OBLIGATIONS AND CONTRACTS

DIFFERENT KINDS OF PRESTATION obligations are those which arise from the
same cause, wherein each party is a
debtor and a creditor of the other, such
OBLIGATI OBLIGATI
OBLIGATI that the performance of one is
BASIS ON TO ON NOT
ON TO DO conditioned upon the simultaneous
GIVE TO DO
fulfillment of the other.
Covers the
As to 6. Existence of burden or condition
rendering
what the Consists in a. Pure – not burdened with any condition
of works or Refraining
obligatio the delivery or term. It is immediately demandable
services from doing
n of a thing to (Art. 1179);
whether certain acts
consists the creditor b. Conditional – subject to a condition which
physical or
of may be suspensive (happening of which
mental
shall give rise to the obligation) or
Contract resolutory (happening of which
for Negative terminates the obligation) (NCC. 1181).
Sale, profession easement,
deposit, al services restraining 7. Character of responsibility or liability
Example
pledge, like order or a. Joint – each debtor is liable only for a part
s
donation, painting, injunction of the whole liability and to each creditor
antichresis modeling, (Pineda, shall belong only a part of the correlative
singing, 2000) rights (8 Manresa 194 ; NCC. 1207);
etc. b. Solidary – debtor is answerable for the
whole of the obligation without prejudice
CLASSIFICATION OF OBLIGATIONS to his right to collect from his co-debtors
the latter’s shares in the obligation (NCC.
From the viewpoint of: 1207).
1. Creation
a. Legal – imposed by law (Art. 1158); 8. Susceptibility of partial fulfillment
b. Conventional – established by the a. Divisible – obligation is susceptible of
agreement of the parties (eg. Contracts). partial performance (NCC. 1223; and
1224);
2. Nature b. Indivisible – obligation is not susceptible
a. Personal – to do; not to do; of partial performance (NCC. 1225).
b. Real – to give.
9. Right to choose and substitution
3. Object a. Alternative – obligor may choose to
a. Determinate / specific - particularly completely perform one out of the several
designated or physically segregated from prestations
all others of the same class; (NCC. 1199);
b. Generic – designated merely by its class or b. Facultative – only one prestation has been
genus; agreed upon, but the obligor may render
c. Limited generic – generic objects confined one in substitution of the first one (NCC.
to a particular class or source (Tolentino, 1206).
2002). (e.g. An obligation to deliver one of
my horses). 10. Imposition of penalty
a. Simple – there is no penalty imposed for
4. Performance violation of the terms thereof (NCC. 1226);
a. Positive - to give; to do; b. Obligations with a penal clause –
b. Negative – not to do (ex. an obligation not obligation which imposes a penalty for
to run for an elective post). violation of the terms thereof (NCC. 1226;
Pineda, 2000).
5. Person obliged
a. Unilateral – only one party is bound; 11. Sanction
b. Bilateral – both parties are bound. a. Civil – gives a right of action to compel
their performance;
NOTE : A bilateral obligation may be b. Natural– not based on positive law, but
reciprocal or non-reciprocal. Reciprocal on equity and natural law; does not grant

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 CIVIL LAW
a right of action to enforce their Obligations derived from law are not presumed.
performance, but after voluntary Only those expressly determined in the Code or in
fulfillment by the obligor, they authorize special laws are demandable and shall be
retention of what has been delivered regulated by the precepts of the law which
rendered by reason thereof. establishes them and as to what has not been
foreseen by the provisions of Book IV of NCC (NCC,
Moral – cannot be enforced by action but are Art. 1158).
binding on the party who makes it in conscience
and natural law. NOTE: If there is conflict between the NCC and a
special law, the latter prevails unless the contrary
has been expressly stipulated in the NCC (NCC, Art.
SOURCES OF OBLIGATIONS 18; Paras, 2008).

Characteristics of a legal obligation

1. Law;
1. Does not need the consent of the obligor;
2. Contracts;
2. Quasi-contracts; 2. Must be expressly set forth in the law creating it
3. Delict; and not merely presumed; and
3. In order that the law may be a source of
4. Quasi-delict.
obligation, it should be the creator of the
This enumeration is exclusive. No obligation obligation itself (NCC, Art. 1158).
exists if its source is not one of those enumerated
Determining whether an obligation arises
in Art. 1157 of the NCC (Navales v. Rias, G.R. No. L-
3489, September 7, 1907). from law or from some other source

Note: Actually, there are only two sources (i.e., law
and contracts) because obligations arising from
quasi-contracts, delicts, and quasi-delicts are
imposed by law (Leung Ben v. O’Brien, 38 Phil.
182).
Time of perfection
GR:
3. Law – from the time designated by the law
creating or regulating them;
4. Contracts –from the time of the perfection of
the contract.
e.g. meeting of the minds
XPNs:
a. When the parties made a stipulation on
the right of the creditor to the fruits of the
thing;
b. When the obligation is subject to a
suspensive condition, from which it arises
upon fulfillment of the condition;
c. When the obligation is with a period;
there is already an existing obligation, but
it is only demandable when the period
expires or becomes due.
5. Quasi Contracts, delicts, quasi-delicts – from
the time designated by the law creating or
regulating them.
OBLIGATION EX LEGE
1. Arises from law if it establishes obligation;
2. Arises from the act itself if the law merely
recognizes the existence of an obligation
generated by an act (Manresa).
e.g.
1. According to Art. 2014 of the NCC, a loser in a
game of chance may recover his loss from the
winner, with legal interest from the time he
paid the amount lost (Leung Ben v. O’Brien,
G.R. No. L-13602, April 6, 1918);
2. The obligation of the spouses to support each
other;
3. The obligation of the employers under the
Worker’s Compensation Act;
4. The obligations of the owners of the dominant
and servient estates in legal easements and
others scattered in the NCC and in special
laws (Jurado, 2009);
5. The obligation to pay taxes (Rabuya, 2017).
OBLIGATION EX CONTRACTU
Requisites of a contractual obligation
1. It must contain all the essential requisites of a
contract (NCC, Art. 1318); and
2. It must not be contrary to law, morals, good
customs, public order, and public policy (NCC,
Art. 1306).
Rules governing the obligations arising from
contracts

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2019 GOLDEN NOTES 322
 OBLIGATIONS AND CONTRACTS
GR: These obligations arising from contracts shall
be governed primarily by the stipulations, clauses,
terms, and conditions of the parties’ agreements.
XPN: Contracts with prestations that are
unconscionable or unreasonable (Pineda, 2009).
Binding force of obligation ex contractu
Obligations arising from contracts have the force
of law between the parties and should be
complied with in good faith (NCC, Art. 1159). This
is known as the “principle of obligatory force of
contracts” (Rabuya, 2017).
Good faith is performance in accordance with the
stipulation, clauses, terms, and conditions of the
contract (Pineda, 2000).
GR: Neither party may unilaterally evade his
obligation in the contract.
XPNs: Unilateral evasion is allowed when the:
1. Contract authorizes such evasion; or
2. Other party assents thereto.
Q: FBDC entered into a Trade Contract with MS
Maxco Company, Inc. (MS Maxco) for the
execution of the structural and partial
architectural works of one of its condominium
projects. The Trade Contract likewise
provided that MS Maxco is prohibited from
assigning or transferrings any of its rights,
obligations, or liabilities under the said
Contract without the written consent of FBDC.
FBDC received a letter from the counsel of
Fong informing it that MS Maxco had already
assigned its receivables from FBDC to him.
Despite Fong’s repeated requests, FBDC
refused to deliver to Fong the amount assigned
by MS Maxco. Is FBDC bound by the assignment
between MS Maxco and Fong?
A: No. Obligations arising from contracts have the
force of law between the contracting parties and
should be complied with in good faith. The Court
finds that MS Maxco, as the Trade Contractor,
cannot assign or transfer any of its rights,
obligations, or liabilities under the Trade Contract
without the written consent of FBDC (Fort
Bonifacio Development Corporation vs. Valentin L.
Fong, G.R. No. 209370, March 25, 2015).
OBLIGATION EX QUASI – CONTRACTU
Quasi-contract
323
A juridical relation arising from lawful, voluntary,
and unilateral acts based on the principle that no
one shall be unjustly enriched or benefited at the
expense of another (NCC, Art. 2142).
Distinguished from “implied contracts”
An implied contract, in the proper sense, is a
contract which arises when the intention of the
parties is not expressed, but an agreement in fact,
creating an obligation, is implied or presumed
from their acts, or where there are circumstances
which show a mutual intent to contract.
An implied contract requires consent while a
quasi-contract, being a unilateral contract, does
not. The basis of an implied contract is the will of
the parties while the basis of a quasi-contract is
law, to the end that there be no unjust enrichment
(Rabuya, 2017).
Characteristics of a quasi-contract (LUV)
1. It must be Lawful;
2. It must be Unilateral; and
3. It must be Voluntary (Pineda, 2000).
Presumptive consent
Since a quasi-contract is a unilateral contract
created by the sole act(s) of the gestor, there is no
express consent given by the other party. The
consent needed in a contract is provided by law
through presumption (Pineda, 2000).
Principal forms of quasi-contracts
1. Negotiorum gestio (inofficious manager) – Arises
when a person voluntarily takes charge of the
management of the business or property of
another without any power from the latter (NCC,
Art. 2144);
2. Solutio indebiti (unjust enrichment) – Takes
place when a person received something from
another without any right to demand for it, and
the thing was unduly delivered to him through
mistake (NCC, Art. 2154).
NOTE: The delivery must not be through liberality
or some other cause.
Solutio indebiti (SI) v. Accion in rem verso
(AIRV)
1. Mistake is an essential element in SI which is
not necessary in AIRV;
2. An AIRV is merely an auxilliary action, available
only when there is no other remedy on contract,
 CIVIL LAW
quasi-contract, crime or quasi-delict (Rabuya, XPNs: When the offended party:
2017).
1. Waives the civil action;
Rule in case of excess of payment of interest 2. Reserves the right to institute it separately;
and
If the borrower pays interest when there has been 3. Institutes the civil action prior to the criminal
no stipulation therefor, the provisions of the Code action (Rule 111, Sec. 1, Rules of Court).
concerning solutio indebiti, or natural obligations,
shall be applied, as the case may be. Scope of civil liability (IRR)

If the payment of interest is made out of mistake, 1. Restitution;

solutio indebiti applies; hence, the amount must be 2. Reparation for damage caused; and
returned to the debtor. If the payment was made 3. Indemnity for consequential damages (Art.
after the obligation to pay interest has already 104, RPC).
prescribed, natural obligation applies; hence, the
creditor is authorized to retain the amount paid. Acquittal in criminal case

Contract v. Quasi-contract GR: The acquittal of the accused in criminal case

on the ground of reasonable doubt does not
CONTRACT QUASI-CONTRACT preclude the filing of a subsequent civil action and
only preponderance of evidence is required to
There is a meeting of prove the latter.
There is no consent, but
the
the XPNs: When the acquittal is on the basis that:
minds or consent; the
same is supplied by 1. The accused did not commit the crime
parties must have
fiction of law; to charged; or
deliberately entered
prevent injustice 2. There is a declaration in the decision of
into a formal agreement
acquittal that no negligence can be attributed
to the accused and that the fact from which
*For further discussion on quasi contracts, please
the civil action might arise did not exist (NCC,
see the discussion of quasi contract on Credit
Art. 29).
Transactions.
Q: Petitioner was charged with estafa.
OBLIGATIONS EX DELICTO
Respondent averred that on February 20,
1996, she entrusted merchandise worth
Delict
P35,300.00 to petitioner as evidenced by an
acknowledgment receipt. However, petitioner
An act or omission punishable under the law.
was only able to remit the amount of
P3,300.00 and thereafter, failed to make
Basis
further remittances and ignored respondent's
demands to remit the proceeds or return the
GR: Art. 100 of the RPC provides: “Every person
goods. As a defense, petitioner admitted
criminally liable for a felony is also civilly liable.”
having previous business dealings with
respondent not as an agent but as a client who
XPNs: Crimes of treason, rebellion, espionage,
used to buy purchase order cards (POCs) and
contempt and others wherein no civil liability
gift checks (GCs) from respondent on
arises on the part of the offender either because
installment basis. The RTC acquitted
there are no damages to be compensated or there
petitioner of the charge of estafa but held her
is no private person injured by the crime (Reyes,
civilly liable to pay respondent the amount of
2008).
P32,000.00, with interest from the filing of the
Information on March 11, 1999 until fully paid,
Implied institution of the civil action in a
and to pay the costs. The RTC adjudged
criminal case
petitioner civilly liable "having admitted that
she received the [GCs] in the amount of
GR: When a criminal action is instituted, the civil
P32,000.00." In this relation, it further
action for the recovery of the civil liability arising
considered the relationship of respondent and
from the offense charged shall be deemed
petitioner as in the nature of a principal-agent
instituted with the criminal action (Sec. 1, Rule
which renders the agent civilly liable only for
111, Rules of Court).

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2019 GOLDEN NOTES 324
 OBLIGATIONS AND CONTRACTS
damages which the principal may suffer due to
the non-performance of his duty under the
agency. CA upheld petitioner's civil liability.
Should the petitioner be held civilly liable? If
yes, what is the rate of interest?
A: Yes. Respondent was able to prove by
preponderance of evidence the fact of the
transaction, as well as petitioner's failure to remit
the proceeds of the sale of the merchandise worth
P32,000.00, or to return the same to respondent
in case such merchandise were not sold. This was
established through the presentation of the
acknowledgment receipt which, as the document's
name connotes, shows that petitioner
acknowledged receipt from respondent of the
listed items with their corresponding values, and
assumed the obligation to return the same on
March 20, 1996 if not sold
With the amendment introduced by the Bangko
Sentral ng Pilipinas Monetary Board in BSP-MB
Circular No. 799, series of 2013, there is a need to
partially modify the same in that the interest
accruing from the time of the finality of this
Decision should be imposed at the lower rate of
six percent (6%) p.a., and not twelve percent
(12%) p.a. as imposed by the CA. (Dolores Diaz v.
People, GR No. 208113, December 2, 2015)
OBLIGATIONS EX QUASI – DELICTO
Instances when Art. 2176 is inapplicable
a) When there was a pre-existing
contractual relation because the breach of
contract is the source of the obligation
(Robles v. Yap Wing, 41 SCRA 267, G.R. No.
L-20442, October 4, 1971);
NOTE: However, if the act that breaches
the contract is tortuous, the pre-existing
contractual relation will not bar the
recovery of damages (Singson v. BPI, G.R.
No. L-24837, June 27, 1968);
b) When the fault or negligence is punished
by law as a crime, Art. 100 of RPC shall be
applicable;
c) If the action for quasi-delict is instituted
after four years, it is deemed prescribed
(Afialda v. Hisole, G.R. No. L-2075,
November 29, 1949);
d) When the injury suffered by a person is
the result of a fortuitous event without
human intervention;
e) If there is no damage or injury caused to
another (Walter A. Smith & Co., Inc. v.
Cadwallader Gibson Lumber Company, G.R.
No. L-32640, December 29, 1930).

Quasi-delict or tort Delict v. Quasi-delict

An act or omission arising from fault or negligence BASIS DELICT QUASI-DELICT

which causes damage to another, there being no
pre-existing contractual relations between the Presence of
parties (NCC, Art. 2176). criminal or
As to the kind
malicious Only
NOTE: A single act or omission may give rise to of intent
intent or negligence
two or more causes of action. Thus, an act or present
criminal
omission may give rise to an action based on negligence.
delict, quasi-delict, or contract.
As to the
In negligence cases, prior conduct should be whether Concerned Concerned
examined, that is, conduct prior to the injury that private or with public with private
resulted, or in proper case, the aggravation public interest interest. interest.
thereof. is concerned

Elements of a quasi-delict Generally, the

act or omission The act or
As to the kind
gives rise to omission gives
1. Negligent or wrongful act or omission; of liability
two liabilities: rise only to a
2. Damage or injury caused to another; arises
3. Causal relation between such negligence or criminal and civil liability.
civil liability.
fault and damage; and
4. No pre-exisitng contractual relationship
between the parties (NCC, Art. 2176).

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 CIVIL LAW
Criminal Take care of
As to The civil
liability is not the thing with
availability of liability can be
subject to a the proper
a compromise compromised.
compromise. diligence of a If the object is
good father of generic, but the
As to the Guilt must be Guilt may be a family unless source is
quantum of proved beyond proved by Required
the law specified or
evidence is reasonable preponderance diligence to be
requires or delimited, the
required doubt. of evidence. observed
parties obligation is to
stipulate preserve the
NOTE: Inasmuch as civil liability co-exists with another source.
criminal responsibility in negligence cases, the standard of
offended party has the option between an action care (NCC,
for enforcement of civil liability based on culpa Art.1163).
criminal under Art. 100 of the RPC and an action
for recovery of damages based on culpa aquiliana Delivery of
Deliver all
under NCC, Art. 2177. another thing
accessions,
within the
accessories,
same genus as
and fruits of
the thing
NATURE AND EFFECTS OF OBLIGATIONS the thing even
What delivery promised if
though they
comprises of such thing is
may not have
damaged due
Types of real obligations been
to lack of care
mentioned
or a general
1. Determinate/specific – Particularly designated (NCC, Art.
breach is
or physically segregated from all others of the 1166).
committed.
same class;
2. Indeterminate/Generic – Is designated merely Pay damages in Pay damages in
by its class or genus; case of breach case of breach
3. Delimited generic – Generic objects confined of obligation by of obligation by
to a particular class (Tolentino, 2002); reason of reason of
e.g. An obligation to deliver one of my horses. Effect of delay, fraud, delay, fraud,
breach of negligence, negligence,
Obligations of a debtor in an obligation to obligation contravention contravention
deliver of the tenor of the tenor
thereof thereof
The obligations of the debtor (in an obligation to (NCC, Art. (NCC, Art.
deliver) depends upon the kind thing involved: 1170). 1170).
Obligation is
BASIS SPECIFIC GENERIC not
Fortuitous extinguished
Deliver the Effect of
event (genus
thing which is fortuitous
extinguishes nunquam
neither of event
the obligation. peruit – genus
superior nor
Deliver the never
inferior quality
What the thing agreed perishes).
if quality and
obligation upon
circumstances
consists of (NCC, Art. Remedies of the creditor in case of failure to
have not been
1165). deliver the thing due
stated by the
parties.
(NCC, Art. The following are the remedies of the creditor in
1246). case of failure to deliver the thing due (Pineda,
2000)

SPECIFIC GENERIC

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2019 GOLDEN NOTES 326
 OBLIGATIONS AND CONTRACTS
Specific performance
(delivery of anything
Specific performance.
belonging to the same
species).
Ask that the obligation
Rescission (action to be complied with at the
rescind under NCC, Art. debtor’s expense with a
1380). right to recover
damages.
Resolution or specific
Resolution (action for
performance, with
cancellation under
damages in either case
NCC, Art. 1191).
(NCC, Art. 1191).
Damages, in both cases (NCC, Art. 1170).
NOTE: May be exclusive or in addition to the
above-mentioned remedies
Personal right v. Real right
PERSONAL RIGHT REAL RIGHT
The right or interest of
The right or power of a a
person (creditor) to person over a specific
demand from another thing
(debtor), as a definite (i.e. ownership,
passive subject, the possession,
fulfillment of the latter’s mortgage), without a
obligation to give, to do, definite subject against
or not to do. whom the right may be
personally enforced.
There is a definite There is only a definite
active active
subject and a definite subject without any
passive passive
subject. subject.

NOTE: In an obligation to deliver a specific thing, Binding and enforceable Directed against the
the creditor has the right to demand preservation only against a particular whole
of the thing, its accessions, accessories, and the person. World.
fruits. The creditor is entitled to the fruits and
interests from the time the obligation to deliver Principle of “balancing of equities” in actions
the thing arise. for specific performance

Right of the creditor to the fruits In decreeing specific performance, equity requires
not only that the contract be just and equitable in
The creditor has a right to the fruits of the thing its provisions, but that the consequences of
from the time the obligation to deliver it arises. specific performance likewise be just and
However, he shall acquire no real right over it equitable. The general rule is that this equitable
until the same has been delivered to him (NCC, Art. relief will not be granted if, under the
1164). circumstances of the case, the result of the specific
performance of the contract would be harsh,
SOURCE OF WHEN OBLIGATION inequitable, and oppressive or result in an
OBLIGATION ARISES unconscionable advantage to the plaintiff (Agcaoili
v. GSIS, G.R. No. 30056, August 30, 1988).
Based on specific
Law, quasi-delict, quasi- Types of personal obligations
provisions of applicable
contract, or crime.
law.
1. Positive - To do;
Subject to a suspensive From the happening of 2. Negative - Not to do.
condition. the condition.
Remedies in personal obligations
From the constitution,
Subject to a supensive
creation or perfection of
term/period. 1. Positive personal obligations
obligation. a. Not purely personal act – To have obligation
From the constitution, executed at debtor's expense plus damages;
Pure creation or perfection of b. Purely personal act - Damages only.
the obligation.
When positive personal obligations
considered breached:
Nature of the right of the creditor with respect a. If the debtor fails to perform the
to fruits obligation; or
b. Even in case of performance but the same
1. Before delivery – Personal right; is done either in a poor manner or in
2. After delivery – Real right.

327
 CIVIL LAW
contravention of the tenor of the obligation
(NCC, Art. 1167).
2. Negative personal obligation – To have the
prohibited thing undone at the expense of the
debtor plus damages. However, if thing cannot
be physically or legally undone, only damages
may be demanded (8 Manresa 58).
Specific performance is not a remedy in
positive personal obligations
If specific performance will be allowed, it will
amount to involuntary servitude which is
prohibited by the Constitution (Pineda, 2000).
BREACHES OF OBLIGATIONS
Degree of diligence required
1. That agreed upon;
2. In the absence of such, that which is required
by the law;
GR: In the absence of the foregoing, diligence
of a good father of a family
XPNs:
a. Common carriers requiring
extraordinary diligence (NCC, Arts.
1998-2002);
b. Banks require the highest degree of
deligence, being imbued with public
interest.
Diligence of a good father of a family
That reasonable diligence which an ordinary
prudent person would have done under the same
circumstances.
Forms of breach of obligations
1. Voluntary – Debtor is liable for damages if he
is guilty of:
a. Default (mora)
b. Fraud (dolo)
c. Negligence (culpa)
d. Breach through contravention of the
tenor thereof (NCC, Art. 1170).
2. Involuntary – Debtor is unable to perform the
obligation due to fortuitous event thus not
liable for damages.
Effects of breach of obligation
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
If a person obliged to do something fails to do it,
or if he does it in contravention of the tenor of the
obligation or what has been poorly done be
undone, the same shall be executed at his cost
(NCC, Art. 1167).
When the obligation consists in not doing, and the
obligor does what has been forbidden him, it shall
also be undone at his expense (NCC, Art.1168).
Instances where the remedy under Art. 1168 is
not available
1. Where the effects of the act which is forbidden
are definite in character – Even if it is possible
for the creditor to ask that the act be undone
at the expense of the debtor, consequences
contrary to the object of the obligation will
have been produced which are permanent in
character.
2. Where it would be physically or legally
impossible to undo what has been undone –
Because of:
a. The very nature of the act itself;
b. A provision of law; or
c. Conflicting rights of third persons.
NOTE: In either case, the remedy is to seek
recovery for damages (NCC, Art. 1168).
DELAY (MORA) OR DEBTOR’S DEFAULT
Those obliged to deliver or to do something incur
in delay from the time the obligee (creditor)
judicially or extrajudicially demands from them
the fulfillment of their obligation.
In reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready
to comply in a proper manner with what is
incumbent upon him. From the moment one of the
parties fulfills his obligations, delay by the other
begins (NCC, Art. 1169). (2002 Bar)
Kinds of delay
2. Ordinary delay – This is the mere failure to
perform an obligation at the stipulated time.
3. Extraordinary delay or legal delay – This delay
already equates to non-fulfillment of the
obligation and arises after the extrajudicial or
judicial demand has been made upon the
debtor (Pineda, 2000).
Kinds of legal delay or default
1 Mora solvendi – Default on the part of the
debtor/obligor
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 OBLIGATIONS AND CONTRACTS
a. Ex re – Default in real obligations (to
give);
b. Ex personae – Default in personal
obligations (to do);
2. Mora accipiendi – Default on the part of the
creditor/oblige;
4. Compensatio morae – Default on the part of
both the debtor and creditor in reciprocal
obligations.
Causes of cessation of the effects of mora
1. Renunciation (express/implied); or
2. Prescription.
Q: American Express Card (AMEX) failed to
approve Pantaleon’s credit card purchases
which urged the latter to commence a
complaint for moral and exemplary damages
against AMEX. He said that he and his family
experienced inconvenience and humiliation
due to the delays in credit authorization
during his vacation trip in Amsterdam and in
the United States. Did AMEX commit a breach
of its obligations to Pantaleon?
A: YES. Generally, the relationship between a
credit card provider and its cardholders is that of
creditor-debtor, with the card company as the
creditor extending loans and credit to the
cardholder, who as debtor is obliged to repay the
creditor. One hour appears to be patently
unreasonable length of time to approve or
disapprove a credit card purchase. The culpable
failure of AmEx herein is not the failure to timely
approve petitioner’s purchase, but the more
elemental failure to timely act on the same,
whether favorably or unfavorably (Pantaleon v.
American Express International, Inc., G.R. No.
174269, May 8, 2009).
MORA SOLVENDI
Requisites (PDF-MJ)
1. Obligation Pertains to the debtor;
2. Obligation is Determinate, due and
demandable, and liquidated;
3. Obligation has not been performed on its
Maturity date;
4. There is Judicial or extrajudicial demand by the
creditor; and
5. Failure of the debtor to comply with such
demand.
Non-applicability of mora solvendi
329
Mora solvendi does not apply in natural
obligations because performance is optional or
voluntary on the debtor’s part. One can never be
late in not giving or doing something.
Instances when demand by the creditor is not
necessary in order that delay may exist
GR: No demand = no default [NCC, Art. 1169 (2)].
XPNs: Demand by the creditor shall not be
necessary in order that delay may exist when:
1. The obligation or the law expressly so
declares; or
2. From the nature and the circumstances of the
obligation it appears that the designation of
time when the thing is to be delivered or the
service is to be rendered was a controlling
motive for the establishment of the contract;
or
3. Demand would be useless, as when the
obligor has rendered it beyond his power to
perform [Art. 1169 (2)].
Q: “A” borrowed P2,000 from “B” on December
1, 1956. He executed a promissory note
promising to pay the indebtedness on
December 1, 1958. Upon the arrival of the
designated date for payment, is demand
necessary in order that “A” shall incur in
delay?
A: YES. In order that the first exception provided
for in Art. 1169 of the NCC can be applied, it is
indispensable that the obligation or the law
should expressly add that the obligor shall incur in
delay if he fails to fulfill the obligation upon the
arrival of the designated date or that upon the
arrival of such date demand shall not be necessary
(Bayla, et al. v. Silang Traffic Co., G.R. Nos. L-48195
and 48196, May 1, 1942).
Effects of mora solvendi
1. Debtor may be liable for damages (NCC, Art.
1155) or interests; and
NOTE: The interest begins to run from the
filing of the complaint when there is no
extrajudicial demand.
2. When the obligation has for its object a
determinate thing, the debtor may bear the
risk of loss of the thing even if the loss is due
to fortuitous event;
3. Rescission or resolution.
 CIVIL LAW
Debtor’s liability may be mitigated even if he is If neither party complies with his prestation,
guilty of delay default of one compensates for the default of the
other.
If the debtor can prove that loss would
nevertheless transpire even if he had not been in Rules on compensatio morae
default, the court may equitably mitigate his
liability [NCC, Art. 2215(4); Pineda, 2000] Unilateral Reciprocal
Obligations Obligations
MORA ACCIPIENDI
Default or delay
Requisites begins from
extrajudicial or Delay by the other
1. Offer of Performance by a capacitated debtor; Time judicial demand – party begins from
2. Offer must be to Comply with the prestation of mere expiration of the moment one of
as it should be performed; and delay the period fixed is the parties fulfills
3. Refusal of the creditor without just cause not enough in his obligation.
(Pantaleon v. Amex, supra). order that debtor
may incur delay.
Effects of mora accipiendi
a. The obligation
1 Responsibility of debtor is limited to fraud or the law
and gross negligence; expressly so
2 Debtor is exempted from risk of loss of thing; dictates;
creditor bears risk of loss;
3 Expenses by debtor for preservation of thing b. Time is of the
after delay is chargeable to creditor; essence;
4 If the obligation bears interest, debtor does When different
not have to pay it from time of delay; c.Demand would dates for the
5 Creditor liable for damages; and XPNs be useless, as performance of
6 Debtor may relieve himself of obligation by debtor has obligation is fixed
consigning the thing. rendered it by the parties.
beyond his power
COMPENSATIO MORAE to perform; or

Reciprocal obligations d. Debtor

has acknowledged
Reciprocal obligations are those which arise from that he is in
the same cause, wherein each party is a debtor default.
and a creditor of the other, such that performance
of one is conditioned upon the simultaneous FRAUD (Deceit or Dolo)
fulfillment of the other from the moment one of
the parties fulfills his obligation, delay by the It is an intentional evasion of the faithful
other party begins (ASJ Corporation v. Evangelista, performance of the obligation (8 Manresa 72).
G.R. No. 158086, February 14, 2008).
Kinds of fraud
Delay in reciprocal obligations

One party incurs in delay from the moment the Basis Fraud in the Fraud in the
other party fulfills his obligation, while he himself performance perfection
does not comply or is not ready to comply in a It occurs after
proper manner with what is incumbent upon him. the valid
execution of It occurs before or
Demand is only necessary in order for a party to the contract. It simultaneous with
incur delay when the respective obligations are to Time of
is employed in the creation or
be performed on separate dates. occurrence
the perfection of the
performance obligation.
Effect of non-compliance of both parties in of a pre-
reciprocal obligations existing

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2019 GOLDEN NOTES 330
 OBLIGATIONS AND CONTRACTS
obligation. It is incidental fraud or fraud in the performance
of the obligation and not the fraud in the execution
of the contract or causal fraud. It is the intentional
evasion of the normal fulfillment of the obligation
(Pineda, 2000).

Waiver of action arising from future fraud

Consent is vitiated
Consent is free With respect to fraud that has already been
by serious
Consent and not committed (past fraud), the law does not prohibit
deception or
vitiated. renunciation of the action for damages based on
misrepresentation.
the same since such can be deemed an act of
It is not a generosity. What is renounced is the effect of
It is a ground for
ground for fraud, particularly the right to indemnity.
Effect annulment of the
annulment of However, the law prohibits any waiver of an
contract.
the contract. action for future fraud since the same is contrary
to law and public policy. Waiver for future fraud is
Action for
Action for void (NCC, Art. 1171).
Remedy annulment with
damages only.
damages.
Remedies of the defrauded party

2. Specific performance (NCC, Art. 1233); or

Dolo causante v. Dolo incidente 3. Resolution of the contract (Art. 1191); and
4. Damages, in either case.
Basis Dolo causante Dolo incidente
(causal (incidental CULPA OR NEGLIGENCE
fraud) fraud)
The fault or negligence of the obligor consists in
This is the kind the omission of that diligence which is required by
of fraud which the nature of the obligation and corresponds with
is not the the circumstances of the persons, of the time and
efficient cause the place. When negligence shows bad faith, the
This is the
for the giving provisions of Art. 1171 and 2201, paragraph 2,
essential cause
of the consent shall apply. If the law or contract does not state
of the consent
to the contract, the diligence which is to be observed in the
without which
as it refers performance, that which expected of a good father
the party
merely to an of a family shall be required (NCC, Art. 1173).
Nature would not
incident
have agreed to
therein and, Test of negligence
enter into the
which even if
contract
not present, Did the defendant in doing the alleged negligent
(NCC, Art.
the contracting act use the reasonable care and caution which an
1338).
party would ordinarily prudent person would have used in the
have still same situation? If not, then he is guilty of
agreed to the negligence. (Picart v. Smith, G.R. No. L-12219,
contract. March 15, 1918).

It does not Fraud v. Negligence

It renders the
affect the
Effect contract
validity of the
voidable.
contract.
Contract
remains valid.
Annulment
Remedy Remedy is
with damages.
claim for
damages only.

Fraud as mentioned in Art. 1171

331
 CIVIL LAW
BASIS FRAUD NEGLIGENCE Q: Wenifredo Salvaña was driving the bus
owned by Bachelor Express, Inc./Ceres Liner,
There is no Inc. along the national highway when he
deliberate overtook a PUJ jeepney while negotiating a
There is intention to blind curve in a descending road causing him
As to the to intrude into the opposite lane and bump the
deliberate cause damage
intention to 10-wheeler Hino dump truck of petitioner
intention to or injury even
cause damage Cresencio Baño running uphill from the
cause damage. if the act was
done opposite direction. The collision resulted in
voluntarily. damage to both vehicles, the subsequent death
of the truck driver, Amancio Asumbrado, and
As to the Liability serious physical injuries to bus driver Salvaña.
Liability may
mitigation of cannot be A complaint for quasi-delict was filed against
be mitigated.
liability mitigated. Salvaña for negligently driving the bus causing
it to collide with the dump truck. Respondents
GR: Waiver for denied liability, claiming that prior to the
future collision the bus was running out of control
negligence may
because of a problem in the steering wheel
be allowed in system which could not have been avoided
certain cases.
despite their maintenance efforts. Instead,
As to the Waiver for they claimed that Asumbrado had the last
XPN: Nature of
waiver of future fraud is clear chance to avoid the collision had he not
the obligation driven the dump truck at a very fast speed.
future fraud void.
or public policy
Was Salvaña grossly negligent?
requires
extraordinary A: Yes. When bus driver Salvaña overtook the
diligence. (e.g.
jeepney in front of him, he was rounding a blind
common
curve along a descending road. Considering the
carrier).
road condition and that there was only one lane
on each side of the center line for the movement of
NOTE: When negligence is so gross that it traffic in opposite directions, it would have been
amounts to wanton attitude on the part of the more prudent for him to confine his bus to its
debtor or such negligence shows bad faith, the proper place. Having thus encroached on the
laws in case of fraud shall apply. opposite lane in the process of overtaking the
jeepney, without ascertaining that it was clear of
Effect of good faith or bad faith of the obligor oncoming traffic that resulted in the collision with
the approaching dump truck driven by deceased
If the obligor acted in good faith, he is responsible Asumbrado, Salvaña was grossly negligent in
for the natural and probable consequences of the driving his bus. He was remiss in his duty to
breach of contract and which the parties have determine that the road was clear and not to
reasonably foreseen at the time of the constitution proceed if he could not do so in safety (Cresencio
of the obligation. Baño v. Bachelor Express, GR No. 191703, March 12,
2012).
If the obligor is guilty of fraud, bad faith, malice or
wanton attitude, he shall be responsible for all Kinds of negligence or culpa
damages which may be reasonably attributed to
the non-performance of the obligation. 1. Culpa contractual (contractual negligence) -
Negligence which results from the breach of
Contributory negligence of the creditor contract;
2. Culpa aquiliana (civil negligence or tort or
GR: It reduces or mitigates the damages which he quasi-delict) Acts or omissions that cause
can recover. damage to another, there being no contractual
relation between the parties (NCC, Art. 2176);
XPN: If the negligent act or omission of the and
creditor is the proximate cause of the event which 3. Culpa criminal (criminal negligence) – Those
led to the damage or injury complained of, he which results in the commission of a crime or
cannot recover. a delict.

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2019 GOLDEN NOTES 332
 OBLIGATIONS AND CONTRACTS
CULPA CONTRACTUAL
(CONTRACT)
Negligence is merely an
Existence of negligence incident in the performance
of an obligation.
There is always a pre-
Contractual relations existing contractual relation. existing contractual relation.
The source of
obligation of defendant to
Source of obligation pay damages is the breach or
non-fulfillment of the
contract.
Proof of the existence
of the contract and of its
Proof of negligence breach or non-fulfillment is
sufficient prima facie to
warrant recovery.
Defense of “good father
of a family” in the selection
& supervision of the
employees is not a proper
complete defense though it
Defense available
may mitigate damages.
Respondeat superior or
command responsibility or
the master and servant rule.
Preponderance of
Proof needed
evidence.
CONTRAVENTION OF TENOR OF OBLIGATION
(VIOLATIO)
The act of contravening the tenor or terms or
conditions of the contract is also known as
“violatio,” i.e. failure of common carrier to take its
passenger to their destination safely (Pineda,
2000).
Under NCC, Art. 1170, the phrase “in any manner
contravene the tenor” of the obligation includes
any illicit act which impairs the strict and faithful
fulfillment of the obligation, or every kind of
defective performance. Such violation of the terms
of contract is excused in proper cases by
fortuitous events.
FORTUITOUS EVENT / CASO FORTUITO
333
CULPA AQUILIANA/ CULPA CULPA CRIMINAL
EXTRA-CONTRACTUAL (DELICT)
(QUASI-DELICT)
Negligence is Negligence is
substantive and substantive and
independent. independent.
GR: There is no pre- There is no pre-
existing contractual
relation.
The source of The source of
obligation is defendant’s obligation is an act or
negligence itself. omission punishable by
law.
The negligence of the Accused shall be
defendant must be proved. presumed innocent until
the contrary is proved
beyond reasonable doubt.
Defense of “good father Defense of “good
of a family” in the selection father of a family” in the
& supervision of the selection & supervision of
employees is a proper and the employees is not a
complete defense. proper defense.
The employee’s guilt is
automatically the
employer’s civil guilt, if
the former is insolvent.
Preponderance of Proof of guilt
evidence. beyond reasonable doubt.
An occurrence or happening which could not be
foreseen, or even if foreseen, is inevitable (NCC,
Art. 1174). (2002, 2008 Bar)
Requisites: (CODE)
1. Cause of breach is independent of the will of
the debtor;
2. The Event is unforeseeable or unavoidable;
3. Occurrence renders it absolutely impossible
for the debtor to fulfill his obligation in a
normal manner - impossibility must be
absolute not partial, otherwise not force
majeure; and
4. Debtor is free from any participation in the
aggravation of the injury to the creditor.
NOTE: The fortuitous event must not only be the
proximate cause but it must also be the only and
sole cause. Contributory negligence of the debtor
 CIVIL LAW
renders him liable despite the fortuitous event Q: MIAA entered into a compromise agreement
(Pineda, 2000). with ALA. MIAA failed to pay within the period
stipulated. Thus, ALA filed a motion for
If the negligence was the proximate cause, the execution to enforce its claim. MIAA filed a
obligation is not extinguished. It is converted into comment and attributed the delays to its being
a monetary obligation for damages. a government agency and the Christmas rush.
Is the delay of payment a fortuitous event?
Difficulty to foresee
A: NO. The act-of-God doctrine requires all human
The mere difficulty to foresee the happening is not agencies to be excluded from creating the cause of
impossibility to foresee the same (Republic v. the mischief. Such doctrine cannot be invoked to
Luzon Stevedoring Corp., G.R. No. L-21749, protect a person who has failed to take steps to
September 29, 1967). forestall the possible adverse consequences of loss
or injury. Since the delay in payment in the
Liability for loss due to fortuitous event present case was partly a result of human
participation - whether from active intervention
GR: There is no liability for loss in case of or neglect - the whole occurrence was humanized
fortuitous event. and was therefore outside the ambit of a caso
fortuito.
XPNs: (LaNS-PC-BaG)
First, processing claims against the government
1. Law; are certainly not only foreseeable and expectable,
2. Nature of the obligation requires the but also dependent upon the human will. Second,
assumption of risk; the Christmas season is not a caso fortuito, but a
3. Stipulation; regularly occurring event. Third, the occurrence of
4. The debtor is guilty of dolo, malice or bad the Christmas season did not at all render
faith, has Promised the same thing to two or impossible the normal fulfillment of the
more persons who does not have the same obligation. Fourth, MIAA cannot argue that it is
interest (NCC, Art. 1165); free from any participation in the delay. It should
5. The debtor Contributed to the loss (Tan v. have laid out on the compromise table the
Inchausti & Co., G.R. No. 6092, March 8, 1912); problems that would be caused by a deadline
6. The possessor is in Bad faith (NCC, Art. 552); falling during the Christmas season. Furthermore,
or it should have explained to ALA the process
7. The obligor is Guilty of fraud, negligence or involved for the payment of ALA’s claim (MIAA v.
delay or if he contravened the tenor of the Ala Industries Corp., G.R. No. 147349, February 13,
obligation (Juan Nakpil v. United Construction 2004).
Co., Inc. v. CA, G.R. No. L-47851, April 15, 1988).
Effects of fortuitous events
Act of God v. Act of Man
1. On determinate obligation – The obligation is
ACT OF GOD ACT OF MAN extinguished.
2. On generic obligation – The obligation is not
Fortuitous event Force majeure extinguished (genus nun quam peruit – genus
never perishes).
Event caused by the
Event which is legitimate or Q. Kristina brought her diamond ring for
absolutely independent illegitimate acts of cleaning to a jewelry shop which failed to
of human intervention persons other than the fuilfill its promise to return such ring in
obligor February 1, 1999. Kristina went back to the
shop on February 6, 1999 but she was
e.g. Earthquakes, e.g. Armed invasion,
informed that the ring was stolen by a thief the
storms, floods, robbery, war (Pineda,
night before. Kristina filed an action for
epidemics 2000).
damages against the jewelry shop which put
up the defense of force majeure. Will the action
NOTE: There is no essential difference between prosper or not? (2000 Bar)
fortuitous event and force majuere; they both
refer to causes independent of the will of the A : YES. The action will prosper. Since the
obligor (Tolentino, 2002). defendant was already in default for not having

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2019 GOLDEN NOTES 334
 OBLIGATIONS AND CONTRACTS
delivered the ring when delivery was demanded
by plaintiff at due date, the defendant is liable for
the loss of the thing and even when the loss was
due to force majeure.
The defendant who is obliged to deliver incurred
delay from the time the plaintiff extrajudicially
demands the fulfillment of the obligation (NCC,
Art. 1169). The defendant shall be held liable for
the loss of the thing even it was due to fortuitous
event.
Q. AB Corp entered into a contract with XY
Corp for the construction of the research and
laboratory facilities of the XY Corp. XY Corp
paid 50% of the 10M contract price on the
other hand AB agreed to complete the work for
18 months. After 17 months, work was only
45% completed as AB Corp experienced work
slippage due to labor unrest.
(a) Can the labor unrest be considered a
fortuitous event?
(b) Can XY Corp. unilaterally and
immediately cancel the contract?
(c) Must AB Corp. return the 50% down
payment? (2008 Bar)
A:
a.) NO. Labor unrest is not a fortuitous event that
will excuse AB Corp. from complying with its
obligation of constructing the research and
laboratory facilities of XY Corp. The labor unrest,
which may even be attributed in large part to AB
Corp. itself, is not the direct cause of non-
compliance by AB Corp. It is independent of its
obligation. It is similar to the failure of a DBP
borrower to pay her loan just because her
plantation suffered losses due to the cadang-
cadang disease. It does not excuse compliance
with the obligation (DBP v. Vda. De Moll, G.R. No. L-
25802, January 31, 1972). AB Corp. could have
anticipated the labor unrest which was caused by
delays in paying the laborer’s wages. The company
could have hired additional laborers to make up
for the work slowdown.
b.) YES, XY Corp. may unilaterally cancel the
obligation but this is subject to the risk that the
cancellation of the reciprocal obligation being
challenged in court and if AB Corp. succeeds, then
XY Corp. will be declared in default and be liable
for damages.
c.) NO, under the principle of quantum meruit, AB
Corp. had the right to retain payment
corresponding to his percentage of
accomplishment less the amount of damages
335
suffered by XY Corp. because of the delay or
default.
Q: X, a dressmaker, accepted clothing
materials from Karla to make two dresses for
her. On the day X was supposed to deliver
Karla’s dresses, X had an urgent matter to
attend to and told Karla to deliver those the
next day. That night, however, a robber broke
into her shop and took everything including
Karla’s dresses. X claims she is not liable to
deliver Karla’s dresses or to pay for the
clothing materials considering she herself was
a victim of the robbery which was a fortuitous
event and over which she had no control. Do
you agree? Why? (2015 Bar)
A: NO. The law provides that except when it is
otherwise declared by stipulation or when the law
provides or the nature of the obligation requires
the assumption of risk, no person shall be liable
for those events which could not be foreseen or
which though foreseen were inevitable (NCC, Art.
1174).
In this case, X cannot invoke fortuitous event as a
defense because she had already incurred delay at
the time of the occurrence of the loss (NCC, Art.
1165).
REMEDIES
In case of breach of obligation, the following are
the remedies available:
1. Specific performance, or substituted
performance by a third person in case of an
obligation to deliver a generic thing, and in
obligations to do, unless it is a purely personal
act;
2. Rescission (or resolution in reciprocal
obligations);
3. Damages, in any case; or
4. Subsidiary remedies of creditors:
a. Accion subrogatoria
b. Accion pauliana
c. Accion directa
SPECIFIC PERFORMANCE
Remedies in connection with specific
performance
1. Exhaustion of the properties of the debtor
(not exempt from attachment under the law);
2. Accion subrogatoria (subrogatory action) – An
indirect action brought in the name of the
 CIVIL LAW
debtor by the creditor to enforce the former’s
rights except:
a. Personal rights of the debtor;
b. Rights inherent in the person of the
debtor;
c. Properties exempt from execution.
e.g. family home
3. Accion pauliana (rescissory action) – An
action to impugn or assail the acts done or
contracts entered into by the debtor in fraud
of his creditor.
NOTE: Resort to the remedies must be in the
order stated above (NCC, Art. 1177).
Q: Sacramento Steel Corporation (SSC)
executed 5 separate deeds of chattel mortgage
constituted over various equipment for
International Exchange Bank (IEB) which
subsequently, SSC defaulted in the payment of
its obligations. IEB’s demand for payment went
unheeded. Meanwhile, Metropolitan Bank and
Trust Company (Metro Bank) filed a motion
for intervention as a creditor of SSC.which it
contends that the mortgage contracts between
IEB and SSC were entered into to defraud the
latter’s creditors. Thus, it prayed for the
rescission of the chattel mortgaged executed
by SSC in favor of IEB. Will the action to rescind
the mortgage prosper?
A: NO. Jurisprudence is clear that the following
successive measures must be taken by a creditor
before he may bring an action for rescission of an
allegedly fraudulent contract: (1) exhaust the
properties of the debtor through levying by
attachment and execution upon all the property of
the debtor, except such as are exempt by law from
execution; (2) exercise all the rights and actions of
the debtor, save those personal to him (acción
subrogatoria); and (3) seek rescission of the
contracts executed by the debtor in fraud of their
rights (acción pauliana). It is thus apparent that an
action to rescind, or an acción 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).
Q: Jebson entered into a Joint Venture
Agreement (JVA) with Sps. Salonga which
obligated the former to construct ten (10)
residential units on the latter’s three parcels of
land. Out of the ten (10) units, seven (7) units
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
will belong to Jebson. It was also allowed to
sell its allocated units under such terms as it
may deem fit, subject to the condition that the
price agreed upon was with the conformity of
Sps. Salonga. Thereafter, Jebson entered into a
Contract to Sell with Buenviaje over one of its
units without the conformity of Sps. Salonga.
Buenviaje was able to fully pay for Jebson’s
unit through a swapping arrangement which
allows the vendee to convey certain properties
as consideration for the sale. Despite this full
payment, Jebson was unable to complete said
unit. This prompted Buenviaje to demand the
unit’s immediate completion and delivery.
Jebson having failed to comply with the
demand, Buenviaje filed an action before the
HLURB against Jebson and Sps. Salonga for
specific performance praying for the unit’s
completion and delivery and rescission in the
alternative. Jebson, in its defense, claimed that
they were not able to secure the necessary
permits because Sps. Salonga stubbornly
refused to cause the consolidation and
partition of the parcels of land. Sps. Salonga
averred that they were not liable to the
complainants since there was no privity of
contract between them, adding that the
contracts to sell were unenforceable against
them as they were entered into by Jebson
without their conformity, in violation of the
JVA. HLURB rescinded the Contract to Sell and
held Sps. Salonga Solidarily liable with Jebson.
HLURB-BOC reversed the former ruling and
instead rescinded the swapping arrangement
and maintaining the validity of the Contract to
Sell, thereby granting specific performance
instead. Is the grant of the remedy of specific
performance in Buenviaje's favor proper?
A: Yes. As between the two remedies made
available to him, Buenviaje, had, in fact, chosen the
remedy of specific performance and therefore,
ought to be bound by the choice he had made. To
add, the fundamental rule is that reliefs granted a
litigant are limited to those specifically prayed for
in the complaint. Buenviaje's alternative prayer
for resolution is textually consistent with that
portion of Article 1191 of the Civil Code which
states that an injured party "may also seek
rescission, even after he has chosen fulfillment, if
the latter should become impossible."
Nevertheless, the impossibility of fulfillment was
not sufficiently demonstrated in the proceedings
conducted in this case.
Besides, mutual restitution is the proper
consequence of the remedy of resolution. It cannot
arise - as it is, in fact, theoretically incompatible -
336
 OBLIGATIONS AND CONTRACTS
with the remedy of specific performance, which is
the relief prayed for and consequently, granted to
the injured party herein (Dr. Restituto C. Buenviaje
vs. Spouses Jovito R. & Lydia B. Salonga, GR No.
216023, October 05, 2016).
Q: While the case was pending, Felix donated
his parcels of land in favor of his children.
Judgment was rendered against Felix. Four
years after the said donation, the sheriff
sought to enforce the alias writ of execution
and discovered that Felix no longer had any
property and had conveyed the subject
properties to his children. Thus, Philam filed
an accion pauliana for rescission of the
donations. Felix countered that an action for
rescission of the donation had already
prescribed since the time of prescription has
to run from the date of registration. Has the
action filed by Philam prescribed?
A: NO. Philam only learned about the unlawful
conveyances made by Felix more than four years
after the donations were effected, when its
counsel accompanied the sheriff to Butuan City to
attach the properties. There they found that he no
longer had any properties in his name. It was only
then that Philam's action for rescission of the
deeds of donation accrued because then it could
be said that Philam had exhausted all legal means
to satisfy the trial court's judgment in its favor.
Since Philam filed its complaint for accion
pauliana against petitioners barely a month from
its discovery that Felix had no other property to
satisfy the judgment award against him, its action
for rescission of the subject deeds clearly had not
yet prescribed (Khe Hong Cheng v. CA, G.R. No.
144169, March 28, 2001).
- and defendant is not;
NOTE: The debtor is liable with all his property,
present and future, for the fulfillment of his
obligations, subject to the exemptions provided by
law (De Leon, 2003).
Substitute performance
It is a remedy of the creditor in case of non-
performance by the debtor where another party
performs the obligation or the same is performed
at the expense of the debtor.
Applicability of substitute performance
1. Positive personal obligation:
a. If not purely personal – Substitute
performance; the obligation shall be
executed at debtor’s cost if he fails to do it
(NCC, Art. 1167).
337
b. Purely personal – No substitute
performance may be demanded because
of the personal qualifications taken into
consideration. The only remedy is
damages.
2. Real obligation:
a. Generic thing – Substitute performance;
delivery may be made by a person other
than the debtor since the object is merely
designated by its class or genus. The
creditor may ask that the obligation be
complied with at the expense of the
debtor (NCC, Art. 1165).
b. Specific thing – Specific performance may
be demanded, that is, the creditor may
compel the debtor to make the delivery.
RESCISSION (RESOLUTION) (NCC, ART. 1191)
It refers to the cancellation of the contract or
reciprocal obligation in case of breach on the part
of one, which breach is violative of the reciprocity
between the parties. This is properly called
resolution. (2005, 2008 Bar)
NOTE: The rescission under Art. 1380 is
rescission based on lesion or fraud upon creditors.
Applicability
Rescission or resolution is applicable in reciprocal
obligations, since it is implied therein.
Characteristics of the right to rescind
1. Can be demanded only if plaintiff is ready,
willing and able to comply with his own obligation
2. Not absolute;
3. Needs judicial approval in the absence of a
stipulation allowing for extra-judicial
rescission, in cases of non-reciprocal
obligations;
4. Subject to judicial review if availed of extra-
judicially;
5. May be waived expressly or impliedly; and
6. Implied to exist in reciprocal obligations
therefore need not be expressly stipulated
upon.
Fulfillment or rescission of the obligation
GR: The injured party can only choose either
fulfillment or rescission of the obligation, and not
both.
 CIVIL LAW
XPN: If fulfillment has become impossible, Art.
1191 allows the injured party to seek rescission
even after he has chosen fulfillment (Ayson-Simon
v. Adamos and Feria, G.R. No. L-39378, August 28,
1984).
Q: Pikian Mining Company (PMI) entered into
an Operating Agreement (OA) with Golden
Valley Exploration, Inc. (GVEI), granting the
latter "full, exclusive and irrevocable
possession, use, occupancy, and control over
the mining claims and the processing and
marketing of the products for a period of 25
years.” Later, PMC extra-judicially rescinded
the OA upon GVEI’s violation of Section 5.01,
Article V thereof. GVEI contested PMC’s extra-
judicial rescission of the OA averring therein
that its obligation to pay royalties to PMC
arises only when the mining claims are placed
in commercial production which condition has
not yet taken place. PMC no longer responded
to GVEI’s letter. Is the rescission of the
Operating Agreement valid?
A: Yes. The rescission is valid. As a general rule,
the power to rescind an obligation must be
invoked judicially and cannot be exercised solely
on a party’s own judgment that the other has
committed a breach of the obligation. This is so
because rescission of a contract will not be
permitted for a slight or casual breach, but only
for such substantial and fundamental violations as
would defeat the very object of the parties in
making the agreement. As a well-established
exception, however, an injured party need not
resort to court action in order to rescind a
contract when the contract itself provides that it
may be revoked or cancelled upon violation of its
terms and conditions. PMC’s unilateral rescission
of the Operating Agreement (OA) due to GVEI’s
non-payment of royalties considering the parties’
express stipulation in the OA that said agreement
may be cancelled on such ground. (Golden Valley
Exploration, Inc. v. Pinkian Mining Company, G.R.
No. 190080, June 11, 2014)
Q: Vermen and Seneca entered into an
"offsetting agreement", where Seneca is
obliged to deliver construction materials to
Vermen, who is obliged to pay Seneca and to
deliver possession of 2 condominium units to
Seneca upon its completion. Seneca filed a
complaint for rescission of the offsetting
against Vermen alleging that the latter had
stopped issuing purchase orders of
construction materials without valid reason,
thus resulting in the stoppage of deliveries of
construction materials on its part, in violation
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
of the Offsetting Agreement. Can the
agreement be rescinded?
A: YES, because the provisions of the offsetting
agreement are reciprocal in nature. Art. 1191 of
the Civil Code provides the remedy of rescission
(more appropriately, the term is "resolution") in
case of reciprocal obligations, where one of the
obligors fails to comply with that is incumbent
upon him (Vermen Realty Development Corp. v. CA
and Seneca Hardware Co., Inc., G.R. No. 101762, July
6, 1993).
Q: Ong and spouses Robles executed an
"agreement of purchase and sale" of two
parcels of land. Ong partially paid the spouses
by depositing sums of money with the BPI in
accordance with their stipulation that Ong pay
the loan of the spouse with BPI. To answer for
Ong’s balance, he issued 4 post-dated checks
which were dishonored. Ong failed to replace
the checks and to pay the loan in full. Can the
contract entered into by Ong and the spouses
be rescinded?
A: NO. The agreement of the parties in this case
may be set aside, but not because of a breach on
the part of Ong for failure to complete payment of
the purchase price. Rather, his failure to do so
brought about a situation which prevented the
obligation of the spouses to convey title from
acquiring an obligatory force.
The agreement of purchase and sale shows that it
is in the nature of a contract to sell. Ong’s failure
to complete payment of the purchase price is a
non-fulfillment of the condition of full payment
which rendered the contract to sell ineffective and
without force and effect. The breach contemplated
in Art. 1191 is the obligor’s failure to comply with
an obligation. In this case, Ong’s failure to pay is
not even a breach but merely an event which
prevents the vendor’s obligation to convey title
from acquiring binding force. (Jaime G. Ong vs. The
Honorable Court Of Appeals, Spouses Miguel K.
Robles And Alejandro M. Robles, G.R. No. 97347, July
6, 1999).
Q: Petitioners and respondents entered into a
Contract to Sell (subject contract) over the
subject land. The subject contract
provides, inter alia, that: (a) the consideration
for the sale is P33,155,000.00 payable as
follows: down payment in the amount of
P11,604,250.00 inclusive of the amount of
P2,000,000.00 previously paid by respondents
as earnest money/reservation fee, and the
remaining balance of P21,550,750.00 payable
338
 OBLIGATIONS AND CONTRACTS
in 36 monthly installments, each in the amount
of P598,632.00 through post-dated checks; (b)
in case any of the checks is dishonored, the
amounts already paid shall be forfeited in
petitioners' favor, and the latter shall be
entitled to cancel the subject contract without
judicial recourse in addition to other
appropriate legal action; (c) respondents are
not entitled to possess the subject land until
full payment of the purchase price; (d)
petitioners shall transfer the title over the
subject land from a certain Edilberta N. Santos
to petitioners' names, and, should they fail to
do so, respondents may cause the said transfer
and charge the costs incurred against the
monthly amortizations; and (e) upon full
payment of the purchase price, petitioners
shall transfer title over the subject land to
respondents. However, respondents sent
petitioners a letter seeking to rescind the
subject contract on the ground of financial
difficulties. They also sought the return of the
amount they had paid.. As their letter went
unheeded, respondents filed complaint for
rescission. Petitioners countered that
respondents' act is a unilateral cancellation of
the subject contract as the former did not
consent to it. Moreover, the ground of financial
difficulties is not a ground to effect a valid
rescission. The RTC ruled in favor of
respondents and, accordingly, ordered the
rescission of the subject contract; and the
return of the amounts already paid as well as
the remaining post-dated checks issued by
respondent representing the remaining
monthly amortizations. The CA affirmed. Is the
CA correct?
A: No. It cannot be said that petitioners' failure to
undertake their obligation under paragraph 7 (to
cause the transfer of the property to their names
from one Edilberta N. Santos within 90 days from
the execution of said contract) defeats the object
of the parties in entering into the subject contract,
considering that the same paragraph provides
respondents contractual recourse in the event of
petitioners' non-performance of the aforesaid
obligation, that is, to cause such transfer
themselves in behalf and at the expense of
petitioners. Indubitably, there is no substantial
breach of paragraph 7 on the part of petitioners
that would necessitate a rescission (or resolution)
of the subject contract.
The foregoing notwithstanding, the Court cannot
grant petitioners' prayer to order the cancellation
of the subject contract and the forfeiture of the
amounts already paid by respondents on account
339
of the latter's failure to pay its monthly
amortizations, simply because petitioners neither
prayed for this specific relief nor argued that they
were entitled to the same. Worse, petitioners were
declared "as in default" for failure to file the
required pre-trial brief and, thus, failed to present
any evidence in support of their defense (Rogelio
S. Nolasco v. Celerino S. Cuerpo, GR No. 210215,
December 9, 2015).
NOTE: 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 (Ong v. CA, G.R. No.
97347, July 6, 1999).
Q: Can a contract be rescinded extra-judicially
despite the absence of a special contractual
obligation therefore?
A: YES. An extrajudicial rescission based on
grounds not specified in the contract would not
preclude a party to treat the same as rescinded.
The rescinding party, however, by such course of
action, subjects himself to the risk of being held
liable for damages when the extrajudicial
rescission is questioned by the opposing party in
court. In other words, the party who deems the
contract violated may consider it resolved or
rescinded, and accordingly, without previous
court action, but it proceeds at its own risk. For it
is only the final judgment of the corresponding
court that will conclusively and finally settle
whether the action taken was or was not correct
in law (Nissan Car Lease Phils, Inc., v. LICA
Management and Proton Pilipinas, Inc., G.R. No.
176986, January 13, 2016).
DAMAGES
Liability for damages
Those liable under Art. 1170 shall pay damages
only if aside from the breach of contract, prejudice
or damage was caused (Berg v. Teus, G.R. No. L-
6450, October 30, 1954).
NOTE: If action is brought for specific
performance, damages sought must be asked in
the same action; otherwise the damages are
deemed waived (Daywalt v. La Corporacion, G.R.
No. L-13505, February 4, 1919).
Kinds of damages (MENTAL)
3. Moral;
 CIVIL LAW
4. Exemplary; An action where the creditor files in court for the
5. Nominal; rescission of acts or contracts entered into by the
6. Temperate; debtor designed to defraud the former (NCC, Art.
7. Actual; 1177).
8. Liquidated.
NOTE: When the creditor could not collect in any
SUBSIDIARY REMEDIES manner, accion pauliana may be resorted by him
to rescind a fraudulent alienation of property
ACCION SUBROGATORIA (Regalado, v. Luchsinger and Co., 5 Phil 625, GR L-
2250, February 17, 1906).
An action whereby the creditor, whose claim has
not been fully satisfied, may go after the defendant Requisites (PAPIL)
debtor’s debtor (third person) (NCC, Art. 1177).
1. Defendant must be Indebted to plaintiff;
Accion subrogatoria is different and distinct from 2. The fraudulent act performed by the debtor
active subjective subrogation governed by Articles subsequent to the contract gives Advantage to
1300 to 1304. In the latter, there is change of another;
creditors whereas in the former there is no change 3. The creditor is Prejudiced by such act;
of creditors; the creditor merely acts in the name 4. The creditor must have Pursued all properties
and for the account of the debtor after exhausting of the debtor subject to execution; and
the assets of the latter but not enough to satisfy 5. The creditor has no other Legal remedy.
the claims of the creditor.
e.g. Alienations of property, payment of debts
Requisites (IPIN) which are not due, renunciation of rights such as
the right of usufruct or an inheritance, assignment
1. The debtor’s assets must be Insufficient to of credit, and remission of debts.
satisfy claims against him;
2. The creditor must have Pursued all properties ACCION DIRECTA
of the debtor subject to execution;
3. The right of action must Not be purely Accion directa
personal; and
4. The debtor whose right of action is exercised The right of a person to go directly against
must be Indebted to the creditor. another who is not a privy to the contract (NCC,
Articles 1652, 1608, 1729 and 1893).
Effects of subrogatory action
NOTE:
1. The creditor may exercise the subrogatory 1. Subsidiary liability of sublessee for the rent
action in behalf of the debtor not only up to (NCC, Art. 1652);
the amount of his credit but in its totality. 2. Right of sellers a retro to redeem property
from persons other than the buyer a retro
NOTE: The excess (if any) must be returned to (NCC, Art. 1608);
the debtor. 3. Subsidiary liability of owners to laborers and
material men (NCC, Art. 1729); and
2. The bringing of action does not entitle the 4. The principal may sue the substitute of the
creditor to preference. agent with respect to the obligations which
the substitute has contracted under the
3. The defendant (the debtor of the debtor) may substitution (NCC, Art. 1893).
avail himself of all defenses available against
the creditor.
KINDS OF CIVIL OBLIGATIONS
NOTE: In order to exercise action subrogatoria, a
previous approval of the court is not necessary
(Tolentino, 1991). PURE AND CONDITIONAL OBLIGATION
ACCION PAULIANA Pure obligation
Accion pauliana An obligation whose performance does not
depend upon a future or uncertain event, or upon

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES 340
 OBLIGATIONS AND CONTRACTS
a past event or upon a past event unknown to the
parties, demandable at once (NCC, Art. 1179).
NOTE: Other obligations which are demandable at
once are:
1. Obligations with a resolutory condition; and
2. Obligations with a resolutory term or period
[NCC, Arts. 1179 (2) and 1193 (2)].
The most distinctive characteristic of a pure
obligation is its immediate demandability. This
quality, however, must not be understood in such
a way as to lead to absurd interpretations which
would literally require the obligor or debtor to
comply immediately with his obligation. A
distinction must be made between:
1. The immediate demandability of the
obligation; and
2. Its performance or fulfillment by the obligor
or debtor. Although the obligee or creditor
can demand the performance of the obligation
immediately, the quality of immediate
demandability is not infringed or violated
when a reasonable period is granted for
performance (Jurado, 2009).
Conditional obligation
An obligation subject to a condition and the
effectivity of which is subordinated to the
fulfillment or non-fulfillment of a future and
uncertain event, or upon a past event unknown to
the parties (Pineda, 2000).
Condition
A condition is an event which is future and
uncertain, upon which the efficacy or
extinguishment of an obligation depends.
Constructive fulfillment of a condition
The condition shall be deemed fulfilled when the
obligor voluntarily prevents its fulfillment (NCC,
Art. 1186).
Q: Ramon, the judicial administrator of the
estate of Juan, found out that Rodriguez had
enlarged the area of the land which he
purchased from Juan before his death. Thus,
Ramon demanded Rodriguez to vacate the
portion allegedly encroached by him.
Rodriguez refused and contested there was
indeed a conditional sale with the balance of
the purchase price payable within five years
from the execution of the deed of sale. Ramon
then filed an action for recovery of possession
of the disputed lot. Is the contract of sale a
conditional one?
A: NO. The stipulation that the "payment of the
full consideration based on a survey shall be due
and payable in five years from the execution of a
formal deed of sale" is not a condition which
affects the efficacy of the contract of sale. It merely
provides the manner by which the full
consideration is to be computed and the time
within which the same is to be paid. But it does
not affect in any manner the effectivity of the
contract (Heirs of San Andres v. Rodriguez, G.R. No.
135634, May 31, 2000).
Period v. Condition
BASIS PERIOD CONDITION
Refers to the May refer to
future. past event
As to time
unknown to
the parties.

It has two requisites: first, futurity; and second, It will happen at May or may
uncertainty. an exact date or not happen.
As to at an indefinite
Uncertain but past event as a condition fulfillment time but is
definite to
An uncertain but past event itself can never arrive.
constitute a condition because in order to be
Futurity and Futurity and
classified as a condition, the requisites of futurity
and uncertainty are required. Neither can it Characteristic certainty. uncertainty.
constitute a term or period because in order to be
classified as a term or period, the requisites of
futurity and certainty are required. But the proof No effect upon May give rise
or ascertainment of the fact or event, as the existence of to an
The effect of its
distinguished from the fact or event itself may the obligation obligation
happening to
either constitute a condition or a term depending but only in its (suspensive)
the obligation
upon the circumstances of each case (Jurado, demandability. or the
2009). cessation of

341
 CIVIL LAW
one already condition unless contrary to the intention
existing of the parties (NCC, Art. 1187).
(resolutory).
2. Personal obligations – the court determines
the retroactive effect of the condition fulfilled
(NCC, Art. 1187).

Valid. But the Annulled Rights of the parties before the fulfillment of
If fulfillment is the condition
court is
dependent
empowered to
upon the sole
fix the duration 1. Creditor – May bring the appropriate actions
will of the for the preservation of his right (NCC, Art.
of the period.
debtor
1188), such as:

No The moment a. Action for prohibition/restraining the

retroactivity. the condition alienation of the thing pending the
is fulfilled, the happening of the suspensive condition;
effects will b. Petition for the annotation of the
Retroactivity retroact on creditor’s right with the proper registry;
the day of the c. Action to demand security if the debtor
constitution has become insolvent;
of the d. Action to set aside alienations made by
obligation. the debtor in fraud of creditors; or
e. Action against adverse possessors to
Suspensive condition interrupt the running of prescriptive
period.
A condition the fulfillment of which will give rise
to the acquisition of a right. While the condition 2. Debtor – May recover what, during the same
has not arrived yet, in the meantime, the rights time, he has paid by mistake in case of a
and obligations of the parties are suspended. suspensive condition (NCC, Art. 1188).

NOTE: In suspensive condition or condition Effect of loss, deterioration and improvement

precedent, the efficacy or the obligatory force is in an obligation to deliver a determinate thing
subordinated to the happening of a “future and subject to a suspensive condition
uncertain event”; if the suspensive condition does
not take place, the parties would stand as if the WITH WITHOUT
conditional obligation never existed (Gaite v. BASIS DEBTOR’S DEBTOR’S
Fonacier, GR L-11827, July 31, 1961; Cheng v. FAULT FAULT
Genato, 300 SCRA 722, GR 129760, December 29,
1998; Pineda, 2000). Obligation is Obligation
not extinguished.
Effects of fulfillment of the suspensive extinguished.
Loss
condition (1999 Bar)
Debtor pays
1. Real obligations damages.
GR: Retroacts to the day of the constitution of
the obligation. Creditor may Impairment
choose borne by
XPNs: There is no retroactive effect with between creditor.
respect to the fruits and interest: rescission of
obligation or
Deterioration
4. In reciprocal obligations, the fruits and fulfillment
interests shall be deemed to have been (with
mutually compensated; and indemnity for
5. In unilateral obligations, the debtor damages in
appropriates the fruits and interest either case).
received before the fulfillment of the

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES 342
 OBLIGATIONS AND CONTRACTS
3. By the thing’s nature or
through time – Inure to the
benefit of the creditor;
Improvement 4. At the debtor’s expense –
Debtor shall have no right
other than that granted to a
usufructuary.
NOTE: The abovementioned do not apply to
indeterminate or generic things on the basis of the
maxim “genus nun quam peruit” (genus never
perishes). It will only apply when the object or
thing to be given is specific or determinate.
b. The parties shall return to each other
what they have received (mutual
restitution);
c. Obligation is extinguished;
d. In case of loss, deterioration or
improvement of the thing, NCC, Art. 1189,
with respect to the debtor, shall be
applied to the party who is bound to
return (NCC, Art. 1190).
2. Personal obligations – The courts shall
determine, in each case, the retroactive effect
of the condition that has been complied with.
(NCC, Art. 1187; NCC, Art. 1190).

Requisites for the application of Art. 1189 Suspensive conditionv. Resolutory condition
(SuRF LIDS)

1. Must be a Real obligation; SUSPENSIVE RESOLUTORY

BASIS
2. Object of the obligation is a Specific thing; CONDITION CONDITION
3. Obligation is subject to a Suspensive Obligation Obligation is
condition. Effect of arises or extinguished.
4. The condition is Fulfilled; and fulfilment becomes
5. There is Loss, Deterioration or Improvement effective.
of the thing during the pendency of the
happening of the condition. If not fulfilled, If not fulfilled,
Effect of non- no juridical juridical
NOTE: The same conditions apply to an obligor in fulfillment relation is relation is
obligations subject to a resolutory condition. In created. consolidated.
such cases, the third requisite must read, “subject
to a resolutory condition.” Rights are not Rights are
yet acquired, already vested,
Positive suspensive condition but there is but subject to
When rights hope or the threat or
A condition which requires a positive act on the are acquired expectancy danger of
part of the obligor that gives rise to the acquisition that they will extinction.
of rights. soon be
acquired.
A contract to sell, the obligation to deliver the
subject properties becomes demandable only Q: The late Don Lopez, Sr., who was then a
upon the happening of the positive suspensive member of the Board of Trustees of CPU,
condition (payment of full purchase price). executed a deed of donation in favor of the
Without full payment, there can be no breach of latter involving a parcel of land subject to the
contract to speak of because the seller has no condition that it shall be utilized for the
obligation yet to turn over the title (Reyes v. establishment and use of a medical college.
Tuparan, G.R. No. 188064, June 1, 2011). However, the heirs of Don Lopez, Sr., filed an
action for annulment of the donation,
Resolutory condition (1999 Bar) reconveyance and damages against CPU
alleging that CPU did not comply with the
A condition where the rights already acquired are conditions of the donation. Are the conditions
lost upon fulfillment of the condition. It is also imposed resolutory or suspensive?
known as condition subsequent.
A: Under Art. 1181 of the CC, on conditional
Effects of fulfillment of resolutory condition obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired,
1. Real obligations: shall depend upon the happening of the event
which constitutes the condition. Thus, when a
person donates land to another on the condition

343
 CIVIL LAW
that the latter would build upon the land a school,
the condition imposed was not a condition
precedent or a suspensive condition but
resolutory. It is not correct to say that the school
house (or the establishment and use of a medical
college in this case) had to be constructed before
the donation became effective, that is, before the
donee could become the owner of the land,
otherwise, it would be invading the property
rights of the donor. The donation had to be valid
before the fulfillment of the condition. If there was
no fulfillment or compliance with the condition,
the donation may now be revoked and all rights
which the donee may have acquired under it shall
be deemed lost and extinguished (Central
Philippine University v. CA, G.R. No. 112127, July 17,
1995).
Negative resolutory condition
An act, which if not done, would give rise to a
cause of action against the obligor. It contemplates
a situation where rights are already acquired but
subject to an obligation, the non-fulfillment of
which does not affect the rights already acquired
but merely gives a cause of action in favor of the
other party. In a contract of sale, the buyer’s non-
payment of the price is a negative resolutory
condition. In such case, the seller has lost and
cannot recover the ownership of the property
unless he takes action to set aside the contract of
sale (Heirs of Atienza v. Espidol, G.R. No. 180665,
August 11, 2010).
Potestative Condition (1997, 2000, 2003 Bar)
A condition which depends upon the will of one of
the contracting parties (NCC, Art. 1182).
Effects of potestative conditions upon the
obligation
If the condition is potestative in the sense that its
fulfillment depends exclusively upon the will of
the debtor, and the same is suspensive, both the
condition and obligation are VOID.
However, if the condition is a pre-existing one or
the condition is resolutory, only the condition is
void, leaving the obligation itself valid because
what is left to the sole will of the debtor is not the
existence or the fulfillment of the obligation but
merely its extinguishment.
If the condition is potestative in the sense that its
fulfillment depends exclusively upon the will of
the creditor, the obligation shall be valid. This is so
because the provision of the first sentence of Art.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1182 extends only to conditions which are
potestative to the obligor or debtor. Besides, the
creditor is naturally interested in the fulfillment of
the condition since it is only by such fulfillment
that the obligation arises or becomes effective
(Jurado, 2009 citing NCC, Art. 1181 and Manresa).
Causal condition
It is the performance or the fulfillment of the
condition which depends upon chance and/or the
will of a third person.
Mixed condition
It is the performance or fulfillment of the
condition which depends partly upon the will of a
party to the obligation and partly upon chance
and/or the will of a third person.
NOTE: Casual and mixed conditions are valid,
unlike purely potestative conditions.
Q: Suppose that the debtor executed a
promissory note promising to pay his
obligation to the creditor as soon as he has
received funds derived from the sale of his
property in a certain place, is the condition
potestative or mixed?
A: In the case of Hermosa v. Longara (93 Phil. 971,
G.R. L-5267, October 27, 1953), the condition is
mixed because its fulfillment depends not only
upon the will of the debtor but also upon the
concurrence of other factors, such as the
acceptability of the price and other conditions of
the sale, as well as the presence of a buyer, ready,
able, and willing to purchase the property.
Impossible conditions (1997, 2007 Bar)
GR: Impossible conditions annul the obligation
which depends upon the parties but not of a third
person.
XPNs:
1. Pre-existing obligation;
2. Obligation is divisible;
3. In simple or remuneratory donations;
4. In case of conditions not to do an impossible
thing; and
5. In testamentary dispositions.
NOTE: In the foregoing, the obligations remain
valid, only the condition is void and deemed to
have not been imposed. It is applicable only to
obligations not to do and gratuitous obligations.
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 OBLIGATIONS AND CONTRACTS
Other types of conditions
1. Positive – It involves the doing of an act;
2. Negative –It involves the omission of an act;
3. Divisible – It is susceptible of partial
performance;
4. Indivisible – It is not susceptible of partial
performance;
5. Conjunctive – There are several conditions in
an obligation all of which must be performed;
6. Alternative – There are several conditions in
an obligation but only one must be
performed;
7. Possible – It is capable of fulfillment according
to the nature, law, public policy or good
customs; and
8. Impossible – It is not capable of fulfillment
according to nature, law, public policy or good
customs (NCC, Art. 1183).
OBLIGATIONS WITH A PERIOD
Obligation with a period or a term
Obligations for whose fulfillment a day certain has
been fixed, shall be demandable only when that
day comes (NCC, Art. 1193).
Term or period
A certain length of time which determines the
effectivity or the extinguishment of the
obligations.
Requisites of a valid period or term
1. Future;
2. Certain; and
3. Possible, legally, and physically (Paras, 2008).
“Day certain”
It is understood to be that which must necessarily
come, although it may not be known when.
Kinds of terms or periods
1. Ex die – This is a term or period with
suspensive effect. The obligation begins only
from a day certain, in other words upon the
arrival of the period.
2. In diem – A period or term with a resolutory
effect. Up to a certain extent, the obligation
remains valid, but upon the arrival of said
period, the obligation terminates.
3. Legal – A period granted under the provisions
of the law.
345
4. Conventional or voluntary – The period agreed
upon or stipulated by the parties.
5. Judicial – The period or term fixed by the
courts for the performance of an obligation or
for its termination.
6. Definite – The exact date or time is known and
given.
7. Indefinite – It is something that will surely
happen but the date of happening is unknown.
e.g. “I will pay when my means permit me to
do so.”
When the debtor binds himself to pay when his
means permit him to do so, the obligation is
deemed with a period (NCC, Art. 1180). This is
valid because it is not the payment itself that is
dependent upon the will of the debtor, but the
moment of payment.
As the time of payment is not fixed, the court must
fix the same before any action for collection may
be entertained, unless, the prior action of fixing the
term or period will only be a formality and will
serve no purpose but delay (Tiglao v. Manila
Railroad Co., 98 Phil. 181, GR. L-7900, January 12,
1956).
Benefit of the period
GR: Whenever in an obligation a period is
designated, it is presumed to have been
established for the benefit of both the creditor and
the debtor
XPN: When it appears from the tenor of the period
or other circumstances that it was established for
the benefit of one of the parties (NCC, Art.1196).
Effect of the term or period
2. When it is for the benefit of the creditor –
Creditor may demand the performance of
the obligation at any time but the debtor
cannot compel him to accept payment
before the expiration of the period.
e.g. “on demand”
3. When it is for the benefit of the debtor –
Debtor may oppose any premature demand
on the part of the creditor for performance
of the obligation, or if he so desires, he may
renounce the benefit of the period by
performing his obligation in advance.
Effect of a fortuitous event to an obligation
with a period
 CIVIL LAW
It only relieves the contracting parties from the prestations due or to deliver a thing as a
fulfillment of their respective obligation during substitute for the principal.
the term or period.
Conjunctive obligation
Instances where the court may fix the period
(1991, 1997, 2003 Bar) An obligation where the debtor has to perform
several prestations; it is extinguished only by the
1. If the obligation does not fix a period, but performance of all of them.
from its nature and circumstances it can be
inferred that a period was intended by the
parties;
2. If the duration of the period depends upon the
will of the debtor (1997, 2003 Bar);
3. In case of reciprocal obligations, when there is
a just cause for fixing the period; or
4. If the debtor binds himself when his means
permit him to do so.

NOTE: Once fixed by the courts, the period cannot

be changed by the parties (NCC, Art. 1197).

Instances where the debtor loses his right to

make use of the period

1. When after the obligation has been contracted

he becomes insolvent, unless he gives a
guaranty or security for the debt;
2. When he does not furnish to the creditor the
guaranties or securities which he has
promised;
3. When by his own acts he has impaired said
guaranties or securities after their
establishment;
4. When through a fortuitous event they
disappear, unless he immediately gives new
ones or equally satisfactory;
5. When the debtor violates any undertaking, in
consideration of which the creditor agreed to
the period; and
6. When the debtor attempts to abscond (NCC,
Art. 1198).

ALTERNATIVE, FACULTATIVE, CONJUNCTIVE

OBLIGATIONS

Alternative obligation

It is an obligation where the debtor is alternatively

bound by different prestations but the complete
performance of one is sufficient to extinguish the
obligation.

Facultative obligation

It is an obligation where the debtor, who has a

reserved right to choose another prestation or
thing, is bound to perform one of the several

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES 346
 OBLIGATIONS AND CONTRACTS
Facultative obligations v. Alternative obligations

BASIS FACULTATIVE OBLIGATIONS ALTERNATIVE OBLIGATIONS

Number of prestation Only one object is due. Several objects are due.

May be complied with by substitution of May be complied with by fulfilling any

Manner of compliance
one that is due. of those alternately due.

Choice pertains only to debtor. GR: Choice pertain to debtor.

Right to choose
XPN: Expressly granted to creditor or
third person.

Fortuitous loss extinguishes the Fortuitous loss of all prestations will

Effect of fortuitous loss
obligation. extinguish the obligation.

Culpable loss obliges the debtor to Culpable loss of any object due will give
Effect of culpable loss deliver a substitute prestation without rise to liability to the debtor.
liability to the debtor.

When substitution has been made and
communicated to the creditor, the
obligor is liable for the loss of the thing
Liability of the debtor on account of delay, negligence, or fraud.
The creditor shall have the right of
indemnity for damages when, through
the fault of the debtor only, all things
which are alternatively the object of the
obligation have been lost, or the
compliance of the obligation has
become impossible.

If the principal obligation is void, the If one prestation is void, the others that
Void prestation creditor cannot compel delivery of the are free from any vices of consent
substitute. preserve the validity of the obligation.

If there is impossibility to perform or to If some prestations are impossible to

deliver the principal thing or prestation, perform or to deliver except for one -
Impossibility of the obligation is extinguished, even if the this one must be delivered.
prestation substitute obligation is valid.
If all prestations are impossible to
perform, the obligation is extinguished.
Loss of the substitute before the When the choice is given to the creditor,
substitution is made through the fault of the loss of the alternative through the
Loss of substitute
the debtor doesn’t make him liable. fault of the debtor renders him liable
for damages.

347
 CIVIL LAW
Right to choose prestation in an alternative When choice the choice is rendered impossible
obligation through the creditor’s fault, the debtor may bring
an action to rescind the contract with damages
GR: The right of choice belongs to the debtor. (NCC, Art. 1203).

XPN: Unless it has been expressly given to the Plurality of parties

creditor (NCC, Art. 1200).
When there are various debtors or creditors and
Limitations on debtor’s right to choose the obligation is joint, the consent of all is
necessary to make the selection effective, because
1. The debtor must absolutely perform the chosen none of them can extinguish the entire obligation.
prestation. He cannot compel the creditor to
receive part of one and part of the other If the obligation is solidary and there is no
undertaking; stipulation to the contrary, the choice by one will
2. The debtor shall have no right to choose those binding personally upon him, the choice of one
prestations which are impossible, unlawful, or will be personally binding to him, but not as to the
which could not have been the object of the others. Thus, if A and B solidarily bind themselves
obligation (NCC, Art. 1200); to deliver a horse or a carabao to C, the selection
3. The debtor shall lose the right of choice when of A of the horse, when communicated to C, will
among the prestation whereby he is bind him and he cannot later on deliver the
alternatively bound, only one is practicable carabao. It is, however, not binding on B, who may
(NCC, Art. 1202); extinguish the obligation by delivering the
4. The selection made by the debtor (or the carabao (Tolentino, 2002).
creditor when it has been expressly granted
to him) cannot be subjected by him to a Effects of loss of objects in alternative
condition or a term unless the creditor (or obligations
debtor in case the choice is with the creditor)
consents thereto (Tolentino, 2002). DUE TO
DUE TO DEBTOR’S
FORTUITOUS
Effectivity of the choice in alternative FAULT
EVENT
obligations
Choice Belongs to Debtor
The choice made takes effect only upon its
communication to the other party, and from such Debtor released Creditor shall have
time, the obligation ceases to be alternative. (NCC, Debtor is a right to be
Art. 1201; NCC, Art. 1205). released from the indemnified for
obligation. damages based on
All are
NOTE: The notice of selection or choice may be in the value of the last
lost
any form provided it is sufficient to make the thing which
other party know that the election has been made disappeared or last
(Tolentino,2002). service which
became impossible.
When alternative obligation becomes a simple
Debtor shall Debtor shall deliver
obligation
deliver that that which he shall
Some which he shall choose from among
1. When the debtor has communicated the
but not choose from the remainder
choice to the creditor;
all are among the without damages.
2. When debtor loses the right of choice among
lost remainder.
the prestations whereby the debtor is
alternatively bound, only one is practicable
(NCC, Art. 1202).
Only Deliver that which remains.
NOTE: The choice made by the debtor does not one
require the concurrence of the creditor. remains
Otherwise, it would destroy the very nature of the
right to select given to the debtor. Choice Belongs to Creditor

Impossibility of choice due to creditor’s acts

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES 348
 OBLIGATIONS AND CONTRACTS
Debtor is Creditor may claim Presumed by Not presumed.
released from the the price or value of law. Must be
All are
obligation. any of them with (NCC, Art. 1208). expressly
lost
indemnity for stipulated by
damages. the parties, or
Presumption
when the law or
Creditor may Creditor may claim by law
the nature of
choose from any of those the obligation
among the subsisting OR he requires
Some remainder or may choose any of solidarity (NCC,
but not that which those which were Art. 1207).
all are remains if only lost, but it is the
lost one subsists. price or value of Proportionate Obliged to pay
Liability of
with right to part of the the entire
each debtor
damages that can entire debt. obligation.
be claimed.
Each creditor, if Each creditor
Only Deliver that which remains. In case of there are has the right to
one fault of debtor, creditor has a right to several, is demand from
Right of the
remains indemnity for damages. entitled only to any of the
creditor to
a proportionate debtors, the
the
JOINT AND SOLIDARY OBLIGATIONS part of the payment or
fulfillment
(1992, 2001, 2008 BAR) credit. fulfillment of
of the
the entire
obligation
Joint obligations obligation
(Tolentino,
One where the credit or debt shall be presumed to 1999).
be divided into as many equal shares as there are
creditors or debtors, the credits or debts being Character of an obligation
considered distinct from one another (NCC, Art.
1208). Each debtor is liable only for a GR: When two or more creditors or two or more
proportionate part of the debt and each creditor debtors concur in one and the same obligation, the
to his proportionate share to the credit. presumption is that the obligation is joint.

Other terms for joint obligations are: (a) joint XPNs: The obligation shall only be solidary when:
simply; (b) mancomunada; or (c) pro rata. (LEN-CJ)

Solidary obligations 1. Law requires solidarity;

2. Expressly stipulated that there is solidarity;
It is where each of the debtors obliges to pay the 3. Nature of the obligation requires solidarity;
entire obligation, while each one of the creditors e.g. Civil liability arising from crime.
has the right to demand from any of the debtors, 4. Charge or condition is imposed upon heirs or
the payment or fulfillment of the entire obligation legatees and the will expressly makes the
(NCC, Art. 1207; Pineda, 2000). charge or condition in solidum (Manresa); or
5. Solidary responsibility is imputed by a final
Other terms for solidary obligations are: Judgment upon several defendants (Gutierrez
(a) Joint solidarily; v. Gutierrez, 56 Phil 177, GR 34840, September
(b) Jointly and severally; or 23, 1931).
(c) In solidum.
Q: Chua bought and imported to the
Joint obligation v. Solidary obligation Philippines dicalcium phosphate. When the
cargo arrived at the Port of Manila, it was
JOINT SOLIDARY discovered that some were in apparent bad
OBLIGATION OBLIGATION condition. Thus, Chua filed with Smith Bell,
and Co., Inc. (claiming agent of First Insurance
Co.), a formal statement of claim for the loss.
No settlement of the claim having been made,
Chua then filed an action. Is Smith, Bell, and

349
 CIVIL LAW
Co., solidarily liable upon a marine insurance
policy with its disclosed foreign principal?
A: NO. Art. 1207 of the Civil Code clearly provides
that "there is a solidary liability only when the
obligation expressly so states, or when the law or
the nature of the obligation requires solidarity."
The well-entrenched rule is that solidary
obligation cannot lightly be inferred. It must be
positively and clearly expressed (Smith, Bell & Co.,
Inc. v. CA, G.R. No. 110668, February 6, 1997).
Q: The labor arbiter rendered a decision, the
fallo of which states the following respondents
as liable, namely: FCMC, Sicat, Gonzales, Chiu
Chin Gin, Lo Kuan Chin, and INIMACO. INIMACO
questions the execution, alleging that the alias
writ of execution altered and changed the
tenor of the decision by changing their liability
from joint to solidary, by the insertion of the
words "AND/OR". Is the liability of INIMACO
pursuant to the decision of the labor arbiter
solidary or not?
A: INIMACO's liability is not solidary but
merely joint. Well-entrenched is the rule that
solidary obligation cannot lightly be inferred.
There is a solidary liability only when the
obligation expressly so states, when the law so
provides or when the nature of the obligation so
requires.
In the dispositive portion of the labor arbiter, the
word "solidary" does not appear. The said fallo
expressly states the following respondents therein
as liable, namely: Filipinas Carbon Mining
Corporation, Sicat, Gonzales, Chiu Chin Gin, Lo
Kuan Chin, and INIMACO. Nor can it be inferred
therefrom that the liability of the six respondents
in the case below is solidary, thus their liability
should merely be joint (INIMACO v. NLRC, G.R. No.
101723, May 11, 2000).
Q: Mactan Rock Industries, through its
President and Chief Executive Officer Tompar,
entered into a Technical Consultancy
Agreement (TCA) with Germo, whereby the
parties agreed, inter alia, that: (a) Germo shall
stand as MRII's marketing consultant who
shall take charge of negotiating, perfecting
sales, orders, contracts, or services of MRII, but
there shall be no employer-employee
relationship between them; and (b) Germo
shall be paid on a purely commission basis,
including a monthly allowance of P5,000.00.
During the effectivity of the TCA, Germo
successfully negotiated and closed with
International Container Terminal Services, Inc.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
(ICTSI) a supply contract of 700 cubic meters
of purified water per day. Accordingly, MRII
commenced supplying water to ICTSI on
February 22, 2007, and in tum, the latter
religiously paid MRII the corresponding
monthly fees. Despite the foregoing, MRII
allegedly never paid Germo his rightful
commissions amounting to P2,225,969.56 as of
December 2009, inclusive of interest. Initially,
Germo filed a complaint before the National
Labor Relations Commission (NLRC), but the
same was dismissed for lack of jurisdiction
due to the absence of employer-employee
relationship between him and MRII. Germo
filed the instant complaint praying that MRII
and Tompar be made to pay him for unpaid
commissions with legal interest from the time
they were due until fully paid, moral damages,
exemplary damages, and the costs of suit.
MRII and Tompar averred, among others,
that: (a) there was no employer-employee
relationship between MRII and Germo as the
latter was hired as a mere
consultant; (b) Germo failed to prove that the
ICTSI account materialized through his efforts
as he did not submit the required periodic
reports of his negotiations with prospective
clients; and (c) ICTSI became MRII's client
through the efforts of a certain Ed Fornes. Are
MRII and Tompar, as the CEO and President,
solidarily liable to pay Germo?
A: No. It is a basic rule that a corporation is a
juridical entity which is vested with legal and
personality separate and distinct from those
acting for and in behalf of, and from the people
comprising it. As a general rule, directors, officers,
or employees of a corporation cannot be held
personally liable for the obligations incurred by
the corporation, unless it can be shown that such
director/officer/employee is guilty of negligence
or bad faith, and that the same was clearly and
convincingly proven.
Before a director or officer of a corporation can be
held personally liable for corporate obligations,
the following requisites must concur: (1) the
complainant must allege in the complaint that the
director or officer assented to patently unlawful
acts of the corporation, or that the officer was
guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith. In this
case, Tompar's assent to patently unlawful acts of
the MRII or that his acts were tainted by gross
negligence or bad faith was not alleged in Germo's
complaint, much less proven in the course of trial.
350
 OBLIGATIONS AND CONTRACTS
Therefore, the deletion of Tompar's solidary
liability with MRII is in order. (Mactan Rock
Industries v. Benfrei S. Germo, G.R. No. 228799,
January 10, 2018)
Q: Petitioner was the main contractor of the
FOC Network Project of Globe Telecom in
Mindanao. In connection with the project,
petitioner entered into a Sub-Contract
Agreement with DMI, under which the latter
was tasked to undertake an underground
open-trench work. Petitioner required DMI to
give a bond, in the event that DMI fails to
perform its obligations under the Agreement.
Under the bonds, respondent bound itself
jointly and severally liable with DMI. During
the course of excavation and restoration
works, the DPWH issued a work-stoppage
order against DMI after finding the latter's
work unsatisfactory. Notwithstanding the said
order, however, DMI still failed to adopt
corrective measures, prompting petitioner to
terminate the Agreement and seek
indemnification from respondent. However,
respondent effectively denied petitioner's
claim on the ground that the liability of its
principal, DMI, should first be ascertained
before its own liability as a surety attaches.
Respondent claimed that DMI is an
indispensable party that should be impleaded
and whose liability should first be determined
before respondent can be held liable. On the
other hand, petitioner asserted that
respondent is a surety who is directly and
primarily liable to indemnify petitioner, and
that the bond is "callable on demand" in the
event DMI fails to perform its obligations
under the Agreement. The RTC dismissed the
complaint without prejudice, for failure to
implead DMI as a party defendant. It ruled that
before respondent could be held liable on the
surety and performance bonds, it must first be
established that DMI, with whom petitioner
had originally contracted, had indeed violated
the Agreement. DMI, therefore, is an
indispensable party that must be impleaded in
the instant suit. Is DMI an indispensable party
in this case?
A: NO. The nature of the solidary obligation under
the surety does not make one an indispensable
party. An indispensable party is a party-in-interest
without whom no final determination can be had
of an action, and who shall be joined mandatorily
either as plaintiffs or defendants.
In this case, DMI is not an indispensable party
because petitioner can claim indemnity directly
351
from respondent, having made itself jointly and
severally liable with DMI for the obligation under
the bonds. Therefore, the failure to implead DMI is
not a ground to dismiss the case, even if the same
was without prejudice. (Living v. Malayan
Insurance Company, GR No. 193753, September 26,
2012)
Consequences of a joint obligation
1. Each debtor is liable only for a proportionate
part of the entire debt;
2. Each creditor, if there are several, is entitled
only to a proportionate part of the credit;
2. The demand made by one creditor upon one
debtor, produces effects of default only as
between them;
3. Interruption of prescription caused by the
demand made by one creditor upon one
debtor, will NOT benefit the co-creditors or
the co-debtors;
4. Insolvency of a debtor will not increase the
liability of his co-debtor;
5. Vices of each obligation emanating from a
particular debtor or creditor will not affect
the others;
6. In indivisible or joint obligation, the defense
of
res judicata of one does not extend to the
others (8 Manresa, 200-201);
7. The delay on the part of only one of the joint
debtors does not produce effects with respect
to the others, and if the delay is produced
through the acts of only one of the joint
creditors, the others cannot take advantage
thereof.
JOINT INDIVISIBLE OBLIGATIONS
The obligation is joint because the parties are
merely proportionately liable. It is indivisible
because the object or subject matter is not
physically divisible into different parts. In other
words, it is joint as to liabilities of the debtors or
rights of the creditors but indivisible as to
compliance (De Leon, 2010).
A joint indivisible obligation gives rise to
indemnity for damages from the time anyone of
the debtors does not comply with his undertaking.
The debtors who may have been ready to fulfill
their promises shall not contribute to the
indemnity beyond the corresponding portion of
the price of the thing or of the value of the service
in which the obligation consists (NCC, Art. 1224).
Effects of different permutations of joint
indivisible obligations
 CIVIL LAW
1. If there are two or more debtors, compliance
with the obligation requires the concurrence
of all the debtors, although each for his own
share. The obligation can be enforced only by
preceding against all of the debtors;
2. If there are two or more creditors, the
concurrence or collective act of all the
creditors, although each of his own share, is
also necessary for the enforcement of the
obligation;
3. Each credit is distinct from one another;
therefore a joint debtor cannot be required to
pay for the share of another with debtor,
although he may pay if he wants to.
In case of insolvency of one of the debtors, the
others shall not be liable for his shares. To hold
otherwise would destroy the joint character of the
obligation (NCC, Art. 1209).
Effect of breach of a joint indivisible obligation
by one debtor
If one of the joint debtors fails to comply with his
undertaking, and the obligation can no longer be
fulfilled or performed, it will then be converted
into one of indemnity for damages. Innocent joint
debtor shall not contribute to the indemnity
beyond his corresponding share of the obligation.
SOLIDARY OBLIGATIONS
Each one of the debtors is obliged to pay the entire
obligation, and each one of the creditors has the
right to demand from any of the debtors the
payment or fulfillment of the entire obligation.
Kinds of solidary obligation
1. Passive – Solidarity on the part of the debtors;
2. Active – Solidarity on the part of the
creditors ;
3. Mixed – Solidarity on both sides.
JUDICIAL EFFECTS OF ACTIVE AND PASSIVE
SOLIDARITY
(TOLENTINO, 2002)
Active solidarity
The essence of active solidarity consists in the
authority of each creditor to claim and enforce the
rights of all, with the resulting obligation of paying
every one what belongs to him; there is no
merger, much less a renunciation of rights, but
only mutual representation. It is thus essentially a
mutual agency. Its juridical effects may be
summarized as follows:
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1. Since it is a reciprocal agency, the death of a
solidary creditor does not transmit the
solidarity to each of his heirs but to all of them
taken together;
2. Each creditor represents the others in the act
of receiving payment, and in all other acts
which tend to secure the credit or make it
more advantageous. Hence, if he receives only
a partial payment, he must divide it among the
other creditors. He can interrupt the period of
prescription or render the debtor in default,
for the benefit of all other creditors;
3. One creditor, however, does not represent the
others in such acts as novation (even if the
credit becomes more advantageous),
compensation and remission. In these cases,
even if the debtor is released, the other
creditors can still enforce their rights against
the creditor who made the novation,
compensation or remission;
4. The creditor and its benefits are divided
equally among the creditors, unless there is an
agreement among them to divide differently.
Hence, once the credit is collected, an
accounting and a distribution of the amount
collected should follow ;
5. The debtor may pay to any solidary creditor,
but if a judicial demand is made on him, he
must pay only to the plaintiff; and
6. Each creditor may renounce his right even
against the will of the debtor, and the latter
need not thereafter pay the obligation to the
former.
Passive solidarity
In passive solidarity, the essence is that each
debtor can be made to answer for the others, with
the right on the part of the debtor-payor to
recover from the others their respective shares. In
so far as the payment is concerned, this kind of
solidarity is similar to a mutual guaranty. Its
effects are as follows:
1. Each debtor can be required to pay the entire
obligation; but after the payment, he can
recover from the co-debtors their respective
shares;
2. The debtor who is required to pay may set up
by way of compensation his own claim against
the creditor, in this case, the effect is the same
as that of payment;
3. The total remission of a debt in favor of a
debtor releases all the debtors; but when this
remission affects only the share of one debtor,
the other debtors are still liable for the
balance of the obligation;
352
 OBLIGATIONS AND CONTRACTS
4. All the debtors are liable for the loss of the Death of
thing due, even if such loss is caused by only solidary debtor Heirs of the
one of them, or by fortuitous event after one As to the terminates the debtor remain
of the debtors has incurred in delay; effect of solidarity, the bound to
5. The interruption of prescription as to one death of a tie, or perform the
debtor affects all the others; but the party vinculum being same
renunciation by one debtor of the prescription intransmissible prestation.
already had does not prejudice the others, to the heirs.
because the extinguishment of the obligation
by prescription extinguishes also the mutual
representation among the solidary debtors; Rules in solidary obligations (1998, 2003 Bar)
and
6. The interest due by reason of the delay by one 1. Anyone of the solidary creditors may collect or
of the debtors are borne by all of them. demand payment of the whole obligation;
there is mutual agency among solidary
NOTE: Example of words that connote solidary debtors (NCC, Arts. 1214 and 1215) ;
obligation: a) joint and several; b) in solidum; c) 2. Any of the solidary debtor may be required to
individually and collectively; d) each will pay the pay the whole obligation; there is mutual
whole value; e) “I promise to pay” and there are guaranty among solidary debtors (NCC,
two or more signatures; and f) juntos o Articles 1216, 1217 & 1222);
separadamente. 3. Each one of solidary creditors may do
whatever may be useful to the others, but not
Solidarity v. Indivisibility anything prejudicial to them (NCC, Article.
1212) ; however, any novation, compensation,
confusion, or remission of debt made by any
BASIS SOLIDARITY INDIVISIBILITY solidary creditors or with any of the solidary
debtors shall extinguish the obligation
Refers to the without prejudice to his liability for the shares
vinculum Refers to the of other solidary creditors (NCC, Articles. 1215
As to the kind
existing prestation or and 1219).
of unity it
between the object of the
refers to
subjects or contract. Q: Joey, Jovy, and Jojo are solidary debtors
parties. under a loan obligation of P300,000.00 which
As to the has fallen due. The creditor has, however,
Requires the Does not condoned Jojo's entire share in the debt. Since
requirement
plurality of require plurality Jovy has become insolvent, the creditor makes
of plurality of
parties or of subjects or a demand on Joey to pay the debt.
parties or
subjects. parties.
subjects
a. How much, if any, may Joey be compelled
In case of to pay?
In case of breach, it is b. To what extent, if at all, can Jojo be
breach, the converted to compelled by Joey to contribute to such
liability of the one of payment? (1998 BAR)
solidary indemnity for
debtors damages and A:
As to the a. Joey can be compelled to pay only the
although the indivisibility
effect of remaining balance of P200,000, in view of
converted into of the obligation
breach
one of the is terminated the remission of Jojo’s share by the creditor
indemnity for and so each (NCC, Art. 1219).
damages debtor is liable
remains only for his part b. Jojo can be compelled by Joey to contribute
solidary. of the P50,000. When one of the solidary debtors
indemnity. cannot, because of his insolvency, reimburse
his share to the debtor paying the obligation,
such share shall be borne by all his co-
debtors, in proportion to the debt of each
[NCC, Art. 1217(3)].

353
 CIVIL LAW
Since the insolvent debtor's share which Joey
paid was P100,000, and there are only two
remaining debtors - namely Joey and Jojo -
these two shall share equally the burden of
reimbursement. Jojo may thus be compelled
by Joey to contribute P50,000.
Q: Iya and Betty owed Jun P500,000 for
advancing their equity in a corporation they
joined as incorporators. Iya and Betty bound
themselves solidarily liable for the debt. Later,
Iya and Jun became sweethearts so Jun
condoned the debt of P500,000. May Iya
demand from Betty P250,000 as her share in
the debt? Explain with legal basis? (2015 Bar)
A: NO. Iya may not demand the P250,000 from
Betty because the entire obligation has been
condoned by the creditor Jun. In a solidary
obligation, the remission of the whole obligation
obtained by one of the solidary debtors does not
entitle him to reimbursement from his co-debtors.
(NCC, Art. 1220).
Q: Juancho, Don, and Pedro borrowed
P150,000 from their friend Cita to put up an
internet café, orally promising to pay her the
full amount after one year. Because of their
lack of business know-how, their business
collapsed. Juancho and Don ended up
penniless but Pedro was able to borrow money
and put up a restaurant which did well. Can
Cita demand that Pedro pay the entire
obligation since he, together with the two
others, promised to pay the full amount after
one year? Defend your answer (2015 BAR).
A: NO. The obligation in this case is presumed to
be joint. The concurrence of two or more creditors
or two or more debtors in one and the same
obligation does not imply that each one of the
former has the right to demand, or that each one
of the latter is bound to render the entire
compliance of the prestation (NCC, Art. 1207). In a
joint obligation, there is no mutual agency among
the joint debtors such that if one of them is
insolvent the others shall not be liable for his
share.
To whom payment should be made in a
solidary obligation
GR: To any of the solidary creditors.
XPN: If demand, judicial or extra-judicial, has been
made by one of the creditors, payment should be
made to him (NCC, Art. 1214).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
In cases of solidary creditors, one may act for
all
Each one of the solidary creditors may execute
acts which may be useful or beneficial to the
others, but he may not do anything which may be
prejudicial to them (NCC, Art. 1212).
NOTE: Prejudicial acts may still have valid legal
effects, but the performing creditor shall be liable
to his co-creditors (Pineda, 2000).
Effects of assignment of rights in a solidary
obligation
GR: A solidary creditor cannot assign his right
because it is predicated upon mutual confidence,
meaning personal qualification of each creditor
had been taken into consideration when the
obligation was constituted (NCC, Art. 1213).
XPNs:
1. Assignment to co-creditor; or
2. Assignment is with consent of co-creditor.
DIVISIBLE AND INDIVISIBLE OBLIGATIONS
Divisible obligations
Those which have as their object a prestation
which is susceptible of partial performance with
the essence of the obligation being changed.
Indivisible obligations
Those which have as their object a prestation
which is not susceptible of partial performance,
because otherwise the essence of the obligation
will be changed. The obligation is clearly
indivisible because the performance of the
contract cannot be done in parts, otherwise, the
value of what is transferred is diminished
(Nazareno v. CA, G.R. No. 138842, October 18,
2000).
Divisible v. Indivisible obligations
DIVISIBLE INDIVISIBLE
Susceptibility of an Non-susceptibility to be
obligation to be performed partially.
performed partially. Partial performance is
tantamount to non-
performance.
NOTE: The divisibility of the object does not
necessarily determine the divisibility of the
354
 OBLIGATIONS AND CONTRACTS
obligation; while the indivisibility of the object
carries with it the indivisibility of the obligation.
Test of divisibility
Whether or not the prestation is susceptible of
partial performance, not in the sense of
performance in separate or divided parts, but in
the sense of the possibility of realizing the
purpose which the obligation seeks to obtain. It is
indivisible, if a thing which could be divided into
parts and as divided, its value is impaired
disproportionately (Pineda, 2000).
Obligations that are deemed indivisible
1. Obligations to give definite things;
2. Those which are not susceptible of partial
performance;
3. Even the object or service may be physically
divisible, an obligation is indivisible if so
provided (i) by law or (ii) intended by the
parties (NCC, Art. 1225).
NOTE: A pledge or mortgage is one and indivisible
by provision of law, and the rules apply even if the
obligation is joint and not solidary (NCC, Art.
2089).
Obligations that are deemed divisible
When the object of the obligation involves:
1.Certain number of days of work;
2.Accomplishment of work by metrical unit;
3.Analogous things which are by their nature
susceptible of partial performance (NCC, Art.
1225).
Factors to determine whether an obligation is
divisible of indivisible
a) The will or intention of the parties (express or
implied);
b) The objective or purpose of the stipulated
prestation;
c) The nature of the thing; and
d) The provisions of law affecting the prestation.
OBLIGATIONS TO
OBLIGATIONS TO DO
GIVE
In obligations to give, In obligations to do,
those for the delivery of indivisibility is also
certain objects such as presumed, and it is only
an animal or a chair are when they are under
indivisible [NCC, 1225 the exceptional cases
(1)]. mentioned in NCC, Art.
355
1225 (2) that they are
divisible.
Effect of illegality of a part of a contract
1. Divisible contract – the illegal part is void and
unenforceable, meawhile, the legal part is
valid and enforceable (NCC, Art. 1420).
2. Indivisible contract – the entire contract is
void and unenforceable.
Partial performance in indivisible obligation
GR : In indivisible obligations, partial performance
is equivalent to non-performance.
XPNs : (NCC, Articles 1234 and 1235).
1. Where the obligation has been substantially
performed in good faith, the debtor may
recover as if there had been complete
performance, minus the damages suffered by
the creditor; and
2. Where the creditor accepts performance
knowing its incompleteness and without
protest, the obligation is deemed fully
performed.
OBLIGATIONS WITH A PENAL CLAUSE
An obligation with a penal clause is one with an
accessory undertaking by virtue of which the
obligor assumes a greater liability in case of
breach of the obligations (Jurado, 2009).
Penal clause
A penal clause is an accessory undertaking to
asume greater liability in case of breach. It is
attached to an obligation in order to insure
performance. The penalty is generally a sum of
money. But it can also be any othe thing stipulated
by the parties, inlcuding an act or abstention.
Double functions:
1. To provide for liquidated damages; and
2. To strengthen the coercive force of the
obligation by the threat of greater
responsibility in case of breach.
Kinds of penalties
1. As to origin
 CIVIL LAW
a. Legal - it is legal when it is constituted by
law.
b. Conventional - it is constituted by
agreement of the parties.
2. As to purpose
a. Compensatory - it is compensatory when
it is established for the purpose of
indemnifying the damages suffered by the
obligee or creditor in case of breach of the
obligation.
b. Punitive - it is punitive when it is
established for the purpose of punishing
the obligor or debtor in case of breach of
the obligation.
3. As to effect
a. Subsidiary - it is subsidiary when only the
penalty may be demanded in case of
breach of the obligation;
b. Joint - it is joint when the injured party
may demand the enforcement of both the
penalty and the principal obligation.
Q: Can the debtor just choose penalty over
non-fulfillment?
A: GR: The debtor cannot exempt himself from the
performance of the obligation by paying the
penalty (NCC, Art. 1227).
XPN: When the right has been expressly reserved
to the debtor (NCC, Art. 1227).
Creditor cannot demand both the fulfillment of
the principal obligation and the penalty
GR: The creditor cannot demand the fulfillment of
the obligation and the satisfaction of the penalty at
the same time (NCC, Art. 1227).
XPNs:
1. When the right has been clearly granted to
him;
2. If the creditor has decided to require the
fulfillment of the obligation, the performance
thereof should become impossible without his
fault, the penalty may be enforced (NCC, Art.
1227).
NOTE: The creditor need not present proof of
actual damages suffered by him in order that the
penalty may be demanded (NCC, Art. 1228). In this
jurisdiction, there is no difference between a
penalty and liquidated damages, so far as the
results are concerned. Whatever differences exist
between them, as a matter of language, they are
legally treated the same (Rabuya, 2017).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Effect of incorporating a penal clause in an
obligation
GR: The penalty fixed by the parties is a
compensation or substitute for damages in case of
breach.
XPNs: Damages shall still be paid even if there is a
penal clause if:
1. There is a stipulation to the contrary;
2. The debtor refuses to pay the agreed penalty;
or
3. The debtor is guilty of fraud in the fulfillment
of the obligation (NCC, Art. 1126).
NOTE: The nullity of the penal clause does not
carry with it that of the principal obligation. For
example, the penal clause may be void because it
is contrary to law, morals, good custom, public
order, or public policy. In such case, the principal
obligation subsists if valid.
GR: The nullity of the principal obligation carries
with it that of the penal clause (NCC, Art. 1230).
XPNs: The penal clause subsists even if the
principal obligation cannot be enforced:
1. When the penalty if undertaken by a third
person precisely for an obligation which is
unenforceable, voidable, or natural, in which
case, it assumes the form of a guaranty which is
valid, under Art. 2052 of the NCC; and
2. When the nullity of the principal obligation
itself gives rise to the liability of the debtor for
damages.
Instances where penalty may be reduced by
the courts (PIU)
1. Partial performance of the obligation;
2. Irregular performance of the obligation;
3. Penalty is Unconscionable even if there has
been no performance.
Q: When can the creditor demand the
enforcement of the penalty?
A: Only when the non-performance is due to the
fault or fraud of the debtor. But the creditor does
not have to prove that there was fault or fraud of
the debtor. The non-performance gives rise to the
presumption of fault; and in order to avoid the
payment of penalty, the debtor has the burden of
proving an excuse – either that the failure of the
356
 OBLIGATIONS AND CONTRACTS
performance was due to force majeure or to the
acts of the creditor himself.
NOTE: When there are several debtors in an
obligation with a penal clause, the divisibility of
the principal obligation among the debtors does
not necessarily carry with it the divisibility of the
penalty among them.
EXTINGUISHMENT OF OBLIGATIONS
Modes of extinguishment of an obligation
Principal modes (PaLoCo3N)
1. Payment or performance;
2. Loss of the thing due;
3. Condonation or remission of debt;
4. Confusion or merger;
5. Compensation;
6. Novation (NCC, Art. 1231).
Other Modes (PARF)
7. Annulment;
8. Rescission;
9. Fulfillment of a resolutory condition;
10. Prescription (NCC, Art. 1231).
NOTE: The enumeration is not exclusive.
Other causes not expressly mentioned (Rabuya,
2017)
11. Death – in obligations which are of purely
personal character;
12. Arrival of resolutory period;
13. Mutual dissent;
14. Change of civil status;
15. Happening of unforseen events.
Mutual desistance as another mode
extinguishing obligations
It is a concept derived from the principle that
since mutual agreement can create a contract,
mutual disagreement by the parties can likewise
cause its extinguishment (Saura v. Development
Bank of the Phils., G.R. No. L-24968, April 27, 1972).
PAYMENT OR PERFORMANCE
Payment is the fulfillment of the obligation by the
realization of the purposes for which it was
constituted (Jurado, 2010) - (1998, 2009 Bar)
Payment may consist not only in the delivery of
money but also the giving of a thing (other than
money), the doing of an act, or not doing of an act
(NCC, Art. 1232).
Characteristics of payment
1. Integrity – The payment of the obligation must
be completely made;
2. Identity – The payment of the obligation must
consist the performance of the very thing due;
3. Indivisibility – The payment of the obligation
must be in its entirety.
Integrity
GR: Payment or performance must be complete
(NCC, Art. 1233).
XPNs:
1. Substantial performance performed in good
faith (NCC, Art. 1234);
2. When the obligee accepts the performance,
knowing its incompleteness or irregularity
and without expressing any protest or
objection; (NCC, Art. 1235); or
3. Debt is partly liquidated and partly
unliquidated, but the liquidated part of the
debt must be paid in full.
Substantial Performance Doctrine
It provides the rule that if a good-faith attempt to
perform does not precisely meet the terms of an
agreement or statutory requirements, the
performance will still be considered complete if
the essential purpose is accomplished (Black’s
Law Dictionary, 2009).
Requisites
of
1. Attempt in good-faith to comply with
obligation;
2. Slight deviation from the obligation; and the
omission or defect of the performance is
technical and unimportant; and does not
pervade the whole, or is not material that the
object which the parties intended to
accomplish is not attained (Tolentino, 2002).
Identity of the thing
GR: Thing paid must be the very thing due and
cannot be another thing even if of the same or
more quality and value.
XPNs:
1. Dation in payment;
357
 CIVIL LAW
2. Novation of the obligation; and
3. Obligation is facultative.
NOTE: In an obligation to do or not to do, an act or
forbearance cannot be substituted by another act
or forbearance against the obligee’s will.
Indivisibility
GR: Debtor cannot be compelled by the creditor to
perform obligation in parts and neither can the
debtor compel the creditor to accept obligation in
parts.
XPNs :
When:
1. Partial performance has been agreed upon;
2. Part of the obligation is liquidated and part is
unliquidated; or
3. To require the debtor to perform in full is
impractical.
Acceptance by a creditor of a partial payment
NOT an abandonment of its demand for full
payment
When creditors receive partial payment, they are
not ipso facto deemed to have abandoned their
prior demand for full payment.
To imply that creditors accept partial payment as
complete performance of their obligation, their
acceptance must be made under circumstances
that indicate their intention to consider the
performance complete and to renounce their
claim arising from the defect.
NOTE: While Art. 1248 of the Civil Code states
that creditors cannot be compelled to accept
partial payments, it does not prohibit them from
accepting such payments (Selegna Management
and Development Corp. v. UCPB, G.R. No. 165662,
May 3, 2006).
Requisites of a valid payment
1. The person who pays the debt must be
the debtor;
2. The person to whom payment is made
must be the creditor;
3. The thing to be paid or to be delivered
must be the precise thing or the thing
required to be delivered by the creditor;
4. The manner (if expreslly agreed upon),
time, and place of payment, etc.; and
5. Acceptance by the creditor.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Kinds of payment
1. Normal - When the debtor voluntarily performs
the prestation stipulated;
2. Abnormal - When he is forced by means of a
judicial proceeding, either to comply with the
prestation or to pay the indemnity (Tolentino,
1991).
Person who pays
The following persons may effect payment and
compel the creditor to accept the payment:
1. Debtor himself;
2. His heirs and assigns;
3. His agents and representatives; or
4. Third persons who have a material interest in
the fulfilment of the obligation ([NCC, Art.
1236 (1)].
PAYMENT MADE BY THIRD PERSONS
GR: The creditor is not bound to accept payment
or performance by a third person.
XPNs:
1. When made by a third person who has
interest in the fulfillment of the obligation;
and
2. Contrary stipulation (NCC, Art. 1236).
NOTE: The rules on payment by a third person
(NCC, Article. 1236 to 1238) cannot be applied to
the case of a third person who pays the
redemption price in sales with right of repurchase.
This is so because the vendor a retro is not a
debtor within the meaning of the law (Jurado,
2010).
Rights of a third person who made the
payment
1. If the payment was made with knowledge and
consent of the debtor:
a. Can recover entire amount paid (absolute
reimbursement); or
b. Can be subrogated to all rights of the
creditor.
2. If the payment was made without knowledge or
against the will of the debtor – Can recover
only insofar as payment has been beneficial to
the debtor (right of conditional
reimbursement).
NOTE: Payment made by a third person who does
not intend to be reimbursed by the debtor is
358
 OBLIGATIONS AND CONTRACTS
deemed to be a donation, which requires the
debtor's consent. But the payment is in any case
valid as to the creditor who has accepted it (NCC,
Art. 1238).
Person to whom payment is made
Persons entitled to receive the payment:
1. The person in whose favor the obligation has
been constituted;
2. His successor in interest; or
3. Any person authorized to receive it (NCC, Art.
1240).
NOTE: 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 (Sps. Miniano v. Concepcion,
G.R. No. 172825, October 11, 2012).
Payment to an unauthorized person
GR: Payment to an unauthorized person is not a
valid payment (NCC, Art. 1241).
XPNs:
1. Payment to an incapacitated person if:
a. He kept the thing delivered; or
b. It has been beneficial to him (NCC, Art.
1241);
2. Payment to a third person insofar as it
redounded to the benefit of the creditor; and
Benefit to the creditor need not be proved:
(RRE)
a. If after the payment, the third person
acquires the creditor’s Rights;
b. If the creditor Ratifies the payment to
the third person; or
c. If by the creditor’s conduct, the debtor
has been led to believe that the third
person had authority to receive the
payment (Estoppel) (NCC, Art. 1241).
3. Payment in good faith to the possessor of
credit (NCC, Art. 1242).
NOTE : Payment made to the creditor by the
debtor after the latter has been judicially
ordered to retain the debt shall not be valid.
(NCC, Art. 1243).
SPECIAL FORMS OF PAYMENT
Dation in Payment
359
Alienation by the debtor of a particular property
in favor of his creditor, with the latter’s consent,
for the satisfaction of the former’s money
obligation to the latter, with the effect of
extinguishing the said money obligation.
Application of Payment
Designation of the particular debt being paid by
the debtor who has two or more debts or
obligations of the same kind in favor of the same
creditor to whom the payment is made .
Payment by Cession
Debtor cedes his property to his creditors so the
latter may sell the same and the proceeds realized
applied to the debts of the debtor.
Tender of Payment
Voluntary act of the debtor whereby he offers to
the creditor for acceptance the immediate
performance of the former’s obligation to the
latter.
Consignation
Act of depositing the object of the obligation with
the court or competent authority after the creditor
has unjustifiably refused to accept the same or is
not in a position to accept it due to certain reasons
or circumstances.
DATION IN PAYMENT
(dacion en pago)
The delivery and transmission of ownership of a
thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation.
The property given may consist not only of a thing
but also of a real right (Tolentino, 2002) (2009
Bar)
NOTE: The undertaking partakes 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
essential elements of a contract of sale, namely,
consent, object certain, and cause or
consideration, must be present.
The requisites for dacion en pago are:
1. There must be a 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;
 CIVIL LAW
2. There must be some difference between the
prestation due and that which is given in
substitution (aliud pro alio); and
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 (Caltex Philippines, Inc. v. IAC, G.R. No.
72703, November 13, 1992).
Q: Lopez obtained a loan in the amount of
P20,000.00 from the Prudential Bank. He
executed a surety bond in which he, as
principal, and PHILAMGEN as surety, bound
themselves jointly and severally for the
payment of the sum. He also executed a deed of
assignment of 4,000 shares of the Baguio
Military Institution in favor of PHILAMGEN. Is
the stock assignment made by Lopez dation in
payment or pledge?
A: The stock assignment constitutes a pledge and
not a dacion en pago. Dation in payment is the
delivery and transmission of ownership of a thing
by the debtor to the creditor as an accepted
equivalent of the performance of the obligation.
Lopez’s loan has not yet matured when he
"alienated" his 4,000 shares of stock to Philamgen.
Lopez's obligation would arise only when he
would default in the payment of the principal
obligation which is the loan and Philamgen had to
pay for it. Since it is contrary to the nature and
concept of dation in payment, the same could not
have been constituted when the stock assignment
was executed. In case of doubt as to whether a
transaction is a pledge or a dation in payment, the
presumption is in favor of pledge, the latter being
the lesser transmission of rights and interests
(Lopez v. CA, G.R. No. L-33157, June 29, 1982).
Q: Cebu Asiancars Inc., with the conformity of
the lessor, used the leased premises as a
collateral to secure payment of a loan which
Asiancars may obtain from any bank, provided
that the proceeds of the loan shall be used
solely for the construction of a building which,
upon the termination of the lease or the
voluntary surrender of the leased premises
before the expiration of the contract, shall
automatically become the property of the
lessor. Meeting financial difficulties and
incurring an outstanding balance on the loan,
Asiancars conveyed ownership of the building
on the leased premises to MBTC, by way of
"dacion en pago."Is the dacion en pago by
Asiancars in favor of MBTC valid?
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
A: YES. MBTC was a purchaser in good faith.
MBTC had no knowledge of the stipulation in the
lease contract. Although the same lease was
registered and duly annotated, MBTC was charged
with constructive knowledge only of the fact of
lease of the land and not of the specific provision
stipulating transfer of ownership of the building to
the Jaymes upon termination of the lease. While
the alienation was in violation of the stipulation in
the lease contract between the Jaymes and
Asiancars, MBTC’s own rights could not be
prejudiced by Asiancars’ actions unknown to
MBTC. Thus, the transfer of the building in favor of
MBTC was valid and binding (Jayme v. CA, G.R. No.
128669, October 4, 2002).
Assignment of credit
An agreement by virtue of which the owner of a
credit, known as the assignor, by a legal cause,
such as sale, dation in payment, exchange or
donation, and without the consent of the debtor,
transfers his credit and accessory rights to
another, known as the assignee. The assignee
acquires the power to enforce it to the same
extent as the assignor could enforce it against the
debtor. It may be in the form of a sale, but at times
it may constitute a dation in payment, such as
when a debtor, in order to obtain a release from
his debt, assigns to his creditor a credit he has
against a third person. 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.
FORM OF PAYMENT
1. Payment in cash – all monetary obligations
shall be settled in Philippine currency.
However, the parties may agree that the
obligation be settled in another currency at
the time of payment (R.A. 8183, Sec. 1).
2. Payment in check or other negotiable
instrument – not considered payment, they
are not considered legal tender and may be
refused by the creditor except when:
a. the document has been encashed; or
b. it has been impaired through the fault of
the creditor (NCC, Art. 1249).
PAYMENT IN CASH
(2008 Bar)
Legal tender
360
 OBLIGATIONS AND CONTRACTS
Legal tender means such currency which in a
given jurisdiction can be used for the payment of
debts, public and private, and which cannot be
refused by the creditor (Tolentino, 2002).
The legal tender covers all notes and coins issued
by the Bangko Sentral ng Pilipinas and guaranteed
by the Republic of the Philippines. The amount of
coins that may be accepted as legal tender are:
1. One-Peso, Five-Pesos, 10-Pesos coins in
amount not exceeding P1,000.00
2. 25 centavos or less – in amount not exceeding
P100. 00 (BSP Circular No. 537, Series of 2006,
July 18, 2006).
Q: Northwest Airlines, through its Japan
Branch, entered into an International
Passenger Sales Agency Agreement with CF
Sharp, authorizing the latter to sell its air
transport tickets. CF Sharp failed to remit the
proceeds of the ticket sales, thus, Northwest
Airlines filed a collection suit before the Tokyo
District Court which rendered judgment
ordering CF Sharp to pay 83,158,195 Yen and
damages for the delay at the rate of 6% per
annum. Unable to execute the decision in
Japan, Northwest Airlines filed a case to
enforce said foreign judgment with the RTC of
Manila. What is the rate of exchange that
should be applied for the payment of the
amount?
A: The repeal of R.A.529 by R.A. 8183 has the
effect of removing the prohibition on the
stipulation of currency other than Philippine
currency, such that obligations or transactions
may now be paid in the currency agreed upon by
the parties. Just like R.A. 529, however, the new
law does not provide for the applicable rate of
exchange for the conversion of foreign currency-
incurred obligations in their peso equivalent. It
follows, therefore, that the jurisprudence
established in R.A. 529 regarding the rate of
conversion remains applicable. Thus, in Asia
World Recruitment, Inc. v. National Labor Relations
Commission(GR 113363, August 24, 1999), the SC,
applying RA 8183, sustained the ruling of the
NLRC that obligations in foreign currency may be
discharged in Philippine currency based on the
prevailing rate at the time of payment. It is just and
fair to preserve the real value of the foreign
exchange-incurred obligation to the date of its
payment (C.F. Sharp & Cp., Inc. v. Northwest
Airlines, Inc., G.R. No. 133498, April 18, 2002).
PAYMENT BY NEGOTIABLE INSTRUMENT
(2008 BAR)
361
Rule on tender payment as to checks
Q: When does payment by a negotiable
instrument produce the effect of payment?
A: (1) Only when it is cashed, or (2) when through
the fault of the creditor, they have been impaired
[NCC, Art. 1249 (2)].
A check does not constitute a legal tender, thus a
creditor may validly refuse it. However, this does
not prevent a creditor from accepting a check as
payment – the creditor has the option and the
discretion of refusing or accepting it (Far East
Bank & Trust Company v. Diaz Realty, Inc., G.R. No.
138588, August 23, 2001).
NOTE: While it is true that the delivery of a check
produces the effect of payment only when it is
cashed, pursuant to Art. 1249 of the CC, the rule is
otherwise if the debtor is prejudiced by the
creditor's unreasonable delay in presentment.
The payee of a check would be a creditor under
this provision and if its non-payment is caused by
his negligence, payment will be deemed effected
and the obligation for which the check was given
as conditional payment will be discharged (Papa v.
Valencia & Co., Inc., G.R. No. 105188, January 23,
1998).
Q: Diaz & Company obtained a loan from
Pacific Banking Corp which was secured by a
real estate mortgage. ABC rented an office
space in the building constructed on the
properties covered by the mortgage contract.
The parties then agreed that the monthly
rentals shall be paid directly to the mortgagee
for the lessor's account. Thereafter, FEBTC
purchased the credit of Diaz & Company in
favor of PaBC, but it was only after two years
that Diaz was informed about it. Diaz asked the
FEBTC to make an accounting of the monthly
rental payments made by Allied Bank. Diaz
tendered to FEBTC the amount of P1, 450, 000.
00 through an Interbank check, in order to
prevent the imposition of additional interests,
penalties and surcharges on its loan but FEBTC
did not accept it as payment, instead, Diaz was
asked to deposit the amount with the FEBTC’s
Davao City Branch Office. Was there a valid
tender of payment?
A: YES. True, jurisprudence holds that, in general,
a check does not constitute legal tender, and that a
creditor may validly refuse it. It must be
emphasized, however, that this dictum does not
prevent a creditor from accepting a check as
payment. In other words, the creditor has the
 CIVIL LAW
option and the discretion of refusing or accepting it
(FEBTC v. Diaz Realty Inc., G.R. No. 138588, August
23, 2001).
Burden of proving payment in an action for
sum of money
The party who pleads payment as a defense has
the burden of proving that such payment has, in
fact, been made.
EXTRAORDINARY INFLATION OR DEFLATION
(2001 Bar)
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
decrease or increase could not have been
reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the
establishment of the obligation (Tolentino, 2002).
In case an extraordinary inflation or deflation of
the currency stipulated should supervene, the
value of the currency at the time of the
establishment of the obligation shall be the basis
of payment, unless there is an agreement to the
contrary (NCC, Art. 1250).
When the currency is devaluated in terms beyond
what could have been reasonably forseen by the
parties, the doctrine of unforseen risks can be
applied, and the effects of the devaluation should
not be borne by the creditor alone. The
revaluation of the credit in such cases must be
made according to the principles of good faith and
in view of the circumstances of each particular
case, recognizing the real value of the credit as in
consonance with the intent of the parties.
NOTE: Requisites for application of Art. 1250, NCC
(Rabuya, 2017).
1. That there was an official declaration of extra-
ordinary inflation or deflation from the BSP;
2. That the obligation was contractual in nature;
and
3. That the parties expressly agreed to consider
the effects of the extraordinary inflation or
deflation.
PLACE OF PAYMENT
GR: Payment must be made in the place
designated in the obligation (NCC, Art. 1251).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
XPN: If there is no express designation or
stipulation in the obligation:
1. At the place where the thing might be at the
time the obligation was constituted – If the
obligation is to deliver a determinate thing;
2. At the domicile of the debtor – In any other case
(NCC, Art. 1251).
NOTE: Governs only unilateral obligations since
reciprocal obligations are governed by special
rules (Jurado, 2010).
Moreover, if the debtor changes his domicile in
bad faith or after he has incurred in delay, the
additional expenses shall be borne by him.
The foregoing are without prejudice, however, to
the venue under the Rules of Court.
APPLICATION OF PAYMENTS
It is the designation of the debt to which the
payment must be applied when the debtor has
several obligations of the same kind in favor of the
same creditor (NCC, Art. 1252).
Requisites:
1. There is only one debtor and creditor;
2. The debtor owes the creditor two or more
debts;
3. Debts are of the same kind or identical
nature;
e.g. both debts are money obligations
obtained on different dates;
4. All debts are due and demandable, except:
a. When there is mutual agreement
between the parties (Tolentino,
2002);
b. The application is made by the
party for whose benefit the term
has been constituted [NCC, Art.
1252(1]).
5. The payment made is not sufficient to
cover all obligations. Right of the debtor
in the application of payments.
GR: The law grants the debtor a preferential right
to choose the debt to which his payment is to be
applied. But the right of the debtor is not absolute;
he cannot impair the rights granted by law to the
creditor (Tolentino, 2002).
XPN: Debtor’s failure to ascertain which debt his
payment is to be applied. – The right of the debtor
to choose to which debt his payment will be
362
 OBLIGATIONS AND CONTRACTS
applied against may be transferred to the creditor
when he fails to make the application and
subsequently he accepts a receipt from the
creditor evidencing the latter’s choice of
application. Under this circumstance, the debtor
cannot complain of the application made by the
creditor unless there be a cause for invalidating
such act.
As far as the debtor is concerned, the right to
make an application of payment must be exercised
at the time payment is made (Bachrach Garage
and Taxicab Co., v. Golingco, G.R. No. 13761, July 12,
1919).
Limitation upon right to apply payment
If the debt produces interests, payment of the
principal shall not be deemed to have been made
until the interest have been covered (NCC, Art.
1253).
NOTE: This applies only in the absence of a verbal
or written agreement to the contrary; in other
words, it is merely directory, and not mandatory
(Magdalena Estates, Inc. v. Rodriguez, G.R. No. L-
18411, December 17, 1966).
Legal application of payment
If both the creditor and the debtor failed to
exercise the right of application of payment or
legal application (the law makes the application)
of payment will be now govern.
Rules on legal application of payment
The payment should be applied to the more
onerous debts:
1. When a person is bound as principal in one
obligation and as surety in another, the
former is more onerous.
2. When there are various debts, the oldest ones
are more burdensome.
3. Where one bears interest and the other does
not, even if the latter is the older obligation,
the former is considered more onerous.
4. Where there is an encumbrance, the debt with
a guaranty is more onerous than that without
security.
5. With respect to indemnity for damages, the
debt which is subject to the general rules on
damages is less burdensome than that in
which there is a penal clause.
6. The liquidated debt is more burdensome than
the unliquidated one.
363
7. An obligation in which the debtor is in default
is more onerous than one in which he is not
(Tolentino, 2002).
NOTE: If the debts happen to be of same
nature and burden, the payment shall be
applied proportionately.
Effect of creditor’s refusal
If the debtor makes a proper application of
payment, but the creditor refuses to accept it
because he wants to apply it to another debt, such
creditor will incur in delay (Tolentino, 1991).
PAYMENT BY CESSION
Cession
The assignment or cession contemplated here is
the abandonment of the universality of the
property of the debtor for the benefit of his
creditors in order that such property may be
applied to the payment of the credits.
The initiative comes from the debtor, but it must
be accepted by the creditors in order to become
effective. A voluntary assignment cannot be
imposed upon a creditor who is not willing to
accept it.
If the offer is not accepted by the creditors, the
same end may be attained by a proceeding in
insolvency instituted in accordance with
Insolvency Law.
Circumstances evidencing payment by cession
Debtor abandons all of his property for the benefit
of his creditors in order that from the proceeds
thereof, the latter may obtain payment of credits.
Requisites:
1. Plurality of debts;
2. Partial or relative insolvency of the debtor;
and
3. Acceptance of the cession by the creditors
Dation in payment v. Payment in cession
DATION IN PAYMENT PAYMENT IN CESSION
Number of creditors
Maybe one creditor. Plurality of creditors.
Financial condition of the debtor
 CIVIL LAW
Not necessarily in state Debtor must be partially Tender of payment is a preparatory act which
of financial difficulty. or relatively insolvent. precedes consignation. The tender of payment by
itself does not cause the extinguishment of the
obligation unless completed by consignation.
Object (Tolentino, 1991).
Thing delivered is Universality or property
considered as equivalent of debtor is what is Consignation
of performance. ceded.
Act of depositing the object of the obligation with
the court or competent authority after the creditor
Extent of the extinguishment
has unjustifiably refused to accept the same or is
Payment extinguishes Merely releases debtor not in a position to accept it due to certain reasons
obligation to the extent of for net proceeds of or circumstances (Pineda, 2000).
the value of the thing things ceded or assigned,
delivered as agreed upon, unless there is contrary NOTE: Once the consignation has been duly made,
proved or implied from intention. the debtor may ask the judge to order the
the conduct of the cancellation of the obligation (NCC, Art. 1260).
creditor.
Requisites of consignation
Ownership
1. There was a debt due ;
Ownership is transferred Ownership is not 2. The consignation of due obligation was made
to CR upon delivery. transferred. because of some legal cause provided under
NCC, Art. 1256;
Novation 3. The previous notice of the consignation had
been given to the person interested in the
An act of novation. Not an act of novation. performance of the obligation;
4. The amount or thing due was placed at the
Presumption of insolvency disposal of the court; and
5. That after the consignation had been made
Does not presuppose Presupposes insolvency. the persons interested were notified thereof.
insolvency.
TENDER OF PAYMENT AND CONSIGNATION NOTE: Requirement No. 5 may be complied
Tender of payment with by the service of summons upon the
defendant creditor together with a copy of teh
The definitive act of offering to the creditor what complaint.
is due to him together with the demand that the
creditor accepts the same (FEBTC v. Diaz Realty After this notice, the creditor may:
Inc., G.R. No. 138588, August 23, 2001). (a) Accept the thing or amount deposited, in
which case the matter of the payment is
Tender of payment is the manifestation by debtors terminated;
of their desire to comply with or to pay their (b) Refuse to accept the thing or amount, in
obligation (Sps. Benos v. Sps. Lawilao, G.R. No. which case a trial must be held to determine
172259, December 5, 2006). the validity of consignation.

NOTE: If the creditor refuses the tender of
payment without just cause, the debtors are
discharged from the obligation by the
consignation of the sum due (Sps. Benos v. Sps.
Lawilao, G.R. No. 172259, December 5, 2006).
The creditor may neither accept nor refuse in
which case the debtor may ask the court to
cancel the obligation after showing that the
requisites of consignation have been complied
with (NCC, Art. 1260).

There must be a fusion of intent, ability, and
capability to make good such offer, which must be
absolute and must cover the amount due (FEBTC
v. Diaz RealtyInc., G.R. No. 138588, August 23,
2001).
NOTE: Tender of payment must be valid and
unconditional (Sps. Rayos v. Reyes, G.R. No.
150913, February 20, 2003).
Substantial compliance is not enough. The
giving of notice to the persons interested in
the performance of the obligation is

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES 364
 OBLIGATIONS AND CONTRACTS
mandatory. Failure to notify the persons 3.
interested in the performance of the 4.
obligation will render the consignation void
(Dalton v. FGR Realty and Development Corp., 5.
G.R. No. 172577, January 19, 2011).
Title of the obligation has been lost;
Creditor is Incapacitated to receive payment
at the time it is due; or
Two or more persons claim the right to
collect (NCC, Art. 1256).

Consignation is necessarily judicial. Art. 1258 NOTE: The expenses of consignation, when
of the CC specifically provides that properly made, shall be charged against the
consignation shall be made by depositing the creditor (NCC, Art. 1259).
thing or things due at the disposal of judicial
authority. The said provision clearly Right of the debtor to withdraw the thing
precludes consignation in venues other than deposited
the courts (Sps. Oscar and Thelma Cacayorin v.
Armed Forces and Police Mutual Benefit Before the creditor has accepted the consignation,
Association, Inc., G.R. No. 171298, April 15, or before a judicial declaration that the
2013). consignation has been properly made, the debtor
may withdraw the thing or the sum deposited,
Consignation and tender of payment must not allowing the obligation to remain in force (NCC,
be encumbered by conditions (Sps. Rayos v. Art.1260).
Reyes, G.R. No. 150913, February 20, 2003).
NOTE: If, the consignation having been made, the
Q: Dorotea leased portions of her 2,000 sq. m. creditor should authorize the debtor to withdraw
lot to Monet, Kathy, Celia and Ruth for five (5) the same, he shall lose every preference which he
years. Two (2) years before the expiration of may have over the thing. The co-debtors,
the lease contract, Dorotea sold the property guarantors and sureties shall be released (NCC,
to PM Realty and Development Corp. The Art. 1261).
following month, Dorotea and PM Realty
stopped accepting rental payments from all Tender of Payment v. Consignation
the lessees because they wanted to terminate
the lease contracts. Due to the refusal to accept TENDER OF PAYMENT CONSIGNATION
rental payments, the lessees, Ruth, et al., filed a
complaint for consignation of the rentals Nature
before the RTC of Manila without notifying
Dorotea. Is the consignation valid? (2014 Bar) Antecedent of Principal or
consignation or consummating act for
A: NO. Art. 1257 of the Civil Code provides that in preliminary act to the extinguishment of
order that the consignation of the thing due may consignation. the obligation.
release the obligor, it must first be announced to
Effect
the persons interested in the fulfillment of the
obligation. Moreover, Art. 1258 of the same code It does not by itself It extinguishes the
provides that consignation having been made, the extinguish the obligation when
interested parties shall also be notified thereof. In obligation. declared valid.
this case Dorotea, an interested party, was not
notified of the consignation. The consignation is Character
therefore not valid for non-compliance with NCC,
Art. 1257. Extrajudicial. Judicial for it requires
the filing of a complaint
Effectivity of consignation as payment in court (Pineda, 2000).

GR: Consignation shall produce effects of payment
only if there is a valid tender of payment.
XPNs: It shall, however, not produce the same
effect in the following cases. When: (ARTIT)
1. Creditor is Absent or unknown, or doesn’t
appear at place of payment;
2. Creditor Refuses to issue a receipt without
just cause;
Q: In an ejectment case, X refused to vacate the
land alleging that Y had sold to him the
additional area, the payment of which would
be effected five years after the execution of a
formal deed of sale. However, the parties failed
to execute a deed of sale. During the pendency
of the action, X deposited the payment for the
additional area with the court. Is there a valid
consignation?

365
 CIVIL LAW
A: NO. Under Art. 1257 of the CC, consignation is
proper only in cases where an existing obligation
is due. In this case, the contracting parties agreed
that full payment of purchase price shall be due
and payable within five years from the execution
of a formal deed of sale. At the time Rodriguez
deposited the amount in court, no formal deed of
sale had yet been executed by the parties, and,
therefore, the five-year period during which the
purchase price should be paid had not
commenced. In short, the purchase price was not
yet due and payable (Heirs of San Andres v.
Rodriguez, G.R. No. 135634, May 31, 2000).
Q: Under a pacto de retro sale, X sold to Y his
lot and the building erected thereon. They
agreed that half of the consideration shall be
paid to the bank to pay off the loan of X. After
paying the first installment, Y, instead of
paying the loan to the bank, restructured it
twice. Eventually, the loan became due and
demandable. Thus, X paid the bank. On the
same day, Y also went to the bank and offered
to pay the loan, but the bank refused to accept
the payment. Y then filed an action for
consignation without notifying X. Is there a
valid consignation by Y of the balance of the
contract price?
A: NO. Y filed the petition for consignation against
the bank without notifying X, resulting to the
former’s failure to prove the payment of the
balance of the purchase price and consignation. In
fact, even before the filing of the consignation
case, Y never notified X of their offer to pay (Sps.
Benos v. Sps. Lawilao, G.R. No. 172259, December 5,
2006).
LOSS OF THE THING DUE
Loss here is not contemplated in its strict and
legal meaning and is not limited to obligations to
give, but extends to those which are personal,
embracing therefore all causes which may render
impossible the performance of the prestation. In
some Codes, this is designated as impossibility of
performance.
NOTE: The impossibility of performance must be
subsequent to the execution of the contract in
order to extinguish the obligation; if the
impossibility already existed when the contract
was made, the result is not extinguishment but
inefficacy of the obligation under NCC, Articles
1348 and 1493.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
When a thing is considered lost (DOPE)
1. It Disappears in such a way that its existence
is unknown;
2. It goes Out of commerce;
3. It Perishes; or
4. Its Existence is unknown or if known, it
cannot be recovered.
Effect of loss of the thing/object of the
obligation
If the obligation is a:
1. Determinate obligation to give:
Requisites
a. The thing lost must be determinate;
b. The thing lost is without fault of the
debtor; and
c. The thing is lost before the debtor has
incurred delay (NCC, Art. 1262)
GR: The obligation is extinguished when the
object of the obligation is lost or destroyed
(NCC, Art. 1262).
XPNs: (LAS-CD-PCG)
a. Law provides otherwise (NCC, Art. 1262);
b. Nature of the obligation requires the
Assumption of risk;
c. Stipulation to the contrary;
d. Debtor Contributed to the loss;
e. Loss the of the thing occurs after the
debtor incurred in Delay;
f. When debtor Promised to deliver the
same thing to two or more persons who
do not have the same interest (NCC, Art.
1165);
g. When the debt of a certain and
determinate thing proceeds from a
Criminal offense (NCC, Art. 1268); and
h. When the obligation is Generic (NCC, Art.
1263).
2. Generic obligation to give:
GR: The obligation is not extinguished because
a generic thing never perishes (genus nun
guam perit (NCC, Art. 1263).
XPNs:
a. In case of generic obligations whose
object is a particular class or group with
specific or determinate qualities
(delimited generic obligation);
b. In case the generic thing has already been
segregated or set aside, in which case, it
has become specific.
366
 OBLIGATIONS AND CONTRACTS
3. An obligation to do – The obligation is
extinguished when the prestation becomes
legally or physically impossible without the
fault of the obligor (NCC, Art. 1266).
Types of impossibility to perform an
obligation to do
1. Legal impossibility – Act stipulated to be
performed is subsequently prohibited by law.
2. Physical impossibility – Act stipulated could
not be physically performed by the obligor
due to reasons subsequent to the execution of
the contract (Pineda, 2000).
NOTE: The impossibility must be after the
constitution of the obligation. If it was before,
there is nothing to extinguish.
Effect of partial loss
1. Due to the fault or negligence of the debtor –
Creditor has the right to demand the
rescission of the obligation or to demand
specific performance, plus damages, in either
case.
2. Due to fortuitous event:
a. Substantial loss – Obligation is
extinguished.
b. Unsubstantial loss – The debtor shall
deliver the thing promised in its impaired
condition (NCC, Art. 1264).
Effect when the thing is lost in the possession
of the debtor
GR: It is presumed that loss is due to debtor’s
fault. The obligation is not extinguished.
XPN: Presumption shall not apply in case loss is
due to earthquake, flood, storm, or other natural
calamity (NCC, Art. 1262).
XPN to the XPN: Debtor still liable even if loss
is due to fortuitous event when:
1. Debtor incurred in delay; or
2. Debtor promised to deliver the thing to
two or more persons with different
interests [NCC, Art. 1165(3)].
Effect of unforeseen difficulty of fulfilment
When the service has become so difficult as to be
manifestly beyond the contemplation of the
parties, the obligor may also be released
therefrom, in whole or in part (NCC, Art. 1267).
The impossibility of performance of an obligation
to do shall release the obligor.
367
Rebus sic stantibus
A principle in international law which means that
an agreement is valid only if the same conditions
prevailing at the time of contracting continues to
exist at the time of performance. It is the basis of
the principle of unforeseen difficulty of service
(NCC, Art. 1267).
NOTE: Principle of unforeseen events applies
when the service has become so difficult as to be
manifestly beyond the contemplation of the
parties, the obligor may also be released
therefrom in whole or in part (NCC, Art. 1267).
However, this principle cannot be applied
absolutely in contractual relations since parties
are presumed to have assumed the risk of
unfavorable developments (Pineda, 2000). This
rule also does not apply to obligations for the
payment of a sum of money when there is a
change in the value of the stipulated currency. In
such case, Art. 1250 will apply (Tolentino, 2002).
Requisites in order to relieve the debtor from
his obligation, in whole or in part, based on
unforeseen difficulty of fulfilment
1. Event or change in circumstance could not
have been foreseen at the time of the
execution of the contract;
2. Such event makes the performance extremely
difficult but not impossible;
3. The event must not be due to the act of any of
the parties; and
4. The contract is for a future prestation
(Tolentino, 2002).
Q: The parties entered into a lease agreement
whereby Santos Car Check Center agreed to
lease a property to Comglasco Corp. for five (5)
years. However, a year after, Comglasco
advised Santos Car Check Center that it will be
pre-terminating the contract, to which the
latter refused. Despite refusal, Comglasco
vacated the property and stopped paying
rentals. Santos Car Check then filed a suit for
breach of contract. Comglasco rely on the
provision of the lease contract whereby pre-
termination is allowed with cause in the first
three years. Citing business reverses which it
ascribed to the 1997 Asian Financial Crisis,
Comglasco insists that under Article 1267 of
the NCC, it is exempted from its obligation,
because its business setback is the “cause”
contemplated in their lease. Is Comglasco
correct?
 CIVIL LAW
A: NO. The payment of lease rentals does not
involve a prestation “to do” envisaged in Articles
1266 and 1267. Art. 1267 speaks of a prestation
involving service which has been rendered
difficult by unforeseen subsequent events as to be
manifestly beyond the contemplation of the
parties. Additionally, the Asian Currency Crisis
befell from July 1997 and for some time
thereafter, but Comglasco cannot be permitted to
blame its difficulties on the said regional economic
phenomenon because it entered into the subject
lease only on August 2000, more than three years
after it began, and by then Comglasco had known
what business risks it assumed when it opened a
new shop in Iloilo City (Comglasco Corp. v. Santos
Car Check Center Corp., G.R. No. 202989, March 25,
2015).
Debt which proceeds from a criminal offense
GR: Debtor shall not be exempted from the
payment of his obligation regardless of the cause
of the loss.
XPN: The thing having been offered by debtor to
the person who should receive it, the latter
refused without justification to accept it (NCC, Art.
1268).
NOTE: Offer referred in Art. 1268 is different from
consignation; the former refers to extinguishment
of obligation through loss while the latter refers to
the payment of the obligation.
Creditor’s right of action
The obligation, having been extinguished by
the loss of the thing, the creditor shall have all the
rights of action which the debtor may have against
third persons by reason of the loss (NCC, Art.
1269).
This refers not only the rights and actions which
the debtor may have against third persons, but
also to any indemnity which the debtor may have
already received.
CONDONATION OR REMISSION OF DEBT
(2000 Bar)
(BAR 2000)
An act of liberality by virtue of which the creditor,
without receiving any price or equivalent,
renounces the enforcement of the obligation, as a
result of which it is extinguished in its entirety or
in that part or aspect of the same to which the
condonation or remission refers (Pineda, 2000).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Requisites of condonation (GAIDE)
1. Must be Gratuitous;
2. Acceptance by the debtor;
3. Must not be Inofficious;
4. Formalities provided by law on Donations
must be complied with if condonation is
express; and
5. An Existing demandable debt at the time the
remission is made.
NOTE: Remission or condonation of a debt is in
reality a donation (Jurado, 2010).
Form of express remission
It must comply with the forms of donation (NCC,
Art. 1270).
Form of implied remission
The Code is silent with respect to the form of
implied remission. There must be acceptance by
the obligor or debtor (Jurado, 2010).
Manner and kinds of remission:
1. Total – Refers to the remission of the whole of
the obligation;
2. Partial – Remission of the part of the
obligation: to the amount of indebtedness or
to an accessory obligation only (such as
pledge or interest), or to some other aspect of
the obligation (such as solidary);
3. Inter vivos - Effective during the lifetime of the
creditor;
4. Mortis causa - Effective upon death of the
creditor. In this case, the remission must be
contained in a will or testament (Tolentino,
1991);
5. Express – When it is made formally, it should
be in accordance with the forms of ordinary
donations with regard to acceptance, amount,
and revocation; and
6. Implied – When it can be inferred from the
acts of the parties
Effect of delivery of evidence of credit to
debtor
If the creditor voluntarily delivers the private
document evidencing the credit to the debtor,
there is a presumption that he renounces his right
of action against the latter for the collection of the
said credit (Jurado, 2010).
NOTE: The presumption here is only prima facie
and may be overcome by contrary evidence
(Tolentino, 1991).
368
 OBLIGATIONS AND CONTRACTS
Requisites
1. The document evidencing the credit must have
been delivered by the creditor to the debtor;
2. The document must be a private document;
and
3. The delivery must be voluntary (NCC, Art.
1271).
NOTE: If the document is public, the
presumption does not arise considering the fact
that the public character of the document would
always protect the interest of the creditor
(Jurado, 2010).
Effect of remission in general
It extinguishes the obligation in its entirety or in
the part or aspect thereof to which the remission
refers (Jurado, 2010).
Effect of the remission of the principal debt
with respect to the accessory obligation and
vice versa
The renunciation of the principal debt shall
extinguish the accessory but the waiver of the
latter shall leave the former in force (NCC, Art.
1273).
NOTE: It is presumed that the accessory
obligation of pledge has been remitted when the
thing pledged, after its delivery to the creditor, is
found in the possession of the debtor, or of a third
person who owns the thing (NCC, Art. 1274).
Effect of inofficious condonation
It may be totally revoked or reduced depending on
whether or not it is totally or only partly
inofficious (Pineda, 2000).
The obligation remitted is considered inofficious if
it impairs the legitime of the compulsory heirs
(NCC, Art. 752).
Acceptance by the debtor
The acceptance by the debtor is required. There
can be no unilateral condonation. This is because
condonation or remission is an act of liberality. It
is a donation of an existing credit, considered a
property right, in favor of the debtor, it is required
that the debtor gives his consent thereto by
making an acceptance. If there is no acceptance,
there is no condonation (Pineda, 2009).
369
CONFUSION OR MERGER OF RIGHTS
There is a confusion when there is a meeting in
one person of the qualities of a creditor and
debtor of the same obligation (4 Sanchez Roman
421).
Requisites of confusion or merger of rights
1. It must take place between the creditor and
the principal debtor (NCC, Art. 1276);
2. The very same obligation must be involved
(for if the debtor acquires rights from the
creditor, but not the particular obligation in
question, there will be no merger);
3. The confusion must be total or as regards
with the entire obligation.
Effect of confusion or merger of rights
The creditor and debtor becomes the same person
involving the same obligation. Hence, the
obligation is extinguished (NCC, Art. 1275).
There can be partial confusion
It will be definite and complete up to the extent of
the concurrent amount or value, but the
remaining obligation subsists (Pineda, 2000).
Effect of confusion or merger in relation to the
guarantors
1. Merger which takes place in the person of the
principal debtor or principal creditor benefits
the guarantors. The contract of guaranty is
extinguished;
2. Confusion which takes place in the person of
any of the guarantors does not extinguish the
obligation (NCC, Art. 1276).
Effect of confusion or merger in one debtor or
creditor in a joint obligation
GR: Joint obligation is not extinguished since
confusion is not definite and complete with regard
to the entire obligation. A part of the obligation
still remains outstanding.
XPN: Obligation is extinguished with respect only
to the share corresponding to the debtor or
creditor concerned. In effect, there is only partial
extinguishment of the entire obligation (NCC, Art.
1277; Pineda, 2000).
 CIVIL LAW
Effect of confusion or merger in one debtor or
creditor in a solidary obligation
If a solidary debtor had paid the entire obligation,
the obligation is totally extinguished without
prejudice to the rights of the solidary debtor who
paid, to proceed against his solidary co-debtors
for the latter’s individual contribution or liability
(NCC, Art. 1215).
Revocation of confusion or merger of rights
If the act which created the confusion is revoked
for some causes such as rescission of contracts or
nullity of the will or contract, the confusion or
merger is also revoked. The subject obligation is
revived in the same condition as it was before the
confusion.
NOTE: During such interregnum, the running of
the period of prescription of the obligation is
suspended. (Pineda, 2000)
COMPENSATION
It is a mode of extinguishing obligations that take
place when two persons, in their own right, are
creditors and debtors of each other (NCC, Art.
1278).
It is the offsetting of the respective obligation of
two persons who stand as principal creditors and
debtors of each other, with the effect of
extinguishing their obligations to their concurrent
amount.
Requisites of compensation (1998, 2002, 2008,
2009 BAR)
For the compensation to be proper, it is necessary
that (NCC, Art. 1279):
1. Each one of the obligors must be bound
principally, and that he be at the same time a
principal creditor of the other except
guarantor who may set up compensation as
regards what the creditor may owe the
principal (NCC, Articles. 1279-1280);
2. Both debts consist in 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. Both debts are due;
4. Both debts are liquidated and demandable;
5. Neither debt must be retained in a
controversy commenced by third person and
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
communicated in due time to the debtor
(neither debt is garnished) (NCC, Art. 1279);
and
6. Compensation must not be prohibited by law.
(NCC, Art. 1290).
NOTE: When all the requisites mentioned in Art.
1279 of the CC are present, compensation takes
effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the
creditors and debtors are not aware of the
compensation (NCC, Art. 1290).
Effects of compensation:
1. Both debts are extinguished;
2. Interests stop accruing on the extinguished
obligation or the part extinguished;
3. The period of prescription stops with respect
to the obligation or part extinguished; and
4. All accessory obligations of the principal
obligation which has been extinguished are
alsoextinguished (4 Salvat 353).
Q: X, who has a savings deposit with Y Bank in
the sum of P1,000,000.00, incurs a loan
obligation with the said bank in the sum of
P800,000.00 which has become due. When X
tried to withdraw his deposit, Y Bank allowed
only P200,000.00 to be withdrawn, less service
charges, claiming that compensation has
extinguished its obligation under the savings
account to the concurrent amount of X's debt.
X contends that compensation is improper
when one of the debts, as here, arises from a
contract of deposit. Assuming that the
promissory note signed by X to evidence the
loan does not provide for compensation
between said loan and his savings deposit, who
is correct? (1998 Bar)
A: Y Bank is correct. All the requisites of Art.
1279, Civil Code are present. Compensation shall
take place when two persons are reciprocally
creditor and debtor of each other. In this
connection, it has been held that the relation
existing between a depositor and a bank is that of
creditor and debtor. As a general rule, a bank has a
right of set off of the deposits in its hands for the
payment of any indebtedness to it on the part of a
depositor (Gullas v. PNB, G.R. No. L-43191,
November 13, 1935). Hence, compensation took
place between the mutual obligations of X and Y
Bank.
Q: Foodmasters, Inc. (FI) had outstanding loan
obligations to both Union Bank’s predecessor-
in-interest, Bancom Development Corporation
(Bancom), and to DBP.On May 21, 1979, FI and
370
 OBLIGATIONS AND CONTRACTS
DBP, among others, entered into a Deed of
Cession of Property In Payment of Debt
(dacion en pago) whereby the former ceded in
favor of the latter certain properties (including
a processing plant in Marilao, Bulacan
[processing plant]) in consideration of the
following: (a) the full and complete
satisfaction of FI’s loan obligations to DBP; and
(b) the direct assumption by DBP of FI’s
obligations to Bancom in the amount of
₱17,000,000.00 (assumed obligations). On the
same day, DBP, as the new owner of the
processing plant, leased back for 20 years the
said property to FI (Lease Agreement) which
was, in turn, obliged to pay monthly rentals to
be shared by DBP and Bancom. DBP also
entered into a separate agreement with
Bancom (Assumption Agreement) whereby the
former: (a) confirmed its assumption of FI’s
obligations to Bancom; and (b) undertook to
remit up to 30% of any and all rentals due
from FI to Bancom (subject rentals) which
would serve as payment of the assumed
obligations, to be paid in monthly installments.
Claiming that the subject rentals have not been
duly remitted despite its repeated demands,
Union Bank filed, on June 20, 1984, a collection
case against DBP before the RTC, docketed as
Civil Case No. 7648. In opposition, DBP
countered, among others, that the obligations
it assumed were payable only out of the rental
payments made by FI. Thus, since FI had yet to
pay the same, DBP’s obligation to Union Bank
had not arisen. In addition, DBP sought to
implead FW as third party-defendant in its
capacity as FI’s assignee and, thus, should be
held liable to Union Bank. Was there legal
compensation?
A: NONE. The rule on legal compensation is stated
in Article 1290 of the Civil Code which provides
that "when all the requisites mentioned in Article
1279 are present, compensation takes effect by
operation of law, and extinguishes both debts to
the concurrent amount, even though the creditors
and debtors are not aware of the compensation."
Therefore, compensation could not have taken
place between these debts for the apparent reason
that requisites 3 and 4 under Article 1279 of the
Civil Code are not present. Since DBP’s assumed
obligations to Union Bank for remittance of the
lease payments are – in the Court’s words –
"contingent on the prior payment thereof by FW
to DBP," it cannot be said that both debts are due
(requisite 3 of Article 1279 of the Civil Code). Also,
the Court observed that any deficiency that DBP
had to make up for the full satisfaction of the
371
assumed obligations "cannot be determined until
after the satisfaction of FW’s obligation to DBP." In
this regard, it cannot be concluded that the same
debt had already been liquidated, and thereby
became demandable (requisite 4 of Article 1279 of
the Civil Code). Thus, CA correctly upheld the
denial of Union Bank’s motion to affirm legal
compensation (Union Bank Of The Philippines vs.
Development Bank Of The Philippines, G.R. No.
191555, January 20, 2014).
Q: May the parties agree upon the
compensation of debts which are not due?
A: YES. Under Art. 1282, conventional or
voluntary compensation is not limited to
obligations which are not yet due. The parties may
compensate by agreement any obligations, in
which the objective requisites provided for legal
compensation are not present. It is necessary,
however, that the parties should have the capacity
to dispose of credits which they compensate,
because the extinguishment of the obligations in
this case arises from their wills and not from law.
Q: May rescissible or voidable debts which are
already compensated be rescinded or
annulled? What are its effects?
A: YES. Although a rescissible or voidable debt can
be compensated before it is rescinded or annulled,
the degree of rescission or annulment is
retroactive, and the compensation must be
considered as cancelled. And as rescission or
annulment requires mutual restitution, the party
whose obligation is annulled or rescinded can thus
recover to the extent that his credit was
extinguished by the compensation; because to that
extent, he is deemed to have made a payment.
Compensation v. Payment
BASIS COMPENSATIO
PAYMENT
N
A mode of Payment
extinguishing to means not
the concurrent only
amount, the delivery of
obligations of money but
those persons also
Definition
who in their own performanc
right are e of an
reciprocally obligation.
debtors and
creditors of each
other.
 CIVIL LAW
Capacity of Debtor must Need not to be pleaded; It must be pleaded to be
parties not have takes place by effectual.
necessary capacity to operation of law and
Reason: dispose of extinguishes
As to the
Compensation the thing reciprocally the two
necessity of the
operates by law, paid; debts as soon as they
capacity of the
not by the act of creditor exist simultaneously, to
parties
the parties. must have the amount of their
capacity to respective sums.
receive
payment. Generally, both debts Does not require that
must be liquidated. debts are liquidated.
There can be The
partial performanc Legal or conventional Judicial compensation
As the extinguishment e must be compensation governed provided that the
susceptibility of the obligation. complete by the Civil Code. requirements of Rules
of partial and of Court, particularly on
extinguishmen indivisible Counterclaims and/or
t unless Cross-claims are
waived by observed.
the creditor.
Debts or obligations not subject to
Legal Takes effect compensation
compensation by the act of
As to the
takes place by the parties 1. Debts or obligations arising from contracts of
operation of
operation of law and involves depositum (NCC, Art. 1287);
extinguishing
without delivery or 2. Debts arising from obligations of a depositary;
the obligation
simultaneous action. 3. Debts arising from obligations of a bailee in
delivery. commodatum;
Parties must be It is not 4. Claims for support due by gratuitous title;
mutually debtors necessary 5. Obligations arising from criminal offenses
and creditors of that the (NCC, Art. 1288); and
As to the 6. Certain obligations in favor of government.
each other. parties be
relationship of
mutually
the parties e.g. Taxes, fees, duties, and others of a similar
debtors and
creditors of nature.
each other.
There can be no off-setting of taxes against the
claims that the taxpayer may have against the
Compensation v. Confusion government. A person cannot refuse to pay a tax
on the ground that the government owes him an
COMPENSATION CONFUSION amount equal to or greater than the tax being
(NCC, Articles. 1278- (NCC, Articles. 1275- collected. Internal revenue taxes cannot be the
1279) 1277) subject of compensation because government and
taxpayer are not mutually creditors and debtors of
Two persons who are One person where each other. Taxes are not in the nature of
mutual debtors and qualities of debtor and contracts between parties (Francia v. IAC, G.R. No.
creditors of each other. creditor are merged. L-67649, June 28, 1988).
At least two obligations. One obligation.
NOTE: Compensation takes place by operation of
law, even though the debts may be payable at
Compensation v. Counterclaim or Set-off different places, but there shall be an indemnity
for expenses of exchange or transportation to the
COUNTERCLAIM / place of payment (NCC, Art. 1286).
COMPENSATION
SET-OFF
Q: When is compensation not proper?

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES 372
 OBLIGATIONS AND CONTRACTS
A: Under Art. 1287, compensation shall not be
proper when one of the debts arises from a
depositum or from the obligations of a depositary
or of a bailee in commodatum. Neither can
compensatin be set up against a creditor who has
a claim for support due by gratuitous title without
prejudice to the provisions of Art. 301 (2).
NOTE: Only the depositary and the borrower in
commodatum cannot set up compensation. The
depositor can set up his deposit against the
depositary, and the lender can set up his loan
against a credit of the borrower.
Neither shall there be compensation if one of the
debts consists in civil liability arising from a penal
offense.
NOTE: The person who has the civil liability
arising from crime is the only party who cannot
set up the compensation; but the offended party is
entitled to indemnity can set up his claim in
compensation of his debt.
KINDS OF COMPENSATION
1. Legal compensation – by operation of law;
2. Conventional – by agreement of the parties;
3. Judicial (set-off) – by judgment of the court
when there is a counterclaim duly pleaded,
and the compensation decreed; and
4. Facultative – may be claimed or opposed by
one of the parties.
Q: De Leon sold and delivered to Silahis
various merchandise. Due to Silahis' default,
De Leon filed a complaint for the collection of
said accounts. Silahis asserts, as affirmative
defense, a debit memo as unrealized profit for
a supposed commission that Silahis should
have received from De Leon from the sale
made directly to DOLE Philippines, Inc.
(DOLE). Was there legal compensation?
A: NONE. Silahis admits the validity of his
outstanding accounts with De Leon. But whether
De Leon is liable to pay Silahis a commission on
the subject sale to DOLE is disputed. This
circumstance prevents legal compensation from
taking place (Silahis Marketing Corp. v. IAC, G. R.
No. L-74027, December 7, 1989).
NOTE: Compensation is not proper where the
claim of the person asserting the set-off against
the other is not clear or liquidated; compensation
cannot extend to unliquidated, disputed claim
existing from breach of contract (Silahis Marketing
Corp. v. IAC, G.R. No. L-74027, December 7, 1989).
373
Q: Atty. Laquihon, in behalf of Pacweld, filed a
pleading addressed to MPCC titled “motion to
direct payment of attorney's fee”, invoking a
decision wherein MPCC was adjudged to pay
Pacweld the sum of P10, 000. 00 as attorney's
fees. MPCC filed an opposition stating that the
said amount is set-off by a like sum of P10,
000. 00, collectible in its favor from Pacweld
also by way of attorney's fees which MPCC
recovered from the same CFI of Manila in
another civil case. Was there legal
compensation?
A: YES. MPCC and Pacweld were creditors and
debtors of each other, their debts to each other
consisting in final and executory judgments of the
CFI in two separate cases. The two obligations,
therefore, respectively offset each other,
compensation having taken effect by operation of
law and extinguished both debts to the concurrent
amount of P10,000.00, pursuant to the provisions
of Articles. 1278, 1279 and 1290 of the Civil Code,
since all the requisites provided in Art. 1279 of the
said Code for automatic compensation "even
though the creditors and debtors are not aware of
the compensation" were present (Mindanao
Portland Cement Corp. v. CA, G.R. No. L-62169,
February 28, 1983).
Conventional compensation
It is one that takes place by agreement of the
parties.
Effectivity of conventional compensation
For compensation to become effective:
GR: The mutual debts must be both due (NCC, Art.
1279).
XPN: The parties may agree that their mutual
debts be compensated even if the same are not yet
due. (NCC, Art. 1282).
Judicial compensation
If one of the parties to a suit over an obligation has
a claim for damages against the other, the former
may set it off by proving his right to said damages
and the amount thereof (NCC, Art. 1283).
All the requisites mentioned in Art. 1279 must be
present, except that at the time of filing the
pleading, the claim need not be liquidated. The
liquidation must be made in the proceedings.
Facultative compensation
 CIVIL LAW
One of the parties has a choice of claiming or
opposing the compensation but waives his
objection thereto such as an obligation of such
party is with a period for his benefit alone and he
renounces the period to make the obligation
become due.
Facultative compensation is unilateral and does
not require mutual agreement; voluntary or
conventional compensation requires mutual
consent.
e.g. X owes Y P100,000 demandable and due on
April 1, 2012. Y owes X P100, 000 demandable
and due on or before April 15, 2012. Y, who was
given the benefit of the term, may claim
compensation on April 1, 2012. On the other hand,
X, who demands compensation, can be properly
opposed by Y because Y could not be made to pay
until April 15, 2012.
NOTE: Compensation can be renounced either at
the time an obligation is contracted or afterwards
(Tolentino, 1991). It can be renounced expressly or
impliedly.
Examples of implied renunciation:
1. By not setting it up in the litigation;
2. By consenting to the assignment of credit
under NCC,Art. 1285; or
3. By paying debt voluntarily, with knowledge
that it has been extinguished by compensation
(Tolentino, 1991).
Q: Eduardo was granted a loan by XYZ Bank for
the purpose of improving a building which XYZ
leased from him. Eduardo executed the
promissory note in favor of the bank, with his
friend Ricardo as cosignatory. In the PN, they
both acknowledged that they are “individually
and collectively” liable and waived the need
for prior demand. To secure the PN, Ricardo
executed a real estate mortgage on his own
property. When Eduardo defaulted on the PN,
XYZ stopped payment of rentals on the
building on the ground that legal
compensation had set in. Since there was still a
balance due on the PN after applying the
rentals, XYZ foreclosed the real estate
mortgage over Ricardo’s property. Ricardo
opposed the foreclosure on the ground that he
is only a co-signatory; that no demand was
made upon him for payment, and assuming he
is liable, his liability should not go beyond half
of the balance of the loan. Further, Ricardo
said that when the bank invoked
compensation between the rentals and the
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
amount of the loan, it amounted to a new
contract or novation, and had the effect of
extinguishing the security since he did not give
his consent (as owner of the property under
the real estate mortgage) thereto.
a. Can XYZ Bank validly assert legal
compensation?
b. Can Ricardo’s property be foreclosed to
pay the full balance of the loan?
c. Does Ricardo have basis under the Civil
Code for claiming that the original
contract was novated? (2008 Bar)
A:
a. NO. XYZ Bank may validly assert the partial
compensation of both debts, but it should be
facultative compensation because not all of
the five requisites of legal compensation are
present (NCC, Art. 1279). The payment of the
rentals by XYZ Bank is not yet due, but the
principal obligation of loan where both
Eduardo and Ricardo are bound solidarily and
therefore any of them is bound principally to
pay the entire loan, is due and demandable
without need of demand. XYZ Bank may
declare its obligation to pay rentals as already
due and demand payment from any of the two
debtors.
b. NO, because there was no prior demand on
Ricardo, depriving him of the right to
reasonably block the foreclosure by payment.
The waiver of prior demand in the PN is
against public policy and violates the right to
due process. Without demand, there is no
default and the foreclosure is null and void.
Since the mortgage, insofar as Ricardo is
concerned is not violated, a requirement
under Act 3135 for a valid foreclosure of real
estate mortgage is absent.
In the case of DBP v. Licuanan (, February 26,
2007), it was held that: “the issue of whether
demand was made before the foreclosure was
effected is essential. If demand was made and
duly received by the respondents and the
latter still did not pay, then they were already
in default and foreclosure was proper.
However, if demand was not made, then the
loans had not yet become due and
demandable. This meant that the respondents
had not defaulted in their payment and the
foreclosure was premature.”
c. NO. Since none of the three kinds of novation
is applicable. There is no objective novation,
whether express or implied, because there is
no change in the object or principal conditions
of the obligation. There is no substitution of
374
 OBLIGATIONS AND CONTRACTS
debtors, either. Compensation is considered
as abbreviated or simplified payment and
since Ricardo bound himself solidarily with
Eduardo, any facultative compensation which
occurs does not result in partial legal
subrogation. Neither Eduardo nor Ricardo is a
third person interested in the obligation
under NCC, Art. 1302.
Obligations subject to facultative
compensation
When one of the debts arises from:
1. Depositum;
2. Obligations of a depositary;
3. Obligations in commodatum;
4. Support; and
GR: Claim of support due to gratuitous title
XPN: Future support.
5. Civil liability from a crime.
NOTE: NCC, Art. 1288 prohibits compensation if
one of the debts consists in civil liability arising
from a penal offense. However, the victim is
allowed to claim compensation.
If one or both debts are rescissible or voidable
When one or both debts are rescissible or
voidable, they may be compensated against each
other before they are judicially rescinded or
avoided (NCC, Art. 1284).
If the prescriptive period had already lapsed,
there is automatic compensation and the same
will not be disturbed anymore. Whereas, if the
debt is rescinded or annulled, compensation shall
be restitution of what each party had received
before the rescission or annulment.
Effects of assignment on compensation of
debts
1. After the compensation took place
GR: Ineffectual; useless act since there is
nothing more to assign
XPN: When the assignment was made with
the consent of the debtor.
NOTE: Such consent operates as a waiver of
the rights to compensation.
375
XPN to the XPN: At the time he gave his
consent, he reserved his right to the
compensation.
2. Before compensation took place
a. With the consent of the debtor –
Compensation cannot be set up except
when the right to compensation is
reserved.
b. With the knowledge but without consent
of the debtor – Compensation can be set
up regarding debts previous to the
cession or assignment but not
subsequent ones.
c. Without the knowledge of debtor - Can set
up compensation as a defense for all
debts maturing prior to his knowledge of
the assignment.
Renunciation of compensation
Compensation can be renounced expressly or
impliedly. It can also be renounced either at the
time an obligation is contracted or afterwards. It
rests upon a potestative right, and a unilateral
declaration of the debtor would be sufficient
renunciation.
NOVATION
(1994, 2008 Bar)
It is the substitution or change of an obligation by
another, resulting in its extinguishment or
modification, either by changing the object or
principal conditions, or by substituting another in
the place of the debtor or by subrogating a third
person to the rights of the creditor (Pineda, 2000).
Requisites of novation (OIC –SN)
1. Valid Old obligation;
XPNs:
a. When the annulment may be claimed only
by the debtor and he consented to the
novation; and
b. When ratification validates acts which are
voidable.
2. Intent to extinguish or to modify the old
obligation;
3. Capacity and consent of all the parties to the
new obligation (except in case of expromission
where the old debtor does not participate);
 CIVIL LAW
4. Substantial difference of the old and new
obligation – on every point incompatible with
each other (implied novation); and
5. Valid New obligation.
NOTE: If the new obligation is void, the
original one shall subsist as there is no
novation. However, even if the new obligation
turns out to be void, the original obligation
does not subsist if the parties clearly intended
that the former relation should be
extinguished in any event (NCC, Art. 1297).
Presumption of novation
Novation is never presumed; it must be proven as
a fact either by:
1. Explicit declaration – If it be so declared in
unequivocal terms; or
2. Material incompatibility – That the old and the
new obligations be on every point
incompatible with each other (NCC, Art. 1292).
Express novation
Takes place only when the intention to effect a
novation clearly results from the terms of the
agreement or is shown by a full discharge of the
original debt (Jurado, 2010).
Implied novation
It is imperative that the old and new obligations
must be incompatible with each other.
The test of incompatibility between the old and
the new obligations is to determine whether or
not both of them can stand together, each having
its own independence. If they can stand together,
there is no incompatibility; consequently, there is
no novation. If they cannot stand together, there is
incompatibility; consequently, there is novation
(Borja v. Mariano, G.R. No. L-44041,
October 28, 1938).
NOTE: Novation is never presumed and the
animus novandi (intent to make a new obligation)
whether totally or partially, must appear by
express agreement of the parties or by their acts
that are too clear and unequivocal to be mistaken.
Two-fold functions of novation
1. It extinguishes the old obligation; and
2. Creates a new obligation in lieu of the old one.
Kinds of novation
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1. As to essence
a. Objective or real novation – Changing the
object or principal conditions of the
obligation (NCC, Art. 1291).
NOTE: In payment of sum of money, the
first obligation is not novated by a second
obligation that:
(1) Expressly recognizes the first
obligation;
(2) Changes only the terms of payment;
(3) Adds other obligation not
incompatible with the old ones; or
(4) Merely supplements the first one.
b. Subjective or personal novation – Change
of the parties.
i. Substituting the person of the debtor
(passive novation) – may be made
without the knowledge of or against
the will of the latter, but not without
the consent of the creditor.
a) Delegacion – The substitution is
initiated by the old debtor
himself (delegante) by
convincing another person
(delegado) to take his place and
to pay his obligation to the
creditor (1996, 2001 Bar).
b) Expromission – The substitution
of the old debtor by a new
debtor is upon the initiative or
proposal of a third person
(1996, 2001 Bar).
NOTE: If it is the creditor who initiated
the change of debtor, it is considered
expromission
ii. Subrogating a third person to the
rights of the creditor (active
novation)
c. Mixed – Combination of the objective and
subjective novation.
3. As to form of their constitution
a. Express – The parties declared in
unequivocal terms that the obligation is
extinguished by the new obligation.
b. Implied – No express declaration that the
old obligation is extinguished by the new
one. The old and new obligation is
incompatible on every material point
(NCC, Art. 1292).
4. As to extent of their effects
376
 OBLIGATIONS AND CONTRACTS
a. Total or extinctive – Obligation is
originally extinguished.
NOTE: Four requisites of extinctive
novation:
(1) A previous valid obligation;
(2) An agreement of all parties
concerned to a new contract;
(3) The extinguishment of the old
obligation; and
(4) The birth of a valid new obligation
(Iloilo Traders Finance, Inc., v. Heirs
of Soriano,
G.R. No. 149683, June 16, 2003).
The extinctive novation would thus have
the twin effects of first, extinguishing an
existing obligation and second, creating a
new one in its stead.
b. Partial or modificatory – Original
obligation is not extinguished but merely
modified.
5. As to their origin
a. Legal novation – By operation of law
(NCC, Art. 1300 & 1302).
b. Conventional novation – By agreement of
the parties (NCC, Arts. 1300-1301).
6. As to presence of absence of condition
a. Pure – New obligation is not subject to a
condition.
b. Conditional – When the creation of the
new obligation is subject to a condition.
Rights of the new debtor
1. With the debtor’s consent – Right of
reimbursement and subrogation.
2. Without the consent of the old debtor or
against his will – Right to beneficial
reimbursement.
Novation by substitution of debtor
The consent of the creditor is mandatory both in
delegacion and expromission (NCC, Art. 1293). It
may be express or implied from his acts but not
from his mere acceptance of payment by a third
party, for there is no true transfer of debt.
NOTE: Creditor’s consent or acceptance of the
substitution of the old debtor by a new one may
be given at anytime and in any form while the
agreement of the debtor subsists (Asia Banking
Corp. v. Elser, G.R. No. L-30266, March 25, 1929).
377
Requisites of delegacion
1. Substitution is upon the initiative or proposal
of the old debtor himself by proposing to the
creditor the entry of another (third person) as
the new debtor who will replace him in
payment of the obligation;
2. The creditor accepts and the new debtor
agrees to the proposal of the old debtor; and
3. The old debtor is released from the obligation
with the consent of the creditor.
Insolvency of the new debtor in delegacion
GR: Insolvency of the new debtor (delegado), who
has been proposed by the original debtor
(delegante) and accepted by the creditor
(delegatario), shall not revive the action of the
latter against the original obligor (NCC, Art. 1295).
XPNs: Original debtor shall be held liable; if:
1. Insolvency was already existing and of public
knowledge, or known to the debtor; - (NCC,
Art. 1295); or
2. Insolvency of the new debtor was already
existing and known to the original debtor at
the time of the delegation of the debt to the
new debtor (NCC, Art. 1295).
Requisites of expromission
1. Substitution is upon the initiative or proposal
of a third person who will step into the shoes
of the debtor;
2. Creditor must give his consent to the proposal
of the third person; and
3. Old debtor must be released from the
obligation with the consent of the creditor.
Insolvency of the new debtor in expromission
If substitution is without the knowledge or against
the will of the debtor, the new debtor’s insolvency
or non-fulfillment of the obligation shall not give
rise to any liability on the part of the original
debtor. (NCC, Art. 1294).
NOTE: If the old debtor gave his consent and the
new debtor could not fulfill the obligation, the old
debtor should be liable for the payment of his
original obligation.
SUMMARY
EXPROMISSIO
DELEGACION
N
 CIVIL LAW
Person who the new debtor – the new
initiated the Old debtor Third person was already debtor’s
substitution existing and insolvency or
known to the non-fulfillment
It may be express or implied original debtor of the
Consent of the from his acts but not from his at the time of obligation shall
creditor mere acceptance of payment by a the delegation not give rise to
third party. of the debt to any liability on
the new the part of the
With the With or without
debtor. original debtor.
consent of the the knowledge
Consent of the old debtor of the debtor or
old debtor (since he against the will Q: Metro Corporation obtained a loan from
initiated the of the old Allied Bank covered by promissory notes,
substitution). debtor. letters of credit, and trust receipts. By way of
security, Metro’s officers individually executed
Consent is a continuing guaranty in favor of Allied Bank.
needed but it Metro’s officers failed to settle their
Consent of need not be Consent is obligations prompting Allied Bank to demand
third person given needed. for payment to no avail. In order to settle their
simultaneously debts, they offered the sale of Metro’s
. remaining assets (machines and equipment) to
the Bank which the latter refused. Meanwhile,
Intention of Released from the obligation
Starpeak Corporation, acting through Allied
substitution with the consent of the creditor.
Bank’s counsel, entered into an agreement
With the with Metro to buy the machines that were
debtor’s consent reduced to mere scraps of metals. Starpeak,
– right of unfortunately, reneged on its obligation to
reimbursement Metro. In this regard, Metro asseverates that
With the their failure to pay their outstanding loan
and
debtor’s obligations to Allied Bank must be considered
subrogation.
consent – right as force majeure, and since Allied Bank was the
Rights of the
of party, through their counsel, that accepted the
new debtor Without the
reimbursement terms and conditions of payment proposed by
consent of the
and Starpeak, petitioners must therefore be
old debtor or
subrogation. deemed to have settled their obligations to
against his will
– right to Allied Bank.
beneficial
reimbursement. Were the loan obligations under the
promissory notes, letters of credit, and trust
Shall not revive With the receipts have already been extinguished?
the action of debtor’s consent
the latter - If the old A: No. Article 1231 of the New Civil Code states
against the debtor gave his that obligations are extinguished either by
original consent and the payment or performance, the loss of the thing due,
obligor. new debtor the condonation or remission of the debt, the
Insolvency or could not fulfill confusion or merger of the rights of creditor and
nonfulfillmen Original debtor the obligation, debtor, compensation or novation.
t of the shall be held the old debtor
obligation of liable: should be liable Starpeak and Metro’s agreement is a sale of assets
the new 1. Insolvency for the payment contract, while Metro’s obligations to Allied Bank
debtor was already of his original arose from various loan transactions. Absent any
existing and obligation. showing that the terms and conditions of the
of public latter transactions have been, in any way,
knowledge, Without the modified or novated by the terms and conditions
or known to consent of the in the Starpeak-Metro agreement, said contracts
the debtor. old debtor or should be treated separately and distinctly from
Insolvency of against his will each other, such that the existence, performance

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES 378
 OBLIGATIONS AND CONTRACTS
or breach of one would not depend on the
existence, performance or breach of the other.
The performance or breach of the agreement
bears no relation to the performance or breach of
the subject loan transactions, they being separate
and distinct sources of obligations. Metro’s loan
obligations to Allied Bank remain subsisting for
the basic reason that the former has not been able
to prove that the same had already been paid or,
in any way, extinguished (Metro Concast Steel
Corporation, Spouses Jose S. Dychiao And Tiuoh
Yan, Spouses Guillermo And Mercedes Dychiao, And
Spouses Vicente And Filomena Dychiao vs. Allied
Bank Corporation, G.R. No. 177921, December 4,
2013).
Q: SDIC issued to Danilo a Diners Card (credit
card) with Jeannete as his surety. Danilo used
this card and initially paid his obligations to
SDIC. Thereafter, Danilo wrote SDIC a letter
requesting it to upgrade his Regular Diners
Club Card to a Diamond (Edition) one. As a
requirement of SDIC, Danilo secured from
Jeanette her approval and the latter obliged.
Danilo's request was granted and he was
issued a Diamond (Edition) Diners Club Card.
Danilo had incurred credit charged plus
appropriate interest and service charge.
However, he defaulted in the payment of this
obligation. Was the upgrading a novation of
the original agreement governing the use of
Danilo Alto's first credit card, as to extinguish
that obligation?
A: YES. Novation, as a mode of extinguishing
obligations, may be done in two ways: by explicit
declaration, or by material incompatibility.
There is no doubt that the upgrading was a
novation of the original agreement covering the
first credit card issued to Danilo Alto, basically
since it was committed with the intent of
cancelling and replacing the said card. However,
the novation did not serve to release Jeanette from
her surety obligations because in the surety
undertaking she expressly waived discharge in
case of change or novation in the agreement
governing the use of the first credit card (Molino v.
Security Diners International Corp., G.R. No.
136780, August 16, 2001).
Q: J. C. Construction bought steel bars from
Matibay Steel Industries (MSI) which is owned
by Buddy Batungbacal. J.C. failed to pay the
purchased materials worth P500,000 on due
date. J.C. persuaded its client Amoroso with
whom it had receivables to pay its obligation
to MSI. Amoroso agreed and paid MSI the
379
amount of P50,000. After 2 other payments,
Amoroso stopped making further payments.
Buddy filed a complaint for collection of the
balance of the obligation and damages against
J.C. JC denied any liability claiming that its
obligation was extinguished by reason of
novation which took place when MSI accepted
partial payments from Amoroso on its behalf.
Was the obligation of JC to MSI extinguished by
novation? Why? (2014 Bar)
A: NO. Under Art. 1292 of the NCC, in order that
an obligation may be extinguished by another
which substitute the same, it is imperative that it
be so declared in unequivocal terms, or that the
old and the new obligations be on every point be
incompatible with each other. Novation by
substitution of the debtor requires the consent of
the creditor as provided in Art. 1293. This
requirement is not present in this case.
In Magdalena Estates Inc., vs. Rodriguez (G.R. No.
L-18411, December 17, 1966) it was ruled that the
mere fact that the creditor received payment from
a third person does not constitute novation and
does not extinguish the obligation of the original
debtor. Thus, the obligation of JC to MSI subsists.
Effects of novation
1. Extinguishment of principal also extinguishes
the accessory, except:
a. Mortgagor, pledgor, surety or guarantor
agrees to be bound by the new obligation
(Tolentino, 1999); or
b. Stipulation made in favor of a third
person such as stipulation pour atrui
(NCC, Art. 1311) unless beneficiary
consents to the novation (NCC, Art. 1296).
2. If old obligation is:
a. Void – Novation is void (NCC, Art. 1298)
b. Voidable – Novation is valid provided that
the annulment may be claimed only by
the debtor or when ratification validates
acts (NCC, Art. 1298).
c. If the old obligation was subject to a
suspensive or resolutory condition, the
new obligation shall be under the same
condition, unless it is otherwise
stipulated. (NCC, Art. 1299).
3. If old obligation is conditional and the new
obligation is pure:
 CIVIL LAW
a. If resolutory and it occurred – Old
obligation already extinguished; no new
obligation since nothing to novate.
b. If suspensive and it did not occur – It is as
if there is no obligation; thus, there is
nothing to novate.
4. If the new obligation is:
a. Void – Original one shall subsist, unless
the parties intended that the former
relation should be extinguished in any
event (NCC, Art. 1297).
b. Voidable – Novation can take place, except
when such new obligation is annulled. In
such case, old obligation shall subsist.
c. Pure obligation – Conditions of old
obligation deemed attached to the new,
unless otherwise stipulated (Tolentino,
1999).
d. Conditional Obligation:
i. If resolutory – Valid until the
happening of the condition (NCC, Art.
1181).
ii. If suspensive and did not materialize –
No novation, old obligation is
enforced.
(NCC, Art. 1181).
NOTE: Novation does not extinguish criminal
liability (PNB v. Soriano, G.R. No. 164051, October
3, 2012)
Q: Will a contract of suretyship, which is
secondary to a principal obligation, be
extinguished when novation occurs?
A: It depends. A surety is released from its
obligation when there is a material alteration of
the principal contract in connection with which
the bond is given, such as a change which imposes
a new obligation on the promising party, or which
takes away some obligation already imposed, or
one which changes the legal effect of the original
contract and not merely its form (Philippine
Charter Insurance Corporation v. Petroleum
Distributors & Service Corporation, G.R. No. 180898,
April 18, 2012). Furthermore, a surety is not
released by a change in the contract, which does
not have the effect of making its obligation more
onerous (Stronghold Insurance Company, Inc. v.
Tokyu Construction Company, G.R. Nos. 158820-21,
June 5, 2009). As such, a contract is only
extinguished by novation when there is a material
alteration in the principal contract or if it has the
effect of making the obligation more onerous.
Subrogation
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
It is the active subjective novation characterized
by the transfer to a third person of all rights
appertaining to the creditor in the transaction
concerned including the right to proceed against
the guarantors or possessors of mortgages and
similar others subject to any applicable legal
provision or any stipulation agreed upon by the
parties in conventional subrogation.
NOTE: Whoever pays on behalf of the debtor
without the knowledge or against the will of the
latter cannot compel the creditor to subrogate him
in his rights, such as those arising from a
mortgage, guaranty, or penalty (NCC, Art. 1237).
Kinds of subrogation
1. As to their creation
a. Legal subrogation – Constituted by virtue
of a law (NCC, Articles 1300 and 1302);
b. Voluntary or conventional subrogation –
Created by the parties by their voluntary
agreement (NCC, Art. 1300);
NOTE: Conventional subrogation of a third
person requires the consent of the original
parties and of the third person (NCC, Art.
1301);
2. As to their extent
a. Total subrogation – Credits or rights of
the creditor in the transaction are totally
transferred to the third person.
b. Partial subrogation – Only part of the
credit or rights of the creditor in the
transaction are transferred to the third
person.
NOTE: A creditor, to whom partial payment
has been made, may exercise his right for the
remainder and he shall be preferred to the
person who has been subrogated in his place
in virtue of the partial payment of the same
credit (NCC, Art. 1304).
Presumption of legal subrogation
GR: Legal subrogation is not presumed (NCC, Art.
1300).
XPN: In cases expressly mentioned in the law:
1. When a creditor pays another creditor who is
preferred, even without the debtor’s
knowledge;
2. When a third person, not interested in the
obligation, pays with the express or tacit
approval of the debtor;
380
 OBLIGATIONS AND CONTRACTS
3. When, even without the knowledge of the
debtor, a person interested in the fulfillment
of the obligation pays, without prejudice to
the effects of confusion as to the latter’s share.
(NCC, Art. 1302).
NOTE: In the law of subrogation, active subjective
novation is stricter than passive subjective
novation. In the latter, the consent of the old
debtor is not even required in expromission.

Conventional subrogation v. Assignment of CONTRACTS

credit

ASSIGNMENT
CONVENTIONAL GENERAL PROVISIONS
BASIS OF CREDITS
SUBROGATION
OR RIGHTS

Governing Article 1300- Article 1624- A contract is a meeting of minds between two
law 1304 1627 persons whereby one binds himself, with respect
to the other, to give something or to render some
It extinguishes The transfer
service (NCC, Art. 1305).
the original of the credit
obligation and or right does
A contract is a meeting of the minds between two
creates a new not extinguish
or more parties, whereby one party binds himself
one. or modify the
with respect to the other, or where both parties
Effect obligation.
bind themselves reciprocally, in favor of one
The transferee
another, to fulfill a prestation to give, to do or not
becomes the
to do. (Pineda, 2009)
new creditor
for the same
Meeting of minds
obligation.

The consent of The consent of Speaks of the intention of the parties in entering
the debtor is the debtor is into the contract respecting the subject matter and
necessary (NCC, not necessary. the consideration thereof. As a rule therefore, a
Need for Art. 1301). Notification is contract is perfected by mere consent. It does not
consent of enough for the require any special form, as a rule, and is binding
debtor validity of the from the moment that the essential requisites are
assignment present. Thus, the meeting of the minds between
(NCC, Art. the parties rise to the binding contract althought
1626). they have not affixed their signature to its written
form (Rabuya, 2017).
Begins from the Begins from Obligation v. Contract
Effectivity moment of notification of
subrogation. the debtor. While a contract is one of the sources of
obligations, an obligation is the legal tie or
The defect in the The defect in relations itself that exists after a contract has been
old obligation the credit or entered into.
may be cured rights is not
Curability of
such that the cured by its Hence, there can be no contract if there is no
defect or vice
new obligation mere obligation. But an obligation may exist without a
becomes valid. assignment to contract (De Leon, 2010).
a third person.

Debtor cannot The debtor Duty of courts in interpreting contracts

set up a defense can still set up
against the new the defense It is not the province of the court to alter a
creditor which (available contract by construction or to make a new
Defense contract for the parties. Its duty is confined to the
he could have against the old
availed himself creditor) interpretation of the one which they have made
of against the old against the for themselves without regard to its wisdom or
creditor. new creditor. folly as the court cannot supply material
stipulations or red into the contract words which

381
 CIVIL LAW
it does not contain (Cuizon v. CA, G.R. No. 102096,
August 22, 1996).
STAGES IN THE MAKING OF A CONTRACT
Three stages in the making of a contract (CPC) :
1. Conception or Generation – the first stage
where the parties begin their initial negotiation
and bargaining for the formation of the contract
ending at the moment of agreement of the parties.
2. Perfection or Birth – Here, the parties had a
meeting of minds as to the object, cause or
consideration and other terms and conditions of
the contract.
3. Consumation or fulfillment – This the last
stage which consists in their performance or
fulfillment by the parties of their obligations
under the term of the perfected contract.
CHARACTERISTICS OF A CONTRACT
The following are the characteristics of a contract
(AMOR):
1. Autonomy (NCC, Art. 1306);
2. Mutuality (NCC, Art. 1308);
3. Obligatoriness and consensuality (NCC, Art.
1315);
4. Relativity (NCC, Art. 1311)
5. Consensuality (NCC, Art. 1315)
RELATIVITY OF CONTRACTS
(1991, 1996, 2002 BAR)
Principle of relativity or Principle of limited
effectivity of contracts (2011 BAR)
GR: Contracts take effect only between the parties
or their assigns and heirs.
Res inter alios acta aliis neque nocit prodest (a
thing done between others does not harm or
benefit others) – a contract can only obligate the
parties who entered into it, or their successors
who assumed their personalities, and that,
concomitantly, a contract can neither favor nor
prejudice third persons (Vitug, 2006).
NOTE: With respect to the heir, he shall not be
liable beyond the value of the property he
received from the decedent (NCC, Art. 1311).
XPNs:
1. Rights and obligations that are not
transmissible by their nature, or by the
stipulation or by provisions of law (NCC,
Art. 1311);
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
NOTE : Determine whether a contract
terminates upon the death of one of the
parties
2. Stipulation pour autrui (stipulation in
favor of a third person) – benefits clearly
and deliberately conferred by parties to a
contract upon third persons (NCC, Art.
1311) and which stipulation is merely
part of a contract entered into by the
parties, neither of whom acted as agents
of the third person and which favor can
be demanded by the third person if duly
accepted by him before it could be
revoked;
Requisites of stipulation pour atrui:
a. Stipulation in favor of a third person;
b. Stipulation is just part and not the
whole obligations of the contract;
c. Contracting parties must have clearly
and deliberately conferred a favor
upon third person;
d. Favor or benefit conferred is not just
an incidental benefit or interest;
e. Third person must have
communicated his acceptance; and
f. Neither of the contracting parties
bears the legal representation of the
third person (Young v. Court of
Appeals, G.R. No. 79518, January 13,
1989).
NOTE: The fairest test to determine whether
the interest of third person in a contract is a
stipulation pour autrui or merely an
incidental interest, is to rely upon the
intention of the parties as disclosed by their
contract. In applying this test, it matters not
whether the stipulation is in the nature of a
gift or whether there is an obligation owing
from the promise to the third person (Rabuya,
2017).
3. Third persons coming into possession of the
object of the contract creating real rights
subject to the provisions of Mortgage Law and
the Land Registration Law (NCC, Art. 1312);
4. Contracts entered into in fraud of creditors;
(NCC, Art. 1313);
5. When a third person induces a party to violate
the contract (NCC, Art. 1314). (1991, 1998
BAR)
NOTE: This tort or wrongful conduct is known
as “interference with contractual relations.”
382
 OBLIGATIONS AND CONTRACTS
Requisites:
a. Existence of a valid contract;
b. Third person has knowledge of such
contract;
c. Third person interferes without legal
justification or excuse (De Leon, 2010).
Thus, third person and the breaching party is
liable for damages. It is based on quasi-delict
and their liability is solidary.
NOTE: A third person can be held liable for
tort intereference even if he does not know
the identity of one of the contracting parties.
The interference with lawful contracts by
strangers thereto gives rise to an action for
damage in favor of the injured person. The
law does not require that the responsible
person shall have known the identity of the
injured person (Rabuya, 2017).
Q: PCGG filed a complaint for reconveyance,
reversion, accounting, restitution, and
damages before the Sandigan Bayan against
Ferdinand and Imelda Marcos, and several of
their cronies including Benedicto and Africa.
PCGG, through its Chairman, David M. Castro,
entered into a Compromise Agreement with
Benedicto where the latter undertook to cede
to the government properties listed in the
agreement and transfer to the government
whatever rights he may have in the assets of
the corporations listed in the same agreement.
The SB dismissed the case against Africa and
ruled that since that act being complained of
constituted a quasi-delict or tort and the
obligation of the defendants were solidary
therefore the obligation of Africa has been
extinguished by the Compromise Agreement.
Did the Compromise Agreement between PCGG
and Benedicto extinguish the liability of
Africa?
A: NO. A stipulation pour autrui to be appreciated,
it is indispensable that there be a stipulation
deliberately conferring a benefit or favor to a third
person. The requisites of a stipulation pour autrui
are the following:
1. There is a stipulation in favor of a third
person;
2. The stipulation is a part, not the whole, of the
contract;
3. The contracting parties clearly and
deliberately conferred a favor to the third
person — the favor is not an incidental
benefit;
383
4. The favor is unconditional and
uncompensated;
5. The third person communicated his or her
acceptance of the favor before its revocation;
and
6. The contracting parties do not represent, or
are not authorized by, the third party.
The Compromise Agreement executed between
Benedicto and PCGG do not contain any express
stipulation that confers the benefit of absolute
immunity to Africa. Absent any express stipulation
in favor of a third person, the rule on relativity of
contract must be applied i.e., that the contract only
takes effect between the parties, their assigns or
heirs (Republic of the Philippines v. Legal Heirs of
Jose L. Africa, G.R. No. 205722, August 19, 2015).
Q: Fieldmen's Insurance issued, in favor of
MYT, a common carrier, accident insurance
policy. 50% of the premium was paid by the
driver. The policy indicated that the Company
will indemnify the driver of the vehicle or his
representatives upon his death. While the
policy was in force, the taxicab driven by
Carlito, met with an accident. Carlito died. MYT
and Carlito's parents filed a complaint against
the company to collect the proceeds of the
policy. Fieldmen’s admitted the existence
thereof, but pleaded lack of cause of action on
the part of the parents. Decide.
A: Carlito’s parents who, admittedly, are his
sole heirs have a direct cause of action against
the Company. This is so because pursuant to the
stipulations, the Company will also indemnify
third parties. The policy under consideration is
typical of contracts pour autrui, this character
being made more manifest by the fact that the
deceased driver paid 50% of the premiums
(Coquia v. Fieldmen’s Insurance Co., Inc.,G.R. No. L-
23276, November 29, 1968).
OBLIGATORY FORCE OF CONTRACTS
Contracts shall be obligatory, in whatever form
they may have been entered into, provided all the
essential requisites for validity are present (NCC,
Art. 1356).
Obligations arising from contracts have the force
of law between the contracting parties and should
be complied with in good faith. (NCC, Art. 1159)
This provision must fall within the other
characteristic of a contract
 CIVIL LAW
NOTE: Obligations arising from contracts have the
force of law between the contracting parties and
should be complied with in good faith (NCC, Art.
1159).
Requisites for the application of the principle
Before a contract may be considered obligatory, it
is necessary that:
1. It is perfected;
2. It is valid; and
3. It is enforceable (Rabuya, 2017).
Q: Villamor borrowed a large amount from
Borromeo, for which he mortgaged his
property but subsequently defaulted.
Borromeo pressed him for settlement. The
latter instead offered to execute a promissory
note containing a promise to pay his debt as
soon as he is able, even after 10 years and that
he waives his right to prescription. What are
the effects of said the stipulation to the action
for collection filed by Borromeo?
A: NONE. The rule is that a lawful promise made
for a lawful consideration is not invalid merely
because an unlawful promise was made at the
same time and for the same consideration. This
rule applies although the invalidity is due to
violation of a statutory provision, unless the
statute expressly or by necessary implication
declares the entire contract void. Thus, even with
such waiver of prescription, considering that it
was the intent of the parties to effectuate the
terms of the promissory note, there is no legal
obstacle to the action for collection filed by
Borromeo (Borromeo v. CA, G.R. No. L-22962,
September 28, 1972).
NOTE: Where an agreement founded on a legal
consideration contains several promises, or a
promise to do several things, and a part only of the
things to be done are illegal, the promises which
can be separated, or the promise, so far as it can
be separated, from the illegality, may be valid
(Borromeo v. CA, G.R. No. L-22962,
September 28, 1972).
Q: FBDC entered into a Trade Contract with MS
Maxco Company, Inc. (MS Maxco) for the
execution of the structural and partial
architectural works of one of its condominium
projects. The Trade Contract likewise
provided that MS Maxco is prohibited from
assigning or transferring any of its rights,
obligations, or liabilities under the said
Contract without the written consent of FBDC.
FBDC received a letter from the counsel of
Fong informing it that MS Maxco had already
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
assigned its receivables from FBDC to him.
Despite Fong’s repeated requests, FBDC
refused to deliver to Fong the amount assigned
by MS Maxco. Is FBDC bound by the assignment
between MS Maxco and Fong?
A: No. Obligations arising from contracts have the
force of law between the contracting parties and
should be complied with in good faith. The Court
finds that MS Maxco, as the Trade Contractor,
cannot assign or transfer any of its rights,
obligations, or liabilities under the Trade Contract
without the written consent of FBDC. ( Dort
Bonifacio Dev’t Corp., vs. Valentin L. Fong, G.R. No.
209370, March 25, 2015) (Perlas-Bernabe,J.)
Q: Sps. Tanchuling and Cantela executed the
subject deed covering two (2) parcels of land.
On the face of the subject deed, the sum of
F400,000.00 appears as the consideration for
Cantela's purported purchase. After the
subject deed's execution, Vicente delivered the
owner's copies of the TCTs to Cantela, although
it is undisputed that none of the parties are in
actual physical possession of the properties.
When Sps. Tanchuling tried to recover the
TCTs from Cantela, the latter refused,
prompting them to file a Complaint for
Annulment of Deed of Sale and Delivery of the
[Owner's] Duplicate Copy of the [TCTs] with
Preliminary Prohibitory and Mandatory
Injunction before the RTC. They alleged that
the subject deed was absolutely simulated,
hence, null and void, given that: there was no
actual consideration paid by Cantela to them;
and the subject deed was executed to merely
show to their neighbors that they are the true
owners of the properties. However, Cantela
insisted that the sale of the properties to him
was valid as he bought the same for the price
of P400,000.00. He further averred that the
undated deed was surreptitiously inserted by
Sps. Tanchuling in the copies of the subject
deed presented to him for signing. Is the
subject deed simulated?
A: Yes. In this case, the subject deed was
absolutely simulated. The parties never intended
to be bound by any sale agreement. Instead, the
subject deed was executed merely as a front to
show the public that Sps. Tanchuling were the
owners of the properties in order to deter the
group of John Mercado from illegally selling the
same. Moreover, there was actually no exchange
of money between the parties. (Renee B.
Tangchuling vs. Sotero C. Cantela, G.R. No. 209284,
November 20, 2015) (Perlas-Bernabe,J.)
384
 OBLIGATIONS AND CONTRACTS
MUTUALITY OF CONTRACTS
The contract must bind both contracting parties
and its validity or compliance cannot be left to the
will of one of them (NCC, Art. 1308). (2001, 2004,
2008 BAR)
If a party alleges defects in the contract so that it
could be set aside, he must prove conclusively the
existence of the defects because the validity and
fulfillment of the contract cannot be left to the will
of one of the contracting parties. (Pineda, 2009)
The binding effect of any agreement between
parties to a contract is premised on two settled
principles: (1) that any obligation arising from
contract has the force of law between the parties;
and (2) that there must be mutuality between the
parties based on their essential equality. Any
contract which appears to be heavily weighed in
favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation
regarding the validity or compliance of the
contract which is left solely to the will of one of
the parties, is likewise, invalid. (Sps. Juico vs. China
Banking Corp., G.R. 187678, April 10, 2013)
NOTE: A contract containing a condition whose
efficacy or fulfillment is dependent solely on the
uncontrolled will of one of the parties is void
(Garcia v. Rita, G.R. No. L-20175, October 30, 1967;
PNB v. CA, G.R. No. 88880, April 30, 1991).
However, the termination of the contract does not
necessarily require mutuality, and it can even be
validly left to one party by agreement or under a
resolutory facultative condition (Vitug, 2006; see
also PNB v. CA, 1994).
Contract of Adhesion (2018 BAR)
It is a contract in which one of the parties
prepares the stipulations in the form of a ready-
made contract, which the other party must accept
or reject, but not modify, by affixing his signature
or his “adhesion” thereto; leaving no room for
negotiation and depriving the latter of the
opportunity to bargain on equal footing (Norton
Resources and Development Corporation v. All Asia
Bank Corporation, G.R. No. 162523, November 25,
2009).
Validity of contract of adhesion
It is not entirely prohibited since the one who
adheres to the contract is, in reality, free to reject
it entirely, and if he adheres, he gives his consent
(Premiere Development Bank v. Central Surety &
Insurance Company, Inc., G.R. No. 176246, February
385
13, 2009). However, it is void when the weaker
party is imposed upon in dealing with the
dominant bargaining party, and its option is
reduced to the alternative of “taking or leaving it,”
completely depriving such party of the
opportunity to bargain on equal footing (Keppel
Cebu Shipyard, Inc. v. Pioneer Insurance and Surety
Corporation, G.R. Nos. 180880-81, September 25,
2009).
Note: Such contracts are not void in themselves.
They are as binding as ordinary contracts. Parties
who enter into such contracts are free to reject the
stipulations entirely. (Ermitao vs. CA, G.R. No.
127246, April 21, 1999)
Interpretation of contract of adhesion
In interpreting such contracts, however, courts
are expected to observe greater vigilance in order
to shield the unwary or weaker party from
deceptive schemes contained in ready-made
covenants (Premiere Development Bank v. Central
Surety Insurance Company, Inc., G.R. No. 176246,
February 13, 2009). In case of doubt, which will
cause a great imbalance of rights against one of
the parties, the contract shall be construed against
the party who drafted the same (Magis Young
Achiever’s Learning Center v. Manalo, G.R. No.
178835, February 13, 2009).
Third person may determine the performance
of a contract
The determination of the performance may be left
to a third person. However, his decision shall not
be binding until it has been known to both the
contracting parties (NCC, Art. 1309). Moreover, the
determination made shall not be obligatory if it is
evidently inequitable. In such case, the courts shall
decide what is equitable under the circumstances
(NCC, Art. 1310).
Unilateral increase of interest rate
Even assuming that the loan agreement between
the creditor and the debtor gave the former a
license 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 (Rabuya, 2017).
AUTONOMY OF CONTRACTS / LIBERTY OF
CONTRACTS (1996, 2004 BAR)
It is the freedom of the parties to contract and to
stipulate provided the stipulations are not
 CIVIL LAW
contrary to law, morals, good customs, public
order or public policy (NCC, Art. 1306).
NOTE: Courts cannot make for the parties better
or more equitable agreements than they
themselves have been satisfied to make, or
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 terms which he voluntarily
consented to, or impose on him those which he
did not (Angel Bautista v. Court of Appeals, G.R. No.
123655, January 19, 2000).
An agreement to pay unconscionable interests on
a loan is against morals. (Medel, et al. vs. Ca, 299
SCRA 481)
PERFECTION BY MERE CONSENT
Contracts are perfected by mere consent, and
from that moment the parties are bound not only
to the fulfillment of what has been expressly
stipulated but also to all the consequences which,
according to their nature, may be in keeping with
good faith, usage and law. (NCC, Art. 1315)
Note: This refers to consensual contracts.
However, real contracts are perfected by delivery
and formal contracts are perfected upon
compliance.
EFFECT OF CONTRACTS
Contracts take effect only between the parties, and
their assigns and heirs, the latter being liable only
to the extent of the property received from the
decedent (NCC, Art. 1311).
Persons affected by a contract
GR:
4. Parties to the contract; and their
5. Corresponding successors.
XPNs:
1. Contracts containing a stipulation in favor of a
third person (pour autrui) [NCC, Art. 1311
(2)];
2. Contracts containing real rights (NCC, Art.
1312);
3. Contracts entered into to defraud creditors
(NCC, Art. 1313);
4. Contracts which have been violated at the
inducement of 3rd persons (NCC, Art. 1314);
5. Quasi-contract of negotiorum gestio (NCC, Art.
2150).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Liability of heirs for the obligation contracted
by the decedent
The heirs are liable for the obligation contracted
by the decedent when the rights and obligations
arising from the contract are transmissible:
2. By their nature;
3. By stipulation; or
4. By provision of law (NCC, Art. 1311).
Requisites in order that a third person may
demand the fulfillment of the contract
1. The contracting parties must have clearly and
deliberately conferred a favor upon the third
person;
2. The third person’s interest or benefit in such
fulfillment must not be merely incidental; and
3. Such third person communicated his
acceptance to the obligor before the
stipulations in his favor are revoked.
ESSENTIAL REQUISITES OF A CONTRACT
ELEMENTS OF A CONTRACT
1. Natural Elements – Those which are derived
from the very nature of the contract, and as a
consequence, ordinarily accompany the same.
2. Essential Elements – Those without which
there can be no contract.
3. Accidental Elements – those which exist only
when the contracting parties expressly
provide for them (De Leon, 2010).
ESSENTIAL REQUISITES OF A CONTRACT (2005
BAR)
The following are the essential requisites of
contracts (COC):
1. Consent;
2. Object or subject matter; and
3. Cause or consideration (NCC, Art 1318). (See
Cathay Pacific v. Vasquez, 2003)
NOTE: These three requisites are, therefore, the
essential elements of a consensual contract. In real
contracts, however, in addition to the above, the
delivery of the object of the contract is required as
a further requisite.
CONSENT (2005 BAR)
Consent is manifested by the meeting of the offer
and the acceptance upon the thing and the cause
386
 OBLIGATIONS AND CONTRACTS
which are to constitute the contract. The offer
must be certain and the acceptance absolute. A
qualified acceptance constiturtes a counter-offer.
(NCC, Art. 1319)
It is the concurrence of the wills of the contracting
parties with respect to the object and cause, which
shall constitute the contract (De Leon, 2010).
NOTE: Consent is essential to the existence of a
contract; and where it is wanting, the contract is
non-existent.
Requisites of consent (LM-CR)
1. Legal capacity of the contracting parties;
NOTE: The parties must have full civil
capacity. Hence, if any one party to a
supposed contract was already dead at the
time of its execution, such contract is
undoubtedly simulated and false and,
therefore, null and void by reason of its
having been made after the death of the party
who appears as one of the contracting parties
therein. The death of a person terminates
contractual capacity (Milagros De Belen Vda.
De Cabalu, et. al. v. Sps. Renato Dolores Tabu
and Laxamana, G.R. No. 188417, September 24,
2012).
2. Manifestation of the conformity of the
contracting parties;
Note: Manifestation may be in writing bearing
the signature or marks of the parties, or it
may be implied from the conduct of the
parties like the acceptance of payment.
3. Parties’ Conformity to the object, cause, terms
and condition of the contract must be
intelligent, spontaneous and free from all
vices of consent; and
NOTE: Intelligence in consent is vitiated by
error; freedom by violence, intimidation or
undue influence; and spontaneity by fraud.
4. The conformity must be Real.
Offer
An offer is defined as an expression of willingness
to contract on certain terms, made with the
intention that it shall become binding as soon as it
is accepted by the person to whom it is addressed
(Rabuya, 2017 citing G. H. Treitel, The Law of
Contract, 10th Ed., p.8).
387
Elements of a valid offer and acceptance
1. Definite – unequivocal
2. Intentional
3. Complete – unconditional
NOTE: We follow the cognitive theory and NOT the
mailbox theory. Under our Civil Law, the offer and
acceptance concur only when the acceptance has
reached the knowledge of the offeror (actual
knowledge), and not at the time of sending the
acceptance.
Requisites of an effective offer
1. The one offering must have a serious
intention to become bound by his offer;
2. The terms of the offer must be reasonably
certain, definite and complete, so that the
parties and the court can ascertain the terms
of the offer; and
3. The offer must be communicated by the
offeror to the offeree, resulting in the offeree’s
knowledge of the offer (Rabuya, 2017).
Q: The husband assumed sole administration
of the family’s mango plantation since his wife
worked abroad. Subsequently, without his
wife’s knowledge, the husband entered into an
antichretic transaction with a company, giving
it possession and management of the
plantation with power to harvest and sell the
fruits and to apply the proceeds to the
payment of a loan he got. What is the standing
of the contract? (2011 BAR)
A: It is considered a continuing offer by the
parties; perfected only upon the wife’s acceptance
or the court’s authorization.
NOTE: The person making the offer may fix the
time, place and manner of acceptance, all of which
must be complied with (NCC, Art. 1321).
Rules on complex offer
1. Offers are interrelated – contract is perfected
if all the offers are accepted
2. Offers are not interrelated – single acceptance
of each offer results in a perfected contract
unless the offeror has made it clear that one is
dependent upon the other and acceptance of
both is necessary.
Rules on advertisements as offers
1. Business advertisements – not a definite offer,
but mere invitation to make an offer, unless it
appears otherwise (NCC, Art. 1325).
 CIVIL LAW
Note: If the advertisement contains all the
necessary date need in a contract, its a definite
offer for the sale of the thing advertised.
Otherwise, it is not a definite offer, it is a mere
invitation to make offer.
2. Advertisement for bidders – simply invitation
to make proposals and advertiser is not
bound to accept the highest or lowest bidder,
unless the contrary appears (NCC, Art. 1326).
Grounds that would render the offer
ineffective
1. Death, civil interdiction, insanity or
insolvency of either party before acceptance is
conveyed;
2. Express or implied revocation of the offer by
the offeree;
3. Qualified or conditional acceptance of the
offer, which becomes counter-offer;
4. Subject matter becomes illegal or impossible
before acceptance is communicated;
5. Period given to the offeree to signify his
acceptance has already lapsed.
Requisites of a valid acceptance
1. Must be absolute; a qualified acceptance
constitutes a counter-offer (NCC, Art. 1319).
2. No specified form but when the offeror
specifies a particular form, such must be
complied with.
NOTE: Offer or acceptance, or both, expressed in
electronic form, is valid, unless otherwise agreed
by the parties (electronic contracts).
A conditional acceptance is a counter-offer which
extinguishes the offer. If not accepted by the
offeror there is no contract.
An acceptance may be express or implied (NCC,
Art. 1320).
Mirror Image Rule in law on contracts
This is a common law concept which states that in
order for there to be an acceptance, the offeree
must accept the terms as stated in the offer. Our
courts also adhere to the “mirror-image rule.”
Thus, it has been ruled that acceptance must be
identical in all respects with that of the offer so as
to produce consent of meeting of the minds
(Rabuya, 2017 citing ABS-CBN v. CA. 301 SCRA 592-
593, 1999).
Period for acceptance
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1. Stated fixed period in the offer
a. Must be made within the period given by
the offeror.
b. As to withdrawal of the offer:
GR: It can be made by communicating
such withdrawal at any time before the
acceptance is made
XPN: When the option is founded upon a
consideration (something paid or
promised since partial payment of the
purchase price is considered as proof of
the perfection of the contract). (NCC, Art
1324)
2. No stated period
a. Offer is made to a person present –
acceptance must be made immediately.
b. Offer is made to a person absent –
acceptance may be made within such time
that, under normal circumstances, an
answer can be expected from him.
Note: If there was an acceptance already, the
offeror cannot just withdraw his offer unilaterally.
He will be liable for damages. (Pineda, 2009)
Option contract
It is a contract between the offeror and the offeree
whereby the former grants the latter, for a
valuable consideration, the privilege to buy or not
to buy certain objects at anytime within a
specified period and for a fixed price.
Note: The privilege granted to the offeree must be
supported by a considereation, the option is just
considered an “offer to sell” to the offeree which is
not binding until accepted. (Pineda,2009 citing
Sanchez vs. Rigos, 45 scra 368)
Persons incapacitated to give consent (DIM)
1. Deaf-mutes who do not know how to read
and write (illiterates);
2. Insane or demented persons, unless the
contract was entered into during a lucid
interval;
3. Minors (NCC, Art. 1327) except:
a. Contracts for necessaries (NCC, Art.
1489);
b. Contracts by guardians or legal
representatives and the court having
jurisdiction had approved the same;
388
 OBLIGATIONS AND CONTRACTS
c. When there is active misrepresentation
on the part of the minor (minor is
estopped);
d. Contracts of deposit with the Postal
Savings Bank provided that the minor is
over 7 years of age;
e. Contract of an insurance for life, health
and the accident on the minor’s life.
f. Upon reaching age of majority – they
ratify the same.
NOTE: Because the law incapacitates them to give
their consent to a contract, the only way by which
any one of those enumerated above can enter into
a contract is to act through a parent or guardian. If
this requirement is not complied with, the result is
a defective contract. If only one of the contracting
parties is incapacitated to give his consent, the
contract is voidable. If both of them are
incapacitated to give their consent, the contract is
unenforceable [NCC, Art. 1390(1), NCC, Art.
1403(3)].
Vices of consent (MI-VUF)
1. Mistake
2. Intimidation
3. Violence
4. Undue influence
5. Fraud
NOTE: A threat to enforce a just or legal claim
through a competent authority does not amount
to intimidation nor vitiate consent (NCC, Art.
1335).
Mistake
GR: Mistake as a vice of consent refers to mistake
of facts and not of law, thus rendering the contract
voidable (Jurado, 2010).
XPN: When mistake of law involves mutual error
as to the legal effect of an agreement when the
real purpose of the parties is frustrate (NCC, Art.
1334).
Mistake Distinguished from Ignorance
Mistake is a false impression on something, while
Ignorance is absence of any notion or impression
about a particular thing.
Requisites:
1. Mistake must be with respect to the legal effect
of the agreement;
389
2. It must be mutual; and
3. Real purpose of the parties must have been
frustrated.
Kinds of mistakes of fact which vitiate consent
1. Mistake as to the nature of the contract ;
2 Mistake as to object of the contract ;
3. Mistake as to the quality or principal conditions
of the thing ;
4. Mistake or error in quantity ;
5. Mistake as to identy of the person ;
Mistake as to the identity or qualifications of one
of the parties will vitiate consent only when such
identity or qualifications have been the principal
cause of the contract.
For mistake (as to the qualification of one of the
parties) to vitiate consent, two requisites must
concur:
a. The mistake must be either with regard to
the identity or with regard to the
qualification of one of the contracting
parties; and
b. The identity or qualification must have been
the principal consideration for the
celebration of the contract (The Roman
Catholic Church v. Regino Pante, G.R. No.
174118, April 11, 2012).
Q: Leonardo is the only legitimate child of the
late spouses Tomasina and Balbino. She only
finished Grade three and did not understand
English. The Sebastians, on the other hand, are
illegitimate children. She filed an action to
declare the nullity of the extrajudicial
settlement of the estate of her parents, which
she was made to sign without the contents
thereof, which were in English, explained to
her. She claims that her consent was vitiated
because she was deceived into signing the
extrajudicial settlement. Is the extra-judicial
settlement of estate of Tomasina valid?
A: NO. When one of the parties is unable to read,
or if the contract is in a language not understood
by him, and mistake or fraud is alleged, the person
enforcing the contract must show that the terms
thereof have been fully explained to the former
(Art. 1332). Leonardo was not in a position to give
her free, voluntary and spontaneous consent
without having the document, which was in
English, explained to her. Therefore, the consent
of Leonardo was invalidated by a substantial
mistake or error, rendering the agreement
voidable. The extrajudicial partition between the
Sebastians and Leonardo should be annulled and
 CIVIL LAW
set aside on the ground of mistake (Leonardo v.
CA, G.R. No. 125485, September 13, 2004).
Note: Burden rests upon the party who seeks to
enforce the contract to show that the other party
fully understood the contents of the document.
(Mayor vs. Belen, 430 SCRA 561)
Mutual Error
Mutual Error as to the legal effect of an agreement
when the real purpose of the parties is frustrated,
may vititate consent. (NCC, Art. 1334)
Legal effect refers to the rights of the parties as
stated in legal provisions.
Intimidation
There is intimidation when one of the contracting
parties is compelled by a reasonable and well-
grounded fear of an imminent and grave evil upon
his person or property, or upon the person or
property of his spouse, descendants or
ascendants, to give his consent [NCC, Art. 1335(2)].
Requisites of intimidation (CICU)
1. One of the parties is compelled to give his
Consent by a reasonable and well-grounded
fear of an evil;
2. The evil must be Imminent and grave;
3. It must be Unjust; and
4. The evil must be the determining Cause for
the party upon whom it is employed in
entering into the contract (NCC, Art. 1335).
NOTE: To determine the degree of the
intimidation, the age, sex and condition of the
person shall be borne in mind (NCC, Art. 1335).
Validity of a contract if consent is reluctant
A contract is valid even though one of the parties
entered into it against his wishes and desires or
even against his better judgment. Contracts are
also valid even though they are entered into by
one of the parties without hope of advantage or
profit (Martinez v. Hongkong and Shanghai
Banking Corp., G.R. No. L-5496, February 19, 1910).
Violence
There is violence when in order to wrest consent,
serious or irresistible force is employed. (Art.
1335)
Requisites of violence
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1. Physical force employed must be serious or
irresistible; and
2. The determining cause for the party upon
whom it is employed in entering into the
contract.
A threat to enforce one’s claim through competent
authority, if the claim is just or legal, does not
vititate consent. [NCC, Art. 1335(4)]
NOTE: Violence or intimidation shall annul the
obligation, although it may have been employed
by a third person who did not take part in the
contract (NCC, Art. 1336).
Undue influence
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 (NCC, Art. 1337).
It must in some measure destroy the free agency if
a party and interfere with the exercise of that
independent discretion. (4 Tolentino 501)
Circumstances to be considered for the
existence of undue influence
1. Confidential, family, spiritual and other
relations between the parties;
2. Mental weakness;
3. Ignorance;
4. Financial distress (NCC, Art. 1337).
NOTE: The enumeration is NOT exclusive. Moral
dependence, indigence, mental weakness, tender
age or other handicap are some of the
circumstances to consider undue influence.
Determination of undue influence
The test to determine whether or not there is
undue influence which will invalidate a contract is
to determine whether or not the influence exerted
has so overpowered and subjugated the mind of
the contracting party as to destroy his free agency,
making him express the will of another rather
than his own (Jurado, 2011).
Due influence does not vitiate consent
When influence consists in persuasive arguments
or in appeals to the affections which are nort
prohibited by law or morals, the consent is not
vitiated at all. (Pineda, 2009)
Reverential Fear
390
 OBLIGATIONS AND CONTRACTS
The fear of displeasing persons to whom respect
and obedience are due does not vitiate consent.
Fraud
There is fraud when through the insidious words
or machinations of one of the contracting parties
the other is induce to enter into a contract which,
without them, he would not have agreed to (NCC,
Art. 1338).
NOTE: Insidious words refers to a deceitful
scheme or plot with an evil design, or a fraudulent
purpose (Pineda, 2000).
Failure to disclose facts, when there is a duty to
reveal them, as when the parties are bound by
confidential relations, constitutes fraud (NCC, Art.
1339).
Requisites of Fraud to vitiate consent
Dolo
Contract voidable the contract
Remedies Annulment Contract
with damages remains valid.
Remedy is
claim for
damages.
Q: Santos’ lease contract was about to expire
but it was extended and he continued to
occupy the leased premises beyond the
extended term. Samson offered to buy Santos’
store and his right to the lease. Santos stated
that the lease contract between him and the
lessor was impliedly renewed and that formal
renewal thereof would be made upon the
arrival of a certain Tanya Madrigal, based on
the letter to him given by the lessor. When
Samson occupied the premises, he was forced
to vacate for Santos’ failure to renew his lease.
He filed an action for damages against Santos
for fraud and bad faith claiming that the
misrepresentation induced him to purchase
the store and the leasehold right. Decide.

1. it was applied or utilized by one A: Santos was not guilty of fraud nor bad faith in
contracting party upon the other claiming that there was implied renewal of his
2. it must be serious deception contract of lease with his lessor. The letter given
3. it must have induced the victim to enter by the lessor led Santos to believe and conclude
the contract without which he would not that his lease contract was impliedly renewed and
have agreed to. that formal renewal thereof would be made upon
4. It must have resulted in damage or injury. the arrival of Tanya Madrigal. Thus, from the start,
it was known to both parties that, insofar as the
Kinds of Fraud agreement regarding the transfer of Santos’
leasehold right to Samson was concerned, the
1. Fraud in the perfection of the contract object thereof relates to a future right. It is a
a. Causal fraud (dolo causante) conditional contract, the efficacy of which depends
b. Incidental fraud (dolo incidente) upon an expectancy the formal renewal of the
lease contract between Santos and lessor. The
2. Fraud in the performance of an obligation efficacy of the contract between the parties was
(NCC, Art. 1170). thus made dependent upon the happening of this
Requisites: suspensive condition (Samson v. CA, G.R. No.
108245, November 25, 1994).
(ALREADY MENTIONED ABOVE)
Acts considered not fraudulent
Dolo Causante v. Dolo Incidente
1. The usual exaggerations in trade and the
BASIS DOLO DOLO other party had an opportunity to know the
CAUSANTE INCIDENTE facts are not themselves fraudulent (NCC, Art.
(Art. 1338) (Art 1344) 1340). Principle of Tolerated Fraud ;
Gravity of Serious in Not serious 2. A mere expression of an opinion does not
Fraud character signify fraud, unless made by an expert and
Efficient Efficient cause Not the the other party had relied on the former’s
Cause which induces efficient cause special knowledge (NCC, Art. 1341. Expert
the party to Opinion);
enter into a 3. Misrepresentation by a third person does not
contract vitiate consent, unless such misrepresentation
Effect on the Renders the Does not affect has created substantial mistake and the same
Status of the contract the validity of is mutual (NCC, Art. 1342);

391
 CIVIL LAW
4. Misrepresentation made in good faith is not
fraudulent but may constitute error (NCC, Art.
1343).
Note: The contract just the same is voidable, not
because of the misrepresentation but because of
substantial error.
Note: in order that frud may make a contract
voidable, it should be serious and should not gave
been employer by both cotracting parties. (NCC, Art
1344)
Simulation of contract
It is the declaration of a fictitious will, deliberately
made by agreement of the parties, in order to
produce, for the purposes of deception, the
appearance of a juridical act which does not exist
or is different from that which was executed
(Tolentino, 2002).
Kinds of simulation of contract
1. Absolute (simulados) – The contracting parties
do not intend to be bound by the contract at
all, thus the contract is void (NCC, Arts. 1345-
1346). 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 Dr. Mario S. Intac and
Angelina Mendoza-Intac v. CA, G.R. No. 173211,
October 11, 2012).
They lack the element of true consent.
2. Relative (disimulados) – The contracting
parties conceal their true agreement (NCC,
Art. 1345); binds the parties to their real
agreement when it does not prejudice third
persons or is not intended for any purpose
contrary to law, morals, good customs, public
order or public policy (NCC, Art. 1346). If the
concealed contract is lawful, it is absolutely
enforceable, provided it has all the essential
requisites: consent, object, and cause (NCC,
Arts. 1345-1346).
As to third persons without notice, the
apparent contract is valid for purposes
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
beneficial to them. As to third persons with
notice of the simulation, they acquire no
better right to the simulated contract than the
original parties to the same.
The primary consideration in determining the
true nature of a contract is the intention of the
parties. Such intention is determined from the
express terms of their agreement as well as from
their contemporaneous and subsequent acts
(Tating v. Tating Marcella, et al., G.R. No. 155208,
March 27, 2007).
NOTE: 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.
Q: Gilbert averred that sometime in 1999, he,
through an undated contract of lease, leased a
portion of a 541 square-meter property
situated in Poblacion, Nabunturan, Compostela
Valley Province, registered in his name, to
Robert, which the latter intended to use as a
lottery outlet. Gilbert claimed that Robert and
Gil failed to pay their rental arrears to him and
refused to vacate the subject property, despite
repeated demands. Thus, he filed an ejectment
complaint. In their defense, Robert and Gil
posited that the aforementioned lease contract
was simulated and, hence, not binding on the
parties as there was no demand to pay the
rentals on the part of the complainants and
that such contract was only executed as a
requirement to be able to put up a lottery stall.
Is the contract involved absolutely simulated?
A: Yes. Simulation of a contract may be absolute
or relative. The former takes place when the
parties do not intend to be bound at all; the latter,
when the parties conceal their true agreement.
The fact of executing the contract to comply with
the requirement to put up a lottery stall makes the
contract absolutely simulated as there was no
intention between the parties to enter into the
contract of lease (Robert and Nenita De Leon vs.
Gilbert and Analyn Dela Llana, G.R. No. 21227,
February 11, 2015). (Perlas-Bernabe,J.)
May the owner-simulator recover ?
If the absolutely simulated contract does not have
any illegal purpose, the interested party may
392
 OBLIGATIONS AND CONTRACTS
prove the simulation to recover whatever he
might have given under the fictitious contracts. In
the event intednded for an illegal purpose, the
contract is void and the parties have no cause of
action. (Pineda, 2009)
Q: Tiro is a holder of an ordinary timber
license issued by the Bureau of Forestry. He
executed a deed of assignment in favor of the
Javiers. At the time the said deed of
assignment was executed, Tiro had a pending
application for an additional forest concession.
Hence, they entered into another agreement.
Afterwards, the Javiers, now acting as timber
license holders by virtue of the deed of
assignment entered into a forest consolidation
agreement with other ordinary timber license
holders. For failure of the Javiers to pay the
balance due under the two deeds of
assignment, Tiro filed an action against them.
Are the deeds of assignment null and void for
total absence of consideration and non-
fulfillment of the conditions?
A: NO, they are not null and void per se. The
parties are to be bound by their real agreement.
The true cause or consideration of said deed was
the transfer of the forest concession of private
respondent to petitioners for P120,000.00. This
finding is supported by the following
considerations, viz:
1. Both parties, at the time of the execution of the
deed of assignment knew that the Timberwealth
Corporation stated therein was non-existent;
2. In their subsequent agreement, private
respondent conveyed to petitioners his inchoate
right over a forest concession covering an
additional area for his existing forest concession,
which area he had applied for, and his application
was then pending in the Bureau of Forestry for
approval;
3. Petitioners, after the execution of the deed of
assignment, assumed the operation of the logging
concessions of private respondent ;
4. The statement of advances to respondent
prepared by petitioners stated: "P55,186.39
advances to L.A. Tiro be applied to succeeding
shipments. Based on the agreement, we pay
P10,000.00 every after (sic) shipment. We had
only 2 shipments’; and
5. Petitioners entered into a Forest Consolidation
Agreement with other holders of forest
393
concessions on the strength of the questioned
deed of assignment.
The contemporaneous and subsequent acts of Tiro
and the Javiers reveal that the cause stated in the
first deed of assignment is false. It is settled that
the previous and simultaneous and subsequent
acts of the parties are properly cognizable indicia
of their true intention. Where the parties to a
contract have given it a practical construction by
their conduct as by acts in partial performance,
such construction may be considered by the court
in construing the contract, determining its
meaning and ascertaining the mutual intention of
the parties at the time of contracting. The first
deed of assignment is a relatively simulated
contract which states a false cause or
consideration, or one where the parties conceal
their true agreement. A contract with a false
consideration is not null and void per se. Under
Article 1346 of the Civil Code, a relatively
simulated contract, when it does not prejudice a
third person and is not intended for any purpose
contrary to law, morals, good customs, public
order or public policy binds the parties to their
real agreement (Javier v. CA, G.R. No. L-48194,
March 15, 1990).
Q: On 02 July 1990, by virtue of an Order of
Branch 62 of the RTC of Makati City, notice of
levy on attachment of real property and writ of
attachment were inscribed on TCTs No. 31444
(452448) and No. 45926 (452452). Edmundo
alleged that as early as 11 September 1989, the
properties, subject matter of the case, were
already sold to him by Ricardo, Sr. As such,
these properties could not be levied upon on
02 July 1990 to answer for the debt of Ricardo,
Sr. who was no longer the owner thereof.
TMBC alleged, among other things, that the
sale in favor of Edmundo was void for being an
absolutely simulated contract, therefore, the
properties levied upon were still owned by
Ricardo, Sr. Discuss the nature of an absolutely
simulated contract.
A: An absolutely simulated contract, under Article
1346 of the Civil Code, is void. It takes place when
the parties do not intend to be bound at all. The
characteristic of simulation is the fact 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. Thus, where a
person, in order to place his property beyond the
reach of his creditors, simulates a transfer of it to
another, he does not really intend to divest
himself of his title and control of the property;
hence, the deed of transfer is but a sham. Lacking,
 CIVIL LAW
therefore, in a fictitious and simulated contract is
consent which is essential to a valid and
enforceable contract (The Manila Banking
Corporation v. Edmundo Silverio, G.R. No. 132887,
August 11, 2005).
OBJECTS, CAUSE AND FORM OF CONTRACTS
OBJECT
It is the subject matter of the contract. It can be a
thing, right or service arising from a contract.
Note: rights which are not intransmissible can
only be the object of the contract. (NCC, Art. 1347)
Requisites of an object (DELiCT)
1. Determinate as to kind (even if not
determinate, provided it is possible to
determine the same without the need of a new
contract);
2. Existing or the potentiality to exist
subsequent to the contract;
3. Must be LIcit;
4. Within the Commerce of man; and
5. Transmissible.
NOTE: The most evident and fundamental
requisite in order that a thing, right or service may
be the object of a contract, is that it should be in
existence at the moment of the celebration of the
contract, or at least, it can exist subsequently or in
the future (De Leon, 2010).
Object of contracts
GR: All things or services may be the object of
contracts.
XPNs:
1. Things outside the commerce of men (NCC,
Art. 1347);
2. Intransmissible rights;
3. Future inheritance, except in cases expressly
authorized by law;
4. Services which are contrary to law, morals,
good customs, public order or public policy;
5. Impossible things or services; and
6. Objects which are not possible of
determination as to their kind.
Exceptions to the rule that no person can enter
into a contract with regard to future
inheritance
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1. Under Art. 130 of the Family Code, which
allows the future spouses to give or donate to
each other in their marriage settlement their
future property to take effect upon the death
of the donor and to the extent laid down by
the provisions of the NCC relating to
testamentary succession; and
2. Under Art. 1080 of the Code, which allows a
person to make a partition of his estate among
his heirs by an act inter vivos, provided that
the legitime of the compulsory heirs is not
prejudiced (Jurado,2009; De Leon 2010).
NOTE: Except in cases authorized by law, future
inheritance cannot be an object of contract
because its extent, amount or quantity is not
determinable (Sta. Maria, 2003).
CAUSE
Cause is the essential reason which moves the
parties to enter into the contract It is the
immediate, direct and proximate reason which
justifies the creation of an obligation through the
will of the contracting parties.
Requisites of a cause
It must:
1. Exist;
2. Be true; and
3. Be licit.
NOTE: Although the cause is not stated in the
contract, it is presumed that it exists and is lawful
unless the debtor proves the contrary. (NCC, art.
1354)
Kinds of cause
1. Cause of onerous contracts – the prestation or
promise of a thing or service by the other.
e. g. Contract of Sale.
2. Cause of remuneratory contracts– the service
or benefit remunerated.
e. g. Donation in consideration of a past
service which does not constitute a
demandable debt.
3. Cause of gratuitous contracts – the mere
liberality of the donor or benefactor.
4. Accessory – identical with cause of principal
contract, the loan which it derived its life and
existence
e.g. mortgage or pledge.
(This must be included in Interpretation of
Contracts)
394
 OBLIGATIONS AND CONTRACTS
Cause v. Motive no approval, the contract is void
regardless of the amount of lesion.
BASIS CAUSE MOTIVE
Q: May a moral obligation constitute a
Direct and Indirect or sufficient cause to support an onerous
As to contract?
most remote
proximate
proximate reasons.
reason in a A: Where the moral obligation arises wholly from
reason of a
contract ethical considerations, unconnected with any civil
contract.
obligation, and as such is demandable only in
Objective and Psychological conscience, and not in law, it cannot constitute a
As to the kind
juridical or purely cause to support an onerous contract. Where such
of reason in
reason of personal moral obligation, however, is based upon a
the contract
contract. reason. previous civil obligation which has already been
barred by the statute of limitations at the time
Legality or Legality or when the contract is entered into, it constitutes a
illegality of illegality of sufficient cause or consideration to support said
(As to the cause affects motive does
contract (Villaroel v. Estrada, 71 Phil. 14, GR L-
legal effect to the existence not affect the
47362, December 19, 1940).
the contract or validity of existence or
the contract. validity of
FORMALITY
contract.
Cause is Motive differs Rules on the form of contracts
always the for each
As to the GR: Form is not required in consensual contracts.
same for each contracting
parties (Provided, all the essential requisites for their
contracting party.
party. validity are present.)

As to its Always known May be known XPNs: When the law requires a contract be in
knowability to the other writing for its:

1. Validity (formal contracts);

NOTE: The motive may be regarded as the cause 2. Enforceability (under Statute of Frauds);
when the realization of such motive or particular or
purpose has been made a condition upon which 3. For the convenience of the parties
the contract is made to depend (Phil. National
Construction Corp. v. CA, 272 SCRA 183, 1997). NOTE: The parties may compel each other to
reduce the verbal agreement into writing (2006
Rules relating to cause on contracts BAR)

1. Absence of cause – confers no right and
produces no legal effect.
2. Failure of cause – does not render the contract
void.
3. Illegality of cause – contract is null and void.
4. Falsity of cause – contract is void; unless the
parties show that there is another cause
which is true and lawful.
5. Lesion or inadequacy of cause – does not
invalidate the contract, unless:
a. there is fraud, mistake, or undue
influence;
b. when the parties intended a donation or
some other contract; or
c. in cases specified by law
e.g. contracts entered by guardian when
ward suffers lesion of more than 25% and
with court approval, otherwise, if there is
The parties may required to observe the form
required for their convenience
The contracting parties may compel each other to
observe the required form once the contract has
been perfected and is enforceable under the
statute of frauds.
This one of the rights of the creditor.
The right to demand the execute of the document
required under Art.1358 is not imprescriptible. It
is subject to prescription. It must be pursued
within the period prescribed by law which is five
(5) years. (Pineda, 2009)
NOTE : the right must be exercised once the
contract has been perfected, otherwise, the
exercise will be considered as premature.

395
 CIVIL LAW
Q: On March 3, 2003, Aguinaldo led a
complaint for annulment of sale, cancellation
of title, and damages against Torres before the
RTC. They claimed that they are the registered
owners of three lots situated in Tanza, Cavite
(subject properties). Sometime in December
2000, they discovered that the titles to the
subject properties were transferred to Torres
who, in bad faith, and through fraud, deceit,
and stealth, caused the execution of a Deed of
Absolute Sale dated July 21, 1979 (1979 deed
of sale), purportedly selling the subject
properties to him.
Torres led his Answer with Counterclaim,
denying participation in the execution of the
1979 deed of sale, and averring that the
subject properties were validly sold by
Aguinaldo to him through a Deed of Absolute
Sale dated March 10, 1991 (1991 deed of sale).
He claimed that Aguinaldo caused the
registration of the 1979 deed of sale with the
Register of Deeds of Trece Martires City, and
the transfer of title in his name, hence, they are
estopped from impugning the validity of his
title. Moreover, the action has prescribed,
having been led beyond four (4) years from
discovery of the averred fraud, reckoned from
the registration of the said deed on March 26,
1991. He further alleged that Aguinaldo only
led the instant baseless suit to harass him in
view of their acrimonious relationship, and
thus, interposed a counterclaim for moral
damages and attorney's fees. Is there a valid
conveyance of the subject properties to Torres
and directing Aguinaldo to execute a
registrable deed of conveyance in his favor
within thirty (30) days from the finality of the
decision.
A: Yes. Although the improper notarization of the
1991 deed of sale did not affect the validity of the
sale of the subject properties to respondent, the
same, however, rendered the said deed
unregistrable, since notarization is essential to the
registrability of deeds and conveyances. Bearing
in mind that the legal requirement that the sale of
real property must appear in a public instrument
is merely a coercive means granted to the
contracting parties to enable them to reciprocally
compel the observance of the prescribed form,
and considering that the existence of the sale of
the subject properties in respondent's favor had
been duly established, the Court upholds the CA's
directive for petitioners to execute a registrable
deed of conveyance in respondent's favor within
thirty (30) days from finality of the decision, in
accordance with the prescribed form under
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Articles 1357 and 1358 (1) of the Civil Code (Sps.
Aguinaldo vs. Torres Jr., G.R. No. 225808, September
11, 2017). (Perlas-Bernabe, J.)
Formalities required in specific contracts
1. Donations
a. Personal property – if value exceeds
5,000, the donation and acceptance must
both be written (NCC, Art. 748).
b. Real property:
i. Donation must be in a public
instrument, specifying therein the
property donated and value of charges
which donee must satisfy.
ii. Acceptance must be written, either in
the same deed of donation or in a
separate instrument.
iii. If acceptance is in a separate
instrument, the donor shall be notified
thereof in authentic form, and this step
shall be noted in both instruments
(NCC, Art. 749).
2. Partnership where real property
contributed
a. There must be a public instrument
regarding the partnership;
b. The inventory of the realty must be
made, signed by the parties and attached
to the public instrument (NCC, Art. 1773).
Antichresis - the amount of the principal and
interest must be in writing (NCC, Art. 2134).
3. Agency to sell real property or an interest
therein - authority of the agent must be in
writing (NCC, Art. 1874).
4. Stipulation to charge interest - interest
must be stipulated in writing (NCC, Art. 1956).
5. Stipulation limiting common carrier's duty
of extraordinary diligence to ordinary
diligence:
a. Must be in writing, signed by shipper or
owner;
b. Supported by valuable consideration
other than the service rendered by the
common carrier;
c. Reasonable, just and not contrary to
public policy (NCC, Art. 1744).
6. Chattel mortgage - personal property must
be recorded in the Chattel Mortgage Register.
(NCC, Art. 2140).
Contracts which must be in writing to be valid
396
 OBLIGATIONS AND CONTRACTS
1. Donation of personal property whose value
exceeds five thousand pesos (NCC, Art. 748). –
the donation and acceptance must be in
writing.
2. Sale of a piece of land or any interest therein
through an agent (NCC, Art. 1874). – the
authority of the agent shall appear in writing.
3. Agreements regarding payment of interest in
contracts of loan (NCC, Art. 1956).
4. Antichresis – the amount of the principal and
the interest shall be specified in writing (NCC,
Art. 2134; Jurado, 2011).
Contracts which must appear in a public
document
1. Donation of real properties (NCC, Art. 719);
2. Partnership where immovable property or
real rights are contributed to the common
fund (NCC, Arts. 1171 & 1773);
3. Acts and contracts which have for their object
the creation, transmission, modification or
extinguishment of real rights over immovable
property; sale of real property or of an
interest therein is governed by Arts. 1403, No.
2, and 1405 [NCC, Art. 1358(1)];
4. The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains [NCC, Art. 1358(2)];
5. The power to administer property or any
other power which has for its object an act
appearing or which should appear in a public
document or should prejudice a third person;
[NCC, Art. 1358(3)];
6. The cession of actions or rights proceeding
from an act appearing in a public document
[NCC, Art. 1358(4)].
NOTE : Article 1358 of the Civil Code which
requres the embodiement of certain contracts in a
public instrament is only for convenience, and
registration of the instrument only adversely,
afficts third parties. Formal requirements are,
therefore, for the benefit of third parties. Non-
compliance therewith does adversely affect the
validity of the contract nor the contractual rights
and obligations of the parties (Fule vs. CA, 286 CRA
700)
Contracts that must be registered
1. Chattel mortgages (NCC, Art. 2140).
NOTE: In accordance with Article 2125 of the
Civil Code, an unregistered chattel mortgage
is binding between the parties because
registration is necessary only for the purpose
of binding third persons (Filipinas Marble
397
Corporation v. Intermediate Appellate Court,
G.R. No. L-68010, May 30, 1986).
2. Sale or transfer of large cattle (Cattle
Registration Act).
ELECTRONIC COMMERCE ACT of 2000
(RA No. 8792)
Legal Recognition of Electronic Documents
Under Section 7 of the Act, electronic documents
shall have the legal effect, validity or
enforceability as any other document or legal
writing, and —
(a) Where the law requires a document to be in
writing, that requirement is met by an
electronic document if the said electronic
document maintains its integrity and
reliability and can be authenticated so as to be
usable for subsequent reference, in that;
(i) The electronic document has
remained complete and unaltered,
apart from the addition of any
endorsement and any authorized
change, or any change which arises in
the normal course of communication,
storage and display; and
(ii) The electronic document is reliable in
the light of the purpose for which it
was generated and in the light of all
relevant circumstances.
(b) Paragraph (a) applies whether the
requirement therein is in the form of an
obligation or whether the law simply provides
consequences for the document not being
presented or retained in its original form.
(c) Where the law requires that a document be
presented or retained in its original form, that
requirement is met by an electronic document
if —
(i) There exists a reliable assurance as to
the integrity of the document from
the time when it was fi rst generated
in its final form; and
That document is capable of being displayed to the
person to whom it is to be presented. It is
expressly provided, that no provision of the Act
shall apply to vary any and all requirements of
existing laws on formalities required in the
execution of documents for their validity.
 CIVIL LAW
According to their relation to other contracts:

KINDS OF CONTRACTS 1. Preparatory Contracts – are those which have

According to perfection or formation:
1. Consensual contracts which are perfected by
the mere meeting of the minds of the parties
(NCC, Art. 1305). (2005 BAR)
e.g. Sale, Lease.
for their object the establishment of a
condition in law which is necessary as a
preliminary step towards the celebration of
another subsequent contract.
e.g. Partnership, Agency.
2. Principal Contracts – are those which can
subsist independently from other contracts.
e.g. Sale, Lease.

2. Real contracts are those which require for 3. Accessory Contracts – those which can exist
their perfection both the consent of the only as a consequence of, or in relation with,
another prior contract.
parties and the delivery of the object by one
party to the other. e.g. Pledge, Mortgage.

According to their form:

e.g. creation of real rights over immovable
property must be written, deposit and pledge.
1. Common or Informal Contracts – are those
3. Solemn contracts – contracts which must which require no particular form.
e.g. Loan.
appear in writing, such as:
2. Special or Formal Contracts – are those which
a. Donations of real estate or of movables if
the value exceeds P5,000; require a particular form.
b. Partnership to which immovables are e.g. Donations, Chattel Mortgage.
contributed;
According to their purpose:
c. Contract of antichresis – requires the
1. Transfer of Ownership
amount of principal and interest be
e.g. Sale.
specified;
d. Sale of piece of land or interest therein is
through an agent; 2. Conveyance of Use
e.g. Usufruct, Commodatum.
e. Stipulation to charge interest;
f. Stipulation limiting common carrier's
duty of extraordinary diligence to 3. Rendition of Services
e.g. Agency.
ordinary diligence;
g. Chattel mortgage; or
According to the nature of the vinculum which
h. Transfer of large cattle (Sec. 22,
Act No. 1147; NCC, Art. 1581). they produce:
1. Unilateral Contracts – are those which give
rise to an obligation only to one of the parties.
According to the degree of dependence:
e.g. Commodatum.
2. Bilateral Contracts – are those which give rise
1. Principal – that which can exist independently
to reciprocal obligations for both parties.
of ther contracts;
e.g. Sale.
e. g. contract of loan.

2. Accessory – that which cannot exist without a According to their cause:

1. Onerous
valid principal contract;
e. g. guaranty, surety, pledge, mortgage. e. g. Sale.
3. Preparatory – that which is not an end by
itself but only a means for the execution of 2. Gratuitous
another contract. e. g. commodatum

e. g. contract of agency as agency does not 3. Remuneratory

stop with the agency because the purpose is
to enter into other contracts (Rabuya, 2017). According to the risks involved:

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES 398
 OBLIGATIONS AND CONTRACTS
1. Commutative Contracts – are those where Distinction between Reformation and
each of the parties acquire an equivalent of his Annulment
prestation and such equivalent is pecuniarily
appreciable and already determined from the Reformation Annulment
moment of the perfection of the contract. There is meeting of the There is no meeting of
e.g. Lease. minds between the the minds. Consent is
parties as to the object, vitiated.
2. Aleatory Contracts – are those which are cause of the contract
dependent upon the happening of an The instrument failed The meeting of the
uncertain event, thus, charging the parties to express the true mids was prevented by
with the risk of loss or gain. intention of the parties reason of mistake,
e.g. Insurance. due to mistake, fraud, fraud, inequitable
inequitable conduct or conduct or accident
According to their names or norms regulating accident. perpetrated by one
them: party against the other
1. Nominate Contracts – are those which have Thepurpose of The purpose of
their own name and individuality, and are reformation is to annulment is to render
regulated by provisions of law. establish the true inefficacious the
e.g. Sale (2003 BAR). agreement of the contract in question.
parties and not to
2. Innominate Contracts – are those which lack create a new one
name or individuality, and are not regulated
by special provisions of law. NOTE: When there is no meeting of the minds, the
proper remedy is annulment and not reformation
(Pineda, 2000).
REFORMATION OF INSTRUMENTS
The fundamental distinction between reformation
of an instrument and annulment of a contract is
It is a remedy to conform to the real intention of that the first presupposes a perfectly valid
the parties due to mistake, fraud, inequitable contract in which there has been a valid meeting
conduct, accident (NCC, Art. 1359). of the minds of the contracting parties while the
second is based on a defective contract in which
Reformation is a remedy in quity by means of there has been no meeting of the minds because
which a written instrument is made or construed the consent is vitiated (Jurado, 2010).
so as to express or confirm the real intention of
the parties when some error or mistake is Operation and effect of reformation
committed. (Pineda, 2009)
It relates back to, and takes effect from the time of
Rationale : It would be unjust and inequitable to its original execution, especially as between the
allow the enforcement of a written instrument parties (Tolentino, 2002).
which does not reflect or disclose the real meeting
of the minds of the parties. Reformation of instruments may be availed of
judicially or extrajudicially.
Requisites in reformation of instruments
Basis and nature of the remedy of reformation
1. Meeting of the minds to the contract; of instrument
2. True intention is not expressed in the
instrument; The remedy of reformation of an instrument is
3. By reason of: (MARFI) based on the principle of equity where, to express
a. Mistake; the true intention of the contracting parties, an
b. Accident; instrument already executed is allowed by law to
c. Relative simulation; be reformed. The right of reformation is
d. Fraud; or necessarily an invasion or limitation of the parol
e. Inequitable conduct evidence rule, since, when a writing is reformed,
the result is that an oral agreement is by court
4. Strong, clear and convincing proof of MARFI. decree made legally effective. The remedy, being
an extraordinary one, must be subject to the
limitations as may be provided by law. A suit for

399
 CIVIL LAW
for reformation of an instrument must be brought
within the period prescribed by law, otherwise, it
will be barred by the mere lapse of time (Bentir v.
Leanda, G.R. 128991, April 12, 2000).
Reformation of instruments; when allowed
1. Mutual mistake. – When the mutual mistake of
the parties causes the failure of the
instrument to disclose their agreement (NCC,
Art. 1361);
Requisites:
a. The mistake should be of fact;
b. The same should be proved by clear and
convincing evidence; and
c. the mistake should be common to both
parties to the instrument (BPI v. Fidelity
Surety, Co. 51 Phil 57).
2. Mistake on one party and fraud on the other. –
In such a way that the instrument does not
show their true intention, the party mistaken
or defrauded may ask for the reformation of
the instrument (NCC, Art. 1362);
3. Mistake on one party and concealment on the
other. – When one party was mistaken and the
other knew or believed that the instrument
did not state their real agreement, but
concealed that fact from the former (NCC, Art.
1363);
4. Ignorance, lack of skill, negligence or bad faith.
– When through the ignorance, lack of skill,
negligence or bad faith on the part of the
person drafting the instrument or of the clerk
or typist, the instrument does not express the
true intention of the parties (NCC, Art. 1364);
5. Right of repurchase. – If the parties agree upon
the mortgage or pledge of real or personal
property, but the instrument states that the
property is sold absolutely or with a right of
repurchase (NCC, Art. 1365).
Reformation of instruments; when not allowed
1. Simple, unconditional donations inter vivos;
2. Wills;
3. When the agreement is void (NCC, Art. 1366);
4. When an action to enforce the instrument is
filed (estoppel);
5. If mistake, fraud, inequitable conduct, or
accident has prevented a meeting of the
minds of the parties;
NOTE: The remedy here is annulment of
contract.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
6. When the contract is unenforceable because
of failure to comply with the statute of frauds.
Prescriptive period in reformation of
instruments
10 years from the date of the execution of the
instrument
NOTE:The prescriptive period within which to
bring an action to set aside or reform a simulated
or fictitious written deed of pacto de retro sale
starts only when the alleged vendees made known
their intention by overt acts not to abide by the
true agreement, and not from the date of
execution of contract (Conde v. Cuenca, G.R. No. L-
643, 1956).
Persons who can ask for the reformation of the
instrument
It may be ordered at the instance of:
1. Either party or his successors in interest
(if the mistake is mutual);
2. Upon petition of the injured party; or
3. His heirs and assigns.
NOTE: In reformation of contracts, what is
reformed is not the contract itself, but the
instrument embodying the contract. It follows that
whether the contract is disadvantageous or not is
irrelevant to reformation and therefore, cannot be
an element in the determination of the period for
prescription of theaction to reform (Pineda, 2000).
An action for reformation of an instrument may be
brought under Rule 63 (Declaratory Relief and
Similar Remedies) of the New Rules of Court.
INTERPRETATION OF CONTRACTS
If the terms of a contract are clear and leave no
doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall
control.
If the words appear to be contrary to the evident
intention of the parties, the latter shall prevail
over the former (NCC, Art. 1370).
In order to judge the intention of the contracting
parties, their contemporaneous and subsequent
acts shall be principally considered (NCC, Art.
1371).
However the general terms of a contract may be,
they shall not be understood to comprehend
things that are distinct and cases that are different
400
 OBLIGATIONS AND CONTRACTS
from those upon which the parties intended to
agree (NCC, Art. 1372).
If some stipulation of any contract should admit of
several meanings, it shall be understood as
bearing that import which is most adequate to
render it effectual (NCC, Art. 1373).
Principle of effectiveness in contract
interpretation
Pursuant to this principle, where two
interpretations of the same contract language are
possible, one interpretation having the effect of
rendering the contract meaningless while the
other would give effect to the contract as a whole,
the latter interpretation must be adopted (PNB v.
Utility Assurance & Surety, Co., Inc., 177 SCRA 393,
1989).
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 (NCC, Art. 1374).
Complementary-contracts-construed-together
doctrine
The variious stipulations of a contract shall be
interpreted together, attributing to the doubtful
ones that sense which may result from all of them
taken jointly. (NCC, Art. 1374)
When there are several provisions in a contract,
the construction to be adopted shoud be that one
which will give effect to all provisions. A contract
must be read in its entirety. (Bank of P.I. vs. Ty
Canco Sabrino, 57 Phil. 804) Piecemeal
interpratation must be avoided.
Under this doctrine, an accessory contract must be
read in its entirety and together with the principal
agreement (Rabuya, 2017). Thus, a promissory
note and a deed of chattel mortgage must be
contrued together (Rigor v. Consolidated Orix
Leasing and Finance Corp., 387 SCRA 270, 2002);
and the surety contract, being an accessory
contract, must be interpreted with its principal
contract, for instance, a loan agreement (Rabuya,
2017).
Words which may have different significations
shall be understood in that which is most in
keeping with the nature and object of the contract
(NCC, Art. 1375).
The usage or custom of the place shall be borne in
mind in the interpretation of the ambiguities of a
401
contract, and shall fill the omission of stipulations
which are ordinarily established (NCC, Art. 1376).
The interpretation of obscure words or
stipulations in a contract shall not favor the party
who caused the obscurity (NCC, Art. 1377).
When it is absolutely impossible to settle doubts
by the rules established in the preceding articles,
and the doubts refer to incidental circumstances
of a gratuitous contract, the least transmission of
rights and interest shall prevail. If the contract is
onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests.
If the doubts are cast upon the principal object of
the contract in such a way that it cannot be known
what may have been the intention or will of the
parties, the contract shall be null and void (NCC,
Art. 1378).
The principles of interpretation stated in Rule 123
of the Rules of Court shall likewise be observed in
the construction of contracts (NCC, Art. 1378).
NOTE: The provisions of Rule 123 of the Rules of
Court referred to are Secs. 58-67, now Secs. 8-17,
Rule 130, New Rules of Court.
Q: Gloria dela Cruz was granted by respondent
Planters Products, Inc. (PPI) a regular credit
line of P200,000.00 for a 60- day term, with
trust receipts as collaterals. The spouses Dela
Cruz submitted a list of their assets in support
of her credit application for participation in
the Special Credit Scheme (SCS) of PPI. Gloria
signed two documents labelled "Trust
Receipt/Special Credit Scheme". The products
were thereafter released to Gloria. The 60-day
credit term lapsed without Gloria paying her
obligation under the Trust Receipt/SCS. Hence,
PPI wrote collection letters to her. PPI brought
against the spouses a complaint for the
recovery of a sum of money with prayer for a
writ of preliminary attachment. PPI alleged
that Gloria had violated the fiduciary
undertaking and therefore, she is guilty of
fraudulently misapplying or converting to her
own use the items delivered to her as
contained in the invoices. It charged that
Gloria did not return the goods indicated in
the invoices and did not remit the proceeds of
sales. Spouses Dela Cruz alleged that Gloria
was only a marketing outlet of PPI under its
SCS Program, not a dealer primarily obligated
to PPI for the products delivered to her. Did
the two transaction documents signed by
Gloria express the intent of the parties to
 CIVIL LAW
establish a creditor-debtor relationship A: NO. With the execution of separate mortgage
between them? contracts for the two (2) loans, it is clear that the
intention of the parties was to limit the mortgage
A: YES. Gloria signed the application for credit to the loan for which it was constituted. The mere
facilities indicating that a trust receipt would fact that the mortgage constituted on the property
serve as collateral for the credit line. Gloria, as covered by TCT No. T-66139 made no mention of
"dealer," signed together with Quirino the list of the pre-existing loan could only strongly indicate
their assets that they tendered to PPI "to support that each of the loans of the Spouses Alonday had
our credit application in connection with our been treated separately by the parties themselves,
participation to your Special Credit and this sufficiently explained why the loans had
Scheme." Gloria further signed the Trust been secured by different mortgages. Another
Receipt/SCS documents defining her obligations indication that the second mortgage did not
under the agreement, and also the invoices extend to the agricultural loan was the fact that
pursuant to the agreement with PPI, indicating her the second mortgage was entered into in
having received PPI products on various dates. connection only with the commercial loan (PNB v.
These established circumstances comprised by the Heirs of Alonday, G.R. No. 171865, October 12,
contemporaneous and subsequent acts of Gloria 2016) (Bersamin, J.).
and Quirino that manifested their intention to
enter into the creditor-debtor relationship with
PPI show that the Spouses Dela Cruz are fully
liable to PPI. The law of contracts provides that in
determining the intention of the parties, their
contemporaneous and subsequent acts shall be
principally considered. Consequently, the written
terms of their contract with PPI, being clear upon
the intention of the contracting parties, should be
literally applied. Her act of signing the application
signified her agreement to be bound by the terms
of the application (Spouses Dela Cruz v. Planters
Planters Products, Inc., G.R. No. 158649, February
18, 2013) (Bersamin, J.).
Q: The spouses Alonday obtained an
agricultural loan of P28, 000. 00 from the PNB
Digos branch and secured the obligation by
constituting a real estate mortgage on their
parcel of land. Thereafter, spouses Alonday
again obtained a commercial loan from the
petitioner and constituted a real estate
mortgage over their 598 square meter
residential lot. After paying in full their
commercial loan, the children of the Spouses
Alonday demanded the release of the
mortgage over the property. The PNB
informed them, however, that the mortgage
could not be released because the agricultural
loan had not yet been fully paid, and that as the
consequence of the failure to pay, it had
foreclosed the mortgage over the property.
According to PNB, the deed of mortgage
relating to the property covered included an
"all-embracing clause" whereby the mortgage
secured not only the commercial loan
contracted with its Davao City Branch but also
the earlier agricultural loan contracted with
its Digos Branch. Does the “all-embracing
clause” cover both loans?

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES 402
 OBLIGATIONS AND CONTRACTS

DEFECTIVE CONTRACTS

VOID
BASIS RESCISSIBLE VOIDABLE UNENFORCEABLE
/INEXISTENT

Economic Incapacity of one Entered without authority or in Illegality (void)

damage or lesion of parties to give excess thereof; non-compliance or absence of
to either one of consent or with Statute of Frauds; any of essential
Origin of the
the parties or to vitiated consent. incapacity of both parties to give requisites of a
defect
3rd persons; consent. contract
declaration by (inexistent).
law.

Suffered by – As to the other Not necessary Not necessary

Necessity of
either one of contracting party
Damage/
parties or 3rd - not necessary.
prejudice
person.
Curable by Curable Curable Not curable Not Curable
Prescripiton

Valid & legally Valid & legally Inoperative until ratified; not None
enforceable until enforceable until enforceable in court without
Legal effect
judicially judicially proper ratification.
rescinded. annulled.
Rescission or Annulment of Only personal defense Declaration of
Remedy rescissory action. contract. nullity of
contract.

Must be a direct Direct action Indirect attack allowed Can be attacked

Nature of
action. needed. directly or
action
indirectly.

GR: Contracting Contracting party Contracting party 3rd persons

Who can file party; cannot file unless
the action XPN: Defrauded their interest are
Creditors directly affected.

Susceptibility Susceptible but Susceptible Susceptible Not Susceptible

of not of ratification
ratification proper.

Action for Action for Action for recovery; specific Action for
rescission annulment performance or damages declaration of
Susceptibility prescribes after 4 prescribes after 4 prescribes nullity or putting
prescription years. years. (10 years if based on a written of defense of
contract; 6 years if unwritten). nullity does not
prescribe.

403
 CIVIL LAW
RESCISSIBLE CONTRACTS
These are contracts validly constituted but
nevertheless maybe set aside due to a particular
economic damage or lesion caused to either to one
of the parties or to a third person. It may be set
aside in whole or in part, or up to the extent of the
damage caused (NCC, Art. 1381).
Contracts that may be rescinded
1. Under Art. 1381, those
2.
a. Entered into by guardians whenever the
wards whom they represent suffer lesion
by more than ¼ of value of the property
[NCC, Art. 1381(1)];
If a guardian alienates properties of the
ward without judicial approval, the
contract is ”unenforceable” for lack of
authority. (NCC, Art. 1403,par. 1)
b. Agreed upon in representation of
absentees, if absentee suffers lesion by
more than ¼ of value of property [NCC,
Art. 1381(2)];
c. Contracts where rescission is based on
fraud committed on creditor and cannot
collect the claim due (accion pauliana)
[NCC, Art. 1381(3)];
NOTE: Contracts which are rescissible
under the third paragraph of Art. 1381
are valid contracts, although undertaken
in fraud of creditors. If the contract is
‘‘absolutely simulated’’, the contract is not
merely rescissible but inexistent,
although undertaken as well in fraud of
creditors (MBC v. Silverio, 466 SCRA 438,
August 11, 2005). In the former, the
remedy is rescission; in the latter, the
remedy is an action to declare the
contract inexistent which action is
imprescriptible (Rabuya, 2017).
d. Contracts where the object involved is the
subject of litigation; contract entered into
by defendant without knowledge or
approval of litigants or judicial authority
[NCC, Art. 1381(4)];
e. Payment by an insolvent – on debts which
are not yet due; prejudices the claim of
others (NCC, Art. 1382);
f. Provided for by law (NCC, Arts. 1526,
1534, 1538, 1539, 1542, 1556, 1560, 1567
& 1659).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
NOTE: C, D and E are contracts which are
not necessarily entered into by persons
exercising fiduciary capacity. In Art. 1381
(1 & 2), the contract must be of
administration and representation.
3. Payments made in state of insolvency (NCC,
Art. 1382):
a. Plaintiff has no other means to maintain
reparation;
b. Plaintiff must be able to return whatever
he may be obliged to return due to
rescission;
c. The things must not have been passed to
third persons in good faith;
d. It must be made within 4 years (NCC, Art
1382).
Characteristics of rescissible contract
1. It has all the elements of a valid contract.
2. It has a defect consisting of an injury
(generally in the form of economic damage or
lesion, fraud, and alienation of the property)
to one of the contracting parties or to a third
person.
3. It is valid and effective until rescinded.
4. It can be attacked only directly.
5. It is susceptible of convalidation only by
prescription (De Leon, 2010).
Nature of an action for rescission
The action for rescission is subsidiary. It cannot be
instituted except when the party suffering damage
has no other legal means to obtain reparation for
the same (NCC, Art. 1383). Hence, it must be
availed of as the last resort, availed only after all
legal remedies have been exhausted and proven
futile (Khe Hong Cheng v. CA, G.R. No. 144169,
March 28, 2001).
Rationale: In order not to disturb other contracts
and to comply with the principle of relativity of
contracts.
However, if it can be proven that the property
alienated was the only property of the debtor at
the time of the transaction, the action for
rescission is certainly maintainable because it is
clear that the creditor has no other remedy under
the circumstances. (Pineda,2009 citing Regalado
vs. Luchsinger, 5 Phil. 625)
NOTE: Rescission shall be only to the extent
necessary to cover the damages (NCC, Art. 1384).
404
 OBLIGATIONS AND CONTRACTS
Persons who may institute an action for the
rescission of a rescissible contract
The action for rescission may be instituted by the
following:
1. Injured party;
2. Contracts entered into by guardians – by
ward, or by guardian ad litem of ward during
the latter’s incapacity in an action against the
original guardian;
3. Contracts in representation of absentees – by
the absentee;
4. Contracts defrauding creditors – by the
creditors;
5. Contracts referring to things in litigation – by
the party litigant;
6. Their representatives;
7. Their heirs;
8. Their creditors by virtue of subrogatory
action defined in Art. 1177, NCC (Jurado,
2009).
Q: Jebson entered into a Joint Venture
Agreement (JVA) with Sps. Salonga which
obligated the former to construct ten (10)
residential units on the latter’s three parcels of
land. Out of the ten (10) units, seven (7) units
will belong to Jebson. It was also allowed to
sell its allocated units under such terms as it
may deem fit, subject to the condition that the
price agreed upon was with the conformity of
Sps. Salonga. Thereafter, Jebson entered into a
Contract to Sell with Buenviaje over one of its
units without the conformity of Sps. Salonga.
Buenviaje was able to fully pay for Jebson’s
unit through a swapping arrangement which
allows the vendee to convey certain properties
as consideration for the sale. Despite this full
payment, Jebson was unable to complete said
unit. This prompted Buenviaje to demand the
unit’s immediate completion and delivery.
Jebson having failed to comply with the
demand, Buenviaje filed an action before the
HLURB against Jebson and Sps. Salonga for
specific performance praying for the unit’s
completion and delivery and rescission in the
alternative. Jebson, in its defense, claimed that
they were not able to secure the necessary
permits because Sps. Salonga stubbornly
refused to cause the consolidation and
partition of the parcels of land. Sps. Salonga
averred that they were not liable to the
complainants since there was no privity of
contract between them, adding that the
contracts to sell were unenforceable against
them as they were entered into by Jebson
without their conformity, in violation of the
405
JVA. HLURB rescinded the Contract to Sell and
held Sps. Salonga Solidarily liable with Jebson.
HLURB-BOC reversed the former ruling and
instead rescinded the swapping arrangement
and maintaining the validity of the Contract to
Sell, thereby granting specific performance
instead.
Is "swapping arrangement" invalid entitling it
to be rescinded?
A: NO, there is no basis to rescind the aforesaid
swapping arrangement. In Union Bank Philippines
v. Sps. Ong (G.R. No. 152347, June 21, 2006), Article
1381 of the Civil Code which lists as among the
rescissible contracts: “those undertaken in fraud
of creditors when the latter cannot in any other
manner collect the claim due them”. Contracts in
fraud of creditors are those executed with the
intention to prejudice the rights of creditors. In
determining whether or not a certain conveying
contract is fraudulent, what comes to mind first is
the question of whether the conveyance was a
bona fide transaction or a trick and contrivance to
defeat creditors. To creditors seeking contract
rescission on the ground of fraudulent conveyance
rest the onus of proving by competent evidence
the existence of such fraudulent intent on the part
of the debtor
Here, the onus of proving that the "swapping
arrangement" was a fraudulent conveyance, or a
trick and contrivance to defeat creditor rights, was
not sufficiently discharged by Sps. Salonga. Thus,
absent such proof of fraud, the Court concludes
that the "swapping arrangement" was a bona fide
transaction freely entered into between Jebson
and Buenviaje (Dr. Buenviaje vs. Sps. Salonga, G.R.
No. 216023, October 05, 2016). (Perlas-Bernabe,
J.)
Prescriptive period of action for rescission
1. Under Art. 1381, no.1 – within 4 years from the
time the termination of the incapacity of the
ward;
2. Under Art. 1381, no. 2- within 4 years from the
time the domicile of the absentee is known; or
3. Under Art. 1381, nos. 3 & 4 & Art. 1382 – within
4 years from the time of the discovery of
fraud.
Requisites that must concur before a contract
may be rescinded on the ground of lesion
Whether the contract is entered into by a guardian
in behalf of his ward or by a legal representative
in behalf of an absentee, before it can be rescinded
 CIVIL LAW
on the ground of lesion, it is indispensable that the
following requisites must concur:
1. The contract must be entered into by the
guardian in behalf of his ward or by the
legal representative in behalf of an
absentee.
2. The ward or absentee suffered lesion of
more than 1/4 of the value of the
property which is object of the contract.
3. The contract must be entered into
without judicial approval.
4. There must be no other legal means for
obtaining reparation for the lesion.
5. The person bringing the action must be
able to return whatever he may be
obliged to restore.
6. The object of the contract must not be
legally in the possession of a third person
who did not act in bad faith.
Statutory presumptions of Fraud in Article
1387
1. Alienation by gratuitous title.
When a debtor donates his property
without reserving sufficient property to
pay all his pre-existing debts, the law
presumes that the gratuitous dispositions
are made in fraud of creditors.
2. Alienation by onerous title.
The contract is presumed fraudulent if at
the time of alienation, some judgement
has been rendred against him, whether it
is on appeal or has already become final
and executory; or some writ of
attachment has been issued against him
in any case.
NOTE: The decision or writ of attachment need
not refer to the very property subject of
alienation. The person who obtained the
judgement or writ of attachment need not be the
same person seeking the rescission.
These presumptions are rebuttable, which means,
they may be overcome by clear, strong and
convincing evidence.
Requisites before a contract entered into in
fraud of the creditors may be rescinded
1. There must be a credit existing prior to the
constitution of the said fraudulent
contract;
2. There must be fraud, or at least, the intent
to commit fraud to the prejudice of the
creditor seeking rescission;
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
3. The creditor cannot in any legal manner
collect his credit (subsidiary character of
rescission);
4. The object of the contract must not be
legally in possession of a third person in
good faith.
NOTE: If the object of the contract is legally in the
possession of a third person who did not act in
bad faith, the remedy available to the creditor is to
proceed against the person causing the loss for
damages. Such person is solidarily liable with that
of transferring creditor as both of them are guilty
of fraud.
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:
a) The plaintiff asking for rescission has a
credit prior to the alienation;
b) The debtor has made a subsequent
contract conveying a patrimonial benefit to
a third person;
c) The creditor has no other legal remedy to
satisfy his claim;
d) The act being impugned is fraudulent;
e) The third person who received the
property conveyed, if it is by onerous title,
has been an accomplice in fraud (Siguan vs
Lim, G.R. No. 134685, November 19, 1999).
Badges of fraud
1. Consideration for the conveyance of the
property is inadequate or fictitious;
2. Transfer was made by the debtor after a suit
has commenced and during its pending against
him;
3. Sale upon credit by an insolvent debtor;
4. The presence of evidence of large indebtedness
or complete insolvency of the debtor;
5. Transfer of all his property by a debtor when
he is financially embarrassed or insolvent;
6. Transfer is made between father and son,
where there are present some or any of the
above circumstances; and
7. Failure of the vendee to take exclusive
possession of the property (Oria v. McMicking,
21 Phil. 243, G. R. No. 7003, January 18, 1912).
Resolution v. Rescission
RESOLUTION RESCISSION
(NCC, ART. 1191) (NCC, ART. 1381)
406
 OBLIGATIONS AND CONTRACTS
Both presuppose contracts validly entered into based, was “resolution” (Ong v. CA, G.R. No. 97347,
and subsisting and both require mutual restitution July 6, 1999).
when proper.
Effect of rescission
Nature
1. Obligation of mutual restitution (but not
Principal action; Subsidiary remedy absolute);
Retaliatory in character 2. Abrogation of contract (Absolute);
3. Obligation of third person to restore (if third
Grounds person has nothing to restore, Article does not
Non-performance of 5 grounds under Art. apply) (De Leon, 2016).
obligation (only 1381. (lesions or fraud
ground) of creditors); Mutual Restitution

Non-performance is not Rescission of contract creates an obligation of

important mutual restitution of the objects of the contract,
their fruits, and the price with interest.
Applicability
NOTE: Rescission is possible only when the
Only to reciprocal Applies to both person demanding rescission can return whatever
obligations unilateral and he may be obliged to restore. A court of equity will
reciprocal obligations not rescind a contract unless there is restitution,
that is, the parties are restored to the status quo
Prescriptive Period
ante (NCC, Art. 1385).
10 years from accrual of 4 years (NCC, Art. 1389)
right of action for Mutual restitution is not applicable when:
written contracts;
1. Creditor did not receive anything from
6 years for verbal contract; or
contracts [NCC, Arts. 2. Thing already in possession of third
1144 (2) and 1145 (1)] persons in good faith; subject to
indemnity only, if there are two or more
Person who can Initiate the Action alienations – liability of first infractor.
Only the injured party Even third persons Q: Reyes (seller) and Lim (buyer) entered into
to the contract prejudiced by the a contract to sell a parcel of land. Harrison
contract Lumber occupied the property as lessee. Reyes
Fixing of Period by the Court offered to return the P10 million
downpayment to Lim because Reyes was
Court may fix a period Court cannot grant having problems in removing the lessee from
or grant extension of extension of time the property. Lim rejected Reyes’ offer. Lim
time for the fulfillment learned that Reyes had already sold the
of the obligation when property to another.
there is sufficient
reason to justify such Both Reyes and Lim are now seeking
extension rescission of the contract to sell. However,
Reyes does not want to deposit the 10M to the
Purpose court because according to him, he has the
“right to use, possess and enjoy” of the money
Cancellation of the Reparation for
as its owner before the contract to sell is
contract damage or injury,
rescinded. Is Reyes’ contention correct?
allowing partial
rescission of
A: NO. There is also no plausible or justifiable
contract (Pineda,
reason for Reyes to object to the deposit of the
2000)
P10 million down payment in court. The contract
to sell can no longer be enforced because Reyes
NOTE: While Article 1191 uses the term himself subsequently sold the property. Both Lim
“rescission,” the original term which was used in and Reyes are seeking for rescission of the
the old Civil Code, from which the article was

407
 CIVIL LAW
contract. By seeking rescission, a seller necessarily allowed to retain the money at the same time
offers to return what he has received from the appropriate the proceeds of the second sale made
buyer. Such a seller may not take back his offer if to another (Goldenrod, Inc. v. CA, G.R. No. 126812,
the court deems it equitable, to prevent unjust November 24, 1998).
enrichment and ensure restitution, to put the
money in judicial deposit.
VOIDABLE CONTRACTS (BAR 2004)
NOTE: In this case, it was just, equitable and
proper for the trial court to order the deposit of
the down payment to prevent unjust enrichment Voidable contracts are those where consent is
by Reyes at the expense of Lim. Depositing the vitiated either by the incapacity of one of the
down payment in court ensure its restitution to its
contracting parties or by mistake, violence,
rightful owner. Lim, on the other hand, has intimidation, undue influence or fraud. These
nothing to refund, as he has not received anything contracts are binding, unless they are annulled by
under the contract to sell (Reyes v. Lim, Keng and a proper action in court. It is susceptible of
Harrison Lumber, Inc., G.R. No. 134241, August 11,
ratification (NCC, Art. 1390).
2003).
--- NOTE: Annulment may be had even if there be no
Q: Goldenrod offered to buy a mortgaged
damage to the contracting parties.
property owned by Barreto Realty to which it
paid an earnest money amounting to P1 Characteristics of a voidable contract
million. It was agreed upon that Goldenrod
would pay the outstanding obligations of
1. Effective until set aside;
Barreto Realty with UCPB. However, 2. Can be; and
Goldenrod did not pay UCPB because of the
(the word should be ”ratified ”)
bank’s denial of its request for the extension to 3. Can be assailed only by the party whose
pay the obligation. Thereafter, Goldenrod, consent was defective or his heirs or assigns.
through its broker, informed Barreto Realty
that it could not go through with the purchase
NOTE: Third persons may assail if they are
of the property and also demanded the refund
prejudiced. (Development Bank vs. CA, 96 SCRA
of the earnest money it paid. In the absence of
342)
a specific stipulation, may the seller of real
estate unilaterally rescind the contract and as 4. A voidable contract, unlike an unenforceable
a consequence keep the earnest money to
and void contracts may be attacked indirectly
answer for damages in the event the sale fails or collaterally, by way of defense to an action
due to the fault of the prospective buyer? under the contract by way of a counterclaim
(De Leon, 2016).
A: NO. Goldenrod and Barretto Realty did not
intend that the earnest money or advance
Classes of voidable contracts
payment would be forfeited when the buyer
should fail to pay the balance of the price,
1. Those where one of the parties is incapable of
especially in the absence of a clear and express
giving consent; and
agreement thereon.
NOTE: If both parties are incapacitated to give
Moreover, Goldenrod resorted to extrajudicial
consent, the contract is unenforceable and not
rescission of its agreement with Barretto Realty.
merely voidable.
Under Article 1385, rescission creates the 2. Those where the consent is vitiated by
obligation to return the things which were the mistake, violence, intimidation, undue
object of the contract together with their fruits
influence or fraud (NCC, Art. 1390).
and interest. Therefore, by virtue of the
extrajudicial rescission of the contract to sell by Who may institute an action for annulment
Goldenrod without opposition from Barretto
Realty, which in turn, sold the property to other 1. Real party in interest. – All who are
persons, Barretto Realty, had the obligation to
principally or subsidiarily liable ; and
return the earnest money which formed part of 2. One not responsible for the defect of the
the purchase price plus legal interest from the
contract.
date it received notice of rescission. It would be
most inequitable if Barretto Realty would be

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES 408
 OBLIGATIONS AND CONTRACTS
NOTE: An action for annulment may be instituted
by all who are thereby obliged principally or
subsidiarily.He who has capacity to contract may
not invoke the incapacity of the party with whom
he has 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.
Effects of annulment of a contract
1. If contract not yet consummated – parties shall
be released from the obligations arising
therefrom.
2. If contract has already been consummated –
rules provided in Arts. 1398-1402 shall
govern.
a. Restitution
GR: Mutual restitution. – the contracting
parties shall restore to each other things
which have been the subject matter of the
contract, with their fruits and the price
with its interest except in case provided
by law. In an obligation to render
services, the value thereof shall be the
basis for damages (NCC, Art. 1398).
Note: No restitution. – The party
incapacitated is not obliged to make any
restitution except insofar as he has been
benefited by the thing or the price
received by him (NCC, Art. 1399).
XPN : If and when the application of
mutual restitution will result in unjust
enrichment of one party at the expense of
another. (4 Tolentino, 607, [1991])
b. Whenever the person obliged by the
decree of annulment to return the thing
cannot do so because it has been lost
through his fault, he shall return the fruits
received and the value of the thing at the
time of the loss, with interest from the
same date (NCC, Art. 1400).
Causes of extinction of action to annul
1. Prescription – the action for annulment must
be commenced within 4 years depending on
the ground stated.
NOTE: If the action has prescribed, the
contract can no longer be set aside (Villanueva
v. Villanueva, 91 Phil 43).
409
2. Ratification – cleanses the contract of its
defects from the moment it was constituted.
(NCC, Art. 1396).
3. By loss of the thing which is the object of the
contract through fraud or fault of the person
who is entitled to annul the contract (NCC, Art.
1401).
4. If the minor is guilty of active
misrepresentation of his age (Braganza v. De
Villa Abrille, 1959).
NOTE: If the right of action is based upon the
incapacity of any one of the contracting parties, the
loss of the thing shall not be an obstacle to the
success of the action, unless it took place through
the fraud or fault of the plaintiff (NCC, Art. 1401).
Prescriptive period for an annulment of a
voidable contract
The action for annulment shall be brought within
4 years, reckoned from:
1. In cases of intimidation, violence or undue
influence, from the time the defect of the
consent ceases;
2. In case of mistake or fraud, from the time of
the discovery of the same;
3. And when the action refers to contracts
entered into by minors or other incapacitated
persons, from the time the guardianship
ceases (NCC, Art. 1391).
Ratification
It is the act or means by virtue of which, efficacy is
given to a contract which suffers from a vice of
curable nullity (Manresa).
NOTE: Ratification extinguishes the action to
annul a voidable contract (NCC, Art. 1392).
Requisites of ratification
1. The contract involved must be voidable;
2. Person ratifying must know the reason for the
voidability;
3. The cause for the voidability must
immediately cease after the ratification; and
4. Ratification must be express or through an act
implying a waiver of the action to annul;
NOTE: Ratification entered into by the
incapacitated person may be effected by the
guardian of the incapacitated person (NCC,
Art. 1394). However, this rule does not pertain
to a rescissible contract entered into by the
guardian in behalf of his ward.
 CIVIL LAW
The right to ratify is transmitted to the heirs of the Confirmation v. Recognition
party entitled to such right (Tolentino, 2002).
CONFIRMATION RECOGNITION
Party who may ratify
It is an act by which It is an act whereby a defect
1. In contracts entered into by incapacitated a voidable contract is of proof is cured such as
persons. cured of its vice or when an oral contract is
(a) guardian ; defect. put into writing or when a
(b) injured party himself, provided he is private instrument is
already capacitated. converted into a public
2. In contracts voidable on the ground of instrument (Luna v.
mistake. – party whose consent was vitiated Linatoc, G.R. No. L-48403,
(De Leon, 2016). October 28, 1942).

Kinds of ratification
Voidable contract v. Rescissible contract
1. Express –the desire of the innocent party to
BASIS VOIDABLE RESCISSIBLE
convalidate the contract, or his waiver or
As to the kind Defect is Defect is
renunciation of his right to annul the contract
of defect intrinsic external
is clearly manifested verbally or formally in
present
writing (Pineda, 2000).
2. Implied (tacit) – it is the knowledge of the As to the Vitiated The damage or
reason which renders the contract voidable source of consent makes prejudice
defect the contract suffered by
and such reason having ceased, the person
who has a right to invoke it should execute an voidable one of the
act which necessarily implies an intention to contracting
parties or a
waive his right (NCC, Art. 1393).
third person
makes the
Effects of ratification
contract
rescissible
Ratification cleanses the contract from all its
defects from the moment it was constituted, As to the Damage is Damage /
thereby extinguishing the action to annul a necessity of immaterial prejudice is
voidable contract. It results therefore that after a damage material
contract is validly ratified, no action to annul the As to the Annulability of Rescissibility
same can be maintained based upon defects source of the contract is of the contract
relating to its original validity (Rabuya, 2017). remedy based on law is based on
equity
Retroactivity in ratification of contracts As to the kind Public interest Private
of interest the predominates interest
GR: Retroactivity applies in ratification of predominates predominates
contracts. As to the Susceptible of Not
susceptibility ratification susceptible of
XPN: When the rights of innocent third persons of ratification ratification
will be prejudiced, ratification will not take effect. As to whether It is a sanction It is a remedy
a sanction or
NOTE: Ratification does not require the a remedy
conformity of the contracting party who has no As to who can Only parties to Third persons
right to bring the action for annulment. avail the the contract who are
remedies can assail it affected may
file the action
As to the kind It is a principal It is a
of action action subsidiary
action

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES 410
 OBLIGATIONS AND CONTRACTS
UNENFORCEABLE CONTRACTS
Those contracts which cannot be enforced by
action or complaint, unless they have been ratified
by the party or parties who did not give consent
thereto (Jurado, 2009).
Characteristics of unenforceable contract
a. It cannot be enforced by a proper action in
court;
b. It may be ratified;
c. It cannot be assailed by third person; and
d. May only be assailed as a way of defense, not
by direct action.
e. The defect of an unenforceable contract is of a
permanent nature and it will exist as long as
the contract is not duly ratified. The mere
lapse of time cannot give efficacy to the
contract (Rabuya, 2017).
NOTE: An unenforceable contract is valid
although it produces no legal effect (Tolentino,
2002).
Kinds of unenforceable contracts
The following contracts are unenforceable unless
they are ratified:
1. Those entered into the name of another
person by one who has been given no
authority/legal representation or acted
beyond his powers; “Unauthorized
contracts”;
NOTE: A contract of sale over a piece of land
entered by an agent whose authority is not in
writing, even if he acted beyond the scope of
his authority is void, not merely
unenforceable (NCC, Art. 1874).
2. Those that do not comply with the Statute
of Frauds; and
3. Those where both parties are incapable of
giving consent to a contract (NCC, Art.
1403).
Q: Julian Cuizon executed a Deed of
Extrajudicial Settlement and Sale (Deed)
covering Lot No. 4539 (subject lot) in favor of
the Civil Aeronautics Administration (CAA),
the predecessor-in-interest of petitioner
Mactan Cebu International Airport Authority
(MCIAA). The subject lot was transferred and
conveyed to MCIAA. However, the heirs of
411
Gavina Ijordan claims ownership over the lot
asserting that they had not authorized Julian
to sell their shares to MCIAA’s predecessor-in-
interest. Was the subject lot validly conveyed
in its entirety to the petitioner?
A: NO. New Civil Code provides that no person
could contract in the name of another without
being authorized by the latter, or unless he had by
law a right to represent him; the contract entered
into in the name of another by one who has no
authority or legal representation, or who has
acted beyond his powers, is unenforceable, unless
it is ratified, expressly or impliedly, by the person
on whose behalf it has been executed, before it is
revoked by the other contracting party. Verily, the
Deed, being null and void, had no adverse effect on
the rights of the the heirs of Ijordan in the subject
lot. However, the conveyance by Julian through
the Deed had full force and effect with respect to
his share of 1/22 of the entire property. A sale of
jointly owned real property by a co-owner
without the express authority of the others is
unenforceable against the latter, but valid and
enforceable against the seller (Mactan Cebu
International Airport Authority v. Heirs of Gavina
Ijordan, G.R. No. 173140, January 11, 2016)
(Bersamin, J.).
Statute of Frauds (2009 BAR)
The term "Statute of Frauds" [Article 1403, (2)] is
descriptive of statutes which require certain
classes of contracts to be in writing. It requires
certain contracts enumerated therein to be
evidenced by some note or memorandum
subscribed by the party charged or by his agent in
order to be enforceable. The Statute does not
deprive the parties of the right to contract with
respect to the matters therein involved, but
merely regulates the formalities of the contract
necessary to render it enforceable. Evidence of the
agreement cannot be received without the writing
or a secondary evidence of its contents (Swedish
Match, AB v. CA, G.R. No. 128120, October 20, 2004).
The Statute of Frauds applies only to executory
contracts, not to those that are partially or
completely fulfilled. Where a contract of sale is
alleged to be consummated, it matters not that
neither the receipt for the consideration nor the
sale itself was in writing. Oral evidence of the
alleged consummated sale is not forbidden by the
Statute of Frauds and may not be excluded in
court (Victoriano v. CA, G.R. No. 87550, February
11, 1991).
Purpose of the Statute of Frauds
 CIVIL LAW
It is to prevent fraud and perjury in the
enforcement of obligations depending for their
evidence on the unassisted memory of witnesses,
by requiring certain enumerated contracts and
transactions to be evidenced by a writing signed
by the party to be charged (Swedish Match, AB v.
CA, G.R. No. 128120, October 20, 2004).
NOTE: The statute of Frauds simply provides the
method by which the contracts enumerated
therein may be proved. It does not declare the said
contracts are invalid because they are not reduced
to writing. A contract exists and is valid even
though it is not clothed with the necessary form
(De Leon, 2010).
Contracts or agreements covered by the
Statute of Frauds
1. An agreement that by its terms is not to be
performed within a year from the making
thereof;
2. A special promise to answer for the debt,
default or miscarriage of another;
3. An agreement made in consideration of
marriage, other than a mutual promise to
marry;
4. An agreement for the sale of goods, chattels or
things in action, at a price not less than 500
pesos, unless the buyer accepts and receives
part of such goods and chattels, or the
evidences, or some of them, of such things in
action, or pay at the time some part of the
purchase money; but when a sale is made by
an auction and entry is made by the
auctioneer in his sales book, at the time of the
sale, of the amount and kind of property sold,
terms of sale, price, names of the purchasers
and person on whose account the sale is
made, it is a sufficient memorandum;
5. An agreement for the leasing for a longer
period than one (1) year, or for the sale of real
property or of an interest therein;
6. A representation as to the credit of a third
person (NCC, Art. 1403).
NOTE: The enumeration is EXCLUSIVE.
Fundamental principles governing Statute of
Frauds
1. It only applies to executory contracts and not
partially or completely executed.
2. It cannot apply if the action is neither for
damages because of violation of an agreement
nor for the specific performance of said
agreement.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
3. It is exclusive as it applies only to the
agreements or contracts enumerated in Art.
1403.
4. The defense of Statute of Frauds may be
waived.
5. It is a personal defense; it cannot be assailed
by third persons.
6. Contracts infringing the Statute of Frauds are
not void; they are merely unenforceable.
7. It is a Rule of Exclusion as it excludes oral
testimony.
8. It does not determine the credibility or weight
of evidence. It merely concerns itself with the
admissibility.
9. It does not apply if the claim is that the
contract does not express the true agreement
of the parties (Paras, 2008).
Q: Cenido, as an heir of Aparato and claiming
to be the owner of a house and lot, filed a
complaint for ejectment against spouses
Apacionado. On the other hand, spouses
Apacionado alleged that they are the owners of
the house and lot which are unregistered
purchased by them from its previous owner,
Aparato. Their claim is anchored on a 1-page
typewritten document entitled
"Pagpapatunay," executed by Aparato. Is the
“Pagpapatunay” entered into by Bonifacio and
spouse Apacionado valid and enforceable?
A: YES, it is valid and enforceable. Generally,
contracts are obligatory, in whatever form such
contracts may have been entered into, provided
all the essential requisites for their validity are
present. When, however, the law requires that a
contract be in some form for it to be valid or
enforceable, that requirement must be complied
with.
The sale of real property should be in writing and
subscribed by the party charged for it to be
enforceable. The "Pagpapatunay" is in writing and
subscribed by Aparato, hence, it is enforceable
under the Statute of Frauds. Not having been
subscribed and sworn to before a notary public,
however, the "Pagpapatunay" is not a public
document, and therefore does not comply with
par. 1, Art. 1358.
Moreover, the requirement of a public document
in Article 1358 is not for the validity of the
instrument but for its efficacy. Although a
conveyance of land is not made in a public
document, it does not affect the validity of such
conveyance. The private conveyance of the house
and lot is therefore valid between Aparato and the
spouses. For greater efficacy of the contract,
412
 OBLIGATIONS AND CONTRACTS
convenience of the parties and to bind third
persons, respondent spouses have the right to
compel the vendor or his heirs to execute the
necessary document to properly convey the
property (Cenidon v. Spouses Apacionado, G.R.No.
132474, November 19, 1999).
Enforceability of Electronic Transactions (RA.
No. 8792)
The Electronic Commerce Act of 2000 hsd given
legal recognition to the following:
a. Electronic Data Message
b. Electronic Documents
c. Electronic Signatures
Unenforceable contract is ratifiable
1. A contract entered into in the name of another
by one who has no authority, legal
representation or who acted beyond his
powers shall be unenforceable, unless it is
ratified expressly or impliedly, by the person
on whose behalf it has been executed, before
it is revoked by the other contracting party
(NCC, Art. 1317).
2. Contracts infringing the Statute of Frauds are
ratified:
a. By failure to object to the
representation of oral evidence to
prove the same; or
b. By the acceptance of benefits under
them; the contract is already
executed. (NCC, Art. 1317).
c. By cross-examining the witness who
is testifying on the oral contract.
(Pineda, 2009 citing Abrenica vs.
Gonda, 24 Phil. 739)
3. In a contract where both parties are incapable
of giving consent, express or implied
ratification by the parents or guardian, as the
case may be, of one of the contracting parties,
or one of the contracting parties upon
attaining capacity, shall give the contract the
same effect as if only one of them is
incapacitated. Hence, the contract becomes
voidable and the rules on voidable contracts
should govern.
If the ratification is made by the parents or
guardians as the case may be, of both
contracting parties, or both of the contracting
parties upon attaining capacity, the contract
shall be validated from the inception (Jurado,
2011).
413
Contracts enforceable under Statute of Frauds
If the contract is enforceable under Statute of
Frauds because it is duly evidenced by writing,
nore, or memorandum, but it cannot be registered
because it not in a pblic instrument, the party
concerned may compel the opposite party to
formalize it in the proper form required by law. If
the latter refuses, the court will issue necessary
oreder to that effect. (Art. 1406; Pineda, 2009)
Note: The article applies only when the contract
involved is both valid and enforceable.
VOID AND INEXISTENT CONTRACTS (2004
BAR)
In general, void and inexistent contracts may be
defined as those which lack absolutely either in
fact and or in law one or some or all of those
elements which are essential for its validity.
Void contracts are those which have no force and
effect from the beginning and which cannot be
ratified or validated by lapse of time (Pineda,
2000).
NOTE: The principle of in pari delicto is applicable
in cases of void contracts but not in inexistent
contracts. Consequently, void contracts may
produce effects (NCC, Arts. 1411-1412), but
inexistent contracts do not produce any effect
whatsoever (Jurado, 2009).
Characteristics of void/inexistent contracts
1. It produces no legal force and effect;
2. It cannot be cured or validated by
prescription or ratification (NCC, Art. 1409);
3. The right to set up the defense of illegality
cannot be waived (NCC, Art. 1409).
4. The defense of illegality of contracts is not
available to third persons whose interests are
not directly affected (NCC, Art. 1421).
5. Cannot give rise to a valid contract (NCC, Art.
1422).
6. Can be assailed either directly or collaterally.
7. Parties to a void agreement cannot expect the
aid of the law. (in pari delicto)
NOTE : In case of a divisible contract, if the illegal
terms can be separated from the legal ones, the
latter may be enforced. (Art. 1420)
Reiteration
 CIVIL LAW
GR: They produce no legal effect whatsoever in
accordance with the principle quod nullum est
nullum producit effectum (Jurado, 2011).
XPN: In case of pari delicto since it will refuse legal
remedy to either party to an illegal agreement and
leaves them to where they were. Hence, if a void
contract is already executed, neither of the parties
can recover from each other.
NOTE: A party has a right to unilaterally cancel
and treat as avoided a void contract. However, an
action to declare its inexistence is necessary to
allow restitution of what has been given under it
(Fuentes v. Roca, 618 SCRA 702, [2010]).
Effect of Laches.
GR: The action or defense for the declaration of
the ineistnce of a contract does not prescribe. (Art.
1410)
XPN : When there is laches on the part of the
party assailing this contract.
Lache is neglignece or ommission to assert a right
within the reasonable time, warranting a
presmption that the party entitled to assert it
either has abandoned it or declined to assert it.
(Lim Tay vs. Court of Appeals, 293 SCRA 634)
The prevailing doctrine is that the right to have a
contract declared void ab initio may be barred by
laches although not barred by prescription.
(Jurado, 2009)
Kinds of void contracts
Those lacking in essential elements:
a. Those whose cause, object or purpose is
contrary to law, morals, good customs, public
order or public policy: illicit cause, or object;
b. Those which are absolutely simulated or
fictitious: no cause;
c. Those whose cause or object did not exist at
the time of the transaction: no cause or
object;
d. Those whose object is outside the commerce
of man: no object;
e. Those which contemplate an impossible
service: no object;
f. Those where the intention of parties relative
to principal object of the contract cannot be
ascertained.
Contracts prohibited by law
a. Pactum commisorium – the creditor
appropriates to himself the things given by
way of pledge or mortgage to fulfill the debt.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
b. Pactum de non alienando – an agreement
prohibiting the owner from alienating the
mortgaged immovable.
c. Pactum leonina – a stipulation in a
partnership agreement which excludes one or
more partners from any share in the profits or
losses.
d. Illegal or illicit contracts (e.g. contract to sell
marijuana)
Q: Judie sold one-half of their lot to Guiang
under a deed of transfer of rights without the
consent and over the objection of his wife,
Gilda and just after the latter left for abroad.
When Gilda returned home and found that
only her son, Junie, was staying in their house.
She then gathered her other children, Joji and
Harriet and went to stay in their house. For
staying in their alleged property, the spouses
Guiang complained before the barangay
authorities for trespassing.
Is the deed of transfer of rights executed by
Judie Corpuz and the spouses Guiang void or
voidable?
A: It is void. Gilda’s consent to the contract of sale
of their conjugal property was totally inexistent or
absent. Thus, said contract properly falls within
the ambit of Article 124 of the FC.
The particular provision in the old Civil Code
which provides a remedy for the wife within 10
years during the marriage to annul the
encumbrance made by the husband was not
carried over to the Family Code. It is thus clear
that any alienation or encumbrance made after
the Family Code took effect by the husband of the
conjugal partnership property without the
consent of the wife is null and void (Spouses
Guiang v. CA, G.R. No. 125172, June 26, 1998).
Q: On July 6, 1976, Honorio and Vicente
executed a deed of exchange. Under this
instrument, Vicente agreed to convey his
64.22-square-meter lot to Honorio, in
exchange for a 500-square-meter property.
The contract was entered into without the
consent of Honorio’s wife. Is the deed of
exchange null and void?
A: The deed is valid until and unless annulled.
The deed was entered into on July 6, 1976, while
the Family Code took effect only on August 3,
1998. Laws should be applied prospectively only,
unless a legislative intent to give them retroactive
effect is expressly declared or is necessarily
implied from the language used. Hence, the
414
 OBLIGATIONS AND CONTRACTS
provisions of the NCC, not the FC are applicable. fixed by law. In such case, the buyer may
According to Art. 166 of the NCC, the husband recover the excess (NCC, Art. 1417).
cannot alienate or encumber any real property of 6. Contract whereby a laborer undertakes to
the conjugal partnership without the wife’s work longer than the maximum number of
consent. This provision, however, must be read in hours fixed law. In such case, the laborer may
conjunction with Art. 173 of the same Code. The demand for overtime pay (NCC, Art. 1417).
latter states that an action to annul an alienation 7. Contract whereby a laborer accepts a wage
or encumbrance may be instituted by the wife lower than the minimum wage fixed by law. In
during the marriage and within ten years from the such case the laborer may demand for the
transaction questioned. Hence, the lack of consent deficiency (NCC, Art. 1418).
on her part will not make the husband’s alienation
or encumbrance of real property of the conjugal When in pari delicto rule not applicable
partnership void, but merely voidable (Villaranda
v. Villaranda, G.R. No. 153447, February 23, 2004). 1. Breach of warranty cases;
2. Simulated contracts;
Principle of in pari delicto 3. When parties are not equally guilty;
4. Against the government;
When the defect of a void contract consists in the 5. Prohibted conveyances under the law;
illegality of the cause or object of the contract, and 6. Constitutional prohibition against alien
both of the parties are at fault or in pari delicto, landholding.
the law refuses them every remedy and leaves
them where they are. This rule which is embodied Void contract v. Inexistent contract
in Arts. 1141 & 1142 of the NCC is what is
commonly known as the principle in pari delicto. BASIS VOID INEXISTENT
Exceptions to the principle of in pari delicto Those where
all the
The exceptions to the principles of pari delicto are requisites of a
the following: contract are
present, but
1. Interest paid in excess of the interest allowed Those where
the cause,
by usury laws may be recovered by the one or some of
object or
debtor, with interest thereon from the date of As to the the requisites
purpose is
payment (NCC, Art. 1413). presence of which are
contrary to law,
2. Payment of money or delivery of property for requisites of a essential for
morals, good
an illegal purpose, where the party who paid contract validity are
customs, public
or delivered repudiates the contract before absolutely
order or public
the purpose has been accomplished, or before lacking.
policy or the
any damage has been caused to a third contract itself
person. In such case, the courts may allow is prohibited or
such party to recover what he has paid or declared
delivered, if the public interest will thus be prohibited.
subserved (NCC, Art. 1414).
3. Payment of money or delivery of property by As to the
an incapacitated person. In such case, the applicability Principle of in Principle of in
courts may allow such person to recover what of the pari delicto is pari delicto is
he has paid or delivered, if the interest of principle of in applicable. not applicable.
justice so demands (NCC, Art. 1415). pari delicto
4. Agreement or contract which is not illegal per
se but is merely prohibited by law, and the Void contract v. Unenforceable contract
prohibition is designed for the protection of
the plaintiff. In such case, such plaintiff, if
public policy is thereby enhanced, may BASIS VOID UNENFORCEABLE
recover what he has paid or delivered (NCC,
Art. 1416). As to the There is contract
No contract
5. Payment of any amount in excess of the effect of the but which cannot
at all.
maximum price of any article or commodity contract be enforced.

415
 CIVIL LAW
As to the Defense may
It is not
susceptibility It is subject to be invoked
subject to Defense may be
to ratification. only by the
ratification. availed of by
ratification parties
anybody,
(those
It can be whether he is a
principally
As to the easily As to the set-up party to the
and
capacity of assailed by of defense contract or not
It cannot be subsidiarily
third third persons as long as his
assailed by third liable) or
persons to whose interest is
persons. their
assail the interests are directly affected
successors in
contract directly (NCC, Art. 1421).
interest and
affected. privies.

Void contract v. Voidable contract (2004 BAR) Void contract v. Rescissible contract

BASIS VOID VOIDABLE BASIS VOID RESCISSIBLE

Consent is
Absence of
vitiated or Defect is in
As to the defect essential
there is its effects,
of the contract element/s of a
incapacity to Defect is either
contract. As to the defect
give consent. inherent in the against one
of the contract
contract itself. of the parties
Valid or a third
As to the status No effect even if
contract until person.
of the contract not set aside.
set aside.
Based on
As to the Nullity is a
Cannot be Can be equity and
susceptibility of As to the source matter of law
ratified. ratified. matter of
ratification of the defect and public
private
interest.
interest.
Nullity can be
set up against Produces
any person No legal effects legal effects
Nullity can
asserting right As to effect of even if no action and remains
be set up
As to the effect arising from it, the contract is filed to set it valid if no
only against
of the nullity and his aside. action is
a party
successors in filed.
thereto.
interest not
protected by Action to
law. rescind
Action to
prescribes
Action to As to the declare its
within 4
Action to annul prescription of nullity does not
years (NCC,
As to the declare nullity contract the action prescribe
Art. 1389;
prescription of does not prescribes in (NCC, Art. 1410).
Pineda,
the contract prescribe 4 years 2000).
(1999 BAR). (Pineda,
2000).

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2019 GOLDEN NOTES 416
 OBLIGATIONS AND CONTRACTS
NATURAL OBLIGATIONS
Natural obligations, not being based on positive
law but on equity and natural law, do not grant a
right of action to enforce their performance, but
after voluntary fulfillment by the obligor, they
authorize the retention of what has been delivered
or rendered by reason thereof (NCC, Art. 1423).
NOTE: They are real obligations to which the law
denies an action, but which the debtor may
perform voluntarily.
Requisites for natural obligations to arise
1. The obligation is not prohibited by law or
contrary to morals and good customs.
2. There must be a previous juridical
relationship between two persons but due to
certain intervening circumstances, it lost its
legal enforceability leaving its fulfillment
entirely to the free will or discretion of the
supposed debtor (Pineda, 2000).
Examples of natural obligations
1. Performance even after the civil obligation
has prescribed (NCC, Art. 1424);
2. Reimbursement of a third person for a debt
that has prescribed (NCC, Art. 1425);
3. Restitution by minor of the thing or price after
annulment of contract (NCC, Art. 1426);
4. Delivery by minor of money or fungible thing
in fulfillment of obligation (NCC, Art. 1427);
5. Performance after action to enforce civil
obligation has failed (NCC, Art. 1428);
6. Payment by the heir of a debt exceeding the
value of property he inherited (NCC, Art.
1429); and
7. Payment of legacy after will has been declared
void (NCC, Art. 1430).
NOTE: The enumeration is not exclusive.
Voluntary payment of debt which has already
prescribed
The obligor who voluntarily performs the contract
cannot recover what he has delivered or the value
of the service he has rendered. Because of
extinctive prescription, the obligation of the
debtor to pay his debt became a natural
obligation. While it is true that a natural obligation
cannot be enforced by court action, nevertheless,
after voluntary fulfillment by the debtor, under
the law, the creditor is authorized to retain what
417
has been paid by reason thereof (Jurado, 2009).
Fulfillment puts the debtor into estoppel from
recovering what had been paid or delivered
(Pineda, 2009).
Q: Sara borrowed P50,000.00 from Julia and
orally promised to pay it within six months.
When Sara tried to pay her debt on the 8th
month, Julia demanded the payment of
interest of 12% per annum because of Sara's
delay in payment. Sara paid her debt and the
interest claimed by Julia. After rethinking, Sara
demanded back from Julia the amount she had
paid as interest. Julia claims she has no
obligation to return the interest paid by Sara
because it was a natural obligation which Sara
voluntarily performed and can no longer
recover. Do you agree? Explain (2015 BAR).
A: No. The case is not one of a natural obligation
because even if the contract of loan is verbal, the
delay of Julia made her liable for interest upon
demand by Sara. This is not a case of a natural
obligation but a civil obligation to pay interest by
way of damages by reason of delay (NCC, Articles
1956; 1169; 2209).
Effect of partial performance
If only a part of the natural obligation has been
fulfilled, such cannot be later on recovered. The
obligation is converted into a civil one (if it is
legally susceptible of confirmation or ratification).
However, if the fulfilled portion is not susceptible
of confirmation or ratification, this portion can be
the basis of a cause of action for recovery of what
has been delivered because it has not been
converted into legal obligation (Pineda, 2000).
Natural obligation v. Civil obligation (2004
BAR)
BASIS NATURAL CIVIL
OBLIGATION OBLIGATION
Based on law,
contracts,
As to the Based on
quasi-
source of the equity and
contracts,
obligation natural law
delicts, and
quasi-delicts
 CIVIL LAW
Cannot be legal effect relation or
enforced in affection
court because
the obligee has
no right of
action to
compel its As to the Within the Within the
As to the performance Can be applicability domain of the domain of
availability of but after enforced in of the law law morals
enforcement voluntary court because
of the fulfilment by the obligee has As to the effect
Performance
of the When fulfilled
obligation in the obligor, a right of does not
courts they authorize action performance produces mora
produce legal
the retention of of the legal effects
effects
what may have obigation
been delivered As to
or rendered by Cannot be
susceptibility Can be ratified
reason thereof ratified
to ratification
(Ncc, Art.
1423).
NOTE: A natural obligation can be guaranteed
(Rabuya, 2017 citing NCC, Art. 2052).
Conversion of natural obligation to civil
obligation
ESTOPPEL
Natural obligations may be converted into civil
obligations by acts of novation. Thus, a prescribed
debt is turned into civil obligation when the
debtor renounces the defense of prescription or An admission or representation rendered
by signing a document recognizing such with a conclusive upon the person making it, and cannot
promise to pay the debt at some future time. The be denied or disproved as against the person
natural obligation becomes a valid cause for a civil relying thereon (NCC, Art. 1431).
obligation after it has been affirmed or ratified
anew by the debtor (Pineda, 2009). Estoppel is effective only between the parties
thereto or their successors in interest (NCC, Art.
Natural obligation v. Moral obligation 1439).

NOTE: The admission or representation must be

BASIS NATURAL MORAL plain and clear. Estoppel cannot be sustained on
OBLIGATION OBLIGATION doubtful or ambiguous inferences.
Juridical tie
Basis and purpose of estoppel
previously
existed
Estoppel is based on public policy, fair dealing,
between the
good faith and justice and its purpose is to forbid
parties but
As to the one to speak against his own act, representation
because of
presence of No juridical tie or commitments to the injury of one who
certain
juridical tie reasonably relied thereon (Pineda, 2000).
intervening
causes they
Kinds of Estoppel
cannot be
enforced in
1. Estoppel in pais – a person is considered in
courts
estoppel if by his conduct, representations,
Voluntary Performance is admissions or silence when he ought to speak
As to the out, whether intentionally or through culpable
fulfillment by a pure act of
performance negligence, "causes another to believe certain
the debtor is a liberality
of the facts to exist and such other rightfully relies
legal which springs
obligation and acts on such belief, as a consequence of
fulfillment with from blood

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2019 GOLDEN NOTES 418
 OBLIGATIONS AND CONTRACTS
which he would be prejudiced if the former is
permitted to deny the existence of such facts.
2. Estoppel by deed – a party to a deed and his
privies are precluded from denying any
material fact stated in the deed as against the
other party and his privies.
3. Estoppel by laches – an equitable estoppel, a
person who has 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.
Estoppel by judgment
Estoppel by judgment is a type of estoppel by
record. It is the preclusion of a party to a case
from denying the facts adjudicated by a court of
competent jurisdiction. It must not be confused
with res judicata. Estoppel by judgment bars the
parties from raising any question that might have
been put in issue and decided in a previous
litigation whereas, res judicata makes a judgment
conclusive between the same parties as to the
matter directly adjudged (Philippine National
Bank v. Barreto, G. R. No. L-30073, February 21,
1929).
Estoppel by acceptance of benefits
It refers to a type of estoppel in pais which arises
when a party, by accepting benefits derived from a
certain act or transaction, intentionally or through
culpable negligence, induces another to believe
certain facts to exist and such other relies and act
on such belief, as a consequence of which he
would be prejudiced if the former is permitted to
deny the existence of such facts (Jurado, 2009).
Illustration:
Article 1438 provides that one who has allowed
another to assume apparent ownership of
personal property for the purpose of making any
transfer of it, cannot, if he received the sum for
which a pledge has been constituted, set up his
own title to defeat the pledge of the property,
made by the other to a pledgee who received the
same in good faith and for value.
Estoppel by silence or inaction
419
It refers to a type of estoppel in pais which arises
when a party, who has a right and opportunity to
speak or act as well as a duty to do so under the
circumstances, intentionally or through culpable
negligence, induces another to believe certain
facts to exist and such other 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.
Illustration:
Article 1437 provides that:
When in a contract between third persons
concerning immovable property, one of them is
misled by a person, with respect to the ownership
of real right over the real estate, the latter is
precluded from asserting his legal title or interest
therein, provided all these requisites are present:
1. There must be fraudulent representation or
wrongful concealment of facts known to the
party estopped;
2. The party precluded must intend that the
other should act upon the facts as
misrepresented;
3. The party misled must have been aware of the
true facts; and
4. The party defrauded must have acted in
accordance with the misrepresentation.
Q: Discuss the three kinds of estoppel.
A: There are three kinds of estoppels, to wit: (1)
estoppel in pais; (2) estoppel by deed; and (3)
estoppel by laches. Under the first kind, a person
is considered in estoppel if by his conduct,
representations, 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." Under estoppel by deed, a party to a
deed and his privies are precluded from denying
any material fact stated in the deed as against the
other party and his privies. Under estoppel by
laches, an equitable estoppel, a person who has
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
 CIVIL LAW
former state (Jose Go et al., v. BSP, G.R. No. 202262, Not statutory Statutory
July 8, 2015) (Bersamin, J.).
Applies in equity Applies at law
LACHES (2000, 2002 BAR
(Stale Demands) Not based on fixed of
Based on fixed of time
time
The failure or neglect, for an unreasonable length
of time, to do that which by exercising due NOTE: The doctrine of laches is inapplicable when
diligence could or should have been done earlier; the claim was filed within the prescriptive period
it is negligence or omission to assert a right within set forth under the law (Pineda, 2000).
a reasonable time, warranting a presumption that
the party entitled to assert it either has
abandoned it or declined to assert it. It is also
known as stale demands (Lim Tay v. CA, 293 SCRA
34, G.R. No. 126891, August 5, 1998; Pineda, 2000).

Basis of the doctrine of laches

It is based upon grounds of public policy which

requires for the peace of society, discouragement
of stale claims.

Elements of Laches (DILC)

1. Delay in asserting complainant’s right after he

had knowledge of the defendant’s conduct
and after he has opportunity to exercise it;
2. Injury or prejudice to the defendant in the
event relief is accorded to the complainant;
(Pineda, 2000)
3. Lack of knowledge or notice on the part of the
defendant that the complainant would assert
the right on which he bases his suit; and
4. Conduct on the part of the defendant or one
under whom he claims, giving rise to the
situation complained of.

Inaction and passivity to recover land subject

to an invalid sale for more than 34 years

Action to recover will not prosper. The passivity

and inaction for more than 34 years justify the
defense of laches. All of the four (4) elements are
present. As a result, the action of plaintiffs must be
considered barred (Miguel v. Catalino, G.R. No. L-
23072, November 29, 1968).

Laches v. Prescription

LACHES PRESCRIPTION

Concerned with the Concerned with the fact

effect of delay of delay
Principally a question of
inequity of permitting a It is a matter of time
claimed to be enforced

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2019 GOLDEN NOTES 420