It is the deliberate or intentional evasion of the normal fulfillment of an obligation.

(8 Manresa 72) It is the fraud

in the performance or fulfillment of an obligation already existing, as distinguished from the fraud referred to in Article

1338 which is the cause of nullity of contracts and which exists before and at the moment of creating the obligation.

 TYPES OF FRAUD

1. Causal Fraud (Dolo Causante) - fraud employed in the execution of the contract

2. Incidental Fraud (Dolo Incidente) - fraud in performance of obligation already existing because of a contract

FRAUD IN THE PERFORMANCE / DOLO INCIDENTE (ART. CAUSAL FRAUD/ DOLO CAUSANTE (ART 1338)

1170)

 Present during the performance of a pre-existing  Present during the perfection of a contract

obligation

 Purpose is to evade the normal fulfillment of the  Purpose is to secure the consent of another to enter

obligation into the contract

 Results in the breach of an obligation  Results in vitiation of consent; voidable contract

 Gives rise to a right in favor of the creditor to recover  Gives rise to a right of an innocent party to annul the

damages contract

 REMEDIES OF DEFRAUDED PARTY

1. Specific performance (Art 1233)

2. Resolve contract (Art 1191)

3. Damages, in either case

NEGLIGENCE

- Any voluntary act or omission, there being no malice which prevents the normal fulfillment of an obligation

- Consists in the omission of that diligence which is required by the nature of the obligation and corresponds

with the circumstances of the persons, of the time and of the place (Art. 1173)

 KINDS OF NEGLIGENCE

1. Quasi-Delict (Culpa aquiliana/culpa extra contractual) – source of obligation; wrong or negligence

committed independent of contract and without criminal intent

2. Contractual Negligence (Culpa Contractual) – wrong or negligence in the performance of an

obligation/contract

3. Criminal Negligence (Culpa Criminal) – wrong or negligence in the commission of a crime

 INSTANCES WHERE THE LAW REQUIRES A HIGHER STANDARD OF CARE

1. Banks

GENERAL RULE: as a business affected with public interest, and because of the nature of its functions, the bank

is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the

fiduciary nature of their relationship. (Simex v. CA, 183 SCRA 360)

 EXCEPTION: Extraordinary diligence does not cover transactions outside bank deposits, ie: commercial

transactions (Reyes v. CA, 363 SCRA 51)

2. Common Carriers – from the nature of their business and for reasons of public policy, common carriers are

bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the

passengers transported by them, according to all the circumstances of each case (Art. 1733)

Diligence of a good father of a family - ordinary care or that diligence which an average or reasonably prudent person

would exercise over his own property.

 DISTINGUISH FRAUD FROM NEGLIGENCE

FRAUD NEGLIGENCE

 There is deliberate intention to cause damage.  There is no deliberate intention to cause damage.

 Liability cannot be mitigated.  Liability may be mitigated.

 Presumed from the breach of a contractual  Must be clearly proved

obligation

 Waiver for future fraud is void.  Waiver for future negligence may be allowed in

certain cases

 DISTINGUISH NEGLIGENCE FROM CRIME

NEGLIGENCE CRIME

WHAT IT PUNISHABLE  Any act with fault or negligence  Acts punishable by law

CONDITION OF THE MIND  Criminal intent unnecessary  Necessary

LIABILITY FOR DAMAGES  Damages may be awarded to  Some crimes do not give rise to civil

injured party liability

NATURE OF THE RIGHT VIOLATED  Violation of private rights  Public rights

AMOUNT OF EVIDENCE  Preponderance of evidence  Proof beyond reasonable doubt

COMPROMISE  Can be compromised as any other  Criminal liability can never be

civil liability compromised

PRESUMPTION  Presumption of negligence  Presumption of innocence

 KINDS OF NEGLIGENCE, DISTINGUISHED

CULPA AQUILIANA CULPA CONTRACTUAL

 Negligence is substantive and independent  Negligence merely an incident of performance of an

obligation

 There may or may not be a pre-existing contractual  There is a pre-existing contractual relation

obligation
  Source of the obligation is the negligence itself  Source of the obligation is the breach of the

contractual obligation

 Negligence must be proved  Proof of existing of the contract and its breach is prima

facie sufficient to warrant recovery

 Diligence in the selection and supervision of the  Diligence in the selection and supervision of the

employees is a defense employees is not available as a defense

 EFFECTS OF CONTRIBUTORY NEGLIGENCE OF THE OBLIGEE

GENERAL RULE: Reduces or mitigates the damages which he can recover

EXCEPTION: If the negligent act or omission of the creditor is the proximate cause of the event, which led to the

damage or injury complained of, he cannot recover.

 EFFECTS OF IMPOSSIBLE AND ILLEGAL CONDITIONS

CONDITION EFFECT ON OBLIGATION EFFECT ON CONDITION

TO DO impossible OR illegal VOID VOID

NOT to Do an Illegal Thing VALID VALID

NOT to do an impossible thing VALID DISREGARD CONDITION

Condition is preexisting and NOT VALID VOID

dependent on the fulfillment of

impossible condition for existence

Condition IMPOSSIBLE BUT Obligation ONLY THE AFFECTED OBLIGATION IS VOID

DIVISIBLE

CONTRAVENTION OF THE TENOR OF THE OBLIGATION

FORTUITOUS EVENT (Force Majeure)

GENERAL RULE: No one should be held to account for fortuitous cases, which are those situations that could not

be foreseen, or which though foreseen, were inevitable.

EXCEPTION: There concurs a corresponding fraud, negligence, delay or violation or contravention in any

manner of the tenor of the obligation.

 ELEMENTS OF A FORTUITOUS EVENT

1. The cause of breach is independent of the debtor’s will.

2. The event must be unforeseeable or unavoidable

3. The events render performance impossible

4. The debtor must be free from any participation, or aggravation of the injury.
REMEDIES OF OBLIGATIONS

GENERAL RULE: The law protects the creditors. The creditors are given by law all possible remedies to enforce

such obligations.

SPECIFIC PERFORMANCE - To demand specific performance or fulfillment of the obligation with a right to indemnity for

damages

RESCISSION - It means to abrogate the contract from the beginning and to restore the parties to their relative positions as

if no contract has been made.

- It is “to declare the contract void at its inception and to put an end to it as though it never was.”

- It is predicated on the breach of faith by any party that violates the reciprocity between them.

DAMAGES - To demand payment of damages when it is a feasible remedy

SUSIDIARY REMEDIES OF CREDITORS

1. Accion Subrogatoria – action which the creditor may exercise in the place of his negligent debtor in order to

preserve or recover for the patrimony of the debtor the product of such action, and then obtain

therefrom the satisfaction of his own credit

2. Accion Pauliana – action to revoke or rescind acts which the debtor may have done to defraud his creditor.

3. Accion Directa - (Arts. 1652, 1608, 1729, 1893)

PURE OBLIGATIONS

- It is an unqualified obligation which is demandable immediately. It is an obligation whose performance does

not depend upon a future and uncertain event, or past event unknown to the parties. (Art. 1179)

CONDITIONAL OBJECTIVES

- It is exactly the reverse of a pure obligation. The performance in conditional obligations depends upon a

future or uncertain event or upon a past event unknown to parties.

A. RESOLUTORY CONDITION

 Demandable at once

 Once the condition is established or acknowledged, the right to demand performance immediately

exists and therefore the obligation concomitant to the right can be demanded at once.

 It is also known as “condition subsequent”

 It extinguishes obligations

B. SUSPENSIVE CONDITION

 Not demandable at once

 It gives rise to the performance of an obligation (ex. Contract to Sell)

 It is also known as “condition precedent”

 It gives birth to obligations

C. POTESTATIVE CONDITION - The fulfillment of the condition entirely depends upon the sole will of the debtor.

GENERAL RULE: All potestative conditions are void.

EXCEPTION: Potestative resolutory conditions are not void. If the potestative condition is imposed not on the

birth (suspensive) of the obligation but on its fulfillment (resolutory), only the condition is avoided,

leaving unaffected the obligation itself.

D. EFFECT OF SUSPENSIVE AND RESOLUTORY CONDITIONS Art. 1187:

 When the obligation imposes reciprocal prestations, the fruits and interests during the pendency of the

condition shall be deemed to have been mutually compensated.

 If the obligation is unilateral, the debtor or obligor shall appropriate the fruits and interests received, unless

from the nature and circumstances of the obligation it should be inferred that the intention of the person

constituting the same is different.

o Extent of Retroactivity

 In resolutory conditions, retroactivity is irrelevant.

 In suspensive conditions, the effect of a conditional obligation “to give” retroacts to the day

of the constitution of the obligation (Art 1187)

E. IMPROVEMENT, LOSS, AND DETERIORATION Constructive fulfillment

The condition shall be deemed fulfilled when the obligor (debtor) voluntarily prevents its fulfillment

(Art. 1186)
  Before the happening of a suspensive condition in an obligation to do or not to do (Art. 1189)

 If the thing is lost without the fault of debtor, the obligation shall be extinguished.

 If the thing is lost with the fault of debtor, he shall be obliged to pay damages.  If the thing deteriorates

without the fault of debtor, the impairment is to be borne by creditor

 If the thing deteriorates with the fault of debtor, the creditor may choose between rescission of the

obligation and its fulfillment, with indemnity for damages in either case

 If the thing improves by its nature or by time, the benefit shall inure to the benefit of the creditor.

 If the thing improves at the expense of debtor, he shall have no other right than that granted to the

usufructuary.

 When a resolutory condition in an obligation to do or not to do happens (Art. 1190, par. 3)

 In obligations to do and not to do, the court shall determine the effect of the extinguishment of the

obligation

OBLIGATIONS WITH A PERIOD OR TERM

WITH A PERIOD – An obligation whose demandability or extinguishment depends on a future and certain event; subject

to the expiration of a term of period (Arts 1193, 1196)]

PERIOD – Interval of time, which, exerting an influence on an obligation as a consequence of a juridical act, either

suspends its demandability or produces its extinguishment

REQUISITES:

1. Future

2. Certain

3. Legally and physically possible

 WHEN STIPULATION SAYS “PAYABLE WHEN ABLE”

 When the obligor binds himself to pay when his means permit him to do so, the obligation shall be deemed

to be one with a period.

 Remedy:

1. Agreement among parties

2. Court shall fix period of payment when parties unable to agree

 KINDS OF OBLIGATIONS WITH A PERIOD

1. According to effect:

a. Resolutory (in diem) – demandable at once but terminates upon arrival of the day certain

 Day certain – that which must necessarily come, although it may not be known when

b. Suspensive (ex die) – obligation becomes demandable on the day stipulated

 2. According to source

a. Legal - when it is provided by laws

b. Conventional or Voluntary - when it is agreed to by the parties

c. Judicial - when it is fixed by the court

3. According to definiteness: CIVIL LAW REVIEWER Page 97 of 383

a. Definite - when it is fixed or it is known when it will come

b. Indefinite - when it is not fixed or it is not known when it will come

 TERMS VS. CONDITION, DISTINGUISHED

TERM CONDITION

 Interval of time which is future and certain  Fact or event which is future or uncertain or a past

event unknown to the parties

 Time w/c must necessarily come although it may  Future and uncertain fact or event which may or

not be known when may not happen

 Exerts an influence upon the time of  Exerts an influence upon the very existence of the

demandability or extinguishment of an obligation obligation itself

 Does not have any retroactive effect unless there  Has retroactive effect

is an agreement to the contrary

 When it is left exclusively to the will of the debtor,  When it is left exclusively to the will of the debtor,

the existence of the obligation is affected the obligation is void

 WHEN COURTS MAY FIX PERIOD

1. If the obligation does not fix a period, but 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

3. In case of reciprocal obligations, when there is a just cause for fixing a period

4. If the debtor binds himself when his means permit him to do so

 PERIOD, FOR WHOSE BENEFIT

GENERAL RULE: When a period is designated for the performance or fulfillment of an obligation, it is presumed

to have been established for the benefit of both parties.

EXCEPTION: When it appears from the tenor of the obligation or other circumstances that the period has been

established in favor of one or the other.

1. PERIOD FOR THE BENEFIT OF THE CREDITOR

 Creditor may demand the fulfillment of the obligation at any time but the debtor cannot compel

him to accept before the expiration of the period

 2. PERIOD FOR THE BENEFIT OF THE DEBTOR

 Debtor may oppose any premature demand of the creditor but he may renounce the benefit of the

period by performing his obligation in advance (Manresa)

WHEN DEBTOR LOSES RIGHT TO PERIOD (Art 1198):

1. Insolvency of debtor, unless security provided

2. Did not deliver security promised

3. Impaired security through his own acts or through fortuitous event unless he gives new

securities equally satisfactory

4. Violates undertaking in consideration of extension of period

5. Attempts to abscond

ALTERNATIVE

Facultative - only one prestation has been agreed upon but another may be given in substitution

 EFFECT OF LOSS OR DETERIORA0TION THRU NEGLIGENCE, DELAY OR FRAUD OF OBLIGOR:

1. Of thing intended as substitute - no liability

2. Of the substitute after substitution is made – with liability

Alternative – bound by different prestations but only one is due

 RIGHT OF CHOICE IN ALTERNATIVE OBLIGATIONS

GENERAL RULE: the right of choice belongs to debtor

EXCEPTION:

1. Expressly granted to creditor

2. Expressly granted to third person

 LIMITATIONS ON THE RIGHT OF CHOICE OF THE DEBTOR

The debtor shall not have the right to choose the prestations, which are:

a. Impossible

b. Unlawful

c. Those which could not have been the object of the obligation

 WHEN CONVERTED TO SIMPLE OBLIGATION:

1. When the person who has a right of choice has communicated his choice

2. Only one is practicable

 EFFECT OF LOSS OF OBJECTS OF ALTERNATIVE OBLIGATIONS

1. If the right of choice belongs to the debtor

o If through a fortuitous event all were lost, debtor cannot be held liable for damages
 o If 1 or more but not all of the things are lost or one or some but not all of the prestations cannot be

performed due to fortuitous event or fault of the debtor, creditor cannot hold the debtor liable for

damages because the debtor can still comply with his obligation

o If all things, except one, were lost, the debtor must comply by performing that which remain

o If all were lost by fault of the debtor the later is liable for the value of the last thing or service which

became impossible

2. If right of choice belongs to the creditor

o If 1 of the things is lost through a fortuitous event, the debtor shall perform the obligation by

delivering that which the creditor should choose from among the remainder or that which remains if

only 1 subsists

o If the loss of 1 of the things occurs through the fault of the debtor, the creditor may claim any of

those subsisting or the price of that which, through the fault of the former, has disappeared with a

right to damages

o If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the

price of any 1 of them, also with indemnity for damages.

 REQUISITES FOR MAKING THE CHOICE

1. Made properly so that creditor or his agent will actually know

2. Made with full knowledge that a selection is indeed being made

3. Made voluntarily and freely

4. Made in due time – before or upon maturity

5. Made to all proper persons

6. Made w/o conditions unless agreed by the creditor

7. May be waived, expressly or impliedly

 DISTINGUISH ALTERNATIVE FROM FACULTATIVE

ALTERNATIVE FACULTATIVE

 Various things are due but the giving principally of  Only one thing is due but a substitute may be given

one is sufficient to render payment/fulfillment easy

 If one of prestations is illegal, others may be valid but  If one of prestations is illegal, others may be valid but

obligation remains obligation remains

  If it is impossible to give all except one, the last one  If it is impossible to give the principal, the substitute

must still be given does not have to be given; if it is impossible to give

the substitute, the principal must still be given

 Right to choose may be given either to debtor or  The right of choice is given only to the debtor

creditor

JOINT

- The whole obligation is to be paid or fulfilled proportionately by different debtors or demanded proportionately

by the different obliges.

GENERAL RULE: The presumption of the law is that an obligation is always joint.

EXCEPTIONS TO THE PRESUMPTION:

1. When expressly stated that there is solidarity

2. When the law requires solidarity

3. When the nature of the obligation requires solidarity

4. When a charge or condition is imposed upon heirs or legatees and the testament expressly makes the

charge or condition in solidum (Manresa)

5. When a solidary responsibility is imputed by a final judgment upon several defendants

 EFFECTS OF JOINT LIABILITY

1. Demand on one produces delay only with respect to the debt

2. Interruption in payment by one does not benefit or prejudice the other

3. Vices of one debtor to creditor has no effect on the others

 4. Insolvency of one debtor does not affect other debtors

 JOINT DIVISIBLE OBLIGATIONS

1. Each creditor can demand for the payment of his proportionate share of the credit, while each debtor can

be held liable only for the payment of his proportionate share of the debt

2. A joint creditor cannot act in representation of the other creditors while a joint debtor cannot be compelled

to answer for the acts or liability of the other debtors

MANCUMUNADA

1. If there are 2 or more debtors, the fulfillment of or compliance with the obligation requires the concurrence

of all the debtors, although each for his own share. The obligation canbe enforced only by proceeding against

all of the debtors.

2. If there are 2 or more creditors, the concurrence or collective act of all the creditors, although each for his

own share, is also necessary for the enforcement of the obligation

 EFFECT OF BREACH

If one of the joint debtors fails to comply with his undertaking, the obligation can no longer be fulfilled or

performed. Consequently, it is converted into one of indemnity for damages. Innocent joint debtor shall not

contribute to the indemnity beyond their corresponding share of the obligation.

 INDIVISIBILITY AND SOLIDARITY DISTINGUISHED

INDIVISIBILITY SOLIDARITY

 Refers to the prestation which constitutes the  Refers to the legal tie and consequently to the

object of the obligation subjects or parties of the obligation

 Plurality of subjects is not required  Plurality of subjects is indispensable

 In case of breach, obligation is converted into 1 of  When there is liability on the part of the debtors

indemnity for damages because of breach, because of the breach, the solidarity among the

indivisibility of the obligation is terminated debtors remains

 PASSIVE SOLIDARITY AND SURETYSHIP DISTINGUISHED

PASSIVE SOLIDARITY SURETYSHIP

Stands for some other person

May be reimbursed after payment

 liable for his and codebtor's share  only the principal's share
  Primary  Secondary

 Extension of time, not released  Released

SOLIDARY

- must be expressed in stipulation or provided by law or by nature of obligation

1. Active – on the part of creditor or oblige

 EFFECTS:

o Death of 1 solidary creditor transmits share to heirs (but collectively)

o Each creditor represents the other in the act of recovery of payment

o Credit is divided equally between creditors as among themselves

o Debtor may pay any of the solidary creditors

2. Passive – on the part of debtors or obligors

 EFFECTS:

o Each debtor may be requested to pay whole obligation with right to recover from co-debtors

o Interruption of prescription to one creditor affects all

o Interest from delay on 1 debtor is borne by all

3. Mixed – on the part of the obligors and obligees, or the part of the debtors and the creditors

4. Conventional – agreed upon by the parties

5. Legal – imposed by law

 Instances where law imposes solidary obligation:

a. Obligations arising from tort

b. Obligations arising from quasi-contracts

c. Legal provisions regarding obligation of devisees and legatees

d. Liability of principals, accomplices, and accessories of a felony

e. Bailees in commodatum

 EFFECTS:

a. Payment made before debt is due, no interest can be charged, otherwise – interest can be charged

b. Insolvency of one – others are liable for share pro-rata

c. If different terms and conditions – collect only what is due, later on collect from any

d. No reimbursement if payment is made after prescription or became illegal

e. Remission made after payment is made – co-debtor still entitled to reimbursement

f. Effect of insolvency or death of co-debtor – still liable for whole amount

g. Fault of any debtor – everyone is responsible – price, damage and interest

h. Complete/ personal defense – total or partial ( up to amount of share only ) if not personal to him
  EFFECT OF LOSS OR IMPOSSIBILITY OF THE PRESTATION

1. If without fault – no liability

2. If with fault – there is liability (also for damage and interest)

3. Loss due to fortuitous event after default – there is liability (because of default)

DIVISIBLE

DIVISIBLE - obligation that is capable of partial performance

 Execution of certain no of days work

 Expressed by metrical units

 Nature of obligation – susceptible of partial fulfillment

INDIVISIBLE - one not capable of partial performance

 To give definite things

 Not susceptible of partial performance

 Provided by law

 Intention of parties

PENAL CAUSE

WITH A PENAL CLAUSE – One to which an accessory undertaking is attached for the purpose of insuring its performance

by virtue of which the obligor is bound to pay a stipulated indemnity or perform a stipulated prestation in case of

breach.

 PENAL CAUSE DISTINGUISHED FROM CONDITION

PENAL CAUSE CONDITION

 Constitutes an obligation  Not an obligation

 Demandable in default  Never demandable

 Obligation exists  No obligation until condition happens

 Depends on the nonperformance of the principal  Principal itself is dependent on an uncertain event

obligation

 PENAL CAUSE DISTINGUISHED FROM ALTERNATIVE OBLIGATIONS

PENAL CAUSE ALTERNATIVE OBLIGATIONS

 Only 1 prestation  Several prestations

  Impossibility of principal extinguishes penalty  Impossibility of 1 prestation does not extinguish the

obligation

 Debtor may not choose between principal and  Debtor may choose among the prestations

penalty

 PENAL CAUSE DISTINGUISHED FROM FACULTATIVE OBLIGATION

PENAL CAUSE FACULTATIVE OBLIGATION

 Penalty of payment in lieu of the principal must be  Power to choose prestation is absolute

expressly granted

 Creditor may demand both if expressly granted  Creditor may not demand both principal and

penalty

 PENAL CAUSE DISTINGUISHED FROM GUARANTEE

PENAL CUASE GUARANTEE

Insure performance of principal obligation

Accessory and subsidiary obligations

Obligation to pay the penalty is different from the Object of the principal and the guarantee is the

principal obligation same

Principal and penalty can be assumed by the same No

person

Penalty is extinguished by the nullity of the principal Guarantee subsists even if the principal obligation is

voidable, unenforceable or a natural one, same

applies if penal clause is assumed by a guarantee

 PURPOSE OF PENALTY:

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

2. Funcion liquidatoria – to liquidate the amount of damages to be awarded to the injured party in case of breach of

the principal obligation (compensatory), and

3. Funcion estrictamente penal – in certain exceptional cases, to punish the obligor in case of breach of the principal

obligation (punitive).

 CHARACTERISTICS OF PENAL CLAUSES

1. Subsidiary

GENERAL RULE: Only penalty can be demanded, principal cannot be demanded

EXCEPTION: Penalty is joint or cumulative

2. Exclusive - takes place of damage, damage can only be demanded in the ff. cases:
 a. Stipulation – granting right

b. Refusal to pay penalty

c. With dolo (not of creditor)

 PENALTY AS SUSTITUTE FOR DAMAGES

GENERAL RULE: the penalty fixed by the parties is or substitute for damages in case of breach EXCEPTIONS:

1. When there is a stipulation to the contrary

2. When the debtor is sued for refusal to pay the agreed penalty; and

3. When debtor is guilty of fraud

 DOUBLE FUNCTIONS OF PENALTY

1. to provide for liquidated damages

2. to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach

 KINDS OF PENALTIES:

1. Legal – constituted by law

2. Conventional – constituted by agreement of the parties

3. Compensatory – established for the purpose of indemnifying the damages suffered by the obligee or creditor in

case of breach of the obligation

4. Punitive – established for the purpose of punishing the obligor or debtor in case of breach of the obligation

5. Subsidiary or alternative- in case of non-performance only the penalty is demandable

6. Joint or cumulative – both the principal undertaking and the penalty may be demanded

 CAUSES FOR REDUCTION OF PENALTY

1. Partial/irregular performance

2. Penalty provided is iniquitous/ unconscionable

PAYMENT

 Principal Modes: (PAL-CoCoCo-No)

1. Payment or performance

2. Loss of the thing due

3. Condonation or remission of debt

4. Confusion or merger of rights

5. Compensation

6. Novation
 Other Modes:

7. Annulment

8. Rescission

9. Fulfillment of resolutory condition

10. Prescription

 Not Stated in the Civil Code:

11. Death of a Party in Personal Obligations

12. Mutual Desistance

13. Compromise

14. Impossibility of Fulfillment

15. Happening of Fortuitous Event

16. Arrival of Resolutory Period

17. Will of One of the Parties Due to Indeterminate Duration or Nature of the Prestation/ Unilateral Withdrawal in

Partnerships

18. Change of Civil Status

19. Rebus Sic Stantibus (Art. 1267)

20. Want of Interest in Some Circumstances

21. Abandonment in Special Cases

22. Insolvency Judicially Declared and Debtor is Discharged

PAYMENT OR PERFORMANCE

- Delivery of money and performance, in any other manner of the obligation

 REQUISITES FOR VALID PAYMENT/PERFORMANCE

1. With respect to prestation itself

a. Identity

b. Integrity or completeness

c. Indivisibility

2. With respect to parties - must be made by proper party to proper party

a. Payor

i. Payor - the one performing, he can be the debtor himself or his heirs or assigns or his agent, or anyone

interested in the fulfillment of the obligation; can be anyone as long as it is with the creditor's consent

ii. 3RD person pays/performs - only the creditor's consent; if performance is done also with debtor's consent -

he takes the place of the debtor. There is subrogation except if the 3rd person intended it to be a donation

iii. 3RD person pays/performs with consent of creditor but not with debtor's consent, the repayment is only to

the extent that the payment has been beneficial to debtor

 b. Payee

i. Payee - creditor or obligee or successor in interest of transferee, or agent

ii. 3RD person - if any of the ff. concur:

a.It must have redounded to the obligee's

b. benefit and only to the extent of such benefit

c. It falls under art 1241, par 1,2,3 - the benefit is total so, performance is total

iii. Anyone in possession of the credit - but will apply only if debt has not been previously garnished

 PRINCIPLE OF INTEGRITY (Art. 1233)

GENERAL RULE: A debt shall not be understood to have been paid unless a thing or service of which the obligation

consists has been completely delivered or rendered, as the case maybe.

EXCEPTIONS:

1. When the obligation has been substantially performed in good faith (Art. 1234);

2. When the obligee accepts performance despite its incompleteness or irregularity and without expressing any

protest or correction. (Art. 1235)

 PERSONS FROM WHOM THE CREDITOR MUST ACCEPT PAYMENT

1. Debtor himself or his legal representative

2. Any person who has interest in the obligation (i.e., guarantor)

3. A 3rd person who has no interest in the obligation, when there is a stipulation to the contrary

 PAYMENT MADE BY 3RD PERSON

o If payment was made without the knowledge or against the will: the recovery is only up to the extent or the

amount of the debt at the time of the payment; the defense may only be availed of by the obligor

o If payment was with knowledge: the rights of reimbursements and subrogation are acquired by the 3rd person

 TO WHOM PAYMENY MUST BE MADE

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

2. His successor-in-interest

3. Any person authorized by law or by the obligee at the time when payment is due to receive it (not during the

time when the obligation is constituted)

 PAYMENT TO AN INCAPACITATED PERSON, VALID IF:

1. Incapacitated person kept the thing delivered, or

2. Insofar as the payment has been beneficial to him

 PAYMENT TO 3RD PERSON

GENERAL RULE: Payment is not valid, even though made in good faith

EXCEPTIONS:

1. Payment which redounded to the benefit of the obligee

 Instances when the presumption that the payment redounded to the benefit of the obligee:

1. After payment, 3rd person acquires the creditor’s rights (subrogation)

2. Creditor ratifies payment to 3rd person

3. By creditor’s conduct, debtor has been led to make the payment (estoppel)

2. Payment to the possessor of the credit, when made in good faith

 REQUISITES:

1. Payment by debtor must be made in good faith

2. Creditor must be in possession of the credit and not merely the evidence of indebtedness

 WHERE PAYMENT SHOULD BE MADE

1. In the place designated in the obligation

2. If there is no express stipulation and the undertaking is to deliver a specific thing – at the place where the thing

might be at the moment the obligation was constituted

3. In other case – in the place of the domicile of the debtor

 Time of payment - time stipulated

 Effect of payment – extinguish obligation

Except: order to retain debt

 SUBSTANTIAL PERFORMANCE

A debt shall not be understood to have been paid unless the thing or service in which the obligation consists

has been completely delivered or rendered, as the case may be. If the obligation has been substantially

performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less

damages suffered by the obligee.

When the obligee accepts the performance, knowing its incompleteness or irregularity, and without

expressing any protest or objection, the obligation is deemed fully complied with

o Attempt in Good Faith to perform without willful or intentional departure

o Deviation is slight

o Omission/Defect is technical or unimportant

o Must not be so material that intention of parties is not attained

  EFFECT OF SUBSTANTIAL PERFORMANCE IN GOOD FAITH

o Obligor may recover as though there has been strict and complete fulfillment, less damages suffered by the

oblige

o Right to rescind cannot be used for slight breach

 SPECIAL RULES/FORMS OF PAYMENT

1. Application of Payments

2. Dation in Payment/ Dacion en Pago/ Adjudication/ Dacion in Solutum/ Adjudicacion en Pago/ Payment in

Kind/ Dation en Paiement

3. Payment by Cession/Cession en Pago

4. Tender of Payment and Consignation

A. APPLICATION OF PAYMENTS – the designation of the debt which payment shall be made, out of 2 or more debts

owing the same creditor: stipulation or application of party given benefit of period – OK; to be valid: must be debtor’s

choice or w/ consent of debtor

 REQUISITES FOR THE APPLICATION OF PAYMENT:

a. There must be only one debtor and only one creditor

b. Two or more debts of the same kind

c. All debts must be due

EXCEPTION: there may be application of payment even if all debts are not yet due if:

i. Parties so stipulate

ii. When application of payment is made by the party for whose benefit the term has been constituted

iii. Payment is not enough to extinguish all debts

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

 HOW APPLICATION IS MADE

a. Debtor makes the designation

b. If not, creditor makes it by so stating in the receipt that he issues – unless there is cause for invalidating the

contract

c. If neither the debtor nor creditor has made the application or if the application is not valid, then application, is

made by operation of law

 WHO MAKES APPLICATION OF DEBTS

GENERAL RULE: Debtor

 EXCEPTION: Creditor

a. Debtor without protest accepts receipt in which creditor specified expressly and unmistakably the obligation to

which such payment was to be applied – debtor in this case renounced the right of choice

b. When monthly statements were made by the bank specifying the application and the debtor signed said

statements approving the status of her account as thus sent to her monthly by the bank

c. In case no application is made:

 Apply payment to the most onerous

 If debts are of the same nature and burden, application shall be made to all proportionately

B. DACION EN PAGO - mode of extinguishing an obligation whereby the debtor alienates in favor of the creditor

property for the satisfaction of monetary debt; extinguish up to amount of property unless w/ contrary stipulation; A

special form of payment because 1 element of payment is missing: IDENTITY

 REQUISITES FOR A VALID DACION EN PAGO

a. There must be the performance of the prestation in lieu of payment (animo solvendi) which may consist in the

delivery of a corporeal thing or a real right or a credit against the third person

b. There must be some difference between the prestation due and that which is given in substitution (aliud pro alio)

c. 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

 CONDITIONS FOR A VALID DACION

a. If creditor consents, because a sale presupposes the consent of both parties

b. If dacion will not prejudice the other creditors

c. If debtor is not judicially declared insolvent

 DACION EN PAGO DISTINGUISHED FROM PACTUM COMMISORIUM

DACION EN PAGO PACTUM COMMISORIUM

 There is an intervening agreement subsequent  Generally, only one single contract where the

and independent from the original contract is parties agree that in the event debtor fails to pay,

entered into by the parties to have the property the mortgaged or pledged property shall

collaterizes in the original agreement as payment automatically be appropriated or owned by the

of the debt creditor

 Valid  Void

 DACION EN PAGO DISTINGUISHED FROM PLEDGE

 DACION EN PAGO PLEDGE

 Delivery and transfer of ownership  Delivery but no transfer of ownership

 Presumed since less transmission of rights

 DACION EN PAGO DISTINGUISHED FROM SALE

DACION EN PAGO SALE

 Preexisting credit  None

 Obligation extinguished  Obligation rises

 Less freedom in determining the price  Greater freedom

 Total or partial extinguishment  Payment of price generally totally extinguishes

 if done by mistake, recovery of the thing  If done by mistake, recovery of the price paid

 DACION EN PAGO DISTINGUISHED FROM ASSIGNMENT

DACION EN PAGO ASSIGNMENT

Substitute forms of performance

 1 creditor  Several creditors

 Debtor not partially insolvent  Debtor partially insolvent

C. CESSION or ASSIGNMENT (IN FAVOR OF CREDITORS) – the process by which debtor transfer all the properties not

subject to execution in favor of creditors is that the latter may sell them and thus, apply the proceeds to their credits;

extinguish up to amount of net proceeds ( unless w/ contrary stipulation)

 KINDS OF ASSIGNMENT

a. Legal – governed by the insolvency law

b. Voluntary – agreement of creditors

 REQUISITES OF VOLUNTARY ASSIGNMENT

a. More than one debt

b. More than one creditor

c. Complete or partial insolvency of debtor

d. Abandonment of all debtor’s property not exempt from execution

e. Acceptance or consent on the part of the creditors

 EFFECTS OF ASSIGNMENT

a. Creditors do not become the owner; they are merely assignees with authority to sell

b. Debtor is released up to the amount of the net proceeds of the sale, unless there is a stipulation to the contrary
 c. Creditors will collect credits in the order of preference agreed upon, or in default of agreement, in the order

ordinarily established by law

 DATION IN PAYMENT DISTINGUISHED FROM CESSION IN PAYMENT

DATION IN PAYMENT CESSION IN PAYMENT

 One creditor  Plurality of creditors

 Not necessarily in state of financial difficulty  Debtor must be partially or relatively insolvent

 Thing delivered is considered as equivalent of  Universality of property of debtor is what is ceded

performance

 Payment extinguishes obligation to the extent of the  Merely releases debtor for net proceeds of things

value of the thing delivered as agreed upon, proved ceded of, assigned, unless there is a contrary

or implied from the conduct of the creditor intention

D. TENDER AND CONSIGNATION

TENDER -the act of offering the creditor what is due him together with a demand that the creditor accept the same

(When creditor refuses w/o just cause to accept payment, he becomes in mora accepiendi and debtor is released

from responsibility if he consigns the thing or sum due)

CONSIGNATION – the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot

accept or refuses to accept payment; generally requires prior tender of payment

 REQUISITES OF VALID CONSIGNATION

a. Existence of valid debt

b. Consignation was made because of some legal cause - previous valid tender was unjustly refused or

circumstances making previous tender exempt

c. Prior Notice of Consignation had been given to the person interested in performance of obligation (1st notice)

d. Actual deposit/Consignation with proper judicial authorities

e. Subsequent notice of Consignation (2nd notice)

 EFFECTS: EXTINGUISHMENT OF OBLIGATION

a. Debtor may ask judge to order cancellation of obligation

b. Running of interest is suspended

c. Before creditor accepts or before judge declares consignation has been properly made, obligation remains

(debtor bears risk of loss at the meantime, after acceptance by creditor or after judge declares that consignation has

bEeen properly made – risk of loss is shifted to creditor)

 CONSIGNATION W/O PRIOR TENDER – allowed in:

 a. Creditor absent or unknown/ does not appear at the place of payment

b. Incapacitated to receive payment at the time it is due

c. Refuses to issue receipt w/o just cause

d. 2 or more creditor claiming the same right to collect

e. Title of obligation has been lost

 TENDER OF PAYMENT DISTINGUISHED FROM CONSIGNATION

TENDER OF PAYMENT CONSIGNATION

 antecedent act; preparatory  principal act; produces the effects of payment

 extrajudicial  judicial

 LOSS OF THE THING DUE - partial or total/ includes impossibility of performance

 WHEN IS THERE A LOSS

a. When the object perishes (physically)

b. When it goes out of commerce

c. When it disappears in such a way that: its existence is unknown or it cannot be recovered

 WHEN IS THERE IMPOSSIBILITY OF PERFORMANCE

a. Physical impossibility

b. Legal impossibility

i. Directly – caused as when prohibited by law

ii. Indirectly – caused as when debtor is required to enter a military draft

 EFFECT OF LOSS IN OBLIGATION TO DELIVER A SPECIFIC THING

GENERAL RULE: Loss shall extinguish the obligation

EXCEPTIONS:

a. If by law the obligor is liable even for fortuitous event

b. If by stipulation the obligor is liable even for fortuitous event

c. If the nature of the obligation requires the assumption of the risk

d. If the loss of the thing occurs after the obligor incurred in delay

e. If the loss of the thing occurs after the obligor incurred delay

f. If the obligor promised to deliver the same thing to two or more persons who do not have the same interest

g. IF the obligation is generic, unless the object is a particular class or group with specific or determinate qualities

 OBLIGATION TO DELIVER A GENERIC THING

 GENERAL RULE: Not extinguished

EXCEPTIONS:

a. If the generic thing is delimited

b. If the generic thing has already been segregated

c. Monetary obligation

 EFFECT OF IMPOSSIBILITY OF PERFROMANCE IN OBLIGATION TO DO

GENERAL RULE: Debtor is released when prestation becomes legally or physically impossible without fault on part of

debtor

 EFFECT OF PARTIAL LOSS

a. When loss is significant – may be enough to extinguish obligation

b. When loss insignificant – not enough to extinguish obligation

 WHEN THING IS LOST IN THE POSSESSION OF THE DEBTOR

Presumption: Loss due to debtor’s fault (disputable)

Exception: natural calamity, earthquake, flood, storm

REBUS SIC STANTIBUS: agreement is valid only if the same conditions prevailing at time of contracting continue to exist

at the time of performance; Obligor may be released in whole or in part based on this ground

 REQUISITES

A. The event or change could not have been foreseen at the time of the execution of the contract

B. The performance is extremely difficult, but not impossible (because if it is impossible, it is extinguished by

impossibility)

C. The event was not due to the act of any of the parties

D. The contract is for a future prestation

CONDONATION

- gratuitous abandonment of debt; right to claim; donation; rules of donation applies; express or implied

 REQUISITES

a. There must be an agreement

b. There must be a subject matter (object of the remission, otherwise there would be nothing to condone)

c. Cause of consideration must be liberality (Essentially gratuitous, an act of liberality )

d. Parties must be capacitated and must consent; requires acceptance by obligor; implied in mortis causa and

expressed inter vivos

e. Formalities of a donation are required in the case of an express remission

 f. Revocable – subject to rule on inofficious donation ( excessive, legitime is impaired ) and ingratitude and condition

not followed

g. Obligation remitted must have been demandable at the time of remission

h. Waivers or remission are not to be presumed generally

 FORMS, EXTENT AND KINDS

FORM EXTENT KINDS

a. Express – formalities of donation a. Total a. Principal – accessory also

condoned

b. Implied – conduct is sufficient b. Partial b. Accessory – principal still

outstanding

c. Accessory obligation of pledge

– condoned; presumption only,

rebuttable

 REQUISITES OF IMPLIED CONDONATION

1. Voluntary delivery – presumption; when evidence of indebtedness is w/ debtor – presumed voluntarily delivery by

creditor; rebuttable

2. Effect of delivery of evidence of indebtedness is conclusion that debt is condoned – already conclusion; voluntary

delivery of private document

a. If in hands of joint debtor – only his share is condoned

b. If in hands of solidary debtor - whole debt is condoned

c. Tacit – voluntary destruction of instrument by creditor; made to prescribe w/o demanding

CONFUSION

– character of debtor and creditor is merged in same person with respect to same obligation

 REQUISITES

a. It must take place between principal debtor and principal creditor only

b. Merger must be clear and definite

c. The obligation involved must be same and identical – one obligation only

d. Revocable, if reason for confusion ceases, the obligation is revived

COMPENSATION

- Set off; it is a mode of extinguishment to the concurrent amount the obligation of persons who are in their own right

reciprocally debtors or creditors

 REQUISITES

a. Both parties must be mutually creditors and debtors - in their own right and as principals

b. Both debts must consist in sum of money or if consumable , of the same kind or quality

c. Both debts are due

d. Both debts are liquidated and demandable (determined)

e. Neither debt must be retained in a controversy commenced by 3rd person and communicated w/ debtor

(neither debt is garnished)

 KINDS OF COMPENSATION

a. Legal – by operation of law; as long as 5 requisites concur- even if unknown to parties and if payable in diff

places; indemnity for expense of exchanges; even if not equal debts – only up to concurring amount

b. Conventional – agreement of parties is enough, forget other requirement as long as both consented

c. Facultative – one party has choice of claiming/opposing one who has benefit of period may choose to

compensate:

i. Not all requisites are present

ii. Depositum; commodatum; criminal offense; claim for future support; taxes

d. Judicial – set off; upon order of the court; needs pleading and proof; all requirements must concur except

liquidation

e. Total – when 2 debts are of the same amount

f. Partial – when 2 debts are not of the same amount

 EFFECT OF ASSIGNMENT OF CREDIT TO 3RD PERSON; CAN THERE STILL BE COMPENSATION

a. If made after compensation took place – no effect; compensation already perfected

b. If made before compensation took place – depends

i. With consent of debtor – debtor is estopped unless he reserves his right and gave notice to assignee

ii. With knowledge but w/o consent of debtor – compensation may be set up as to debts maturing prior to

assignment

iii. W/o knowledge – compensation may be set-up on all debts prior to his knowledge

 COMPENSATION DISTINGUISHED FROM CONFUSION

COMPENSATION CONFUSION

 2 persons; each is a debtor and creditor of each  only 1 person who is creditor and debtor of himself

other

 2 obligations  one obligation

  Indirect payment  impossibility of payment

 COMPENSATION DISTINGUISHED FROM PAYMENT

COMPENSATION PAYMENT

 capacity not necessary  capacity to dispose and capacity to receive

required

 may be partial performance  must be complete performance

 Simpler

 more guarantee and less risk

 may take place by operation of law  involves action or delivery of the amount paid

 COMPENSATION DISTINGUISHED FROM COUNTERCLAIM

COMPENSATION COUNTERCLAIM

 takes place by operation of law and extinguishes  must be pleaded to be effectual

reciprocally 2 claims as soon as they exist

simultaneously to the concurrent amounts

 OBLIGATIONS NOT COMPENSABLE

o When one of the debts arises from a depositum or from the obligations of a depositary or of a baliee in

commodatum. (Art. 1287)

o Against a creditor who has a claim for support due by gratuitous title, without prejudice to Article 301 par. 2

(Article 1287)

o If one of the debts consists in civil liability arising from a penal offense. (Art. 1288)

NOVATION

- Extinguishment of obligation by creating/ substituting a new one in its place

o Changing object or principal conditions

o Substituting person of debtor

o Subrogating 3rd person in right of creditor

 REQUISITES

a. Valid obligation

b. Intent to extinguish old obligation – expressed or implied: completely/substantially incompatible old and new

obligation on every point

c.Capacity and consent of parties to the new obligation

d. Valid new obligation

 EFFECTS OF NOVATION

a. Extinguishment of principal carries accessory, except:

i. Stipulation to contrary

ii. Stipulation pour autrui unless beneficiary consents

iii. Modificatory novation only; obliged to w/c is less onerous

iv. Old obligation is void

b. Old obligation subsists if new obligation is void or voidable but annulled already (except: intention of parties)

c. If old obligation has condition

i. If Resolutory and it occurred – old obligation already extinguished; no new obligation since nothing to novate

ii. If Suspensive and it never occurred –as if no obligation; also nothing to novate

d. If old obligation has condition, must be compatible with the new obligation; if new is w/o condition – deemed

attached to new

e. If new obligation has condition

i. If resolutory: valid

ii. If suspensive and did not materialize: old obligation is enforced

 KINDS OF NOVATION

1. REAL/OBJECTIVE – change object, cause/consideration or principal condition

2. PERSONAL/SUBJECTIVE

i. Substituting person of debtor (passive)

 EXPROMISION: initiative is from 3rd person or new debtor; new debtor and creditor to consent; old debtor

released from obligation; subject to full reimbursement and subrogation if made w/ consent of old debtor; if

w/o consent or against will , only beneficial reimbursement; if new debtor is insolvent, not responsible since

w/o his consent

 DELEGACION: initiative of old debtor; all parties to consent; full reimbursement; if insolvent new debtor – not

responsible old debtor because obligation extinguished by valid novation unless: insolvency already existing

and of public knowledge or know to him at time of delegacion

1. Delegante – old debtor

2. Delegatario - creditor

3. Delegado – new debtor

 EXPROMISION DISTINGUISHED FROM DELEGACION

EXPROMISION DELEGACION

Intention: old debtor be released from the obligation

 Consent of creditor may be express or tacit but not presumed by acceptance of payment from third person

Donation cannot be presumed

consent of creditor and third person consent of debtor (initiates), creditor and third

person; need not be given simultaneously

governed by the rules of payment by third persons same applies in the absence of an agreement by

old and new debtors

if w/o knowledge of debtor, beneficial subrogation

reimbursement , no subrogation

new debtor's insolvency does not make old debtor same unless new debtor is known to the public as

liable insolvent or old debtor knows of such insolvency at

the time of delegacion creditor may not recover

from old debtor if he knows of such insolvency of

the new debtor

quite rare delegante (old)

delegado (new)

delegatario (creditor)

ii. Subrogating 3rd person to rights of creditor (active)

1. Conventional - agreement and consent of all parties; clearly established

2. Legal - takes place by operation of law; no need for consent; not presumed except as provided for in law:

PRESUMED WHEN

• Creditor pays another preferred creditor even w/o debtor’s knowledge

• 3 rd person not interested in obligation pays w/ approval of debtor

• Person interested in fulfillment of obligation pays debt even w/o knowledge of debtor

DIFFERENCE FROM PAYMENT BY 3RD PERSON VS. CHANGE OF DEBTOR

DIFFERENCE FROM PAYMENT BY 3RD PERSON CHANGE OF DEBTOR

debtor is not necessarily released from debt debtor is released

can be done w/o consent of creditor needs consent of creditor – express or implied

one obligation two obligations; one is extinguished and new one

created

3rd person has no obligation to pay if insolvent new debtor is obliged to pay

 CONVENTIONAL SUBROGATION DISTINGUISHED FROM ASSIGNMENT OF RIGHTS

CONVENTIONAL SUBROGATION ASSIGNMENT OF RIGHTS

  Governed by Arts. 1300-1304  Governed by Arts. 1624 to 1627

 debtor’s consent is required  debtor’s consent is not required

 extinguishes the obligation and gives rise to a new  transmission of right of the creditor to third person

one without modifying or extinguishing the obligation

 defects and vices in the old obligation are cured  defects and vices in the old obligation and not

cured

 takes effect upon moment of novation or  as far as the debtor is concerned, takes effect

subrogation upon notification

ESSENTIAL
 ESSENTIAL ELEMENTS

1. Consent

2. Subject Matter

3. Consideration

CONSENT

– meeting of minds between parties on subject matter and cause of contract; concurrence of offer and

acceptance

 REQUIREMENTS

1. Must be manifested by the concurrence of the offer and payment;

2. Parties are legally capacitate to enter into contracts

3. Consent must be intelligent, free, spontaneous, and real

AUTO CONTRACTS - made by a person acting in another’s name in one capacity

COLLECTIVE CONTRACTS - will of majority binds a minority to an agreement notwithstanding the opposition of the latter

CONTRACTS OF ADHESION - one party has already a prepared form of a contract, containing the stipulations he desires,

and he simply asks the other party to agree to them if he wants to enter into the contract.

UNDER THE CIVIL LAW, the offer and acceptance concur only when the offeror comes to know, and not when the

offeree merely manifests his acceptance.

OFFER – a proposal made by one party to another to enter into a contract; must be certain or definite, complete and

intentional

 ELEMENTS OF VALID OFFER / ELEMENTS OF VALID ACCEPTANCE

1. Definite--unequivocal

2. Complete--unconditional

3. Intentional

 WHEN OFFER BECOMES 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 a counter-offer

4. Subject matter becomes illegal or impossible before acceptance is communicated

ACCEPTANCE - manifestation by the offeree of his assent to the terms of the offer; must be absolute
 PERIOD FOR ACCEPTANCE

1. Stated fixed period in the offer

2. No stated fixed 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 received from him

 AMPLIFIED ACCEPTANCE

Under certain circumstances, a mere amplification on the offer must be understood as an acceptance of the

original offer, plus a new offer, which is contained in the amplification.

 RULE ON COMPLEX OFFERS

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.

 Offer inter praesentes must be accepted IMMEDIATELY. If the parties intended that there should be an express

acceptance, the contract will be perfected only upon knowledge by the offeror of the express acceptance

by the offeree of the offer. An acceptance which is not made in the manner prescribe by the offeror is NOT

EFFECTIVE, BUT A COUNTER-OFFER which the offeror may accept or reject. Malbarosa v. CA, [G.R. No. 125761,

April 30, 2003]

 RULE ON ADVERTISEMENTS AS OFFERS

1. Business advertisements – Not a definite offer, but mere invitation to make an offer, unless it appears otherwise

2. Advertisement for Bidders – only invitation to make proposals and advertiser is not bound to accept the highest or

lowest bidder, unless appears otherwise

 THE 4 THEORIES IN ACCEPTANCE OF OFFER BY TELEGRAM OR LETTER

1. Manifestation – perfected from the moment the acceptance is declared or made

2. Expedition – perfected from the moment the offeree transmits the notification of acceptance

3. Reception – perfected from the moment the offeror receives the letter

4. Cognition – perfected from the moment the acceptance comes to the knowledge of the offeror

When the offeror refuses to open the letter or telegram he is held to have a constructive notice of the contents

thereof and will be bound by the acceptance of the offeree. (Jurado citing Castan)
OPTION: option may be withdrawn anytime before acceptance is communicated but not when supported by a

consideration other than purchase price: option money

 EFFECTS OF OPTION:

o NOT supported by independent consideration – the offeror can withdraw the privilege at any time by

communicating the withdrawal before acceptance

o Supported by independent consideration – the offeror cannot withdraw his offer

 PERSONS WHO CANNOT GIVE CONSENT TO A CONTRACT

1. Minors

2. Insane or demented persons, unless the contract was entered into during a lucid interval

3. Illiterates/ deaf-mutes who do not know how to write

4. Intoxicated and under hypnotic spell

5. Art 1331 - person under mistake; mistake may deprive intelligence

6. Art 1338 - person induced by fraud (dolo causante)

 RULE ON CONTRACTS ENTERED INTO BY MINORS

GENERAL RULE: VOIDABLE

EXCEPTIONS:

a. Upon reaching age of majority – they ratify the same

b. They were entered unto by a guardian and the court having jurisdiction had approved the same

c. They were contracts for necessities such as food, but here the persons who are bound to give them support

should pay therefor

d. Minor is estopped and cannot be absolved from the contract they entered into for having misrepresented his

age and misled the other party through his active misrepresentation. Mercado vs. Espiritu, [37 Phil 215] HOWEVER,

minors can set up the defense of minority to resist the claim when there is only passive misrepresentation, as they did

not disclose their minority because they had no juridical duty to disclose their inability. (Braganza vs. De Villa Abrille,

[105 Phil 456]

 DISQUALIFIED TO ENTER INTO CONTRACTS (contracts entered into are void)

1. Those under civil interdiction

2. Hospitalized lepers

3. Prodigals

4. Deaf and dumb who are unable to read and write

5. Those who by reason of age, disease, weak mind and other similar causes, cannot without outside aid, take

care of themselves and manage their property, becoming an easy prey for deceit and exploitation (Rule 92,

Sec.2, Rules of Court)

 INCAPACITY DISTINGUISHED FROM DISQUALIFICATION

INCAPACITY DISQUALIFICATION

Restrains the exercise of the right to contract Restrains the very right itself

May still enter into contract through parent, Absolutely disqualified

guardian or legal representative

Based upon subjective circumstance of certain Based upon public policy and morality

person

Contracts entered into are merely voidable Contracts entered into are void

 CAUSES WHICH VITIATE FREEDOM

1. Violence

 REQUISITES

a. Irresistible physical force

b. Such force is the determining cause for giving consent

2. Intimidation

 REQUISITES:

a. Determining cause for the contract

b. Threatened act is unjust and unlawful

c. Real and serious

d. Produces a well grounded fear that the person making it will carry it over

Reluctant consent – 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 vs. Hongkong

and Shanghai Bank, [15 Phil 252]

3. Mistake - Not only wrong conception of the thing but also the lack of knowledge with respect to it (Manresa)

 TWO GENERAL KINDS OF MISTAKES

a.Mistake of Fact – when one or both of the contracting parties believe that a fact exist when in reality it

does not, or that such fact does not exist when in reality it does

b. Mistake of Law General Rule - Mistake does not vitiate consent Exception: Mutual error as to the effect

of an agreement when the real purpose of the parties is frustrated

4. Fraud - When, through insidious words or machinations of 1 of the contracting parties, the other is induced to

enter into a contract which, without them, he would not have agreed to.

 KINDS OF FRAUD

a. Causal Fraud (Dolo Causante)- Fraud in the PERFECTION of the contract

o Deception of serious character, without which the other party would not have entered into

o It is the cause which induces the party to enter into a contract

 o Renders the contract voidable. Insidious words or machinations are employed

o Not employed by both or by third person

o Ground for annulment

o Incidental Fraud (Dolo Incidente)- Fraud in the PERFORMANCE of an obligation

 Deception which are not serious and without which the other party would still have entered

into the contract

 It is not the cause which induced the party to enter into a contract

 Renders the party liable for damages

5. 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

 SIMULATED CONTRACTS

1. Absolute – no intention to be bound at all, fictitious only – void from beginning

2. Relative – there is intention to be bound but concealed; concealed contract binds:

a. No prejudice to 3rd persons

b. Not contrary to law, morals, etc.

OBJECT

 REQUISITES

1. Within the commerce of man – either existing or in potency

2. Licit or not contrary to law, good customs

3. Possible

4. Determinate as to its kind or determinable w/o need to enter into a new contract

5. Transmissible

 THINGS WHICH CANNOT BE THE OBJECT OF CONTRACT

1. Things which are outside the commerce of men

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

6. Objects which are not possible of determination as to their kind

CAUSE (CAUSA)

- Immediate, direct and most proximate reason why parties enter into contract
 REQUISITES

1. It must exist

2. It must be true

3. It must be licit

MOTIVE - Purely private reason; illegality does not invalidate contract except when it predetermines purpose of contract;

when merged into one

 CAUSE DISTINGUISHED FROM MOTIVE

CAUSE MOTIVE

 Direct and most proximate reason of a contract  Indirect or remote reasons

 Objective and juridical reason of contract  Psychological or purely personal reason

 Cause us always same for each contracting party  The motive differs for each contracting party

 Legality or illegality of cause affects the existence  Legality or illegality of motive does not affect the

or validity of the contract existence or validity of contract

 CAUSA IN SOME CONTRACT

1. Onerous contracts – the prestation of promise of a thing or service by the other

2. Remuneratory contracts – the service or benefit remunerated

3. Pure Beneficence – mere liberality of the donor or benefactor

4. Accessory – identical with cause of principal contract, the loan which it derived its life and existence (ex:

mortgage or pledge)

Want of Cause - There is a total lack or absence of cause

Illegal Cause – The cause is contrary to law, morals, good customs, public order and public policy

False Cause – The cause is stated but it is not true

WANT OF CAUSE EFFECT

ABSENCE OF CAUSA Void - produce no legal effect

ILLEGALITY OF CAUSA Void - produce no legal effect

FALSITY OF CAUSA Voidable – party must prove that cause is untruthful;

presumption of validity but rebuttable

CAUSA NOT STATED IN CONTRACT Presumed to Exist - burden of proof is on the person

assailing its existence

INADEQUAC Y OF CAUSA Does not Invalidate Contract per se

Exceptions:
 * Fraud

* Mistake

* Undue influence

* Cases specified by law - contracts entered when ward

suffers lesion of more than 25%

 MORAL OBLIGATIONS AS CAUSE

o Where the moral obligation arises wholly from ethical considerations, unconnected with any civil obligations, it

cannot constitute a sufficient cause or consideration to support an onerous contract. Fisher vs. Robb [69 Phil 101]

o Where such moral obligation is based upon a previous civil obligation which has already been barred by the

statute of limitations at the time when the contract is entered into, it constitutes a sufficient cause or consideration

to support a contract Villaroel vs. Estrada 71 Phil 14]

A contract is a meeting of minds between two persons whereby one binds himself, with respect to the

other, to give something or to render some service

 CONTRACT DISTINGUISHED FROM OBLIGATION

CONTRACT OBLIGATION

One of the sources of obligations Legal tie or relation itself

There must be an obligation There need not be a contract

 CONTRACT DISTINGUISHED FROM AGREEMENT

CONTRACT AGREEMENT

Agreements enforceable through legal proceedings Cannot be enforced by action in courts of justice

Should have all the requisites of a contract Need not have all the requisites

There must be an agreement There need not be a contract

A. PRINCIPAL CHARACTERISTICS

1. Autonomy of wills – parties may stipulate anything as long as not illegal, immoral, etc.

2. Mutuality – performance or validity binds both parties; not left to will of one of parties

3. Obligatory Force and Consensuality – parties are bound from perfection of contract; 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 consequences which, according to their nature may be in keeping with good faith, usage

and law.

4. Fulfill what has been expressly stipulated

 5. All consequences w/c may be in keeping with good faith, usage and law 6. Relativity – binding only between

the parties, their assigns, heirs; strangers cannot demand enforcement

B. EXCEPTION TO RELATIVITY

1. Accion Pauliana

2. Accion directa

3. Stipulation pour autrui

C. REQUISITES OF STIPULATION POUR AUTRUI

1. Parties must have clearly and deliberately conferred a favor upon a 3rd person

2. The stipulation in favor of a 3rd person should be a part of, not the whole contract

3. That the favorable stipulation should not be conditioned or compensated by any kind of obligation whatsoever

4. Neither of the contracting parties bears the legal representation or authorization of 3rd party

5. The third person communicates his acceptance before revocation by the original parties

6. Art 1312; Art 1314

In contracts creating real rights, third persons who come into possession of the object of the contract are

bound thereby, subject to the provisions of the Mortgage Law and the Land Registration Laws

D. REQUISITES

1. Existence of a valid contract

2. Knowledge of the contract by a 3rd person

3. Interference by the 3rd person

E. TEST OF BENFICIAL SITUATION

The fairest to determine whether the interest of 3rd 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. Determine whether

contracting parties desired to tender him such interest Uy Tam vs. Leonard, [30 Phil 471]

KINDS OF CONTRACTS

1. As to perfection or formation

a. Consensual – perfected by agreement of parties

b. Real – perfected by delivery (e.g. commodatum, pledge, deposit)

c. Formal/solemn – perfected by conformity to essential formalities (donation )

2. As to cause

a. Onerous – with valuable consideration

b. Gratuitous – founded on liberality

 c. Remunerative – prestation is given for service previously rendered not as obligation

3. As to importance or dependence of one upon another

a. Principal – contract may stand alone

b. Accessory – depends on another contract for its existence; may not exist on its own

c. Preparatory – not an end by itself; a means through which future contracts may be made

4. As to parties obliged

a. Unilateral – only one of the parties has an obligations

b. Bilateral – both parties are required to render reciprocal prestations

5. As to form

a. Common or informal – require no particular form

b. Special or formal – require some particular Form

6. As to their purpose

a. Transfer of ownership

b. Conveyance of use c. Rendition of service

7. As to their subject matter

a. Things

b. Services

8. As to the risk involved

a. Commutative – example lease

b. Aleatory – example insurance

9. As to name or designation

a. Nominate – those which have their own distinctive individuality and are regulated by special provisions of law

b. Innominate – those which lack individuality and are not regulated by special provisions of law

II. Do ut des – I give that you may give

III. Do ut facias – I give that you may do

IV. Facio ut des – I do that you may give

V. Facio ut facias – I do that you may do

 STAGES IN A CONTRACT

1. Preparation - negotiation

2. Perfection/birth

3. Consummation – performance

FORMAL CONTRACTS

1. Donation

 The donation of a movable may be made orally or in writing (Article 748)

  An oral donation requires the simultaneous delivery of the thing or of the document representing the right

donated. (Article 748)

 If the value of the personal property donated exceeds five thousand pesos, the donation and the acceptance

shall be made in writing. Otherwise, the donation shall be void. (Article 748)

 In order that the donation of an immovable may be valid, it must be made in a public document, specifying

therein the property donated and the value of the charges which the donee must satisfy. (Article 749)

 The acceptance may be made in the same deed of donation or in a separate public document, but it shall not

take effect unless it is done during the lifetime of the donor. (Article 749)

 If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and

this step shall be noted in both instruments. (Article 749)

2. Partnership

 A partnership may be constituted in any form, except where immovable property or real rights are contributed

thereto, in which case a public instrument shall be necessary. (Article 1771)

 A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said

property is not made, signed by the parties, and attached to the public instrument. (Article 1773)

3. Antichresis

 The amount of the principal and of the interest shall be specified in writing; otherwise, the contract of antichresis

shall be void

4. Agency to Sell Real Property

 When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in

writing; otherwise, the sale shall be void. (Article 1874)

5. Interest

 No interest shall be due unless it has been expressly stipulated in writing (Article 1876)

6. Ordinary Diligence

 A stipulation between the common carrier and the shipper or owner limiting the liability of the former for the loss,

destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it

be: o In writing, signed by the shipper or owner; o Supported by a valuable consideration other than the service

rendered by the common carrier; and o Reasonable, just and not contrary to public policy. (Article 1744)

7. Chattel Mortgage

 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.

8. Sale of Large Cattle

 The form of sale of large cattle shall be governed by special laws. (Article 1581)

FORM OF CONTRACTS
FORM - in some kind of contracts only as contracts are generally consensual; form is a manner in which a contract is

executed or manifested

1. Informal – may be entered into whatever form as long as there is consent, object and cause

2. Formal – required by law to be in certain specified form such as: donation of real property, stipulation to pay

interest, transfer of large cattle, sale of land thru agent, contract of antichresis, contract of partnership, registration

of chattel mortgage, donation of personal prop in excess of 5,000

3. Real – creation of real rights over immovable prop must be written

 WHEN FORM IS IMPORTANT

1. For validity (formal/solemn contracts)

2. For enforceability (statute of frauds)

3. For convenience

 GENERAL RULE: contract is valid and binding in whatever form provided that 3 essential requisites concur

 EXCEPTIONS

a. Law requires contract to be in some form for validity - donation and acceptance of real property

b. Law requires contract to be in some form to be enforceable - Statute of Frauds; contract is valid but right to

enforce cannot be exercised; need ratification to be enforceable

c. Law requires contract to be in some form for convenience - contract is valid and enforceable, needed only to

bind 3rd parties Ex: public documents needed for the ff:

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

ii. Cession, repudiation, renunciation of hereditary rights/CPG

iii. Power to administer property for another

iv. Cession of action of rights proceeding from an act appearing in a public inst.

v. All other docs where amount involved is in excess of 500 (must be written even private docs)

REFORMATION

REFORMATION OF CONTRACTS - remedy to conform to real intention of parties due to mistake, fraud, inequitable

conduct, accident

 CAUSES/GROUNDS

1. Mutual: instrument includes something w/c should not be there or omit what should be there

a. Mutual

b. Mistake of fact

c. Clear and convincing proof

d. Causes failure of instrument to express true intention

 2. Unilateral

a. One party was mistaken

b. Other either acted fraudulently or inequitably or knew but concealed

c. Party in good faith may ask for reformation

3. Mistake by 3rd persons – due to ignorance, lack of skill, negligence, bad faith of drafter, clerk or typist

4. Others specified by law – to avoid frustration of true intent

Requisites:

a.There is a written instrument

b. There is meeting of minds

c. True intention not expressed in instrument

d. Clear and convincing proof

e. Facts put in issue in pleadings

 WHEN REFORMATION NOT AVAILABLE

1. Simple donation inter vivos

2. Wills

3. When real agreement is void

4. Estoppel when party has brought suit to enforce it

INTERPRETATION

GENERAL RULE: If the terms of the contract are clear and leave no doubt upon the intention of the contracting

parties, the literal meaning of its stipulations shall control. (Art. 1370)

EXCEPTION: It is alleged and proved that the intention of the parties is otherwise.

 Sec. 13 Rule 130 of the Rules of Court

“When an instrument consists partly of written words and partly of a printed form, and the two are inconsistent,

the former controls the latter.”

NOTE:

1. If the law is clear, there is no room for interpretation

2. In case of ambiguity, the most important guideline is intention of the parties.

3. Ambiguity is construed against the one who caused it because he had control (e.g. contract of adhesion).

However, this rule does not apply to all contracts of adhesion (e.g. if contract is negotiated)

4. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be

principally considered. (Art. 1371)

 5. Words which may have different significations shall be understood in that which is most in keeping with the nature

and object of the contract. (Art. 1375)

6. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.

(Art. 1377)

7. If the court cannot resolve the ambiguity based on the elements of the contract:

a. If a gratuitous contract, the least transmission of rights and interests shall prevail

b. If an onerous contract, doubt shall be settled in favor of the greatest reciprocity of interest

8. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction

of contracts

In the case of Felipe v. Heirs of Maximo Aldon [G.R. No. L-60174, February 16, 1983], the Court stated that the

description that a contract is “invalid” is no longer precise, since the Civil Code uses specific names in designating

defective contract (e.g. rescissible, voidable, unenforceable, and void or inexistent contracts)

DEFECTIVE

 KINDS OF DEFECTIVE CONTRACTS

RESCISSIBLE CONTRACTS

- Those which have caused a particular economic damage either to one of the parties or to a 3rd person and

which may be set aside even if valid. It may be set aside in whole or in part, to the extent of the damage caused

 REQUISITES

(a) Contract must be rescissible Under Art 1381: Contracts entered into by persons exercising fiduciary

capacity:

1. Entered into by guardian whenever ward suffers damage by more than 1/4 of value of object

2. Agreed upon in representation of absentees, if absentee suffers lesion by more than ¼ of value of

property

3. Contracts where rescission is based on fraud committed on creditor (accion pauliana)

4. Objects of litigation; contract entered into by defendant w/o knowledge or approval of litigants or

judicial authority

5. Provided for by law – Arts 1526, 1534, 1539, 1542, 1556, 1560, 1567 and 1659

o Art. 1526 – Unpaid seller of goods, notwithstanding that the ownership in the goods may have

passed to the buyer, subject to other provisions on Sales

o Art. 1534 – Unpaid seller having the right of lien or having stopped the goods in transit, where

he expressly reserved his right to do so in case the buyer should make default, or the buyer has

been in default in the payment of the price for an unreasonable time

o Art. 1539 – In the sale of real estate at a rate of a certain price for a unit of measure or number,

at the will of the vendee, when the inferior value of the thing sold exceeds onetenth of the
 price agreed upon, or if the vendee would not have bought the immovable had he known of

its smaller area or inferior quality

o Art. 1542 – In the sale of real estate, made for a lump sum, where the boundaries are

mentioned and the area or number within the boundaries exceed that specified in the

contract, when the vendee does not accede to the failure to deliver what has been stipulated

o Art. 1556 – Should the vendee lose, by reason of eviction, a part of the thing sold of such

importance, in relation to the whole, that he would not have bought it without said part

o Art. 1560 – Vendee may ask for recession if the immovable sold should be encumbered with

any non-apparent burden or servitude, not mentioned in the agreement, of such a nature that

it must be presumed that the vendee would not have acquired it had he been aware thereof

o Art. 1567 – In cases of breach of warranty against hidden defects of or encumbrances upon

the thing sold

o Art. 1658 – If the lessor or lessee should not comply with their obligations, the aggrieved party

may ask for rescission

 ARTICLE 1191 COMPARED TO ARTICLE 1381

RESCISSION IN ARTICLE 1191 RESCISSION PROPER IN ARTICLE 1381

It is a principal action retaliatory in character it is a subsidiary remedy

Only ground is nonperformance of one’s obligation There are 5 grounds to rescind. Nonperformance by

or what is incumbent upon him the other is not important

Applies only to reciprocal obligation Applies to both unilateral and reciprocal obligations

Only a party to the contract may demand fulfillment Even a third person who is prejudiced by the

or seek the rescission of the contract contract may demand the rescission of the

contract.

Court may fix a period or grant extension of time for Court cannot grant extension of time for fulfillment of

the fulfillment of the obligation the obligation

Its purpose is to cancel the contract Its purpose is to seek reparation for the damage or

injury caused, thus allowing partial rescission of the

contract

 Under Art. 1382 - Payments made in a state of insolvency

1. Plaintiff has no other means to obtain reparation.

2. Plaintiff must be able to return whatever he may be obliged to return due to rescission

3. The things must not have been passed to 3rd parties who did not act in bad faith

4. It must be made within the prescribed period (of 4 years)

 REQUISITES before a contract entered into in fraud of creditors may be rescinded:

1. There must be credit existing prior to the celebration of the contract.

2. There must be fraud, or at least, the intent to commit fraud to the prejudice of the creditor seeking rescission

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 the possession of a 3rd person who did not act in bad faith.

 OBLIGATION CREATED BY THE RESCISSION OF THE CONTRACT:Mutual Restitution

a. Things w/c are the objects of the contract and their fruits

b. Price with interest

 MUTUAL RESTITUTION NOT APPLICABLE WHEN

a. creditor did not receive anything from contract

b. thing already in possession of party in good faith; subject to indemnity only; if there are 2 or more alienations –

liability of 1st infractor

 BADGES OF FRAUD

a. consideration of the conveyance is inadequate or fictitious

b. transfer was made by a debtor after a suit has been begun and while it is pending against him

c. sale upon credit by an insolvent debtor

d. evidence of indebtedness or complete insolvency

e. transfer of all his property by a debtor when he is financially embarrassed or insolvent

f. transfer made between father and son where there is present any of the above circumstances

g. failure of the vendee to take exclusive possession of the property

VOIDABLE

- intrinsic defect; valid until annulled; defect is due to vice of consent or legal incapacity

 CHARACTERISTICS

a. Effective until set aside

b. May be assailed or attacked only in an action for that purpose

c. Can be confirmed (NOTE: confirmation is the proper term for curing the defect of a voidable contract)

d. Can be assailed only by the party whose consent was defective or his heirs or assigns

 WHAT CONTRACTS ARE VOIDABLE

a. Minors

b. Insane unless acted in lucid interval

c. Deaf mute who can’t read or write

 d. Persons specially disqualified: civil interdiction

e. In state of drunkenness

f. In state of hypnotic spell

MISTAKE - False belief of something which is contrary to the real intention of the parties

 REQUISITES

a. Refers to the subject of the thing which is the object of the contract

b. Refers to the nature of the contract

c. Refers to the principal conditions in an agreement

d. Error as to person - when it is the principal consideration of the contract

e. Error as to legal effect - when mistake is mutual and frustrates the real purpose of parties

VIOLENCE - Serious or irresistible force is employed to wrest consent

INTIMIDATION - One party is compelled by a reasonable and well-grounded fear of an imminent and grave danger

upon person and property of himself, spouse, ascendants or descendants (moral coercion)

UNDUE INFLUENCE - Person takes improper advantage of his power over will of another depriving latter of reasonable

freedom of choice

The doctrine on reluctant consent provides that a contract is still valid even if one of the parties entered it

against his wishes 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 vs. HSBC, [12 Phil 252]

FRAUD - Thru insidious words or machinations of contracting parties, other is induced to enter into contract w/o w/c he

will not enter (dolo causante)

 KINDS OF FRAUD IN THE PERFORMANCE OF OBLIGATION OR CONTRACTS

a. Causal Fraud (dolo causante) – deception of serious character without which the other party would not have

entered into; contract is VOIDABLE (Art. 1338)

b. Incidental Fraud (dolo incidente) – deception which are not serious and without which the other party would still

have entered into the contract; holds the guilty party liable for DAMAGES (Art. 1344)

c. Tolerated Fraud – includes minimizing the defects of the thing, exaggeration of its god qualities and giving it

qualities it does not have; LAWFUL misrepresentation

 CAUSES OF EXTINCTION OF ACTION TO ANNUL

a. PRESCRIPTION - Period to bring an action for Annulment

i. Intimidation, violence, undue influence - 4 years from time defect of consent ceases

ii.Mistake, fraud – 4 years from time of discovery

iii. Incapacity - From time guardianship ceases

  Discovery of fraud must be reckoned to have taken place from the time the document was registered in the

office of the register of deeds. Registration constitutes constructive notice to the whole world. Carantes v. CA,

[76 SCRA 514]

b. RATIFICATION REQUISITE

i. Knowledge of reason rendering contract voidable

ii. Such reason must have ceased, except in case of ratification effected by the guardian to contracts entered

into by an incapacitated,

iii. The injured party must have executed an act which expressly or impliedly conveys an intention to waive his

right

c. 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

UNENFORCEABLE CONTRACT

– valid but cannot compel its execution unless ratified; extrinsic defect; produce legal effects only after ratified

 KINDS

a. Unauthorized or No sufficient authority – entered into in the name of another when:

i. No authority conferred

ii. In excess of authority conferred (ultra vires)

b. Curable by Ratification - Both parties incapable of giving consent -2 minor or 2 insane persons

c. Curable by Acknowledgment - Failure to comply with Statute of Frauds

 STATUTE OF FRAUDS

o Agreement to be performed within a year after making contract

o Special promise to answer for debt, default or miscarriage of another

o Agreement made in consideration of promise to marry

o Agreement for sale of goods, chattels or things in action at price not less than 500; exception: auction when

recorded sale in sales book

o Agreement for lease of property for more than one year and sale of real property regardless of price

o Representation as to credit of another

 TWO WAYS OF CURING UNENFORCEABLE CONTRACTS

a. Failure of defendant to object in time, to the presentation of parole evidence in court, the defect of

unenforceability is cured
 b. Acceptance of benefits under the contract. If there is performance in either part and there is acceptance of

performance, it takes it out of unenforceable contracts; also estoppel sets in by accepting performance, the

defect is waived

VOID

– of no legal effect

 CHARACTERISTICS

a. It produces no effect whatsoever either against or in favor of anyone

b. There is no action for annulment necessary as such is ipso jure. A judicial declaration to that effect is merely a

declaration

c. It cannot be confirmed, ratified or cured

d. If performed, restoration is in order, except if pari delicto will apply

e. The right to set up the defense of nullity cannot be waived

f. Imprescriptible

g. Anyone may invoke the nullity of the contract whenever its juridical effects are asserted against him

 KINDS OF VOID CONTRACT

a. Those lacking in essential elements: no consent, no object, no cause (inexistent ones) – essential formalities are

not complied with (ex: donation propter nuptias – should conform to formalities of a donation to be valid)

i. Those w/c are absolutely simulated or fictitious – no cause

ii. Those which cause or object did not exist at the time of the transaction – no cause/object

iii. Those whose object is outside the commerce of man – no object

iv. Those w/c contemplate an impossible service – no object

v. Those w/c intention of parties relative to principal object of the contract cannot be ascertained

b. Prohibited by law

c. Those expressly prohibited or declared void by law - Contracts w/c violate any legal provision, whether it amounts

to a crime or not

d. Illegal/Illicit ones – Those whose cause, object or purpose is contrary to law, morals, good customs, public order or

public policy ; Ex: Contract to sell marijuana

 OTHER VOID CONTRACTS

1. PACTUM COMMISSORIUM

 ELEMENTS

1. There should be a property mortgaged by way of security for the payment of the principal obligation.

2. There should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-

payment of the principal obligation within the stipulated period.

2. PACTUM DE NON ALIENANDO

 A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

 It is a clause in a mortgage giving the mortgagee the right to foreclose by executory process directed solely against

the mortgagor, and giving him or her the right to seize and sell the mortgaged property, regardless of any subsequent

alienations.

3. PACTUM LEONINA - A stipulation which excludes one or more partners from any share in profit or loss is void.

 KINDS OF ILLEGAL CONTRACTS PARI DELICTO DOCTRINE

Both parties are guilty, no action against each other; those who come in equity must come with clean hands;

applies only to illegal contracts and not to inexistent contracts; does not apply when a superior public policy intervene

 EXCEPTION TO PARI DELICTO RULE - If purpose has not yet been accomplished and if damage has not been caused to

any 3rd person

 OTHER EXCEPTIONS

a. Payment of Usurious interest

b. payment of money or delivery of property for an illegal purpose, where the party who paid or delivered repudiates

the contract before the purpose has been accomplished, or before any damage has been caused to a 3 rd person

c. payment of money or delivery of property made by an incapacitated person

d. agreement or contract which is not illegal per se and the prohibition is designed for the protection of the plaintiff

e. payment of any amount in excess of the maximum price of any article or commodity fixed by law or regulation by

competent authority

f. contract whereby a laborer undertakes to work longer than the maximum number of hours fixed by law

g. One who lost in gambling because of fraudulent schemes practiced on him is allowed to recover his losses (Art. 313

RPC) even if gambling is prohibited.

 REQUISITES OF ILLEGAL CONTRACTS

a. Contract is for an illegal purpose

b. Contract must be repudiated by any of the parties before purpose is accomplished or damage is caused to 3rd

parties

c. Court believes that public interest will be served by allowing recovery (discretionary upon the court) – based on

remorse; illegality is accomplished when parties entered into contract; before it takes effect – party w/c is remorseful

prevents it

 WHERE LAWS ARE ISSUED TO PROTECT CERTAIN SECTORS

 a. Consumer protection – if price of commodity is determined by statute, any person paying an amount in excess of

the maximum price allowed may recover such excess

b. Labor – if law sets the minimum wage for laborers, any laborer who agreed to receive less may still be entitled to

recover the deficiency; if law set max working hours and laborer who undertakes to work longer may demand

additional compensation

c. Interest paid in excess of the interest allowed by the usury law may be recovered by debtor with interest from date

of payment

 EFFECTS OF ILLEGAL CONTRACTS

a. If one party is incapacitated, courts may allow recovery of money, property delivered by incapacitated person in

the interest of justice; pari delicto cannot apply because an incapacitated person does not know what he is entering

into; unable to understand the consequences of his own action

b. If agreement is not illegal per se but merely prohibited and prohibition is designated for the protection of the

plaintiff – may recover what he has paid or delivered by virtue of public policy

 MUTUAL RESTITUTION IN VOID CONTRACTS

GENERAL RULE: parties should return to each other what they have given by virtue of the void contract in case

 Where nullity arose from defect in essential elements

a. return object of contract and fruits

b. return price plus interest

EXCEPTION: No recovery can be had in cases where nullity of contract arose from illegality of contract where parties

are in pari delicto; except when incapacitated – not obliged to return what he gave but may recover what he has

given other party is less guilty or not guilty

EFFECTS OF CONTRACTS

Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and

obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir

is not liable beyond the value of the property he received from the decedent. (Article 1311)

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he

communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is

not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (Article

1311)
 CONTRACT OF SALE – One of the contracting parties obligates himself to transfer the ownership of and to deliver a

determinate thing, and the other to pay therefore a price certain in money or its equivalent. A contract of sale may be

absolute or conditional.

 ELEMENTS OF A CONTRACT OF SALE

1. Consent

2. Determinate subject matter

3. Price certain in money or its equivalent

 STAGES IN LIFE OF CONTRACT OF SALE

1. Negotiation

2. Perfection

3. Consummation

 OBLIGATIONS CREATED

2 sets of real obligations to give

o Obligation of the Seller:

a. to transfer ownership and

b. to deliver possession

 CHARACTERISTICS OF CONTRACT OF SALE

1. Nominate

2. Principal

3. Consensual

4. Bilateral

5. Reciprocal

6. Onerous

7. Commutative

8. Title and not a mode

SALE IS TITLE AND NOT MODE

 LEASE DISTINGUISHED FROM SALE

LEASE SALE

Use of thing is for a specified period only with an Obligation to absolutely transfer ownership of thing

obligation to return

Consideration is rent Consideration is price

Lessor need not be owner Seller needs to be owner of thing to transfer ownership

 CONTRACT FOR PIECE OF WORK DISTINGUISHED FROM SALE

CONTRACT FOR PIECE OF WORK SALE

Goods are to be manufactured specially for a customer Contract for delivery of an article which the vendor in

and upon special order and not for the general market the ordinary course of business manufactures or

procures for general market (whether on hand or not)

Essence is service Essence is object

Real obligation Personal obligation

Tests under Jurisprudence:

GR: IF YES, Contract for piece of work,

IF NO, SALE

1. Timing test - Under art 1467: whether the thing transferred only existed upon special order

2. Habituality test - if manufacturer engages in activity with the need to employ extraordinary skills and

equipment (Celestino v CIR)

3. Nature of the object test - Each product’s nature of execution differs from the others; products are not ordinary

products of Manufacturer (EEI v CIR)

 BARTER DISTINGUISHED FROM SALE

BARTER SALE

Consideration: giving of a thing Consideration: giving of money as payment

Governed by law on sales: species of the genus sales

If consideration consists partly in money and partly by thing – look at manifest intention;

If intention is not clear: value of thing is more than If intention is not clear: value of thing is equal or less

amount of money – barter than amount of money – sale

 DATION IN PAYMENT DISTINGUISHED FROM SALE

DATION IN PAYMENT SALE

Pre-existing credit No pre-existing credit

Obligations are extinguished Obligations are created

 Debtor’s consideration: extinguishment of the debt Consideration of seller: price Consideration of buyer:

Creditor’s consideration: acquisition of the object acquisition of the object

offered in lieu of the original credit

Less freedom in determining the price Greater freedom in determining the price

Payment is received by the debtor before the Buyer still has to pay the price

contract is perfected

 AGENCY TO SELL DISTINGUISHED FROMS SALE

AGENCY TO SELL SALE

Agent not obliged to pay for price, merely obliged Buyer pays for price of object

to deliver price received from buyer.

Preparatory contract Principal contract

Principal remains owner even if object delivered to Buyer becomes owner of thing; in agency

agent

Agent assumes no risk/liability as long as within the Seller warrants

authority given

May be revoked unilaterally because fiduciary and Not unilaterally revocable

even if revoked w/o ground

Agent not allowed to profit Seller receives profit

Personal Contract; Rescission is not available Real Contract

 DONATION DISTINGUISHED FROM SALE

DONATION SALE

Gratuitous or onerous Onerous

Formal contract Consensual contract

 CONTRACT OF SALE AND CONTRACT TO SELL DISTINGUISHED

CONTRACT OF SALE CONTRACT TO SELL

Absolute Conditional

Real obligation – obligation to give Personal obligation – obligation to do

Title passes to the buyer upon delivery Ownership is reserved in the seller and will pass to

the buyer only upon full payment of the price

Non-payment of the price is a negative resolutory Full payment is a positive suspensive condition, the

condition failure of which is not a breach but prevents the

obligation of the vendor to convey title to arise

 Remedies available: Remedies available:

Specific Resolution

Performance Damages

Rescission

Damages

PARTIES

CAPACITY

GENERAL RULE - All persons who are authorized in this Code to obligate themselves may enter into a contract of sale

ABSOLUTE

 MINORS, INSANE AND DEMENTED PERSONS, AND DEAF-MUTES

o Contracts are voidable, subject to annulment or ratification

o Also includes:

- State of drunkenness

- Hypnotic spell

- NECESSARIES: Those sold and delivered to a minor or other person without capacity to act, he must pay a

reasonable price therefore

RELATIVE

A. SPOUSES - A spouse may, without the consent of the other spouse, enter into sales transactions in the regular pursuit of

their profession, vocation, or trade. These contracts are void.

GENERAL RULE: The husband and the wife cannot sell property to each other.

EXCEPTION:

 When a separation of property was agreed upon in the marriage settlement

 When there has been a judicial separation of property under Art. 191

B. OTHERS - TRUST RELATIONSHIPS

I. Art. 1491 - Two groups of parties prohibited from acquiring by purchase certain properties:

a. Guardian/Agent/Executors and Administrators

 Direct or indirect

 May be ratified since only private wrong is involved

b. Public Officers & Employees/Officers of Court

i. Cannot be ratified since public wrong is involved

ii. Requisites for the prohibition to apply to attorneys:

1. Existence of attorney client relationship;

 2. Property is the subject matter in litigation;

3. While in litigation (from filing of complaint to final judgment)

II. Legal Status of Contract

1. Void (case law) – guardian/ executor/public officers / officers of the court

2. Voidable (civil code) – agent; VALID if with consent

SPECIAL

SUBJECT MATTER

 REQUISITES OF A VALID SUBJECT MATTER

1. Things

A. “Possible” - existing, future, and contingent

i. Whether the subject matter is of a type and nature that exists or could be made to exist to allow the seller

reasonable certainty of being able to comply with his obligations

ii. Minimum requirement of potential existence: taking into consideration the state of science and technology

at the time of perfection of the contract

B. Licit

B.1. Not outside the commerce of man

B.2. If illicit, contract is void

B.3. Prohibited:

i. Animals with contagious diseases

ii. Sale of future inheritance

C. Determinate or determinable

i. Determinate: particularly designated or physically segregated from all others of the same class; always

specific

ii. Determinable: always generic

a) Thing is capable of being made determinate

b) Without the necessity of a new or further contract between the parties.

2. Rights – Must be transmissible, except:

a. Future inheritance

b. Service
 EMPTIO RE SPERATAE DISTINGUISHED FROM EMPTIO SPEI

EMPTIO RE SPERATAE EMPTIO SPEI

Sale of an expected thing Sale of a mere hope or expectancy that the thing will

come to existence; sale of the hope itself

Sale is subject to the condition; that the thing will exist; if it Sale is effective even if the thing does not come into

does not, there is no contract existence, unless it is a vain hope (Art 1461 Sale of a vain

hope or expectancy is void)

Uncertainty is with regard to the quantity and quality of The uncertainty is with regard to the existence of the

the thing and not the existence of the thing thing

Object is a future thing Object is a present thing which is the hope or

expectancy

PARTICULAR KINDS

 GOODS THAT MAY BE THE OBJECTS OF SALE

1. Existing goods – goods owned or possessed by the seller at the time of perfection

2. Future goods – goods to be manufactured, raised or acquired by the seller after the perfection of the contract

NOTES:

 Quantity of subject matter is not essential for perfection; must determine nature and quality of subject matter

 Generic things may be the object of sale, but the obligation to deliver the subject matter can only be complied

with when the subject matter has been made determinate (either by physical segregation or particular designation)

OBLIGATIONS

 OBLIGATION OF THE SELLER TO TRANSFER OWNERSHIP

GENERAL RULE: Seller need not be the owner of the subject matter at the time of perfection: sufficient that he is the

owner at the time of delivery.

EXCEPTION: Foreclosure sale (mortgager must be absolute owner)

 RULES ON LEGAL EFFECTS OF SALE BY A NON-OWNER

GENERAL RULE: Sale by non-owner, buyer acquires no better title than seller had.

EXCEPTIONS:

1. Owner by his conduct is precluded from denying seller’s authority (ESTOPPEL)

2. Contrary is provided for in recording laws (PD 1529)

3. Sale is made under statutory power of sale or under order of a court of competent jurisdiction
 4. Sale is made in a merchant’s store in accordance with code of commerce and special laws But subject to

ANTI-FENCING LAW

 TITLE AS TO MOVABLE PROPERTIES

GENERAL RULE: Possession is equivalent to title

REQUISITES: Possession of movable and Good Faith

EXCEPTIONS:

1. Owner lost movable – owner can recover without reimbursing price

2. Owner is unlawfully deprived – owner can recover w/o reimbursing price

EXCEPTIONS TO THE EXCEPTIONS:

1. Movable is bought at public sale – owner can only recover after reimbursing price

2. Acquired in good faith and for value from auction

PRICE

– The sum stipulated as the equivalent of the thing sold and also every incident taken into consideration for the fixing

of the price, put to the debit of the vendee and agreed to by him.

 REQUISITES FOR A VALID PRICE

A. Real

When at the perfection of the contract of sale, there is every intention on the buyer to pay the price, and

every expectation on the part of the seller to receive such price as the value of the subject matter he obligates

himself to deliver. (Test of intention)

B. In money or its equivalent

Consideration for a valid contract of sale can be the price and other valuable consideration; at the very

least, a true contract of sale must have price as part of its consideration (Test of value consideration)

C. Certain or ascertainable

i. Certain: expressed and agreed in terms of specific pesos and/or centavos

ii. Ascertainable:

a. Set by third persons

b. Set by the courts – in cases where the third person fixes the price in bad faith or by mistake

c. Set by reference to a definite day, particular exchange or market

d. Set by reference to another thing certain

e. But never by one party to the contract (unless the price is accepted by the other party)

 EFFECT WHERE PRICE IS SIMULATED

o The act may be shown to have been in reality a donation, or some other act or contract
 o If not and neither party had any intention whatsoever that the amount will be paid (absolutely simulated): the

sale is void If there is a real price but what is stated in the contract is not the one intended to be paid (only

relatively simulated): the contract of sale is valid but subject to reformation (false price)

INADEQUACY

 EFFECT OF GROSS INADEQUACY OF PRICE

NOTE: Mere inadequacy of the price does not affect the validity of the sale, except

(1) When there is fraud, mistake, or undue influence indicative of a defect in consent is present,

(2)When it shows that the parties really intended a donation or some other act or contract.

(3)Judicial sale, where the inadequacy is shocking to the conscience of man and there is showing that in

event of resale, a better price can be obtained.

NO PRICE AGREED

Note: If there was a failure of the contract to set a price but the BUYER has already APPROPRIATED IT, then the buyer

must pay a reasonable price (Article 1474)

EARNEST MONEY

EARNEST MONEY

1. Money given as part of purchase price

2. Acceptance is the proof that contract of sale exists

3. Nothing in law prevents parties from treating earnest money differently

4. Old concept: subject to forfeiture when BUYER backs out

5. New concept: cannot be forfeited – part of purchase price; must be restored

6. Qualification: if old concept is stipulated – VALID

7. Presumption of perfection of contract of sale and such earnest money as part of purchase price is disputable

 OPTION MONEY DISTINGUISHED FROM EARNEST MONEY

OPTION MONEY EARNEST MONEY

Money given as distinct consideration for an option Part of the purchase price

contract

Applies to a sale not perfected Given only when there is already a sale

Not required to buy When given, buyer is bound to pay the balance

FORMATION

PREPARATORY

 3 STAGES IN LIFE OF A CONTRACT OF SALE

 A. Policitacion/Negotiation Stage - offer is floated, acceptance is floated but they do not meet; the time when

parties indicate their interest but no concurrence of offer and acceptance.

B. Perfection - concurrence of all requisites; meeting of the minds.

C. Consummation - parties perform their respective undertakings

 RULES

1. Offer is floated Prior to acceptance, may be withdrawn at will by

offeror

2. Offer floated with a period Without acceptance, extinguished when period has

ended and maybe withdrawn at will by offeror; right

to withdraw must not be arbitrary otherwise, liable to

damage under Art 19, 20, 21 of Civil Code

3. Offer floated w/ condition Extinguished by happening/non-happening of

condition

4. Offer floated without period/without condition Continues to be valid depending upon

circumstances of time, place and person

5. Offer is floated and there is counter-offer Original offer is destroyed, there is a new offer;

cannot go back to original offer

6. Offer is floated No authority of offeror to modify offer

7. Offer accepted absolutely Proceed to perfected stage

OPTION CONTRACT - a contract granting an exclusive right in one person, for which he has paid a separate

consideration, to buy a certain object within an agreed period

OPTION- an unaccepted or unexercised contractual offer

 Characteristics of Option Contract

a. Not the contract of sale by itself, separate and distinct

b. Nominate

c. Principal - but can be attached to other principal contracts

d. Onerous

e. Commutative

f. Unilateral – versus contract of sale which is bilateral

g. Preparatory

Consideration in an option contract may be anything of value, unlike in sale where it must be price certain in money.

(San Miguel Philippines v. Cojuangco)

 How EXERCISED: Notice of acceptance should be communicated to offeror without actual payment as long as there

is delivery of payment in consummation stage

 ELEMENTS OF VALID OPTION CONTRACT

a. Consent – meeting of the minds

b. Subject matter – an option right, or accepted unilateral offer to buy, or accepted unilateral offer to sell:

i. a determinate object

ii. for a price certain (including manner of payment)

c. Prestation – a consideration separate from purchase price for option given

 SITUATIONS IN AN OPTION CONTRACT

a. With separate consideration

i. Option contract is valid

ii. Offeror cannot withdraw offer until after expiry period

iii. Subject to rescission, damages but not to specific performance because this is not an obligation to give

b. Without separate consideration

i. OLD RULE - offer is still valid, but option contract is void and not subject to rescission, damages

ii. NEW RULE: Right of first refusal recognized as a valid offer

 RIGHT OF FIRST REFUSAL

1. Creates a promise to enter into a contract of sale and it has no separate consideration, not subject to specific

performance because there is no contractual relationship here and it is not an obligation to give (not a real

contract)

2. New doctrine: May be subject to specific performance.

The right of first refusal is only subject to specific performance insofar as it is attached to a valid written principal

contract (e.g. lease). RFR becomes one of the considerations in the contract. If RFR is violated, and property sold to

another buyer in bad faith, the sale to the 3rd party buyer is rescissible. The price for the 3rd party buyer is to be the basis

for the price of the sale back to the one with the RFR. Equatorial Dev’t v. Mayfair Theater, [370 SCRA 56]

Effect of new doctrine: turned the world of policitacion upside down because while valid option contract is

not subject to specific performance, right of first refusal which does not even have a separate consideration may be

subject to specific performance

Recognizes recovery of damage based on abuse of rights doctrine

 OPTION CONTRACT DISTINGUISHED FROM RIGHT OF FIRST REFUSAL

 OPTION CONTRACT RIGHT OF FIRST REFUSAL

Principal contract; stands on its own Accessory; cannot stand on its own

Needs separate consideration Does not need separate consideration

Subject matter and price must be valid There must be subject matter but price not

important

Not conditional Conditional

Not subject to specific performance Subject to specific performance

PERFECTION OF SALE

GENERAL RULE: A contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is

the object of the contract and upon the price; consensual contract

EXCEPTION: When the sale is subject to a suspensive condition

 REQUIREMENTS

1. When parties are face to face – when there is absolute acceptance of an offer that is certain

2. When thru correspondence or telegram – when the offeror receives or had knowledge of the acceptance

3. When the sale is subject to a suspensive condition – from the moment the condition is fulfilled

 RULES GOVERNING AUCTION SALE

1. Sales of separate lots by auction are separate contracts of sale

2. Sale is perfected by the fall of the hammer

3. Seller has the right to bid at the auction provided such right was reserved and notice was given to that effect

FORMALITIES

 FORM NOT IMPORTANT IN VALIDITY OF SALE

A. Sale being consensual, may be oral or written, perfected by mere consent as to price and subject matter

B. If particular form is required under the statute of frauds:

- valid and binding between parties but not binding to 3rd persons

- Reason: purposes of convenience only and not for validity and enforceability; cause of action is granted to sue

and compel other party to execute the document

 WHEN FORM IS IMPORTANT FOR VALIDITY; EXCEPTION BY SPECIFIC PROVISION OF LAW

1. Power to sell a piece of land granted to an agent – otherwise VOID

2. Sale of large cattle; must also be registered with Municipal treasurer – otherwise VOID

3. Sale of land by non-Christian if not approved by Governor– VOID

 WHEN FORM IS IMPORTANT FOR ENFORCEABILITY [STATUTE OF FRAUDS Article 1403 (2)]

a. Performed 1 Year: A sale agreement which by its terms is not to be performed within a year from the making

thereof;

b. 500 and Above: An agreement for the sale of goods, chattels or things in action, at a price not less than P500.00;

and

c. Sale Land: A sale of real property or of an interest therein.

 EXCEPTIONS TO COVERAGE OF STATUTE IN SALES CONTRACTS

1. WRITTEN: When there is a note or memorandum in writing and subscribed to by party or his agent (contains essential

terms of the contract)

2. PARTIAL EXECUTION: When there has been partial performance/execution (seller delivers with intent to transfer

title/receives price)

3. FAILURE TO OBJECT: When there has been failure to object to presentation of evidence (oral)

4. E-COMMERCE: When sales are effected through electronic commerce

While a sale of land appearing in a private deed is binding between the parties, it cannot be considered binding on

third persons if not embodied in a public instrument and recorded in the Registry of Deeds. Secuya v. Vda. De Selma,

[G.R. No. 136021, February 22, 2000]

TRANSFER

MANNER

 OBLIGATIONS OF THE SELLER

1. Preserve subject matter (proper diligence of a good father of a family unless law or parties stipulate another

standard)

2. Deliver – transfer ownership and deliver object

3. Deliver fruits and accessories

4. Warrant subject matter against eviction and hidden defects

A. Delivery of the Thing - Transfer ownership (tradicion) covers twin obligations of the seller which are:

1. To transfer the ownership; and

2. To deliver a determinate thing

B. Delivery of the thing together with the payment of the price, marks the consummation of the contract of sale. PNB

v. Ling, [69 Phil 611, October 5, 1927]

The act of delivery must be coupled with the intention of delivering the thing and putting the buyer under control.

Norkis Distributor v. CA, [195 SCRA 694, February 7, 1991]

DIFFERENT

1. Actual or real - when thing sold is placed in the control and possession of the buyer

2. Legal or Constructive- can take several forms and may be any manner signifying an agreement that the possession

is transferred from the vendor to the vendee.

 Different forms of Constructive Delivery - Constructive delivery has same legal effect as actual or physical delivery

Gives rise only to a prima facie presumption of delivery which is destroyed when actual delivery is not effected

because of a legal impediment. Ten Forty Realty v. Cruz

1. Traditio Longa Manu

Delivery of thing by mere agreement; when SELLER points to the property without need of actually delivering

2. Traditio Brevi Manu

Before contract of sale, the would be buyer was already in possession of the would be subject matter of sale

(ex: as lessee)

3. Symbolic delivery

As to movables – ex: delivery of the keys to a car

4. Constitutum possessarium

When at the time of the perfection of the contract of sale, seller had possession of the subject matter in the

concept of owner and pursuant to the contract, seller continues to hold physical possession no longer in the

concept of an owner but as a lessee or any other form of possession other than in the concept of owner.

5. Quasi-tradition

Delivery of rights, credits or incorporeal property, made by:

a. Placing titles of ownership in the hands of the buyer

b. Allowing buyer to make use of rights

6. Tradition by operation of law

The execution of a public instrument is equivalent to delivery. But to be effective, it is necessary that the vendor

have such control over the thing sold that, at the moment of sale, its material

delivery could have been made. Addison v. Felix, [38 Phil. 404]

A. WHEN EXECUTION OF PUBLIC INSTRUMENT DOES NOT PRODUCE THE EFFECTS OF DELIVERY

1. When there is stipulation to contrary, execution does not produce effect of delivery

2. When at the time of execution of instrument, subject matter was not subject to control of the seller

3. Subject matter should be within control of seller; he should have capacity to deliver at the time of execution of

public instrument when he wants to effect actual delivery

4. Such capacity should subsist for a reasonable time after execution of instrument (reasonable time depends on

circumstances of persons, places and things)

  The presumption of delivery when the sale is made through a public instrument can be rebutted by clear and

convincing evidence. Presumptive delivery through a public instrument can be negated by the failure of the vendee to

take actual possession of the land or the continued enjoyment of possession by the vendor. Santos v. Santos, [366 SCRA

395]

B. DELIVERY OF FRUITS AND ACCESSIONS/ACCESSORIES

Right to fruits and accessions/accessories accrue from time sale is perfected but no real right over it until it is

delivered

C. DELIVERY THROUGH CARRIER

GENERAL RULE: Where the seller is authorized or required to send the goods to the buyer, delivery to the carrier is

delivery to the buyer.

EXCEPTIONS: a contrary intention appears or implied reservation of ownership under pars. 1,2, 3 of Art. 1503

I. FAST – FREE ALONG SIDE

- When goods delivered alongside the ship, there is already delivery to the buyer (twin effects deemed

fulfilled)

II. FOB - FREE ON BOARD

- Shipment – when goods are delivered at ship at point of shipment; delivery to carrier by placing goods on

vessel is delivery to buyer

- Destination – when goods reach the port even if not disembarked yet from the vessel, there is delivery to the

buyer

III. CIF – COST, INSURANCE, FREIGHT

 When buyer pays for services of carrier – delivery to carrier is delivery to buyer; carrier is agent of the buyer.

 When buyer pays seller the price – from moment the vessel is at port of destination, there is already delivery to

buyer.

See Arts. 1522, 1539, 1540, 1541, 1542, 1543.

D. TIME AND PLACE OF DELIVERY

a. Follow stipulation in contact, or

b. Follow usage in trade, or

c. Seller’s place of business or his residence

d. Specific goods – place where the thing is

e. At reasonable hour

E. EFFECTS OF DELIVERY
 GENERAL RULE: The ownership of the thing sold shall be transferred to the buyer upon the actual or constructive

delivery thereof.

EXCEPTION: When the contrary is stipulated such in the cases of:

1. Contract to sell

2. Sale on acceptance/approval – ownership only passes to the buyer when:

o The buyer signifies approval to the seller, or

o The buyer does not signify his rejection but retains the goods

3. Sale on return – ownership passes to the buyer but he may re-vest ownership to the seller by returning the goods

within time fixed. If no time is fixed, within reasonable time.

F. SALE BY DESCRIPTION/SAMPLE

1. Sample – goods must correspond with sample shown

2. Description – goods must correspond with description or sample

3. Effect if there is no compliance: RESCISSION may be availed of by the buyer

G. OBLIGATIONS OF BUYER

1. Pay the price

o Buyer is obligated to pay price according to terms agreed upon regarding time, place and amount

o If payment of interest is stipulated – must pay; if amount of interest not mentioned – apply legal rate

o When buyer defaults – constitutes breach: subject to specific performance/rescission and damages; interest

to be paid also from default

2. Accept delivery of thing sold

a. Where to accept: at time and place stipulated in the contract; if none specified – at the time and place of

delivery goods; there is acceptance when:

i. He intimates to seller that he has accepted

ii. When delivered and does any act inconsistent with ownership of seller

iii. Retains without intimating to seller that he has rejected

3. Sale of Goods on installment

1. Goods must be delivered in full, except when stipulated

2. When not examined by buyer – not accepted until examined or at least had reasonable time to examine

 Acceptance of goods in general, absent contrary express stipulation, does not discharge seller from

liability in case of breach of warranties (unless no notice or failure to give it within reasonable time)

4. When buyer has a right to refuse goods, no need to return; shall be considered as depositary; unless there is

stipulation to the contrary

DOUBLE SALE
 GENERAL RULE: FIRST IN TIME, PRIORITY IN RIGHT

WHEN DOES IT APPLY: when not all requisites embodied in Art. 1544 concur.

I. REQUISITES FOR DOUBLE SALES TO EXIST: (VOCS)

1. Two or more sales transactions must constitute valid sales;

2. Two or more sales transactions must pertain to the same object or subject matter;

3. Two or more buyers at odds over the rightful ownership of the subject matter must each represent conflicting

interests; and

4. Two or more buyers must each have bought from the very same seller.

 If not all the elements are present for Art. 1544 to apply, the priniciple of prior tempore, potior jure or simply

“he who is first in time is preferred in right” should apply. Undisputably, he is a purchaser in good faith because at the

time he bought the real property, there was still no sale to as a second vendee. Consolidated Rural Bank v. CA, [Jan.

17, 2005]

II. RULES ACCORDING TO 1544:

1. MOVABLE - First to posses in good faith

2. IMMOVABLE

a. First to register in good faith

b. No inscription, first to possess in good faith

c. No inscription and no possession in good faith – Person who presents oldest title in good faith

d. Good Faith - one who buys property without notice that another person has a right or interest in such property;

one who has paid price before notice that another has claim or interest.

III. LIS PENDENS – notice that subject matter is in litigation

IV. ADVERSE CLAIM – notice that somebody is claiming better right

V. POSSESSION - Both actual or constructive

VI. REGISTRATION - any entry made in the books of the registry, including both registration in its ordinary and strict sense,

and cancellation, annotation, and even marginal notes. It is the entry made in the registry which records solemnly and

permanently the right of ownership and other real rights.

 Registered under Torrens system 1544 applies

 Not registered under the Torrens system 1544 still applies

If 2nd sale is a judicial sale (by way of levy on execution), buyer merely steps into the shoes of the judgment debtor.

Outside of such situation – must apply to conflicting sales over the same unregistered parcel of land. If sale 1 occurs

when land is not yet registered and sale 2 is done when land is already registered – apply FIRST IN TIME, PRIORITY IN

RIGHT.
 Good faith must concur with registration. To be entitled to priority, the second purchaser must not only establish prior

recording of his deed, but must have acted in good faith. Gabriel v. Mabanta, [GR 142403, March 26, 2003]

 CONDITION

1. Effect of Non-Fulfillment of Condition

The other party may

a. refuse to proceed with the contract

b. proceed with the contract, waiving the performance of the condition

If the condition is in the nature of a promise that it should happen, the non-performance of such condition may be

treated by the other party as breach of warranty.

2. Effect if buyer has already sold the goods

GENERAL RULE: The unpaid seller’s right to lien or stoppage in transitu remains even if buyer has sold the goods

EXCEPTION:

 When the seller has given consent thereto, or

 When the buyer is a purchaser in good faith for value of a negotiable document of title.

RISK OF LOSS

GENERAL RULE

 Legal consequences from point of perfection are the same in both legal systems: upon perfection of an

unconditional contract of sale involving specific or determinate subject matter, the risk of loss deterioration and the

benefits of fruits and improvements, were fro the account of the buyer.

 If Subject matter is GENERIC, Simply replace item.

 WHO BEARS RISK OF LOSS/ DETERIORATION/ FRUITS:

1. BEFORE PERFECTION

o Res perit domino

o Owner is seller so seller bears risk of loss

2. AT PERFECTION

o Res perit domino

o Contract is merely inefficacious because loss of the subject matter does not affect the validity of the sale

o Seller cannot anymore comply with obligation so buyer cannot anymore be compelled.

3. AFTER PERFECTION BUT BEFORE DELIVERY

o Loss – confused state

o Paras: BUYER

o Tolentino: SELLER

o Deterioration and fruits - Buyer bears loss;

 4. AFTER DELIVERY

o Res perit domino

o Delivery extinguishes ownership visa-vis the seller and creates a new one in favor of the buyer

DOCUMENTS OF TITLE

1. Not creation of law but by merchants to allow them to deal with merchandise without having to physically carry

them around

2. Pertains to specific type of movables only: GOODS

a. Documents of title serve two (2) functions:

i. Evidence of existence and possession of goods described therein

ii. Medium by which seller is able to transfer possession of goods

3. A document of title which states that the goods referred to therein will be delivered to the bearer, or to the order

of any person named in such document

4. Negotiable by delivery or indorsement

NEGOTIABLE DOCUMENTS OF TITLE

1. Deliver to bearer (negotiation by mere delivery)

2. Deliver to specific person or his order (negotiation by endorsement + delivery)

Even if face of instrument says NONNEGOTIABLE, it is still NEGOTIABLE; limiting words does not destroy

negotiability.

If order instrument and no endorsement was made – equivalent to assignment

NON-NEGOTIABLE

Effects of Unauthorized Negotiation

The validity of the negotiation of a negotiable document is not impaired by the fact that negotiation was done

in breach of duty or that the owner of the document was deprived of the same by loss, theft, accident, fraud,

mistake if the person to whom the document is delivered is in good faith and without notice of the said irregularities.

 Important Considerations

1. Negotiation gives better right than assignment

2. Assignee takes document with defects of the assignor

3. Obligation of bailee – bailee is immediately bound to the document

WARRANTIES

 Warranties on Negotiation

1. The document is genuine

 2. He has legal right to negotiate or transfer it

3. He has knowledge of no fact which would impair the validity or worth of the document

4. He has right to transfer title to goods and goods are merchantable/fit

RULES

 NON NEGOTIABLE

o Notification is operative act to transfer title/possession of goods in favor assignee

o Before notification – can still be garnished

 NEGOTIABLE

o Cannot be levied or garnished when documents are already with purchaser in good faith, unless:

o Document is first surrendered

o Document is pounded by court

o Negotiation is enjoined

 NEGOTIATION AND ASSIGNMENT DISTINGUISHED

NEGOTIATION ASSIGNMENT

Transferor/holder acquires title to goods Acquires title to goods against transferor

Bailee has direct obligation to holder as if directly Acquires right to notify bailee so that he acquires

dealt with him obligation of bailee to hold goods for him

A. SALE BY NON-OWNER OR BY ONE HAVINGVOIDABLE TITLE

1. PERFECTION STAGE

a. Sale by owner – VALID

b. Sale by non-owner – VALID;

c. Reason why both sales are valid: ownership is necessary only at time when transfer title to goods; at perfection

stage, no obligation on part of seller to transfer ownership

d. Law on estoppel further bolsters it: title passes by operation of law to grantee when person who is not owner of

the goods sold delivers it and later on acquires title thereto

e. Since valid, action to annul is improper; there is already a perfected contract

2. CONSUMMATION STAGE

a. Contract of sale is valid because it has passed perfected stage, despite seller not being the owner or seller

having no authority to sell

b. What is void is the transfer of title/ ownership did not pass

c. Effect: buyer acquired no better right than transferor

 d. Legal effect: CAVEAT EMPTOR – BUYER BEWARE

e. Sale of co-owner of whole property or definite portion

GENERAL RULE:

o Co-owner sells whole property prior to partition – sale of property itself is void but valid as to his spiritual share

o Co-owner sells definite portion to partition – sale is void as to other co-owner but valid as to his spiritual share if the

buyer would have still bought such spiritual share had he known that the definite portion sold would not be

acquired by him.

EXCEPTIONS TO THE RULE ON THE EFFECT OF SALE OF A DEFINITE PORTION BY A COOWNER

1. Subject matter is indivisible in nature or by intent;

2. Sale of a particular portion of a property is with consent of other co-owners;

3. Co-owner sells 1 of 2 commonly-owned lands and does not turn over ½ of the proceeds, other co-owner, by law

and equity, has exclusive claim over remaining land.

B. SALE BY SELLER WITH VOIDABLE TITLE IN GOOD FAITH and WITHOUT NOTICE OF THE DEFECT

1. PERFECTION STAGE

a. Valid sale – buyer acquires title of goods

2. CONSUMMATION STAGE

o Valid sale – if title has not yet been avoided, buyer buys goods under following condition:

 in good faith

 for value

 without notice of seller’s defect of title

REMEDIES

UNPAID SELLER

GENERAL RULE: Any man may not take law in his own hands, must seek remedy through courts. EXCEPTION:

 DOCTRINE OF SELF HELP

 SPECIAL REMEDIES

 REQUISITES

1. Subject matter – goods

2. Seller is unpaid – not completely paid or received negotiable instrument under a condition and condition has been

breached by reason of dishonor

3. Physical possession is with seller

REMEDIES

 The following are the special remedies of unpaid seller

 1. Possessory lien

2. Stoppage in transitu

3. Special right of re-sale

4. Special right to rescind

POSSESSORY LIEN

1. Seller not bound to deliver if buyer has not paid him the price

2. Right to retain; cannot be availed when seller does not have custody

3. Exercisable only in following circumstances:

a. goods sold without stipulation as to credit

b. goods sold on credit but term of credit has expired

c. buyer becomes insolvent

d. When part of goods delivered, may still exercise right on goods undelivered

 Instances when possessory lien lost

1. seller delivers goods to carrier for transmission to buyer without reserving ownership in goods or right to possess

them

2. buyer or his agent lawfully obtains possession of goods

3. Waiver

4. loses lien when he parts with goods (still has stoppage in transitu)

5. notice by seller to buyer not essential

STOPPAGE IN TRANSITU

 Goods are in transit

 Requisites when goods are in transit

1. From the time goods are delivered to carrier for purpose of transmission to buyer

2. Goods rejected by buyer and carrier continues to possess them

 When goods no longer in transit

1. Reached point of destination

2. Before reaching destination, buyer obtains delivery of the goods

3. Goods are supposed to have been delivered to buyer but carrier refused

4. Shown by seller that buyer is insolvent (failure to pay when debts become due)

 How is right exercised

1. Obtain actual possession of goods

2. Give notice of claim to carrier / bailee in possession thereof

 3. Notice by seller to buyer is not required; notice to carrier is essential

Special Right to Resell the Goods

1. Goods are perishable

2. Stipulated the right of resale in case buyer defaults in payment

3. Buyer in default for unreasonable time

4. Notice by seller to buyer not essential

 Why special? There are things which seller cannot do in ordinary sale:

A. ownership is with buyer but seller can sell goods

B. title accorded to buyer is destroyed even without court intervention

Special Right to Rescind

1. Expressly stipulated

2. Buyer is in default for unreasonable time

3. Notice needed to be given by seller to buyer

 Why special?

– ownership of goods already with buyer but seller may still rescind; ownership is destroyed even without court

intervention but in ordinary sale, need to go to court to destroy transfer of ownership

 Remedies of Buyer

When Seller fails to deliver, buyer may seek SPECIFIC PERFORMANCE WITHOUT GIVING SELLER OPTION TO RETAIN

GOODS ON PAYMENT OF DAMAGES

PERFORMANCE

DELIVERY

A. MOVABLES

a. Delivery of thing plus accessories and accessions in the condition in which they were upon the perfection of the

contract including the fruits

b. When the seller delivers to the buyer a quantity of goods LESS than he contracted to sell, buyer has the option to

reject or accept it.

i. When accepts with knowledge that seller is not going to perform contract in full, he must pay at price stipulated

ii. When accepts and consumes before knowledge that buyer will not perform contract in full, liable only for fair

value of goods delivered

 c. When seller delivers to the buyer a quantity of goods LARGER than he contracted to sell the buyer has the following

options:

i. Accept per contract and reject the rest

ii. Accept the whole – pay price stipulated

iii. Eject whole if subject matter is indivisible

d. When the seller delivers to the buyer the goods he contracted to sell, MIXED with goods of a different description

not included in the contract, buyer has 2 options:

i. Accept good w/c are in accordance with contract and reject the rest

ii. Reject goods entirely – if indivisible

 Obligations of a Vendor (Art. 1537)

1. To deliver the subject matter

2. To deliver the fruits and accessories

o Those which pertains to the vendee from the day on the perfection of contract

3. To preserve the subject matter

o In the condition in which they were upon the perfection of the contract.

Article 1480. Any injury to or benefit from the thing sold, after the contract has been perfected, from the moment of

the perfection of the contract to the time of delivery, shall be governed by articles 1163 to 1165, and 1262.

This rule shall apply to the sale of fungible things, made independently and for a single price, or without

consideration of their weight, number, or measure.

Should fungible things be sold for a price fixed according to weight, number, or measure, the risk shall not be

imputed to the vendee until they have been weighed, counted, or measured and delivered, unless the latter has

incurred in delay.

B. IMMOVABLES

o Sold per unit or number

i. If the sale should be made with statement of its area, rate at certain price, deliver all that may have been

stated in the contract if impossible, remedies of buyer:

ii. If Less in area:

 Rescission

 Proportional reduction of price: LACK IN AREA SHLD NOT BE LESS THAN 1/10 OF AREA AGREED UPON

iii. If Greater in area:

 Accept per stipulation and reject the rest

 Accept whole area – pay at contract rate

 Not applicable to judicial sales

 iv. Sold for lump sum

 When price per unit not indicated

 If area delivered is either greater or lesser – price will not be adjusted accordingly

The actions arising from above in delivery of immovables shall prescribe in six months, counted from the day of

delivery.

C. INSPECTIONS AND ACCEPTANCE

 Accept delivery of thing sold

o Where to accept: at time and place stipulated in the contract; if none specified – at the time and place of

delivery goods;

o There is acceptance when: He intimates to seller that he has accepted

o When delivered and does any act inconsistent with ownership of seller

o Retains without intimating to seller that he has rejected

PAYMENT

 Buyer is obligated to pay price according to terms agreed upon regarding time, place and amount

 If payment of interest is stipulated – must pay; if amount of interest not mentioned – apply legal rate

When buyer defaults – constitutes breach: subject to specific performance/rescission and damages; interest

to be paid also from default

WARRANTIES

EXPRESS

I. Condition

1. When a contract contains a condition, the non happening of which would not constitute a breach but extinguishes

the obligation

2. However, if party to the sales contract has promised that the condition should happen or be performed, the non-

performance of which may be treated by parties as breach

II. Warranties

A statement or representation made by the seller contemporaneously and as a part of the contract of sale,

having reference to the character, quality, or title of the goods, and by which he promises or undertakes to insure that

certain facts are or shall be as he then represents

 REQUISITES:
 1. It must be an affirmation of fact or any promise by seller relating to the subject matter of sale

2. Natural tendency of affirmation or promise is to induce buyer to purchase subject matter

3. Buyer purchases the subject matter relying thereon

4. When breached, seller is liable for damages

IMPLIED

- Deemed included in all contracts of sale whether parties are actually aware or not, whether they were intended

or not; by operation of law

1. Warranty that seller has a right to sell

 Refers to consummation stage since in consummation stage, it is where ownership is transferred by tradition

 Not applicable to sheriff, auctioneer, mortgagee, pledge

2. Warranty against eviction

a. Implied, unless contrary provision appears in contract

b. When ownership is transferred, buyer shall enjoy the legal and peaceful possession of the thing

c. Requisites of breach of warranty against eviction:

 Buyer is evicted in whole or in part from the subject matter of sale

 There is a final judgment

 Basis of eviction is a right prior to sale or an act imputable to vendor

 Seller has been summoned in the suit for eviction at the instance of buyer; or made 3rd party defendant

through 3rd party complaint brought by buyer

 Vendor’s liability shall consists of (Total Eviction) (VICED)

1. Value of the thing at the time of eviction;

2. Income or fruits if he has been ordered to deliver the to the party who won the suit

3. Cost of the suit

4. Expenses of the contract; and

5. Damages and interests if the sale was in bad faith

 Partial Eviction

1. To enforce vendor’s liability for eviction (VICED);

2. To demand rescission of contract.

a. No appeal needed nor a need for buyer to resist eviction for right to accrue; it is enough that the

aforementioned requisites are complied with

b. Warranty cannot be enforced until aforementioned requisites concur

 c. Applies to judicial sale; judgment debtor responsible for eviction unless otherwise decreed in judgment

d. Vendor not liable for eviction if adverse possession had been commenced before sale but prescriptive period

is completed after transfer e. Rights of buyer when deprived of only part of the subject matter but would not have

bought such part if not in relation for the whole:

1. Rescission

2. Mutual restitution

3. Warranty against encumbrances (nonapparent)

 REQUISITES:

a. Immovable sold is encumbered with non– apparent burden or servitude not mentioned in the agreement

b. Nature of non–apparent servitude or burden is such that it must be presumed that the buyer would not have

acquired it had he been aware thereof

c. When breach of warranty exist: buyer may ask for rescission of indemnity

d. Warranty not applicable when non– apparent burden or servitude is recorded in the Registry of Property – unless

there is express warranty that the thing is free from all burdens and encumbrances

4. Warranty against hidden defects

 SELLER does not warrant patent defect; caveat emptor

 Except when hidden

1. subject matter may be movable or immovable

2. nature of hidden defect is such that it should render the subject matter unfit for the use of which it was

intended or should diminish its fitness

3. had the buyer been aware, he would not have acquired it or would have given a lower price

a. When defect is visible or even if not visible but buyer is an expert by reason of his trade or profession,

seller is not liable

b. Obligation of seller for breach depends on whether he has knowledge of such defect or not

c. Seller is aware – seller should return price and refund expenses of contract with damages

d. Seller is not aware - seller should return price and interest and refund expenses (no damages)

e. Buyer may elect between withdrawing from contract or demanding proportionate reduction of price

with damages in either case

f. Applicable to judicial sale except that judgment debtor not liable for damages

g. Action to prescribe 6 months from delivery of subject matter

5. Defects on animals

a. Even in the case of professional inspection but hidden defect is of such nature that expert knowledge is not

sufficient to discover it - defect shall be considered as REDHIBITORY

 b. If vet fails to discover through ignorance or bad faith, he is liable for damages

c. Sale of animals on teams (2 or more)

 When only one is defective, only one is prohibited and not the others

 Exception: when it appears buyer would not have purchased the team without the defective one

 Apply to sale of other things

d. Animals at fair or public auction

 No warranty against hidden defects

e. Sale of animals with contagious disease is void

f. Sale of unfit animals

 Void if use / service for which they are acquired has been stated in the contract and they are found to be unfit

therefor

 Prescription of action: 40 days from date of delivery to buyer

 If sale is rescinded, animals to be returned in same condition when they were acquired; buyer shall answer for

injury / loss due to his fault

 Buyer may elect between withdrawing from sale and demanding proportionate reduction of price with

damages in either case

 Specific Implied Warranties in the Sale of Goods

A. Warranty as to fitness and quality; requisites:

1. Buyer makes known to seller the particular purpose for which goods are acquired and it appears that the

buyer relied on the seller’s skill or judgment

2. Goods are bought by description from seller who deals in goods of that description

3. in case of sale of specified article under its patent or trade name, no warranty unless there is a stipulation to

the contrary

4. measure of damage: difference between value of goods at time of delivery and value they would have had

if they had answered to the warranty

 SALE OF GOODS BY SAMPLE

If seller is a dealer in goods of that kind, there is an implied warranty that the goods shall be free from defect

rendering them unmerchantable which would not be apparent on reasonable examination of the sample

EFFECTS

 Waiver in Warranty against eviction - Parties may increase or diminish implied warranty against eviction; but effect

depends on good faith or bad faith on the part of the seller.

o Seller in bad faith and there is waiver against eviction – null and void
 o Buyer without knowledge of a particular risk, made general renunciation of warranty – not waiver but merely

limits liability of seller in case of eviction (pay value of subject matter at time of eviction)

o Buyer with knowledge of risk of eviction assumed its consequences and made a waiver – vendor not liable

(applicable only to waiver of warranty against eviction)

1. Waiver to a specific case of eviction - wipes out warranty as to that specific risk but not as to eviction caused

by other reasons.

 Waiver against Hidden Defects

i. If there has been a stipulation exempting seller from hidden defects

ii. If seller not aware of hidden defects – loss of the thing due to such defect will not make seller liable

iii. If seller aware – waiver is in bad faith, thus seller still liable

 Buyer’s Option in Case of Breach of Warranty

1. Accept goods and set up breach of warranty by way of recoupment in diminution or extinction of the price.

2. Accept goods and maintain action against seller for damages

3. Refuse to accept goods and maintain action against seller for damages

4. Rescind contract of sale and refuse to receive goods/return them when already received.

 When rescission by buyer not allowed

1. If the buyer accepted the goods knowing the breach of warranty WITHOUT protest

2. If he fails to notify the seller within a reasonable time of his election to rescind

3. If he fails to return or offer to return the goods in substantially as good condition as they were in at the time of the

transfer of ownership to him

BREACH

 Remedies of Unpaid Seller (Art. 1484)

1. Exact fulfillment should the buyer fail to pay.

2. Cancel the sale if buyer fails to pay 2 or more installments.

3. Foreclose on chattel mortgage if buyer fails to pay 2 or more installments

RECTO LAW

 Incidents

1. If buyer chooses foreclosure, no further action against buyer to recover any unpaid balance of the price

2. When is the law applicable? Sale on movables by installment

o Sale on installment: payment by several partial payments in small amount

 Rationale of the law: Buyer is lulled into thinking that he could afford because of small amounts per installment and at

the same time remedy abuse of commercial houses

 Nature of remedies: alternative and not cumulative Coverage: sale and financing transaction and contracts of lease

with option to purchase

GENERAL RULE: If already chose specific performance, can no longer choose other remedies

EXCEPTION: After choosing, it has become impossible, rescission may be pursued

 The fact that the seller did not foreclose the chattel mortgage constituted on the movable purchased on credit,

but opted specific performance, with a plea for a writ of replevin, does not amount to a foreclosure of the chattel

mortgage to be covered by Art. 1484. Tajanglangit v. Southern Motors, [101 Phil. 606]

 Rescission

1. When chosen, there is correlative obligation to restitute

2. But stipulations that installments paid are forfeited are valid if not unconscionable

3. Deemed chosen when: - Notice of rescission is sent

- Takes possession of subject matter of sale

- Files action for rescission

- Barring effect on recovery of balance

 Foreclosure

i. Barring effect on recovery of balance

ii. Extent of barring effect: purchase price

iii. Exception: mortgagor refuses to deliver property to effect foreclosure, recover also expenses incurred in attorneys

fees, etc. (Perverse Buyer-Mortgagor)

SALE

 Anticipatory breach

1. Seller has reasonable grounds to fear loss of immovable sold and its price, sue for RESCISSION

2. Non–payment of price, sue for RESCISSION

 IMMOVABLES (BY INSTALLMENT) Art 1592 – Applies only to contract of sale MACEDA LAW

1. applies to COS and CTS and Financing

2. Coverage: REAL ESTATE – defined space vs. CONDO – not defined space (w/ common areas) 3. Excluded:

a. Industrial

b. Commercial
 c. Sale to tenants under agrarian laws

REMEDIES

 In case of subdivision or condo projects, suspend payment.

 If real estate developer fails to comply with obligation according to approved plan:

- RESCIND

- SUSPEND PAYMENT UNTIL SELLER COMPLIES

 Rights Granted to Buyers:

o Buyer paid at least 2 years installment

1. Pay without interest the balance within grace period of 1 month for every year of installment payment

2. Grace to be exercised once every 5 years

3. When no payment - cancelled; buyer entitled to 50% of what he has paid + if after 5 years of installments, 5%

for every year but not to exceed 90% of total payments made

4. Cancellation to be effected 30 days from notice and upon payment of cash surrender value

o Buyer paid less than 2 years installment

1. 1st Grace period is 60 days from date installment became due

2. 2nd grace period of 30 days from notice of cancellation/demand for rescission

1. buyer can still pay within the 30 day period

2. with interest

3. No payment after 30 day period, can cancel.

 Purpose of law - Protect buyers in installments against oppressive conditions

 Notice needed - waiver thereof if oppressive

 Applies to contracts even before law was enacted

 Stipulation to contrary is void

 Other rights:

o Sell rights to another o Reinstate contract by updating during grace period and before actual cancellation

o Deed of Sale to be done by notarial act o To pay in advance any installment or the full balance of price anytime

without interest

o Have full payment annotated in certificate of title

 REMEDY OF RESCISSION IN CONTRACTS COVERING IMMOVABLES (Articles 1191 & 1592)

GENERAL RULE: Judicial

 EXCEPTION: Extra judicial Rescission allowed but SUBJECT to COURT Confirmation.

a. allowed if stipulated; burden to sue shifts to party who does not like rescission

b. court still has final say as to propriety of rescission

c. Forfeiture of amounts valid being in nature of penal clause

 Contract of Sale – Rescission is Applicable

 Contract to Sell – Rescission not Applicable

 Non–payment of purchase price would automatically cancel even without further action for rescission

Exception: If subject matter is residential lots, law on rescission applies when there is substantial breach. Maceda law

applies.

EXTINGUISHMENT

CAUSES

I. GROUNDS (same grounds whereby obligations in general are extinguished)

1. Payment or performance

2. Loss of the subject matter

3. Condonation or remission

4. Confusion or merger of rights of creditor and debtor

5. Compensation

6. Novation

7. Annulment

8. Rescission

9. Fulfillment of a resolutory condition

10. Prescription

2. CONVENTIONAL REDEMPTION

 Only extinguishes obligations pertaining to contract of sale, not extinguish contract itself; only applies to contract of

sale

 The right which the vendor reserves to himself to reacquire the property sold provided he returns to the vendee:

a. The price of the sale,

b. Expenses of contract,

c. Other legitimate payments,

d. The necessary and useful expenses made on the thing sold

e. And fulfills other stipulations which may have been agreed upon

 The right is exercised only be seller in whom right is recognized in the contract or by any person to whom right

was transferred; must be in the same contract

EQUITABLE

- One which lacks the proper formalities, form of words, or other requisites prescribed by law for a mortgage, but

shows the intention of the parties to make the property subject of the contract as security for a debt and contains

nothing impossible contrary to law. Cachola v. CA, [208 SCRA 496]

1. A contract with right to repurchase is deemed to be an equitable mortgage if the following requisites concur (IPERTI):

a. Price of sale with right to repurchase is unusually inadequate

b. Seller remains in possession as lessee or otherwise

c. Upon or after expiration of right to repurchase, another instrument extending the period of redemption or granting

new period is executed

d. Buyer retains for himself a part of the purchase price

e. Seller binds himself to pay taxes on thing sold

f. Real intention of parties is to secure the payment of a debt or performance of other obligation

2. What to Look for in Determining Nature of Contract

a. Language of the contract

b. Conduct of parties – to reveal real intent

3.Remedy available to vendor: ask for reformation of contract

4.Rationale behind provision on Equitable Mortgage:

a. Circumvention of usury law

b. Circumvention of prohibition against pactum commissorium – creditor cannot appropriate the things given by way

of pledge or mortgage; remedy here is foreclosure. The real intention of parties is that the pretended purchase price

is

OPTION TO PURCHASE - Right to repurchase the thing sold granted to the vendor in a separate instrument from the deed

of sale

PERIOD

a. No period agreed upon – 4 years from date of contract

b. Period agreed upon – should not exceed 10 years; if it exceeded, valid only for the first 10 years.

c. When period to redeem has expired and there has been a previous suit on the nature of the contract – seller still

has 30 days from final judgment on the basis that contract was a sale with pacto de retro:

d. Rationale: no redemption due to erroneous belief that it is equitable mortgage which can be extinguished by

paying the loan.

e. This refers to cases involving a transaction where one of the parties contests or denies that the true agreement is

one of sale with the right to repurchase; not to cases where the transaction is conclusively a pacto de retro sale.
 f. Example: Where a buyer a retro honestly believed that he entered merely into an equitable mortgage, not a pacto

de retro transaction, and because of such belief he had not redeemed within the proper period.

NOTE: When period has expired and seller allowed the period of redemption to expire – seller is at fault for not having

exercised his rights so should not be granted a new period Tender of payment is SUFFICIENT to compel redemption, but is

not in itself a payment that relieves the vendor from his liability to pay the redemption price. Paez v. Magno, G.R. No. :-

792, April 27, 1949

EXERCISE

 EFFECT WHEN THERE IS NO REDEMPTION MADE

i. Jurisprudence before the NCC: buyer a retro automatically acquires full ownership

ii. Under present art 1607: there must be judicial order before ownership of real property is consolidated in the buyer

a retro

 HOW IS REDEMPTION EFFECTED

Seller a retro must first pay the following:

o The price of the thing sold

o Expenses of the contract and other legitimate payments made by reason of the sale

o Necessary and useful expenses made on the thing sold

o Valid tender of payment is sufficient

o Mere sending of notice without valid tender is insufficient

o Failure to pay useful and unnecessary expenses entitles vendee to retain land unless actual reimbursement is

made

 IN CASE OF MULTI-PARTIES

1. When an undivided thing is sold because co-owners cannot agree that it be allotted to one of them – vendee a

retro may compel the vendor to redeem the whole thing

2. When an undivided thing is sold by coowners / co-heirs, vendors a retro may only exercise his right over his

respective share; vendee a retro may demand that they must come to an agreement first and may not be

compelled to consent to a partial redemption

3. When rights of co-owners over an undivided thing is sold as regards to their own share – vendee retro cannot

compel one to redeem the whole property

4. Should one of the co-heirs/co-owners succeed in redeeming the property – such vendor a retro shall be

considered as trustee with respect to the share of the other co-owners/co-heirs.

 FRUITS

What controls is the stipulation between parties as regards the fruits; If none:

a. At time of execution of the sale a retro there are visible or growing fruits – there shall be no pro-rating at time of

redemption if no indemnity was paid by the vendee a retro

b. At time of execution sale a retro there be no fruits but there are fruits at time of redemption – pro-rated between

vendor a retro and vendee a retro giving the vendee a retro a part corresponding to the time he possessed the

land.

 PRE-EMPTION AND REDEMPTION DISTINGUISHED

PRE-EMPTION REDEMPTION

Arises before sale Arises after sale

No rescission because no sale exists yet There can be rescission of the original sale

The action is directed against prospective seller Action is directed against buyer

LEGAL REDEMPTION

 Only applies to contracts of sale.

 The right to be subrogated upon the same terms and conditions stipulated in the contract, in the place of one who

acquires the thing by (1) purchase OR (2) by dation in payment OR (3) by other transaction whereby ownership is

transmitted by onerous title.

 Types of Legal Redemption:

a. Among co-heirs

i. Any of the heirs sell his hereditary rights to stranger before partition

ii. Any of the co-heirs may be subrogated to the rights of the purchaser by redeeming said hereditary right:

reimburse buyer of the price of the sale

iii. Co-heirs has 1 month from receipt of notice in writing

b. Among co-owners

i. any or all of co-owners sells their shares to 3rd person

ii. any co-owner may exercise right of redemption by paying reasonable price of property to the buyer

iii. if 2 or more co-owners desire to exercise right of redemption, they may only do so in proportion to the share

they respectively have in thing owned in common

c. Among adjoining owners

i. Rural land

o Where piece of rural land has an area not exceeding 1 hectare, adjoining owner has right to redeem

unless grantee does not own a rural land

 o If two or more adjacent lot owners desire to exercise right to redeem, owner of adjoining lot with smaller

area shall be preferred

o If two or more adjacent lit owners desire to exercise right to redeem and both have same lot area, one

who first requested shall be granted

ii. Urban land

o when piece of land is small and cannot be used for any practical purpose and bought merely for

speculation, owner of adjoining land can redeem

o 2 or more owners of adjoining lot desire to exercise right to redeem, owner whose intended use is best

justified shall be preferred.

d. Sale of credit in litigation

i. when a credit or other incorporeal right in litigation is sold, debtor shall have a right to extinguish it by

reimbursing the assignee for the price the latter paid therefor plus judicial costs, interest

ii. debtor may exercise right within 30 days from the date assignee demands payment from him Other Instances

When Right of Legal Redemption is Granted

a. Redemption of homesteads

b. Public Land Act

c. Land acquired under free patent homestead subject to repurchase by wife, legal heirs within 5 years

from date of conveyance granted by law, need not be stipulated

1. Redemption in tax sales

i. in case of tax delinquency/failure to pay tax assessments, property is foreclosed

ii. delinquent payer has 1 year from date of sale to redeem by paying to the revenue District Officer the amount of

tax delinquencies, and interest or purchase price.

2. Redemption by judgment debtor

- 1 year from date of registration of certificate of sale to redeem by paying purchaser at public auction with interest

3. Redemption in extrajudicial foreclosure

- 1 year from date of sale and registration

4. Redemption in judicial foreclosure of mortgage

- no right to redeem is granted to debtor mortgagor except when mortgagee is bank of a banking institution 90

days after finality of judgment

5. When Period of Redemption Begins to Run

- Right of legal pre-emption of redemption shall be exercised within 30 days from notice by the seller

6. How exercised

- tender of payment is not necessary; offer to redeem is enough.

 i. There is no prescribed form for an offer to redeem to be properly effected. Hence, it can either be through a

formal tender with consignation of the redemption price within the prescribed period. What is paramount is the

availment of the fixed and definite period within which to exercise the right of legal redemption.

ii. Deeds of sale are not to be recorded in Register of Deeds unless accompanied by affidavit of seller that he

has given notice to all possible redemptioners

GENERAL RULE: Actual knowledge notwithstanding, written notice is still required

EXCEPTION: When actual knowledge is acquired by co-heirs living in same land with purchaser, or co-owner was

middleman in sale to 3rd party.

o Art. 1623 does not prescribe any distinctive method for notifying the redemptioner. Etcuban v. CA, [148 SCRA

507]

I. ASSIGNMENT

The owner of a credit transfers to another his rights and actions in consideration of a price certain in money or its

equivalent

1. Transfers the right to collect the full value of the credit, even if he paid a price less than such value

2. Transfers all the accessory rights (e.g. guaranty, mortgage, pledge, preference)

3. Debtor can set up against the assignee all the defenses he could have set up against the assignor

II. WHAT MAKES ASSIGNMENT DIFFERENT FROM SPECIES SALE?

1. Technical term but basically a sale

2. Sale of credits and other incorporeal things

III. EFFECTS OF ASSIGNMENT

1. Lack of knowledge or consent of debtor not essential for validity but has legal effects (“meeting of minds” in

assignment contemplates that between assignor of the credit and his assignee)

2. Assignment of rights made w/o knowledge of debtor – debtor may set up against assignee the compensation

w/c would pertain to him against assignor of all credits prior to assignment and of later ones until he had knowledge

of the assignment

3. Debtor has consented to assignment – cannot set up

4. Compensation unless assignor was notified by debtor that he reserved his right to the compensation

5. Debtor has knowledge but no consent - may still set up compensation of debts previous to assignment but not

the subsequent ones.

IV. TRANSFER OF OWNERSHIP

1. By tradition and not by perfection

 2. By execution of public instrument because intangibles cannot be physically transferred

3. Without necessity of delivering the document evidencing the credit.

4. This rule does not apply to negotiable documents and documents of title which are governed by special laws.

V. EFFECT OF PAYMENT OF DEBTOR AFTER ASSIGNMENT OF CREDIT

1. Before Notice of the Assignment Payment to the original creditor is valid and debtor shall be released from his

obligation

2. After Notice

a. Payment to the original creditor is not valid as against the assignee

b. He may be made to pay again by the assignee

VI. WARRANTIES OF THE ASSIGNOR OF CREDIT

1. NO warranty against hidden defect - N/A because intangibles has no physical existence

2. He warrants the existence and legality of credit - there is warranty except when expressly sold as a doubtful

account

a. NO warranty as to the solvency of debtor unless it is expressly stipulated OR unless the insolvency was already

existing and of public knowledge at the time of the assignment

b. Warranty shall last for 1 year only

c. One who assigns inheritance right w/o enumerating rights shall be answerable for his character as an heir

d. One who sells whole of certain rights for a lump sum, shall be answerable for legitimacy of the whole in

general but not for each of the various parts

VII. BREACH OF WARRANTY: LIABILITIES OF THE ASSIGNOR OF CREDIT FOR VIOLATION OF HIS WARRANTIES

1. Assignor in good faith Liability is limited to price received, expenses of the contract and other legitimate

payments made by reason of the assessment

2. Assignor in bad faith Liable ALSO for (expenses of contract and other legitimate payments plus useful and

necessary expenses) damages

VIII. ASSIGNMENT OF CREDIT OR INCORPOREAL RIGHT IN LITIGATION - REQUISITES

1. There must be a sale or assignment of credit

2. There must be a pending litigation

3. The debtor must pay the assignee:

a. Price paid by him AND

b. Judicial costs incurred by him AND

c. Interest on the price from the date of payment

 4. The right must be exercised by the debtor within 30 days from the date the assignee demands (judicially or extra-

judicially) payment from him

NOTE:

 Presumption: buyer’s purpose is speculation and; law would rather benefit the debtor of such credits rather than the

one who merely speculates for profit.

 When credit or incorporeal right in litigation is assigned or sold, debtor has a right to extinguish it by reimbursing the

assignee for the price the buyer paid plus interest

IX. Right to redeem by debtor not available in the following instances (not considered speculative)

1. Assignment of credit / incorporeal right to co-heir or co-owner; the law does not favor co-ownership

2. Assignment to creditor in payment for his credit

 Presumption is that the assignment is above suspicion; assignment is in the form of dacion en pago, thus

perfectly legal

3. Assignment to possessor of tenement or piece of land which is subject to the right in litigation assigned

 Purpose is to presumably preserve the tenement

THE SUBDIVISION

P.D. 957: LAW ON SALE OF SUBDIVISION AND CONDOMINIUM

 REMEDIES FOR FAILURE OF THE DEVELOPER TO DEVELOP THE SUBDIVISION OR CONDOMINIUM ACCORDING TO THE

APPROVED PLAN AND TO COMPLY WITH SUCH WITHIN THE TIME LIMIT

o The buyer may desist from further payment any installments. Also, there would be no forfeiture of past payments in

favor of the developer after due notice has been given.

o The buyer may demand reimbursement of the total amount paid including amortization interests but excluding

delinquency interests, with interest thereon at the legal rate. (Sec. 23, P.D. 957)

Otherwise: RA 6552 (Maceda Law) will apply.

 REQUISITES OF SEC 3 OF RA 6552:

o Failure to pay installments was due to reasons, other than failure of the developer to develop the subdivision or

condominium according to the approved plan and to comply with such within the time limit, and,

o Only covers residential lots including condominium units, excluding, sales to tenants.

o The buyer has paid at least two years of installments

 RIGHTS OF THE BUYER UNDER RA 6552 WITH AT LEAST TWO (2) YEARS OF INSTALLMENT:
 o To pay, without additional interest, the unpaid installments due within the total grace period earned by him. Said

grace period is fixed at the rate of one month grace period for every one year of installments payments made.

Thus, here the buyer has at least two months grace for he should have paid at least two years of installments to

avail of the rights under this section.

This rights can only be exercised only once in every five (5) years of the life of the contract and its

extensions, if any.

o To be refunded of the cash surrender value of this payments equal to 50% of his total payments if the contract is

cancelled. But if he has paid five years or more, he is entitled to an increase of 5% every year and so on but the

cash surrender value shall not exceed 90% of his total payments. McLaughlin v CA, [G.R. No. L-57552, Oct 10,

1986]

 THE ACTUAL CANCELLATION OF THE CONTRACT REFERRED TO ABOVE SHALL TAKE PLACE ONLY

1. After 30 days from receipt by the buyer of the notice of cancellation or demand for rescission, AND

2. Upon full payment to the buyer of the cash surrender value In the computation of the total number of installment

payments the following are included:

a. downpayment and

b. deposit or option money

 RIGHTS OF THE BUYER UNDER RA 6552 WITH LESS THAN 2 YEARS OF INSTALLMENTS

o If he has paid less than two (2) years of installments, he still has the right to pay within a grace period of not less

than sixty (60) days from the date the installment became due.

o If the buyer fails to pay the installment due at the expiration of the grace period, i.e. 60 days, the seller may

cancel the contract after 30 days from receipt by the buyer of the notice of cancellation or demand for

rescission of the contract by a notarial act.

Here the buyer is not entitled to any refund

CONDOMINIUM

Restrictions and Additional requirements on transfer of condominiums:

 It shall include the transfer or conveyance of the undivided interests in the common areas or membership or

shareholdings in the condominium corporation.

 Membership in a condominium corporation, regardless whether stock or non-stock, shall not be transferable

separately from the condominium unit of which it is an appurtenance.

 No condominium owner’s copy of the certificate of title shall, subsequent to the original conveyance, be

registered unless accompanied by a certificate of the management body of the project that such conveyance is in

accordance with the provisions of the declaration of restrictions of such project.

A. CONTRACT

- is a contract whereby a person binds himself to render some service or to do something in representation or on behalf

of another, with the consent or authority of the latter.

 CHARACTERISTICS

1. Consensual: perfected by mere consent;

2. Nominate: it has its own name;

3. Preparatory: entered into as means to enter into other contracts

4. Principal: does not depend on another contract for its existence and validity;

5. Unilateral/Bilaterial:

a. Unilateral: if contract is gratuitous or it creates obligations for only one party (i.e. the agent)

b. Bilateral: if contract is for compensation or gives rise to reciprocal rights and obligations

 Nature: Since it is a contract, there must be a meeting of the minds as to consent, object, and cause.

 Exception to contractual nature: When the agency is created by operation of law

Ex: Agency by Estoppel

 Basis: Representation

The acts of the agent on behalf of the principal within the scope of his authority produce the same legal and

binding effects as if they were personally done by the principal.

Hence, the distinguishing features of agency are its representative character & its derivative authority.

 Purpose: Extend the personality of the principal through the facility of the agent

 Capacity of the Parties:

PRINCIPAL: He may be a natural or a juridical person He must be capacitated.

General RULE: If a person is capacitated to act for himself or his own right, he can act through an agent. The agent

is not liable where he was ignorant of the principal’s incapacity

 Agent

Insofar as third persons are concerned, it is enough that the principal is capacitated. Insofar as his obligations

to his principal are concerned, the agent must be able to bind himself.

As an agent, some mental capacity is necessary, therefore, those who are absolutely incapacitated (ex.

Insane persons) cannot be agents.

 ESSENTIAL ELEMENTS

1. Consent of the parties to establish the relationship;

2. Object of the contract is the execution of a juridical act in relation to third persons;

3. Agent acts as a representative and not for himself; and

4. Agent acts within the scope of his authority.

 An illegal termination of agency does not justify reinstatement of the agent as such. The agency cannot be

compelled by the courts to be reinstated because such relationship can only be given effect with the consent of

the principal. Orient Air Services v. CA, G.R. No. 76931, May 29, 1991

 Acts That Cannot Be Done By Agent:

1. Personal Acts – ex. making of a will

2. Criminal or Illegal Acts

 Nature of Relationship between Principal and Agent:

Fiduciary  based on trust & confidence

1. Agent is estopped from asserting interest adverse to his principal’s

2. Agent must not act as an adverse party

3. Agent must not act for an adverse party

4. Agent must not use or disclose secret information

5. Agent must give notice of material facts

GENERAL RULE: Knowledge of the agent is imputed to the principal even though the agent never communicated it to his

principal.

EXCEPTIONS:

a. Where the interests of the agent are adverse to those of the principal;

b. Agent Acts in Bad Faith or where the person claiming the benefit of the rule colludes with the agent to defraud the

principal.

B. POWERS

 Special powers of attorney are necessary in the following cases: (PECWAM-LLBBOCARO)

o To make such payments as are not usually considered as acts of administration;

o To effect novations which put an end to obligations already in existence at the time the agency was constituted;

o To compromise, to submit questions to arbitration, to renounce the right to appeal from a judgment, to waive

objections to the venue of an action or to abandon a prescription already acquired;

o To waive any obligation gratuitously;

o To enter into any contract by which the ownership of an immovable is transmitted or acquired either gratuitously

or for a valuable consideration;

o To make gifts, except customary ones for charity or those made to employees in the business managed by the

agent;
 o To loan or borrow money, unless the latter act be urgent and indispensable for the preservation of the things

which are under administration;

o To lease any real property to another person for more than one year;

o To bind the principal to render some service without compensation;

o To bind the principal in a contract of partnership;

o To obligate the principal as a guarantor or surety;

o To create or convey real rights over immovable property;

o To accept or repudiate an inheritance;

o To ratify or recognize obligations contracted before the agency;

o Any other act of strict dominion.

A special power to sell excludes the power to mortgage; and a special power to mortgage does not

include the power to sell.

Special Power of Attorney

- an instrument in writing by which one person, as principal, appoints another as his agent and confers upon him the

authority to perform certain specified acts or kinds of acts on behalf of the principal.

The special power of attorney can be included in the general power when it specifies therein the act or

transaction for which the special power is required.

 Powers Not Included in the Power to Mortgage

o To sell

o To execute a second mortgage

o To mortgage for the agent’s or any 3rd persons’ benefit, UNLESS clearly indicated

 Powers Not Included in the Power to Compromise

- Submission to Arbitration

Rationale:

A principal may authorize his agent to compromise because of absolute confidence in the latter’s

judgment and discretion to protect the former’s rights and obtain for him the best bargain in the transaction. If

the transaction would be left in the hands of an arbitrator, said arbitrator may not enjoy the trust of the principal.

The agent must act within the scope of his authority. He may do such acts as may be conducive to the

accomplishment of the purpose of the agency.

 Requisites for Principal to be Bound by Act of Agent

o The agent must act in behalf of the principal

o The agent must act within the scope of his authority

 When a principal NOT BOUND by act of agent

o The latter acts without or beyond the scope of his authority in the former’s name

o Exceptions:

 Where the acts of the principal have contributed to deceive a 3rd person in good faith;

 Where the limitations upon the power created by the principal could not have been known by the 3rd

person;

 Where the principal has placed in the hands of the agent instruments signed by him in blank;

 Where the principal has ratified the acts of the agent

The latter acts within the scope of his authority but in his own name, EXCEPT when the transaction involves

things belonging to the principal

NOTE:

The agent is not deemed to have exceeded the limits of his authority should he perform the agency in a manner

more advantageous to the principal than that indicated by him, since he is authorized to do such acts as may be

conducive to the accomplishment of the purpose of the agency.

The powers of an agent are particularly broad in the case of one acting as a general agent or manager; such a

position presupposes a degree of confidence reposed and investiture with liberal powers for the exercise of judgment

and discretion in transactions and concerns which are incidental or appurtenant to the business entrusted to his care

and management. In the absence of an agreement to the contrary, a managing agent may enter into contracts that

he deems reasonably necessary or requisite for the protection of the interests of his principal entrusted to his

management. Eurotech v. Cuizon, G.R. No. 167552, April 23, 2007

 DISTINCTION BETWEEN AGENCY AND LEASE OF WORK/SERVICE

AGENCY LEASE OF WORK/SERVICE

Representation Employment

Agent exercises discretionary powers Lessor ordinarily performs only ministerial functions

3 persons are involved: principal, agent and the 3rd 2 persons are involved: lessor and lessee

person with whom the agent contracts

Relates to commercial or business transactions Relates more to the matters of mere manual or

mechanical execution

 DISTINCTION BETWEEN AGENCY AND GUARDIANSHIP

AGENCY GUARDIANSHIP

Agent represents a capacitated person A guardian represents an incapacitated person.

 Agent is appointed by the principal and can be Guardian is appointed by the court and stands in

removed by the latter. loco parentis.

Agent is subject to the directions of the principal. Guardian is not subject to the directions of the ward

but must act for the benefit of the latter

Agent can make the principal personally liable. Guardian has no power to impose personal liability

on the ward.

 DISTINCTION BETWEEN AGENCY AND LEASE OF PROPERTY

AGENCY LEASE OF PROPERTY

Agent is controlled by the principal. Lessee is not controlled by the lessor.

Agency may involve things other than property. Lease of property involves property.

Agent can bind the principal. Lessee cannot bind the lessor.

 DISTINCTION BETWEEN AGENCY TO SELL AND SALE

AGENCY TO SELL SALE

Agent receives the goods as the principal’s goods Buyer receives the goods as owner

Agent delivers the proceeds of the sale Buyer pays the price

Agent can return the object in case he is unable to Buyer, as a general rule, cannot return the object

sell the same to a third person sold

Agent in dealing with the thing received is bound to Buyer can deal with the thing as he pleases, being

act according to the instructions of his principal the owner

 DISTINCTION BETWEEN AGENT AND CONTRACTOR

AGENT CONTRACTOR

Represents his principal Employed by the employer

Acts under the principal’s control and instruction Acts according to his own method

Principal is liable for torts committed by the agent Employer not liable for torts committed by the

within the scope of his authority independent contractor.

 DISTINCTION BETWEEN AGENCY AND PARTNERSHIP

AGENCY PARTNERSHIP

An agent must submit to the principal’s right to A co-partner is not subject to co-partner’s right to

control control, unless there is an agreement to that effect

The agent assumes no personal liability where he The partner binds not only the firm members but

acts within the scope of his authority himself as well

 The agent takes his agreed share of profits not as The profits belong to all the partners as common

owner but as an agreed measure of compensation proprietors in agreed proportions

for his services

C. EXPRESS

Express – agent has been actually authorized by the principal, either orally or in writing

Implied – agency is implied from the acts of the principal, from his silence, or lack of action, or his failure to repudiate the

agency knowing that another person is acting on his behalf without authority, or from the acts of the agent which carry

out the agency.

 OTHER CLASSIFICATIONS OF AGENCY

o As to character

 Gratuitous – agent receives no compensation for his services

 Onerous – agent receives compensation for his services

o As to extent of business of the principal

 General – agency comprises all the business of the principal

 Special – agency comprises one or more specific transactions

o As to authority conferred

 Couched in general terms – only acts of administration

 Couched in specific terms – only the performance of a specific act/s

o As to nature and effects

 Ostensible or Representative – agent acts in the name and representation of the principal

 Simple or Commission – agent acts in his own name but for the account of the principal.

 Forms of Agency

GENERAL RULE: Appointment of an agent may be oral or written; no formal requirements

EXCEPTION: When the law requires a specific form (ex. agent’s sale of real property or any interest therein)

Agency is presumed to be for compensation, unless there is proof to the contrary. The agent does not have

to prove that the agency is for compensation.

But the prima facie presumption that the agency is for a compensation may be contradicted by contrary

evidence.

Broker

- negotiate contracts relative to property in behalf of others and for a compensation/fee

 When Broker Entitled to Compensation

 Whenever he brings to his principal a party who is able and willing to take the property, and enter into a valid

contract upon the terms named by the principal, although the particulars may be arranged and the matter

negotiated and completed between the principal and the purchaser directly.

However, a broker is never entitled to commission for unsuccessful efforts.

The broker should be paid his commission where he is the efficient procuring cause in bringing the sale.

 Efficient procuring cause: when there is a close proximate and causal connection between the efforts and

labor of the agent and the principal’s sale of property. Manotoc Brothers v. CA, 221 SCRA 224 (1993)

LAW ON DOUBLE AGENCY

Disapproved by law for being against public policy and sound morality EXCEPT where the agent acted with full

knowledge and consent of the principals

 Right of agent to compensation in case of double agency

o With knowledge of both principals - recovery can be had from both principals

o Without the knowledge of both principals - the agent can recover from neither With knowledge of one principal

- as to the principal who knew of that fact and as to the agent, they are in pari delicto and the courts shall leave

them as they were, the contract between them being void as against public policy and good morals

ACCEPTANCE BY AGENT

 Forms of Acceptance by Agent:

o Express - when it is oral or written

o Implied -when it can be inferred from the acts of the agent which carry out the agency, or from his silence or

inaction according to the circumstances

 Between persons who are present – implied acceptance if the principal delivers his power of attorney to the agent and

the latter receives it without any objection

 Between persons who are absent – acceptance not deemed implied from the silence of the agent.

EXCEPTIONS:

o When the principal transmits his power of attorney to the agent who receives it without any objection

o When the principal entrusts to him by letter or telegram a power of attorney with respect to the business in which

he is habitually engaged as an agent, and he did not reply to the letter or telegram

 What is meant by “present”?

- Generally, “face to face”, but includes people conversing directly through technology (ex. over the telephone).
Power of Attorney - Instrument in writing by which one person, as principal, appoints another as his agent and confers

upon him the authority to perform certain specified acts or kinds of acts on behalf of the principal; primary purpose is to

evidence agent’s authority to third parties within whom the agent deals

 Construction of Power of Attorney:

GENERAL RULE: Strictly construed and strictly pursued; held to grant only those specified powers

EXCEPTION: when strict construction will destroy the very purpose of the power

 Ways of Giving Notice of Agency & Its Effect:

o By special information - the person appointed as agent is considered as such with respect to the person to

whom it was given.

o By public advertisement - the agent is considered as such with regard to any person

 How do you revoke an agency?

In the same manner as it was constituted. However, constitution by Special Information may be revoked by

notice in a daily newspaper, provided it can be proven that 3rd persons in question read the revocation

D. AGENCY BY ESTOPPEL

There is really no agency at all, but the alleged agent seemed to have apparent or ostensible, although not real,

authority to represent another.

 DISTINCTION BETWEEN AGENCY BY ESTOPPEL AND IMPLIED AGENCY

BASIS AGENCY BY ESTOPPEL IMPLIED AGENCY

Existence of actual agency No agency at all There is an actual agency

Reliance by 3rd persons Can be invoked only by a 3rd Such reliance is not needed, since

person who in good faith relied on the agent is a real agent

the conduct of the principal in

holding the agent out as being

authorized

Nature of Authority An agent by estoppel has none of An agent by implied appointment

the rights of an agent, except has all the rights and liabilities of

where the principal’s conduct are an agent, i.e. has actual authority

such that the agent reasonably to act on behalf of the principal

believed that the principal

intended him to act as an agen

 An agency couched in general terms comprises only acts of administration, even if the principal should state that

he withholds no power or that the agent may execute such acts as he may consider appropriate, or even though the

agency should authorize a general and unlimited management.

 Will an authority embodied in a letter be sufficient?

Yes. Jimenez v. Rabot, 38 Phil 387 (1918)

 Attorney-In-Fact

One who is given authority by his principal to do a particular act not of a legal character

The term is, in loose language, used to include agents of all kinds, but in its strict sense, it means an

agent having a special authority created by a deed.

 GENERAL AND SPECIAL AGENCY DISTINGUISHED

BASIS GENERAL AGENT SPECIAL AGENT

Scope of Authority All acts connected with the Specific acts in pursuance of

business or employment in which particular instructions or with

he is engaged restrictions necessarily implied

from the act to be done

Nature of Service Authorized Involves continuity of service No continuity of service

Extent to Which Agent May Bind May bind his principal by an act Cannot bind his principal in a

the Principal within the scope of his authority manner beyond or outside the

although it may be contrary to specific acts which he is

the latter’s special instructions authorized to perform

Termination of Authority Apparent authority does not Duty imposed upon the third

terminate by the mere revocation party to inquire makes termination

of his authority without notice to of the relationship as between the

the third party principal and agent effective as

to such third party unless the

agency has been entrusted for

the purpose of contracting with

such third party

Construction of Principal’s Merely advisory in nature Strictly construed as they limit the

Instructions agent’s authority

AGENCY

 Covers only MERE ACTS OF ADMINISTRATION even if:

o The principal should state that he withholds no power

o The agent may execute such acts as he may consider appropriate

o The agency should authorize a general and unlimited management

 How are contracts of agency construed?

Contracts of agency, as well as general powers of attorney, must be interpreted in

accordance with the language used by the parties.

The real intention of the parties is primarily determined from the language used and

gathered from the whole instrument.

In case of doubt, resort must be had to the situation, surroundings and relations of the

parties. The intention of the parties must be sustained rather than defeated.

If the contract is open to 2 constructions, one of which would uphold the intention while the

other would overthrow it, the former is to be chosen.

F. AGENCY REQUIRING SPECIAL POWER OF ATTORNEY

 Special powers of attorney are necessary in the following cases: (PECWAM-LLBBOCARO)

o To make such payments as are not usually considered as acts of administration;

o To effect novations which put an end to obligations already in existence at the time the agency

was constituted;

o To compromise, to submit questions to arbitration, to renounce the right to appeal from a

judgment, to waive objections to the venue of an action or to abandon a prescription already

acquired;

o To waive any obligation gratuitously;

 o To enter into any contract by which the ownership of an immovable is transmitted or acquired

either gratuitously or for a valuable consideration;

o To make gifts, except customary ones for charity or those made to employees in the business

managed by the agent;

o To loan or borrow money, unless the latter act be urgent and indispensable for the preservation

of the things which are under administration;

o To lease any real property to another person for more than one year;

o To bind the principal to render some service without compensation;

o To bind the principal in a contract of partnership;

o To obligate the principal as a guarantor or surety;

o To create or convey real rights over immovable property;

o To accept or repudiate an inheritance;

o To ratify or recognize obligations contracted before the agency;

o Any other act of strict dominion.

A special power to sell excludes the power to mortgage; and a special power to mortgage does

not include the power to sell.

Special Power of Attorney

- an instrument in writing by which one person, as principal, appoints another as his agent and

confers upon him the authority to perform certain specified acts or kinds of acts on behalf of the

principal.

- The special power of attorney can be included in the general power when it specifies therein the act

or transaction for which the special power is required.

 Powers Not Included in the Power to Mortgage

o To sell
 o To execute a second mortgage

o To mortgage for the agent’s or any 3rd persons’ benefit, UNLESS clearly indicated

 Powers Not Included in the Power to Compromise

- Submission to Arbitration

Rationale:

A principal may authorize his agent to compromise because of absolute confidence in the latter’s

judgment and discretion to protect the former’s rights and obtain for him the best bargain in the

transaction. If the transaction would be left in the hands of an arbitrator, said arbitrator may not

enjoy the trust of the principal.

The agent must act within the scope of his authority. He may do such acts as may be conducive to the

accomplishment of the purpose of the agency.

 Requisites for Principal to be Bound by Act of Agent

o The agent must act in behalf of the principal

o The agent must act within the scope of his authority

 When a principal NOT BOUND by act of agent:

The latter acts without or beyond the scope of his authority in the former’s name

Exceptions:

o Where the acts of the principal have contributed to deceive a 3rd person in good faith;

o Where the limitations upon the power created by the principal could not have been known by

the 3rd person;

o Where the principal has placed in the hands of the agent instruments signed by him in blank;

o Where the principal has ratified the acts of the agent

 The latter acts within the scope of his authority but in his own name, EXCEPT when the

transaction involves things belonging to the principal

NOTE:

The agent is not deemed to have exceeded the limits of his authority should he perform the

agency in a manner more advantageous to the principal than that indicated by him, since he is

authorized to do such acts as may be conducive to the accomplishment of the purpose of the agency.

The powers of an agent are particularly broad in the case of one acting as a general agent or

manager; such a position presupposes a degree of confidence reposed and investiture with liberal

powers for the exercise of judgment and discretion in transactions and concerns which are incidental

or appurtenant to the business entrusted to his care and management. In the absence of an

agreement to the contrary, a managing agent may enter into contracts that he deems reasonably

necessary or requisite for the protection of the interests of his principal entrusted to his management.

Eurotech v. Cuizon, G.R. No. 167552, April 23, 2007

G. RIGHTS AND OBLIGATIONS OF PRINCIPAL

 Obligations of the Principal to the Agent: (CARIP)

o Comply with all the obligations agent contracted in representation of the principal

o Advance sums necessary for the execution of the agency, when agent so requests; liable for

reimbursement regardless of the undertaking’s success whenever agent had advanced & has no

fault; includes interest

o Reimburse the agent for all advances made by him provided the agent is free from fault

o Indemnify the agent for all the damages which the execution of the agency may have caused the

latter without fault or negligence on his part

o Pay the agent the compensation agreed upon or the reasonable value of the latter’s services
 Liability of 3rd persons to the Principal

o In Contract – a 3rd person is liable to the principal upon contracts entered into by his agent, as if

the contract has been entered into by the principal.

o In Tort – the 3rd person’s tort liability to the principal, insofar as the agent is involved in the tort,

arises in 3 situations:

 Where the 3rd person damages or injures property or interest of the principal in the

possession of the agent

 Where the 3rd person colludes with the agent to injure/defraud the principal

 Where the 3rd person induces the agent to violate his contract with the principal to betray

the trust reposed upon him by the principal.

 Requisites for solidary liability of principals

There are 2 or more principals

o The principals have all concurred in the appointment of the same agent

o The agent is appointed for a common transaction or undertaking.

 Rule where 2 persons contract separately with agent and principal

Two persons may contract separately with the agent and the principal with regard to the same

thing. If the two contracts are incompatible with each other, the one of prior date shall be preferred.

This is subject, however, to the rules on Double Sales under Article 1544 of the Civil Code (i.e. for

movables: first in possession, first in right; for immovables: first to register in good faith, first in

right; absent any inscription: first in possession or party who presents oldest title acquires

ownership).

 Agent’s Right of Retention

 o Specific (only for those goods connected with the agency) and

o Until the principal effects the reimbursement and pays the indemnity

 PRINCIPAL’S LIABILITIES FOR EXPENSES

GENERAL RULE: Principal is liable for the expenses incurred by the agent

EXCEPTIONS: (AFUS)

o If the agent acted in contravention of the principal's instructions, unless the latter should wish

to avail himself of the benefits derived from the contract

o When the expenses were due to the fault of the agent

o When the agent incurred them with knowledge that an unfavorable result would ensue, if the

principal was not aware thereof

o When it was stipulated that the expenses would be borne by the agent, or that the latter would

be allowed only a certain sum

 Who can be estopped to deny agency?

o Estoppel of Agent- one professing to act as agent is estopped to deny his agency both as against his

asserted principal and the third persons interested in the transaction in which he is engaged

o Estoppel by the Principal

 As to agent – one knowing another is acting as his agent and fails to repudiate his acts, or

accept the benefits of them, will be estopped to deny the agency as against such other

 As to sub-agent – for the principal to be estopped from denying his liability to a third person,

he must have known or be charged with knowledge of the transaction and the terms of the

agreement between the agent and subagent

 As to third persons – one who knows that another is acting as his agent or permitted another

to appear as his agent, to the injury of third persons who have dealt with the apparent agent as

such in good faith and in the exercise of reasonable prudence, is estopped to deny the agency
 Estoppel of Third Persons – a third person, having dealt with one as an agent may be estopped

to deny the agency as against the principal, agent or 3rd persons in interest

 Estoppel of the Government - government neither estopped by the mistake/error of its

agents; may be estopped through affirmative acts of its officers acting within the scope of their

authority