SAMPLE QUESTIONS AND ANSWERS
of the creditors as well as the liability of the debtors,
EXTINGUISHMENT AND CONTRACTS
1. A sold his entire interest in 24,000 tons of iron ore
to B for P75,000, P10,000 of which was actually paid
upon the signing of the contract. With respect to the
balance of P65,000, it was agreed that it “will be paid
from the fi rst amount derived from the sale of the
ore.’’ To insure payment thereof, B delivered to A a
surety bond which provided that the liability of the
surety liability would automatically expire after the
lapse of two years. Inasmuch as the ore had not yet
been sold and the surety bond had expired without
being renewed and the balance had not yet been paid
in spite of repeated demands, A fi nally brought an
action against B for the recovery of said balance. B,
however, interposed the defense that his obligation to
pay is conditional and that inasmuch as the condition
has not yet been fulfilled, therefore, it is not yet due
and demandable. Is this defense tenable?
Answer — This defense is untenable. The sale of the
iron ore is not a condition precedent to the payment
of the balance but only a suspensive term or period.
There is no uncertainty whatsoever with regard to the
fact of payment; what is undetermined is merely the
exact date of payment. Normally, therefore, A will
have to wait for the actual sale of the iron ore before
he can demand from B for the payment of the unpaid
balance. However, inasmuch as by his own act B has
impaired the guaranty or security after its
establishment without giving another one which is
equally satisfactory, it is clear that he has now lost the
benefit of the term or period. Consequently, the case
now falls squarely within the purview of pars. 2 and 3
of Art. 1198 of the NCC. (Gaite vs. Fonacier, 112 Phil.
728.)
JOINT AND SOLIDARY
Problem No. 1. — A, B, and C executed a promissory
note binding themselves to pay P9,000 to X, Y, and Z.
The note is now due and demandable.
(a) Can the creditors proceed against A alone for
payment of the entire obligation? Why?
(b) Can X alone proceed against A, B and C for
payment of the entire obligation? Why?
(c) Suppose that X proceeds against A alone for
payment, how much can he collect? Why?
(d) Suppose that C is insolvent, can A and B be held
liable for his share in the obligations? Why?
(e) Suppose that the obligation was about to prescribe,
but X wrote a letter to A demanding for payment of
the entire debt, will this have the effect of interrupting
the running of the period of prescription? Why?
Answer — (a) The creditors cannot proceed against A
alone for the payment of the entire obligation. Since
the promissory note is silent with respect to the right
the obligation is, therefore, presumedto be joint (Art.
1207, CC). Consequently, the only right of such
creditors if they proceed against A alone for payment
would be to collect from him P3,000, which is his
proportionate share in the obligation. (Ibid.) Once the
amount is collected, it will then be divided equally
among X, Y and Z. This is so because, under the law, in
the absence of any legal provision or stipulation of the
parties to the contrary, the credit or debt shall be
presumed to be divided into as many equal shares as
there are creditors or debtors, the creditors or debts
being considered distinct from one another (Art. 1208,
CC).
(b) X alone cannot proceed against A, B and C for the
payment of the entire obligation for the same reason
stated in the previous paragraph. The most that he will
be able to collect from the three debtors will be his
proportionate share in the obligation which is P3,000
(Arts. 1207, 1208, CC). As far as the debtors are
concerned, because of the principle that in joint
obligations the credit or debt shall be presumed to be
divided into as many equal shares as there are
creditors or debtors, the credits or debts being
considered distinct from one another (Art. 1208, CC),
the liability of each will be only with respect to his
share in the P9,000. Consequently, X can collect only
P1,000 from A, P1,000 from B, and P1,000 from C.
(c) If X proceeds against A alone for payment, the most
that he will be able to collect will be only P1,000. The
reason has already been stated in the previous
paragraph.
(d) If C is insolvent, his co-debtors cannot be held liable
for his share in the obligations. This necessarily follows
from the principle that in joint obligation, the credit or
debt shall be presumed to be divided into as many
equal shares as there are creditors or debtors, the
credits or debts being considered distinct from one
another (Art. 1208, CC).
(e) The demand made by X upon A, for the purpose of
interrupting the running of the period of prescription,
shall prejudice the latter only, but not the other
debtors. Consequently, if after ten years, X, Y and Z
should bring an action against A, B and C to collect the
debt, the defense of prescription would be absolute
insofar as B and C are concerned, but partial insofar as
A is concerned. In other words, A can still be
compelled to pay P1,000 to X. The reason for this is the
fact that the principle of mutual agency is not
applicable in joint obligations. (Agoncillo vs. Javier, 38
Phil. 424.)
Problem — A, B and C borrowed P12,000 from X on
June 1, 1966. They executed a promissory note binding
themselves jointly and severally to pay the obligation
on June 1, 1968. For failure to pay, X brought an action
against A for payment of the entire obligation plus
interests. A interposed the following defenses:
(1) that B was only a minor at the time of the
celebration of the contract and that such fact was
known to X; and
(2) that X had granted an extension of two years to C
within which to pay.
(1) Can A avail himself of these defenses?
(2) Granting that A can avail himself of these defenses,
what would be the effect upon his liability, assuming
that he can establish both defenses by competent
evidence? Reasons.
Answer — (a) A can avail himself of these defenses.
Under Art. 1222 of the Civil Code, there are three kinds
of defenses which are available to a solidary debtor if
the creditor proceeds against him alone for payment
of the entire obligation. They are: fi rst, defenses
derived from the nature of the obligation; second,
defenses personal to him or pertaining to his share;
and third, defenses personal to the others, but only as
regards that part of the debt for which the latter are
responsible. It is evident that both defenses interposed
by A fall within the purview of the third.
(b) Since A can avail himself of both defenses, and
since such defenses are not absolute but merely partial
in character, undoubtedly, X can collect from A the
following: (a) P4,000 corresponding to the share of A in
the obligation; and (b) an amount equivalent to the
extent that B had been benefitted by his share in the
obligation, applying the rule enunciated in Art. 1399
regarding the effect if the defect of a contract consists
in the incapacity of one of the contracting parties. As
far as the share corresponding to C is concerned, X
must wait for the expiration of the two years extension
which he had given to C before he can collect such
share from A.
These are: first, when the obligation expressly
stipulates the contrary, second, when the different
prestations constituting the objects of the obligation
are subject to different terms and conditions; and third,
when the obligation is in part liquidated and in part
unliquidated.
According to the records of this case, Francisco sold a
parcel of land to Martin with right of repurchase.
Subsequently, by virtue of a court judgment rendered
against Francisco, the right of repurchase was
purchased by Del Rosario, the judgment creditor, at an
execution sale. Francisco, as judgment debtor, was
unable to redeem the right thus sold. Meanwhile, he
paid the redemption price to the vendee a retro,
Martin, without the knowledge of Del Rosario. Later,
Del Rosario sold the right to the plaintiff Gonzaga. One
of the questions that had to be decided in this case is
whether the provision of what is now Art. 1236 of the
New Civil Code is applicable or not. The Supreme Court
held: “Del Rosario was not a debtor. He was under no
obligation to repurchase the land from Martin. He had
a right to do so but whether he exercised this right or
not depended upon his own volition. Article 1158 (now
Art. 1236) is not for these reasons applicable.’’
PAYMENT OF PERFORMANCE
Problem No. 1 — In 1972, D executed a promissory
note promising to pay to C P10,000 within a period of
four years. The payment of the debt was guaranteed
by G. In 1976, P, a third person, paid the entire amount
of the indebtedness with the knowledge and consent
of D. What are the respective rights and obligations of
the parties?
Answer — P shall be subrogated to all of the rights of C,
not only against D, but also against G. This is so,
because the law expressly states that if a third person
pays the obligation with the express or tacit approval
of the debtor, he shall be legally subrogated to all of
the rights of the creditor, not only against the debtor,
but even against third persons, be they guarantors or
possessors of mortgages.31 Consequently, P can
demand reimbursement from D of the P10,000 which
he had paid to C. If D cannot pay because of insolvency,
he can still proceed against G for the recovery of the
amount.
Problem No. 2 — If in the above problem, C had
condoned one-half of the obligation in 1975, and
subsequently, in 1976, P, unaware of the partial
remission of the indebtedness, paid, without the
knowledge and consent of D, the entire amount of
P10,000 to C, who accepted it, what would be the
effect of such payment upon the rights and obligations
of the parties?
Answer — With respect to D, the only right which P
has against him is to recover P5,000, because, it is only
to that extent that he had been benefi ted by the
payment.34 With respect to G, if D cannot pay the
P5,000 because of insolvency, P can no longer proceed
against him, because the payment was made without
the knowledge and consent of D, and consequently, he
cannot be subrogated to the rights of C against G.35
With respect to C, however, undoubtedly, P can still
proceed against him for the recovery of P5,000,
applying the principle that no person can unjustly
enrich himself at the expense of another.
Problem — “S,” an American resident of Manila, about
to leave on a vacation, sold his car to “B” for
US$2,000.00, the payment to be made ten days after
delivery to ‘’X,’’ a third party depositary agreed upon,
who shall deliver the car to “B’’ upon receipt of “X” of
the purchase price. It was stipulated that ownership is
retained by “S’’ until delivery of the car to “X.” Five
days after delivery of the car to “X,” it was destroyed in
a fi re which gutted the house of “X,” without the fault
of either “X” or “B.’’
Question No. 1 — Is buyer “B’’ still legally obligated to
pay the purchase price? Explain. (1981 Bar Problem)
Answer — Yes, buyer “B” is still legally obligated to pay
the purchase price. It must be observed that “S” had
already delivered the car to “X,” the third party
depositary or bailee. It was agreed that ownership is
retained by “S” until delivery to “X.” Therefore, in
effect, there was already a transfer of the right of
ownership over the car to “B.” Consequently, “B’’ shall
assume the fortuitous loss of the car. As a matter of
fact, even if it was agreed that “S’’ shall retain the
ownership of the caruntil the purchase price has been
paid by “B,” the end result will still be the same. Since,
evidently, the purpose is to secure performance by the
buyer of his obligation to pay the purchase price, by
express mandate of the law, the fortuitous loss of the
car shall be assumed by “B.’’
Question No. 2 — May seller “S’’ demand payment in
U.S. dollar? Why? (1981 Bar Problem) Answer — The
seller “S’’ cannot demand payment in U.S. dollars.
According to the law, an agreement that payment shall
be made in currency other than Philippine currency is
void because it is contrary to public policy. That does
not mean, however, that “S” cannot demand payment
from “B.” He can demand payment, but not in
American dollars. Otherwise, there would be unjust
enrichment at the expense of another. Payment,
therefore, should be made in Philippine currency.
Problem — The debtor owes his creditor several debts,
all of them due, to wit: (1) an unsecured debt; (2) a
debt secured with a mortgage of the debtor’s property;
(3) a debt bearing interest; (4) a debt in which the
debtor is solidarily liable with another.
Partial payment was made by the debtor. Assuming
that the debtor had not specified the debts to which
the payment should be applied and, on the other hand,
the creditor had not specified in the receipt he issued
the application of payment, state the order in which
the payment should be applied and your reasons
therefore. (1982 Bar Problem)
Answer — In this case, according to the Civil Code, the
debt, which is most onerous to the debtor, among
those due, shall be deemed satisfied.
Analyzing the four debts stated in the problem, the
most onerous is No. 4, the second most onerous is No.
2, the third most onerous is No. 3, and the least
onerous is No. 1. Consequently, the payment should
be applied in that order.
LOSS OF A THING DUE
Labayen vs. Talisay-Silay Milling Co. 52 Phil. 440
CONDONATION/REMISSION OF THE DEBT
Thus, if A pledged his watch to B as security for an
indebtedness of P100, and subsequently, the watch is
found in his possession, there arises a presumption of
remission of the accessory obligation of pledge. The
debt of P100, however, is not affected. B may disprove
the remission by proving that he gave the watch
temporarily to the debtor to be repaired or that A was
able to take possession thereof without his consent or
authority.
CONFUSION OR MERGER OF RIGHTS
In order that there will be a confusion of rights which
will result in the extinguishment of the obligation, it is
essential that the following requisites must concur:
(1) that the merger of the characters of creditor and
debtor must be in the same person;
(2) that it must take place in the person of either the
principal creditor or the principal debtor; and
(3) that it must be complete and definite.
COMPENSATION
Garcia vs. Lim Chiu Sing 59 Phil. 562
Problem — “B’’ borrowed from “C’’ P1,000.00 payable
in one year. When “C’’ was in the province, “C’s’’ 17-
year-old son borrowed P500.00 from “B’’ for his school
tuition. However, the son spent it instead nightclubing.
When the debt to “C’’ fell due, “B’’ tendered only
P500.00, claiming compensation on the P500.00
borrowed by “C’s’’ son.
Question No. 1 — Is there legal compensation? Why?
(1981 Bar Problem)
Answer — There is no legal compensation. Under the
Civil Code, in order that there will be a valid and
effective compensation, it is essential that there must
be two parties, who in their own right, are principal
creditors and principal debtors of each other. In the
instant case, “C’’ cannot be considered as a party to
the act of his 17-year-old son in borrowing P500.00
from “B.’’ Consequently, he did not become a principal
debtor of “B’’; neither did “B’’ become a principal
creditor of “C.’’ Therefore, there can be no partial
compensation of the P1,000.00 borrowed by “B’’ from
“C.’’
Question No. 2 — Suppose the minor son actually used
the money for school tuition, would the answer be
different? Reasons. (1981 Bar Problem)
Answer — There would be no difference in my answer.
There will still be no legal compensation. The fact that
“C’s’’ son actually used the P500.00 for his school
tuition did not make “C’’ a party to the contract
between his son and “B.’’ Therefore, “C’’ is not the
principal debtor of “B’’ with respect to said amount.
Gullas vs. Phil. National Bank 62 Phil. 519
NOVATION
Problem — Suppose that under the judgment
obligation, the liability of the judgment debtor is for
the amount of P6,000, but both judgment debtor and
judgment creditor subsequently entered into a
contract reducing the liability of the former toonly
P4,000, is there an implied novation which will have
the effect of extinguishing the judgment obligation and
creating a modified obligatory relation? Reasons.
Answer — There is no implied novation in this case.
We see no valid objection to the judgment debtor and
the judgment creditor in entering into an agreement
regarding the monetary obligation of the former under
the judgment referred to. The payment by the
judgment debtor of the lesser amount of P4,000,
accepted by the creditor without any protest or
objection and acknowledged by the latter as in full
satisfaction of the money judgment, completely
extinguished the judgment debt and released the
debtor from his pecuniary liability.
Novation results in two stipulations — one to
extinguish an existing obligation, the other to
substitute a new one in its place. Fundamentally, it is
that novation effects a substitution or modifi cation of
an obligation by another or an extinguishment of one
obligation by the creation of another. In the case at
hand, we fail to see what new or modified obligation
arose out of the payment by the judgment debtor of
the reduced amount of P4,000 to the creditor.
Additionally, to sustain novation necessitates that the
same be so declared in unequivocal terms clearly and
unmistakably shown by the express agreement of the
parties or by acts of equivalent import — or that there
is complete and substantial incompatibility between
the two obligations.
In People’s Bank and Trust Co. vs. Syvel’s, Inc. (164
SCRA 247), Syvel’s had a loan with People’s Bank and
Trust Co. in the amount of P900,000.00 secured by a
chattel mortgage. Syvel’s failed to pay the loan and
People’s Bank and Trust Co. foreclosed the chattel
mortgage. Syvel’s opposed the foreclosure of the
chattel mortgage on the ground that the obligation
secured by the chattel mortgage sought to be
foreclosed was novated by the subsequent execution
of a real estate mortgage as additional collateral to the
obligation secured by said chattel mortgage. The
Supreme Court held: “Novation takes place when the
object or principal condition ofan obligation is changed
or altered. It is elementary that novation is never
presumed, it must be explicitly stated or there must be
manifest incompatibility between the old and the new
obligation in every aspect. In the case at bar, there is
nothing in the Real Estate Mortgage which supports
appellants’ submission. The contract on its face does
not show the existence of an explicit novation nor
incompatibility on every point between the old and the
new agreements as the second contract evidently
indicates that the same was executed as new
additional security to the chattel mortgage previously
entered into by the parties.
In the case of Sps. Francisco and Ruby Reyes vs. BPI
Family Savings Bank, Inc., et al., G.R. Nos. 149840-41,
March 31, 2006, Petitioner spouses executed a Real
Estate Mortgage on their property in favor of
respondent BPI FSB to secure a P15,000,000 loan of
Transbuilders Resources & Development Corporation.
When the latter failed to pay within the stipulated
period of one year, the loan was restructured
providing that the loan shall be paid in quarterly
installments at interest of 18% per annum. Petitioners
averred that they were not informed about the
restructuring of the loan. Hence, they wrote BPI FSB
requesting cancellation of their mortgage and the
return of their title. They claimed that the new loan
novated the loan agreement and that because the
novation was without their consent, they were
allegedly released from their obligation under the
mortgage.BPI FSB refused to cancel the mortgage and
instituted extrajudicial foreclosure proceedings against
the petitioners. The latter fi led the instant petition.
Question —Was there a novation of the mortgage
loan contract?
Answer — No. Well-settled is the rule that with
respect to obligations to pay a sum of money, the
obligation is not novated by an instrument that
expressly recognizes the old, changes only the terms of
payment, adds other obligations not incompatible with
the old ones, or the new contract merely supplements
the old one.BPI FSB and Transbuilders only extended
the repayment term of the loan from one year to 20
quarterly installments at 18% per annum. There was
absolutely no intention by the parties to supersede or
abrogate the old loan contract secured by the REM
executed by the petitioners in favor of BPI FSB. In fact,
the intention of the new agreement was precisely to
revive the old obligation after the original period
expired and the loan remained unpaid. In the absence
of an express agreement, novation takes place only
when the old and the new obligations are incompatible
on every point.
Problem — ABC Trading Co., a domestic corporation
engaged in the sale of automobile spare parts, opened
with “X’’ Bank a letter of credit up to the extent of
$450,000.00 for a period of one year. To secure
payment thereof, it executed a chattel mortgage over
its stock-in-trade valued at P500,000.00. On May 15
and June 15, 1981, “Y,” president and general manager
of ABC Trading, drew against this letter of credit by
means of promissory notes in the total amount of
P430,000.00, payable within 30 days from the
respective dates of the promissory notes with interest
of 10%. Upon maturity of said notes, ABC Trading
failed to pay, but was able to negotiate for an
extension of six (6) months within which to pay said
amount, in return for the additional security posted by
Mr. “Y’’ consisting of a real estate mortgage over his
land in Manila. At the end of 6 months, ABCTrading Co.
failed to pay the amount due despite repeated
demands by “X’’ Bank. “Y’’ Bank fi led an action for
foreclosure of the chattel mortgage executed by ABC.
Trading ABC Trading opposed said action contending
that the chattel mortgage has been novated by the
real estate mortgage executed by “X’’ Bank. Is the
contention of ABC Trading Co. tenable? Reasons.
Answer — The contention of ABC Trading Co. that the
chattel mortgage has been novated by the real estate
mortgage executed by Mr. “R” in favor of “X’’ Bank is
untenable. Wellsettled is the rule that in order that
there will be a novation there must be complete
incompatibility between the two obligations. And the
test of incompatibility is simple. The test is whether
the two obligations can stand together. If they can
stand together, then there is no incompatibility. If
there is incompatibility, then there is novation.
Applying the test to the instant case, it is clear that the
two obligations can stand together. Therefore, there is
no novation.
Problem — A obtained a favorable judgment against B
from the Court of First Instance of Manila for the sum
of P2,000. Subsequently, a writ of execution was
issued and a jeep belonging to the latter was seized by
the sheriff. However, the two (A and B) arrived at an
arrangement by virtue of which B executed a chattel
mortgage on the jeep stipulating, inter alia that B shall
satisfy the judgment in two equal installments payable
at designated periods. B failed to pay the fi rst
installment, and as a result, A obtained an alias writ of
execution and levied upon certain personal properties
of B. The latter fi led an urgent motion for suspension
of the execution sale on the ground of payment of the
judgment obligation. He maintains that the execution
of the deed of chattel mortgage has extinguished the
judgment debt because of implied novation. Is this
correct? Reasons.
Answer — The contention of B that the mortgage
obligation has extinguished the judgment obligation
because of implied novation is not correct. The
defense of implied novation requires clear and
convincing proof of complete incompatibility between
the two obligations. The law requires no specifi c form
for an effective novation by implication. The test is
whether the two obligationscan stand together. If they
cannot, incompatibility arises, and the second
obligation novates the fi rst. If they can stand together,
no incompatibility results and novation does not take
place.
Problem No. 1 — “A’’ owed “B’’ a certain sum of
money. “C’’ wrote “B’’ a letter stating that he would be
the one to take care of “A’s’’ debt as soon as “A’’ had
made a shipment of logs to Japan. “A’’ never made
such shipment. “C’’ did not pay “B.’’ Is “C’’ liable to “B’’?
Explain. (1975 Bar Problem)
Answer — “C’’ is not liable to “B.’’ In the fi rst place, in
order that “C’’ may be held liable to “B,’’ there should
have been asubstitution of debtor through
expromision within the meaning of Art. 1291, No. 2,
and Art. 1293 of the Civil Code resulting in novation of
the obligation. Here, there was none. “C’’ merely
wrote a letter to the creditor “B” stating that he would
take care of “A’s” debt. The problem does not even say
that “B” gave his assent or consent to “C’s’’ statement.
In the second place, even assuming that there was a
substitution of debtor, “C’s’’ liability depends upon a
suspensive condition, that he would take care of “A’s’’
debt as soon as “A’’ had made a shipment of logs to
Japan. “A” never made such shipment. Therefore, “C’s’’
liability never became effective. (Villanueva vs. Girged,
110 Phil. 478.)
Problem No. 2 — “A’’ borrowed from “B” the sum of
P3,000.00. Three days after, “A’’ in a letter authorized
the Philippine National Bank to pay his debt to “B” out
of whatever crop loan might be granted to him by said
Bank. On the same day, the Bank agreed but the Bank
paid “B’’ only P2,000.00. On the date of maturity, “B’’
sued the Bank and “A’’ for the remaining P1,000.00. Is
the Bank liable to “B’’? (1975 Bar Problem.)
Answer — The Bank is not liable to “B’’ for the
remaining P1,000.00. Even assuming that “B’’ gave his
consent to “A’s’’ proposal that the Bank shall pay his
indebtedness of P3,000.00, in reality, there was no
substitution of debtor by delegacion within the
meaning of Arts. 1291, No. 2, and 1293 of the Civil
Code resulting in a novation of the obligation. The
Bank never assumed payment of the obligation. There
was merely an authorization, which was accepted by
the Bank, that the latter shall pay “A’s’’ debt out of
whatever crop loan would be granted to him by the
Bank. As it turned out, the Bank agreed to lend “A’’
only P2,000.00, and said amount was paid directly to
“B’’ in accordance with the Bank’s promise. Beyond
that amount, the Bank cannot be held liable. (Hodges
vs. Rey, 111 Phil. 219.)
CONTRACTS
Beneficial Stipulations Requisites
(1) that there must be a stipulation in favor of a third
person;
(2) the stipulation must be a part, not the whole of the
contract;
(3) the contracting parties must have clearly and
deliberately conferred a favor upon a third person, not
a mere incidental benefit or interest;
(4) the third person must have communicated his
acceptance to the obligor before its revocation; and
(5) neither of the contracting parties bears the legal
representative or authorization of the third party.
Problem — A and B entered into a contract of
compromise. In the contract, there is a stipulation
wherein the parties ceded a house and lot to X. Upon
the signing of the contract, X entered into the
possession of the property. Ten years later, after the
death of both A and B, their heirs revoked the
beneficial stipulation. Subsequently, they brought an
action against X for the recovery of the property. Will
the action prosper?
Answer — The action will not prosper. The stipulation
in the instant case is a stipulation pour autrui. All of the
requisites of a valid and enforceable stipulation pour
autrui are present. It is a part, not the whole, of a
contract; it is not conditioned or compensated by any
kind of obligation whatever, and neither A nor B bears
the legal representation or authorization of X.
Additionally, there was an implied acceptance by X
when he entered into the possession of the property.
That implied acceptance is recognized by the law is
now well-settled. Therefore, the act of the heirs of A
and B in revoking the stipulation is an absolute nullity.
Since the stipulation was accepted by X, it is crystal
clear that there was a perfected agreement, with A
and B as stipulators or benefactors and X as beneficiary,
although still constituting a part of the main contract.
Consequently, the cardinal rules of contracts, such as
the obligatory force of contracts and the mutuality of
contracts based on the essential equality of the parties
are directly applicable to the beneficial stipulation
itself. It can no longer be revoked.
Before the third person who induces another to violate
his contract can be held liable for damages, it is
essential, however, that the following requisites must
concur:
(1) the existence of a valid contract;
(2) knowledge on the part of the third person of the
existence of the contract; and
(3) interference by the third person without legal
justification or excuse.
Problem — “O,” a very popular movie star, was under
contract with “P’’ Movie Productions to star exclusively
in the latter’s films for two years. “O’’ was prohibited
by the contractto star in any film produced by another
producer. “X’’ Film Co. induced “O’’ to break her
contract with “P’’ Movie Productions by giving her
twice her salary. “P’’ Movie Productions sued “X’’ Film
Co. for damages. “X’’ Film Co. contended that it had a
right to compete for the services of “O” and that her
contract with “P” Movie Productions was in restraint of
trade and a restriction on her freedom of contract.
Whose contention would you sustain? (1980 Bar
Problem)
Answer — The contention of “P’’ Movie Productions
should be sustained. According to the Civil Code, any
third person who induces another to violate his
contract shall be liable for damages to the other
contracting party. In the law of torts, we call this
“interference with contractual relation.’’ However, in
order that it will be actionable, it is necessary that the
following requisites must concur: (a) the existence of a
valid contract; (b) knowledge on the part of the third
person of the existence of such contract; and (c)
interference by the third person without legal
justification or excuse. All of these requisites are
present in the case at bar.
The contention of “X’’ Film Co. that “O’s’’ contract with
“P’’ Movie Productions was in restraint of trade and a
restriction of her freedom to contract, on the other
hand, cannot be sustained. Well-established is the rule
that in order to determine whether or not an
agreement of this nature constitutes an undue
restraint of trade, and therefore, is contrary to public
policy, two tests are always applied. They are first, is
there a limitation as to time or place? And second, is
the prohibition or restraint reasonably necessary for
the protection of the contracting parties? If the answer
to both of these questions is in the affirmative, then
the prohibition or restraint is not contrary to public
policy. It is crystal clear that the agreement between
“O’’ and “P” Movie Productions passes both tests.
Suppose then that A bought a Colt Lancer from X
Motor Co. paying a down payment of P18,000 thus
leaving a balance of P40,000 which he agreed to pay
within a period of two years. As security, the parties
agreed that A shall mortgage the Colt Lancer which he
bought in favor of the motor company. That was on
June 15, 1980. On June 20, 1980, the deed of chattel
mortgage was signed by both parties. On June 25,
1980, the deed was recorded in the Chattel Mortgage
Register. When was the contract perfected? Reading
Art. 1319 of the Civil Code in relation to Art. 1315, it is
clear that the contract was perfected only on June 25,
1980. It was only then that there was a complete
manifestation of the meeting of the offer and the
acceptance upon the thing and the cause which are to
constitute the contract.
Art. 1318. There is no contract unless the following
requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the
contract;
(3) Cause of the obligation which is established.
Problem — Gigi offered to construct the house of
Chito for a very reasonable price of P1 Million, giving
the latter 10 days within which to accept or reject the
offer. On the fifth day, before Chito could make up his
mind, Gigi withdrew the offer. What is the effect of the
withdrawal of Gigi’s offer? (2005 Bar Problem)
Answer — The withdrawal of Gigi’s offer will cause the
offer to cease in law. Hence, even if subsequently
accepted, there could be no concurrence of the offer
and the acceptance . In the absence of concurrence of
offer and acceptance, there can be no consent.
(Laudico vs. Arias Rodriguez, G.R. No.16530, March 31,
1922). Without the consent, there is no perfected
contract for the construction of the house of Chito.
(Salonga vs. Farrales G.R. No. L-47088, July 10, 1981).
Article 1318 of the Civil Code provides that there can
be no contract unless the following requisites concur :
(1) consent of the parties; (2) object certain which is
the subject matter of the contract; and (3) cause of the
obligation. Gigi will not be liable to pay Chito any
damages for withdrawing the offer before the lapse of
the period granted. In this case, no consideration was
given by Chito for the option given. Thus, there is no
perfected contract of option for lack of cause of
obligation. Gigi cannot be held to have breached the
contract. Thus, he cannot be held liable for damages
(Suggested Answers to the 2005 Bar Examination
Questions, Philippine Association of Law Schools)
Problem — In an offer to sell, parties failed to agree on
the size of the land to be sold. Is there a meeting of
the minds of the parties that would perfect a contract?
Answer — There is no consent that would perfect a
contract as there is no agreement on the exact area to
be sold. Contracts that are consensual in nature are
perfected upon mere meeting of the minds. A contract
is produced once there is concurrence between the
offer and the acceptance upon the subject matter,
consideration, and terms of payment. The offer must
be certain. To convert the offer into a contract, the
acceptance must be absolute and must not qualify the
terms of the offer. It must be plain, unequivocal,
unconditional, and without variance of any sort from
the proposal, constitutes a counter-offer and is a
rejection of the original offer. Hence, when something
is required is desired which is not exactly what is
proposed in the offer, such acceptance is not sufficient
to generate consent because any modification or
variation from the terms of the offer.
Problem — A gasoline manufacturing company (TPMC)
obtained a loan from PNB and executed a real estate
mortgage over its parcel of land in Paranaque City to
secure its loan. When the loan matured, PNB sent
collection letters to TPMC. In reply, TPMC proposed to
pay its obligations by way of a dacionenpago conveying
its TCT No. 122533.Instead of accepting the offer, PNB
filed a petition for extrajudicial foreclosure of the REM.
TPMC filed a complaint for annulment of extrajudicial
foreclosure sale alleging that its debt has already been
extinguished by its offer of dacionenpago. PNB
contended that the proposal of TPMC to pay by way of
dacionenpago did not extinguish its obligation as it was
not accepted by PNB. Hence, the extrajudicial
foreclosure sale was proper.Was PNB correct?
Answer — Yes, TPMC has no clear right to an injunctive
relief because its proposal to pay by way of
dacionenpago did not extinguish its obligation.
Undeniably, TPMC’s proposal to pay by way of
dacionenpago was not accepted by PNB.
Dacionenpago is a special mode of payment whereby
the debtor offers another thing to the creditor who
accepts it as equivalent of payment of an outstanding
obligation. The undertaking is really one 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. It
is only when the thing offered as an equivalent is
accepted by the creditor that novation takes place,
thereby, totally extinguishing the debt.
Thus, the unaccepted proposal neither novates the
parties’ mortgage contract nor suspends its execution
as there was no meeting of the minds between the
parties on whether the loan will be extinguished by
way of dacionenpago (Technogas Philippines Mfg. Corp.
vs. Philippine National Bank, G. R. No. 161004, April 14,
2008).
Article 1321-1323
Problem No. 1 — A, who resides in Manila, wrote to
his friend B, who is residing in Cotabato City, stating in
the letter that he (A) is donating to him (B) one new
car worth P25,000. Upon receipt of the letter, B, called
A by long distance telephone telling A that he is
accepting the donation. The same day B wrote and
mailed a letter to A accepting the donation.
Immediately after mailing the letter, B died of a heart
failure. Who is entitled to the car now, A or the heirs of
B? Reasons. (1962 Bar Problem)
Answer — A is entitled to the car. The reason is that
the donation in the instant case cannot produce any
effect whatsoever. According to Art. 748 of the Civil
Code, if the value of the personal property donated
exceeds P5,000, the donation and the acceptance shall
be in writing; otherwise, the donation is void. True, the
acceptance by B was actually written and mailed. But
immediately after mailing the letter of acceptance, B
died. The effect is to bring into play the provision of
Art. 1323 of the Civil Code which is certainly applicable
here, considering the provision of Art. 732. According
to Art. 1323, an offer becomes ineffective upon the
death, civil interdiction, insanity, or insolvency of
either party before acceptance is conveyed. Analyzing
the provision, it is clear that the offer of A has become
ineffective and that the contract of donation, as a
consequence, has never been perfected.

Article 1324
Problem — “A’’ agreed to sell to “B’’ a parcel of land
for P5,000.00. “B’’ was given up to May 6, 1975 within
which to raise the necessary funds. It was further
agreed that if “B’’ could not produce the money on or
before said date, no liability would attach to him.
Before May 6, 1975, “A’’ backed out of the agreement.
Is “A’’ obliged to sell the property to “B’’? Explain.
(1975 Bar Problem)
Answer — Assuming that the offer of “A’’ to sell the
land to “B’’ is merely a unilateral offer to sell, and that
there is still no bilateral agreement in the sense that
“B’’ had already agreed to buy the land, “A’’ is not
obliged to sell the property to “B.’’ In such case, it is
clear that the general rule stated in Art. 1324 and the
particular rule stated in Art. 1479, par. 2, of the Civil
Code are applicable. As a matter of fact, even if “B’’
has formally accepted the option given to him by “A,’’
such acceptance would be of no moment since the
option is not supported by any consideration distinct
from the purchase price. “A’’ can always change his
mind at any time. The option does not bind him for
lack of a cause or consideration. It would have been
different if “B’’ had accepted the offer to sell within
the period of the option before said offer was
withdrawn by “A.’’ In such a case, a contract of sale
would have been generated right then and there. As it
turned out, “A’’ withdrew his offer in time. (See
Sanchez vs. Rigor, 45 SCRA 368)
Problem — “Q,’’ the owner of a house and lot in
Quezon City, gave an option to “R’’ to purchase said
property for P100,000.00 within ninety days from May
1, 1979. “R’’ gave “Q’’ one (P1.00) peso as option
money. Before the expiration of the ninety-day period,
“R’’ went to “Q’’ to exercise his option to pay the
purchase price but “Q’’ refused because somebody
wanted to buy his property for P150,000.00 and
because there was no sufficient consideration for the
option. “R’’ sued “Q’’ to compel him to accept
payment and execute a deed of sale in his favor.
Decide the case. (1980 Bar Problem)
Answer — “Q’’ should be compelled to accept the
purchase price of P100,000.00 and to execute a deed
of sale of the subject property in favor of “R.’’ The
reason is that there is already a perfected contract of
sale. Undoubtedly, in the instant case, there is a
unilateral offer of “Q’’ to sell the subject property to
“R.’’ For that purpose, the latter is given an option of
ninety days from May 1, 1979 within which to exercise
the option. The consideration for the option is P1.00.
According to the Civil Code, since there is a
consideration for the option, “Q’’ is now bound by his
promise to sell the property to “R’’ so long as the latter
will exercise the option within the agreed period of
ninety days. “R’’ exercised his option. Therefore, there
is already a perfected contract of sale.
True, “Q’’ will suffer some sort of lesion or prejudice if
what he says about another desiring to buy the
property for P150,000.00 is established. True also, the
consideration of P1.00 for the option is grossly
inadequate. The Civil Code, however, declares that
except in cases specified by law, lesion or inadequacy
of cause shall not invalidate a contract, unless there
has been fraud, mistake or undue influence. Here,
there is no fraud, mistake or undue influence which
would be a possible basis for invalidating either the
preparatory contract of option or the principal
contract of sale.
As a matter of fact, even assuming that there is no
consideration for the option, the end result would still
be the same. Since “R’’ accepted the offer before it
could be withdrawn or revoked by “Q,’’ there is
already a perfected contract of sale.
Article 1325-1326
Problem — “K’’ and Co. published in the newspaper an
“Invitation to Bid’’ inviting proposals to supply labor
and materials for a construction project described in
the invitation. “L,’’ “M’’ and “N’’ submitted bids. When
the bids were opened, it appeared that “L’’ submitted
the lowest bid. However, “K’’ and Co. awarded the
contract to “N,’’ the highest bidder, on the ground that
he was the most experienced and responsible bidder.
“L’’ brought an action against “K’’ and Co. to compel
the award of the contract to him and to recover
damages.
Is “L’s’’ position meritorious? (1980 Bar Problem)
Answer — “L’s’’ position is not meritorious. According
to the Civil Code, advertisements for bidders are
simply invitations to make proposals, and the
advertiser is not bound to accept the highest or lowest
bidder unless the contrary appears. It is clear that the
general rule applies in the instant case. In its
advertisement, “K’’ and Co. did not state that it will
award the contract to the lowest bidder. Therefore, in
awarding the contract to “N,’’ the defendant company
acted in accordance with its rights.
Article 1327
Problem — Is a person of advanced years or age or by
reason of physical infirmities incapacitated to enter
into a contract?
Answer — A person is not incapacitated to enter into a
contract merely because of advanced years or by
reason of physical infirmities, unless such age and
infirmities impair his mental faculties to the extent that
he is unable to properly, intelligently and fairly
understand the provisions of said contract (Dr. Jose
and Aida Yason and Faustino Arciaga, et. al., G.R. No.
145017, Jan. 28, 2005). Art. 1328.
Martinez vs. Hongkong and Shanghai Ban
Kinds of Fraud
The first is the fraud which is employed by a party to
the contract in securing the consent of the other party,
while the second is the fraud which is employed by the
obligor in the performance of a pre-existing obligation.
Dolo causante or causal fraud refers to those
deceptions or misrepresentations of a serious
character employed by one party and without which
the other party would not have entered into the
contract. Article 1338
Dolo incidente or incidentalfraud refers to those
deceptions or mispresentations which are not serious
in character and without which the other party would
still have entered into the contract. Art 1344
Distinguishment:
(1) The first refers to a fraud which is serious in
character, while the second is not serious.
(2) The first is the cause which induces the party upon
whom it is employed in entering into the contract,
while the second is not the cause.
(3) The effect of the first is to render the contract
voidable, while the effect of the second is to render
the party who employed it liable for damages.
Consent of a party to a contract is vitiated by fraud, it is
essential that the following requisites must concur.
(1) Fraud or insidious words or machinations must
have been employed by one of the contracting parties;
(2) The fraud or insidious words or machinations must
have been serious;
(3) The fraud or insidious words or machinations must
have induced the other party to enter into the contract;
and
(4) The fraud should not have been employed by both
of the contracting parties or by third persons.
ARTICLE 1342
Problem — C, an old and ignorant woman, was helped
by V in obtaining a loan of P3,000.00 from X Rural Bank
secured by a mortgage on her house and lot. On the
day she signed thepromissory note and the mortgage
covering the loan, she also signed several documents.
One of these documents signed by her was promissory
note of V for a loan of P3,000.00 also secured by a
mortgage on her house and lot. Several years later, she
received advice from the sheriff that her property shall
be sold at public auction to satisfy the two obligations.
Immediately she filed suit for annulment of her
participation as co-maker in the obligation contracted
by V as well as of the mortgage in relation to said
obligation of V on the ground of fraud and mistake.
Upon filing of the complaint, she deposited P3,383.00
in court as payment of her personal obligation
including interests.
(a) Can be held liable for the obligation of V? Why?
(b) Was there a valid and effective consignation
considering that there was no previous tender of
payment made by C to the Bank? Why?
Answer — (a) C cannot be held liable for the
obligation of V. It is crystal clear that C’s participation
in V’s obligation both as co-maker and as mortgagor is
voidable not on the ground of fraud because the Bank
was not a participant in the fraud committed by V, but
on the ground of mistake. There was substantial
mistake on the part of both C and the Bank mutually
committed by them as a consequence of the fraud
employed by V. (See Rural Bank of Caloocan City vs. CA,
104 SCRA 151.)
(b) Despite the fact that there was no previous tender
of payment made directly to the Bank, nevertheless,
the consignation was valid and effective. The deposit
was attached to the record of the case and the Bank
had not made any claim thereto. Therefore, C was
right in thinking that it was useless and futile for her to
make a previous offer and tender of payment directly
to the Bank. Under the foregoing circumstances, the
consignation was valid, if not under the strict
provisions of the law, under the more liberal
consideration of equity.
Section 2. — Object of Contract
First: The object should be within the commerce of
men; in other words, it should be susceptible of
appropriation and transmissible from one person to
another.
Second: The object should be real or possible; in other
words, it should exist at the moment of the celebration
of the contract, or at least, it can exist subsequently or
in the future.
Third: The object should be licit; in other words, it
should not be contrary to law, morals, good customs,
public order or public policy.
Fourth: The object should be determinate, or at least,
possible of determination, as to its kind.
Consequently, the following cannot be the object of
contracts: (1) Things which are outside the commerce
of men;146 (2) intransmissible rights;147 (3) future
inheritance, except in cases expressly authorized by
law;148 (4) services which are contrary to law, morals,
good customs, public order or public policy;149 (5)
impossible things or services;150 and (6) objects which
are not possible of determination as to their kind.
Section 3. — Cause of Contracts
Essential Requisites of Cause
First: The cause should be in existence at the time of
the celebration of the contract;
Second: The cause should be licit or lawful; and
Third: The cause should be true.
Forms of Contracts
General rule is that it shall be obligatory, provided all
of the essential requisites for its validity are present.
Contracts which must appear in writing are as follows:
(1) Donations of personal property whose value
exceeds five thousand pesos. According to Art. 748 of
the Code, the donation and the acceptance shall be
made in writing; otherwise, it shall be void.
(2) Sale of a piece of land or any interest therein
through an agent. According to Art. 1874 of the Code,
the authority of the latter shall be in writing; otherwise,
the sale shall be void.
(3) Agreements regarding payment of interest in
contracts of loan. According to Art. 1956 of the Code,
no interest shall be due unless it has been expressly
stipulated in writing. The validity of the contract of
loan, however, is not affected.
(4) Antichresis. According to Art. 2134 of the Code, in
contracts of antichresis, the amount of the principal
and of the interest shall be specified in writing;
otherwise, the contract shall be void.
Contracts which must appear in a public document are
as follows:
(1) Donations of immovable property. According to Art.
749 of the Code, the donation must be made in a
public document. The acceptance, on the other hand,
may be made in the same deed of donation or in a
separate public document. If the acceptance is made
in a separate public document, the donor shall be
notified thereof in an authentic form, and this step
shall be noted in both instruments. Noncompliance
with any of these formalities shall render the donation
void.
(2) Partnerships where immovable property or real
rights are contributed to the common fund. According
to Arts. 1771 and 1773 of the Code, in a contract of
partnership where immovable property or real rights
are contributed to the common fund, it is necessary
that the contract must appear in a public instrument
and that there must be an inventory of the immovable
property or real rights, signed by the partners, and
attached to the public instrument; otherwise, the
contract is void.
Contracts which must be registered are as follows:
(1) Chattel mortgages. According to Art. 2140 of the
Code, by a chattel mortgage, personal property is
recorded in the Chattel Mortgage Register as a security
for the performance of an obligation. If the movable,
instead of being recorded, is delivered to the creditor
or a third person, the contract is a pledge and not a
chattel mortgage.
(2) Sales or transfers of large cattle. According to the
Cattle Registration Act, no sale or transfer of large
cattle shall be valid unless it is duly registered and a
certificate of transfer is secured.
Problem — Spouses Robert and Yollie wanted to sell
their house. They found a prospective buyer, Nina.
Yollie negotiated with Nina for the sale of the property.
They agreed on a fair price of P2 Million. Nina sent
Yollie a letter confirming her intention to buy the
property. Later, another couple, Marius and Ellen ,
offered a similar house at a lower price of P1.5 Million.
But Nina insisted on buying the house of Robert and
Yollie for sentimental reasons. Nina prepared a deed of
sale to be signed by the couple and a manager’s check
for P2 Million. After receiving the P2 Million, Robert
signed the deed of sale. However, Yollie was not able
to sign it because she was saying she changed her
mind. Yollie filed suit for nullification of the deed of
sale and for moral and exemplary damages against
Nina. Does Nina have any cause of action against
Robert and Yollie? (2006 Bar Problem)
Answer — Considering that the contract has already
been perfected and taken out of the operation of the
statute of frauds, Nina can compel Robert and Yollie to
observe the form required by law in order for the
property to be registered in the name of Nina which
can be filed together with the action for the recovery
of house.(Art. 1357, NCC). In the alternative, she can
recover the amount of P2 Million that she paid.
Otherwise, it would result in solution indebiti or unjust
enrichment.
REFORMATION OF INSTRUMENTS
General Rule
When the true intention of the parties to a perfected
and valid contract are not expressed in the instrument
purporting to embody their agreement by reason of
mistake, fraud, inequitable conduct or accident, one of
the parties may ask for the reformation of the
instrument so that such true intention may be
expressed.
In order that there can be a reformation of the
instrument, the following requisites must, therefore,
concur:
(1) There must be a meeting of the minds of the
contracting parties;
(2) Their true intention is not expressed in the
instrument; and
(3) Such failure to express their true intention is due to
mistake, fraud, inequitable conduct or accident.
REFORMATION OF INSTRUMENTS MAY BE ADOPTED:
Art. 1361. When a mutual mistake of the parties
causes the failure of the instrument to disclose their
real agreement, said instrument may be reformed.
Art. 1362. If one party was mistaken and the other
acted fraudulently or inequitably in such a way that the
instrument does not show their true intention, the
former may ask for the reformation of the instrument.
Art. 1363. When one party was mistaken and the other
knew or believed that the instrument did not state
their real agreement, but concealed that fact from the
former, the instrument may be reformed.
Art. 1364. When through the ignorance, lack of skill,
negligence or bad faith on the part of the person
drafting the instrument or of the clerk or typist, the
instrument does not express the true intention of the
parties, the courts may order that the instrument be
reformed.
Art. 1365. If two parties agree upon the mortgage or
pledge or real or personal property, but the
instrument states that the property is sold absolutely
or with a right of repurchase, reformation of the
instrument is proper.
THERE SHALL NO REFORMATION:
(1) Simple donations inter vivos wherein no condition
is imposed;
(2) Wills;
(3) When the real agreement is void
CONTRACT OF ADHESION-defined as one in which one
of the parties imposes a ready-made form of contract,
which the other party may accept or reject, but which
the latter cannot modify.
Problem — (a) What is a contract of adhesion? (b) Are
contracts of adhesion void or prohibited?
Answer — In the case of Development Bank of the
Philippines vs. Perez, G.R. No. 14854, Nov. 11, 2004,
the Court held that:
(a) A contract of adhesion is so-called because its
terms are prepared by only one party while the other
party merely affixes his signature signifying his
adhesion thereto.
(b) A contract of adhesion is just as binding as ordinary
contracts. It is true that we have, on occasion, struck
down such contracts as void when the weaker party is
imposed upon in dealing with the dominant bargaining
party and is reduced to the. Nevertheless, contracts of
adhesion are not invalid per se; they are not entirely
prohibited. The one who adheres to the contract is in
reality free to reject it entirely; if he adheres, he gives
his consent.
In the case of Sps. Francisco and Ruby Reyes vs. BPI
Family Savings Bank, Inc., et al., G. R. Nos. 149840-41,
March 31,2006, where the petitioner spouses
undertook to secure the P15M loan of Trans builders
Resources & Development Corporation to BPI-FSB
“and other credit accommodations of whatever nature
obtained by the Borrower/Mortgagor” under the Real
Estate Mortgage they executed in favor of BPI-FSB, the
Supreme Court held that while the stipulation proved
to be onerous to the petitioners, neither the law nor
the courts willextricate a party from an unwise or
undesirable contract entered into with all the required
formalities and with full awareness of its consequences.
Petitioners voluntarily executed the REM on their
property infavor of BPI-FSB to secure the loan. They
cannot now be allowed to repudiate their obligation to
the bank after Trans builder’s default. While
petitioner’s liability was written in fi ne print and in a
contract written by BPI-FSB, it has been the consistent
holding of the Court that contracts of adhesion footing
are not invalid per se. On numerous occasions, the
Supreme Court has upheld the binding effects of such
contracts.
CONTRACTS OF CREDIT CARDS
For the cardholder to be absolved from liability for
unauthorized purchases made through his lost or
stolen card, two steps must be followed:
(1) the cardholder must give written notice to the
credit card company, and
(2) the credit card company must notify its member
establishments of such loss or theft, which, naturally, it
may only do upon receipt of a notice from the
cardholder.
The cause of the contract and the motives of the
contracting parties:
(1) While the cause is the direct or most proximate
reason of a contract, the motives are the indirect or
remote reasons;
(2) While the cause is the objective or juridical reason
of a contract, the motives are the psychological or
purely personal reasons;
(3) While the cause is always the same, the motives
differ for each contracting party; and
(4) While the legality or illegality of the cause will
affect the existence or validity of the contract, the
legality or illegality of the motives will not affect the
existence of the contract.
(1) Where a married man of mature years donated a
parcel of land to a girl of sixteen subject to the
condition that the latter shall cohabit with him, and
such condition is accepted, it is clear that the donation
is conditioned upon the attainment of the motive of
the donor; in other words, it predetermines the
purpose of the contract. Thus considered, the
conveyance is clearly predicated upon an illegal causa.
Consequently, it is void. Therefore, under what is now
Art. 1412 of the New Civil Code, there can be no
recovery of what has already been delivered. (Liguez vs.
CA, 102 Phil. 577.)
(2) Where a mother sold two fishponds to a daughter
and the latter, in turn, resold the same fishponds to
her and her stepfather, as a consequence of which said
fishponds were converted into conjugal properties, it is
clear that the motive or purpose is to circumvent the
law against donations between spouses (Art. 133, CC).
This motive or purpose is the illegal causa rendering
the contract void. Consequently, the rule of in pari
delicto non oritur actio, now enunciated in Art. 1412 of
the New Civil Code, is applicable. (Rodriguez vs.
Rodriguez, 20 SCRA 908.)
(3) Where a Filipino leased a parcel of land to an alien
for 99 years with an option to buy the property within
50 years, provided that the latter shall become a
Filipino citizen, it is clear that the motive or purpose of
the arrangement, which has resulted in the virtual
transfer of ownership to the lessee, is to circumvent
the Constitutional prohibition of transfer of lands to
aliens. This motive or purpose is the illegal causa
rendering the contract void. However, it will be the
provision of Art. 1416 and not of Art. 1412, of the New
Civil Code that will apply. Because of public policy, the
lessor will be allowed to recover the property. (Phil.
Banking Corp. vs. Lui She, 21 SCRA 52.)
ONEROUS CAUSE
Onerous contracts, the cause is understood to be, for
each contracting party, the prestation or promise of a
thing or service by the other. From this it necessarily
follows that a promise made by one party may be a
sufficient cause for a promise made by another party.
ACCESSORY CONTRACTS
In accessory contracts the rule is that the cause of the
accessory contract is identical with that of the principal
contract. Thus, it has been held that as a mortgage is
an accessory contract, its cause is the very cause of the
principal contract from which it receives its life, and
without which it cannot exist as an independent
contract, although it may secure an obligation incurred
by another.
REMUNERATORY CONTRACTS
According to Art. 1350, the cause in remuneratory
contracts is the service or benefit which is
remunerated. From this we can say that a
remuneratory contract is one in which one of the
contracting parties remunerates or compensates the
service or benefit rendered or given by the other party,
although such service or benefit does not constitute a
demandable debt.
INTERPRETATION OF CONTRACTS
The cardinal rule in the interpretation of contracts is to
the effect that the intention of the contracting parties
should always prevail because their will has the force
of law between them.
Problem — What is the cardinal rule applicable in a
case where the terms of a contract are clear and leave
no doubt upon the intention of the contracting parties?
Answer — It is a cardinal rule that if the terms of a
contract are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning
of its stipulation shall control. In the case of Philippine
National Construction Corporation vs. The Hon. CA, et
al., G.R. No. 159417, Jan.25, 2007, the Court held that
the contract between parties is the formal expression
of the parties’ rights, duties and obligations. It is the
best evidence of the intention of the parties. Thus,
when the terms of an agreement have been reduced
to writing, it is considered as containing all the terms
agreed upon and there can be, between the parties
and their successors in interest, no evidence of such
terms other than the contents of the written
agreement. It is further required that the various
stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that which may result
from all of them taken jointly (Bobie Rose V. Frias vs.
Flora San Diego-Sison, G.R. No.155223, April 3, 2007).
RESCISSIBLE CONTRACTS
Aquino vs. Tañedo ( distinguish rescission by mutual
consent)
Facts:
When plaintiff bought a land to the defendant and they
agreed to return the said land and the money to each
other as the other can no longer pay, the fruits earned
by the plaintiff should be paid as well as contended by
the defendant and the contract they entered is
rescissble base on Art.1385
Rescission, in the light of these provisions, is a relief
which the law grants, on the premise that the contract
is valid, for the protection of one of the contracting
parties and third persons from all injury and damage
that the contract may cause, or to protect some
incompatible and preferential right created by the
contract. Article 1295 (now Art. 1385) refers to
contracts that are rescissible in accordance with law in
the cases expressly fixed thereby, but it does not refer
to contracts that are rescinded by mutual consent and
for the mutual convenience of the contracting parties.
The rescission in question was not originated by any of
the causes specified in Articles 1291 and 1292 (now
Arts. 1381 and 1382), nor is it any relief for the
purposes sought by these articles. It is simply another
contract for the dissolution of a previous one, and its
effects, in relation to the contract so dissolved, should
be determined by the agreement made by the parties,
or by the application of other legal provisions, but not
by Article 1295 (now Art. 1385), which is not
applicable.’’6
Art. 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians
whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of the
things which are the object thereof;
(2) Those agreed upon in representation of absentees,
if the latter suffer the lesion stated in the preceding
number;
(3) Those undertaken in fraud of creditors when the
latter cannot in any manner collect the claims due
them;
(4) Those which refer to things under litigation if they
have been entered into by the defendant without the
knowledge and approval of the litigants or of
competent judicial authority;
(5) All other contracts specially declared by law to be
subject to rescission
Sikatuna vs. Guevara
Facts: Lot under litigation
Held: Impossibility of maintaining an action for the
rescission of the contract where the object thereof is
legally in the possession of a third person who did not
act in bad faith, the person who is prejudiced is not left
without any remedy. He may still bring an action for
indemnity for damages against the person who caused
the loss. This action may be directed against the
guardian, representative of the absentee or litigant
who transferred the thing, as the case may be.56 It
may even be directed against a third person who, in
bad faith, had previously acquired the thing and,
subsequently, had alienated it to an innocent
purchaser for value.
Cabaliw vs. Sadorra
“Alienations by onerous title are also presumed
fraudulent when made by persons against whom some
judgment has been rendered in any instance or some
writ of attachment has been issued. The decision or
attachment need not refer to the property alienated
and need not have been obtained by the party seeking
rescission.’’
Honrado vs. Marcayda, et al.
In other words, if the property is acquired by a
purchaser in good faith and for value, the acquisition
as far as the law is concerned is not fraudulent. The
right of such purchaser over the property is legally
superior to that of any other person even as against
the creditor who is prejudiced by the conveyance.
Consequently, the contract or conveyance is not
rescissible.
Rivera vs. Li Tam & Co.
If the property is acquired by one who is not a
purchaser in good faith and for value, it is clear that
the contract or conveyance is rescissible.
VOIDABLE CONTRACTS
Felipe vs. Heirs of Aldon 120 SCRA 628
Carantes vs. Court of Appeals 76 SCRA 514
( prescription of four years from the discovery of fraud)
Problem — Mrs. S borrowed P20,000.00 from PG. She
and her 19-year old son, Mario, signed the promissory
note for the loan, which note did not say anything
about the capacity of the signers. Mrs. S made partial
payments little by little. After seven (7) years, she died
leaving a balance of P10,000.00 on the note. PG
demanded payment from Mario who refused to pay.
When sued for the amount, Mario raised the defense:
that he signed the note when he was still a minor.
Should the defense be sustained? Why? ]
Answer No. 1 — The defense should be sustained.
Mario cannot be bound by his signature in the
promissory note. It must be observed that the
promissory note does not say anything about the
capacity of the signers. In other words, there is no
active fraud or misrepresentation; there is merely
silence or constructive fraud or misrepresentation. It
would have been different if the note says that Mario
is of age. The principle of estoppel would then apply.
Mario would not be allowed to invoke the defense of
minority. The promissory note would then have all the
effects of a perfectly valid note. Hence, as far as
Mario’s share in the obligation is concerned, the
promissory note is voidable because of minority or
non-age. He cannot, however, be absolved entirely
from monetary responsibility. Under the Civil Code,
even if his written contract is voidable because of
minority he shall make restitution to the extent that he
may have been benefited by the money received by
him (Art. 1399, Civil Code). True, more than four years
have already elapsed from the time that Mario had
attained the age of 21. Apparently, his right to
interpose the defense has already prescribed. It has
been held, however, that where minority is used as a
defense and no positive relief is prayed for, the four-
year period (Art. 1391, Civil Code) does not apply. Here,
Mario is merely interposing his minority as an excuse
from liability. (Braganza vs. Villa Abrille, 105 Phil. 456.)
Answer No. 2 — The defense should not be sustained.
It must be noted that the action for annulment was
instituted by PG against Mario when the latter was
already 26 years old. Therefore, the right of Mario to
invoke his minority as a defense has already prescribed.
According to the Civil Code, actions for annulment of
voidable contracts shall prescribe after four years. In
the case of contracts which are voidable by reason of
minority or incapacity, the four-year period shall be
counted from the time the guardianship ceases (Art.
1391, Civil Code). The same rule should also be applied
to the defense. In the instant case, since more than
four years already elapsed from the time Mario had
attained the age of 21, therefore, he can no longer
interpose his minority as a defense. It would have been
different if four years had not yet elapsed from the
time Mario had attained the age of 21. Since there was
no active fraud or misrepresentation on his part at the
time of execution of the promissory note, it is clear
that the contract is voidable as far as he is concerned.
In such case, the defense of minority should then be
sustained. (Braganza vs. Villa Abrille, 105 Phil. 456.
Problem No. 1 — X, of age, entered into a contract
with Y, a minor. X knew and the contract specifi cally
stated the age of Y. May X successfully demand
annulment of the contract? Reason. (1971 Bar
Problem)
Answer — X cannot successfully demand annulment of
the contract. True, said contract is voidable because of
the fact that at the time of the celebration of the
contract, Y, the other contracting party, was a minor,
and such minority was known to X (Arts. 1327, No. 1,
1390 CC). However, the law is categorical with regard
to who may institute the action for annulment of the
contract. In addition to the requirement that the
action may be instituted only by the party who has an
interest in the contract in the sense that he is obliged
thereby either principally or subsidiarily, Art. 1397 of
the Civil Code further requires that in case of contracts
voidable by reason of incapacity of one of the
contracting parties, the party who has capacity cannot
allege the incapacity of the party with whom he
contracted. Because of this additional requisite, it is
clear that Y and not X can institute the action for
annulment.
Problem No. 2. — Pedro sold a piece of land to his
nephew Quintin, a minor. One month later, Pedro died.
Pedro’s heirs then brought an action to annul the sale
on the ground that Quintin was a minor and therefore
without legal capacity to contract. If you are the judge,
would you annul the sale? (1974 Bar Problem)
Answer — If I am the judge, I will not annul the sale.
The Civil Code in Art. 1397 is explicit. Persons who are
capable cannot allege the incapacity of those with
whom they contracted. True, Pedro who sold the land
to the minor Quintin is already dead, and it is his heirs
who are now assailing the validity of the sale. However,
under the principle of relativity of contracts recognized
in Art. 1311 of the Civil Code, the contract takes effect
not only between the contracting parties, but also
between their assigns and heirs. ( Note: Another way
of answering the above problem would be to state the
two requisites which must concur in order that a
voidable contract may be annulled. These requisites
are: (a) that the plaintiff must have an interest in the
contract; and (b) that the victim or the incapacitated
party must be the person who must assert the same.
The second requisite is lacking in the instant case.)
UNENFORCEABLE CONTRACTS
(1) No one may contract in the name of another
without being authorized by the latter or unless he has
a right to represent him. If he is duly authorized, he
must act within the scope of his powers.
(2) A contract entered into in the name of another by
one who has no authority or legal representation, or
who has acted beyond his powers, is unenforceable.10
This principle is reiterated in the law on agency.
(3) However, such contract may be ratifi ed, expressly
or impliedly, by the person in whose behalf it has been
executed, before it is revoked by the other contracting
part
The Statute of Frauds was enacted for the purpose of
preventing frauds
Problem — “A” and “B” entered into a verbal contract
whereby “A” agreed to sell to “B” his only parcel of
land for P20,000.00 and “B” agreed to buy at the
aforementioned price. “B” went to the bank, withdrew
the necessary amount, and returned to “A” for the
consummation of the contract. “A,” however, had
changed his mind and refused to go through with the
sale. Is the agreement valid? Will an action by “B’’
against “A” for specifi c performance prosper? Reason.
(1982 Bar problem)
Answer — It must be observed that there are two
questions which are asked. They are: (
1) Is the agreement valid? The answer is yes. It is a
time honored rule that even a verbal agreement to sell
land is valid so long as there is already an agreement
with respect to the object and the purchase price.
(2) Will an action by “B” against “A” for specifi c
performance prosper? The answer is no, unless it is
ratifi ed. The reason is obvious. The agreement, being
an agreement of sale of real property, is covered by
the Statute of Frauds. It cannot, therefore, be enforced
by a court action because it is not evidenced by any
note or memorandum or writing properly subscribed
by the party charged.
Carbonnel vs. Poncio, et al. 103 Phil. 655
“It is well settled in this jurisdiction that the Statute of
Frauds is applicable only to executory contracts
(Facturan vs. Sabanal, 81 Phil. 512), not to contracts
that are totally or partially performed. (Almirol, et al.
vs. Monserrat, 48 Phil. 67, 70; Robles vs. Lizarraga
Hermanos, 50 Phil. 387; Diana vs. Macalibo, 74 Phil. 70)
The reason is simple. In executory contracts there is a
wide fi eld for fraud because unless they be in writing
there is no palpable evidence of the intention of the
contracting parties. The statute has precisely been
enacted to prevent fraud. (Moran, Comments on the
Rules of Court, Vol. III, 1957 ed., p. 178) However, if a
contract has been totally or partially performed, the
exclusion of parol evidence would promote fraud or
bad faith, for it would enable the defendant to keep
the benefi ts already derived by him from the
transaction in litigation, and, at the same time, evade
the obligations, responsibilities or liabilities assumed or
contracted by him thereby. So that when the party
concerned has pleaded partial performance, such
party is entitled to a reasonable chance to establish by
parol evidence the truth of his allegation, as well as the
contract itself.”
Ratification
Problem — Can an oral sale of land be judicially
enforced as between the contracting parties, if the
land has not been delivered but the buyer has paid ten
percent (10%) of the purchase price? (1974 Bar
problem)
Answer — Yes, an oral sale of land where the land has
not been delivered but the buyer has paid ten percent
(10%) of the purchase price may be judicially enforced.
Well-settled is the rule that the Statute of Frauds by
virtue of which oral contracts are unenforceable by
court action is applicable only to those contracts which
are executory and not to those which have been
consummated either totally or partially. The reason is
obvious. In effect, there is already a ratification of the
contract because of acceptance of benefits. As a
matter of fact, this reason is now embodied in the New
Civil Code. According to Art. 1405 of said Code,
contracts infringing the Statute of Frauds are ratifi ed
by the failure to object to the presentation of oral
evidence to prove the same, or by the acceptance of
benefi ts under them.
Problem — “O” verbally leased his house and lot to
“L’’ for two years at a monthly rental of P250.00 a
month. After the first year, “O” demanded a rental of
P500.00 claiming that due to the energy crisis, with the
sudden increase in the price of oil, which no one
expected, there was also a general increase in prices.
“O” proved an inflation rate of 100%. When “L’’
refused to vacate the house, “O” brought an action for
ejectment. “O” denied that they had agreed to a lease
for two years.
Question No. 1 — Can the lessee testify on a verbal
contract of lease? Reason. (1981 Bar problem) Answer
— Yes, the lessee “L” may testify on the verbal
contract of lease. Well-settled is the rule that the
Statute of Frauds by virtue of which oral contracts
(such as the contract in the instant case) are
unenforceable by court action is applicable only to
those contracts which have not been consummated,
either totally or partially. The reason for this is obvious.
In effect, there is already a ratification of the contract
by acceptance of benefi ts. Here “L’’ has been paying
to “O” a monthly rental of P250.00 for one year. The
case is, therefore, withdrawn from the coverage of the
Statute of Frauds. ( Note: The above answer is based
on Arts. 1403, No. 2 and 1405 of the Civil Code, and on
decided cases.)
Question No. 2 — Assuming that “O” admits the two-
year contract, is he justified in increasing the rental?
Why? (1981 Bar problem)
Answer — Yes, “O’’ is justified in increasing the
monthly rental. Since it is admitted that the contract of
lease is for a definite term or period of two years, it is
crystal clear that the case is withdrawn from the
coverage of the new rental law. Now during the
hearing of the case, “O” was able to prove an inflation
rate of 100%. Therefore, an increase is justified.
VOID OR INEXISTENT CONTRACTS
Problem — (a) Cite an example of a contract which is
contrary to morals.
(b) Can the nullity of the stipulation on the usurious
interest affect
(i) the lender’s rights to recover the principal loan;
(ii) the terms of the real estate mortgage?
 Answer —
(a) Stipulations authorizing iniquitous or
unconscionable interests are contrary to morals, if not
against the law. Under Art. 1409 of the New Civil Code,
these contracts are inexistent and void from the very
beginning. They cannot be ratified nor the right to set
up their illegality as a defense be waived.
(b) The nullity of the stipulation on the usurious
interest does not, however, affect the lender’s right to
recover the principal loan. Nor would it affect the
terms of the real estate mortgage (REM). The right to
foreclose the mortgage remains with the creditors and
said right can be exercised upon the failure of the
debtors to pay the debt due. The debt due is to be
considered without the stipulation of the excessive
interest. A legal interest of 12% per annum will be
added in place of the excessive interest formerly
imposed.
Castillo vs. Galvan
Rodriguez vs. Rodriguez 20 SCRA 908
Briones vs. Cammayo 41 SCRA 404
Angeles vs. Court of Appeals 102 Phil. 100
Philippine Banking Corp. vs. Lui She 21 SCRA 5
Problem — A partnership borrowed P20,000.00 from
“A’’ at clearly usurious interest. Can the creditor
recover anything from the debtor? Explain.
Answer — Yes, the creditor can recover from the
debtor the following: the principal, legal interest on
the principal from the date of demand (Art. 2209, CC),
legal interest on the legal interests from the time of
judicial demand (Art. 2212, CC), and attorney’s fees, if
proper, under Art. 2208 of the Civil Code.
That the creditor can recover the principal from the
debtor is now well settled. (Angel Jose vs. Chelda
Enterprises, 23 SCRA 119; Briones vs. Cammayo, 41
SCRA 404.) In a usurious contract of loan, there are
always two stipulations. They are: fi rst, the principal
stipulation whereby the debtor undertakes to pay the
principal; and second, the accessory stipulation
whereby the debtor undertakes to pay a usurious
interest. These two stipulations are divisible. According
to Art. 1420 of the Civil Code, in case of a divisible
contract, if the illegal terms can be separated from the
legal ones, the latter may be enforced. It is clear that
what is illegal is the prestation to pay the stipulated
interest. Hence, being separable, the latter only should
be deemed void.
NATURAL OBLIGATION
Problem — A borrowed from B P1,000 which amount
B failed to collect. After the debt has prescribed, A
voluntarily paid B who accepted the payment. After a
few months, being in need of money, A demanded the
return of the P1,000 on the ground that there was a
wrong payment, the debt having already prescribed, B
refused to return the amount paid. May A succeed in
collecting if he sues B in court? Reason out your
answer. (1970 Bar problem)
Answer — A will not succeed in collecting the P1,000
if he sues B in court. The case is expressly covered by
Art. 1424 of the Civil Code which declares that when a
right to sue upon a civil obligation has lapsed by
extinctive prescription, the obligor who voluntarily
performs the contract cannot recover what he has
delivered or the value of the service he has rendered.
Because of extinction prescriptive, the obligation of A
to pay his debt of P1,000 to B became a natural
obligation. While it is true that a natural obligation
cannot be enforced by court action, nevertheless, after
voluntary fulfi llment by the obligor, under the law, the
obligee is authorized to retain what has been paid by
reason thereof. (Art. 1423, Civil Code.)
ESTOPPEL
=a condition or state by virtue of which an admission
or representation is rendered conclusive upon the
person making it and cannot be denied or disproved as
against the person relying thereon.
Estoppel by laches. — Laches, in a general sense, is
failure or neglect, for an unreasonable and
unexplained length of time, to do that which, by
exercising due diligence, could or should have been
done earlier; it is negligence or omission to assert a
right within a reasonable time, warranting a
presumption that the party entitled to assert it either
has abandoned it or declined to assert it.11 It is,
therefore, a type of equitable estoppel which arises
when a party, knowing his rights as against another,
takes no step or delays in enforcing them until the
condition of the latter, who has no knowledge or
notice that the former would assert such rights, has
become so changed that he cannot without injury or
prejudice, be restored to his former state.
The doctrine of laches or of “stale demands” is based
upon grounds of public policy which requires, for the
peace of society, the discouragement of stale claims
and, unlike the statute of limitations, is not a mere
question of time but is principally a question of the
inequity or unfairness of permitting a right or claim to
be enforced or asserted.
These elements are:
(1) conduct on the part of the defendant, or of one
under whom he claims, giving rise to the situation of
which complaint is made and for which the complaint
seeks a remedy;
 (2) delay in asserting the complainant’s rights, the
complainant having had knowledge or notice, of the
defendant’s conduct and having been afforded an
opportunity to institute a suit;

(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) injury or prejudice to the defendant in the event

relief is accorded to the complainant, or the suit is not
held to be barred.

Laches Vs Prescription

(1) Laches is concerned with the effect of delay;

prescription is concerned with the fact of delay.

(2) Laches is principally a question of inequity of

permitting a claim to be enforced, this inequity being
founded on some changes in the condition of the
property or the relation of the parties; prescription is a
question or matter of time;

(3) Laches is not statutory, whereas prescription is

statutory.

(4) Laches applies in equity, whereas prescription

applies at law.

(5) Laches is not based on fi xed time, whereas

prescription is based on fi xed time