contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of them. (Equitable
PCI Bank v. Ng Sheung Ngor, G.R. No. 171545, December 19, 2007)
94. Not all contracts though which vest to one party their determination of validity or compliance
or the right to terminate the same are void for being violative of the mutuality principle. Jurisprudence
is replete with instances of cases where this Court upheld the legality of contracts which left their
fulfillment or implementation to the will of either of the parties. In these cases, however, there was
a finding of the presence of essential equality of the parties to the contracts, thus preventing the
perpetration of injustice on the weaker party. (GF Equity, Inc. v. Valenzona, G.R. No. 156841,
June 30, 2005)
95.
Hence, even assuming that the P1.8 million loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there was none) to increase the interest rate
at will during the term of the loan, that license would have been null and void for being violative of
the principle of mutuality essential in contracts. It would have invested the loan agreement with the
character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker
party's (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law
Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party
whom the courts of justice must protect against abuse and imposition. (Philippine National Bank
v. Court of Appeals, G.R. No. 88880, April 30, 1991)
Relativity of Contract
96. It is clear that under Article 1311 of the Civil Code, contracts take effect only between the
parties who execute them. Where there is no privity of contract, there is likewise no obligation or
liability to speak about. The civil law principle of relativity of contracts provides that contracts can
only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he
is aware of such contract and has acted with knowledge thereof. Since a contract may be violated
only by the parties thereto as against each other, a party who has not taken part in it cannot sue for
performance, unless he shows that he has a real interest affected thereby. (Spouses Borromeo v.
Court of Appeals, G.R. No. 169846, March 28, 2008)
97. In an earlier case, Teves v. People's Homesite and Housing Corporation, this Court also
allowed the Complaint for annulment of title and the deed of sale between PHHC and its grantee on
the allegation that the deed of sale was executed contrary to public policy and that fraud was
exercised by defendants. In remanding the case to the trial court, the High Court ruled that the
plaintiff is entitled to the relief prayed for if the allegations in the Complaint are supported by
evidence. The same case likewise allowed one who is not a party to a contract to ask for its
annulment if he is prejudiced in his rights with respect to one of the contracting parties, and can
14
show the detriment which would positively result to him. (National Housing Authority v. Pascual
, G.R. No. 158364, November 28, 2007; (I) Teves v. People's Homesite and Housing
Corporation, G.R. No. L-21498, June 27, 1968)
98. The death of a party does not excuse nonperformance of a contract which involves a property
right and the rights and obligations thereunder pass to the personal representatives of the deceased.
Similarly, nonperformance is not excused by the death of the party when the other party has a
property interest in the subject matter of the contract. (Spouses Santos v. Spouses Lumbao, G.R.
No. 169129, March 28, 2007)
99. In any event, the compromise agreement cannot bind a party who did not voluntarily take
part in the settlement itself and gave specific individual consent. It must be remembered that a
compromise agreement is also a contract; it requires the consent of the parties, and it is only then
that the agreement may be considered as voluntarily entered into. (Philippine Journalists, Inc. v.
National Labor Relations Commission, G.R. No. 166421, September 5, 2006)
100. The parties to a contract are the real parties in interest in an action upon it, as consistently
held by the Court. Only the contracting parties are bound by the stipulations in the contract; they are
the ones who would benefit from and could violate it. Thus, one who is not a party to a contract, and
for whose benefit it was not expressly made, cannot maintain an action on it. One cannot do so,
even if the contract performed by the contracting parties would incidentally inure to one's benefit.
(Spouses Oco v. Limbaring, G.R. No. 161298, January 31, 2006)
Contractual interference
101. To prove that respondents were guilty of malicious interference, petitioner had to show the

following: the existence of a valid contract, knowledge by respondents that such a contract existed
and acts (done in bad faith and without legal basis) by respondents which interfered in the due
performance by the contracting parties of their respective obligations under the contract. (U-Bix
Corporation v. Milliken & Company, G.R. No. 173318, September 23, 2008)
102. In the very early case of Gilchrist v. Cuddy, the Court declared that a person is not a malicious
interferer if his conduct is impelled by a proper business interest. In other words, a financial or profit
motivation will not necessarily make a person an officious interferer liable for damages as long as
there is no malice or bad faith involved. (Lagon v. Court of Appeals, G.R. No. 119107, March 18,
2005)
103. In the case of Lagon v. Court of Appeals, [it was] held that to sustain a case for tortuous
interference, the defendant must have acted with malice or must have been driven by purely impure
reasons to injure the plaintiff; in other words, his act of interference cannot be justified. We further
explained that the word "induce" refers to situations where a person causes another to choose one
course of conduct by persuasion or intimidation. (Go v. Cordero, G.R. No. 164703, May 04, 2010)
104. The rule is that the defendant found guilty of interference with contractual relations cannot be
held liable for more than the amount for which the party who was inducted to break the contract can
be held liable. (Go v. Cordero, G.R. No. 164703, May 04, 2010)
Consent
105. 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
(Yuviengco vs. Dacuycuy, 104 SCRA 668).
15
106. The acceptance must be identical in all respects with that of the offer so as to produce
consent or meeting of the minds. Where a party sets a different purchase price than the amount of
the offer, such acceptance was qualified which can be at most considered as a counter-offer; a
perfected contract would have arisen only if the other party had accepted this counter-offer. (Heirs
of Ignacio v. Home Bankers Savings and Trust Company, G.R. No. 177783, January 23, 2013)
107. A qualified acceptance or one that involves a new proposal constitutes a counter-offer and a
rejection of the original offer. A counter-offer is considered in law, a rejection of the original offer and
an attempt to end the negotiation between the parties on a different basis. Consequently, when
something is desired which is not exactly what is proposed in the offer, such acceptance is not
sufficient to guarantee consent because any modification or variation from the terms of the offer
annuls the offer. The acceptance must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds. (Development Bank of the Philippines v. Medrano,
G.R. No. 167004, February 7, 2011)
108. An offer is a unilateral proposition made by one party to another for the celebration of a
contract. For an offer to be certain, a contract must come into existence by the mere acceptance of
the offeree without any further act on the offeror's part. The offer must be definite, complete and
intentional. In Spouses Paderes v. Court of Appeals, the Court held that, "There is an 'offer' in the
context of Article 1319 only if the contract can come into existence by the mere acceptance of the
offeree, without any further act on the part of the offeror. Hence, the 'offer' must be definite, complete
and intentional." (Korean Air Co., Ltd. v. Yuson, G.R. No. 170369, June 16, 2010)
109. Since a bid partakes of the nature of an offer to contract with the government, the government
agency involved may or may not accept it. Moreover, being the owner of the property subject of the
bid, the government has the power to determine who shall be its recipient, as well as under what

terms it may be awarded. In this sense, participation in the bidding process is a privilege inasmuch
as it can only be exercised under existing criteria imposed by the government itself. (National
Power Corporation v. Pinatubo Commercial, G.R. No. 176006, March 26, 2010)
110. In Keng Hua Paper Products Co., Inc. v. Court of Appeals, [the Court] held that once the bill
of lading is received by the consignee who does not object to any terms or stipulations contained
therein, it constitutes as an acceptance of the contract and of all of its terms and conditions, of which
the acceptor has actual or constructive notice. (MOF Company v. Shin Yang Brokerage
Corporation, G.R. No. 172822, December 18, 2009)
111. Where a time is stated in an offer for its acceptance, the offer is terminated at the expiration
of the time given for its acceptance. The offer may also be terminated when the person to whom the
offer is made either rejects the offer outright or makes a counter-offer of his own. (Villegas v. Court
of Appeals, G.R. No. 111495, August 18, 2006)
112. When the offeror has not fixed a period for the offeree to accept the offer, and the offer is
made to a person present, the acceptance must be made immediately. (Malbarosa v. Court of
Appeals, G.R. No. 125761, April 30, 2003)
113. Ang Yu Asuncion vs. Court of Appeals, 238 SCRA 602 (1994), provides the rules in case
the offeror has allowed the offeree a certain period of time to accept the offer:
a. If the period is not itself founded upon or supported by a consideration, the offeror is still free
and has the right to withdraw the offer before its acceptance, or, if an acceptance has been made,
before the offeror’s coming to know of such fact, by communicating that withdrawal to the offeree.
The right to withdraw must not be exercised whimsically or arbitrarily; otherwise, it could give rise to
a damage claim under Article 19 of the Civil Code.
16
b. If the period has a separate consideration, a contract of “option” is deemed perfected, and it
would be a breach of that contract to withdraw the offer during the agreed period. The option
however is an independent contract by itself, and it is to be distinguished from the projected main
agreement. If the consideration is part of the purchase price, or an earnest money, such is an
evidence of perfected contract.
Capacity of Parties
114. Capacity to act is supposed to attach to a person who has not previously been declared
incapable, and such capacity is presumed to continue so long as the contrary be not proved; that is,
that at the moment of his acting he was incapable, crazy, insane, or out of his mind. The burden of
proving incapacity to enter into contractual relations rests upon the person who alleges it; if no
sufficient proof to this effect is presented, capacity will be presumed. (Alamayri v. Pabale , G.R.
No. 151243, April 30, 2008)
115. The law presumes that every person is fully competent to enter into a contract until
satisfactory proof to the contrary is presented. The burden of proof is on the individual asserting a
lack of proof to the contrary is presented. The burden of proof is on the individual asserting a lack
of capacity to contract, and this burden has been characterized as requiring for its satisfaction clear
and convincing evidence. (Spouses Yason v. Arciaga, G.R. No. 145017, January 28, 2005)
116. Article 1327 of the Civil Code provides that minors are incapable of giving consent to a
contract. Article 1390 provides that a contract where one of the parties is incapable of giving consent
is voidable or annullable. (Samahan ng Magsasaka sa San Josep v. Valisno, G.R. No. 158314,
June 3, 2004)

117. A person is not incapacitated to contract merely because of advanced years or by reason of
physical infirmities. Only when such age or infirmities impair his mental faculties to such extent as
to prevent him from properly, intelligently, and fairly protecting his property rights,is he considered
incapacitated. (Loyola v. Court of Appeals, G.R. No. 115734, February 23, 2000)
Vices of Consent
118. In order that mistake may invalidate consent and constitute a ground for annulment of
contract based on Article 1331, the mistake must be material as to go to the essence of the contract;
that without such mistake, the agreement would not have been made. The effect of error must be
determined largely by its influence upon the party. If the party would have entered into the contract
even if he had knowledge of the true fact, then the error does not vitiate consent. (Cebu Winland
Development Corporation v. Ong Siao Hua, G.R. No. 173215, May 21, 2009)
119. Mistake may invalidate consent when it refers 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 of law as a rule will not vitiate consent. (Dandan v. Arfel Realty &
Management Corp., G.R. No. 173114, September 8, 2008)
120. Where a party is unable to read or when the contract is in a language not understood by the
party and mistake or fraud is alleged, the obligation to show that the terms of the contract had been
fully explained to said party who is unable to read or understand the language of the contract
devolves on the party seeking to enforce the contract to show that the other party fully understood
the contents of the document. If he fails to discharge this burden, the presumption of mistake, if not,
fraud, stands unrebutted and controlling. (Feliciano v. Spouses Zaldivar, G.R. No. 162593,
September 26, 2006)
17
121. An error so patent and obvious that nobody could have made it, or one which could have
been avoided by ordinary prudence, cannot be invoked by the one who made it in order to evade
liability, let alone annul a contract. (Olbes v. China Banking Corp., G.R. No. 152082, March 10,
2006)
122. Where a party is unable to read, and he expressly pleads in his reply that he signed the
voucher in question "without knowing (its) contents which have not been explained to him," this plea
is tantamount to one of mistake or fraud in the execution of the voucher or receipt in question and
the burden is shifted to the other party to show that the former fully understood the contents of the
document; and if he fails to prove this, the presumption of mistake (if not fraud) stands unrebutted
and controlling. (Leonardo v. Court of Appeals, G.R. No. 125485, September 13, 2004)
123. Corollarily, the threat to foreclose the mortgage would not in itself vitiate consent as it is a
threat to enforce a just or legal claim through competent authority. It bears emphasis that the
foreclosure of mortgaged properties in case of default in payment of a debtor is a legal remedy given
by law to a creditor. In the event of default by the mortgage debtor in the performance of the principal
obligation, the mortgagee undeniably has the right to cause the sale at public auction of the
mortgaged property for payment of the proceeds to the mortgagee. (Development Bank of the
Philippines v. Court of Appeals, G.R. No. 138703, June 30, 2006)
124. 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. One who alleges any defect, or
the lack of consent to a contract by reason of fraud or undue influence, must establish by full, clear
and convincing evidence, such specific acts that vitiated the party's consent; otherwise, the latter's
presumed consent to the contract prevails. For undue influence to be present, the influence exerted
must have so overpowered or subjugated the mind of a contracting party as to destroy his free

agency, making him express the will of another rather than his own. (Naranja v. Court of Appeals,
G.R. No. 160132, April 17, 2009)
125. For undue influence to be present, the influence exerted must have so overpowered or
subjugated the mind of a contracting party as to destroy the latter's free agency, making such party
express the will of another rather than its own. The alleged lingering financial woes of a debtor per
se cannot be equated with the presence of undue influence. (Development Bank of the
Philippines v. Court of Appeals, G.R. No. 138703, June 30, 2006)
126. In the absence of a confidential or fiduciary relationship between the parties, the law does
not presume that one person exercised undue influence upon the other.(Loyola v. Court of
Appeals, G.R. No. 115734, February 23, 2000)
127. To prove a confidential relationship from which undue influence may arise, the relationship
must reflect a dominant, overmastering influence which controls over the dependent person.
(Loyola v. Court of Appeals, G.R. No. 115734, February 23, 2000)
128. Deceit is also present when one party, by means of concealing or omitting to state material
facts, with intent to deceive, obtains consent of the other party without which, consent could not
have been given. Art. 1339 of the Civil Code is explicit that failure to disclose facts when there is a
duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud.
Insidious words or machinations constituting deceit are those that ensnare, entrap, trick, or mislead
the other party who was induced to give consent which he or she would not otherwise have given.
(Spouses Lequin v. Spouses Vizconde, G.R. No. 177710, October 12, 2009)
Simulation of Contract
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129. In absolute simulation, there is a colorable contract but it has no substance as the parties
have no intention to be bound by it. "The main characteristic of an absolute simulation is that the
apparent contract is not really desired or intended to produce legal effect or in any way alter the
juridical situation of the parties." "As a result, an absolutely simulated or fictitious contract is void,
and the parties may recover from each other what they may have given under the contract." (Heirs
of Intac v. Court of Appeals, G.R. No. 173211, October 11, 2012)
130. If the parties state a false cause in the contract to conceal their real agreement, the contract
is only relatively simulated and the parties are still bound by their real agreement. Hence, where the
essential requisites of a contract are present and the simulation refers only to the content or terms
of the contract, the agreement is absolutely binding and enforceable between the parties and their
successors in interest. (Heirs of Intac v. Court of Appeals, G.R. No. 173211, October 11, 2012)
131. Article 1345 of the Civil Code provides that the simulation of a contract may either be absolute
or relative. In absolute simulation, there is a colorable contract but it has no substance as the parties
have no intention to be bound by it. The main characteristic of an absolute simulation is that the
apparent contract is not really desired or intended to produce legal effect or in any way alter the
juridical situation of the parties. As a result, an absolutely simulated or fictitious contract is void, and
the parties may recover from each other what they may have given under the contract. However, if
the parties state a false cause in the contract to conceal their real agreement, the contract is only
relatively simulated and the parties are still bound by their real agreement. (Spouses Villaceran v.
De Guzman, G.R. No. 169055, February 22, 2012)
132. Where the essential requisites of a contract are present and the simulation refers only to the
content or terms of the contract, the agreement is absolutely binding and enforceable between the
parties and their successors in interest. (Spouses Villaceran v. De Guzman, G.R. No. 169055,

February 22, 2012)
133. Article 1412 is not applicable to fictitious or simulated contracts, because they refer to
contracts with an illegal cause or subject-matter. This article presupposes the existence of a cause,
it cannot refer to fictitious or simulated contracts which are in reality non-existent. (Heirs of Ureta,
Sr. v. Heirs of Ureta, G.R. No. 165748, September 14, 2011)
134. A simulated contract of sale is without any cause or consideration, and is, therefore, null and
void; in such case, no independent action to rescind or annul the contract is necessary, and it may
be treated as non-existent for all purposes. (Heirs of Ureta, Sr. v. Heirs of Ureta, G.R. No. 165748,
September 14, 2011)
135. The most protuberant index of simulation of contract is the complete absence of an attempt
in any manner on the part of the ostensible buyer to assert rights of ownership over the subject
properties. Policronio's failure to take exclusive possession of the subject properties or, in the
alternative, to collect rentals, is contrary to the principle of ownership. Such failure is a clear badge
of simulation that renders the whole transaction void. (Heirs of Ureta, Sr. v. Heirs of Ureta, G.R.
No. 165748, September 14, 2011)
136. When the parties do not intend to be bound at all, the contract is absolutely simulated; if the
parties conceal their true agreement, then the contract is relatively simulated. An absolutely
simulated contract is void, and the parties may recover from each other what they may have given
under the simulated contract, while a relatively simulated contract is valid and enforceable as the
parties' real agreement binds them. Characteristic of simulation is that the apparent contract is not
really desired or intended to produce legal effects, or in any way, alter the juridical situation of the
parties. (Taghoy v. Spouses Tigol, Jr., G.R. No. 159665, August 3, 2010)
19
137. Suffice it to state that the concept of inadequacy or non-payment of price is irreconcilable
with the concept of simulation. If there exists an actual consideration for transfer evidenced by the
alleged act of sale, no matter how inadequate it be, the transaction could not be a "simulated sale".
(Aliño v. Heirs of Lorenzo, G.R. No. 159550, June 27, 2008)
138. The legal presumption is in favor of the validity of contracts and the party who impugns its
regularity has the burden of proving its simulation. (Tating v. Marcella, G.R. No. 155208, March
27, 2007)
139. Simulation of contract and gross inadequacy of price are distinct legal concepts, with different
effects. When the parties to an alleged contract do not really intend to be bound by it, the contract
is simulated and void. A simulated or fictitious contract has no legal effect whatsoever because there
is no real agreement between the parties. (Bravo-Guerrero v. Bravo, G.R. No. 152658, July 29,
2005)
Object of Contract
140. Well-entrenched is the rule that all things, even future ones, which are not outside the
commerce of man may be the object of a contract. The exception is that no contract may be entered
into with respect to future inheritance, and the exception to the exception is the partition inter vivos
referred to in Article 1080. (J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882, March 11, 2005)
141. Unlike shares of stock, money is a generic thing. It is designated merely by its class or genus
without any particular designation or physical segregation from all others of the same class. This
means that once a certain amount is added to the cash balance, one can no longer pinpoint the
specific amount included which then becomes part of a whole mass of money. (Cordova v. Reyes

Daway Lim Bernardo Lindo Rosales Law Offices, G.R. No. 146555, July 3, 2007)
142. The failure of the parties to state its exact location in the contract is of no moment; this is a
mere error occasioned by the parties' failure to describe with particularity the subject property, which
does not indicate the absence of the principal object as to render the contract void. (Camacho v.
Court of Appeals, G.R. No. 127520, February 9, 2007)
143. The object of a contract, in order to be considered as "certain," need not specify such object
with absolute certainty. It is enough that the object is determinable in order for it to be considered
as "certain." (Domingo Realty, Inc. v. Court of Appeals, G.R. No. 126236, January 26, 2007)
Cause of Contract
144. Lack of ample consideration does not nullify the contract: Inadequacy of consideration does
not vitiate a contract unless it is proven which in the case at bar was not, that there was fraud,
mistake or undue influence. (Article 1355, New Civil Code). We do not find the stipulated price as
so inadequate to shock the court's conscience, considering that the price paid was much higher
than the assessed value of the subject properties and considering that the sales were effected by a
father to her daughter in which case filial love must be taken into account. (Cojuangco, Jr. v.
Republic, G.R. No. 180705, November 27, 2012)
145. In Samanilla v. Cajucom, the Court clarified that the presumption of a valid consideration
cannot be discarded on a simple claim of absence of consideration, especially when the contract
itself states that consideration was given. (Cojuangco, Jr. v. Republic, G.R. No. 180705,
November 27, 2012)
146. A contract is presumed to be supported by cause or consideration. The presumption that a

contract has sufficient consideration cannot be overthrown by a mere assertion that it has no
20
consideration. To overcome the presumption, the alleged lack of consideration must be shown by
preponderance of evidence. The burden to prove lack of consideration rests upon whoever alleges
it, which, in the present case, is respondent. (Mangahas v. Brobio, G.R. No. 183852, October 20,
2010)
147. Under Article 1354 of the Civil Code, it is presumed that consideration exists and is lawful
unless the debtor proves the contrary. Moreover, under Section 3, Rule 131 of the Rules of Court,
the following are disputable presumptions: (1) private transactions have been fair and regular; (2)
the ordinary course of business has been followed; and (3) there was sufficient consideration for a
contract. A presumption may operate against an adversary who has not introduced proof to rebut it.
The effect of a legal presumption upon a burden of proof is to create the necessity of presenting
evidence to meet the legal presumption or the prima facie case created thereby, and which, if no
proof to the contrary is presented and offered, will prevail. The burden of proof remains where it is,
but by the presumption, the one who has that burden is relieved for the time being from introducing
evidence in support of the averment, because the presumption stands in the place of evidence
unless rebutted. (Pentacapital Investment Corp. v. Mahinay, G.R. No. 171736, July 5, 2010)
148. The cause or essential purpose in a contract of lease is the use or enjoyment of a thing. A
party's motive or particular purpose in entering into a contract does not affect the validity or existence
of the contract; an exception is when the realization of such motive or particular purpose has been
made a condition upon which the contract is made to depend. (So v. Food Fest Land, Inc., G.R.
No. 183628, April 7, 2010)
149. Gross inadequacy of price by itself will not result in a void contract. Gross inadequacy of price
does not even affect the validity of a contract of sale, unless it signifies a defect in the consent or
that the parties actually intended a donation or some other contract. Inadequacy of cause will not

invalidate a contract unless there has been fraud, mistake or undue influence. (Bacungan v. Court
of Appeals, G.R. No. 170282, December 18, 2008)
150. Cause is the essential reason which moves the contracting parties to enter into it. In other
words, the cause is the immediate, direct and proximate reason which justifies the creation of an
obligation through the will of the contracting parties. Cause, which is the essential reason for the
contract, should be distinguished from motive, which is the particular reason of a contracting party
which does not affect the other party. (Uy v. Court of Appeals, G.R. No. 120465, September 9,
1999)
151. Ordinarily, a party's motives for entering into the contract do not affect the contract. However,
when the motive predetermines the cause, the motive may be regarded as the cause. In Liguez vs.
Court of Appeals, this Court, speaking through Justice J.B.L. Reyes, held:
. . . It is well to note, however, that Manresa himself (Vol. 8, pp. 641-642), while
maintaining the distinction and upholding the inoperativeness of the motives of the
parties to determine the validity of the contract, expressly excepts from the rule those
contracts that are conditioned upon the attainment of the motives of either party.
The same view is held by the Supreme Court of Spain, in its decisions of February 4, 1941, and
December 4, 1946, holding that the motive may be regarded as causa when it predetermines the
purpose of the contract. (Uy v. Court of Appeals, G.R. No. 120465, September 9, 1999)
Form
152. Article 1358 of the Civil Code, which requires the embodiment of certain contracts in a public
instrument, is only for convenience, and registration of the instrument only adversely affects third
parties. Formal requirements are, therefore, for the benefit of third parties. Non-compliance
21
therewith does not adversely affect the validity of the contract nor the contractual rights and
obligations of the parties thereunder. (Zamora v. Zamora, G.R. No. 162930, December 05, 2012)
153. Notarization, or the requirement of a public document under the Civil Code, is only for
convenience, and not for validity or enforceability. (Spouses Sabitsana, Jr. v. Muertegui, G.R. No.
181359, August 05, 2013)
154. Although it is true that the absence of notarization of the deed of sale would not invalidate
the transaction evidenced therein, yet an irregular notarization reduces the evidentiary value of a
document to that of a private document, which requires proof of its due execution and authenticity
to be admissible as evidence. (Riosa v. Tabaco La Suerte Corporation, G.R. No. 203786,
October 23, 2013)
155. A defective notarization will strip the document of its public character and reduce it to a private
instrument. Consequently, when there is a defect in the notarization of a document, the clear and
convincing evidentiary standard normally attached to a duly-notarized document is dispensed with,
and the measure to test the validity of such document is preponderance of evidence. (Spouses
Martires v. Chua, G.R. No. 174240, March 20, 2013)
156. True it is that the Civil Code requires certain transactions to appear in public documents.
However, the necessity of a public document for contracts which transmit or extinguish real rights
over immovable property, as mandated by Article 1358 of the Civil Code, is only for convenience; it
is not essential for validity or enforceability. Thus, in Cenido v. Apacionado, this Court ruled that the
only effect of noncompliance with the provisions of Article 1358 of the Civil Code is that a party to

such a contract embodied in a private document may be compelled to execute a public document.
(Teoco v. Metropolitan Bank and Trust Company, G.R. No. 162333, December 23, 2008)
157. The mere fact that neither party signs a contract does not prevent it from assuming legal
existence. Consent may either be express or implied, unless the law specifically requires a particular
format or manner of expressing such consent. The signature of a party in a contract is one way of
expressing it; a tacit or constructive acceptance of the offer involved in the contract is another. Once
there is manifestation of the concurrence of the parties' wills, written or otherwise, the stage of
negotiation is terminated and the contract is finally perfected. (Luzon Development Bank v.
Spouses Angeles, G.R. No. 150393, July 31, 2006)
158. In Manuel v. Rodriguez, et al., the Court ruled that to be a written contract, all the terms must
be in writing, so that a contract partly in writing and partly oral is in legal effect an oral contract.
(Spouses Ramos v. Spouses Heruela, G.R. No. 145330, October 14, 2005)
159. [The Court held:] Article 1358 of the Civil Code requires that the form of a contract that
transmits or extinguishes real rights over immovable property should be in a public document, yet it
is also an accepted rule that the failure to observe the proper form does not render the transaction
invalid. Thus, it has been uniformly held that the form required in Article 1358 is not essential to the
validity or enforceability of the transaction, but required merely for convenience. We have even
affirmed that a sale of real property though not consigned in a public instrument or formal writing, is
nevertheless valid and binding among the parties, for the time-honored rule is that even a verbal
contract of sale or real estate produces legal effects between the parties. (Tigno v. Spouses
Aquino, G.R. No. 129416, November 25, 2004)
160. A certain form may be prescribed by law for any of the following purposes: for validity,
enforceability, or greater efficacy of the contract. When the form required is for validity, its non-
observance renders the contract void and of no effect. When the required form is for enforceability,
22
non-compliance therewith will not permit, upon the objection of a party, the contract, although
otherwise valid, to be proved or enforced by action. Formalities intended for greater efficacy or
convenience or to bind third persons, if not done, would not adversely affect the validity or
enforceability of the contract between the contracting parties themselves. (Cenido v. Spouses
Apacionado, G.R. No. 132474, November 19, 1999)
Reformation of instrument
161. In order that an action for reformation of instrument as provided in Article 1359 of the Civil
Code may prosper, the following requisites must concur: (1) there must have been a meeting of the
minds of the parties to the contract; (2) the instrument does not express the true intention of the
parties; and (3) the failure of the instrument to express the true intention of the parties is due to
mistake, fraud, inequitable conduct or accident. (Quiros v. Arjona, G.R. No. 158901, March 9,
2004)
162. An action for reformation is in personam, not in rem, . . . even when real estate is involved. .
. . It is merely an equitable relief granted to the parties where through mistake or fraud, the
instrument failed to express the real agreement or intention of the parties. While it is a recognized
remedy afforded by courts of equity it may not be applied if it is contrary to well-settled principles or
rules. It is a long-standing principle that equity follows the law. It is applied in the absence of and
never against statutory law. . . . Courts are bound by rules of law and have no arbitrary discretion to
disregard them. . . . Courts of equity must proceed with outmost caution especially when rights of
third parties may intervene. . . ." (Huibonhoa v. Court of Appeals, G.R. No. 95897, December 14,
1999)
163. A cause of action for the reformation of a contract only arises when one of the contracting

parties manifests an intention, by overt acts, not to abide by the true agreement of the parties.
(Marquez v. Espejo, G.R. No. 168387, August 25, 2010)
Interpretations of contracts
164. Courts cannot supply material stipulations, read into the contract words it does not contain
or, for that matter, read into it any other intention that would contradict its plain import. Neither can
they rewrite contracts because they operate harshly or inequitably as to one of the parties, or alter
them for the benefit of one party and to the detriment of the other, or by construction, relieve one of
the parties from the terms which he voluntarily consented to, or impose on him those which he did
not. (Spouses Cabahug v. National Power Corporation, G.R. No. 186069, January 30, 2013)
165. It should be emphasized that in case of conflict between the text of a contract and the intent
of the parties, it is the latter that prevails, for intention is the soul of a contract, not its wording which
is prone to mistakes, inadequacies or ambiguities. To hold otherwise would give life, validity, and
precedence to mere typographical errors and defeat the very purpose of agreements. (Global
Resource for Outsourced Workers (GROW), Inc. v. Velasco, G.R. No. 196883, August 22,
2012)
166. Provisions in a contract must be read in conjunction with statutory and administrative
regulations. This finds basis on the principle "that an existing law enters into and forms part of a
valid contract without the need for the parties expressly making reference to it." (St. Mary's
Academy of Dipolog City v. Palacio, G.R. No. 164913, September 08, 2010)
167. On several occasions, [the Court has] decreed that in determining the nature of a contract,
courts are not bound by the title or name given by the parties. The decisive factor in evaluating an
agreement is the intention of the parties, as shown, not necessarily by the terminology used in the
23
contract but, by their conduct, words, actions and deeds prior to, during and immediately after
executing the agreement. Thus, to ascertain the intention of the parties, their contemporaneous and
subsequent acts should be considered. Once the intention of the parties is duly ascertained, that
intent is deemed as integral to the contract as its originally expressed unequivocal terms. (Rockville
Excel International Exim Corporation v. Spouses Culla, G.R. No. 155716, October 02, 2009)
168. If some stipulations of any contract should admit of several meanings, it shall be understood
as bearing that import which is most adequate to render it effectual. The various stipulations of a
contract shall be interpreted together, attributing to the doubtful ones that sense which may result
from all of them taken jointly. When it is impossible to settle doubts by the rules established in the
preceding articles, and the doubts refer to incidental circumstances of an onerous contract, the
doubt shall be settled in favor of the greatest reciprocity of interests. (Security Bank Corporation
v. Court of Appeals, G.R. No. 141733, February 08, 2007)
Rescissible contracts
169. It bears stressing that the right to ask for the rescission of a contract under Article 1381 (4)
of the Civil Code is not contingent upon the final determination of the ownership of the thing subject
of litigation. The primordial purpose of Article 1381 (4) of the Civil Code is to secure the possible
effectivity of the impending judgment by a court with respect to the thing subject of litigation. It seeks
to protect the binding effect of a court's impending adjudication vis-a-vis the thing subject of litigation
regardless of which among the contending claims therein would subsequently be upheld.
Accordingly, a definitive judicial determination with respect to the thing subject of litigation is not a
condition sine qua non before the rescissory action contemplated under Article 1381 (4) of the Civil
Code may be instituted. (Ada v. Baylon, G.R. No. 182435, August 13, 2012)

170. The rescission of a contract under Article 1381 (4) of the Civil Code only requires the
concurrence of the following: first, the defendant, during the pendency of the case, enters into a
contract which refers to the thing subject of litigation; and second, the said contract was entered into
without the knowledge and approval of the litigants or of a competent judicial authority. As long as
the foregoing requisites concur, it becomes the duty of the court to order the rescission of the said
contract.
The reason for this is simple. Article 1381 (4) seeks to remedy the presence of bad faith among the
parties to a case and/or any fraudulent act which they may commit with respect to the thing subject
of litigation. (Ada v. Baylon, G.R. No. 182435, August 13, 2012)
171. The action to rescind contracts in fraud of creditors is known as accion pauliana. For this
action to prosper, the following requisites must be present: (1) the plaintiff asking for rescission has
a credit prior to the alienation, although demandable later; (2) the debtor has made a subsequent
contract conveying a patrimonial benefit to a third person; (3) the creditor has no other legal remedy
to satisfy his claim; (4) the act being impugned is fraudulent; (5) the third person who received the
property conveyed, if it is by onerous title, has been an accomplice in the fraud. (Spouses Lee v.
Bangkok Bank Public Company, G.R. No. 173349, February 9, 2011)
172. Elementary is the principle that the validity of a contract does not preclude its rescission.
Under Articles 1380 and 1381 (3) of the Civil Code, contracts that are otherwise valid between the
contracting parties may nonetheless be subsequently rescinded by reason of injury to third persons,
like creditors. In fact, rescission implies that there is a contract that, while initially valid, produces a
lesion or pecuniary damage to someone. (Coastal Pacific Trading, Inc. v. Southern Rolling Mills,
Co., Inc., G.R. No. 118692, July 28, 2006)
Voidable contracts
24
173. A voidable or annullable contract is one where (i) one of the parties is incapable of giving
consent to a contract; or (ii) the consent is vitiated by mistake, violence, intimidation, undue influence
or fraud. The action for annulment must be brought within four (4) years from the time the
intimidation, violence or undue influence ceases, or four (4) years from the time of the discovery of
the mistake or fraud. (Dailisan v. Court of Appeals, G.R. No. 176448, July 28, 2008)
174. 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.
Any action for the annulment of the contracts thus entered into by the minors would require
that: (1) the plaintiff must have an interest in the contract; and (2) the action must be brought by the
victim and not the party responsible for the defect. Thus, Article 1397 of the Civil Code provides in
part that "[t]he 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." (Samahan ng Magsasaka sa San Josep v. Valisno, G.R. No.
158314, June 3, 2004)
Unenforceable contracts
175. Unenforceable contracts are those which cannot be enforced by a proper action in court,
unless they are ratified, because either they are entered into without or in excess of authority or they
do not comply with the statute of frauds or both of the contracting parties do not possess the required
legal capacity. An unenforceable contract may be ratified, expressly or impliedly, by the person in
whose behalf it has been executed, before it is revoked by the other contracting party. (Mercado v.

Allied Banking Corporation, G.R. No. 171460, July 27, 2007)
176. With respect to real property, Article 1358(1) of the Civil Code specifically requires that a
contract of sale thereof be in a public document. However, an otherwise unenforceable oral contract
of sale of realty under Article 1403(2) of the Civil Code may be ratified by the failure to object to the
presentation of oral evidence to prove it or by the acceptance of benefits granted by it. (Soliva v.
Intestate Estate of Villalba, G.R. No. 154017, December 8, 2003)
177. A contract entered into in the name of another by one who ostensibly might have but who, in
reality, had no real authority or legal representation, or who, having such authority, acted beyond
his powers, would be unenforceable. (Regal Films, Inc. v. Concepcion, G.R. No. 139532, August
9, 2001)
178. The Statute of Frauds expressed in Article 1403, par. (2), of the Civil Code applies only to
executory contracts, i.e., those where no performance has yet been made. Stated a bit differently,
the legal consequence of non-compliance with the Statute does not come into play where the
contract in question is completed, executed, or partially consummated. (Orduña v. Fuentebella,
G.R. No. 176841, June 29, 2010)
179. The effect of noncompliance with this requirement (Statute of Frauds) is simply that no action
can be enforced under the given contracts. If an action is nevertheless filed in court, it shall warrant
a dismissal under Section 1 (i), Rule 16 of the Rules of Court, unless there has been, among others,
total or partial performance of the obligation on the part of either party (Municipality of Hagonoy,
Bulacan v. Dumdum, Jr., G.R. No. 168289, March 22, 2010)
180. When a verbal contract has been completed, executed or partially consummated, as in this
case, its enforceability will not be barred by the Statute of Frauds, which applies only to an executory
25
agreement. Thus, where one party has performed his obligation, oral evidence will be admitted to
prove the agreement. (Ainza v. Spouses Padua, G.R. No. 165420, June 30, 2005)
181. We have previously held that not all agreements "affecting land" must be put into writing to
attain enforceability. Thus, we have held that the setting up of boundaries, the oral partition of real
property, and an agreement creating a right of way are not covered by the provisions of the statute
of frauds. The reason simply is that these agreements are not among those enumerated in Article
1403 of the New Civil Code. (Rosencor Development Corporation v. Inquing, G.R. No. 140479,
March 8, 2001)
182. Lest it be overlooked, a contract that infringes the Statute of Frauds is ratified by the
acceptance of benefits under the contract. (Orduña v. Fuentebella, G.R. No. 176841, June 29,
2010)
Void or inexistent contracts
183. A void contract is equivalent to nothing; it produces no civil effect; and it does not create,
modify or extinguish a juridical relation. (Borromeo v. Mina, G.R. No. 193747, June 05, 2013)
184. A void contract is also not susceptible of ratification, and the action for the declaration of the
absolute nullity of such a contract is imprescriptible. (Spouses Binayug v. Ugaddan, G.R. No.
181623, December 5, 2012)
185. The law will not aid either party to an illegal contract or agreement; it leaves the parties where
it finds them. Indeed, one cannot salvage any rights from an unconstitutional transaction knowingly
entered into. (Beumer v. Amores, G.R. No. 195670, December 3, 2012)

186. Invalid stipulations that are independent of, and divisible from, the rest of the agreement and
which can easily be separated therefrom without doing violence to the manifest intention of the
contracting minds do not nullify the entire contract. (Cojuangco, Jr. v. Republic, G.R. No. 180705,
November 27, 2012)
187. The right to set up the nullity of a void or non-existent contract is not limited to the parties, as
in the case of annullable or voidable contracts; it is extended to third persons who are directly
affected by the contract. Thus, where a contract is absolutely simulated, even third persons who
may be prejudiced thereby may set up its inexistence. (Heirs of Ureta, Sr. v. Heirs of Ureta, G.R.
No. 165748, September 14, 2011)
188. Although a void contract has no legal effects even if no action is taken to set it aside, when
any of its terms have been performed, an action to declare its inexistence is necessary to allow
restitution of what has been given under it. This action, according to Article 1410 of the Civil Code
does not prescribe. (Spouses Fuentes v. Roca, G.R. No. 178902, April 21, 2010)
189. A void agreement will not be rendered operative by the parties' alleged performance (partial
or full) of their respective prestations. A contract that violates the law is null and void ab initio and
vests no rights and creates no obligations. It produces no legal effect at all. (Nunga, Jr. v. Nunga
III, G.R. No. 178306, December 18, 2008)
190. This rule, however, is subject to exceptions that permit the return of that which may have
been given under a void contract to: (a) the innocent party (Arts. 1411-1412, Civil Code); (b) the
debtor who pays usurious interest (Art. 1413, Civil Code); (c) the party repudiating the void contract
before the illegal purpose is accomplished or before damage is caused to a third person and if public
interest is subserved by allowing recovery (Art. 1414, Civil Code); (d) the incapacitated party if the
interest of justice so demands (Art. 1415, Civil Code); (e) the party for whose protection the
26
prohibition by law is intended if the agreement is not illegal per se but merely prohibited and if public
policy would be enhanced by permitting recovery (Art. 1416, Civil Code); and (f) the party for whose
benefit the law has been intended such as in price ceiling laws (Art. 1417, Civil Code) and labor
laws (Arts. 1418-1419, Civil Code). (Hulst v. PR Builders, Inc., G.R. No. 156364, September 3,
2007)
191. The good faith of a party in entering into a contract is immaterial in determining whether it is
valid or not. Good faith, not being an essential element of a contract, has no bearing on its validity.
No amount of good faith can validate an agreement which is otherwise void. A contract which the
law denounces as void is necessarily no contract at all and no effort or act of the parties to create
one can bring about a change in its legal status. (Ballesteros v. Abion, G.R. No. 143361, February
9, 2006)
192. While the law bars recovery in a case where the object of the contract is contrary to law and
one or both parties acted in bad faith, we cannot here apply the doctrine of in pari delicto which
admits of an exception, namely, that when the contract is merely prohibited by law, not illegal per
se, and the prohibition is designed for the protection of the party seeking to recover, he is entitled
to the relief prayed for whenever public policy is enhanced thereby. Under the Public Land Act, the
prohibition to alienate is predicated on the fundamental policy of the State to preserve and keep in
the family of the homesteader that portion of public land which the State has gratuitously given to
him, and recovery is allowed even where the land acquired under the Public Land Act was sold and
not merely encumbered, within the prohibited period. (Heirs of Manlapat v. Court of Appeals, G.R.
No. 125585, June 8, 2005)
193. One who loses his money or property by knowingly engaging in a contract or transaction
which involves his own moral turpitude may not maintain an action for his losses. To him who moves

in deliberation and premeditation, the law is unyielding. The law will not aid either party to an illegal
contract or agreement; it leaves the parties where it finds them. (Frenzel v. Catito, G.R. No. 143958,
July 11, 2003)
Estoppel
194. Estoppel is an equitable principle rooted in natural justice; it is meant to prevent persons from
going back on their own acts and representations, to the prejudice of others who have relied on
them. (Philippine Realty and Holdings Corporation v. Ley Construction and Development
Corporation, G.R. No. 165548, June 13, 2011)
195. A party to a contract cannot deny the validity thereof after enjoying its benefits without outrage
to one's sense of justice and fairness. (Toledo v. Hyden, G.R. No. 172139, December 08, 2010)
196. It has long been a settled rule that the government is not bound by the errors committed by
its agents. Estoppel does not also lie against the government or any of its agencies arising from
unauthorized or illegal acts of public officers. This is particularly true in the collection of legitimate
taxes due where the collection has to be made whether or not there is error, complicity, or plain
neglect on the part of the collecting agents. (Intra-Strata Assurance Corporation v. Republic,
G.R. No. 156571, July 09, 2008)
197. Estoppel by deed is "a bar which precludes one party from asserting as against the other
party and his privies any right or title in derogation of the deed, or from denying the truth of any
material facts asserted in it." [The Court has] previously cautioned against the perils of the
misapplication of the doctrine of estoppel:
Estoppel has been characterized as harsh or odious, and not favored in law. When misapplied,
estoppel becomes a most effective weapon to establish an injustice, inasmuch as it shuts a man's
27
mouth from speaking the truth and debars the truth in a particular case. Estoppel cannot be
sustained by mere argument or doubtful inference; it must be clearly proved in all its essential
elements by clear, convincing and satisfactory evidence. (The Learning Child, Inc. v. Ayala
Alabang Village Association, G.R. No. 134269, July 07, 2010)
198. There are generally three kinds of estoppel: (1) estoppel in pais; (2) estoppel by deed; and
(3) estoppel by laches. In the first classification, a person is considered in estoppel if by his conduct,
representations or admissions or silence when he ought to speak out, whether intentionally or
through culpable negligence, "causes another to believe certain facts to exist and such other
rightfully relies and acts on such belief, as a consequence of which he would be prejudiced if the
former is permitted to deny the existence of such facts." Estoppel by deed, on the other hand, occurs
when a party to a deed and his privies are precluded from denying any material fact stated in the
said deed as against the other party and his privies. Estoppel by laches is considered an equitable
estoppel wherein a person who failed or neglected to assert a right for an unreasonable and
unexplained length of time is presumed to have abandoned or otherwise declined to assert such
right and cannot later on seek to enforce the same, to the prejudice of the other party, who has no
notice or knowledge that the former would assert such rights and whose condition has so changed
that the latter cannot, without injury or prejudice, be restored to his former state. (Spouses Chien
v. Sta. Lucia Realty & Development, Inc., G.R. No. 162090, January 31, 2007)
-end-
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NOTES IN OBLIGATIONS AND CONTRACTS

Prof. Rolando B. Faller

Nature and Concept

12. Bar Notes By Prof. RBFaller

Force majeure/fortuitous event

Remedies for Breach of Obligations

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Different Kinds of Obligations

21. It is a condition precedent. The non-compliance of a suspensive condition is not a breach,

Obligations with a Period

Joint and Solidary Obligations

Obligation with a Penal Clause

41. A penalty clause, expressly recognized by law, is an accessory undertaking to assume

53. In general, a payment in order to be effective to discharge an obligation, must be made to

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Payment in foreign currency/value of currency

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61. The existence of extraordinary inflation must be officially proclaimed by competent

Tender of Payment and Consignation

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Loss of the thing due

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146. A contract is presumed to be supported by cause or consideration. The presumption that a

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Void or inexistent contracts

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