PART IV

OBLIGATIONS AND CONTRACTS

A. NATURE OF OBLIGATIONS

1. OBLIGATION DEFINED. — An obligation is a juridical

necessity to give, to do or not to do.1
a) More Complete Definition. In Makati Stock
Exchange, Inc., et al. v. Miguel V. Campos, et al.,2
the Supreme Court cited Justice J.B.L. Reyes
who offered the definition given by Arias Ramos
as a more complete definition: "An obligation
is a juridical relation whereby a person (called
the creditor) may demand from another (called
the debtor) tire observance of a determinative
conduct (the giving, doing or not doing), and in
case of breach, may demand satisfaction from
the assets of the latter."
b) Distinguished from right. The High Court
likewise ruled in Makati Stock Exchange, Inc.,
et al. v. Miguel V. Campos, et al.3 that "right and
obligation are legal terms with specific legal
meaning. A right is a claim or title to an interest
in anything whatsoever that is enforceable by
law. An obligation is defined in file Civil Code as
a juridical necessity to give, to do or not to do.
For every right enjoyed by any person, there is a

’Art. 1156, NCC.

2G.R. No. 138814, April 16, 2009, citing Lawyer's Journal, 31 January 1951, p. 47.
3Itrid., citing Bailey v. Miller, 91 N.E. 24,25, Ind. App. 475, cited in 37A Words and
Phrases 363 and Civil Code, Art. 1156.

417
418 REVIEWER ON CIVIL LAW

corresponding obligation on the part of another

person to respect such right."
1.01. BASIC CONCEPTS INVOLVED IN OBLIGA­
TIONS. The definition under the New Civil Code
involves civil obligation which is said to import three
concepts:4
a) Credit — option of a person to demand a
patrimonial prestation, and which the law will
enforce;
b) Debt — coercible duty of another to render a
prestation or observe a particular conduct;
c) Responsibility — responsibility of the debtor
to satisfy the claim of the creditor from the
debtor's patrimony in case of breach.5 This is
not equivalent to a legal duty or obligations in
general.
1.02. CIVIL OBLIGATION DISTINGUISHED FROM
NATURAL OBLIGATIONS. Civil obligation (Perfect
Obligation) which involves the concept of debt,
credit and responsibility should be distinguished
from natural . obligations (Imperfect Obligation).
Civil obligation can be enforced in court while
natural obligation cannot be enforced in court (2011
Bar). Natural obligation's force and compliance is
only directed against a person's conscience. Natural
obligation is said to be based on equity and natural
law (1968,2004, and 2012 Bar).
1.03. REQUISITES OF OBLIGATIONS.6 a) The
VINCULUM JURIS or TURTDICAL TIE which is the
efficient cause established by the various sources of
obligations; b) The OBTECT which is the prestation
or conduct, required to be observed (to give, to do
or not to do); and c) The SUBTECT-PERSONS who,

4JBL Reyes, Observations on the New Civil Code on Points not covered by
Amendments already Proposed dated January 31,1951, reproduced in Ipse Jure, 2003 Ed.,
hereinafter referred to as "JBL Reyes, Observations."
5See Art. 2236, N.C.C.
6Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994).
 OBLIGATIONS AND CONTRACTS 419
Nature of Obligations

viewed from the demandability of the obligation are

the active (obligee) and passive (obligor) subjects
(2012 Bar).
(1) Prestation— the conduct required to be observed
which includes "to give," "to do" or "not to do"
(1956 and 2012 Bar).
(2) Passive subject — he is the obligor or debtor;
the person who is supposed to perform the
prestation. He is the one who will give, who will
do or who will not do.
(3) Active subject — he is the obligee or creditor.
The obligation of the obligor is owed to him.
He is the one who can demand the performance
of the prestation. He will be the one to whom
the thing involved will be given, or the one for
whom something will be done or will not be
done.

2. SOURCES OF OBLIGATIONS. The different sources of

obligations enumerated in Article 1157 of the New Civil Code
are as follows: (1) Law; (2) Contracts; (3) Quasi-Contracts; (4)
Delict; and (5) Quasi-Delicts. Except for contracts, the other
sources of obligations are obligations without an agreement
(2007 Bar).
a) Exclusivity. The juridical necessity is created
by any of the sources of obligation identified
in Article 1157. There is no other source of
obligation other than those mentioned in Article
1157. As the Supreme Court ruled in one case,
"an obligation imposed on a person, and the
corresponding right granted to another, must
be rooted in at least one of these five sources."7
b) Law. Obligations arising from law are not
presumed; only those provided for by law are
demandable8 (1964 Bar).

7Makati Stock Exchange, Inc., et al. v. Miguel V. Campos, et al., supra.

8Art. 1158, NCC.
420 REVIEWER ON CIVIL LAW

2.01. CLASSIFICATIONS OF OBLIGATIONS.

2.01.01. Primary Classifications.
(1) Pure Obligations or Conditional Obligations
(Arts. 1179-1192).
(2) Obligations with a Period (Arts. 1193-1198).
(3) Facultative Obligations or Alternative Obliga­
tions (Arts. 1199-1206).
(4) Joint Obligations or Solidary Obligations (Arts.
1207-1222).
(5) Divisible Obligations and Indivisible Obliga­
tions (Arts. 1223-1225).
(6) Obligations with a Penal Clause (Arts. 1226-
1230),)':':'
2.01.02. Secondary Classifications.
, (1) Unilateral Obligations or Bilateral Obligations.
(2) Principal Obligations or Primary Obligations.
(3) Real Obligations or Personal Obligations.
(4) Positive Obligations or Negative Obligations.
(5) Legal, Conventional, and Penal Obligations.
(6) Individual or Collective Obligations.
(7) Obligations to do, Obligations not to do, and
Obligations to give.
(8) Specific or generic obligations.

3. EFFECTS OF OBLIGAf IONS.

3.01. OBLIGATIONS TO GIVE.
3.01.01. Purposes of Obligation to Give: (1) To transfer
ownership (Example: delivery to the buyer of the
thing sold); or (2) To transfer of mere possession or
right. (Example: delivery to the tenant of the house
sought to be leased.)
 OBLIGATIONS AND CONTRACTS 421
Nature of Obligations

3.01.02. Things to be D elivered in an O bligation to

Give: The thing may be real or personal property,
consumable or non-consumable, fungible or non-
fungible (See Part II). It m ay also be generic or
determinate things.
a) Generic things— the thing or property involved
is referred to only by its class or genus. Examples:
to give a sack of rice; to give five mangoes; or to
deliver a kilo of com.
b) Determinate or Spedfic things — the thing or
property involved is particularly designated
or physically segregated from the members of
its class.9 Examples: to deliver the watch that is
now in the wrist of Mr. A; to give the only dog of
Mr. B; to deliver all the rice in the warehouse of
Pedro in 123 Rizal Avenue, Manila; or to deliver
the car with Plate No. X Y Z 123.
3.01.03. Obligations that are Induded in Obligation to Give
a Determinate Thing (Art. 1163, NCG) (1963 Bar):
a) Principal Obligation Involved ■— obligation to
give a determinate or specific thing.
b) Accessory Obligations — obligations that are
deemed included in the obligation to give a
determinate thing. These indude the following:
(1) The obligation to take care of the thing to
be delivered with the diligence of a good
father of a family;10
(2) The obligation to deliver the accessions
and accessories;11 and
(3) The obligation to deliver the fruits from
the moment the obligation to deliver
arises.12

9Art. 1460, NCC.

10Art. 1163, ibid.
11Art. 1166, ibid.
12Art. 1164, ibid.
422 REVIEWER ON CIVIL LAW

3.01.04. Duty to Exercise Due Diligence. The obligor must

take care of the thing to be delivered with the
diligence of a good father of a family. The duty to
exercise due diligence is imposed because if the
same is not present, the obligation may be rendered
illusory.13 If the thing will not be preserved, then it
would be unfair to the obligee or creditor who may
be receiving a property that is already damaged or
he may not receive the property altogether because it
may have been destroyed in the meantime.
a) Standard. The standard being used is the
diligence of a good father of a family. Some­
times, the good father of a family is called a
reasonable man or a man of ordinary diligence
or prudence. In Francisco v. Chemical Bulk Carriers
Incorporated,1* the Supreme Court restated the
rule that generally, "to determine the diligence
which must be required of all persons, we
use as basis the abstract average standard
corresponding to a normal orderly person."
b) EXCEPTION: When the standard is not
diligence of good father.
(1) When the law requires a different degree
of diligence. Examples: (i) Articles 1733
and 1755 of the New Civil Code requires m
■M
common carriers to exercise extraordinary
or utmost diligence in the vigilance over
goods and passengers that they contracted
to carry; (ii) Members of the Monetary
Board, officials, examiners and employees
of the Bangko Sentral ng Pilipinas are
required to exercise extraordinary diligence
in the performance of their duties.15

13Tolentino, Commentaries and Jurisprudence on the Civil Code o f the Philippines, Vol.
IV, 1991 Ed., p. 92, hereinafter referred to as "IV Tolentino."
14G.R. No. 193577, September 9, 2011, citing Arturo M. Tolentino, Civil Code o f the
Philippines, Vol. 4 ,1 2 5 (1991) (This case involves due diligence in the conduct of business,
particularly, in purchasing goods).
15Sec. 16, New Central Bank Act.
 OBLIGATIONS AND-CONTRACTS 423
Nature of Obligations

(2) When the parties agree on or stipulate a

different standard of care.
c) Disabled Person. With respect to disabled
persons, the Supreme Court adopted the
rule stated in this author's work on Torts and
Damages stating that: "However, one who is
physically disabled is required to use the same
degree of care that a reasonably careful person
who has the same physical disability would
use. Physical handicaps and infirmities, such
as blindness or deafness, are treated as part of
the circumstances under which a reasonable
person m ust act. Thus, the standard of conduct
for a blind person becomes that of a reasonable
person who is blind."16 The circumstances
that specially pertains to the blind person are
considered.
d) Effects of Failure to Exercise Due Diligence.
(1) The obligor or debtor may be liable for
damages;
(2) The obligor or debtor is liable even if there
was fortuitous event.
3.01.05. The Right to the Fruits. Article 1164 provides that
the creditor has the right to the fruits of the thing
from the time the obligation to deliver arises (2012
Bar). This applies only to an obligation to give a
determinate or specific thing.

EXAMPLES:

(1) The moment the contract of sale of a specified cow is perfected, all
the fruits of that cow should be delivered. For example, Mr. X sold
a specific cow to Mr. Y. Mr. Y paid the price and agreed with Mr. X
that Mr. X will deliver three days thereafter. All the fruits of the cow
like its young or calf from the time they entered into the contract
of sale up to the time of actual delivery should be delivered to the
buyer, Mr. Y.

16Frandsco v. Chemical Bulk Carriers Incorporated, supra, citing Timoteo B.

Aquino, Torts and Damages, 92 (2001).
424 REVIEWER ON CIVIL LAW

(2) I f th e o b lig atio n is to d eliv er a n y co w (g en eric), th e re is n o n e e d to

d eliv er th e ca lf o f th e co w o f th e seller b e ca u se an y o th e r co w can
b e delivered .

a) Real Right and Personal Right. Real right over

the thing to be given is acquired by the obligee
or creditor only upon delivery (1966 Bar). What
is being referred to is the real right of ownership.
However, the moment the parties entered into
a contract, the creditor has the personal right to
compel the debtor to deliver the thing. Example:
If Mr. X agreed to sell his horse to Mr. Y for a
specified price, Mr. Y has the personal right to
compel the delivery of the horse. Mr. X also
has a personal right to compel Mr. Y to pay the
price. The moment the horse is delivered by Mr.
X to Mr. Y, Mr. Y will acquire real right over the
horse. In other words, he will become the owner.
3.01.06. Obligation to Deliver Accessions and Accessories
(Art. 1166). The obligation to deliver or give a
determinate thing carries with it the accessory
obligation to deliver the accessions and accessories.
3.01.07. Remedies.
a) Remedies of the Obligee/Creditor in Obliga­
tion to Give a Determinate Thing.
(1) Specific Performance (Art. 1165). In case
the debtor or obligor failed to give or
deliver what he is supposed to give or
deliver, the obligee/creditor may file an
action to compel the debtor to give or to
make delivery (1983 Bar). This is called
"specific performance." For example, if the
obligation is to deliver a specified chair, the
creditor may file a case in court to compel
the debtor to deliver the chair if the debtor
failed or refused to deliver.
(i) Action to Preserve — since the obligor
must take care of the thing before delivery,
 OBLIGATIONS AND CONTRACTS 425
Nature of Obligations

the creditor may also file an action for the

preservation of the thing.17
(2) Action for Damages (Art. 1170). Those
who, in the performance of an obligation,
are guilty of fraud, negligence, or delay
and those who in any manner contravene
the tenor thereof, are liable for damages.
This is also included in what is referred to
as Equivalent Performance.
b) Remedies in an Obligation to D eliver a
Generic Thing. In an obligation to deliver
a generic thing, the creditor may either ask
for (a) specific performance, or (b) substitute
performance.
(1) Specific Performance. Although Article
1165 mentions only determinate thing,
specific performance is also applicable to
obligations to deliver generic things. In the
case of generic things where the quality
and circumstances are not stipulated, the
creditor cannot demand a thing of superior
quality and the debtor cannot deliver a
thing of inferior quality18 (1983 Bar).
(2) Substitute Performance. If the thing is
generic or not determinate, the second
paragraph states that the obligee or creditor
may ask that the obligation be complied
with at the expense of the debtor or obligor.
For example, if the obligation is to deliver
a sack of rice, another person may deliver
the rice if the obligor failed or refused to
deliver at the expense of the said obligor.
This is known as "substitute performance"
because instead of the debtor, it is another
person who will substitute him in the
performance of an obligation (1983 Bar).

17Arts. 1163 and 1188, NCC.

18Art. 1246, NCC.
 REVIEWER ON CIVIL LAW

(3) Action for Damages under Article 1170

is also available in case of breach of the
obligation to deliver a generic thing.
3.02. REMEDIES O F THE OBLIGEE/CREDITOR IN
CASE OF FAILURE OF OBLIGATIONS TO DO
(A rt 1167). In an obligation to do, the prestation
consists of performing a certain activity, physical or
intellectual, distinct from that of the delivery of a
thing.19
3.02.01. Total Failure to do. — If the debtor or obligor fails to
do what he is required or obliged to do, the activity
shall be performed at his (debtor) cost. Example: If Mr.
X is obligated to paint the fence of Mr. Y and Mr. X
failed to do so, Mr. Y can have somebody else paint
the fence at the expense of Mr. X.
(1) The debtor cannot be physically forced to
perform the obligation because that would
be contrary to his liberty. Example: The debtor
cannot be forced to perform his obligation to
repair a piano (1983 Bar).
(2) If only the debtor can perform the' obligation like
in case the obligation is personal to the debtor
because he was chosen by the creditor because
of his qualification or character, the act cannot
be done by somebody else, hence, the remedy is
to recover damages.

3.02.02. Failure to do in accordance w ith the tenor of the

obligation.— If the obligor did what he was supposed
to do but in an erroneous manner, the obligee or
creditor can also have it done by somebody else at
the debtor's expense. Example: Mr. X is supposed to
erect a stone fence which should be five feet. If Mr. X
constructed a two feet fence, the creditor or obligee
can have the fence completed at the expense of the
debtor.

19IV Caguioa 84-85.

 OBLIGATIONS AND CONTRACTS 427
Nature of Obligations

3.02.03. Failure to do correctly or performing the obligation

poorly.—•1) The obligee can have what was poorly
done be undone; and 2) He can have the obligation
done by somebody else at the expense of the debtor or
obligor. Example: If the fence in the previous example
was poorly done because it was uneven and very
weak, the fence can be removed and another person
can be made to construct the fence properly at the
expense of the debtor or obligor, Mr. X.
3.03. REMEDIES OF THE OBLIGEE/CREDITOR IN AN
OBLIGATIONS NOT TO DO (A rt 1168).
3.03.01. If the debtor did what he was obliged not to do. — it
can be undone at his expense. Example: If the debtor
or obligor is obliged not to construct a wall which
is more than two meters high and he constructed a
three-meter high wall, then the height of the wall may
be decreased by one meter at his expense. Exceptions:
What the debtor did cannot be undone if it is (1) an
accomplish fact or fait accompli, or (2) it is impossible
to undo.
3.03.02. If the debtor did what he was obliged not to do
but it is impossible to undo. — the debtor is liable.
for damages. Example: Mr. A was obliged not to be
involved in an activity that emits noise beyond a
certain decibel but he did it just the same for one day.
The act of Mr. A of creating noise cannot be undone;
hence, the remedy that is available is for damages.

4. PERFORMANCE OF THE OBLIGATION. Compliance of

the debtor or obligor requires the following: a) Identity of
.Obligation; and b) Integrity of Obligations.20
a) Identity of Obligations — this means that
obligations must be complied with precisely,
that is, what was obliged to be done or given is
exactly what should be done dr must be given.

20Vitug, Civil Law, Annotated, Vol. HI, 2003 Ed., p. 8, hereinafter referred to as "HI
Vitug 8."
428 REVIEWER ON CIVIL LAW

What is obliged and what is performed must be

identical. If the obligation is to give a horse, a
horse must be given rather than a carabao.
b) Integrity of Obligations — this means that
compliance of an obligation must be complete.
4.01. BREACH OF OBLIGATIONS (NON-COMPLI­
ANCE OR NON-FULFILLMENT). There is breach of
obligation if there was non-compliance altogether or
if the compliance is without identity or integrity.21
4.01.01. Classification of Breach. Breach may be classified
as total breach or partial breach. It may also be total
non-compliance or defective compliance with the
obligation.
a) Total Breach. — Breach or non-fulfillment by
not doing anything at all or doing all the things
that is not supposed to be done. Example: The
obligation imposed by law is to construct a
firewall in his building but the owner did not
construct a firewall.
b) Defective Performance.
1) Breach by doing something that was not
agreed upon. Example: The obligation
is to deliver a motorcycle but what was
delivered was a horse.
2) Breach by partial performance. Example:
The agreement is to deliver five sacks of
rice but the obligor delivered only two
sacks of rice.
3) Breach by poorly or badly performing the
obligation. Example: The obligation is to
construct a chair and the chair was made
but its feet were uneven.

21Nakpil v. Manila Towers Development Corp., 502 SCRA 470 (2006).

 OBLIGATIONS AND CONTRACTS 429
Nature of Obligations

4) Breach by delay in the performance,

that is, the defect relates to the time of
performance.
5) Breach by performing the obligation but
not in accordance with specifications,
terms and conditions.
4.01.02. Modes of Breaching the Obligation. An obligation
may be breached through (1) fraud, (2) negligence,
(3) delay, or (4) any manner that contravenes the
tenor thereof22 (1991 Bar).
a) Causes of Non-Performance. 1) Cause that can
be attributable to the obligor or debtor (fraud,
malice, negligence) — the obligor or debtor is
responsible; 2) Cause that cannot be attributed
to the obligor or debtor in whole or in part
(fortuitous event) — the obligor or debtor is not
responsible.
b) Contravening the Tenor of the Obligation.
The last mode of breaching the obligation is a
catch-all mode that covers all other cases of total
breach or performance of the obligation without
integrity or identity. It may constitute breach
through defective performance as enumerated
earlier.
4.01.03. Effects of Non-Performance. Article 1170 provides
that those who are guilty of breaching their obliga­
tions through any of the modes provided therein
(fraud, negligence, delay or any manner contravenes
the tenor) are liable for damages.
a) Extent of Damages (Art. 2201). The obligor
who acted in good faith shall be liable for the
damages that are the natural and probable
consequences of the breach of the obligation and
which the parties have foreseen or could have
reasonably foreseen at the time the obligation

“ Art. 1170, NCC.

 f
430 REVIEWER ON CIVIL LAW

was constituted. In case of fraud, bad faith,

malice or wanton attitude, the obligor shall
be responsible for all damages which may be
reasonably attributed to the non-performance of
the obligation.
b) Essential requisites of Action for Damages
under A rticle 1170:
(1) The existence of a perfected contract;
(2) The breach thereof by the obligor/debtor;
and
(3) The damages which the obligee/creditor
sustained due to such breach.23
c) Other Effects of Breach:
(1) The obligor may be liable even if there was
fortuitous event or the creditor may be
required to bear the loss;
(2) There may be liability to pay interest.
4.01.04. Breach through delay (Art. 1169). Delay refers to non-
fufillment of the obligation within the time agreed
upon or within the time contemplated by the nature
of the obligation. There is non-fulfillment with respect
to time.24Delay is also called Mora. By its nature, there
is no delay in obligations not to do.
a) Kinds of Delay or M o r a .
(1) Mora solvendi — delay on the part of the
obligor or debtor (2012 Bar).
(i) Mora solvendi ex re — delay in obliga­
tions to give.
(ii) Mora solvendi ex persona — delay in
obligations to do.

23MCC Industrial Sales Corporation v. Ssyangyong Corp., 536 SCRA 408 (2007).
241V Tolentino 101.
 OBLIGATIONS AND CONTRACTS 431
Nature of Obligations

(2) Mora accipiendi or creditoris — delay on the

part of the creditor or obligee.
(3) Compensatio morae — both parties are in
delay (2012 Bar).
b) Requirements before debtor can be considered
in delay. Before the debtor or obligor can be
considered in delay, the following requirements
must be present:
(1) The obligation is positive — to give or to
do.
(2) The obligation is demandable and liqui­
dated.
(3) The obligor delays for reasons imputable
to him.
(4) There must be demand whether judicial
or extrajudicial and the debtor failed to
comply (2008 and 2012 Bar).
c) Meaning of Liquidated. "A claim is liquidated
when the amount and time of payment is
fixed. If acknowledged by the debtor, although
not in writing, the claim must be treated as
liquidated."25 A demand is liquidated if the
quantification is established with reasonable
certainty.26
d) Examples:
(i) If the debtor is supposed to pay on
January 2,2019, there can be no delay
before such date. The obligation is not
yet demandable.
(ii) If the amount of the obligation is still
undetermined as in the case where
the amount of expenses incurred by
the injured party who is supposed to

“ Lao v. Special Plans, Inc., G.R. No. 164791, June 29,2010.

“ See EasternShiDpine Lines. Tnr v CYnirf rrf Annmi, cr^o a rm \
432 REVIEWER ON OVIL LAW

be paid by the obligor is not yet es­

tablished, then there can be no delay
because the obligation is not yet liqui­
d ated .
(iii) If the proximate and only cause of the
delay is a fortuitous event then there
can be no delay for which the obligor
is liable.
(iv) The tenant is paying the monthly
rentals for the property that he is leas­
ing but the landlord refused to accept.
e) Demand. Demand is indispensable before
the obligor can be considered to be in delay.27
Demand can be either judicial or extrajudicial.
Thus, sending a letter demanding compliance
with an obligation is sufficient. However, even if
there was no such letter or prior verbal demand,
it is sufficient that there be judicial demand. In
other words, filing the case in court is sufficient.
(1) Exceptions: Demand by the creditor shall
not be necessary in order that delay may
exist in the following cases (2969 Bar):2*
(i) When the obligation so declares;
(ii) When the law expressly so declares;
(iii) Time is of the essence — when from
the nature and the circumstances of
the obligation it appears that the des­
ignation of the time when the thing is
to be delivered or the service is to be
rendered was a controlling motive for
the establishment of the contract;
(iv) When demand would be useless,
as when the obligor has rendered it
beyond his power to perform; or

27A rt 1169, NCC.

28Art. 1169.2nd par., ibid.
 OBLIGATIONS AND CONTRACTS 433
Nature of Obligations

(v) In reciprocal obligations when one of

the parties failed to comply.
(2) Demand in Reciprocal Obligations. In
reciprocal obligations, neither party incurs
in delay if the other does not comply or is
not ready to comply in a proper manner
with what is incumbent upon him.29Delay
begins from the moment one of the parties
fulfills his obligation.
(i) Hence, in a contract of sale of a lot,
there is no delay if the seller has not
yet complied with its obligation to
deliver the lot and the buyer has not
yet paid the price. Delay on the part
of the seller commences the moment
the buyer has fully paid the price and
the seller has hot yet delivered the lot
as agreed upon.30
4.01.05, Breach through Fraud (Art. 1170). Fraud is an
intentional evasion of the faithful performance of the
obligation (2012 Bar). It is the deliberate intention to
cause damage or prejudice, the voluntary execution
of a wrongful act, or a willful omission, knowing and
intending the effects which naturally and necessarily
arise from such act or omission. The fraud referred to
in Article 1170 of the Civil Code is the deliberate and
intentional evasion of the normal fulfillment of the
obligation; this also amounts to bad faith or malice.31
a) Applies to all Obligations. Responsibility aris-
: ing from fraud is demand able in all obligations.32
There can be fraud in the performance of any
obligation arising from contract and it may
also be fraud that partakes the nature of delict.

29A rt-1169, last par., ibid.

^See Leano v. Court of Appeals, 369 SCRA 36 (2001).
^International Corporate Bank v. Gueco, 351 SCRA 716 (2001); See also Philippine
Banking Corp. v. Dy, 685 SCRA 567 (2012).
32Art. 1171, NCC.
434 REVIEWER ON CIVIL LAW

Fraud may also be the basis of an independent

civil action under Article 33 of the New Civil
Code. Examples of contractual fraud: (1) If the
obligation of Mr. X is to deliver a diamond ring,
he will be liable for fraud in the performance of
the obligation if he delivers a ring representing
to the creditor that it is a diamond ring although
he knew for a fact that the stone in the ring is
just made of glass; (2) Parties in a contract
cannot be allowed to engage in double-dealing
schemes to dupe those who transact with them
in good faith;33 (3) Selling a car stipulating that
the seller is not liable for hidden defects where
the seller knew that the car had a hidden crack
in the engine (2011 Bar).
b) Bad Faith or M alice. The essence of bad
faith consists in the deliberate commission
of a wrong.34 It has often been equated with
malicious or fraudulent motives. A finding of
bad faith, thus, requires the concurrence of two
necessary elements:
(1) that the actor knew or should have known
that a particular course of action is wrong
or illegal; and
(2) that despite such actual or imputable
knowledge, the actor, voluntarily, con­
sciously and out of his own free will, pro­
ceeds with such course of action.35
c) Future Fraud. Any waiver of an action for future
fraud is void.36 Consequently, the parties to a
contract cannot stipulate in the contract that
the parties will not be liable if they will commit
fraud in the future. However, the prohibition
relates to future fraud. Hence, if fraud was

33Uniwide Holdings, Inc. v. Jandecs Transportation, Co., Inc., 541 SC R A 158.

“ National Power Corporation v. Ibrahim, el al., G.R. No. 175863, February 18,2015.
35Ibid.
“ Art. 1171, second sentence, NCC.
 OBLIGATIONS AND CONTRACTS 435
Nature of Obligations

already committed by the debtor, the creditor

may forgive him by disregarding such fraud
(1966 Bar).
4.01.06. Breach Through Negligence. Breach or non-
compliance with an obligation may also be done
through negligence. Article 1173 provides that fault
or negligence of the obligor consists in the omission
of that diligence which is required by the nature of the
obligation and corresponds with the circumstances of
the persons, of the time and of the place (2014 Bar).
a) Kinds of Negligence. Negligence in the
performance of an obligation can either be culpa
aquiliana, culpa contractual or criminal negligence.
(1) Culpa aquiliana. — This is quasi-delict where
the negligence itself is the independent
source of obligation.
(2) Culpa contractual. — This is negligence in
the performance of contractual obligation.
(3) Culpa delicta (Criminal negligence). — This is
negligence that results in criminal liability.
These include reckless imprudence or
simple imprudence resulting in injuries,
death or damage to property.
4.02. FORTUITOUS EVENT (Art. 1174).
4.02.01. Definition. Fortuitous event under the same
provision is an event which could not be foreseen or
which, though foreseen, is inevitable (1955 Bar).37*
4.02.02. Requisites. In order for fortuitous event to be
accepted as a justification for non-performance of an
obligation, the following must be present (1984,1988,
2008, and 2012 Bar):33
(1) The cause of the unforeseen and unex­
pected occurrence, or of the failure of the

37Art. 1174, ibid.

^National Power Corporation v. Court of Appeals, 225 SCRA 415 IT0031
436 REVIEWER ON CIVIL LAW

debtor to comply with his obligation, must

be independent of the human will;
(2) It must be impossible to foresee the event
which constitutes the “caso fortuito," or if
it can be foreseen, it must be impossible to
avoid;
(3) The occurrence must be such as to render
it impossible for the debtor to fulfill his
obligation in a normal maimer; and
(4) The obligor must be free from any
participation in the aggravation of the
injury resulting to the creditor.
a) The period during which the bank cannot do
business due to insolvency is not a fortuitous
event, unless it is shown that the government's
action to place a bank under receivership
or liquidation proceedings is tainted with
arbitrariness, or that the regulatory body has
acted without jurisdiction.39
4.02.03. When .There is Liability Even if There is Fortuitous
Event. In an obligation to deliver or to give, the
debtor shall be liable for any loss due to fortuitous
event which occurred before delivery in the following
instances (1983,2000, and 2012 Bar):
(1) The obligor or debtor delays;40
(2) The obligor or debtor promised to same thing to
two or more persons who do not have the same
interest;41
(3) When there is stipulation or agreement that the
obligor will not be excused (1966 Bar);
(4) If there is assumption of risk as required by the
nature of obligation;

^Spouses Poem v. Prime Savings Bank, G.R. No. 183794, June 13,2016.
40Art. 1165, NCC.
4 1 Ib id .
 OBLIGATIONS AND CONTRACTS 437
Nature of Obligations

(5) Where the thing to be delivered is generic (1985

and 2012 Bar)}
(6) Where the obligor is also at fault, the fortuitous
event is in effect humanized;
(7) The nature of obligation makes the obligor liable
(Example: Insurance);
(8) The law makes the obligor liable;
(9) Liability from Delict.42

PROBLEM:
1. AB Corp. entered into a contract with XY Corp. whereby the former
agreed to construct the research and laboratory facilities of the
latter. Under the terms of the contract, AB Corp. agreed to complete
the facility in 18 months, at the total contract price of P10 Million.
XY Corp. paid 50% of the total contract price, the balance to be
paid upon completion of the work. The work started immediately,
but AB Corp., later experienced work slippage because of labor
unrest in his company. AB Corp.'s employees claimed that they
are not being paid on time; hence, the work slowdown. As of
the 17th month, work was only 45% completed. AB Corp., asked
for extension of time, claiming that its labor problem is a case of
fortuitous event, but this was denied by XY Corp. When it became
certain that the construction could not be finished on time, XY
Corp., sent written notice cancelling the contract, and requiring AB
Corp., to immediately vacate the premises.
Can the labor unrest be considered a fortuitous event?
Can XY Corp. unilaterally and immediately cancel the
contract?

Must AB Corp. return the 50% down payment? (2008 Bar)

No. Labor unrest is not a fortuitous event. AB Corp. is not
excused from complying with its obligation of constructing
die research and laboratory facilities of XY Corp. The labor
unrest is not impossible to foresee because it was caused
by the AB Corporation's non-compliance with its legal
obligation to the workers.

No. XY Corp. cannot unilaterally and immediately cancel

the contract. The case involves reciprocal obligations on the

42Art. 1268. w r r
438 REVIEW ER O N CIVIL LAW

part of AB Corporation and XY Corp. While under Article

1191 of the New Civil Code the power to rescind is implied
for reciprocal obligations, the rescission contemplated under
the same provision is judicial rescission. Rescission can be
resorted by filing a case in court for such purpose.
c) No, AB Corporation need hot return the entire 50% down
payment. The principle of quantum m eruit is applicable. The
problem states that 47% of the project was completed, hence,
AB Corporation can retain the amount corresponding to this
percentage of accomplishment. However, AB Corporation
must return the balance and must pay damages incurred
by XY Corp. because of AB Corporation's breach of its
obligation.
3. Kristina brought her diamond ring to a jewelry shop for cleaning.
The jewelry shop undertook to return the ring by February 1,2013.
When the-said date arrived, the jewelry shop informed Kristina
that the job was not yet finished. They asked her to return five
days after. On February 6,2013, Kristina went to the shop to claim
the ring, but she was informed that the same was stolen by a thief
who entered the shop the night before. Kristina filed an action for
damages against the jewelry shop which put up die defense offo rce
majeure. Will the action prosper or not?

A: The action will prosper. Article 1165 of the New Civil Code provides
that if the obligor delays, he shall be responsible for any fortuitous
event until he has effected delivery. Thus, even assuming for
the sake of argument that the theft of the ring can be considered
fortuitous event, the jewelry shop is still liable because there was
already delay when the theft occurred.

4.03. LIABILITY TO PAY INTEREST. A creditor may

compel the payment of interest in obligations
arising from contracts if the following requisites
are present:
a) There is an agreement that the interest shall be
earned;
b) The agreement that interest shall be due shall be
expressly stipulated in writing;43 and
c) The rate of interest must not be usurious or
excessive or unconscionable.

43Art. 1956, NCC.

 OBLIGATIONS AND CONTRACTS 439
Nature of Obligations

4.03.01. Kinds of Interest.

a) Monetary Interest — compensation for the use of
money (Monetary interest) under Article 1956 of
the New Civil Code.44Monetary Interest refers to
the price "paid for the use of money for a period
of time and are expressed as a percentage of the
total outstanding balance that is either fixed or
variable. There are two ways by which interest
rates can be defined: first, from the point of view
of a borrower, it is the cost of borrowing money
(borrowing rate); and second, from a lender's
point of view, it is the fee charged for lending
money (lending rate)."45
b) Compensatory Interest — interest as damages
under Articles 2209, 2210, 2211 and 2212 of the
New Civil Code.
4.03.02. Presumptions (A rt 1176).— it is primafacie presumed
or there is disputable presumption that:
a) When the creditor receives the principal without
reservation with respect to die interest, said
interest has been paid.
b) When the creditor receives installment of a debt
without reservation as to prior installments,
such prior installments have been paid.
4.03.03. Usury. Usurious transaction is a transaction which
provides for interest that is above the maximum rate
of interest provided by law (1977 Bar). For example,
if the law provides that the rate of interest on loans
cannot be more than 20% per annum, the loan is
usurious if the rate of interest that is stipulated is 30%
per annum.

^Republic v. Unimex Micro-Electronics GmBH, G.R. Nos. 166309-10, March 9,

2007.
45www.bsp.gov.ph/downloads/publications/FAQS/intrates.pdf (last accessed
1/30/18).
440 REVIEWER O N CIVIL LAW

a) Governing Law. The special law that governs

usurious transactions is Act No. 2655 as amend­
ed, otherwise known as "The Usury Law."
b) Legally Non-Existent. However, usury is legally
non-existent today because in 1983, the Central
Bank (now called Bangko Sentral ng Pilipinas)
lifted the ceiling on interest rates. In other
words, there is no longer any maximum rate of
interest.46
(1) If usury is legally existent, an apparently
lawful loan is usurious when the real
interest agreed upon is usurious. For
example, there is still usury if there is an
additional compensation disguised by an
ostensible unrelated promise that is, in
fact, not to be performed.47
(2) In usurious transaction, the entire obliga­
tion does not become void but only the in­
terest.48
c) Unconscionable. Even if usury is non-existent,
an interest rate agreed upon by the parties may
be declared void for being unconscionable or
grossly excessive.
(1) In Medel v. Court o f Appeals/9 the Supreme
Court ruled that the stipulated interest rate
of 66% p.a. or a 5.5% per month on a P500,000
loan was excessive, unconscionable and
exorbitant, hence, contrary to morals if
not against the law and declared such
stipulation void.
(2) In Toring v. Spouses Ganzon-Olan,50 the
Court found stipulated interest rates of 3%

“ Verdejo v. Court of Appeals, 157 SCRA 743 (1988).

47First Metro Investment Corporation v. Este Del Sol Mountain Reserve, Inc., 369
SCRA 99.
48Ibid.
49359 Phil. 820 (1998).
“ G.R. No. 168782, October 10,2008,568 SCRA 376.
 OBLIGATIONS AND CONTRACTS 441
N ature of Obligations

and 3.81% per month on a P10 Million loan

to be excessive and reduced the same to 1%
per month.
(3) In Chua v. Timan,51 the stipulated interest
rates of 7% and 5% a month, which are
equivalent to 84% and 60% p.a., respectively,
were reduced by the Supreme Court to 1%
per month or 12% p.a. The Court said that
stipulated interest rates of 3% per month
and higher are excessive, unconscionable
and exorbitant, hence, the stipulation was
void for being contrary to morals.
(4) However, the Supreme Court ruled an
interest rate of 23% or 24% per annum is not
unconscionable or excessive.52
4.03.04. Legal Interest (1975 Bar). The debtor shall be liable
to pay interest in the following cases: (1) If there
is agreement that interest will be paid but there is
no agreement as to the rate thereof; (2) From the
time of delay or default in an obligation consisting
of payment of a sum of money, even if no interest
was agreed upon53 — usually counted from judicial
demand;54 (3) From the time decision in favor of
the creditor for the enforcement of an obligation
for a sum of money becomes final and executory
(because the obligation — even if originally not a
loan or forbearance of money or credit — becomes
an equivalent of forbearance of money or credit
from such tim e);55 (4) The interest due shall also earn
legal interest from the time it has been judicially or
extrajudicially demanded.56

51G.R. No. 170452, August 13,2008,562 SC R A 146.

52Spouses Mallari v. Prudential Bank, G.R. No. 197861, June 5, 2013; Villanueva v.
Court of Appeals, G.R. No. 163433, August 22,2011, 655 SCRA 707.
53Art. 2209, NCC.
54Crismina Garments, Inc. v. Court of Appeals, G.R. No. 128721, March 9,1999.
55Eastern Shipping Lines, Inc. v. Court of Appeals, 234 SCRA 78, 95-97 (1994);
Manzano v. Lazaro, 669 SCRA 209 (2012).
56Art. 2212, NCC.
442 REVIEW ER ON CIVIL LAW

a) Rate. The legal rate of interest is now 6% both

for loans and forbearance of money and for
obligations that are not loans and forbearance of
money.57
4.04. REMEDIES OF THE CREDITOR. If there is non-
compliance with the obligation of the debtor or
obligor, the law gives the creditor or obligee the
remedies specified below. It should be noted,
however, that these remedies are mainly judicial in
nature.
4.04.01. Principal Remedies58 (1966 Bar).
a) Specific Performance (See Arts. 1165 and 1167)
— remedy of requiring exact performance of
a contract in the specific form in which it was
made, or according to the precise terms agreed
upon; it is the actual accomplishment of a
contract by a party bound to fulfill it.59
b) Substitute Performance (See Art. 1165).
c) Equivalent Performance (See Arts. 1168 and
1170).
4.04.02. Subsidiary Remedies (1966 Bar).
a) Subrogatory action or accion subrogatoria
(Art. 1177). — The creditor will file a case in
behalf of the debtor with respect to another
obligation that is due to the debtor. This is a case
against the debtor's debtor.
b) Rescissory Action or accion pauliana (Arts.
1177 and 1381[3]). — The creditor will impugn
the acts of the debtor that is in fraud of creditors.
This is a case against the transferee.

57BSP Circular No. 799, Series of 2013, July 1,2013; BSP modified fire previous legal
interest of 12% for loans or forbearance of money, goods, or credit. Fil-Estate Properties,
Inc. v. Spouses Ronquillo, G.R. No. 185798, January 13,2014.
58See Notes 3.01.07, (a) and (b) of this Chapter.
"Buenviaje v. Spouses Salonga, G.R. No. 216023, October 5,2016.
 e- .

OBLIGATIONS AND CONTRACTS 443

N ature of Obligations

c) Accion Directa — There are provisions

of the New Civil Code that allows direct
actions against third persons including those
provided for under Article 1652 (lessor against
the sub-lessee for unpaid rentals), Article
1608 (vendor's right against the possessor),
Article 1729 (supplier of labor or materials to
contractor), and Article 1893 (principal against
the substitute of an agent).
4.04.03. Requisites of Subrogatory Action. The requisites for
the filing of subrogatory actions are as follows:60
(1) The creditor has a right of credit against the
debtor although at the moment it is not liqui­
dated;
(2) The credit must be due and demandable;
(3) There must be failure of the debtor to collect
from third persons (debtor of the debtor),
whether willfully or through negligence;
(4) The assets in the hands of the debtor are
insufficient — the creditor need not bring a
separate action to show this exhaustion or
insolvency of the debtor but he can prove
the same in the very action to exercise the
subrogatory action; and
(5) The right and actions are not purely personal or
inherent in the person of the debtor.
4.04.04. Requisites of Rescissory Action (Accion Pauliana).
The requisites for the filing of rescissory action are as
follows (1989 Bar):61
(1) That the plaintiff asking for rescission, has
a credit prior to the alienation, although
demandable later;

“TV Caguioa 138 citing Castan.

61Anchor Savings Bank v. Furigay, et al., G.R. No. 191178. Marrb r s o m i
444 REVIEW ER ON CIVIL LAW

(2) That the debtor has made a subsequent

contract conveying a patrimonial benefit to
a third person;
(3) That the creditor has no other legal remedy
to satisfy his claim, but would benefit by
rescission of the conveyance to the third
person;
(4) That the act being impugned is fraudu­
lent;
(5) That the third person who received the
property conveyed, if by onerous title, has
been an accomplice in the fraud.
a) Subsidiary. Rescissory Action is also an action
for rescission but it is subsidiary in nature; this
should be distinguished from and is not the
same as the Rescission with respect to reciprocal
obligations under Article 1191 and rescission of
some of the rescissible contracts under Article
1831 [1] and [2], Rescission under Articles 1191
and 1831[1] and [2] are principal actions.
b) "The accion pauliana is an action of a last resort.
For as long as the creditor still has a remedy
at law for the enforcement of his claim against
the debtor, the creditor will not have any cause
of action against the creditor for rescission of
the contracts entered into by and between the
debtor and another person or persons. Indeed,
an accion pauliana presupposes a judgment
and the issuance by the trial court of a writ of
execution for the satisfaction of the judgment
and the failure of the Sheriff to enforce and
satisfy the judgment of the court."62
4.05. TRANSMISSIBLE RIGHTS. A right may be
considered property.63 Thus, a right to collect a
demandable sum is property. As such property, it can

“ Anchor Savings Bank v. Furigay, et a l, supra.

“ Art. 417, NCC.
 OBLIGATIONS AND CONTRACTS 445
Different Kinds of Obligations

be transferred from one person to another and this

fact is recognized in Article 1178.
4.05.01. Non-transmissible Rights. By way of exception, a
right is not transmissible in the following instances:
(1) When there is a stipulation that the right
cannot be transferred;
(2) When the law or contract requires prior
consent before transfer and no such consent
was acquired;
(3) When the law expressly prohibits transfer;
and
(4) When the right is purely personal.

B. DIFFERENT KINDS OF OBLIGATIONS64

5. PURE AND CONDITIONAL OBLIGATIONS.

5.01. CONDITIONAL OBLIGATIONS. In conditional
obligation, the acquisition of rights, as well as the
extinguishment or loss of those already acquired,
shall depend upon the happening of the event which
constitutes the condition.65
a) Definition of Condition. A condition is a future
and uncertain event or a past event unknown
to the parties, which may either result in
acquisition of rights or extinguishment or loss of
those already acquired. Although, Article 1179
uses the terms "future or uncertain," conditions
can only be such if both characteristics are
present.
b) Past Event. Although the past event unknown
to the parties is referred in Article 1179 as a
condition, the reality is that it is not the condi­
tion. The future and uncertain event that is

m1950 Bar.
“ Direct Funders Holding Corporation v. Lavina, 373 SCRA 645 (2002).
 REVIEW ER O N CIVIL LAW

attached to the obligation is the acquisition of

knowledge of the parties as to the truth or falsity
of the past event stipulated.

EXAMPLE:
Mr. B owns a vessel that already left the port. Mr. A agrees to pay Mr.
B if the vessel already sank. At that time, both Mr. A and Mr. B are not
aware of the condition of the vessel. The sinking of the vessel is therefore
the past event which may trigger payment by Mr. A. However, by the
time the parties agreed, the event that was specified may have already
happened, hence, what makes Mr. A liable is the future event that the
parties will acquire knowledge of the loss.

5.02. PURE OBLIGATIONS. A pure obligation is one

to which no condition or period is attached. The
acquisition of right in a pure obligation does not
depend on a future and uncertain event or a past
event unknown to the parties and the obligee need
not wait for a future time.
(1) For exam ple, Mr. A borrowed P1,000 from Mr.
B and the document that serves as evidence of
the loan called the prom issory note states that
it is payable on demand (meaning payable at
any tim e Mr. B demands paym ent from Mr.
A ). This prom issory note that is payable on
demand represents a pure obligation.
5.03. DEMAND ABILITY OF PURE AND CONDITION­
AL OBLIGATIONS.
a) Pure obligations are demandable at once
without need to wait for a future event or time.
b) If the obligation is conditional, the demand-

or suspensive. If the condition is resolutory

it is demandable but it is not immediately
demandable if the condition is suspensive.
 OBLIGATIONS AND CONTRACTS 447
Different Kinds of Obligations

5.04. KINDS OF CONDITIONS.

KIND CHARACTERISTICS
1. Suspensive The happening of the condition or event
gives rise to the obligation or acquisition of
rights.
2. Resolutory The happening of the condition or event
extinguishes obligations/or rights.
3. Potestative The happening or performance depends
upon the will a party
— If performance depends upon the sole
will of the debtor, the obligation is void.

— If the performance depends upon the

sole will of the creditor, the obligation is
valid.
4. Casual The happening or fulfillment depends on
chance or will of a third person.
5. Mixed Fufillment depends partly on chance or the
will of third person and partly on the will of
one party.
6. Possible By its very nature, it can be fulfilled or it
is not against law, public policy or good
customs.
7. Impossible By its nature it cannot be realized or it is
against law, good customs or public policy.
8. Positive Something is to be done or an act shall be
performed.
9. Negative It is required that something will not be
done or an act will be omitted.

10. Divisible It can be partially complied with.

11. Indivisible It is not susceptible of partial compliance

and must always be wholly complied with.
12. Conjunctive There are two or more conditions that must
all be complied with.
448 REVIEWER ON CIVIL LAW

13. Alternative There are two or m ore conditions but

compliance or the happening of one is
sufficient.
14. Express The condition is stated either orally or in
writing.
15. Implied The condition is not stated but is deemed
attached.

5.05. SUSPENSIVE AND RESOLUTORY CONDITIONS

(1975,1988, and 1991 Bar).
a) Suspensive Condition — The acquisition of
rights shall depend upon the happening of an
event that constitutes the condition. The birth or
effectivity of the obligation can take place only if
and when the condition happens or is fulfilled.66
It is a condition precedent and the obligation
Cannot be enforced Unless the condition is
complied with.67 The non-compliance of a
suspensive condition is not a breach, casual or
serious, but simply an event which prevented
the obligation from acquiring obligatory force.68
b) Resolutory Condition — The loss or
extinguishment of rights already acquired
depends upon the happening of the event
that constitutes the condition. It is a condition
subsequent (2011 Bar).
EXAMPLES:
(1) In a contract to sell a car, the obligation to deliver and to transfer
ownership of the car is subject to full payment of the price. Full payment
of the price is a suspensive condition because it is a future and uncertain
event that will give rise to the acquisition by the buyer of the rights as
owner69(1966 and 1999 Bar),

“ Heirs of Spouses .Sandejas v. Lina, 3 5 1 SGRA 183 (2001).

67Direct Funders Holdings Corporation v. Lavina, 373 SCRA 645 (2002).
“ Buot v. Court of Appeals, 357 SCRA 846 (2001).
69Reyes v. Tuparan, 650 SCRA 283 (2011).
 OBLIGATIONS AND CONTRACTS 449
Different Kinds of Obligations

(2) If the agreement is that Mr. X will pay Mr. Y the amount of P2>00Q, if
Mr. Y will pass the GPA board examinations, the agreement is subject to
a condition. Passing the examination is a suspensive condition because it
is a future and uncertain event that will give rise to the obligation to pay
(2000 Bar).

(3) The agreement is that Mr. A will deliver and transfer his car to Mr. B
immediately and Mr. B will become the owner of the car subject to the
stipulation that if Mr. B will fail in the CPA board examination in a given
future date, Mr. B will have to return the car to Mr. A. Failure to pass in
the examination is a resolutory condition because it is a future event that
will extinguish the rights of Mr. B over the car.

5.06. POTESTATIVE CONDITIONS (Art. 1182). A condi­

tion is potestative if the happening of the future and
uncertain event that constitutes the condition is de­
pendent upon the sole will of one party. It is up to the
party to decide whether or not he will perform the
designated event.
5.06.01. Effects of Suspensive Potestative Conditions (1997
and 2000 Bar).
a) Will of Obligor. If the fulfillment of the
suspensive condition that will give rise to the
obligation depends upon the will of the debtor
or obligor — the conditional obligation is
VOID.70 Examples: (1) If Mr. A will pay when he
likes to pay; (2) If Mr. A will deliver if he decides
to sell his specified property; (3) Mr. A agrees to
deliver a horse when he feels like it (1997 Bar).
b) Will of Creditor. If the fulfillment of the
suspensive condition depends upon the will of
the creditor — the obligation is valid. Example:
If Mr. A will deliver the subject property to Mr.
B when Mr. B decides to make a demand from
Mr. A.
c) Not Attached on Birth of Obligation. If the
suspensive potestative condition is attached
not to the birth of the obligation but on the
fulfillment or performance of an obligation that

70See also Perez v. Court of A ppeals, 323 SCRA 613 (2000).

450 REVIEWER ON CIVIL LAW

is already existing— valid and the court must fix

the period to comply (1996 Bar).71 Examples: Mr.
A is indebted to Mr. B, hence, Mr. A is obligated
to pay Mr. B. However, while Mr. A is obliged to
pay, he can decide when he wants to pay.
5.06.02. Effects of Resolutory Potestative Condition (2000
Bar).
a) Will of Obligor. If the fulfillment of the
resolutory condition depends upon the will
of the debtor or obligor — the obligation is
valid.72 Example: A perfected contract of sale
where Mr. B is obligated to deliver a car to Mr.
A (creditor). B has the right to cancel the sale if
the manufacturer failed to ship the car to Mr. B
within a certain period.73
b) Will of Creditor. If the fulfillment of the
resolutory condition depends upon the will of
the creditor — the obligation is valid. Example:
A perfected contract of sale where Mr. B is
obligated to deliver a car to Mr. A (creditor).
Mr. A has the right to cancel the sale if fire
manufacturer failed to ship the car to Mr. B
within a certain period.74
5.07. CASUAL CONDITIONS (Art. 1182). A casual
condition is one where the fulfillment is dependent
on chance an d /or the will of a third person. This
condition is valid. Examples: (1) Mr. A will deliver a
sack of rice to Mr. B if there will be a typhoon in the
first week of the month following the execution of the
agreement; (2) Mr. B will deliver the machinery to Mr.
A upon his receipt of the same machinery from Mr. C
who will ship the same from Japan.

71Patente v. Omega, 93 Phil. 218 (1953); Lim v. Court of A ppeals, G.R. No 118347,
O ctober 24,1996; See Romero v. Court of Appeals, G.R. N o. 107207, N ovem ber 23,1995.
72Ducusin v. Court of A ppeals, 122 SCRA 280 (1983).
B a y lo r v. Uy H eng, 43 Phil. 873.
7iIbid.
 OBLIGATIONS AND CONTRACTS 451
Different Kinds of Obligations

5.08. MIXED CONDITIONS. Mixed conditions are

present if the same depends partly upon the will of
the parties and partly upon chance or the will of third
persons. Example: (1) Mr. A will pay the balance of
the price of the house to the seller Mr. B if Mr. C, the
present possessor will vacate and Mr. B will see to it
that Mr. C will vacate the same; (2) Mr. A promises
to give his grandson a car if the latter passes the bar
examinations (2000 Bar).
a) In a mixed obligation, when a condition was
not fulfilled but the obligor did all in his power
to comply with the obligation, the condition
should be deemed satisfied.75
5.09. POSITIVE AND NEGATIVE CONDITIONS (Arts.
1184 and 1185).
5.09.01. Positive Conditions. An event is supposed to
transpire or something must happen or must be
done.

EXAMPLES:
(1) Mr. A is obliged to pay Mr. B if Mr. B will become a lawyer in 2014
If 2014 expires without B becoming a lawyer, then the obligation to
pay will not arise.

(2) Mr. A delivered a house to Mr. B with die condition that Mr. B
will become a certified public accountant in 2015. If 2015 expires
without B becoming a certified public accountant, Mr. B has to
return the house to Mr. A.

(3) Mr. X agrees to deliver a motorcycle to Mr. Y on die condition that

Mr. Y will win in the New York m arathon in 2015. The obligation
to deliver is extinguished if Mr. Y will tragically lose his legs before
2015 and disabled persons are disqualified to join (he marathon.
It is now indubitable that the event — winning the New York
marathon — will not take place.

5.09.02. Negative condition. An event is not supposed to

happen or something must not be done.

^International H otel Corporation v. Joaquin, Jr., et «Z., G .R. N o. 158361, A pril 10,
452 REVIEWER ON CIVIL LAW

EXAMPLES: \ :7 ; ■

(1) Mr. A agreed to deliver the house to Mr. B provided that Mr. B will
not marry Ms. C and be the latter 's first and only husband up to
2014. If 2014 expires without M r B marrying Ms. C, the obligation
to deliver arises.
(2) In the previous problem, the same conclusion will result if Ms. C
will m arry Mr. D before 2006 because it becomes indubitable that
Mr. B will not become the first husband of Ms. C even if Mr. D will
die in die meantime.

5.10. IMPOSSIBLE CONDITIONS (Art. 1183). In

impossible conditions, the impossibility of the
condition may be juridical or physical. The
impossibility is juridical when a legal and permanent
obstacle obstructs its realization while it is physical if
the realization of the event is incompatible or contrary
to nature.76 Examples: (1) Mr. A will deliver a car to
Ms. B if Ms. B will commit a crime. The condition
is contrary to law and public policy; (2) Mr. A will
deliver a car to Mr. B if Mr. B will dance on the sun.
The condition is a physical impossibility.
5.10.01. Effects of Positive Impossible Condition. (1) The
impossible positive condition makes the obligation
void. (2) If the impossible positive condition's effect
is only partial and the obligation is divisible, the
portion not affected shall be valid. Exception: In
donation, only the impossible condition is void not
the donation itself.77
5.10.02. Effects of Negative Impossible Condition. The
impossible negative condition shall be disregarded.
The obligation is valid and the impossible negative
condition is deemed not imposed. Examples: (1) Mr.
A obliged himself to give to Mr. B a car if Mr. B will
not dance on the sun. (2) The delivery of the property
makes the debtor the owner but he cannot dance
on the sun otherwise the transfer of the property is
annulled and he has to return the property.

76IV Caguioa 161-162.

77A lt. 717, NCC.
 OBLIGATIONS AND CONTRACTS 453
Different Kinds of Obligations

5.11. CONSTRUCTIVE FULFILLMENT OF SUSPEN­

SIVE CONDITION (Art. 1186). If the obligor

condition, the condition is deemed fulfilled. The

requisites for constructive fulfillment to be present
are as follows:
(1) The intent of the obligor to prevent the
fulfillment of the condition; and
(2) The actual prevention of fulfillment.78
a) "Mere intention of the debtor to prevent the
happening of the condition or to place ineffec­
tive obstacles to its compliance, without actually
preventing the fulfillment, is insufficient."79
Example: Mr. X will deliver a car to Mr. Y if Mr. Y
passes the examination that he should take on a
specified date. However, Mr. X paid a group of
persons to detain Mr. Y so that Mr. Y cannot take
the examination on the specified date.
b) There is a ruling of the Supreme Court to
tine effect that Article 1186 on Constructive
Fulfillment of obligations applies only to a
suspensive condition and not to a resolutory
condition.80 A
5.12. RIGHTS BEFORE FULFILLMENT OF SUSPEN­
SIVE AND RESOLUTORY CONDITIONS.
a) Suspensive Condition.
(1) Preservation. The creditor may perform
or file an action for the preservation of his
right.81 The right given to the creditor is
to make sure that the obligation will not
be rendered illusory. Examples: (i) Judicial

^International H otel Corporation v. Joaquin, Jr., e l al., G .R. No. 158361, A pril 10,
2013.
^International H otel Corporation v. Joaquin, Jr., et al., ibid.
B a y lo r v. Uy Tieng, 43 Phil. 760. : ■
“ A rt 1188, NCC.
454 REVIEWER ON CIVIL LAW

action to stop the conveyance of the

property that is the object of the obligation;
(ii) Extrajudicial action like filing a Notice
of Adverse Claim with the Register of
Deeds (register a notice of his claim).
(2) The debtor cannot be required to pay
and if he will pay, he may recover what
he paid by mistake.82 For instance, if the
determinate thing which is the object of
the obligation will not be preserved or
will become Out of reach because it will
be transferred to a third person, then the
creditor cannot expect that the thing will
be delivered to him.
b) Resolutory Condition. The creditor can compel
compliance with the obligation because the
obligation is already demandable subject to the
happening of the condition.83
5.13. RIGHTS UPON FULFILLMENT OF SUSPENSIVE
AND RESOLUTORY CONDITIONS.
5.13.01. Suspensive Condition.
a) As to obligations to Give:
(1) Retroactivity (Art. 1187). The effect shall
retroacts back to the time when the
obligation was constituted. Example: Mr. X
is supposed to deliver a lot to Mr. Y. Since
the right of the creditor Mr. Y shall retroact,
Mr. X cannot transfer the lot to anybody
else even before the fulfillment of the
. ■ . obligation.
(2) As to Fruits (Art. 1187): (i) Reciprocal
Obligations: Each party will retain the
fruits that they received and shall be
deemed mutually compensated. Example:

82Supra.
83A rt. 1179, par. 2, NCC.
 OBLIGATIONS AND CONTRACTS 455
Different Kinds of Obligations

Mr. X is supposed to deliver a house to

Mr. Y and in return Mr. Y is supposed to
deliver a rice field to Mr. X subject to a
suspensive condition. Mr. Y is not required
to deliver all his harvests before the
fulfillment of the suspensive condition and
Mr. X is not supposed to pay the rentals he
may have received before the fulfillment
of tile suspensive condition; (ii) Unilateral:
The debtor shall appropriate the fruits
and interests received unless a contrary
intention appears.
b) As to obligations to do or not to do: The courts
shall determine the retroactive effects.
5.13.02. Resolutory Condition. There shall be mutual
restitution — the parties shall return to each other
what they received.84
5.14. RIGHTS UPON FAILURE TO FULFILL SUS­
PENSIVE OR RESOLUTORY CONDITION.
5.14.01. Suspensive Condition. — The supposed obligation
does not obtain obligatory force; the obligation will
notarise.
a) The obligee may either (a) refuse to proceed with
the agreement, or (b) waive the fulfillment of the
condition.85
b) Where a party's conduct shows that he did not
only disregard the condition but also placed the
other party in a position that his compliance is
no longer necessary, the former is deemed to
have effectively waived compliance with the
condition.86
5.14.02. Resolutory Condition. -— The obligation will not be
extinguished or will remain in force.

84A rt. 1190, NCC.

“ Gonzalez v. Lim , 528 SCRA 507 (2007).
86Ibid.
456 REVIEWER ON CIVIL LAW

5.15. RULES ON LOSS, DETERIORATION AND

IMPROVEMENT BEFORE FULFILLMENT OF
SUSPENSIVE CONDITION (Art. 1189). For the
rules to apply, the object of the contract involved
must be specific or determinate. Before the fulfillment
of the suspensive condition, the thing may be lost,
may deteriorate or there may be improvement on the
DETERMINATE OR SPECIFIC thing. NOTE: It cannot
be generic because any object belonging to the class
can be delivered even if what the debtor intended to
deliver is lost.
(1) Loss — It is understood that the thing
is lost when it perishes, or goes out of
commerce, or disappears in such a way
that its existence is unknown or it cannot
be recovered.
(2) Deterioration ■— When the thing's value is
reduced or when it is partially impaired.
(3) Improvement — When something is added
to the thing that increases its value or when
the utility of the thing is increased.
a) Loss and deterioration of the thing may either be
attributable to the debtor's fault or negligence in
whole or in part or the same can happen without
the fault or negligence of the debtor. Similarly,
improvement may be due to the debtor, in whole
or in part or it may be due to fortuitous event.
5.15.01. Rules on Loss.
a) Loss without debtor's fault. — Obligation is
extinguished. Example: The thing is lost solely
due to typhoon.
b) Loss where debtor is at fault. — Debtor is liable
for damages, Example:..The debtor was negligent
in storing the machine that he is supposed to
deliver, hence the same was destroyed.
 OBLIGATIONS AND CONTRACTS 457
Different Kinds of Obligations

5.15.02. Rules on Deterioration.

a) Without debtor's fault. — Creditor shall bear
the deterioration. Example: If the only cause of
the deterioration is typhoon, the thing shall be
delivered to the creditor even if deteriorated.
The debtor will not be liable for damages.
b) Due to debtor's fault.— Creditor can choose one
of the following: (1) Rescission plus damages, or
(2) Specific Performance plus damages.
5.15.03. Rules on Improvement.
a) By nature or through tim e. — Creditor will get
the improvement. Example: The creditor will get
the alluvion on the property.
b) Due to debtor's expense. — Debtor shall
be entitled to reimbursement for necessary
expenses (example preservation of the thing)
but he is not entitled to expenses for the
improvement itself or expenses for ornaments.
5.16. RULES ON LOSS, DETERIORATION OR
IMPROVEMENT UPON FULFILLM ENT OF
RESOLUTORY CONDITION (Art. 1190). The right
or obligation is extinguished upon the happening
of the resolutory condition. Hence, the law aims
to restore the parties as far as practicable to their
positions when the obligation was constituted.
Consequently, the parties are supposed to return
what they received.
5.16.01. Rides on Loss.
a) W ithout the fault of the person who will
return — obligation to return is extinguished.
Example: The resolutory condition occurred
but the thing to be returned was lost solely
due to typhoon.
b) The person who will return is at fault — He is
liable for damages. Example: The resolutory
condition happened but in die meantime the
458 REVIEWER ON CIVIL LAW

person who was supposed to return a machine

was negligent in driving the truck where the
machine was supposed to be transported
thereby destroying the machine.
5.16.02. Rules on Deterioration.
a) Without the fault of the person who will return
— The person who is supposed to receive shall
bear the deterioration. Example: If the only cause
of the deterioration is typhoon, the thing shall be
returned to the other party even if deteriorated.
The person who will return will not be liable for
damages.
b) Due to the fault of the person who will return
— The person entitled to receive can choose one
of the following: (1) Rescission plus damages,
or (2) Disregard the resolutory condition and
proceed with the contract plus damages.
5.16.03. Rules on Improvement.
a) By nature or through tim e. — The person to
whom the thing will be returned will get the
improvement.
b) Through the expense of the person who will
return. — The person who will return shall
be entitled to reimbursement for necessary
expenses (example preservation of the thing)
but he is not entitled to expenses for the
improvement itself or expenses for ornaments.
5.17. RECIPROCAL OBLIGATIONS. In reciprocal
obligations, the obligation or promise of each party
is tire consideration for that of the other.87 The
performance of one obligation is conditioned on the
fulfillment of the other obligation.88 Examples: (1) A
contract of sale is a reciprocal transaction because the
promise of each party is the cause or consideration for

87BPI Investm ent Corporation v. Court of Appeals, 377 SC R A 117 (2002).

88H eirs o f Luis Bacus v. Court o f Appeals, 371 SCRA 295 (2002).
 OBLIGATIONS AND CONTRACTS 459
Different Kinds of Obligations

the obligation or promise by the other;89(2) The buyer

of a house and lot is not obliged to pay if the seller has
not yet completed the house within the period agreed
upon (1985 Bar).
5.17.01. Remedies in case of Breach. In case of breach, the
injured party can choose one of the following: (1)
Specific Performance plus damages; or (2) Resolution
(rescission) with damages. Only one can be chosen
because these remedies are alternative remedies.
However, Article 1191 provides that rescission can
still be availed of even if the injured party has already
chosen specific performance if specific performance
becomes impossible.
a) These remedies are available to the injured party
even if there is no provision in the contract that
gives him such right. Article 1191 expressly
provides that the power to rescind is implied so
long as the obligation is reciprocal in nature.
b) Resolution (Rescission) under Article 1191
means unmaking of a contract for a legally
sufficient reason; it abrogates the contract from
its inception and restores the parties to their
original positions as if no contract has been
made.90
5.17.02. Specific Rules on Rescission of Reciprocal
obligations:
a) It is predicated on a breach of faith by the other
party who violates the reciprocity between
them.91 Rescission is allowed if one party is
ready and willing to comply but the other party
cannot or will not perform his corresponding
obligation.
b) The breach is with respect to obligations that
are already extant or existing and not failure

89Agro Conglom erates, Inc. v. Court of Appeals, 348 SCRA 450 (2000).
90Buenviaje v. Spouses Salonga, G.R. No. 216023, O ctober 5,2016.
91Velarde v. Court of A ppeals, 361 SCRA 56 (2001).
460 REVIEWER ON CIVIL LAW

to render the obligation binding.92 Thus, if the

birth of the obligation is subject to a suspensive
condition, the non-fulfillment of the obligation
does not give the party a right to rescind under
Article 1191. There is no need to rescind an
obligation because there is still no obligation
in the first place. For example, in a Contract
to Sell where the full payment of the price is
the suspensive condition for the transfer of
ownership, non-fulfillment of the condition
{i.e., non-payment) will prevent the birth of
the obligation to transfer ownership. There is
no need to rescind because there never was an
obligation to transfer ownership.
c) The person who will rescind is the injured party,
that is, the person who is ready and willing to
comply.
d) Mutual restitution is required if there is
rescission. Rescission can be carried out only
when one who demands it can return whatever
he may be obliged to restore.93Rescission creates
the obligation to return the things which were
the objects of the contract together with their
fruits and interests.94
e) Rescission will not be permitted for a slight or
casual breach, but only such substantial and
fundamental breach as would defeat the very
object of the parties in making the agreement.95
Examples o f Casual Breach?6
(1) In Song Fo & Co. v. Hawaiian Philippine Co.,97
it was ruled that a delay in the payment for
a small quantity of molasses for some 20

92Ong v. Court of Appeals, 310 SCRA 1 (1999).

^Velarde v. Court of A ppeals, supra.
^Goldenrod, Inc. v. Court of A ppeals, 299 SCRA 400 (1998). :
^Developm ent Bank o f the Philippines v. Court o f Appeals, 344 SCRA 492 (2000);
Pow er Com m ercial and Industrial C orporation y. Court of A ppeals, 274 SCRA 597 (1997).
96Cited in Spouses Barredo v. Spouses Leano, No. 156627, June 4 ,2004.
w47 Phil. 821,827 (1925).
 OBLIGATIONS AND CONTRACTS 461
Different Kinds of Obligations

days is not such a violation of an essential

condition of the contract that warrants
rescission due to non-performance.
(2) In Philippine Amusement Enterprise, Inc. v.
Nativid<id/S the Supreme Court declined
rescission for "the occasional failure of
the phonograph to operate, not frequent
enough to render it unsuitable and
unserviceable."
(3) In Laforteza v. Machuca,w the Court ruled
that the delay of one month in payment
was a mere casual breach that would not
entitle the respondents to rescind the
contract.
(4) In Ang v. Court o f Appeals,*10010 the Court
held that the failure to remove and clear
the subject property of all occupants and
Obstructions and deliver all the pertinent
papers to the vendees for the registration
and issuance of a certificate of title in their
name were not essential conditions but
merely incidental undertakings which will
not permit rescission.
(5) In Power Commercial and Industrial v. Court
o f Appeals,m the Supreme Court considered
the failure of the vendor to eject the
occupants of a lot sold as a "usual warranty
against eviction," and not a condition that
was not met, and thus, rescission was not
allowed.
(6) In Del Castillo v. Ndguiat,102 the High Court
ruled that the failure to pay in full the
purchase price stipulated in a deed of sale

" G R . No. L-21876, Septem ber 2 9,1967,21 SCR A 284.

"G .R . N o. 137552, June 16,2 0 0 0 ,3 3 3 SCRA 643.
100G .R. N o. 80058, Pebruary 13,1 9 8 9 ,1 7 0 SCRA 286. /
101G.R. N o. 119745, June 2 0 ,1 9 9 7 ,2 7 4 SCRA 597. /
102G .R. N o. 137909, D ecem ber 11,2003. ,
 462 REVIEWER ON CIVIL LAW

does not ipso facto grant the seller the right

to rescind the agreement.
f) When a party has already been compensated for
the other party's defaults, such defaults cannot
be considered as a substantial breach that
justifies the rescission of the contract.103
g) The court may choose not to declare that the
contract is rescinded if there is a just and valid
ground to fix a period instead.
h) Article 1191 contemplates judicial rescission. In
other words, a case should be filed in court.
i) The parties can also stipulate in the contract that
h ere can be rescission even without court action.
There is nothing in Article 1191 which prohibits
the parties from entering into an agreement
that a violation of the terms of the contract
would cause its cancellation even without court
intervention.104
j) Even if there is a provision in the contract
providing for cancellation even without judicial
intervention, the cancellation can still be
reviewed by the court. Moreover, the injured
party cannot take the law in his own hands and
forcibly take what he delivered.
k) Rescission (more appropriately called "reso­
lution") under Article 1191 is different from
rescission of a rescissible contract under Article
1383. The remedy under Article 1191 is also
called "rescission" but it is not the same as
rescission of a defective contract for lesion under
Article 1381.105

103Philippine N ational C onstruction Corporation v. M ars Construction Enterprises,

Inc., 325 SCRA 624 (2000).
104H eirs o f the Late Justice J.B .L . Reyes v. Court o f A ppeals, 338 SCRA 282 (2000);
Pangilinan v. Court o f Appeals, 279 SCRA 590 (1997); Jison v. Court of A ppeals, 164 SCRA
339.
105Rivera v. D el Rosario, G.R. No. 144934, January 15,2004.
 OBLIGATIONS AND CONTRACTS 463
Different Kinds of Obligations

5.18. MUTUAL BREACH. In case both parties have

committed a breach of the obligation, the liability of
the first infractor shall be equitably tempered by the
courts.106 This rule is fair to both parties because the
second infractor also derived, or thought he would
derive, some advantage by his own act or neglect"107
(1969 Bar).
a) If it cannot be determined which of the parties
first violated the contract, the same shall be
deemed extinguished, and each shall bear his
own damages.108The second rule is likewise just,
because it is presumed that both at about the
same time tried to reap some benefits."109 This
rule should also be applied in case the obligation
is pure and both parties are not willing to comply
with their respective obligations.

6. OBLIGATIONS WITH A PERIOD. An obligation is with a

period if an interval of time is provided for, which either
suspends the demandability of an obligation or will terminate
existing obligation.110 A period can either be a fixed date or
a day which must necessarily come although it may not be
known when.
6.01. PERIOD DISTINGUISHED FROM CONDITION.

PERIOD CONDITION
1. Involves a future and 1. Involves a future and
certain time or event. uncertain event.
2. Suspensive period affects 2. Suspensive condition
only the demandability of affects the birth of the
the obligation. obligation and not merely
its demandability.

106A rt 1192, NCC.

107Report o f the Code Com m ission, p. 130.
,osA rt. 1192, NCC.
109Report of the Code Com m ission, p. 130.
110A rt. 1193, NCC.
464 REVIEWER ON CIVIL LAW

3. Generally no retroactive 3. With retroactive effect.

effect.
4. The obligation is still, 4. The obligation is void if the
existing if the period . condition depends upon the
depends upon the will of, will of the obligor.
the obligor.

6.01.01. When the Means of the Debtor Perm its. Under

Article 1180, there is a period if the debtor binds
himself to pay when his means permit him to do so
(1980 and .2003 Bar). T he law does not consider the
event as something that is dependent Upon the will of
the debtor nor does it treat it as a future and uncertain
event. Consequently, the creditor may ask the court to
fix the actual date of performance pursuant to Article
1197.
6.02. KINDS OF PERIOD.

KIND
1. Suspensive fee die) Suspends the demandability of the
obligation up to the period agreed upon.
%. Resolutory (in diem) Obligation is immediately effective and
demandable but will be extinguished
when the period arrives.
3. Legal Fixed by law itself.
4. Conventional ; Agreed upon by the parties.
5. Judicial Fixed by the cotut.
6. Definite Exact date is specified. Example: Payable
on January 10,2015. . .
7. Indefinite The date is' not fixed. When an event
which is certain to happen is specified
although the exact date is unknown.
Example: Death of a specified person.

PROBLEM:
"M " and "N " were very good friends. "N" borrowed P10,000 from
"M ." Because of their close relationship, the promissory note executed by
"N" provided that he would pay the loan "whenever his means nermif"
 OBLIGATIONS AND'GONTRACTS 465
Different Kinds of Obligations

Subsequently, "M " and "N " quarreled. "M " now asks you to collect the
loan because he is in dire need of money. What legal action, if any, would
you take in behalf of "M "? (1980 Bar)...
A: "M " should file an action for the fixing of the term of the lease.
Article 1180 in relation to Article 1197 of die New Civil Code
provides that when the debtor binds himself to pay when his means
permit him to do so, the obligation shall be deemed to be one with
a period and the creditor may ask the court to fix the period. In the
present case/ there is no fixed period; for the payment of the loan.
Hence, "N " cannot be considered in default. It is only after "N "
failed to pay despite demand, within the period fixed by the court
that "M "can file an action against "N " for specific performance.

6.02.01. ■Suspensive and Resolutory Period.

a) Obligations w ith Suspensive Period. —
Obligations for whose fulfillment a day certain
has been fixed, shall be demandable only when
that day comes.111Example: (1) Mr. X shall deliver
the horse to Mr. Y on January 15, 2020. Mr. Y
cannot demand the delivery of the horse before
such date; (2) Mr. A will deliver the house and
lot to Mr. B when Mr. C dies. The death of Mr. C
is certain to happen although the date when it
will happen is uncertain.
b) Obligations with Resolutory Period. — These
obligations take effect at once>. but'term inate
upon arrival of the day certain. Example: Mr. X
will deliver a sack of rice to Mr. Y for a year or
up to January 10,2020. The obligation to deliver
rice takes effect at once but it will stop by January
10, 2020.
6.03. LOSS, DETERIORATION OR IMPROVEMENT
IN OBLIGATIONS WITH SUSPENSIVE PERIOD
(Art. 1194).
a) Rules on Loss before Arrival of Period.
(1) Without debtor's fault — obligation is
extinguished. Example: Mr. X is supposed

.MlAw>-11Qq,NrC.
 REVIEWER ON CIVIL LAW

to deliver a car on January 5, 2014 but the

car was lost solely due to typhoon. The

(2) Debtor is at fault — Debtor is liable for

damages.
b) Rules on Deterioration before the arrival of
Period.
(1) Without debtor's fault — creditor shall
bear the deterioration. Example: The
debtor Mr. A was supposed to deliver a
motorcycle to Mr. B on January 5, 2014.
However, prior to January 5, 2014 the
motorcycle deteriorated and the only
cause of the deterioration is typhoon. The
thing shall be delivered to the creditor
even if deteriorated and the debtor will
not be liable for damages.
(2) Due to debtor's fault — Creditor can
choose one of the following: (1) Rescission
plus damages, or (2) Specific Performance

c) Rules on Improvement before the arrival of

the Period.
(1) By nature or through time — Creditor will
get the improvement. Example: Before the
delivery of the land on the date agreed
upon, January 5, 2015, the land that is
supposed to be delivered was increased
in the meantime when sediments were
deposited on tire banks of the river little by
little.112The creditor will get this additional
portion.
(2) Due to debtor's expense — Debtor shall
be entitled to reimbursement for necessary
 OBLIGATIONS AND CONTRACTS 467
D ifferent Kinds o f O bligations

expenses (example preservation of the

thing) but he is not entitled to expenses
for the improvement itself or expenses for
ornaments.
6.04. DELIVERY BY MISTAKE (Art. 1195). Anything
paid or delivered before the arrival of the suspensive
period, the obligor being unaware of the period or
believing that the obligation has become due and
demandable, may be recovered, with the fruits and
interests. Thus, the provision is applicable only if:
(1) The obligation involved is an obligation to
give;
(2) The period is for the benefit of the creditor
and debtor;
(3) The obligor delivered before the period;
and
(4) The obligor is not aware of the period or
he believes that the obligation has become
due and demandable.
a) Example: Mr. A agreed to deliver a pig on March
5, 2014. He delivered the pig on January 5,2014
thinking that the date of delivery is January 5,
2014. Mr. A can recover the pig from Mr. B with
fruits and interests.
b) When Not Applicable. The provision is not
applicable in the following instances:
(1) Obligations to do and not to do.
(2) In reciprocal obligations and both parties
prematurely performed their respective
obligation.
(3) When the period is for the benefit of the
creditor alone.
(4) When the debtor voluntarily and
knowingly delivered the thing knowing
that the obligation is not yet due. In which
case, this is just prepayment.
 REVIEWER ON CIVIL LAW

c) Effect of Bad Faith of Creditor. According to

Tolentino the rule on solutio indebiti should be
applied. If in bad faith, the creditor must pay
the fruits or interest. If in good faith, he will pay
only insofar as he was benefitted.113
6.05. PRESUMPTION: FOR WHOSE BENEFIT IS THE
PERIOD. The period fixed by the parties is disputably
presumed to be for the benefit of both the creditor and
the debtor114 (1984 Bar).
a) Effect of Presumption. -The creditor cannot
demand payment or performance before the
period unless the debtor consents and the debtor
cannot prematurely pay or comply unless the
creditor consents.
b) Rule if the Period is in Favor of the Creditor.
The creditor can demand performance of the
obligation even before the stipulated period
or he can wait for the fixed period. The debtor
cannot insist on complying with his obligation
before the period.

EXAMPLES:
(1) Mr. X delivered his dog to Mr. Y for safekeeping for a period of one
month. Mr. Y may not return the dog before the expiration of the
period. Mr. X can get the dog back even before the expiration of the
period. The nature of the obligation indicates that the period is for
the benefit of the creditor Mf. X.

(2) Mr. X leased his house to Mr. Y for a period of one year. It was
agreed that Mr. Y cannot pre-terminate the lease; In this case, tenant
Mr. Y cannot terminate the contract of lease before the lapse of the
one-year period. Even if he will abandon the house, he has to pay
the rentals corresponding to the one-year period agreed upon.

c) Rule if the Period is in Favor of the Debtor.

The debtor can insist on paying or complying
even before the lapse of the period that is fixed
in the agreement. Examples: (1) The debtor can

U3IV Tolentino.
 OBLIGATIONS AND CONTRACTS 469
Different Kinds of Obligations

pay on or before December 10,2015. In this case,

the period is for die debtor's benefit because the
debtor can pay on December 10, 2015 or even
before such date; (2) The debtor can comply
within one year.
6.06. FIXING OF THE PERIOD (Art. 1197). The court may
be asked to fix a period in the following cases:
a) Period is Intended. It is required that these two
must concur: (1) the obligation does not fix a
period, and (2) a period is intended as can be
inferred from the nature of the obligation and
the circumstances. No action for specific per­
formance can be filed unless the period is fixed
(1991 Bar). Example: The court may fix the period
if tire obligation is to put artesian well with tank
in a lot within a reasonable time (1982 Bar).
b) Period Depends upon the Will of Debtor. The
Court may fix a period if the duration of the
period depends upon the will of the debtor.
Examples: (1) When the debtor agreed to pay
little by little; (2) When the debtor agreed to
comply as soon as possible; (3) When the debtor
agreed to pay in partial' payments; (4) When the
debtor will pay as soon as he has the money.
c) When the debtor binds himself to pay when his
means permits him to so.us
6.07. WHEN THE DEBTOR LOSES THE BENEFIT OF A
PERIOD. Generally, the debtor cannot be compelled
to pay before the expiration of the stipulated period.
However, in the situations enumerated in Article
1198, the debtor loses every right to make use of the
period. In other words, the creditor can make the
debtor comply with the obligation even before the
fixed m aturity date or. the expiration of the period

ru t * . 4 4 rt/~> x T/T/—!
470 REVIEWER ON CIVIL LAW

a) The Cases When the Debtor Loses the Benefit

of a Period are:
(1) When after the obligation has been
contracted, he becomes insolvent, unless
he gives a guaranty or security for the debt;
(2) When he does not furnish to the creditor
the guaranties or securities which he has
promised (2013 Bar);
(3) When by his own acts he has impaired
said guaranties or securities after their
establishment, and when through a
fortuitous event they disappear, unless
he immediately gives new ones equally
satisfactory (1984 Bar);
(4) When the debtor violates any undertaking,
in consideration of which the creditor
agreed to tire period; and
(5) When the debtor attempts to abscond.
b) Acceleration Clause. In addition to the grounds
mentioned in Article 1198, the debtor may
also lose the benefit of a period if there is an
acceleration clause.

7. ALTERNATIVE OBLIGATIONS. Alternative Obligations are

present when there are two or more prestations but the debtor
is obliged to completely perform only one (1988 Bar). For
example, the debtor agreed to deliver either a pig or a goat.
Delivery of the goat will extinguish the obligation and the
debtor need not deliver a pig.
a) Distinguished from Generic Obligation. Note
the difference between an alternative obligation
and a generic obligation, the latter being limited
to a particular class. Thus, if the obligation is to
deliver a goat without specifying the specific
goat, the debtor can choose any goat. In a sense,
there is an alternative but the same is limited
to the same class. The debtor cannot therefore
deliver a dog.
 OBLIGATIONS AND CONTRACTS 471
Different Kinds of Obligations

b) Not Conditional. Additionally, it should also be

pointed out that alternative obligations are not
conditional in nature. The act of choosing does
not suspend the effectivity of the obligation. The
obligation is effective but the exact prestation is
not yet fixed.
7.01. WHO WILL MAKE THE CHOICE. General Rule:
The debtor is the one who has the right to choose.116
Exception: The debtor does not have the choice if:
(1) there is an agreement that the choice is granted to
the creditor; or (2) there is an agreement that a third
person will make the choice.117
a) When Choice is Effective. Article 1201 provides
that the choice is effective the moment it is
communicated to the other party. Article 1205
provides that when the choice has been ex­
pressly given to the creditor, the obligation shall
cease to be alternative from the day when the
selection has been communicated to the debtor.
Example: If the debtor is obliged to deliver either
a car or house, and he informed the creditor on
June 1, 2013 that he opts to deliver the car, the
choice is effective on June 1,2013. The obligation
becomes simple and the election that was made
is irrevocable.118
b) It is not necessary for the other party to con­
sent. If the debtor communicated his choice to
the creditor, the choice is effective even if the
creditor disagrees with the choice. Exceptions:
The creditor may question the choice in the fol­
lowing cases: (1) the prestation that was chosen
is impossible, or (2) the prestation that was cho­
sen is unlawful, or (3) if it could not have been
intended that the same is one of the alternatives
(it was not one of the intended options.) •

116A rt. 1200, NCC.

117Ait. 1309, ibid.
1,8Reyes v. M artinez, 55 P hil. 492.
472 REVIEWER ON CIVIL LAW

c) Third Party's Choice. If the choice belongs to

third persons, the choice is effective the moment
the same is communicated to all parties.119 In
other words, notice should be given to the
debtor and the creditor.
7.02. HOW THE CHOICE IS MADE.
a) The choice can be expressly made. For example,
the debtor may send a letter to the creditor
expressing his choice.
b) Implied as in the case where only one alternative
remains.12'1For example, tire debtor can deliver
any of the three houses that were specified.
However, two of the three houses were des­
troyed by a calamity.
c) Constructive if the debtor performed one
(like delivery of the object) and the same was
voluntarily accepted.121
7.03. WHEN THE DEBTORS CANNOT OR DO NOT
MAKE A CHOICE. These are lire rules that should be
applied when the debtor who has the right to choose
cannot make a choice:
a) Debtor cannot make a choice due to creditor's
Fault (Art. 1203). — The debtor may rescind
plus damages.
b) Debtor did not make a choice because of his
(Debtor's) own fault or his refusal to make
a choice. — He may be compelled to make a
choice in a court case. Specific performance is
not immediately available. Nevertheless, to

: 119A rt. 1309, NCC.

120A rt 1202, ibid.
U1IV Reyes and Puno 70 citing Reyes v. Zaballero, G.R. N o. L-3561, M ay 23,
1951. N ote, however, that the case d ted involves a situation w here the choice belongs
to the creditor. The creditor voluntarily accepted the one being tendered by the debtor.
The Suprem e Court ruled that the creditor waived his righ t to choose because o f such
voluntary acceptance.
 OBLIGATIONS AND CONTRACTS 473
Different Kinds of Obligations

avoid multiplicity of suits, the creditor can file

a case to compel the debtor to choose and after
making such choice to compel him to perform
the prestation that he has chosen.
7.04. EFFECT OF LOSS OR IMPOSSIBILITY IF THE
CHOICE IS WITH THE DEBTOR (Art. 1204).
a) Only one option remains. — If all the other
alternatives are lost or would otherwise become
impossible the debtor may comply by delivering
or complying with the remaining prestation.
Example: Mr. A agreed to deliver to Mr. B any of
his three dogs but two died in the meantime, Mr.
A can deliver the remaining dog.
b) Two or more options rem ain. — If two or more
options remain while the other alternatives or
alternative are/is lost or compliance becomes
impossible, the debtor should choose any of the
remaining prestations. Example: Mr. A has three
eats and he is obliged to deliver any one of the
cats. One of the cats died. Mr. A should choose
between the two remaining cats.
NOTE: If in the previous examples [a
and b], the loss of the dog or the cat as the case
may be was due to the fault of the debtor, the
debtor has no liability for damages and all that
is required is for him to deliver the remaining
dog or any of the remaining cats.
c) If all alternatives are lo st.— The debtor is liable
for damages if: a) the loss of the last object or
prestation is due to his fault. Even if he Caused
the loss of the other alternatives, he will not be
liable if he was not the cause of the loss of the
last remaining alternative. Thus, he will not be
liable if the cause of the loss of the last remaining
object is solely a fortuitous event.
d) Loss after election. This shall be governed by
the rules on simple obligation to give.
474 REVIEWER ON CIVIL LAW

7.05. EFFECT OF LOSS IF CREDITOR IS GIVEN THE

CHOICE. It should be noted that the obligation shall
cease to be alternative from the moment the selection
by the creditor is communicated to the debtor.122 In
case of loss before the choice is made, the rules to be
followed as prescribed in Article 1205 of the New
Civil Code are as follows:
(1) If one 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
one subsists;
(2) If the loss of one 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 debtor, has disappeared, with a right to
damages;
(3) If all the things are lost through the fault of
the debtor, the choice by the creditor shall
fall upon the price of any one of the things
lost, also with indemnity for damages.
a) Liability for Damages. Note that even if
there are remaining alternatives (one or more
rem ain/s), the debtor will be liable for damages
if the other alternatives are lost due to his
(debtor) fault Thus, if the creditor can make the
debtor deliver either a horse or a motorcycle and
the motorcycle was totally destroyed due to the
negligence of the debtor, the creditor may claim
the horse plus damages.8

8. FACULTATIVE OBLIGATIONS (Art. 1206). Facultative

obligations refer to a situation where only one prestation was
agreed upon and due but the debtor may render another in

m Art. 1204. first narasrranh. N CC

 OBLIGATIONS AND CONTRACTS 475
Different Kinds of Obligations

substitution. Example: The obligation of Mr. A is to deliver a

car to Mr. B with an agreement that Mr. A may substitute the
obligation to deliver a car with performance of a service.
8.01. DISTINCTIONS BETWEEN ALTERNATIVE AND
FACULTATIVE OBLIGATIONS (1977 and 1988 Bar).

ALTERNATIVE FACULTATIVE
1. There are two or more 1. There is only one prestation
prestation that are due. that is due.
2. The debtor can choose any 2. The debtor has only one
of the alternatives. choice, but with a right to
substitute.
3, The debtor in certain cases 3. Loss of the substitute due
may be liable for damages to the debtor's fault will not
if the choice is with the make the debtor liable.
creditor and loss of any Note: If the principal is lost or is
alternative is due to the void, there is no need to give the
debtor's fault.
substitute.
4. The choice is generally with 4. The option to substitute is
the debtor but it can be always with the debtor.
given to the Creditor and a
third person.

9. JOINT AND SOLIDARY OBLIGATION.

9.01. DEFINITIONS (Art. 1207).
9.01.01. Solidary Obligation. — one in which each of the
debtors is liable for the entire obligation and each of
the creditors is entitled to demand the satisfaction
of the whole obligation from any or all of the
debtors123 (1988 Bar). When the contract states that
all the signatories are solidarily liable, any one,
some or all of them may be proceeded against
for the entire obligation. The choice is left to the
solidary creditor to determine against whom he

123PH Credit C orporation v. Court o f A ppeals, 370 SC R A 155 (2001).

 476 REVIEWER ON CIVIL LAW

will enforce collection.124 The obligation is solidary

if it is stipulated that: (1) the liability is "joint and
several," (2) obligation in solidum, (3) persons are
liable "together or separately/'125 and (4) persons are
liable "individually or collectively."
a) Requisites of Solidary Obligations.
(1) Plurality of subjects — two or more
creditors and/or two or more debtors;
(2) Unity of Prestation — the shares of each
creditor or debtor is not determined.
9.01.02. Joint O bligation. — one in which each debtor is
liable only for proportionate part of the debt and the
creditor is entitled to demand only a proportionate
part of the credit from each debtor126(1988 Bar). Each
obligor answers only part of the whole liability
and to each obligee belongs only a part of the
correlative rights (1983 Bar). None of the obligors
can be compelled to satisfy in full the obligation.127
The obligation is joint if it is stipulated that: (1) the
liability is pro rata, or (2) the liability is apportion-
able joint obligation. Mancomunicanidad simple is the
term used in the Spanish Civil Code.
a) Requisites of Joint Obligations.
(1) Plurality of subjects — two or more
creditors an d /or two or more debtors.
(2) Each creditor or debtor has a determined
share in the demandability or fulfillment of
the obligation.
9.02. PRESUMPTION (Art. 1208). The presumption
is that the obligation is joint (2001 and 2011 Bar).
Exceptions: The obligation is solidary only if (1)

124Inciong, Jr. v. Court of A ppeals, 257 SCRA 578 (1996).

125Parot v. Gemora, 7 Phil. 94.
,26PH Credit Corp. v. Court of A ppeals, supra; Industrial M anagem ent International
Developm ent Corp. v. NLRC, 331 SCRA 640 (2000).
in d u s tr ia l M anagem ent International Developm ent Corp. v. NLRC, ibid.
 OBLIGATIONS AND CONTRACTS 477
Different Kinds of Obligations

there is an agreement that the obligation is solidary

(conventional); (2) when the nature of the obligation
contemplates solidary obligation (natural); and (3)
when the law provides for solidary liability (legal).
Solidary obligation cannot be lightly inferred.128
9.03. KINDS OF SOLIDARY OBLIGATIONS.
a) According to source: (1) Conventional; (2)
Natural; or (3) Legal.
Examples:
(1) Conventional — The agreement states that
"Mr. A and Mr. B are jointly and severally
liable to pay P I,000."
(2) Natural — Mr. A and Mr. B own a house
and they mortgaged the house to secure
their obligation to Mr. X. The mortgage
obligation is by nature solidary; and
(3) Legal — (i) Liability of joint-tortfeasor
in quasi-delict is solidary; (ii) The liability
of the makers in a promissory note that
states "I promise to pay" even if there are
two or more makers is solidary;129 (iii) The
recruiter and agent in the Philippines of a
foreign employer of an overseas worker
is solidarily liable with the employer for
violations of contractual stipulation/s;130
and (iv) When there are two or more
bailees to whom a thing is loaned in the
same contract, they are liable solidarily.131
b) According to the parties: (1) Passive — this
pertains to the liability of the debtors (each
debtor may be compelled to pay all); or (2)
Active — this pertains to the right of the creditor

128Sm ith, B ell & Co., Inc. v. Court of A ppeals, 267 SCRA 530 (1997).
129Sec. 17(g), N egotiable Instrum ents Law.
^ P h ilip p ine Integrated Labor A ssistance Corporation v. NLRC, 264 SCRA 418
(1996).
131A rt. 1945, NCC.
478 REVIEWER ON CIVIL LAW

(each creditor shall have the right to compel

payment of the entire obligation.)
c) As to applicability of the terms and condi­
tions: (1) Uniform — all terms and conditions
apply to all (the creditors or debtors are bound
in the same manner and by the same periods
and conditions); (2) Non-uniform — the period,
terms and conditions may vary depending
on the debtor involve. One condition may be
applicable to one but not to the other;132 the
creditors and debtors are not bound in the
same manner and by the same periods and
conditions.
9.04. NATURE AND EFFECTS OF JOINT OBLIGA­
TIONS.
a) Unless the nature of the obligation or the stipu­
lation indicates the contrary, the shares of each
debtor or creditor shall be considered equal.
b) Default or delay of one debtor will not affect the
other.
c) Other debtors may not be compelled to perform
all the obligations.
9.05. INDIVISIBLE OBLIGATION. An obligation
that is indivisible is not necessarily solidary and
an obligation that is solidary is not necessarily
indivisible. In other words, the prestation may
be indivisible but the obligation may be joint. For
example, an obligation to deliver a specified cat is
indivisible because the parties cannot divide or
apportion the obligation. However, the obligation
may still be joint. This is true because the indivisi­
bility of the obligation is the result of the indivisi­
bility of the object or the prestation while an
obligation's joint or solidary nature involves the tie
that binds the parties.

132A rt. 1211, NCC.

 OBLIGATIONS AND CONTRACTS 479
Different Kinds of Obligations

a) Distinctions between Solidary and Indivisible

Obligation.

SOLIDARY INDIVISIBLE
1. There should be two or 1. There can be only one
more creditors an d /or two creditor and only one
or more debtors. debtor.
2. The prestation remains the 2. The obligation is converted
same even in case of non­ into one for damages in case
performance. of non-performance.
3. Each debtor is liable for the 3. One debtor is not liable for
breach of the other debtors. the breach of the others.
4. Performance may be done 4. Collective performance is
by one. usually required.

b) Effects of Joint Indivisible Obligations.

(1) Act of one joint creditor does not prejudice
all and the collective acts of all is required.
Example: The filing of a court case by one
joint creditor stops the running of the
prescriptive period as to his share in the
credit only. As to other joint creditors
who did not file, the prescriptive period
continues to run. For instance, the creditors
have 10 years to file a case and only one
filed a case within such period. Hence, the
action has prescribed as to the others.
(2) The creditor must demand performance
only against all joint debtors. Demand to
one is not effective for all joint debtors.
(3) Insolvency of one debtor will not affect the
others.
(4) Non-compliance by one debtor will convert
the obligation into one for damages or
monetary obligation.
480 REVIEWER ON CIVIL LAW

PROBLEMS:
1. A, B and C borrowed P120,000 from X, This debt is evidenced by
a promissory note wherein the three bound themselves to pay the
debt jointly and severally. However, according to the note, A can
be compelled to pay only on June 1, 2010, B can be compelled to
pay only on June 1, 2011 while C can be compelled to pay only on
June 1,2012. On June 1,2010, X made a demand upon A to pay the
entire indebtedness but the latter paid only P40,000. Subsequently,
because of A's refusal to pay the balance, X brought an action
against him for collection of the amount. Will such an action
prosper? Reasons (2988 Bar).
A: The action will not prosper. Article 1211 of the New Civil Code
provides that the solidary character is not destroyed by the fact that
the debtors are bound by different periods for paym ent. Thus, the
solidary nature of the obligation is not affected by the fact that die
obligors in this case are liable on different dates. In the present case,
the share of each solidary debtor in the total obligation of P12O,OO0
is presumably P40,000. It is submitted that since each solidary
debtor can be compelled to pay on different dates, the right of the
. creditor to collect is limited to the solidary debtor or debtors whose
obligation/s has/have matured and the recovery is limited to the
amount owed by the debtor or debtors whose obligation/s h as/
have already matured. Hence, only A is liable on June 1,2011 and
the liability is limited to 1’40,000. X will have to w ait for Jime 1,2012,
when B's obligation shall have matured, and for June 1,2013, when
C 's obligation shall have also matured. If X was able to recover
P40,000 from A on or after June 1,2011, he can collect P40,000 from
either A or B on June 1, 2012. If X was able to collect the P40,000
on June 1, 2012 (in addition to the amount he previously collected
from A), he can again collect another P40,000 horn either A or B or
C on June 1,2013. (See Ynchausti v. Yulo, 34 Phil. 978)

2. Suppose in problem no. 1, the obligation Of the parties is joint. Will

die action prosper?

A: The action will still not prosper even if the obligation is joint. The
difference, however, is that on June 1, 2012, only B is liable (not A
or B) and in June 1, 2013 only C may be made liable (and not A, B
or C).

3. X, Y and Z who are joint-debtors owe P18,000 to A , B and C, who

are solidary creditors. How much can B collect from X?
A: B can collect P6,000 from X. Since A , B and C are solidary creditors,
any one of them can collect the entire amount of P18,000. However,
since the debtors are joint-debtors, they can only collect the share
of each debtor. They cannot recover the entire obligation of P18,000
 OBLIGATIONS'AND CONTRACTS 481
Different Kinds of Obligations

from one debtor. In the given problem, the share of each joint-
debtor is presumably P6,000 but each of them may be made liable
by any of the solidary creditor. Thus, B can recover P6,000 from X,
P6,000 from Y and P6,000 from Z.
4. Suppose in problem no. 3, X, Y and Z are solidary debtors and A, B
and C are solidary creditors, how much can B recover from X?
A: B can collect P18,000 from Mr. X. The solidary creditors can claim
the entire amount from any one of the solidary debtors.
5. X and Y are solidary debtors of A, B and Z who are joint creditors
in the total amount of P30,000. How much can B collect from X?
A: B can collect P10,000 from X. Since B is a joint creditor, he can only
recover his share in the total of P30,000 which is presumed to be
P10,000. However, he can recover the entire P10,000 from one of the
solidary debtors, X or Y. Each solidary debtor (X or Y) can be made
to pay the entire amount pertaining to one joint creditor.
6. In problem number 5, suppose X arid Y are joint debtors and A, B
and C are joint creditors, how much can B recover from X?
A: B can recover only P5,000 from Mr. X. Every joint creditor has a
presumed share:of P10,000 in the credit of P30,000. However, B
as joint creditor cannot collect the entire amount of P10,000 from
either X or Y. B can collect his total share of P10,000 by collecting
P5,000 from X and P5,000 from Y.

9.06. RULES ON ACTIVE SOLIDARITY (A rts. 1212

to 1216). Active solidarity is solidarity among
creditors There are two aspects of the rules, these
are: (1) rules that govern the relationship between
the solidary creditors and the debtors, and (2) rules
that govern the relationship of the creditors among
themselves.
9.06.01. Relationship between solidary creditors and
debtors.
a) One solidary creditor may ask for full pay­
ment or full compliance with the obligation.
Example: Mr. X, Mir. Y, and Mr. Z are solidary
creditors and Mr. A borrowed from them
P30,000. On its due date, any of the three, Mr.
X, Mr. Y, or Mr. Z can demand payment of the
entire amount of P30,000 from Mr. A.
482 REVIEWER ON CIVIL LAW

b) Under Article 1214, the moment a demand is

made by one solidary creditor, payment must
be paid to him (2011 Bar). Example: Mr. X, Mr.
Y, and Mr. Z are solidary creditors and Mr. A
borrowed from them P30,000. On its due date,
any solidary creditor can demand payment
of the entire amount P30,000. However, the
moment one of them makes a demand, payment
must be made to him. Thus, if Mr. X made a
demand, Mr. A must pay Mr. X.
c) Under Article 1215, any one of the solidary
creditors may extinguish the obligation.
Extinguishment may be total or partial and
it may be through novation, compensation,
remission or any other means recognized under
the law. Example: Mr. X, Mr. Y, and Mr. Z are
solidary creditors and Mr. A borrowed from
them P30,000. Mr. X can remit or condone the
entire obligation of Mr. A, which condonation
binds Mr. Y and Mr. Z.
9.06.02. Relationship among creditors.
a) If the solidary creditor was able to recover
from the debtor, he must thereafter give the
share of the other creditors. Example: Mr. X,
Mr. Y / and Mr. Z are Solidary creditors and Mr.
A borrowed from them P30,000. On its due
date, any of the three, Mr. X, Mr. Y, and Mr. Z
can demand payment of the entire amount of
P30,000. If Mr. X made the demand and Mr. A
paid the entire amount of P30,000 to him, Mr. X
must give the respective shares in the credit of Y
and Z to them.
b) Under A rticle 1212, solidary creditors may do
w hatever may be useful to others. Example:
The filing by one solidary creditor of a case
against the debtors stops the running of the
prescriptive period and makes legal interest
due and payable.
 OBLIGATIONS AND CONTRACTS 483
Different Kinds of Obligations

c) Likewise under Article 1212 and the second

paragraph of Article 1215, solidary creditors
may not do anything that is prejudicial to the
other creditors. Example: Mr. X, Mr. Y, and Mr. Z
are solidary creditors and Mr, A borrowed from
them P30,000. Mr. X can remit or condone the
entire obligation of Mr. A. However, Mr. X may
be made liable to the other solidary creditors
who did not consent to the condonation of their
shares in the credit. Thus, Mr. X is liable to pay
Mr. Y P10,000 and Mr. Z P10,000.
NOTE: The solidary creditor may in effect
prejudice the rights of the creditors (as
against the debtor/s) under Article 1215
by extinguishing the obligations of solidary
debtors,
d) Under A rticle 1213, a solidary creditor must
get the consent of the other creditors before
assigning or transferring his right or share
in the credit. However, there is an opinion
to the effect that the provision applies only
if assignment is made to third persons. Prior
consent is not necessary if the transfer or
assignment is made to one of the other solidary
creditors.133
e) Novation may result in prejudice or benefit
to the solidary creditors. In novation, the
obligation is modified by changing the object or
principal condition, by substituting the person
of the debtor or by subrogating a third person in
the right of the creditor.
(1) If the novation is prejudicial to the credi­
tors, the creditor who caused the novation
shall be liable to the other solidary credi­
tors.

1335 Caguiao, 255.

 REVIEWER ON CIVIL LAW

(2) If the novation is beneficial to the creditors,

the creditor who cause the novation must
share the benefits to other creditors.
(3) Note that extension of time given in favor
of one solidary debtor will not release
the Other debtors. There is no extinctive
novation. The exception is in the case of a
surety.
f) Compensation takes place when two persons
are creditors and debtors of each other and
the respective obligations are extinguished
up to extent that they coincide. Example: A, B,
and C are solidary creditors who lent P3,000
to Mr. X. Mr. A borrowed P3,000 from Mr. X.
Both obligations are extinguished if they are
both due and payable. However, Mr. B and Mr.
C have the right to claim reimbursement from
Mr. A.
9.07. RULES WHEN THERE IS PASSIVE SOLIDARITY
— solidarity among debtors.
9.07.01. Relationship between the creditor and solidary
debtors.
a) One solidary debtor may be obliged or sued
to perform the entire obligation134 (1984, 2001,
and 2012 Bar). The other solidary debtors are not
indispensable parties in a case against one of
the solidary debtors (2012 Bar). Example: Mr. A,
Mr. B, and Mr. C are solidary debtors who are
obligated to deliver to Mr. X 30 sacks of rice. Mr.
A may be compelled by Mr. X to deliver 30 sacks
of rice.
b) Even if the demand is made on one solidary
debtor, demand can be made on the others so
long as there is no full compliance135(1992 Bar).

134A rt 1216, NCC.

I35Second sentence o f Art. 1216, ibid.
 OBLIGATIONS AND CONTRACTS 485
Different Kinds of Obligations

Example: In the previous example, if Mr. A was

only able to deliver 10 sacks, Mr. X can demand

c) Under A rticle 1222, a solidary debtor may raise

defenses against the creditor. These defenses
may either be: ,
(1) Defenses that are derived from the nature
of the obligation. Example: Prescription or
failure to file the case within the period
prescribed by law. Thus, an action based
on a written contract must be filed within
10 years.
(2) Defenses that pertain to one debtor only.
However, with respect to those which
personally belong to the others, a solidary
debtor may avail himself thereof only as
regards that part of the debt for which
the solidary with personal defense are
responsible. Example: A, B, and C are
solidary debtors in the total amount of
P30,000. A is a minor. In this case, B and
C can raise as a defense the minority of A.
However, the defense is only with respect
to the share of A which is presumed to be
P10,000. B and G can still be made solidarity
liable up to P20,000(2003 Bar).
(3) Defenses that pertain only to the share of
one debtor. Example: The obligation of one
debtor is subject to a separate condition or
period.
(4) Defenses that pertain to tire other debtors.
Example: Mr. A, Mr. B, and Mr. C are
solidary debtors who are obligated to
deliver 30 sacks of rice: Mr. B is a minor.
If Mr. X demanded delivery from Mr. A,
Mr. A m ay raise tire defense of minority
of Mr. B to defeat the claim but only as
to proportionate share of Mr. B, which is
486 REVIEWER ON CIVIL LAW

presumed to be one-third or 10 sacks of

. rice.
d) Payment by one solidary debtor extinguishes
the obligation. Example: If Mr. A, Mr. B, and Mr.
C are solidary debtors who are obligated to pay
Mr. X P30,000, payment by Mr. A of the entire
amount will extinguish the obligation. Mr. X can
no longer claim from die other debtors.
e) If the thing w hich is the object of the
obligation disappears or the prestation
becom es impossible — due to the fault of one
or all of the solidary debtors, each solidary
co-debtor shall be liable for the value of the
obligation and damages. Example: Mr. A, Mr. B,
and Mr. C are jointly and severally obligated
to deliver to Mr. X carabaos that are now in the
farm of Mr. A. All the carabaos died due to the
fault of Mr. A. In this case, Mr. B and Mr. C are
also liable to Mr. X.
f) If two or more solidary debtors offer to pay, the
creditor may choose which offer to accept.136
9.07.02. Relationship among Solidary Debtors.
a) If one of the solidary debtors paid the creditor,
he can claim reimbursement from the other
debtors (2012 Bar). However, there is no right
of reimbursement if lie paid after the obligation
has prescribed (2012 Bar). Examples: (1) Under a
written agreement, Mr. A, Mr. B, and Mr. C are
solidary debtors who are obligated to pay Mr.
X P15,000. If Mr. A paid Mr. X P I5,000, he can
claim reimbursement of P5,000 from Mr. B and
P5,000 from Mr. C; (2) In the previous problem,
Mr. A cannot claim reimbursement if he paid 12
years after the obligation became due because
the claim already prescribed (2012 Bar).

136Art. 1217, NCC.

 OBLIGATIONS AND CONTRACTS 487
Different Kinds of Obligations

b) A solidary debtor who has a right of

reimbursement is also entitled to interest if he
paid on due date. He is not entitled to interest if
he paid before the obligation is due.137
c) If one of the solidary debtors is insolvent, the
share of the insolvent debtor shall be borne by
the other debtors138 (1998, 2003, and 2013 Bar).
Example: Mr. A, Mr. B, and Mr. C are solidary
debtors who are obligated to pay Mr. X P15,000.
If Mr. A paid Mr. X P15,000, he can claim
reimbursement of P5,000 from Mr. B and P5,000
from Mr. C. However, if Mr. B is insolvent, Mr. C
will shoulder half of B's share or P2,500. Hence,
Mr. A can claim reimbursement from Mr. C in
the amount of P7,500.
d) A solidary debtor is not entitled to
reimbursement if he paid the obligation after
the obligation has prescribed or after it has
become illegal.139 Example: If the obligation will
prescribe in 10 years but one debtor paid after
10 years, the paying debtor will not be entitled
to reimbursement from the other debtors.
e) A solidary debtor who paid the remaining
debt m ay claim reimbursement even against
a debtor whose share was rem itted by the
creditor.140 While a creditor may release one
solidary debtor only, the debtor who is released
remains to be a solidary debtor (1998, 2003, and
2013 Bar). Examples: (1) Mr. A, Mr. B, and Mr. C
are solidary debtors who are obligated to pay
P I5,000 to Mr. X. Mr. X released or remitted the
share of Mr. C on June 1, 2005. However, the
remission was made after payment was made by
Mr. A on May 10,2005. In this case, Mr. A is still
entitled to reimbursement for tire whole amount

137Supra.
13sIbid.
139A rt. 1218, NCC.
140Art. 1219, ibid.
488 REVIEWER ON CIVIL LAW

even by Mr. C; (2) In the previous example if the

remission was before payment, Mr. A may be
compelled to pay P10,000 (2012 Bar); (3) Mr. A,
Mr. B, and Mr. C are solidary debtors who are
obligated to pay P15,000 to Mr. X. Mr. X released
or remitted the share of Mr. C. If Mr. B becomes
insolvent, Mr. C is still liable to pay the share of
A and B (1998 Bar).
f) A solidary debtor who was able to obtain
release or remission of the entire obligation is
not entitled to reimbursement.141 Example: Mr.
A, Mr. B, and Mr. C are solidary debtors who are
obligated to pay P15,000 to Mr. X. Mr. X released
or remitted die entire obligation at the instance
of Mr. C. Mr. C cannot daim reimbursement
from Mr. A and Mr. B.

PROBLEM:
1. In June 1988, X obtained a loan from A and executed with Y as
solidary co-maker a promissory note in favor of A for the stun of
P200,000. The loan w as payable at P20,000 with interest monthly
within the first week of each month beginning July 1988 until
maturity in April 1989. To Secure the payment of the loan, X put up
as security a chattel mortgage on his car, a Toyota Corolla Sedan.
Because of failure of X and Y to pay the principal amount of the
loan, the car was extrajudidally foreclosed. A acquired the car at
A's highest bid of P120,000 during the auction sale.
After several fruitless letters of demand against X and Y, A
sued Y alone for the recovery of P80,000 constituting the deficiency.
Y resisted the suit raising the defense (a) that Y should not
be liable at all because X was not Sued together with Y and (b) that
assuming that Y is liable, he should only pay the proportionate
sum of P40,000.
Decide each defense with reasons.
A: (a) The defense that X was not sued together with Y is untenable.
Y is solidarity liable in this case, hence, A can sue him alone. A
creditor may proceed against: any one of the solidary debtors. The
demand against one does not preclude further demand against
the others so long as the debt is not fully paid, (b) The argument

141A rt. 1220, ibid.

 OBLIGATIONS AND CONTRACTS 489
Different Kinds of Obligations

that Y is liable only to pay the sum of P40,000 is untenable because

the nature of a solidary obligation is to make each of the solidary
debtors liable to pay the entire amount that is due.

10. DIVISIBLE AND INDIVISIBLE OBLIGATIONS. Indivisible

obligations are those that are not susceptible of being executed
or performed in parts by reason of their nature or as provided
by law or by agreement of the parties.
a) The fact that the obligation is indivisible
does not mean that the obligation is solidary.
The peculiarity however is that it cannot be
performed by only one in part. Thus, the effect
of non-compliance is to convert the obligation
into one for damages and to make the debtors
liable thereafter for their proportionate share.
Thus, the joint indivisible obligation to deliver a
horse is converted into one for damages in case
of breach.
10.01. KINDS OF INDIVISIBLE OBLIGATIONS.
a) Natural indivisibility. — This is present if
the nature of the obligation is that it cannot be
performed in parts. For instance, the thing or
service to be performed is physically incapable
of being performed in parts. Example: A, B, and
C are obligated to deliver a specific dog.
b) Legal indivisibility. — The law itself declares
the obligation as indivisible. In this type, the
object (thing or service) may be divisible or
indivisible.
c) Conventional indivisibility. — The parties
agreed that the obligation is indivisible. In
this type, the object (thing or service) may be
divisible or indivisible.
10.02. RULES WHEN DIVISIBLE OR INDIVISIBLE.
(1) In obligations to give, the obligation to deliver
a specific or definite thing is always indivisible.
Example: obligation to deliver a specific oil
painting.
 490 REVIEWER ON CIVIL LAW

(2) In obligations to perform service, the obligation

is divisible if it will be executed within a certain
number of days of work. Example: A, B, and C
will clean the house of Mr. X for three days.
(3) The obligation is divisible if the work is to be
accomplished by metrical units. Example: Mr. A,
B, and C will transfer 1,000 kilos of rice of Pedro
from one warehouse to another.
(4) It is divisible in any other case which by their
nature are susceptible of partial performance.
(5) Even if the obligation is divisible by nature, the
same may be rendered indivisible by law or by
agreement of the parties.
(6) If the obligation is indivisible by nature, it
cannot be made divisible by law or agreement
of the parties.
11. OBLIGATIONS WITH A PENAL CLAUSE. A penal clause
is in the nature of an accessory obligation which makes one
party liable or makes him perform another prestation if the
principal obligation is not fulfilled. The penalty clause takes
the place of indemnity for damages and the payment of
interests in case of non-compliance with the obligation unless
there is stipulation to the contrary.142
11.01. PURPOSES: (1) Inducement — a penal clause helps
insure the performance of an obligation; (2) Punitive
— punishment for non-compliance; (3) Deterrence
and retribution; (4) To fix in advance the damage
that may be awarded in order to do away with proof
thereof later.143
11.02. KINDS OF PENAL CLAUSES.
a) Subsidiary or Complementary. The penal
clause is subsidiary if only the penalty will be
enforced in case of breach. A penal clause is

142Art. 1226, NCC; Continental Cement Corporation v. Asea Brown Boveri, Inc.,
659 SC R A 137 (2011).
143Florentino v. Supervalue, Inc., 533 SCRA 156 (2007).
 OBLIGATIONS AND CONTRACTS 491
Different Kinds of Obligations

complementary if both the principal obligation

and the penalty can be enforced.
b) Conventional or Legal. There is conventional
penal clause if the same was agreed upon or
stipulated by the parties. Legal penal clause
exists because it is expressly stated in the law.
Example: The parties may agree in the contract to
construct a building and that the contractor will
be liable to pay a penalty of P1,000 for every day
of delay.
11.03. NATURE OF PENAL CLAUSES.
a) Penalty is not an alternative (Art. 1227).
The enforcement of the penalty is made
only if there was non-compliance with the
principal obligation. Consequently, it is not an
alternative obligation which can be chosen by
the debtor. Examples: (1) The parties may agree
in the contract to construct a building that the
contractor will be liable to pay a penalty of
P I,000 for every day of delay. The contractor
cannot choose to pay P I,000 per day instead
of constructing the building on due date. The
exception is if there was an agreement that he
can make such replacement; (2) A contract of
lease may provide for a forfeiture clause — a
provision that allows the lessor to forfeit in its
favor advance rentals and deposits if the lessee
deserts or vacates the premises.144
b) Generally not complementary (Art. 1227).
The rule is that the creditor can either demand
fulfillment of the obligation or enforce the
penalty. The creditor cannot demand both
unless (1) there is an agreement that he can
enforce the penalty and at the same time
demand performance of the obligation; or (2)
the performance of the obligation becomes
impossible.

144Spouses Poon v. Prime Savings Bank, G.R. No. 183794, June 13, 2016.
 REVIEWER ON CIVIL LAW

c) Proof of Actual Damages Not Necessary (A rt

1228). The rule that proof of actual damages is
not necessary is rooted in the purpose of a penal
clause. The penalty is meant to deter violation
and to punish violation. Thus, if the penalty
clause provides for the payment of P10,000, the
party who is claiming such need not prove that
he was damaged up to P10,000.
d) Effect of Nullity of Principal Obligation or
Accessory Obligation (Art. 1230). There is a
well-known principle in law that accessory
follows the principal. This principle is affirmed
in Article 1230 in the sense that the nullity of the
principal obligation carries with it the nullity
of the penal clause. However, the nullity of the
accessory does not carry with it the nullity of the
principal. The accessory follows the principal
and not the other way around. Example: The
penalty was declared grossly unconscionable
and therefore void. The principal obligation to
pay is still valid.

PROBLEM:
1. The Betis Furniture Co. undertook to deliver to Mr. Bagongkasal
specified pieces of living room, dining room and bedroom
furniture, all made of narra, for a price stated in the contract. The
agreement had a penal clause that any violation of the contract
would entitle the aggrieved party to damages in the amount of
1*100,000. The furniture delivered by Betis was made, not of narra,
but of inferior wood. In a suit to recover damages, Bagongkasal
was able to prove that the actual damages he sustained amounted
to P200,000. He demanded that amount plus the P I00,000 penalty
or a total of P300,000. Betis, however, countered that if it were
liable for damages at all, the maximum award should not exceed
P100,000 as stated in the penal clause of the contract.

Whose claim Would you sustain? Why?

A: The claim of Betis should be sustained. Under Article 1228, no proof
of damage is necessary in order for a penal clause to be enforced.
Damages may be awarded in the concept of penalty in the absence
of proof provided that the penal clause was freely agreed upon.
 OBLIGATIONS AND CONTRACTS 493
Extinguishment of Obligations

11.04. WHEN PENALTY CAN BE REDUCED. The penalty

may be reduced by the judge in three cases.145
a) When there was partial com pliance. Example:
The obligation of Mr. A is to deliver 100 sacks of
rice with a penalty of P i,000 if not paid within
due date. If Mr. A was able to deliver 90 sacks
of rice, the court may choose to reduce the
penalty.
b) When there was compliance but it was
irregularly done. Example: In the preceding
example, if there was delivery of 90 sacks of rice
of the quality or type agreed upon (Example: C4
rice) plus 10 sacks of rice which are not of the
variety agreed upon.
c) When the penalty is iniquitous or un­
conscionable. Example: The penalty is P100,000
per day even if the principal obligation is only
P10,000.

C. EXTINGUISHMENT OF OBLIGATIONS

12. CONCEPT OF EXTINGUISHMENT OF OBLIGATION. An

obligation is extinguished if it ceases to exist. Extinguishment
of an obligation under the New Civil Code may include
termination because of full compliance with the obligation,
extinction before full compliance or even the end of the
obligation which may have been partially complied with.
12.01. GROUNDS FOR EXTINGUISHMENT. The
grounds for extinguishment of obligations under
Article 1231 and other provisions of the New Civil
Code are as follows:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;

145Art. 1229, NCC; Floientmo v. Supervalue, Inc., supra.

494 REVIEWER ON CIVIL LAW

(4) By the confusion or merger of the rights of

creditor and debtor;
(5) By compensation;
(6) By novation;
(7) By annulment;
(8) By rescission;
(9) By fulfillment of a resolutory condition;
(10) By prescription;
(11) By death whenever personal obligations are
involved;
(12) By expiration of a resolutory period;
(13) By compromise;
(14) By impossibility of performance; and
(15) By fortuitous event.
12.02. PAYMENT OR PERFORMANCE. Under Article
1232, payment Under the New Civil Code covers not
only cases involving payment of money but includes
all cases when the obligation is performed. Thus,
there is payment when (1) what was obliged to be
given in an obligation to give was actually given
(Example: delivery of a watch), (2) when the act or
service to be done was actually done (Example: A
carpenter agreed to make a table and he made such
table), and (3) when the obligor did not do what he
was not supposed to do (Example: He promised not
to let w ater flow to his neighbor's land and he did
not do so).
12.02.01. Characteristics of Payment. Payment or perfor­
mance of obligations must comply with three
characteristics, namely: (1) Integrity, (2) Identity,
and (3) Indivisibility. Articles 1233, 1234 and 1235
deals with the integrity of payment, Articles 1244
and 1245 deals with identity of payment, jand Article
1248 deals with the indivisibility of payment.
 OBLIGATIONS AND CONTRACTS 495
Extinguishment of Obligations

12.02.02. Integrity. Integrity of payment means the obligation

must be completely and faithfully complied with.
This means all the things promised to be given must
be given and all the things promised to be done
must be done. The creditor may reject partial or
incomplete performance (1983 Bar). Examples: (1) If
the promise is to give 10 sacks of com , 10 sacks of
com must be delivered; (2) If the obligation is to paint
the entire house, the entire house must be painted.
The exceptions or cases when complete performance
is not required are as follows: (1) When there is
substantial compliance, and (2) If the creditor is
barred by estoppel.
a) Substantial compliance (Art. 1234). The
general rule is that the creditor can recover
as though there was substantial compliance.
The requisites are: (i) There was substantial
compliance; (ii) the substantial compliance
must have been done in good faith; and (iii)
there must be payment of damages that may
have been incurred by the creditor.
(1) This applies only when the obligor admits
breaching the contract after honestly and
faithfully performing all material elements
thereof except for some technical aspects
that cause no serious harm to the obligee.
It involves an omission or deviation that
is slight, inconsequential or technical and
unimportant and does not affect the real
purpose of the contract.146
(2) For example, if a corporation hired
another person to look for or find a foreign
financier to finance the construction
of the corporation's hotel project, the
efforts exerted by the person who was
hired cannot be considered substantial

' “ International Hotel Corporation v. Joaquin, Jr., et al., G.R. No. 158361, April 10,
2013.
496 REVIEWER ON CIVIL LAW

compliance if the said person failed to find

a foreign financier or if file corporation
failed to secure a loan.147
b) Estoppel or the Creditor is barred to question
incom plete performance (Art. 1235). The
requisites are: (i) there was incomplete or
irregular perform ance; (ii) the creditor
accepted the incomplete or irregular
performance; and (iii) the creditor did not
protest or object. Example: The obligor agreed
to deliver a black cat but he delivered a white
cat instead. The creditor accepted the white cat
without any objection.
12.02.03. Who can pay the obligation. The obligation may be
performed by: (1) the debtor, or (2) a third person.
a) Third Person. A third person is one who is not
a party to the contract or agreement. He is not
obligated to perform the obligation. However,
the third person may not compel the creditor
to accept payment or performance. The creditor
may insist that the debtor should pay or perform
the obligation. Example: Mr. A, debtor, borrowed
P I,000 from Mr. B, the creditor. Mr. C who is the
friend of Mr. A offered to pay Mr. B. Mr. B can
refuse the payment of Mr. C.
b) Effects of Payment by Third Person. Full
payment of the obligation by a third person
extinguishes the obligation. The third person has
the following rights after making such payment
(1968 Bar).
(1) Right of Third Person if payment is with
the knowledge and consent of the debtor:
(i) The right of reimbursement — the
debtor must pay the third person
what the said third person paid

147Supra.
 OBLIGATIONS AND CONTRACTS 497
Extinguishment of Obligations

the creditor. Exception: when the

third person does not intend to be
reimbursed and the debtor accepted.
Based on Article 1238, this is in the
nature of donation.
(ii) The right of subrogation — the
third person may exercise any right
available to the creditor. Thus, the
right to collect which pertains to the
creditor may now be exercised by the
paying third person. The third person
may also foreclose the mortgage
that secures the obligation and may
exercise any right available to the
creditor.
(2) Right of Third Person if his payment is
without the knowledge and consent of the
debtor:
(i) The limited right of reimbursement
(up to what is beneficial to the
debtor). This right is available even if
payment is without the consent of the
debtor.
(ii) There is no right of subrogation (2011
Bar).
c) Capacity of Payor. The person who must pay
must be capacitated. Payment made by an
incapacitated person is invalid. Thus, payment
made by a minor or by an insane person is
invalid.
12.02.04. To Whom Payment should be made (Payee).
As a general rule, payment shall be effective in
extinguishing an obligation only if the same is made
to the proper party.1® Payment should be made to:148

148De la Cruz v. Concepcion, 684SC R A 74 (2012).

498 REVIEWER ON CIVIL LAW

(1) The creditor, — the person in whose favor

the obligation has been constituted.
(2) The successors-in-interest of the creditor.
— this means the heirs or the assignees of
the creditor. Example: (1) If the creditor died
leaving as his heirs his son and his wife,
payment must be made to the son and
the spouse; (2) If the creditor transferred
the credit, payment must be made to the
transferee.
(3) Any person authorized to receive the
payment by agreement or by law. Example:
(1) The creditor may appoint an agent to
receive payment; (2) The receiver appointed
by the court may also receive payment; (3)
If the creditor dies, the administrator of his
estate may receive payment.
a) Capacity of Payee. Payment to an incapacitated
person is generally not effective. The exception
is provided for in the first paragraph of Article
1241, that is, if the incapacitated person kept
what was paid or he is benefitted thereby. Thus,
payment to a minor is not effective. However,
if the obligation is to deliver a house and the
minor kept or used the house after delivery, then
payment is valid. This is also true if the debtor
delivered a notebook to the minor creditor who
used the same in school.
b) Benefit to Third Persons. Payment to third
persons is not binding on the creditor (1983
Bar). As a rule, the allegation that the creditor
was benefited by the payment made to a third
person cannot be presumed and must therefore
be satisfactorily established by the person
interested in proving this fact.149 However, such
proof is not necessary in the following instances

1498 Manresa 257 cited in Panganiban v. Cuevas, 7 Phil. 477 (1907).

 OBLIGATIONS AND CONTRACTS 499
Extinguishment of Obligations

mentioned in Article 1241: (1) If after the

payment, the third person acquires the creditor's
rights; (2) If the creditor ratifies the payment to
the third person; (3) If by the creditor's conduct,
the debtor has been led to believe that the third
person had authority to receive the payment.
c) Payment to person in possession of the credit.
Payment made in good faith to any person
in possession of the credit shall release the
debtor.150 "It contemplates a situation where a
debtor pays a "possessor of credit" i.e., someone
who is not the real creditor but appears, under
the circumstances, to be the real creditor."151
(1) The person to whom payment is to be
made under this Article is the "person in
possession of the credit" and not the person
in possession of the evidence of the credit.
Thus, even if the person is in possession
of the document, like a non-negotiable
promissory note, that evidences the credit,
payment to him will not release the debtor
if the same person is not in possession of
the credit itself.
(2) The person in possession of the credit
includes an assignee in an invalid
transfer. For example, Mr. X the creditor
assigned his right to Mr. Y. The debtor,
Mr. A, thereafter paid Mr. Y believing that
the transfer was valid. Later, the court
declared the transfer to Mr. Y invalid.
Mr. A is still released from his obligation
because he paid the person in possession
of the credit in good faith.
(3) In one Case, NFC made payments to the
registered owner of the rental fees and

150Art. 1242, NCC.

151National Power Corporation v. Ibrahim, G .R No. 175863, February 18,2015.
500 REVIEWER ON CIVIL LAW

expropriation indemnity due the subject

land pursuant to the final judgment in
two cases. This is considered payment in
possession of credit and is considered to
have extinguished the NPC's obligation
regardless of who between the registered
owner, on one hand, and the other
claimants, on the other, turns out to be the
real owner of the subject land.152
12.02.05. Identity of Perform ance. Identity of the perfor­
mance of the obligation simply means that the
debtor m ust give what should be given or he must
do w hat should be done. Thus, if he agreed to de­
liver a pig, the debtor must deliver a pig and not
a horse. If the debtor agreed to sing in a party, he
m ust sing in the party and not insist on dancing.
Neither can he force the creditor to let another per­
son sing for him if the agreement is that the debtor
himself will sing.
a) Two exceptions on the identity of performance
are as follows: (1) facultative obligation; and (2)
dation in payment.
b) Indeterm inate or Generic Thing. If the
obligation is to deliver a generic thing, the
parties may agree on the quality of the thing
to be delivered. For example, if the obligation
is to deliver a sack of rice, the parties may
agree that the rice to be delivered should be
first class Japanese rice. If nothing is agreed
upon, the creditor cannot demand a thing of
superior quality and the debtor cannot deliver
a thing which is of inferior quality. In case of
disagreement, it is the court that will settle the
controversy.
12.02.06. Dation in Payment or D ation en P ago . Dation en pago
or dation in payment is the delivery and transmission

152National Power Corporation v. Ibrahim, G.R. No. 175863, February 18,2015.

 OBLIGATIONS AND CONTRACTS 501
Extinguishment of Obligations

of ownership of a thing by the debtor to the creditor

as an accepted equivalent of the performance of the
obligation.153
a) Requisites of Dation in Payment:
(1) Instead of the original prestation, another
prestation is performed.
(2) The original prestation that is due and the
one performed are different.
(3) The parties agreed that the performance
of the different prestation extinguishes the
obligation.
b) Effect. Dation in payment is made if, upon
agreement of the parties, a thing is delivered to
the creditor in lieu of the original prestation.154
Example: Mr. X is obligated to pay Mr. Y P5,000.
Later, Mr. Y accepted the proposal of Mr. X to
deliver copra instead of paying the amount of
P5,000. Delivery of the copra constitutes dacion
en pago. In this case, the rules on sales shall
apply. In other words, it is as if Mr. X sold the
copra to Mr. Y.
c) A greem ent required. It is required that there
is an agreement that the perform ance of a dif­
ferent prestation shall extinguish the obliga­
tion. Thus, an assignment which is essentially
a m ortgage cannot constitute dation in pay­
m ent.155
d) Extent of Extinguishment. Dation in payment
extinguishes the obligation to the extent of the
value of the thing delivered, either as agreed
upon by the parties or as may be proved, unless
the parties by agreement — express or implied

153Philippine Lawin Bus Co. v. Court of Appeals, 374 SCRA 332 (2002); Vda. de
Jayme v. Court of Appeals, 390 SCRA 380 (2002).
1S4Tan Shuy v. Maulawin, 665 SCRA 604 (2012).
155DeveIopment Bank of the Philippines v. Court of Appeals, 284 SCRA 14 (1998).
502 REVIEWER ON CIVIL LAW

or by silence — consider the thing as equivalent

to the obligation, in which case the obligation is
totally extinguished.156
e) Co-owner. There is, in effect dacion e pago where
the co-owner renounces his share in the co­
owned property in lieu of payment of the shares
in the taxes and expenses for preservation (2009
Bar).
12.02.07. Indivisibility of Performance.
a) Full Compliance. The creditor is entitled to full
compliance and the debtor must fully comply
with the prestation. The debtor cannot compel
the creditor to accept partial compliance and
the creditor cannot insist on partial compliance.
Thus, if the obligation is to deliver five kilos of
rice, the debtor cannot make the creditor accept
only three kilos. Similarly, the creditor cannot
force the debtor to deliver only one kilo at a
time.
b) EXCEPTIONS: Partial performance can be
made in the following cases:
(1) When the debt is liquidated in part
and unliquidated in part. Example: The
obligation of Mr. A is to deliver P I,000 plus
damages. There is a liquidated portion
because the amount to be delivered (PI,000)
is fixed. However, the damages that must
be paid is unliquidated because it is still
undetermined. Hence, the creditor may
demand and the debtor may effect delivery
of P I,000 even before the liquidation of the
damages aspect.
(2) When the parties agreed on partial
compliance.

I56Tan Shuy v. Maulawin, supra.

 OBLIGATIONS AND CONTRACTS 503
Extinguishment of Obligations

(3) When the nature of the obligation is that

it cannot be done in one instance. Example:
The debtor agreed to deliver one million
sacks of sugar. It can be inferred that
delivery is in parts because it might be
physically impossible to deliver all in one
day.
(4) Solidary obligations where the debtors are
bound by different terms and conditions.
(5) Joint debtors who are bound to deliver
their respective shares only.
12.02.08. Kind of Currency or Money for Payment. The parties
can agree to pay in any currency. R.A. No. 8183 was
enacted providing that obligations contracted in
the Philippines can be denominated and valued at
any convertible currency acceptable to the Bangko
Sentral ng Pilipinas. The Supreme Court observed
in one case that the repeal of R.A. No. 529 by R.A.
No. 8183 has the effect of removing the prohibition
on the stipulation of currency other than Philippine
currency, such that obligations or transactions may
now be paid in the currency agreed upon by the
parties (1995 Bar).157
a) Legal Tender. In the absence of any stipulation
as to currency, payment in money should be in
legal tender. Section 52 of the New Central Bank
Act, R.A. No. 7653 provides that only notes and
coins issued by the Bangko Sentral ng Pilipinas
are considered legal tender.
b) Payment in Coins. Under BSP rules,158 coins are
considered legal tender only in accordance with
the following rules (1975 Bar):*8

157C.F. Sharp & Co., Inc. v. Northwest Airlines, Inc., 3 8 1 SCRA 314 (2002).
li8BSP Circular No. 537, Series of 2006.
504 REVIEWER ON CIVIL LAW

DENOMINATION OF MAXIMUM AMOUNT AS

COINS LEGAL TENDER
One (1) Peso, Five (5) Pesos, One Thousand Pesos
arid Ten (10) Pesos (PI,000)
One (1) Centavo, Five (5) One Hundred Pesos (P100)
Centavos, Ten (10) Centavos,
and Twenty (20) Centavos.

(1) For example, the debtor cannot insist that

the creditor accept his payment for an
obligation in the amount of P200 if the
debtor is trying to deliver the same total
amount all in ten centavo coins.
c) Commercial Papers. Delivery of any
commercial paper (bills of exchange like
checks or promissory notes) whether they are
negotiable instruments or not does not produce
the effect of payment. For instance, the creditor
may refuse to accept checks in payment of the
obligation as it is not valid tender of payment159
(2013 Bar). In addition, even if the creditor
accepts the check, the obligation is not deemed
paid until the check is encashed (1958 Bar).
(1) Exceptions to the rule that delivery of
commercial paper or mercantile documents
does not produce the effect of payment are
as follows: (i) When the paper or document
is encashed; or (ii) When the paper or
. document is impaired due to the fault of
the creditor (2022 Bar).
(2) Delivery of the check to the creditor
shall produce the effect of payment if
the creditor went to the bank to get the
value of (or encash) the check and he in
fact received the amount covered by the

159Bank of Philippine Islands v. Spouses Royeca, 559 SCRA 207 (2008).

 OBLIGATIONS AND CONTRACTS 505
Extinguishment of Obligations

check. This also happens if the amount

covered by the check is already credited to
his account after he deposited the check.
(3) There is payment if the creditor accepted a
check belonging to a third person from the
debtor and he failed to encash the check for
a long period of time. In the meantime, the
third person became insolvent. In this case,
the value of the check was impaired due
to the fault of the creditor. If the creditor
encashed the check earlier, die check would
have been honored but it can no longer be
honored because of the insolvency of the
third person.
(4) Note that there is authority for the view
that the second exception (impairment of
the document or paper) does not apply to
a situation where the instrument that was
delivered was issued by the debtor himself.
The exception applies only to instruments
executed by a third person and delivered
by the debtor to the creditor.160 Thus, even
if the creditor will not encash the check
issued by the debtor, the obligation of the
debtor remains even if the check becomes
stale and can no longer be honored by the
drawee bank.
(5) Delivery of mercantile documents like
negotiable instruments may be acceptable
if what is being done is not payment
but exercise of a right. For instance, it is
acceptable to deliver a m anager's check
in the exercise of the right to redeem.161
Example: Mr. A mortgaged his house in
favor of a bank to secure his loan. He failed
to pay his loan so the bank foreclosed the

160Compania General v. Molina, 5 Phil. 142; NAMARCO v. F.U.N.D, 49 SCRA 238.

161Co v. Philippine National Bank, 114 SCRA 842.
506 REVIEWER ON CIVIL LAW

mortgage (sold it at public auction). Mr.

A has one year to redeem (to buy back)
his property. In this case, delivery of a
cashier's check within one year is sufficient
for die purpose of the exercise of the right
of redemption.

PROBLEM:
Mr. A signed a check and delivered it to Mr. B in payment of his
obligation. Mr. B is indebted to Mr. C. Mr. B delivered and Mr. C accepted
the check of Mr. A in payment of the obligation of Mr. B. Mr. C failed to
encash the check for several years. In the meantime, Mr. A already closed
his checking account and can no longer be found. Can Mr. B claim that
there is payment?
A: Yes, in this case, the check delivered by Mr. B, the debtor, was
impaired because of the fault of Mr. C, the creditor. Hence, the
obligation of Mr. B is extinguished.

12.02.09. Effect of Inflation, General Rule: the value of the

currency at the time of the establishment of the
obligation shall be the basis of payment.
a) Exceptions to the general rule are:
(1) When there is agreement to the contrary.
Example: The parties agreed that the value
of the currency at the time of payment shall
be the basis of payment.162
(2) In case of extraordinary inflation or
deflation.
b) Extraordinary Inflation or Deflation. Extra­
ordinary inflation or deflation exists when there
is a decrease or increase in the purchasing power
of the Philippine currency which is unusual or
beyond the common fluctuation in the value
of said currency, and such decrease or increase
could not have been reasonably foreseen or
was manifestly beyond the contemplation of

162Tdengtan Bios. & Sons v. United States Lines, 483 SCRA45

 OBLIGATIONS AND CONTRACTS 507
Extinguishment of Obligations

the parties at the time of establishment of the

obligation (1969 and 2001 Bar).163 For example,
there is extraordinary inflation if the conversion
rate of peso against the dollar (US) will suddenly
rise to one peso to a million dollar.164
(1) An extraordinary inflation or deflation
cannot be assumed.165 There must be
declaration from the appropriate govern­
ment agency like the Bangko Sentral or the
Department of Finance.166
(2) Extraordinary cannot be established by the
mere fact that there was devaluation of the
peso.167
12.03. APPLICATION OF PAYMENTS. — The debt to
which payment shall be applied is designated or
selected if the debtor has two or more obligations to
the creditor.
12.03.01. Requisites of Application of Payments.
(1) There are two or more debts;
(2) The debtor and the creditor in such obligations
are the same;
(3) The obligations must be of the same kind;
(4) The obligations are all due and demandable;
and
(5) The payment made is not sufficient to pay all
obligations.
12.03.02. Rules on Application. The designation of the debt or
obligation that will be deemed paid shall be made in
accordance with the following rules:

163Huinbonhoa v. Court of Appeals, 320 SCRA 625 (1999).

164Filipino Pipe and Foundry Corporation v. NAWASA, 161 SCRA 32 (1988).
165Ibid.
166Singson v. Caltex, 342 SCRA 91 (2000); Mobil OU Philippines v. Court of Appeals,
180 SCRA 651.
167Equitable PCI Bank v. Ng Sheung Ngor, 541 SCRA 223 (2007).
508 REVIEWER ON CIVIL LAW

a) The debtor shall designate the debt to which

payment shall be applied. The right to specify
which among his various obligations to the
same creditor is to be satisfied first rests with the
debtor.168
b) In die event that the debtor failed to exercise the
right to elect, the creditor may choose to which
among the debts the payment is applied.169 The
right of the debtor to apply payment is merely
directory in nature and must be promptly
exercised, lest, such right passes to the creditor
by indicating the same in his receipt.170
c) If there is no designated debt in accordance
with the above stated rules application shall be
deemed made by operation of law as follows:
(1) Payment shall be applied to the interest
first before application to the principal.171
(2) Payment shall be applied to: 1st The debt
that is most onerous; 2nd: If debts are of
the same terms and conditions and burden
(one is not more onerous than others),
payment shall be applied in proportion to
the debt.

EXAMPLES AND PROBLEMS:

1. Mr. A has two obligations to B, one for P I,000 and the other also
for P I,000. Mr. A delivered P1,000. If both are due and are of equal
burden, the payment of P I,000 shall be proportionately applied
(one is to one; 1000:1000 or 1:1) meaning P500 shall be applied to
the P I,000 debt arid P500 shall be applied to the other P I,000.00
debt;
2. If the debtor owes his creditor Several debts consisting of an (1)
unsecured debt, (2) debt secured by a m ortgage, (3) interest bearing
debt, and (4) a debt in which the debtor is solidarily liable with
another, the m ost onerous is No. 4, the second most onerous is

168Art. 1252, NCC; Paculdo v. Regalado, 345 SC R A 134.

169Spouses Tan v. China Banking Corporation, G.R. No. 200299, Adgust 17,2016.
mIbid.
171A rt 1253, NCC,
 OBLIGATIONS AND CONTRACTS 509
Extinguishment of Obligations

No. 2, the third most onerous No. 3 and the least onerous is No.
1. Hence, the same order should be followed in the application of
payments (1982 Bar).
3. Mr. A borrowed P1,000 from Mr. B payable on June 5, 2013. Later,
Mr. A borrowed P800 from Mr. B payable on June 10,2013. On June
15,2013, Mr. A delivered P I,000 to Mr. B designating the debt that
is payable on June 5, 2013 as the debt that is being paid. Can there
be application of payments? : ,
A: Yes, because all the requisites for application for payments are
present: 1) There are two debts one for P I,000 and one for P800;
2) The debtor (Mr. A) and the creditor (Mr. B) are the same in both
debts; 3) The obligations are of the same kind, payment of money;
4) The obligations are both due before the delivery of money on
June 15,2013; and 5) The amount delivered, P I,000 is not sufficient
to pay for both which totals P I,800.
4. Mr. A borrowed P I,000 from Mr. B payable on June 5, 2013. Later,
Mr. A borrowed P2,000 from Mr. B payable on June 10, 2013. On
June 15,2013, Mr. A delivered P I,000 to Mr. B designating the debt
that is payable on June 10,2013 as the debt that is being paid. Is the
designation of Mr. A binding on Mr. B,

A: No. The designation of Mr. A is not binding on the creditor. Mr. A

cannot compel Mr. B to accept the application of payment because
what he is paying is less than the amount that is due on June 10,
2013. Creditors cannot be compelled to accept partial payments.

12.04. PAYMENT BY CESSION. Assignment or cession

consists in abandonment by the debtor of all his
properties for the benefit of the creditors, so that, from
their proceeds, the latter may obtain satisfaction of
their credits.172
a) What is contemplated here is voluntary or
conventional assignment not legal assignment
which is undertaken under a special law like the
Insolvency Law.
12.04.01. Requisites of Payment by Cession.
(1) There must be two or more debts;
(2) There must be two or more creditors;
(3) There must be one debtor who is insolvent;

1722 De Buen 55; 8 Mantesa 321; translated in 1 Florendo 373.

 510 REVIEWER ON CIVIL LAW

(4) The debtor must abandon his properties in favor

of the creditors; and
(5) The creditors must accept the abandonment in
their favor.
12.04.02. Distinguished from Dation in Payment.

DATION IN PAYMENT CESSION OR ASSIGNMENT

1. Ownership of the 1. The creditors do not acquire
thing delivered is ownership but must sell the
transferred to the thing and apply the proceeds
creditor. to the debts.
2. The debt is 2. The debts are extinguished
extinguished. only up to the extent
covered by the proceeds of
the sale-
3. There is only one 3. There are two or more
creditor. creditors.
4. Insolvency of 4. Insolvency of the debtor is
the debtor is not required.
required.

12.05. TENDER OF PAYMENT AND CONSIGNATION.

"Tender of payment, without more, produces no
effect/'173 Tender of payment and consignation must
both be present in order to extinguish the obligation
(2011 Bar). The exceptions are those enumerated in
Article 1256 when consignation alone is sufficient.
12.05.01. Definitions:
a) Tender of payment. — It is the definitive act
of offering the creditor what is due him or her,
together with the demand that the creditor
accept the same.174

173AUandale Sportsline, Inc. v. The Good Development Corporation, G.R. No.

164521, December 18, 2008; Spouses Bonrostro v. Spouses Luna, G.R. No. 172346, July
24,2013.
174Far East Bank & Trust Company ydSiaz Realty, Inc., 363 SCRA 359 (2001).
 OBLIGATIONS AND CONTRACTS 511
Extinguishment of Obligations

b) Consignation. — It is the deposit in court by

the debtor of the object of the obligation if the
creditor does not want to or cannot receive the
same. It is the act of depositing the thing due
with the court or judicial authority whenever
the creditor cannot accept or refuses to accept
payment175 (1969 Bar).
12.05.02. Requisites of Valid Tender of Payment. For tender
of offer to be valid, there must be a fusion of intent,
ability and capability to make good such offer, which
must be made absolute and must cover the amount
due.176Thus, the following requisites must be present:
(1) The tender of payment must be made to
the creditor;
(2) The payment tendered must be complete,
regular, and identical;
(3) The payment must not only be complete
but must also include accessory obligations
like payment of interest;
(4) The obligation must be due; arid
(5) The tender must be unconditional. ;
a) If the obligation is to pay money, it must involve
a positive and unconditional act by the obligor
of offering legal tender currency as payment
to the obligee for the form er's obligation and
demanding that the latter accept the same.177
b) There is also no valid tender of payment if what
is offered is a check or any mercantile document
or negotiable instrument.178 However, a creditor
who accepted the check can no longer claim that
there was no valid tender of payment.179

175Pabugais v. Sahijward, G.R. No. 156846, February 23,2004.

176Far East Bank & Trust Company v. Diaz Realty, Inc., supra.
177Cebu International Finance Corporation v. Court of Appeals, 316 SCRA 488.
178Far East Bank & Trust Company v. Diaz Realty, Inc., supra.
179Ibid. ,
 REVIEWER ON CIVIL LAW

c) There is no valid tender of payment if the debtor

merely sent a letter stating that he intends to
pay.180
d) There is also no valid tender of payment if the
debtor is offering to pay only a portion of the
obligation.181
12.05.03. Requisites of Valid Consignation (2014 Bar). In order
that the consignation may be effective, the debtor
must establish the requisites enumerated below.182 If
all the requisites are present, the approval of the court
and the obligee or creditor's acceptance of the deposit
are not necessary for a valid consignation.183
(1) The debt must be due;
(2) The consignation of the obligation had
been made because the creditor to whom
tender of payment was made refused to
accept without just cause;
(3) Previous notice of the consignation had
been given to the person interested in the
performance of the obligation;184
(4) The amount due was placed at the disposal
of the court;185 and
(5) After the consignation had been made
the person interested must be notified
thereof.186
a) Debt must be due. If the tender of payment was
made before maturity date and the period that
was fixed is for the benefit of the creditor, there
is no valid tender of payment and consignation.

180Zulueta v. Octaviano, 121 SCRA314.

181Pabugais v. Sahijwani, supra.
1S2Ibid.
183Spouses Rayos v. Reyes, G-R. No. 150913, February 20,2003.
184Art. 1257, NCC.
185Art. 1258,
186Art. 1258,
 OBLIGATIONS AND CONTRACTS 513
Extinguishment of Obligations

b) Unjustifiable Refusal. Prior tender of payment

is indispensable. In addition, there must be
unjustifiable refusal on the part of the creditor
to accept. In other words> there is no valid
consignation if the creditor refused to accept
the tender of payment for a valid reason. For
example, the creditor validly refused, and
therefore there is no valid consignation if:
(1) The tender of payment was conditional;187
(2) If there was intent to only partially per­
form the obligation;
(3) If only a check is tendered;
(4) If the debtor offered to deliver a different
filing.
c) Prior N otice. The debtor must give notice of
his intention to resort to consignation before
doing so. The purpose of the notice is to give
the creditor the opportunity to reconsider his
unjustified refusal to accept payment thereby
avoiding consignation and the subsequent
litigation.188 The consignation is void without
prior notice189 (2014 Bar).
(1) Notice must be given not only to the
creditor but also to interested parties.
These parties who are interested in the
fulfillment of the Obligation include co­
debtors, guarantors, surety or any other
person who secured the obligation.
d) Consignation in Court. A case should be filed
in court whereby the debtor will ask the court to
cancel the obligation and thereafter the amount
should be deposited in the same court. After
the deposit, there will be trial on the merits and

K7Supra,
188Soco v. Milatante, 123 SC R A 160 (1983).
lmIbid., citing Cabanos v. Calo, 104 Phil. 1058; and Limkako v. Teodoro, 74 Phil. 313;
Spouses Rayos v. Reyes, supra.
 REV IEW ER ON CIVIL LAW

the court will determine if the requirements

for a valid consignation are present. After trial,
the court may declare that the obligation is
extinguished.190
e) Notice after consignation. After the judicial
deposit, notice should also be given to interested
parties. However, the filing of the case in court
and the service of summons to the creditor
serves as the second notice.191
f) Exercise of a Right. Tender of payment and/
or consignation is not necessary in redeeming
the property based on a sale with a right of
redemption. Consignation applies to obligations
not to exercise of a right (1984 Bar).
12.05.04. Withdrawal by the Debtor.
a) W ithout Authority of Creditor. The debtor
may still withdraw the thing consigned in
court if: (i) the creditor has not yet accepted
the consignation, and (ii) the court has not yet
declared that the consignation was properly
made. Thus, if the debtor deposited P I,000 but
he withdrew the same before the declaration of
the Court, the effect is that he is still liable to pay
the P I,000.
b) With Authority of the Creditor. If the
withdrawal is with the authority of the creditor:
(1) The obligation remains in force.
(2) The creditor will no longer have any
preference over the thing.
(3) The co-debtors, guarantors and sureties
shall be released.
12.06. LOSS OF THE THING DUE. Loss of the object under
this Section of the New Civil Code covers loss of the

190A rt 1260, NCC.

191Spouses Rayos v. Reyes, supra; Dungao v. Roque, 90 Phil. 657.
 OBLIGATIONS AND CONTRACTS 515
Extinguishment of Obligations

object in an obligation to give and also loss of the

object in an obligation to do or not to do (1994 Bar).192
Hence, this covers impossibility of performance.
a) Meaning of Loss. As to determinate thing, the
said thing is lost if (1) it perishes, (2) goes out
of commerce, (3) or it disappears in such a way
- that its existence is unknown or it cannot be
recovered.
12.06.01. Requisites. The essential requisites of loss were
classified by Giorgi in his Teoria de las Obligationes193
into those pertaining to the object and those
pertaining to the subject, or objective and subjective,
respectively. The first (objective) requires that the loss
be perfect and posterior, and the second (subjective),
the loss must be absolutely free from any intervention
of the debtor in the causes or occasions causing the
loss.
12.06.02. Exceptions: The obligation is not extinguished
because of loss or impossibility:
(1) When the law provides that it shall not be
extinguished;194
(2) When the parties agree or stipulate that die
obligation shall not be extinguished;195
(3) When the nature of the obligation requires
assumption of risk;196
(4) If the thing to be delivered is a generic thing;197
(5) If the debtor is guilty of delay (2000 Bar);198
(6) When the debtor promised to deliver the same
thing to two or more persons;199

192Art. 1262, NCC.

1931 Florendo 394.
194Art. 1262, NCC.
195Ibid.
196Ibid.
197Art. 1263, ibid.
198Art. 1165, ibid.
199Art. 1165, NCC.
516 REVIEWER ON CIVIL LAW

(7) When the obligation to deliver the determinate

thing arises from a criminal act (unless there
was unjust refusal on the part of the creditor to
accept);200
(8) If die debtor's, negligence concurs with the
fortuitous event.
12.06.03. Loss in Reciprocal Obligations. There are two views
regarding the effect of loss with respect to reciprocal
obligations if only One thing is to be delivered or
only one obligation becomes impossible while the
thing to be delivered the other party is not lost or the
other obligation of .the other party does not become
impossible to perform.
a) First view: Senator Tolentino believes that the
rule res perit domino (the thing perishes with
the owner) should be applied. This means "the
entire juridical relation is extinguished, so that
if the creditor has himself an obligation, this is
likewise extinguished."201
b) Second view: Justice Reyes, Justice Puno and
Justice Vitug believe that what is applicable is the
Roman law rule res perit creditori which means
the creditor willbear the loss.202Thus, the creditor
will still be liable to perform his obligation
despite the loss of the thing to be delivered by
the debtor. Exceptions (meaning instead of the
creditor, the debtor bears the loss and he cannot
demand the performance of the obligation of
the creditor):203 (1) In sale of corporeal personal
property when the dung sold is lost through
fortuitous event before delivery204 (1994 Bar); (2)
In a contract of lease where the destruction of

200Art. 1269, ibid.

201IV Tolentino 337.
202m Vitug 80, citing Reyes v. Caltex, 47 O.G. 1293; Villarael v. Manila Motors, 104
Phil. 926.
203IV Reyes and Puno 139.
204Art. 1504, NCC.
 OBLIGATIONS AND CONTRACTS 517
Extinguishment of Obligations

the thing extinguishes the obligation to pay the

rent;205 and (3) In contracts for a piece of work,
where the loss of the thing before delivery bars
the contractor's right to collect the price.206
12.06.04. Loss of Generic Things. The principle is genus
nunquamperuit — the genus never perishes. Examples:
(1) Mr. X is obligated to deliver 10 kilos of white
sugar to Mr. Y. The 10 kilos that he is supposed to
deliver to Mr. Y was destroyed by flood without his
fault. The obligation to deliver is not extinguished
because Mr. X can deliver any other 10 kilos of white
sugar; (2) There will also be no extinguishment if the
money that the debtor is supposed to pay was stolen
or lost.
a) Delimited Generic Things. The rule is different
if what is involved is a delimited generic thing
where there is a limitation of the generic object
to a particular mass or a particular group
of things.207 Examples: (1) The obligation is
extinguished if the debtor promised to deliver
one of his dogs and all his dogs died; (2) The
obligation to deliver is extinguished if the
debtor promised to deliver 10 kilos of lettuce
that is grown in his garden and all the plants in
his garden were destroyed.
12.06.05. Partial Loss. Partial loss will extinguish the obligation
if the portion that was lost is so important such that
it amounts to total loss.208 Example: An obligation to
deliver a car may be extinguished if the engine was
totally destroyed leaving only its body.
12.06.06. Disputable Presumption of Fault. Whenever the
thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault provided
that the following are established: (1) the thing is lost;

205Art. 1655, supra.

206Art. 1717,ibid.
207IV Tolentino 341.
208Art. 1264, NCC.
518 REVIEWER ON CIVIL LAW

and (2) the thing was in the possession of the debtor

when it was lost.
a) Fault on the part of the debtor is not presumed
if the loss occurred during an earthquake, flood,
storm or other natural calamity. According to
tire Code Commission, "in case of a natural
calamity, lack of fault on the part of the debtor is
more likely. So it is unjust to presume negligence
on his part."209
12.06.07. Effect of Im possibility. Legal or physical impossi­
bility of the performance of the work or service is
equivalent to loss of the object and the obligation is
therefore extinguished. This includes obligations to
perform a particular work or service.210 Examples: (1)
Physical Impossibility — Mr. X was hired to repair
a car but the car was totally destroyed by fire in
the meantime; (2) Legal Impossibility — Mr. X was
hired to sing in the house of Mr. Y on the latter's
birthday but the government later issued an order
prohibiting entry into the town of Mr. Y because of
an epidemic.
a) Theory of Imprevisibility. Article 1267 of
the New Civil Code provides that when the
service (prestation) has become so difficult as
to be manifestly beyond the contemplation of
the parties, the obligor may also be released
therefrom, in whole or in part. The requisites are
as follows:
1) The event or change in circumstance could
not have been foreseen at the time of the
execution of the contract;
2) It makes the performance of the contract
extremely difficult but not impossible;

209Report of the Code Commission, p. 133. .

“ “Philippine National Construction Corp. v. Court of Appeals, G.R. No. 116869,
May 5,1997.
 OBLIGATIONS AND CONTRACTS 519
Extinguishment of Obligations

3) It m ust not be due to the act of any of the

parties — no fault or negligence;
4) The contract is for a future prestation —
prestation that will be performed in the
future211 (1993 Bar).
b) The difficulty of performance should be such
that the party seeking to be released from a
contractual obligation would be placed at a
disadvantage by the unforeseen event. Mere
inconvenience, unexpected impediments,
increased expenses, or even pecuniary inability
to fulfill an engagement, will not relieve
the obligor from an undertaking that it has
knowingly and freely contracted.212 Example: A
valid closure of a bank by the BSP for insolvency
is not an impossibility covered by Article 1267.
It cannot be said to be unforeseeable and die
closure is also.due also to the act of the bank.213
c) Rebus Sic Stantibus — it is an International Law
theory under which the parties stipulate in light
of certain prevailing conditions, and the theory
can be made to apply when these conditions
cease to exist.214*The parties stipulate that when a
service has become so difficult as to be manifestiy
beyond their contemplation, total or partial
release from a prestation and from counter­
prestation is allowed.213 However, this theory
does not strictly apply to contracts. The Supreme
Court, however, has cautioned that Article 1267
is not an absolute application of the principle of
rebus sic stantibus, otherwise, it would endanger
the security of contractual relations. After all,
parties to a contract are presumed to have

211A rt 1267, NCC; Spouses Poon v. Prime Savings Bank, G.R. No. 183794, June 13,
2016; Tagaytay Realty, Inc. v. Gacutan, G.R. No. 160033, July 2015.
212Spouses Poon v. Prime Savings Bank, ibid. .
213Spouses Poon v. Prime Savings Bank, ibid.
2HSpouses Poon v. Prime Savings Bank, ibid.
^ O sm en a III v. Social Security System of the Philippines, 533 SCRA 313 (2007).
520 REVIEWER ON CIVIL LAW

It is only in absolutely exceptional changes of

circumstance, therefore, that equity demands
assistance for the debtor.216
d) As a rule, mere difficulty in the performance
of the obligation does not amount to loss or
impossibility. Exception: When the Theory
o f Im previsibility (also known as Theory
of Unforeseen Events) applies. The Code
Commission explained that the intention of the
parties should govern and if it appears that the
service turns out to be so difficult as to have been
beyond their contemplation, it would be doing
violence to that intention to hold the obligor still
responsible.217
e) Assum ption of Risk. The parties to the
contract must be presumed to have assumed
the risks of unfavorable developments. It is
only in absolutely exceptional changes of
circumstances that equity demands assistance
of the debtor.218 Example: Mr. X is obligated to
transport purified water to the factory of Mr. Y
in the mountain. However, it is now extremely
hard to deliver such water because there is
an ongoing firelight between the rebels and

f) Effect of Criminal Offense. Even if the loss is

due to fortuitous event, the debtor is still liable
under this provision because the determinate
filing proceeds from a criminal offense.219
Example: M i. X stole the watch of Mr. Y. Mr. X
is therefore obligated to return the watch. Mr. X
will still be liable if the watch is destroyed before
its return to Mr. Y.

216Spouses Ebon v. Prime Savings Bank, supra.

217Report of the Code Commission, p. 133.
^Philippine National Construction Corporation v. Court of Appeals, supra.
219Art. 1268, NCC.
 OBLIGATIONS AND CONTRACTS 521
Extinguishment of Obligations

g) Refusal of the Debtor to Accept. The debtor

will be excused if the creditor refused to receive
it after the debtor offered to deliver.220 Thus,
in the previous example, if Mr. X is delivered
or returned the watch and Mr. Y refused to
accept, the subsequent loss of the watch due to
fortuitous event shall be borne by Mr. Y.
12.06.08. Other Rights of the Creditor in Case of Loss. Under
this article, die creditor has the following rights after
the extinguishment because of loss: (1) To exercise
rights and actions which the debtor may have against
third persons; and (2) To recover any indemnity that
may have been already received by the debtor.221

EXAMPLES:
(1) Mr. A is obligated to deliver to Mr. B a one-hectare lot w ith a
small house; The house was destroyed by fire before delivery due to the
gross negligence of Mr. C. Mr. B can file a case for damages against Mr.
C. (2) Mr. A is obligated to deliver to Mr. B a one-hectare lot with a small
house. The house w as destroyed by fire before delivery and Mr. A was
able to receive the insurance proceeds. Mr. B is entitled to the insurance
proceeds even if the obligation to deliver the house was extinguished.

13. CONDONATION OR REMISSION OF THE DEBT Condona­

tion is an act of liberality by which, the obligee, who receives
no price or equivalent thereof, renounces the enforcement of
the obligation which is extinguished in its entirety or in part
or aspect of the same to which the remission refers222 (2000
■ Bar).
13.01. ELEMENTS OF CONDONATION. The following
elements are present: (1) acceptance by the obligor,
express or implied; (2) the consideration which is
pure liberality because it is essentially gratuitous; (3)
compliance with the required formalities.223

220Art. 1268, NCC.

221Art. 1269, ibid.
m l Florendo 409 citing 8 Manresa 365.
223Art. 1270, NCC.
522 REV IEW ER O N CIVIL LAW

13.02. FORMALITIES FOR CONDONATION.

a) Express remission must comply with the
formalities of donation;224
(1) If condonation is implied, condonation need
not comply with the formalities of donation
(2000 Bar);
b) Remission that takes effect upon the death of
the creditor may be stated in a last will and
testament or a donation mortis causa which must
also comply with the formalities of a last will
and testament;
c) Remission can also be implied, in which case, no
formalities are required.
13.03. KINDS OF CONDONATION OR REMISSION.
Remission may be: (1) express or implied; (2) partial
or total; (3) inter vivos (takes effect during the lifetime
of the creditor) or mortis causa (takes effect upon the
death of the creditor).
13.04. EFFECT ON ACCESSORY. The basic principle is
that the accessory follows the principal, hence, if the
principal is extinguished, the accessory obligation
is extinguished. However, a waiver of the accessory
does not result in the extinguishment of the obligation.
Examples: (1) Extinguishment of the obligation to pay
extinguishes the obligation to pay penalty; (2) Release
of the mortgage does not mean that the principal
obligation is extinguished.225
a) In a contract of pledge, a movable property
is delivered or placed in the possession of the
creditor or a third person as a security for an
obligation. It is necessary in order to constitute
pledge that the thing be placed in the possession
of the creditor or of a third person by common

224Art. 1270, NCC.

225Art. 1273, ibid.
 OBLIGATIONS AND CONTRACTS 523
Extinguishment of Obligations

agreement.226 Consequently, it is contrary to the

nature of pledge that tike thing pledged is in
the possession of the debtor or the owner. The
logical conclusion is that the pledge is already
extinguished if the thing pledged is already
with the debtor. Note that only the accessory
obligation of pledge is presumed extinguished
under Article 1274 and not the principal
obligation.

14. CONFUSION OR MERGER. Confusion or Merger of Rights

may be defined as the ground for extinguishment of the
obligation which takes place from the time the characters of
creditor and debtor are merged in the same person.227
14.01. ELEMENTS OF CONFUSION OR MERGER. (1)
That it must take place between the principal creditor
and principal debtor; and (2) That it must be complete
and definite.228

EXAMPLES:
(1) Mr. A is indebted to B. A is an heir of B. When B died, Mr. A
inherited all the properties and credits of Mr. B including his
liability. Hence, there is confusion or m erger of rights in the
person of Mr. A.
(2) Mr. A is indebted to Mr. B. Mr. C is the guarantor of Mr. A in the
latter's obligation to Mr. B. Mr. C is an heir of B. When B died, Mr.
C inherited all the properties and credits of Mr. B including his
liability. The obligation is not extinguished because Mr. C is not the
principal debtor. Confusion or merger of rights in the person of die
guarantor does not extinguish the obligation.

15. COMPENSATION. Compensation is a mode of extinguishing

to the concurrent amount the obligations of persons who in
their own right and as principals are reciprocally debtors and
creditors of each other229 (1998 Bar).

226Art. 2093, ibid.

227Art. 1275, NCC.
2282 Castan 60; 1 Floiendo 418-419.
^ P N B MADECOR v. Uy, 363 SC R A 128 (2001).
524 REVIEWER ON CIVIL LAW

15.01. KINDS OF COMPENSATION.

a) As to its origin, compensation may be: (1)
legal, (2) conventional, and (3) judicial (set­
o ff or counterclaim). Legal compensation takes
place by operation of law while conventional
compensation takes place when the parties
agree to compensate their mutual obligations
even in the absence of some requisites.230
(1) As the term implies, judicial compensation
or set-off takes place by order of the court.
Unlike compensation, set-off must be
pleaded and proved231 (1977 Bar).
b) As to its extent compensation may be (1) total,
or (2) partial.
15.02. ELEMENTS OF LEGAL COMPENSATION. The
elements under Article 1279 are as follows (1955 Bar):
(1) That each one of the obligors be bound
principally, and that he be at the same time
a principal creditor of the other (1981 Bar)-,
(2) That both debts consist in a sum of money,
or if the things due are consumable, they
be of the same kind, and also of the same
quality if the latter has been stated;
(3) That the two debts be due (2008 and 2012
Bar); '
(4) That they be liquidated and demandable
(2002 Bar); and
(5) That over neither of them there be any
retention or controversy, commenced by
third persons and communicated in due
time to the debtor.

230PNB MADECOR v. Uy, supra.

231Art. 1283, NCC.
 OBLIGATIONS AND CONTRACTS 525
Extinguishment of Obligations

a) Automatic. The effect of compensation (when

all the requisites are present) is automatic and
no further act is necessary. Consequently, both
obligations are extinguished when the requisites
concur. Nevertheless, the parties may waive
the benefit of compensation and consider the
obligations as still effective.
(1) If not all the requisites are present, the
parties can resort to facultative or volun­
tary compensation (2008 Bar).
b) Principal debtors and creditors of each other.
The requirement is that the two persons must
be principal debtors. Thus, there can be no
compensation if one is a guarantor or a surety
while the other is the principal debtor. Example:
Mr. A is indebted to Mr. B in the amount of
P I,000. Mr. C is also indebted to Mr. A in the
amount of P I,000. Mr. B signed as a guarantor
of Mr. C in the latter's obligation to Mr. A. There
can be no compensation because Mr. B is not the
principal debtor in one obligation.
(1) The situation contemplated by Article
1280. For example, Mr. A borrowed P I,000
from Mr. B. Mr. B is also obligated to pay
Mr. A P i,000. Mr. X is the guarantor of Mr.
B. In this case, if Mr. X will be made to pay
as guarantor by Mr. A, he can claim that
the obligation he guaranteed which is that
of Mr. B was already compensated by the
obligation of Mr. A to Mr. B.
(2) Claim of Third Person. The last
requirement is not deemed complied with
in the following cases: (1) One obligation is
being claimed by a third person who filed
a case stating that he is the real creditor; or
(2) A third person attached or garnished
one obligation.
526 REVIEWER ON CIVIL LAW

c) Money or Consumable. The law provides that

compensation can take place if the obligation is
to pay money or any consumable. However, the
term consumable should be understood to mean
"fungible." In other words, even if the thing is
not consumable, there can be compensation so
long as the thing can be replaced with the same
unit of the same kind.
d) Debts are due, liquidated and demandable.
The debts must already be both due and
demandable. In other words they must be such
that payment must already be made when
demanded. Thus, if one is due on November
10.2013 and the other payable on June 10,2013,
there can be no compensation on June 10, 2013
because the other obligation is not yet due. On
the other hand, if one obligation is due on June
1.2013 and the other due on June 10,2013, there
can be compensation on June 10,2013.
(1) A valid obligation may be compensated
with a resdssible or voidable obligation.232
These obligations, although defective,
are treated as valid. Thus, resdssible or
voidable obligations may compensate
another. However, this is always; subject to
any subsequent case to rescind or annul the
obligation. If the obligation is rescinded or
annulled, the effect will retroact and will
therefore also annul the resdssion.
(2) Compensation CANNOT take effect in the
following instances:
(i) When one of the debts arises from a
deposit or from the obligations of a
depositary;
(ii) When one of the debts arises from the
obligations of a bailee in commodatum;

“ Art. 1284, NCC.

 OBLIGATIONS AND CONTRACTS 527
Extinguishment of Obligations

(iii) When one involves a claim for sup­

port by gratuitous title;
(iv) When one of the debts arises because
of civil liability arising from criminal
liability.
e) Liquidated. The amount subject to compen­
sation should already be liquidated. Thus,
if the obligation is to pay the value of the
damage inflicted on a car, the same cannot be
compensated with another obligation because it
is not yet liquidated or the amount thereof is not
yet fixed.
f) Distinguished from Payment. (1) Payment is
a voluntary act while legal compensation takes
effect by operation of law; (2) Compensation
requires that the parties are creditors and
debtors of each other while this is not required
in payment (1977 and 1998 Bar).
g) Distinguished from Confusion. (1) Two parties
are involved in compensation while there is
only one person in confusion; (2) There is only
one obligation in confusion while compensation
requires two; (3) The obligation need not be
due in confusion while the same is required in
compensation (2977 Bar).
15.03. ASSIGNMENT AFTER COMPENSATION (Art.
1285). The assignment is not effective because the
obligation is automatically extinguished by legal
compensation when all the requisites concur. There is
nothing more to assign.
a) EXCEPTIONS: If the debtor CONSENTS. In
the previous example, the transfer to Mr. C is
effective if Mr. A consents. Therefore, the liability
of Mr. A remains effective and Mr. C can collect
from him.
b) Note, however, that even if the debtor consents,
the liability is still extinguished if the debtor
528 REVIEWER ON CIVIL LAW

consents with reservation with respect to

compensation.

EXAMPLES:
(1) Mr. A borrowed P100,000 from Mr. B payable on June 10, 2013.
Mr. B is also obligated to pay Mr. A P100,000 on June 2, 2013. On
June 15,2013, Mr. B transferred his right to collect P100,000 (from
Mr. A) to Mr. C. This assignment to Mr. C is not effective if all
the requirements for compensation are present on June 10, 2005
because on said date, the obligation to Mr. B is extinguished. Mr. C
cannot collect from Mr. A.

(2) Mr. A borrowed P100,000 from Mr. B payable on June 10,2013. Mr.
B is also obligated to pay Mr. A P50,000 on June 2, 2013. On June
15,2013, Mr. B transferred his right to collect P100,000 (from Mr. A)
to Mr. C with the consent of Mr. A but Mr. A expressly stated that
his consent is subject to any compensation that may have taken
place. This assignment to Mr. C is not effective up to P50,000 if
all the requirements for compensation are present on June 10,2013
because the right to compensation is reserved. On June 10,2013, the
obligation of A to Mr. B was partly extinguished. In other words,
Mr. C cannot collect from Mr. A the whole P100,000 but only up to
P50,000.

15.04. ASSIGNMENT BEFORE COMPENSATION OF

SOME OBLIGATION (Art. 1285). The transfer may
be made before all the requisites for compensation
concurs.
a) If notice is given at the tim e of the transfer of
the credit— compensation of all debts due prior
to die transfer is effective but ineffective as to
debts due after the transfer.

EXAMPLE:
There is a loan payable on June 10, 2013 by Mr. A to Mr. B in the
amount P100,000.
Mr. B is also obligated to pay Mr. A P100,000 on June 2,2013.

In another obligation, Mr. A is also obligated to pay Mr. B P50,000

on June 20 2013.

On June 15, 2013, Mr. B transferred his right to collect both of

the payables of Mr. A to Mr. C with notice to Mr. A but without Mr. A's
consent. In this example, the Mr. A can refuse to pay his total obligation
 OBLIGATIONS AND CONTRACTS 529
Extinguishment of Obligations

of P150,000. There was compensation on June 10,2013 when the first two
obligations became due (P100,000 to A on Jun,e 2, 2013 and P100,000 to B
on Jime 10,2013). Hence, Mr. C can collect only P50,000 from Mr. A.

b) If the assignment was made without notice to

or knowledge of the debtor — he riiay set up
the compensation of all credits prior to obtaining
knowledge of the assignment; compensation for
all debts due prior to the notice is effective but
not for debts due after the notice.

EXAMPLE AND PROBLEM:

1. Obligations of Mr, A to Mr. B: total of P200,000 consisting of a
loan payable on June 10, 2013 in the amount P100,000; in another
obligation, P50,000 payable to B on June 20 2013; and another
obligation to Mr. B in the amount of P50,000 payable on July 1,
2013.
Obligation of Mr. B to Mr. A — Mr. B is also obligated to pay
Mr. A P150,000 on June 2,2013.
On June 15, 2013, Mr. B transferred his right to collect all of
the payables of Mr. A to Mr. C without notice to or knowledge of
Mr. A. Mr. A learned about the assignment on June 25, 2013. In
this example, the Mr. A can refuse to pay his total obligation of
P200,000. There w as compensation on June 10,2013 when the first
two obligations becam e due (P100,000 to A on June 2, 2013 and
P100,000 to B on June 10,2013). Compensation also took place up
to the amount of P50,000 on June 20, 2013 because Mr. A has not
yet learned about the assignment to Mr. C on such date. Hence,
' Mr. C can collect only P50,000 from Mr. A.
2. Sarah had a deposit in a savings account with Filipino Universal
Bank in the amount of five million pesos (P5,000,000). To buy a
new car, she obtained a loan from the same bank in the amount
of P I,200,000, payable in 12 monthly instalments. Sarah issued
in favor of the bank post-dated checks, each in the amount of
P100,00Q, to cover the twelve monthly instalm ent payments.
On the third, fourth and fifth months, the corresponding checks
bounced.
The bank then declared the whole obligation due, and
proceeded to deduct the amount of one million pesos (PI,000,000)
from Sarah's deposit after notice to her that this is a form of
compensation allowed by law. Is the bank correct? Explain (2009
Bar Exams). : r
530 REV IEW ER ON CIVIL LAW

A: No, the bank is not correct with respect to the amount of

compensation. The bank is correct, however, that compensation
applies. The deposit made by Sarah is governed by the contract
of loan and the bank is considered a debtor with respect to such
deposit. Sarah is also a debtor of the bank because of the loan
extended by said bank to Sarah. However, not all the amounts
are due and demandable with respect to the loan to Sarah. In the
absence of an acceleration clause, only the unpaid third, fourth
and fifth monthly installments amounting to P300,000 are due and
demandable. Hence, compensation is only up to P300,000 and such
amount is the only amount that can be deducted from Sarah's bank
deposit.

16. NOVATION. Novation is the extinguishment of an obligation

by a subsequent one which terminates it, either by changing
its object or principal conditions, by substituting a new debtor
in place of an old one, or by subrogating a third person to the
rights of the creditor.233 Novation has dual functions: (1) to
extinguish an existing obligation, and (2) to substitute a new
one in its place.234
16.01. Requisites. For novation to take place, the following
requisites must concur: (a) there must be a previous
valid obligation; (b) there must be an agreement of
the parties concerned to a new contract; (c) there
must be extinguishment of the old contract; and (d)
there must be a valid new contract235 (1994, 2005, and
2008 Bar).
a) Animus N ovandi. Novation is never presumed,
and the animus novandi, whether totally or
partially, must appear by express agreement of
the parties, or by their acts that are too clear and
unmistakable.236

233Heirs of Servando Franco v. Gonzales, 675 SCRA 96 (2012); Reyes v. Court of

Appeals, 383 SCRA 471 (2002).
234Quinto v. People, 305 SCRA 708 (1999).
23SHeirs of Servando Franco v. Gonzales, 675 SCRA 96 (2012); Philippine National
Bank v. Soriano, 682 SCRA 243 (2012); Philippine Realty and Holdings Corporation v. Ley
Construction and Development Corp., 651 SCRA 719 (2011); Reyes v. Court of Appeals,
383 SCRA 471 (2002); Bautista v. Pilar Development Corporation, 312 SCRA 611 (2000).
^Philippine National Bank v. Soriano, ibid.
 OBLIGATIONS AND CONTRACTS 531
Extinguishment of Obligations

16.02. KINDS.

KINDS NATURE
1. As to effect:
a) Total — The entire obligation is
extinguished.
b) Partial — Only a portion is
extinguished.
2. As to the form of
constitution:
a) Express — The parties expressly state
that the old obligation is
novated or extinguished.
b) Implied — When the two obligations
are incompatible.
3. As to its nature:
a) Subjective or personal — When the debtor or
creditors are changed.
b) Objective or real — When there is a change
in the cause, object or
principal conditions.
c) Mixed — both personal and real.
4. As to extent:
a) Extinctive — The old obligation is
extinguished.
b) Modificatory — The old obligation is only
modified.

16.03. HOW TO DETERMINE IF THERE IS

EXTINGUISHMENT. There are two ways to
determine if the new obligation extinguishes the
old obligation: (1) Explicit declaration -— if it is
unequivocally stated in the new agreement that
the old obligation is extinguished; and (2) Material
incompatibility — if the old and new obligations are
 532 REVIEWER ON CIVIL LAW

incompatible with each other on every point.237 In

the absence of an express agreement, novation takes
place only when the old and new obligations are
incompatible on every point.238
a) When not expressed, incompatibility is
required so as to ensure that the parties
intended such novation despite their failure
to express it in categorical term s.239 The test of
incompatibility is whether the two obligations
can stand together, each one having its
independent existence, and if they cannot,
they are incompatible and the latter obligation
novates the first.240
b) Test that should be applied in case of material
incompatibility:241 Can the old obligation stand
despite the new obligation? If the old obligation
cannot be maintained then there is extinctive
novation (1982 Bar).
c) An obligation to pay is not novated in a new
instrument wherein the old is ratified, by
changing only the terms of payment and adding
other obligations not incompatible with the
old one, or wherein the old contract is merely
supplemented by the new one.242
d) No novation of a contract had occurred when the
new agreement entered into between the parties
was intended to give life to the old one. Where
the parties to the new obligation expressly
recognize the continuing existence and validity
of the old one, where, in other words, the par-

237A it. 1292, NCC; Molino v. Security Diners International Corporation, 363 SCRA
358 (2001); See also R Q Bus Lines, Inc. v. Master Tours and Travel Corporation, 682 SCRA
143 (2012).
S e c u r i t y Bank and Trust Company v. Cuenca, 341 SCRA 781 (2000).
^ T igutan v. Court of Appeals, 376 SCRA 560 (2002).
240Molino v. Security Diners International Corporation, supra.
24iIV Tolentino.
242Velasquez v. Court of Appeals, 309 SCRA 539 (1999).
 OBLIGATIONS AND CONTRACTS 533
Extinguishment of Obligations

ties expressly negated the lapsing of the old

obligation, there can be no novation.243
e) No Extinctive Novation. There is also no
novation if unimportant modifications are made
on the obligation.244Thus, there is NO extinctive
novation in the following cases:
(1) Where the parties agreed to impose
payment of interest;
(2) Where the parties agreed that the debtor
will give additional security like a mort­
gage, pledge or a surety bond (1978 Bar);
(3) Where the parties agreed to an extension of
the period (1979 Bar);
(4) Where the parties reduced a verbal
agreement into writing;
(5) Where the parties changed the5place where
payment is supposed to be made.
f) Cases when there is extinctive novation.
(1) Where the obligation is originally pure
and the new obligation is subject to a
suspensive or resolutory condition;
(2) Where the amount to be paid is increased
in the new obligation;
(3) Where the parties agreed to reduce the
period; or
(4) W here a different object is to be delivered^

16.04. TYPES OF SUBJECTIVE NOVATION. Subjective

novation can either be:
a) Change of debtor which can be: (1) Expromission,
or (2) Delagacion;
b) Change of creditor which can be: (1)
Conventional, or (2) Legal.

243Idolor V . Court of Appeals, 351SCRA399 (2001).

m Thid.
534 REVIEWER ON CIVIL LAW

16.04.01. Exprom ission — the initiative for change does not

come from — and may even be made without the
knowledge of — the debtor since it consists of a third
person's assumption of obligation.245
16.04.02. D elegation — the debtor offers, and the creditor
accepts, a third person who consents to the substi­
tution and assumes the obligation. The consent of
these three persons are necessary246 (2001 Bar). Note:
Mere consent to allow payment by third person is not
delegation (1977 and 2014 Bar).
16.04.03. Distinctions between Exprom ission and D elegation.

EXPROMISSION DELEGACION
The initiative does not come The initiative comes from the
from the debtor. debtor.
Consent of the debtor is Consent of the debtor, the
not present and not even creditor, and the third person
necessary, are present.
The debtor is released. The debtor is released.
Insolvency of the new debtor Insolvency of the new debtor
before or after the novation revives the obligation of the
does not revive the obligation debtor if: (a) Insolvency is
of the debtor (2011 Bar). anterior — existing at the
time of novation; and (b) of
public knowledge or known
to the debtor.

16.05. VALID OBLIGATIONS. It is indispensable in

novation that the old and the new obligations are
valid. The consequences of these requisites are
• •reflected in the following rules:
a) There can be no novation if the new obligation is
void. Hence, the old obligation subsists except

245Garcia v. llam as, G.R. No. 154127, December 8,2003.

246IWd.
 OBLIGATIONS AND CONTRACTS 535
Extinguishment of Obligations

if the parties intended to extinguish it in any

event.247
b) There can be no novation if the old obligation is
void.248
c) If the old obligation is subject to a suspensive
or resolutory condition, the new obligation
shall also be subject to the same condition.
Exception: If there is an agreement to the
contrary.249

EXAMPLES:
1. Mr. X is obligated to deliver to Mr. Y a motorcycle that is made in
Japan. The parties agreed to change the object by converting the
obligation into one for the delivery of specified drugs. However,
the parties were not aware that the Bureau of Drugs already
banned the sale of said drugs. In this case, the obligation to deliver
a motorcycle subsists.
2. Mr. X is Obligated to deliver to Mr. Y a sack of rice. The obligation
was the result of the fraud committed by Mr. Y. Later, Mr. Y and Mr.
X agreed to change their agreement by making Mr. X deliver three
Sacks of rice. In this case, the old obligation is deemed ratified and
therefore there is still novation.
3. Mr. X is obligated to deliver P50,000 to Mr. Y subject to the condition
that Mr. Y will graduate from college in April, 2014. Later, they
entered into an agreement w ittiM r. Z whereby Mr. Z will take the
place of Mr. X as debtor. The new agreement with Mr. Z as debtor
is still subject to the same condition.

16.06. SUBROGATION. — It is the transfer of all the rights

of the creditor to a third person. Thus, this involves
novation by changing the creditor. It is the substitution
of one person by another with reference to a lawful
claim or right, so that he who is substituted succeeds
to the rights of the other in relation to a debt or claim,
including its remedies or securities.250

247Art. 1297, NCC.

24KArt. 1298, ibid.
249Art. 1299, ibid.
^“Malayan Insurance Co., Inc. v. Alberto, 664 SCRA 791 (2012).
536 REVIEWER ON CIVIL LAW

16.06.01. Effects of Subrogation. The third person acquires:

(1) the right that the creditor may have against the
debtor (right to demand payment), and (2) the right
to proceed against third persons or any security like
the right to foreclose any mortgage.
16.06.02. Kinds.
a) Conventional.— The change of creditor and the
transfer of right to a third person is by agreement
of the parties (creditor and debtor) and the third
person.
b) Legal. — The change of creditor and the transfer
of rights to a third person is by operation of law.
Example: There is automatic subrogation if the
insurer, in property insurance, paid the insured.
The insurer is subrogated to all the rights of the
insured.
16.06.03. Generally Not Presumed: Exceptions.
GENERAL RULE: legal subrogation is not presumed.
However, legal subrogation is presumed in the
situation contemplated in Article 1302, to wit:
a) When a creditor pays another creditor who is
preferred, even without the debtor's knowledge;
b) When a third person, not interested in the
obligation, pays with the express or tadt
approval of the debtor;
c) When, even without the knowledge of the
debtor, a person interested in the fulfillment of
the obligation pays, without prejudice to the
effects of confusion as to the latter's share.

EXAMPLES AND PROBLEMS:

1. Mr. A is indebted to Mr. X in the amount of P10,000. This obligation

is unsecured. Mr. A is also indebted to Mr. Y in the amount of
P5,000. The obligation to Mr. Y is secured by a chattel mortgage.
If Mr; X will pay Mr. Y in behalf of Mr. A, the presumption is that
there is legal subrogation because Mr. X a creditor paid another
preferred creditor Mr. Y. The debt to Mr. Y is preferred because the
same is secured by a mortgage.
 OBLIGATIONS AND CONTRACTS 537
Extinguishment of Obligations

2. Mr. A is indebted to Mr. X in die amount of P10,000. Mr. Y paid Mr.

X with the consent of Mr. A. Legal subrogation is presumed in this
case.
3. Mr. A is indebted to Mr. X in. the amount of P10,000. The obligation
of Mr. A is secured by a surety Mr. Z. Later, Mr. Z paid Mr. X. Legal
subrogation is presumed in this case because the obligation was
paid by Mr. Z, a person who is interested in the performance of the
obligation as surety.
4. Mr. X is indebted to Mr. Y (in the amount of P10,000. The parties
agreed that P5,000 will be paid to Mr. Z as die new creditor up to
such amount only. Mr. X only has P5,000. Thus, payment should be
given to Mr. Y, the original creditor because Art. 1304 provides that
he is given preference.
5. Eduardo was granted a loan by XYZ Bank for the purpose of
improving a building which XYZ leased from him. Eduardo,
executed the promissory note ,("PN ") in favor of the bank, with his
friend Recardo as co-signatory. In the PN, they both acknowledged
that they are "individually and collectively" liable and waived the
need for prior demand. To secure the PN, Recardo executed a real
estate mortgage on his own property. When Eduardo defaulted on
the PN, XYZ stopped payment of rentals on the building on the
ground that legal compensation had set in. Since there was still a
balance due on the PN after applying the rentals, XYZ foreclosed
the real estate m ortgage over Recardo's property. Recardo opposed
the foreclosure on the ground that he is only a co-signatory; that
no demand was made upon him for payment, and assuming he is
liable, his liability should not go beyond half die balance of the loan.
Further, Recardo said that when die bank invoked compensation
between the rentals and the amount of the loan, it amounted to a
new contract or novation, and had the effect of extinguishing the
security since he did not give his consent (as owner of the property
under the real estate mortgage) thereto. Does Recardo have basis
under the New Civil Code for claiming that die original contract
was novated? (2008 Bar)
A: No. Recardo has no basis under die New Civil Code for claiming
that the original contract w as novated. There is neither subjective
nor objective novation. There is no change in the object or
principal conditions of the obligation. There is also no substitution
of debtors.
If at all, there can be facultative compensation in the case.
However, the facultative compensation will not affect die solidary
liability of Recardo. H e can be made to pay the entire obligation;
payment by Recardo will not be considered payment by a third
person and there will therefore be no partial legal subrogation.
538 REV IEW ER ON CIVIL LAW

6. A, B, C, D and E made themselves solidarity indebted to X for the

amount of P50,000. When X demanded payment from A, the latter
refused on the following grounds: a) B is only 16 years old; b) C has
already been condoned by X; c) D is insolvent; and d) E was given
by X an extension of six months without the consent of the other
four co-debtors. State the effects of each of the above defenses put
up by A on his obligation to pay X, if such defenses are found to be
true. With respect to E, discuss if the extension is in the nature of
extinctive novation. (2003 BarJ251
A: a) A may use the defense of minority of B with respect to the
share of B in the obligation which is presumed to be P10,000.
A solidary debtor may invoke any defense that is personal
to the other solidary creditors up to the extent of the share of
the solidary debtor involved.
b) A may also avail of the effects of condonation with respect
to the share of C, P10,000. Under Art. 1222 of the New Civil
Code, a solidary debtor may invoke defenses that pertain to
the share of other solidary debtors.
c) Insolvency of D cannot be invoked as a defense. There
is mutual guarantee among solidary creditors. Hence, A
guarantees the solvency of D.
d) A may avail of the extension given in favor of E. Extension of
time for paym ent is in the nature of a partial defense that will
benefit the other solidary debtors.
However, there is no novation in the given case. Mere
extension of the period for payment cannot result in extinctive
novation. There is no material incompatibility.
: I

D. CONTRACTS

17. DEFINITION OF CONTRACT. 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.252
a) Another definition of contract ascribed to
Sanchez Roman is as follows: It is a juridical
convention manifested in legal form, by virtue
of which two or more persons bind themselves
in favor of another or others or reciprocally, to

251See also Bar 1989,1992,1994,1998,2000,2001,2002.

252Art. 1305, NCC.
 OBLIGATIONS AND CONTRACTS 539
Contracts

the fulfillment of the prestation to give, to do or

not to do.253
17.01. STAGES. The Supreme Court observed that contracts
undergo three stages (1964 Barl:25*
(1) Negotiation — this covers the period from the
time the prospective contracting parties indicate
interest in the contract to the time the contract is
concluded or perfected.
(2) Perfection — this takes place upon the concur­
rence of the essential elements of the contract.
(3) Consummation — this begins when the parties
perform their respective undertakings under the
contract culminating in the extinguishment of
the same contract.
a) There is no liability for damages for acts or omission
during the negotiation stage (1964 Bar). However, while there
is no liability ex contractu, they may be liability for quasi-delict
or abuse of right depending on the circumstances.

17.02. KINDS OF CONTRACTS.

a) As to how it is perfected: (a) consensual, (b) formal,
and (c) real (See Arts. 1315 and 1316).
b) As to whether or not there is defect: (a) valid, (b)
voidable, (c) unenforceable, (d) rescissible, and
(e) void.
c) As to the degree o f independence or dependence: (a)
principal, (b) accessory, and (c) preparatory.
d) As to whether or not obligations are fulfilled: (a)
executory, and (b) executed.
e) As to whether or not a name is given by law: (a)
nominate, and (b) innominate.

^ Jard in e Davies v. Court of Appeals, 333 SCRA 684 (2000).

^Bugatti v. Court of Appeals, 343 SCRA 335 (2000); Ang v. Court of Appeals, 238
SCRA 602 (1994).
540 REVIEWER ON CIVIL LAW

f) As to the nature o f consideration: (a) gratuitous, (b)

onerous, and (c) remuneratory.
17.02.01. Definitions:
a) Principal — this contract may exist alone even
without the presence of any other contract.
Example: Contract of Sale.
b) Accessory — this contract cannot exist without
the presence or existence of another contract.
Example: Mortgage which cannot exist alone.
There must be another contract like a loan to be
secured by the mortgage.
c) Preparatory — this contract is entered into so
that other ; contracts can be entered into or
in anticipation of another contract. Example:
Agency to sell. This is in anticipation of the
contract of sale that may be entered into.
d) Executed — the obligations are fulfilled upon
entering into the contract.
e) Executory — the obligations will be performed
after the-contract is entered into.
f) Nominate a name is given under the law.
Example: Loan, Sale, Agency.
g) Innominate — rto name is given by law.
17.02.02. Innominate Contracts (Art. 1307). The different kinds
of Innominate Contracts are as follows (1977 Bar):
(1) Do ut des (I give so that you may give). Example:
Goods wrill be given in exchange for goods.
(2) Do utfacias (I give so that you may do). Example:
Goods will be delivered in exchange for services
that will be performed by the other party.
(3) Facio ut facias (I will do so that you may do).
Example: Services will be performed in exchange
for the performance of another service by the
other.4
(4) Facio ut des (I will do so that you may give).
 OBLIGATIONS AND CONTRACTS 541
Contracts

Example: Services will be performed so that the

other may give certain goods.
a) Rules that Apply to Innominate Contracts255
(2012 Bar).
(1) First: The agreement or stipulation between
the parties.
(2) Second: The provisions of the New Civil
Code on Obligations and Contracts.
(3) Third: Provisions on nominate contracts
that may be applied by analogy.
(4) Fourth: Customs of the place.
17.03. BASIC CHARACTERISTICS OF CONTRACTS. (1)
Autonomy,256 (2) Mutuality,257 (3) Relativity,258 and (4)
Obligatoriness.259
17.03.01. Obligatoriness: The contract is (1) the law between the
parties, and (2) must be complied with in good faith
(2013 Bar). The contract itself governs the relationship
of the parties and they are required to perform the
acts required in the contract and to follow the terms
and conditions stated therein. The following rules
logically flow from such rule:
(1) One party cannot unilaterally change the
provisions of the contract without the consent of
the other.
(2) The parties cannot refuse to comply with the
obligations stated in the contract.
(3) Any party can file a case in court if the other
party will fail to perform his obligation.
(4 ) The court Where the case was filed by a party
to the contract cannot change the provisions of
the contract. It can interpret the contract but it

255Art. 1307, NCC.

256Art. 1306, ibid.
257Art. 1308, ibid.
258Art. 1311, ibid.
259A i t 1308, ibid.
 REVIEWER ON CIVII.LAW

cannot replace what was agreed upon by the

parties.
17.03.02. Autonomy of Contracts (Art. 1306). The contracting
parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good
customs, public order, or public policy (2012 Bar).
a) Even the courts cannot make a contract for the
parties..Neither abstract justice nor rule of liberal
construction justifies the creation of contract for
the parties which they did not make themselves
or the imposition upon one party to a contract of
an obligation not assumed.260
b) Limitations. The parties must not agree on
stipulations that are Contrary to:
(1) Law,
(2) Morals, '
(3) Good Customs,
(4) Public Order, or
(5) Public Policy
c) The contract should not be contrary to
law. However, the law referred to here are
mandatory and prohibitory laws. Autonomy
does not mean that the law will be disregarded.
The provisions of positive law which regulate
contracts are deemed written therein and shall
limit and govern the relationship between the
parties.261 The Constitution is the paramount,
fundamental and supreme law and is therefore
written in every statute and contract.262
d) Morals and Good Customs. — This refers to
standards of right and wrong and decency

260Riviera Filipina, Inc. v. Court of Appeals, 380 SCRA245 (2002).

“'Heirs of Severina San Miguel v. Court of Appeals, 364 SCRA523 (2001).
262Manila Prince Hotel v. GSIS, 267 SCRA408 (1997).
 OBLIGATIONS AND CONTRACTS 543
Contracts

acknowledged by the society.263According to the

Code Commission, morals and good customs
overlap each other but sometimes they do not.264
e) Public Order. — What is being considered is
the public weal, peace, safety and health of the
community.265
f) Public Policy. — A contract is against public
policy if it has tendency to injure the public, is
against public good, or contravenes some estab­
lished interests of society, or is inconsistent with
sound policy and good morals or tends clearly
to undermine the security of individual rights.266
Examples: (1) Contracts that exempt those guilty
of malice from liability, (2) An agreement not to
report the commission of crimes.

PROBLEM:
A, a consistent scholar and honor student for three years in M
University and he enjoyed free tuition privileges. In his fourth year,
he decided to study in a university in Davao as his father died and he
had to stay with Ids mother. He needed the transcripts of his records
in M University, but M University refused to issue them until he had
refunded the whole amount of tuition fees given to him for 3 years of
his stay, alleging that he signed the agreement beforehand and waiving
his right to transfer to another university without having refunded the
cash equivalent of bis scholarship. A was forced to refund the amount
as he did not want to be late for his enrollment in the Davao university.
Later he sued for its return. Can A recover the amount he refunded to M
University? Reason for the answer (1978 Bar).
A: Yes, A can recover the amount from M University. The provision
. prohibiting transfer of the student if the cash equivalent of the
student's scholarship is not paid is void for being contrary to public
morals and public policy. Scholarships are meant as a recognition
of merit did not a business scheme of a school (Cui v. Arellano
University, 2 SCRA 205 [1961]).

263De los Reyes v. Alojado, 16 Phil. 499.

264Report of Code Commission.
26SIbid.
^Gabriel v. Monte de Piedad, 71 Phil. 500; Gonzale v. Tamate/Jr., G.R. No. 160600,
January 15,2014.
544 REVIEWER ON CIVIL LAW

17.03.03. M utuality and Obligatoriness of Contracts (Arts.

1308 to 1310). Consistent with obligatory nature and
the principle of mutuality of contracts: (1) Contracts
binds all parties; and (2) The validity and compliance
of contracts cannot be left to the will of one of the
parties (2012 Bar). Thus, one of the parties cannot
claim that the contract is binding on him and not
to the other. One party cannot change his mind and
withdraw from the contract without the consent of
the other.
a) Manresa believes that Article 1308 is based
firstly on the principle that obligations arising
from contracts have the force of law between
the parties and secondly, that there must be
mutuality between the parties based on their
essential equality. Because of their essential
equality, it is repugnant to have one party be
bound by the contract leaving the other party to
be free therefrom.267
b) Will of Party or Third Person. The basic rules
are as follows:
(1) If compliance of the contract is left to the
will of only of the debtor, the contract is
void.268 Example: An agreement that Mr. A
will deliver a sack of rice to Mr. B if Mr. A
wants to deliver is void.
(2) If compliance of the contract is left to the
will of third person, the contract is valid.
c) If the compliancy is left to the will of a third
party, it is necessary that: (1) the decision of
tire third party must be made known to both
parties;269and (2) the decision of the third person
must not be inequitable.270

267Garda v. Rita Legarda, Inc., 21 SCRA555 (1967).

268PNB v. Court of Appeals, 196 SCRA536 (1991).
^Art. 1309, NCC.
270Art. 1310, ibid.
 OBLIGATIONS AND CONTRACTS 545
Contracts

17.03.04. R elativity of Contracts. Relativity of contracts

means that contracts take effect only between (1)
the parties, (2) assigns (the persons to whom the
contract or rights and obligations are transferred),
and (3) heirs (persons who will inherit in case of
death of the parties) (2011 and 2012 Bar). Contracts
will not generally take effect as to third persons
who are not members of any of the three groups.
a) The contract will not take effect between
the assigns and heirs if the contract is not
transmissible because of: (1) nature of the
contract, (2) stipulation, or (3) by provision
of law. This includes cases when the acts
stipulated to be performed require the exercise
of special knowledge, genius, skill, taste, ability,
experience, judgment, discretion, integrity, or
other personal qualifications and therefore the
obligation is personal in nature and is terminated
upon the death of the obligor.271 Example: The
contract whereby a famous painter will make a
painting cannot be transferred if the intention
is that only the famous painter will perform the
act to be done.
b) Exceptions to Relativity. It is a fundamental
axiom in the law of contracts that a person who
is not a party to the agreement should not be
affected thereby.272273Third persons will be affected
by the contract in the following cases:
(1) If there is a stipulation in favor of third
persons (pour au tru i)f3
(2) If there is a law that extends benefits under
the contract to third person.

271DKC Holdings Corporation v. Court of Appeals, 329 SCRA 666 (2000).

272Direct Funders Holding Corporation v. Lavina, 373 SCRA 645 (2002).
273Art. 1311, Second par., NCC.
546 REVIEW ER ON CIVIL LAW

(3) If the contract is intended to defraud the

cre d ito r274 (In this case rescission under
Arts. 1177 and 1381 are available to third
persons who are defrauded);
(4) If the third person files subrogatory action
or rescissory action;
(5) Where real rights are created in the contract
(Example: A real estate mortgage that is
registered with the Register of Deeds is
binding even on third person.)275(2012 Bar);
and
(6) Negotiorum gestio.
c) Stipulation in Favor of Third Persons: Re­
quisites. The second paragraph of Article 1311
restates the rule on contracts pour autrui —
stipulation in favor of third person (1991 and
2002 Bar). The following requisites must concur
before these rules can be made to apply and
before the stipulation can be considered binding
(1977 Bar):
(1) The contract contains a stipulation in favor
of a third person;
(2) The stipulation in favor of third person
must be only part and not the whole of the
contract;
(3) The contracting parties clearly and
deliberately conferred a favor upon a third
person and not merely incidental benefit or
interest;
(4) The favorable stipulation must not be
compensated by any obligation;
: (5) The third person must communicate
his acceptance to the obligor before its
revocation (1991 Bar);

274Art. 1313, ibid.

275Art. 1312, NCC.
 547
OBLIGATIONS AND CONTRACTS
Contracts

(6) The contracting parties are not legal repre­

sentatives or duly authorized by the third
person to enter into the contract that gives
the latter benefit276 (1977 and 1991 Bar).

EXAMPLES:
1) Mr. X, the owner of a passenger jeepney entered into a contract
with Y Insurance Corporation whereby the insurer agreed to pay
all damages that may result to the vehicle of Mr. X in any accident.
The insurance contract also provides that the insurer •will pay any
damage resulting to any passenger in an accident involving the
vehicle of Mr. X.277
2) XYC Credit Card Corporation entered into an agreement with X
Department Store whereby the store agreed to honor the credit card
of XYC that may be presented by a customer in case the customer
wants to purchase goods on credit.278279

17.04. INTERFERENCE WITH CONTRACTS. Article 1314

embodies a tort called interference with contracts
under which a party to the contract may sue a third
person for damages if the said third person causes the
other party to violate the provisions of the contract.
17.04.01. Requisites. The requisites of the liability for the tort
of interference with contracts are as follows (1980,
1991, and 2012 Bar):™
(1) The existence of a valid contract;
(2) The third person must be aware of the
existence of the contract; and
(3) The interference of the third person must
be without legal justification or excuse.
a) Example: Mr. A owns a bar and restaurant and he
hired Mr. X as a singer for a period of one year.

276IV Tolentino 432; Mamaril v. The Boy Scouts of the Philippines, 688 SCRA 437
(2013); Florentino v. Encamacion, 79 SC R A 192.
277Coquia v. Fieldman's Insurance Co., Inc., 26 SCRA 178 (1968).
278Mandarin Villa, Inc. v. Court of Appeals, 257 SCRA 538 (1996).
279So Ping Bun v. Court of Appeals, G.R. No. 120554, September 21,1999; Aquino,
Torts and Damages, 2001 Ed., p. 773.
548 REVIEWER ON CIVIL LAW

When Mr.'B, die owner of another bar, learned

that Mr. X is very good, he induced Mr. X to
'term inate the contract without any reason and
to enter a contract with him (Mr. B.) (1980 Bar).
17.05. PERFECTION OF CONTRACTS (Arts. 1315 and
1316). Perfection signifies die birth of a contract, that
is, when all essential elements of a contract concur. As
to how contracts are perfected, they may be classified
into: (1) consensual contracts, (2) real contracts, or (3)
formal contracts.280
(1) Consensual contracts — perfected by mere
consent or upon the meeting of minds
upon the object and consideration of the
contract. Example: Contract of Sale.
(2) Real contracts — perfected only upon
delivery. Example: Loan, deposit, pledge or
commodatum (1998 Bar).
(3) Formal (or solemn) contracts — perfected
only upon execution or preparation of
certain documents or other formalities.
Examples: (1) Donation of real property
which must be in a public instrument,
(2) Agency to sell real property which
m u st be in writing. Note: Contract for the
construction of a building is not a solemn
contract (2012 Bar).
a) The parties to the contract may personally enter
into the contract or may ask somebody else to
represent them. In addition, the court may also,
in certain cases, appoint a person who may
represent a party to the contract as in the case
of appointment of guardians.281 The contract
is unenforceable if a person enters a contract

280Senator Tolentino believes that formal contracts are no longer recognized as

distinct from consensual contracts (IV Tolentino 441). However, there are contracts that
still require formalities for their validity.
281Art. 1317, NCC.
 OBLIGATIONS AND CONTRACTS 549
Contracts

without authority of the supposed principal.

principal ratified it. Examples: (1) Mr. X sold the

watch of Mr. B to Mr. Y without die authority
of Mr. Y. Later, Mr. Y signed a special power of
attorney authoring Mr. X to sell his watch; (2) In
the first example, there is implied ratification if,
after learning about the unauthorized sale, Mr.
Y accepted from Mr. X, the proceeds of the sale
paid by Mr. B.

18. ESSENTIAL REQUISITES OF CONTRACTS. There is no

contract unless the following requisites concur (1950,1964, and
2011 Bar):™
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter
of the contract;
(3) Cause of the obligation which is estab­
lished.
a) Additional Elements..For Real contracts, delivery
is also an essential element. On the other hand,
formal contracts additionally require certain
formalities to be valid and binding.
b) There are at least two parties to a contract
because there can be no meeting of minds if only
one person is involved. However, two parties
may be represented by one person as in the case
where they are represented by one agent.
18.01. KINDS OF REQUISITES. There are three kinds of
requisites: (1) essential elements, (2) natural elements,
and (3) accidental elements.
a) Essential elements are those enumerated under
Article 1318. There is no contract unless the
essential elements concur.

282Art. 1318, NCC.

550 REVIEWER ON CIVIL LAW

b) Natural elements are those that accompany the

contract based on their nature. Natural elements
are presumed by law to exist. Example: Implied
warranty in a contract of sale.
c) Accidental elements are those that exist only
because of the agreement of the parties.
18.02. CONSENT. Consent is manifested by the meeting of
the offer and the acceptance upon die thing and the
cause which are to constitute the contract.283
a) Castan — It is the meeting of two declarations
of will, which coming from two diverse
subjects are directed to a common end and are
united.284
b) Sanchez Roman — The agreement of the will
of a contracting party with that of another or
others, with respect to the same subject and
terms of the contract.285
18.02.01. Elements of Consent. Castan enumerates the
following elements of consent:286
(1) Plurality of parties;
(2) Capacity of the parties;
(3) Will which must be intelligent or conscious,
spontaneous and free;
(4) Declaration or manifestation, which may be
either express or implied; and
(5) Agreement of the internal and the declared
will. v
18.02.02. Offer and Acceptance. Implicit from the foregoing
elements are two basic elements for the existence of
........ contracts, to wit: (1) offer, and (2) acceptance.

“ Art. 1319, supra.

2W2 Castan 105, citing Rugiero; 2 Florendo 562.
“ Sanchez Roman, p. 191.
“ 2 Castan 105-106; 2 Florendo 562.
 OBLIGATIONS AND CONTRACTS 551
Contracts

a) Offer. An offer is a manifestation of willingness

to enter into a bargain, so made as to justify
another person in understanding that his assent
to that bargain is invited and will conclude it287
(2005 Bar). The essential requisites of an offer
are:
(1) The offer must purport to create legal
liabilities that are legally enforceable;
(2) There must be a real intention to assume
liability;
(3) It must be intended of itself to create legal
relations on acceptance;
(4) It must be complete in terms; and
(5) It must be definite.
b) A cceptance. Acceptance means signification of
conform ity with all the term s of the offer (2005
Bar). The essential elements of acceptance
are:288
(1) The acceptance must be unqualified and
unconditional;
(2) It must be directed to the offeror;
(3) It must be made with the intention to
bound;
(4) It must be made within the proper time;
and
(5) The acceptance must be communicated to
and learned by the offeror.
c) Counter-Offer. There is no perfected contract if
the offeree will not accept but will just make a
counter-offer. If the acceptance is qualified, the
same is considered a counter-offer.

287Black's Law Dictionary, p. 976.

288IV Caguiao 496.
552 REVIEW ER ON CIVIL LAW

EXAMPLES:,,.
1. Mr. A communicated to Mr. B that he is offering to sell his horse to
the latter. However, Mr. A has not yet fixed the price. There is no
effective offer yet because the offer is incomplete.

2. Mr. A offered to sell his dog to Mr. B for P1,000. Mr. B accepted the
offer but informed Mr. A that he is only willing to pay P500. The
acceptance of B does not result in a contract because the acceptance
is qualified and therefore constitutes a mere counter-offer.

d) Advertisements and Invitations. Note that

advertisements for bidders are not offers but
mere invitations. Thus, Mr. A published a notice
in a newspaper whereby he sought offers for
the purchase of his car for the minimum price
of P200/000. The notice is not considered a real
offer under the Civil Code but a mere invitation
to make an offer. If Mr. B sends a letter to Mr. A
: stating that he agrees to buy the car for P200,000,
the contract is not perfected yet because Mr. B is
deemed to be making an offer only. Mr. A must
accept the offer.
18.02.03. C ognition T heory: When Acceptance is Effective.
The rule is that the acceptance takes effect from the
time the offeror learns about the acceptance. This is
known as the cognition theory.289
(1) If the acceptance is made by letter or telegram,
the same is binding on the offeror from the time
it (letter or telegram) came to his knowledge.
(2) If the offer is made through the agent, the
acceptance is effective when the principal or his
agent learns about the acceptance.
EXAMPLES:
1. Mr. A offered to sell his book to Mr. B for P500 on June 5, 2013
while they were having dinner in a restaurant. Mr. B verbally
informed Mr. A on the same date and time that he agrees to buy

289The opposite of this theory is the manifestation theory which .makes the
acceptance effective when the same is manifested. The Manifestation theory is the one
that is the general rule under the Code of Commerce.
 OBLIGATIONS AND CONTRACTS 553
Contracts

the book. The acceptance is effective and the contract is perfected

because there is meeting of minds with respect to the object and
consideration.
2. Mr. A offered to sell his book to Mr. 13 for P500 on June 5,2013. On
June 6,2013, Mr. B sent a letter to Mr. A by mail accepting the offer.
The letter w as delivered to the house of Mr. A on June 9,2013. Mr. A
read the letter on June 10,2013. The contract was perfected on June
10, 2013 because it was on said date that Mr. A learned about the
acceptance.
3. Mr. A wants to sell his book but he has no time to do so. Thus, he
hired Mr. C to sell his book. Mr. C offered to sell Mr. A's book to
Mr. B for P500 On June 5,2013. Mr. B accepted the offer by sending
a letter to Mr. C on June 6,2013. Mr- C received and read die letter
on June 10, 2013. Mr. C informed Mr. A about the acceptance on
June 11, 2013. The acceptance became effective and the contract
w as perfected on June 10,2013 when the agent learned about die
acceptance.

18.02.04. When the Offer is Ineffective. An offer becomes

ineffective or is terminated in the following cases
(2012 Bar):
(1) Upon the death, civil interdiction, insanity or
insolvency of either party before acceptance is
conveyed;290
(2) When a counter-offer is made;
(3) W hen the offeror fixed the time or period
acceptance is to be made and the period
expired.291
(4) When the offer is revoked before acceptance
(revocation can be made even before the
expiration of the time given to accept so long as
there is no consideration distinct from the price)
(2005 and 2013 Bar)-, and
(5) If the person to whom the offer is given rejected
the offer.

^ A rt. 1323, NCC.

291Art. 1322, ibid.
554 REVIEW ER ON CIVIL LAW

EXAMPLES:
1. Mr. A offered to sell his book to Mr. B for P500 on June 5, 2013
while they were having dinner in a restaurant. Mr. A informed
Mr. B that he has five days to accept. Mr. A died on June 6, 2013.
Mr. B accepted the offer on June 10, 2013 by sending a letter. The
acceptance is not effective and the contract is not perfected because
the offer became ineffective on June 6,2013.
2. In the first example, if Mr. A died on June 15 (instead of June 6) and
he learned about the acceptance of Mr. B on June 12, the contract is
perfected.
3. Mr. A offered to sell his book to Mr. B for P500 on June 5,2013. Mr.
A gave Mr. B up to June 10, 2005 to accept the offer. On June 26,
2013, Mr. B sent a letter to Mr. A by mail accepting the offer. Mr.
A received and read the letter on June 30,2013. The contract is not
perfected because the acceptance was not made within the time
stipulated.
4. Mr. A offered to sell his book to Mr. B for P500 on June 5, 2013.
Mr. A gave Mr. B up to June 10, 2013 to accept the offer. On June
7, 2013, Mr. A informed Mr. B that he is revoking the offer. This
revocation is effective and Mr. B can no longer insist on accepting
the offer.
5. Mr. A offered to sell his book to Mr. B for P500 on June 5,2013. Mr.
A gave Mr. B up to June 10,2013 to accept the offer. Mr. B gave Mr.
A P10.00 so that he will not revoke or withdraw the offer up to June
10,2013. On June 7, 2013, Mr. A informed Mr. B that he is revoking
the offer. This revocation is not effective and Mr. B can accept the
offer up to June 10, 2013. Under Article 1324, the offeror cannot
withdraw the offer if the option is founded upon a consideration
like the P10.00 paid by Mr. B (See 2013 Bar).

18.02.05. Capacity to Give Consent.

a) The age of majority is now 18 years as provided
for tinder Article 234 of the Family Code as
amended by R.A. No. 6809. Thus, minors are
persons below 18. When a person is 18 years old,
he is qualified and responsible for all acts o f civil
life.292 '■

292Art. 236, Family Code as amended; The exception under the same provision is
with respect to marriage which required parental consent until the child is 21,
 OBLIGATIONS AND CONTRACTS 555
Contracts

(1) If one party is a minor and the other is not,

the contract is voidable;
(2) If both parties are minors, the contract is
unenforceable.
b) If one of the parties is insane at the time the
contract was entered into, the contract is
voidable. Exception: If the insane entered into
the contract during a lucid interval, the contract
is valid.
c) If one of the parties is deaf-mute who does not
know how to write, the contract is also voidable.
It is required that the party is (1) deaf-mute, and
(2) the deaf-mute must not know how to write. If
the deaf-mute knows how to write, the contract
is valid.293
d) A contract entered into while in a state of
drunkenness or under hypnotic spell is voidable.
e) Married women are not incapacitated to enter
into contracts. There is now equality between
men and women when it comes to capacity to
act.294
f) Persons of advanced age or those suffering from
physical incapacity are not incapacitated to enter
into contracts. Only when such age or infirmity
impair his mental faculties to such extent as
to prevent him from properly, intelligently,
and fairly protecting his property rights, is he
considered incapacitated.2®

18.03. VICES OF CONSENT. A contract is voidable if

consent is vitiated by (1) mistake, (2) violence, (3)
intimidation, (4) undue influence, or (5) fraud.296

^ A rt. 1327[2], NCC.

294R.A. No. 7192.
^ L o y o la v. Court of Appeals, 326 SCRA 285 (2000).
296Art. 1330, NCC. " '
556 REVIEWER ON CIVIL LAW

a) Vices of consent are circumstances that affect

the decision of the party to enter into a contract.
The vice may refer to the capacity of a party
to understand like minority, insanity, being
deaf-mute who do not know how to write
and other personal circumstances discussed
above. The vice may involve the volition of the
persons involved like in cases where violence,
fraud, intimidation and similar circumstances
adversely affect the decision to consent.
18.03.01. Mistake. Mistake may invalidate consent only if
it refers to the substance of the thing which is the
object of the contract, or to those conditions which
have principally moved one or both parties to enter
into the contract. Thus, mistake may involve wrong
conception of the thing and a belief in the existence
of some circumstances, fact or event which in reality
do not exist.297 However, mistake as to the identity
or qualifications of one of the parties will vitiate
consent only when they are the principal causes of
the contract.
a) Error must be Excusable. Mistake connotes
something that is not intentional and one that
is not characterized by recklessness. In addition,
the error must be excusable. This requirement is
contemplated under Article 1333 because under
the same provision, there is no mistake if the
party alleging it knew the doubt, contingency
or risk affecting the object of the contract. There
will be inexcusable error if the party proceeded
even with such knowledge.
b) Exceptions. Article 1332 provides that when one
of the parties is unable to read, or if the contract
is in a language not understood by him, and
mistake or fraud is alleged, the person enforcing
the contract must show that the terms thereof
have been fully explained to the former. The

^ Spouses Theis v. Court of Appeals, G.R. No. L-126013, February 12,1997.

 OBLIGATIONS AND CONTRACTS 557
Contracts

exception are those provided for under Article

1332 because in effect there is no opportunity
to ascertain the truth in those cases because the
party is unable to read or the contract cannot be
understood by him.
c) Mistake of Fact and Law. The mistake that
will vitiate the contract is a mistake of fact
and not generally a mistake of law. The rule is
that ignorance of the law excuses no one from
compliance therewith.298
(1) It was also observed by the Code
Commission that while mistake of law
does not generally vitiate consent, there
is a mistake on doubtful questions of law
or the construction or application of law
which is analogous to mistake of fact.299
Mistake on doubtful questions of law
should vitiate consent because the layman
should not be accountable for his honest
mistake on a doubtful legal issue because
even the highest courts are sometimes
divided upon difficult legal questions and
one-half of the lawyers in all controversies
on a legal question are wrong.300
d) Mutual Error. Under Article 1334, mutual error
as to the legal effect of the agreement when the
real purpose is frustrated will vitiate consent.
The requisites are as follows:
(1) There is an error with respect to the effect
of the agreement;
(2) The error must be mutual or on the part of
both parties; and
(3) The error must frustrate the real purpose of
the parties.

^ A rt. 3, NCC.
^ R ep o rt of the Code Commission, p. 136.
300Ibid.
558 REVIEWER ON CIVIL LAW

18.03.02. Violence and intimidation. — These vices of consent

may be exercised not only by the parties to the
contract but also by third persons.
a) Violence. — It refers to a degree of physical
constraint or danger actually inflicted upon
a person.301 Violence will vitiate consent if the
following requisites are present:
(1) There must be physical force that is of such
degree that the victim has no other choice
but to comply;
(2) The physical force caused the giving of
consent.
b) Intimidation. — It is the exertion of moral
force or compulsion; the danger or constraint is
threatened or impending.302There is intimidation
when one of the contracting parties is compelled
by a reasonable and well-grounded fear of an
imminent and grave evil upon his person or
property, or upon the person or property of his
spouse, descendants or ascendants, to give his
consent.303Intimidation will vitiate consent if the
following requisites are present:304
(1) The intimidation must be the determining
cause of the contract or must have caused
tire consent to be given;
(2) The threatened act must be unjust or
unlawful;
(3) The threat must be real and serious, there
being an evident disproportion between
the evil and the resistance which all men
can offer, leading to the choice of die
contract as a lesser evil; and

“ IV Tolentino 489.
m Ibid.
303Art. 1335, NCC.
SCRA345 (1990).
 OBLIGATIONS AND CONTRACTS 559
Contracts

(4) It produces a reasonable and well-

grounded fear from the fact that the person
from whom it comes has the necessary
means or ability to inflict the threatened
injury.
18.03.03. Undue Influence. Undue influence refers to "any
means employed upon a party which, under the
circumstances, he could not well resist, and which,
under the circumstances, he could well resist, and
which controlled his volition and induced him to give
his consent to the contract, which otherwise he would
not have entered into."305
a) Solicitation, importunity, argument, and
persuasion do not constitute undue influence.306
The line between due and undue influence,
when drawn must be with full recognition of
the liberty due every person to obey the voice
of justice, the dictates of friendship, or gratitude
and of benevolence, as well as claims of kindred,
and, when not hindered by personal incapacity
or particular regulations, to act according to his
free choice.307
b) The elements of undue influence to be estab­
lished to justify the cancellation of the instru­
ment are: (1) a person who can be influenced;
(2) the fact that improper influence was exerted;
and (3) submission to the overwhelming effect
of such unlawful conduct.308
c) Confidential relationship m ay give rise
to undue influence. However, for such,
confidential relationship to give rise to undue
influence, the relationship m ust reflect a
dominant, overm astering influence which
controls the dependent person. Influence

305IV Tolentino 501.

^ M artinez v. Hongkong & Shanghai Bank, 15 Phil. 252 (1910).
307Martinez v. Hongkong & Shanghai Bank, ibid.
^ L o y o la v. Court of Appeals, 326 SCRA 285 (2000).
 REVIEWER ON CIVIL LAW

obtained by persuasion, argument, by appeal

to affections is not prohibited either in law or
m orals and is not obnoxious even in court of
equity.309
18.03.04. Fraud. Fraud is employment of insidious words
or machinations of one of the contracting parties
to induce the other to enter into a contract which,
without them, he would not have agreed to. These
include false promises, exaggerated expectations or
benefits, abuse of confidence, fictitious name, quality
or power.310
a) Fraud involves the deliberate intention to cause
damage or prejudice, the voluntary execution
of wrongful act, or a willful omission, knowing
and intending the effects which naturally and
necessarily arise from such act or omission.311
b) Kinds of Fraud. Fraud may either be dolo
causante or dolo incidente (1960 Bar).
(1) Dolo causante axe misrepresentations or
concealments that are serious and without
which the other party will not enter into
the agreement.312
(2) Dolo incidente are misrepresentations
or concealments that are not serious in
character and the other party would still
have entered into an agreement but under
different terms.313
c) Requisites of D olo Causante.
(1) There must be representation or
concealment of fact; "

309Loyola v. Court of Appeals, supra.

3108 Manresa 677; 2 Florendo 673.
^International Corporate Bank v. Gueco, 3 5 1 SCRA 516 (2001).
3122 Florendo 654; Tankeh v. DBP, et al., G.R. No. 171428, November 11,2013;
313Ibid.
 Co n t r a c t s
o b l ig a t io n s a n d 56i
Contracts

(2) The party who made the representation or

concealment intends to induce the other
party to give his consent;
(3) The fact concealed or represented is not
true;
(4) The party who made the representation or
concealment was aware of the falsity of the
matter represented or concealed;
(5) The party who was induced to give his
consent relied on the representation or con­
cealment without any fault or negligence;
(6) The matter concealed or misrepresented
must be material;
(7) The other party must give his consent
because of the concealment or
misrepresentation; and
(8) The fraud should not be committed by
both parties — only one party committed
the fraud (1966 Bar).

EXAMPLES:
1. Mr. X offered to sell a ring to Mr. Y representing that it is made of
gold. Mr. Y believed Mr. X so he. purchased the ring although it
turned out that the ring is just gold plated.
2. Mr. X advertised that the car that he is selling is the best car in the
market. This is a usual exaggeration in trade that does not vitiate
the consent (Art. 1340). A man who relies upon such an affirmation
made by a person whose interest might be so obvious as to prompt
him to exaggerate the value of the property does so at his peril and
must take the consequences of his own imprudence.314
3. Mr. A sold his car to Mr. B stating that the car is in good order and
condition. This is an expression of opinion and there will be no
fraud if it turns out that the car later developed engine trouble (Art.
1341).
The conclusion would be different if Mr. A is an expert
mechanic and Mr. B relied on the representation. (Art. 1341, second
par.) ■'

314Songco v. Sellner, 37 Phil. 254 (1917).

 REVIEW ER O K CIVIL LAW

18.03.05. Simulation. In simulation, the apparent contract

is not really desired or intended to produce legal
effects nor in any way alter the juridical situation
of tire parties.315 An absolutely simulated contract
is void while a relatively simulated contract is also
void but only if it prejudices third persons and it is
for any purpose that is contrary to law, morals, good
customs, public order or public policy.
a) Definition. Simulation is defined as the
declaration of a fictitious will, deliberately made
by agreement of the parties, in order to produce,
for purposes of deception lire appearances of a
juridical act which does not exist or is different
from what that which was really executed.316
Simulation takes place when the parties do not
really want the contract they executed to produce
the legal effects produced by its wordings.317
b) Requisites of simulation: (1) an outward
declaration of will different from the will of
the contracting parties; (2) the false appearance
must have been intended by mutual agreement;
and (3) the purpose is to deceive third persons.318
c) Kinds of Simulated Contracts.
(1) Absolutely simulated contracts —
contracts where the parties do not intend
to behound at all (2012 Bar). Example: Mr.
X signed a Deed of Sale in favor of Mr. Y
although the parties agreed that Mr. X will
remain to be the owner. Mr. X just signed
the deed in order to make his property out
of reach of the Bureau of Internal Revenue.
(2) Relatively simulated contracts — the
parties intend to be bound but they

3,!j.R . Blanco v. Quashn, 318 SCRA 373 (1999).

316Mendezona v. Ozamiz, 376 SCRA 482 (2002).
317Cruz v. Bancom Finance Corporation, 379 SCRA 490 (2002).
318Loyola v. Court of Appeals, 326 SCRA 285 (2000).
 OI3IIGATIONSAND CONTRACTS 563
Contracts

concealed their true agreement. Example:

Mr. X signed, a Deed of Donation in favor
of Mr. Y although he really received an
amount in return. The true agreement in
this case is a sale.
18.04. OBJECT. The object of the contract refers to the thing
or right which is the subject matter of the contract.
Things that may be the object of the contract may
be tangible or intangible. Therefore, the object may
be intangible things which include rights. The term
thing referred to here is synonymous with the term
"property" under the New Civil Code because only
property may be or is subject to appropriation.
18.04.01. Requisites of the Object. The provisions of the New
Civil Code make implicit the following requisites:
(1) The tiling or service must be within the
commerce of inari;319
(2) The thing or service must not be contrary
to law, morals, good customs, public policy
or public order;320
(3) The thing or service must be possible;321
■■■■ and ■
(4) The thing or service must be determinate
or at least determinable.322
a) Outside the Commerce of Man. Things and
services are outside the commerce of man if they
cannot be appropriated or they are incapable of
private ownership or if they are intransmissible.
The term outside the commerce of man includes
things that are not licit or things that are con­
trary to law> moral, good customs, public
policy and public order. Manresa enumerates

319Art. 1347, NCC.

320A rt 1347, NCC; See discussions in Art. 1306 for meaning of terms.
321Art. 1348, ibid. -> .
322Art. 1349, ibid. ,-t
564 REVIEWER ON CIVIL LAW

those included in things or services outside the

commerce of man as the following:323
(1) Services that presuppose degradation
or absolute submission of the person
rendering the services, sacrificing his
liberty or independence or beliefs, or
equality and dignity. Example: Contract for
perpetual servitude.
(2) Personal rights. Examples: Marital rights
and, right of support.
(3) Honorary rights such as titles and
distinctions.
(4) Political rights. Example: The right to vote.
(5) Public Office.
(6) Things withdrawn from commerce by law
or by public policy. Examples: property of
public dominion, prohibited drugs, and
nuclear weapon.
(7) Things not susceptible of exclusive
ownership. Example: The water in the
ocean in its entirety and the air around us.
b) Future Things and Future Inheritance.
(1) Future things — These refer to all things
that do not belong to the party (like a seller
or a donor).324These include things that are
expected to increase in the future like the
expected harvest of rice that were planted
by the farmer or things that belong to a
third person.
(2) Future inheritance—■ Future inheritance
(herencia futura) is "the contingent
universality or complex of property
rights and obligations that are passed to

3238 Manresa 682,683,690-693; 2 Florendo 695.

324Osorio v. Osorio, 41 Phil. 530 (1921).
 OBLIGATIONS AND CONTRACTS 565
Contracts

the Heirs upon the death of the grantor.325

This includes any property or right not in
existence or capable of determination at
the time of the contract that a person may
in the future acquire by succession.326 The
concept of future inheritance presupposes
that fhe person who previously owns the
property has not yet died. Before such
death, there is pure expectancy and the
property which may exist at time of death
cannot be determined. After such death,
the property that is part of the inheritance is
actually vested in fhe heirs of the deceased.
(3) No contract may be entered into upon
future inheritance except in cases expressly
authorized by law.327 The reason for this
rule is "that if a man were to be allowed
to bargain away all the property he expects
to leave behind (i.e., his estate as a whole),
he would practically remain without any
incentive to practice thrift and frugality
or to conserve and invest his earnings and
property."328
(4) "For the inheritance to be considered
"future," the succession must not have
been opened at the time of the contract."
A contract may be classified as a contract
upon future inheritance, prohibited under
the second paragraph of Article 1347,
where the following requisites concur
(2012 Bar): .
(i) That the succession has not yet been

325Concurring of Opinion of Justice J.B.L. Reyes, in Bias v. Santos, G.R. No. L-14070,
March 29,1961.
326Blas v. Santos, 1 SCRA 899 (1961).
327Art. 1347, N CC.
328Concurring of Opinion of Justice J.B.L. Reyes, in Bias v. Santos, G.R. No. L-14070,
March 29,1961.
566 REVIEWER ON CIVIL LAW

(ii) That the object of the contract forms

part of the inheritance; and
(iii) That the promissor has, with respect
to the object, an expectancy of a right
which is purely hereditary in nature.329
c) Impossible Objects. The object is impossible if
the same cannot be done or performed under
the law or according to the course of nature.
Impossibility are classified into the following
kinds:330
(1) Physical Impossibility — One that is
contrary to the course of nature. This may
be (1) absolute or that which is impossible
in any case (Example: Mr. A will stay in
the sun); or (2) relative or that which is
impossible because of certain circumstances
(Example: For Mr. A to receive a thing if Mr.
A is already dead).
(2) Practical Impossibility — The act can
be done but only at an excessive or
unreasonable cost. Example: When a ship is
so damaged such that although it can be
repaired, the cost is not worth the effort.
(3) Legal or Judicial Impossibility — When
a rule of law makes it impossible to do.
Example: Mr. A, minor, will be obliged to
prepare a last will and testament.
(4) Logical Impossibility — One that is
contrary to the nature of the transaction.
Example: A gives a property to B for his
benefit on the condition that Mr. B will
immediately transfer the same property to
C.

329J.L.T. Agro v. Balansag, G.R. No. 141882, March 11,2005; V ia. de Cabalu v. Tabu,
G.R. No. 188417, September 22,2012.
3302 Florendo 967.
 OBLIGATIONS AND CONTRACTS 567
Contracts

(5) Original Impossibility or ab initio

impossibility — The object is impossible
from the beginning.
(6) Subsequent Impossibility or ex post facto
impossibility — The object becomes
impossible by matters subsequent.
d) Determinate and Determinable.
(1) Determinate. The law requires that the
thing must be determinate as to its kind
and quantity. Example: 1) The object is
determinate if it is a dog of a particular
breed because the kind and quantity
is determinate; 2) The object is not
determinate if what was mentioned only is
"animals."
(2) Determinable. The quantity of the
thing is determinable if the same can be
determined without that need to enter into
an agreement. For example, the quantity
is determinable if it can be determined by
mathematical computation using given
items.
e) Quality. If the quality is not stated, the rule
under Article 1246 should be applied.
18.05. CAUSE OR CONSIDERATION. Cause or
consideration of a contract is the essential or more
proximate purpose which the contracting party
have in view at the time of the contract.331 Cause or
consideration is the reason that impels a party to
assume an obligation under a contract.
a) Stated differently, consideration is the "why" of
a contract, the essential reason which moves the
contracting parties to enter into the contract.332

^R epu blic v. Cloribel, 36 SCRA 534 (1970).

^ D om ingo v. Court of Appeals, 367 SCRA 368 (2001).
 REVIEW ER ON CIVIL LAW

b) THe following results into a void or non-existent

- contract: -
(1) Where there is no cause.333 Note, however,
that the presumption is that there is a cause
so the person who claims that there is no
cause must prove such absence.
(2) Where the cause is not lawful, that is, the
cause is contrary to law, morals, good
customs, public order or public policy.334
(3) If there is false cause.335 Exception: When
it can be established that there is another
cause. Example: Mr. A signed a Deed of
Absolute Sale which states that he is selling
his watch to Mr. B for P I,000. The cause is
false if there is really no agreement to pay
money.
c) However, it can be established that there
is another cause like pure liberality which
will make the contract a donation or that the
obligation of Mr. B is to deliver other goods
which will make die contract barter.
18.05.01. Types of Contracts and their Causes.
I a) Onerous contracts. — The cause is understood
to be, for each contracting party, the prestation
or promise of a thing or service by the other.
Example: Sale where the consideration for the
seller is the promise to pay the price while the
consideration for the buyer is the delivery of the
thing. ■"
b) Remuneratory contracts; — The cause is
the sendee or benefit which is remunerated.
Remuneratory contract is one where a party
gives something to another because of some
service rendered or benefit given by one party to
the other where such service or benefit was not

333Art. 1352, NCC.

^A rt. 1352, ibid.
335Art. 1353. ibid.
 OBLIGATIONS AND CONTRACTS 569
Contracts

due as a legal obligation.336 Example: Mr. A took

care of Ms. B when the latter was sick. Later, Mr.
B delivered an amount to Mr. A in consideration
of the service. The consideration is the act of
taking care of Ms. B.
c) Gratuitous contracts of contracts of pure
beneficence — The mere liberality of the
benefactor is the cause. Example: Donation where
the mere liberality of the donor is the cause.
18.05.02. Cause Distinguished from M otive. Cause is the
essential reason of the contract while motive is the
■ private reason of the contracting party in entering
into the contract. The distinctions are as follows:

CAUSE , 7 MOTIVE
1. The legal reason that 1. The private, personal or
impels one to enter into psychological induce­
the obligation. ment of the party to enter
into the contract.
2. The cause is the same for 2. Even if the same contract
certain types of contract is involved, the motive
(Example: sale, lease, etc.) may be different. ;
3. Both parties are aware of 3. The motive of one party
the cause. need not be known to the
other.
4. Cause is an essential 4. Motive is not an essential
element of the contract. element of the contract.
18.05.03. Inadequacy or Lesion. Inadequacy of the
consideration (also known as lesion) by itself will not
make the contract defective. The inadequacy of the
consideration will adversely affect the contract only
if it Ls coupled with other grounds like fraud, mistake
or undue influence. Example: Mr. A sold a' watch to
Mr. B for P500. The value of the watch is P I,000. The
contract is not defective. Selling a thing at a bargain
will not invalidate or make the contract defective,

3* IV Tolcntino 533.
570 REVIEW ER ON CIVIL LAW

a) It is also important to observe that inadequacy of

the cause is different from partial performance.
In partial performance, the cause m ay be
inadequate but it was partially delivered or
complied with.
18.06. FORM OF CONTRACTS. The general rule is that no
formality or solemnity is required for a contract. As
Article 1356 provides, contracts shall be obligatory,
in whatever form they may have been entered into,
provided all the essential requisites for their validity
are present.
a) The law may however provide for formalities.
Based on Article 1356 and related provisions,
there are at least three types of formalities:
(1) Formalities that are necessary for the
validity of a contract;
(2) Formalities to make the contract binding
on third persons; and
(3) Formalities to allow proof of the existence
or enforceability of the contract.
18.06.01. Formalities for Validity of the Contract. This
includes contracts that are known as formal or
solemn contracts. They are not valid unless the forms
prescribed by law are complied with. The examples
are provided for in the table below indicating the
provisions of the New Civil Code that require the
formalities.

CONTRACT FORMALITY REQUIRED

1. Donation of Real Property. Public instrument.
(A rt. 749)
!
2. Donation of personal Must be in writing.
property exceeding P5,000.
(A rt. 748)
3. Stipulation that interest Must be in writing.
should be paid on loans.
(A rt. 1956)
 OBLIGATIONS AND CONTRACTS 571
Contracts

4. Agency to sell land. (A rt. Must be in writing (2012

1874) B ar).
5. Partnership where real A signed inventory must
property is contributed. be attached to the public
(A rt. 1773) instrument that evidences
the partnership contract.
6. An agreement limiting Must be in writing.
the diligence of common
carriers over goods to
less than extraordinary
diligence. (A rt. 1 7 4 4 )
7. Contract of Antichresis. The principal amount and
(A rt. 2 1 3 4 ) the interest to be paid must
be in writing.

b) Remedy. Article 1357 of the New Civil Code

provides that if the law requires a document or
other special form, the contracting parties may
compel each other to observe that form, once the
contract has been perfected. This right may be
exercised simultaneously with the action upon
the contract. This applies even to formalities to
bind third persons discussed belo>v. E x am p le: If A
sold a parcel of land to B in a private instrument
and B in turn sold the land to C also in a public
instrument. C can file within the prescriptive
period an action to compel the execution of
a public instrument against B but not against
A (1 9 7 7 B ar). The action based on Article 1357
prescribes in 10 years (1 9 7 7 B ar).
18.06.02. Formalities to bind third persons. The following
must appear in a public document:337
(1) Acts and contracts which have for their object
the creation, transmission, modification or
extinguishment of real rights over immovable
property; sales of real property or of an interest

^ A rt. 1358, NCC.

 REVIEWER ON CIVIL LAW
572

therein governed by Articles 1403, No. 2, and

1405; Example: The fact that an extrajudicial
settlement involving real property is in a private
instrument does not invalidate such deed.338
(2) The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains;
(3) The power to administer property, or any other
power which has for its object an act appearing
or which should appear in a public document,
or should prejudice a third person;
(4) The cession of actions or rights proceeding from
an act appearing in a public document.
(NOTE: All other contracts where the
amount involved exceeds five hundred pesos
[P500] must appear in writing, even a private
one. But sales of goods, chattels or things in
action are governed by Articles 1403, No. 2, and
1405.)
18.06.03 Formalities for the Enforceability or to allow proof.
— Contracts that are covered by the Statutes of Fraud
provided for in Article 1403.
18. 07. REFORMATION OF INSTRUM ENTS. Reforma­
tion of instrum ent involves the filing of a case in
court in order to have the docum ent that consti­
tutes the evidence of the agreem ent to reflect the
real intent of the parties. The remedy is grounded
on the principle of equity where, in order to ex­
press the true intention of the contracting parties,
an instrum ent already executed is allowed by law
to be reform ed.339The purpose is not to make a new
contract but to reform the same to reflect the true
intention of the parties.340

338Spouses Pontigcm v. Heirs of Sanchez, G.R. No. 221513, December 5,2016.

339Rosello-Bentir v. Leanda, 330 SCRA591 (2000).
340Cosio v. Palileo, 14 SC R A 170 (1965).
 OBLIGATIONS AND CQNTRACTS 573
Contracts

18.07.01. Requisites. An action for reformation of contract

under Article 1359 may prosper only upon
concurrence of the following requisites:341
(1) There must have been a meeting of minds of the
parties to the contract;
(2) The instrument does not express the true
intention of the parties; and
(3) The failure of the instrument to express the true
intention of the parties is due to mistake, fraud,
inequitable conduct or accident.
18.07.02. Prescriptive Period. The action for reformation of the
instrument must be filed within ten years from the
execution of the contract.342
18.07.03. Mutual M istake. Mistake can result in a situation
where the instrument does not express the true
intention of the parties. The general rule is that the
mistake must be mutual.

EXAMPLES:
(1) . Mr. A owns two lots, Lot 1 and Lot 2. Mr. A and Mr. B entered
into a contract of sale whereby Mr- A sold the lot which is near
the highway. They drought that the lot near the highway is Lot 1
although it is actually Lot 2. Hence, the deed of sale states that Mr.
A sold Lot 1. There can be reformation in this case because the deed
does not express the true agreement that Mr. A sold Lot 2.
(2) Mr. A sold a car to Mr. B. They agreed that there is a right to
repurchase for a period of one year. They did not notice however
that the period that was inserted, in the document is only six
months. There can be reformation of the instrument in this case.

18.07.04. Unilateral M istake. Mistake need not be mutual in

the instances covered by Articles 1362 and 1363. Thus,
reformation is allowed even if mistake is unilateral in
the following cases:

f a r m i n g v. Dy, 383 SC R A 131 (2002); Emilio v. RapaL 617 SC R A 199 (2010).

^Rosello-Bentir v. Leanda, supra.
574 R EV IEW ER O N C IV IL LAW

(1) If one party was mistaken and the other acted

fraudulently or inequitably;343
(2) When one party was mistaken and the other
knew or believed that the instrument did not
state their real agreement, but concealed that
fact from the former.344

EXAMPLES:
(1) Mr. A owns two lots, Lot 1 and Lot 2. Mr. B wants to buy Lot 2 but
Mr. A is only willing to sell Lot 1. Mr. A and Mr. B entered into a
contract of sale whereby Mr. A sold Lot 1. However, Mr. B, who was
the one who prepared the Deed of Sale indicated that the lot that
was sold was Lot 2. There can be reformation in this case because
the deed does hot express the true agreement that Mr. A sold Lot 1
because of the fraud committed by Mr. B.

(2) Mr. A sold a car. to Mr. B. They agreed that there is a right to
repurchase for a period of one year. Mr. A thought that die period in
the document is one year although w hat w as stated is five months.
Mr. B knew that the period that was inserted was five months but
he did not inform Mr. A about it. There can be reformation of the
instrument in this case under Art. 1363.

18.07.05. Third Persons. The instrument may be reformed if

the instrument does not express the agreement of
the parties due to a third person who drafted the
document. The reason why the document does not
express the true agreement of the parties maybe: (1)
ignorance, (2) lack of skill, (3) negligence, or (4) bad
faith.345
18.07.06. No Reformation. Under Article 1366, there shall be
no reformation in the following cases:
(1) Simple donations inter vivos wherein no
condition is imposed;
(2) Wills;
(3) When the real agreement is void.

343Art. 1362, NCC.

^A rt. 1363, ibid.
345Art. 1364, ibid.
 OBLIGATIONS AND CONTRACTS 575
Contracts

a) Simple donation is a contract whereby one

person transfers a property to another and the
consideration is pure liberality. A will on the
other hand is a document which complies with
the formalities of law whereby a person will
leave his property to another when he dies.
In both cases, the transfer of the property is
gratuitous.
b) Article 789 of die Civil Code allows the correc­
tion of wills if properties that are subject thereof
are misdescribed.
c) With respect to void agreements, there is nothing
to reform if the agreement is void.
18.07.07. Who can ask for Reformation. The following persons
can ask the court for reformation:
(1) Either Party — if the ground is mutual
mistake — either party.
(2) The injured party, his heirs or assigns — If
the ground is unilateral mistake.
a) Note that the parties mentioned above can
no longer ask for reformation if an action for
specific perform ance's filed.
18.07.08. Applicable Rides. The rules that should be applied
with respect to the reformation of instruments are as
follows:
a) Substantive Rules: (1) Primary law: New Civil
Code, and (2) Suppletory rules: Principles of
General Law on Reformation of Instruments.346
b) Procedural Rides: Rules of Court to be
promulgated by the Supreme Court.

346Art. 1360, NCC.

576 R E V IE W ^

18.08. INTERPRETATION OF CONTRACTS

18.08.01. Primary Rules of Interpretation.
a) The Cardinal Rule: To seek the intention of the
....... ■■ parties.
b) Interpretation does not involve replacement of
the agreement of the parties nor creating terms of
the agreement. It is just a matter of determining
what the parties intended when they entered
■ . into the contract.
c) Interpretation 's the act of making intelligible
what was before not understood, ambiguous or
not obvious. It is a method by which the meaning
of language is ascertained. Interpretation is
the determination of the meaning attached to
the words written or spoken which make the
contract.3*7
d) The court must read a contract as an average
person would read it and should not give it a
>.■■■■■. strained or forced construction.*348
e) The laws in force-at the time the contract was
made generally govern the effectivity of its
provisions.349
f) Contracts are not defined by the parties but by
principles of law.350 Thus, the parties intention
cannot make a contract a sale if it is really a
lease. Even if they call it a sale, the same will
be governed by the statutory provisions on lease
if by principles of law the agreement is really a
lease contract.

^H uibonhoa v. Court o f Appeals, 320 SCRA 625 (1999).

348Riviera Filipina, Inc. v. Court of Appeals, 380 SCRA 245 (2002).
349Puerto v. Court of Appeals, 383 SCRA 185 (2002).
^ C av ite Development Bank v. Lim, 324 SCRA 346 (2000).
 OBLIGATIONS AND CONTRACTS 577
Contracts

18.08.02. Summary of Rules of Interpretation.

a) If terms are clear and unambiguous: the literal
meaning of the terms used is the controlling
factor. Contracts that are crystal clear should not
be construed.351
b) If words used are not the words that should
have been used to make the intent clear and
unambiguous:

I (1 ) If the meaning of the words is contrary to

the evident intent, then the evident intent
prevails;
( 2) The contemporaneous or subsequent acts
should be considered. Example: If it is not
clear if the. contract is a lease or a sale, the
fact that the. person who took possession
acted as if he is only a tenant will be
considered in concluding that it is a lease.
(a) In construing a particular writing,
previous acts or circumstances may
also be considered. For instance, the
reason behind and the circumstances
surrounding its execution are of para­
mount importance to place the inter­
preter in the situation of the parties
concerned at the time the writing was
executed.352 •
(b) Where the parties to a contract have
given it a -practical construction by
their conduct as by acts in partial per­
form ance/such construction may be
considered by the court in construing
the contract.353
(c) The ambiguity in the stipulation by
reason of faulty sentence construction

^ D B P v. National Merchandizing Corporation, 40.SGRA 624.

352Vieente Gbtamco Hermanos v. Shotwell, 38 SC R A 107.
353Riviera Filipina, Inc. v. Court of Appeals, supra.
578 REVIEWER ON CIVIL LAW

- should not defeat the otherwise clear

intention of the parties.354
, ; c) When there is a conflict between provisions:
(1) When there is a conflict between a general
provision and a particular provision, the
particular or specific provision prevails.
Example: One provision states that the seller
does not extend warranties in favor of the
buyer. However, the contract states in one
of it provisions that the seller warrants that
there are not defects in the goods.
(a) Nevertheless, however general the
terms of a contract may be, they shall
not be understood to comprehend
things that are distinct and cases that
are different from those upon which
die parties intended to agree.355
(2 ) When a principal contract and an accessory
contract are involved, the accessory should
be interpreted together with the principal
so as to harmonize them.356
d) When words are omitted: Usage or customs
shall be used to supply the omission.
e) There
: is doubt as to the meaning of terms:
(1) All the provisions should be examined and
the doubt should be resolved by giving an
: interpretation that is consistent with the
provisions. What should be considered
are all the words, not just a word or two
and words in context, not words standing
alone.357
?. • •

^M am bulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968).

^R epu blic v. Vda. de. Castellvi, 58 SCRA 336.
^ R ig o r v. Consolidated Oriz Leasing and Finance Corporation, 387 SCRA 437
(2002).
^ L im so n v. Court of Appeals, 357 SCRA 209 (2001).
 OBLIGATIONS AND CONTRACTS 579
Contracts

(2) If there are several meanings, the meaning

that should be given is that which is die
most adequate to make the word effectual.
Contracts should be so construed as to
harmonize and give effect to die different
provisions thereof.358*
(3) If there are several meanings, the meaning
that is most consistent with the nature of
the contract should be followed.
(4) Usage or customs of the place will be
considered. ^
f) O bscurity caused by one party: It should be
interpreted against the person who caused the
obscurity. E x a m p les: (1) If the seller caused the
obscurity, die interpretation should favor the
buyer and not the seller; (2) If the lawyer of Mr.
A caused the ambiguity when he drafted the
document, any ambiguity m ust be construed
against Mr. A ;^ (3) The one who prepared
the contract which states, “ T erm s ca sh u p o n th e
signing o f this co n tra ct," cannot deny that the
agreement was not a cash transaction.360
(1) — The terms of these
C o n tra cts o f adh esio n .
contracts are prepared by one party only
while the other party merely affixes his
signature. These contracts are construed
in favbr of the party who merely affixed
his signature. E x a m p le: (1) Insurance
contracts, (2) Airline tickets or bill of lading
for vessels, (3) Credit card applications/
contracts.361

358Reparations Commission v. Northern Lines, Inc., 34 SCRA 203 (1970).

^C oscolluela v. Valderrama, 2 SCRA 1095 (1961).
360Lim Yhi Luya v. Court of Appeals, 99 SCRA 669.
^•BPI Express Credit Card Corporation v. Olalia, 372 SC RA 338 (2001). •
580 REVIEWER-ON CIVIL LAW

g) If settling the doubt is impossible:

(1) If incidental circumstances are involved:
The interpretation should be such that
involves the least transmission of rights.
Example: I f there is doubt if the contract is a
sale or a mortgage, mortgage is preferred.
(2) Construction which would amount to
impairment or loss of right is not favored;
conservation and preservation, not waiver,
abandonment or forfeiture of a right, is the
rule.362
(3) If the principal object of the contract is
involved: The contract is null and void.

19. DEFECTIVE CONTRACTS; The classification of defective

contracts was included in the New Civil Code in order to put
an end to the uncertainty and other ambiguities in the old Civil
Code. The New Civil Code, in a clear-cut and unequivocal way,
classifies and defines the various kinds of defective contracts
and states their consequences.363 :
a) Classification of Defective Contracts.
(1) Resdssible contracts;364365
(2) Voidable contracts,-365
(3) Unenforceable contracts;366and
(4) Void or Inexistent contracts.367
b) Distinctions of-Defective Contracts (2950,1969,
arid2004 Bar).

“ ^ c e n t e Gotamco Hermanos v. Shotwell, supra.

^ Ib id ., pp. 138-139.
•^Arts. 1380-1389, NEC.
365Arts. 1390-1402, ibid.
366Arts. 1403-1408, ibid.
367A rts. 1409-1422. ibid.
 OBLIGATIONS ANR CONTRACTS 581
Contracts

KESCIS- VOIDABLE UNEN­ VOID

SIBLE FORCE­
ABLE
What (1) Lesion, (1) Incapa­ (1) M (1) Absence
is the or (2) cityor ;(2) excess or of requisites
defect? Transfer consent is without or (2) Illicit
in fraud of vitiated authority, nature.
creditors, or by fraud, (2) violation
(3) Transfer violence, of Statute
by insolvent intimidation, of Frauds,
before due undue ’ or (3)
date. influence. incapacity
of both
parties.
What Binding and Valid and Cannot be No effect is
is the enforceable bindingufitil enforced produced. 1
effect? unless annulled. •; unless
rescinded. ratified or
waived.
Can it be Cannot be Can be Can be Cannot be
ratified? ratified. ratified. ■■; . ratified. ratified.
Who can Contracting Contracting Contracting Contracting
assail - party and - parties only parties only. parties
the third persons (1966 Bar). and third
contract? who are persons
prejudiced. whose
interests are
affected.
What is Four years. Four years No,., Action for
the pre­ (1976 Bar).' prescriptive declaration
scriptive period is that tile con­
period provided tract is void
for filing for because is impre­
of the the same scriptible.
case? is not
applicable.
Prescription
cannot cure
the defect. :
582 REVIEWER ON CIVIL LAW

How can Directly. Directly or Directly or Directly or

the con­ collaterally. collaterally. collaterally.
tract be
assailed,
directly
or collat­
erally?

19.01. RESCISSIBLE CONTRACTS. Rescissible contracts

are those where essential requisites of a contract
exist and the contract should have been valid but by
reason of injury or damage to third persons, such as
creditors, the contract may be rescinded.368Rescission
of this type of contract is a matter of equity.
19.01.01. Basic requirements for Rescissible Contracts:
a) Any of the grounds to make the contract
rescissible under Articles 1381 and 1382 must be
present which include (2012 Bar):
1) Lesion. Those which are entered into by
guardians whenever the wards whom
they represent suffer lesion by more than
one-fourth (1 / 4) of the value of the things
which are the object thereof;
(2) Lesion. Those agreed upon in
representation of absentees, if the latter
suffer the lesion stated in die preceding
number;
(3) In Fraud of Creditors. Those undertaken
in fraud of creditors when the latter cannot
in any other manner collect the claims due
them;
(4) Property in C ustodia Legis. Those which
refer to things under litigation if they have
been entered into by the defendant without
the knowledge and approval of the liti­
gants or of competent judicial authority;

36sRepbrt of the CodfrCommissiort; jr. 139.

 OBLIGATIONS AND CONTRACTS 583
Contracts

(5) Special Law. All other contracts specially

declared by law to be subject to rescission;,
and
(6) Insolvency. Payments made in a state
of insolvency for obligations to whose
fulfillment the debtor could not be
compelled at the time they were effected.
b) There is no other, legal means to obtain repara­
tion for the damage;369
c) Mutual restitution can still be made;370 and
d) The action must be filed within four years.371
e) Distinguished from Rescission for Breach
of Contract. It should be emphasized that
rescission of a rescissible contract under Articles
1381 to 1389 is different from rescission that is
allowed under Article 1191 of the New Civil
Code. Rescission under Article 1191 is also
called "resolution." The ground for rescission
under Article 1191 of the New Civil Code is not
defect in the contract but non-compliance of a
binding and enforceable contract.
19.01.02. Grounds for Rescission.
a) Lesion (Art. 1381, nos. 1 and 2). Lesion is the
injury suffered by one who does not receive a full
equivalent for what he gives in a commutative
contract.372Broadly speaking, lesion is inequality
of contracts.373 Lesion is the derivation of old
French term laesio which was in turn derived
from the Latin laedare, meaning, to hurt.374

^ A rt. 1383, NCC.

370Arl. 1385, NCC.
371Art. 1389, ibid.
372Black's Law Dictionary, p. 812.
m Ibid.
374Collins, English Dictionary, 2000 Ed., p. 889.
 REVIEWER ON CIVIL LAW

(1) Requisites o f Lesion. Lesion makes the

contract rescissible if the following
requisites are present:
(i) lire legion that was suffered is more
than one-fourth (1 /4 ) of the value of
the thing;
(ii) The contract was entered into by a
guardian or a representative of ari
absentee;
(iii) The contract was entered into in
behalf of die ward or the absentee
involving the ward or absentee's
property; and
(iv) The contract does not require
approval of the court an d /or there is
no approval of the court.
(2) The last requisite is provided for Under
Article 1386 of the New Civil Code. In other
words, if the court approved the contract,
the contract is valid and not rescissible.
The defect is cured by the court approval.
(3) However, there are contracts that
require court approval. Guardians and
representatives cannot; enter into certain
contracts if the approval of the court is not
first obtained. For example, transfer of real
property requires approval of the court. If
the guardian sells the real property of the
w ard without court approval, the contract
is unenforceable under the first paragraph
of Article 1403 of the New Civil Code and
not rescissible.

EXAMPLES:
(1) Mr. A was appointed by the court as guardian of the minor, X. Mr.
A sold the vegetables that were planted in the lot of X. The value
of the vegetables is P5,000 but Mr. A sold the vegetables for only
P2,000. The contract is rescissible because the lesion is more than
one-fourth (1 /4 ). '
 OBLIGATIONS AND CONTRACTS 585
Contracts

(2) If Mr. A in the first example also sold the lot of X without court
approval, the sale of the lot would be unenforceable even if there is
lesion.

b) The Contract is in Fraud of Creditors. (A rt

1381, par. 3) (2012 Bar). The action to rescind the
contract for being in fraud of creditor is called
action pauliana. In addition to tire requirements
for rescission stated above, it is also necessary
that: (1) the creditor must have in his favor a
credit that existed prior to the contract that
is sought to be rescinded;375 and (2) Fraud
must be established — it is essential that it be
shown that both contracting parties have acted
maliciously and with fraud and for the purpose
of prejudicing the creditor.376
(1) Presumptions. The general rule is that
fraud is not presumed, it must be esta­
blished by evidence. However, there are
circumstances that may establish fraud.
The mere fact that the conveyance was
founded on a valuable consideration does
not necessarily negate the presumption
of fraud under Article 1387.377 These
circumstances include:
(i) A property was transferred by
gratuitous title and the transferor did
not reserve sufficient property to pay
all his debts contracted before the
donation;378
(ii) Transfer by onerous or gratuitous title
after a judgment was rendered by a
court against the transferor.379

^ I V Tolentino 576.
376Bobis v. Provincial Sheriff of Camarines Norte, 1 2 1 SCRA 28 (1983).
377China Banking Corporation v, Court of Appeals, 327 SC R A 378 (2000).
378Art. 1387, NCC.
379Ibid.
586 REVIEWER ON CIVIL LAW

(2) Badges of Fraud. Article 1387 also provides

that in addition to the above-mentioned
presumptions, the design to defraud may
be established by evidence. In one case, the
Supreme Court ruled that the following
may be considered badges of fraud:
(i) The fact that the consideration of
the conveyance is fictitious or is
inadequate;
(ii) A transfer made by a debtor after suit
has begun and while it is pending
against him;
(iii) A sale upon credit by an insolvent
debtbj^
(iv) Evidence of large indebtedness or
complete insolvency;
(v) The transfer of all or nearly all of his
property by the debtor, especially
when he is insolvent or greatly
embarrassed financially;
(vi) The fact that the transfer is made
between father and son, when there
are present other circumstances; and
(vii) The failure of the vendee to take
exclusive possession of all the
property.380
(3) Obligation of Transferee. If there is
fraudulent rescissible transfer and the
transferee is in bad faith, the transferee has
the following obligations:
(1) To return the thing he acquired;
(2) If he cannot return the thing, to pay
damages.381

^ C h in a Banking Corporation v. Court of Appeals, ibid.

381Art. 1388. NCC.
 OBLIGATIONS AND CONTRACTS 587
Contracts

NOTE: If case of more than one

. transfer, die liability to pay damages to die
creditor shall be in the order of acquisition
(die first acquirer is liable first and so on).382
c) Transfer of Property in Litigation. For example,
Mr. A filed a case to recover his boat from Mr.
B. While the case is pending, Mr. B transferred
the boat to Mr. C without notifying the court.
The sale to Mr. C is considered rescissible under
Article 1381, paragraph 4.
d) Transfer by Insolvent. (A rt 1382). Payment
by an insolvent even if he cannot be compelled
to pay at the time he made the payment is
voidable. For instance, if die obligation is not yet
due but the insolvent debtor still transferred his
property to a creditor in payment of his debt, the
transfer can be considered rescissible.
(1) The insolvency in this case is NOT by
judicial declaration. If the transfer of a
property is judicially declared in violation
of the Insolvency Law, the transfer is
considered void.383
e) Rescissible under other Civil Code provision.
The New Civil Code likewise provides for other
rescissible contracts. Example: Article 1098 — A
partition of property on account of lesion where
one of the co-heirs received things whose value
is less by at least oneTourth (1 /4 ) than the share
to which he is entitied.384
19.01.03. Rescission is a Subsidiary Remedy. The person who
seeks to rescind the contract cannot do so unless there
is no other remedy that is available.385 It is the last
resort so to speak. For example, if the obligation to

382Supra.
“ De la Paz v. Garda, 18 SCR A 779 (1966).
^ S e e also Arts. 1189,1526,1534,1539,1542,1556,1560,1567, and 1659 of die NCC.
385Art. 1383, ibid.
588 REVIEWER ON CIVIL LAW .

the creditor is secured by a mortgage, the transfer of

a property cannot be rescinded even if it is in fraud of
creditors.
(1) It should also be noted that rescission is a relief
which the law grants on the premise that the
contract is valid for the protection of one of the
contracting parties and third persons from all
injury and damage the contract may cause or
to protect some incompatible and preferential
right created by the contract. Not being void,
rescissible contracts remain legally effective
until set aside in a rescissory action and they
may convey title. They cannot be collaterally
attacked in a mere motion but in an independent
civil action and after a full-blown trial.386
19:01.04. Total and Partial Rescission. Rescission may be
(1) total rescission, or (2) partial rescission. Partial
rescission occurs if the credit is less than the value
of the thing which is the object of the contract.387
For example, if the liability to the creditor who can
rescind the contract is P10,000 and the value of the
goods that were/transferred in fraud of creditors is
P50,000, the contract will be rescinded only up to
P10,000. I
19.01.05. Mutual Restitution. Mutual restitution is required in
rescission.388 live person who rescinded the contract
must be able to return what he received and the

Logically this applies to rescission where the ground

is lesion. Thus, rescission shall not be allowed in
the following cases because there cannot be mutual
restitution:
a) The person who demands rescission cannot
return what he may be obliged to restore;

386Air France y. Court of Appeals, 245 SCRA485 (1995).

387See Art. |jp84, NCC.
^ A rt 1385, ibid.
 OBLIGATIONS AND CONTRACTS 589
Contracts

b) The thing involved is in the possession of an

innocent third person.
19.01.06. Prescriptive Period. The action to claim rescission
must be commenced within four years.389
a) Period for incapacitated. For persons under
guardianship and for absentees, the period of
four years shall not begin until the termination
of the form er's incapacity, or until the domicile
of the latter is known.390
19.02. VOIDABLE CONTRACTS. These are contracts that
are valid until annulled. The basic characteristics of
these contract are (2009 and 2012 Bar):
(1) Contracts become voidable because of
(i) incapacity of one of the parties to give
consent; or (ii) the consent was vitiated;391
(2) Voidable contracts are binding unless they
are annulled by a proper action in court;
and
(3) Voidable contracts are susceptible of
ratification.
a) Note that the Supreme Court likewise ruled
that contracts that only subject a property
ow ner's property rights to conditions or
lim itations but otherwise contain all the
elements of a valid contract are merely
voidable by the person in whose favor the
conditions or limitations are m ade.392 Example:
Sale in breach of the condition in the previous
sale that it could not be resold within 25 years
from Contract date makes the second contract
of sale voidable not void.393

389Art. 1389, NCC.

390Art. 1389,2nd par., ibid.
391Art. 1390, NCC.
392 Vitug v. Abuda, G.R. No. 201264, January 11,2016.
393 Vitug v. Abuda, ibid.
590 REVIEWER ON CIVIL LAW

19.02.01. Voidable Due Incapacity. Consent is an indispens­

able element. However, even if there is consent, there
is no effective consent in law without the capacity
to give such consent. Legal consent presupposes
capacity.394
a) The first ground is incapacity of one of the parties
to give one's consent to the contract. A person
may be considered incapacitated because of (1)
minority; (2) insanity; (3) imbecility; or (4) the
state of being deaf mute who cannot write.395
b) If both parties are incapacitated, the contract is
unenforceable.
19.02.02. Voidable Because of Vitiated Consent (2011 and
2012 Bar). Consent may be vitiated by: (1) Mistake, (3)
Intimidation, (2) Violence, (4) Undue Influence, and
(5) Fraud.
a) M istake. Mistake must refer to the substance of
the thing that is the object of the contract, or to
those conditions which have principally moved
one or both parties to enter into the contract.396
(1) The concept of error must include both
ignorance, which is the absence of
knowledge with respect to the thing, and
mistake, which is a wrong conception
about said thing, or a belief in the existence
of some circumstance, fact or event, which
in reality does not exist.397
b) Fraud. The elements of fraud vitiating consent
for purposes of annulling a contract are: (1) It
was employed by a contracting party upon the
other; (2) It induced the other party to enter into
the contract; (3) It was serious; and (4) It resulted

^ F e lix Gochan and Sons Realty Corporation v. Heirs of Raymundo Baba, G.R. No.
138945, August 19,2003.
395See also Art. 39, NCC.
396Fule v. Court ofysppeals, 286 SCRA 698 (1998).
397Theis v. C ourtof Appeals, 268 SCRA 727 (1996).
 OBLIGATIONS AND CONTRACTS 591
Contracts

in damages and injury to the party seeking

annulment398 (1966 Bar).
c) Contracts agreed to in a state of drunkenness
or during a hypnotic spell are voidable399 (1976
Bar).
19.02.03. Prescriptive Period. When a prescriptive period is
provided for, the person who has the right to file a
case should file the same within the said prescriptive
period. The law fixes the time limit for the filing of
the case. Thus, in voidable contracts, the prescriptive
period is four years as provided for in Article 1391.
Therefore, the action to annul the contract for being
voidable must be filed within four years. For example,
if the reason why the contract is voidable is minority
of one of the parties, tire case to annul should be filed
within four years from the time the minor reached 18
years (1979 Bar).

PRESCRIPTIVE PERIOD

Kind of Defect Period When Period

Contract Commences or
When It Starts To
Run.
Rescissible Lesion in Four years. From termination
guardianship. of incapacity. (Art.
1389)
Rescissible Lesion in case Four years. Until the domicile
of absentee. of absentee is
known. (Art. 1389)
Voidable Consent Four years. From the time
vitiated by intimidation,
intimidation, violence, or undue
violence, influence stops.
or undue
influence.

398Constantino v. Court of Appeals, 264 SCRA 59 (1996).

399Art. 1328, NCC.
 REVIEWER ON CIVIL LAW

Voidable Consent Four years. From the discovery

vitiated by of fraud or mistake
fraud or : (1979 Bar). '
mistake.,
Voidable Incapacity Four years. From the time
(due to guardianship of
minority .... tile minor and
and other other incapacitated
grounds). ceases.

a) In connection with fraud, the four-year

prescriptive period should be counted from the
discovery of fraud. Discovery of fraud involv­
ing a document that is required to be registered
with the Register of Deeds is deemed to have
taken place at the time of registration400 (1976
and 1979 Bar). This may include for instance a
deed of absolute sale m at is registered so that
a new torrens title over a parcel of land can be
secured.
19.02.04. Ratification. A voidable contract can be ratified.
Ratification is an act or any other means by which
a defective contract is cured of its vice or defect. In
ratification; the person who has the right to annul
the contract executes an act which expressly or
necessarily implies an intention to waive his right.401
a) Requisites of Ratification. It is essential that the
following are present:
(1) The act is done by the person who has the
right to invoke the voidable nature of the
contract — he who suffers incapacity or
the person against whom the vice (fraud,
intimidation, etc.) was exerted (1966 Bar);**1

400Cararites v. Court of Appeals, 76 SCRA 514.

 OBLIGATIONS AND CONTRACTS 593
Contracts

(2) The act that constitutes ratification was

done with knowledge of the vice;403and
(3) The incapacity or vice has ceased.404
(Except when the ground is incapacity and
ratification is made by a guardian) (1976
' Bat). : 1. ■
b) Kinds of Ratification.
(1) Express Ratification — verbal or written
statement whereby the person who has the
. right to annul the contract states that he is
, > ratifying the contract. /
(2) Implied Ratification — performance of
act which implies an intention to waive
his right to annul the contract. Examples:
(1) In a voidable sale, there is ratification
when the person who is incapacitated or
whose consent was vitiated introduced the
buyer as the new owner after the reasoh for
incapacity ceased or after the effect of die
ground that vitiated the consent ceases.405
c) Effects of Ratification.
(1) The action to annul the contract is
extinguished;406
(2) R etroactivity— The contract is cleansed
of all its defects from the moment it was
constituted. When a voidable contract is
ratified, the contract losses its defects and it
is as if it was valid from the very beginning
(1976 Bar).
19.02.05. Who can file an action to annul. The general rule
is that only parties who are either principally or

m Supra.
m Ibid.
405Spouses Godofredo Alfredo v. Spouses Armando Borras, G .R .N 6 .144225, June
17,2003.
406A rt.l392,N C C .
594 REVIEWER ON CIVIL LAW

subsidiarily liable under the voidable contract can

file an action to annul the same contract subject to the
following rules (1966,1978, and 2012 Bar):
(1) If the ground is incapacity — only the
incapacitated person (or his guardian) can
file (1976 Bar).
(2) If the ground is vitiated consent — only the
innocent party can file (1978 Bar).
a) Heirs. The right to annul may be transmitted
to the heirs of the person who has the right to
annul the voidable contract. Whenever the
contract is tainted with vice which will make
the contract voidable, the action to annul may
be filed not only by any person who is bound
or who made them but also by his heir to whom
the right or obligation arising from the contract
are transmitted.407
b) When Third Persons Can Annul. The exception
to the general rule that only parties to the
contract can file an action to annul the voidable
contract is established by jurisprudence. The
High Court declared that even if a person is not a
party to a contract, he may file an action to annul
the contract if he is prejudiced in his rights with
respect to one of the contracting parties and can
prove in court the detriment which would result
to him,*® -
19.02.06. Mutual Restitution when Voidable Contract is
Annulled.
a) Restitution of Things. One of the effects
of annulment of a voidable contract is the
obligation of mutual restitution. This means
each party must return to the other what he
received by virtue of the voidable contract.

^Concepcion v. Sta. Ana, 87 Phil. 787.

^ Ib an ez v. Hongkong & Shanghai Bank, 22 Phil. 572.
 OBLIGATIONS AND CONTRACTS 595
Contracts

The person who has an obligation to restitute

is obliged to deliver to the other party: (1) the
thing which is the subject matter of the contract
and fruits of that tiling, or (2) the price plus
interest. For example, Mr. A sold a book to Mr.
B for P I,000 and the sale was annulled for being
voidable. Mr. A is supposed to return the P I,000
plus interest and Mr. B is obligated to return the
book.
b) Restitution if the Object is Service. If the object
of the contract is service, the second paragraph
of Article 1398 provides that time value of the
service is the basis of damages. For example,
the contract was for the service of a carpenter
who already performed the service but remains
unpaid. If the contract is annulled, it is unfair
if the person who benefitted from the service
will not be liable. There can be no return of
the thing received because the object is service
which cannot be undone. Hence, the value
of the service will be given to the person who
performed the service, the carpenter.
t) Damages. The purpose of mutual restitution
is to return the parties as far as practicable to
their original position. If mutual restitution
cannot answer for all the damage suffered by
the innocent party, the innocent party is also
entitled to recover damages from the other party
in addition to restitution.®9
d) Restitution by Incapacitated. Article 1399
provides that the incapacitated person is not
obliged to make any restitution except insofar
as he has been benefitted by the thing or price
received by him. Mere receipt of the thing or
the price is not the benefit contemplated by law
(1979 Bar).

409TV Tolentino 609.

 REV11TWER ON.CIVIL LAW

e) Effect of Loss of the Thing to be Returned by

Plaintiff.
(1) If the loss of the thing was through the
fault or fraud of the plaintiff or the person
entitled to annul (incapacitated or innocent
party as the case may be) — the action to
annul is extinguished.410 In other words,
he can no longer ask for annulment of the
contract.
(2) If the loss of the thing was the result of
fortuitous event — The provisions of
Article 1402 shall be applied.411 As long
as one of the contracting parties does
not restore what in virtue of the decree
of annulment he is bound to return, the
other cannot be compelled to comply with
w hat is incumbent upon him. However,
the plaintiff can compel the defendant to
return what he (defendant) received if
the plaintiff offers to pay the value of the
thing he received at the time of the loss.411
Senator Tolentino believes that "it would
be illogical to allow a party to replace by
its value the thing lost by its fault, and
deny this right to one who was without
fault."413
f) Loss of the Thing to be Returned by the
Defendant.
(1) Loss is due to defendant's fault or fraud
— the defendant must return: (i) the fruits
received, (ii) the value of the thing at the
time of the loss, and (iii) interest from the
time of the loss.
 OBLIGATIONS AND CONTRACTS 597
Contracts

(2) Loss is due to fortuitous event — title

defendant must return the value of the
thing at time of loss (without interest).414
19.03. UNENFORCEABLE CONTRACTS. Unenforceable
contracts are those that cannot be sued upon or
enforced unless they are ratified.415
a) Kinds of Unenforceable Contract. Based on the
defect of the unenforceable contract, the same
may be classified as follows:
(1) Unenforceable due to absence of
authority;
(2) Unenforceable due to violation of Statute
of Frauds;
(3) Unenforceable due to incapacity of both
parties.
19.03.01. Grounds. The following are unenforceable contracts
under file Civil Code:416
a) Those entered into in the name of another person
by one who has been given no authority or legal
representation, or who has acted beyond his
powers (2012 Bar);
b) Those that do not comply with the Statute of
Frauds (1958 Bar):
(1) An agreement that by its terms is not to be
performed within a year from the making
thereof;
(2) A special promise to answer for file debt,
default, or miscarriage of another;
(3) An agreement made in consideration of
marriage, other than a mutual promise to
m arry; .

4i4jv jo lcn tin o 614, citing Dumasug v. Modelo, 34 Phil. 252.

4,sReport of the Code Commission, p. 139.
416Art. 1403, NCC.
598 REVIEWER ON CIVIL LAW

(4) An agreement for the sale of goods,

chattels or things in action, at a price not
less than P500, unless the buyer accept and
receive part of such goods and chattels, or
the evidences, or some of them, of such
things in action or pay at the time some
part of the purchase money; but when a
sale is made by auction and entry is made
by the auctioneer in his sales book, at the
time of the sale, of the amount and kind of
property sold, terms of sale, price, names
of the purchasers and person on whose
account the sale is made, it is a sufficient
memorandum (1989 Bar)}
(5) An agreement of the leasing for a longer
period than one year, or for the sale of real
property or of an interest therein (1981,
1982, and 2013 Bar);
(6) A representation as to the credit of a third
person.
c) Both Parties Incapacitated. Those where both
parties are incapable of giving consent to a
contract.
19.03.02. Absence of Authority. A person can enter into a
contract through an agent. If the agent is authorized,
the principal (the person on whose behalf he entered
into a contract) is bound as if he personally entered
into the contract. If a person is not authorized to
enter into a contract in behalf of another, the contract
is considered unenforceable. Example: Mr. A owns a
horse. Mr. B sold Mr. A's horse to Mr. C claiming that
he is an agent of Mr. A. The truth is that Mr. A did not
authorize Mr. B as an agent. The contract of sale of
the horse is considered unenforceable under Article
1403[1] (1976 and 2012 Bar).
a) Note that if the thing to be sold is land or any
interest therein, the contract is void and not
 OBLIGATIONS AND CONTRACTS 599
Contracts

merely unenforceable if the authority of the

agent is not in writing417 (1976 Bar).
19.03.03. Statute of Frauds. If the agreement is covered
by the Statute of Frauds, the agreement shall be
unenforceable by action, unless the same, or some
note or memorandum, thereof, be in writing, and
subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence
of its contents (1982 and 1989 Bar).
a) Purpose. The Statute of Frauds was enacted
for the purpose of preventing fraud.418 It is for
"prevention of many fraudulent practices,
which are commonly endeavored to be upheld
by perjury or subornation of perjury."419
b) Applicable to Perfected but Wholly Executory
Contract. It is important to remember that the
application of the Statute of Frauds presupposes
the existence of a perfected contract. The same is
not applicable if there is no perfected contract.420
(1) The Statute of Frauds is not applicable if
the contract is wholly or partially executed.
If the contract is partially performed, the
Statute of Frauds is no longer applicable421
(1956, 1988, and 2013 Bar). Example: The
contract is sale of a pair of shoes worth
P2,000. The shoes were already delivered
but the price is unpaid. The contract is
already enforceable and the seller can
enforce the verbal contract by demanding
for payment of the price.

417Art. 1874, NCC.

418Mactan Cebu International Airport Authority v. Court of Appeals, 263 SCRA
736 (1996).
419John P. Dawson, William Burnett Harvey and Stanley D. Henderson, Contracts,
Cases and Comment, 5th Ed., p. 941, hereinafter referred to as Dawson, Harvey and
Henderson on Contracts.
•20Ibid.
421Paterno v. Jao Yan, 1 SCRA 631 (1961).
 600 REVIEWER ON CIVIL LAW

c) W hat is Required by the Statute of Frauds.

(1) Formality required: Article 1403[2] requires
the contracts enumerated therein to be in
some note or memorandum in writing and
subscribed by the party charged or by his
agent.
(i) For a note or memorandum to satisfy
the statute, it must be complete in
itself and cannot rest partly in writing
and partly in parol.
(ii) Such note must contain the essential
elements of the contract expressed
with certainty that may be ascertained
from the note or memorandum
itself or some other writing to which
it refers or is connected, without
resorting to parol evidence.422 The
note or memorandum must contain
the names of the parties, the terms
and conditions of the contract and a
description of the property involved
sufficient to render it capable of
identification.
(iii) A public instrument or one that is
notarized is not required. It may be
in any form so long as it is in writing
and subscribed by the person charged
or his agent. Exchange of correspon­
dence may even be sufficient.423
However, if a public instrument is
required for registration, an action
to compel the execution of the public
instrument may be filed.424

^ R osencor Development Corporation v. Court of Appeals, 354 SC R A 119 (2001);

Litonjua v. Fernandez, G.R. No. 148116, April 16,2004.
423City of Cebu v. Heirs of Rubi, 306 SCRA 408 (1999).
424Art. 1406, NCC.
 OBLIGATIONS AND CONTRACTS 601
Contracts

(2) Effect of Non-compliance with Form ality:

Parol evidence of the agreement cannot
be received. The writing or secondary
evidence of its content must be presented.
d) Waiver (Art. 1405). Contracts infringing the
Statute of Frauds, referred to in No. 2 of Article
1403, are ratified by the failure to object to the
presentation of oral evidence to prove the same,
or by the acceptance of benefit under them.
Hence, if a question during the oral examination
of a witness calls for testimony on a contract
that is covered by and does not comply with
the Statute of Frauds, the other party's counsel
must already object to the presentation of such
evidence.
e) Contracts that are covered.
(1) Agreement that is not to be performed within
a year from the making thereof. Although a
contract is not to be performed within one
year, the statute is no longer applicable if
one party has completely performed his
obligation, "however many years may have
elapsed before the contract is performed
by the other party."425 Similarly, if the
obligation was actually fully performed
within one year is taken out of the Statute
of Frauds (1988 Bar). Example: A contract
entered into on January 1, 2017 whereby
Mr. A will deliver to Mr. B a notebook and
Mr. B will deliver to Mr. A a fountain pen
both on June 1,2019.
(2) Special promise to answer for the debt, default
or miscarriage o f another. "Debt, default or
miscarriage" referred to in Article 1403
"includes legal obligations or liabilities of
any kind, from any source, matured, or

^ B ab ao v. Perez, 102 Phil. 756 (1957); Shoemaker v. La Tondena, 68 Phil. 24.

602 REVIEWER ON CIVIL LAW

unmatured or not yet created, provided

they are debts of another person."426 Thus,
this may include a guarantee to pay the
obligation of another based on tort or
quasi-delict.*27
(i) The true test as to whether a promise
is within this paragraph of the statute
of frauds has been said to lie in the
answer to the question whether the
promise is an original or a collateral
one. If the promise is an original or
an independent one, that is, if the
promissor becomes thereby primarily
liable for the payment of the debt, the
promise is not within the statute. But
on the other hand, if die promise is
collateral to the agreement of another
and die promisor becomes thereby
merely a surety, die promise must be
in writing.428
(3) Agreement in consideration o f marriage.
Expressly excluded from the coverage of
the statute is a mutual promise to marry. It
should be noted that breach of promise to
marry is no longer actionable.429A marriage
settlement that fixes the property regime of
the married couple (example an agreement
of complete separation of properties of
spouses) was previously covered by the
statute of frauds. However, Article 77 of
the Family Code now contains mandatory
formalities for a marriage settlement.

^ D aw son, Han>ey and H enderson on Contracts, p. 947.

427Ibid.
^ R e iss v. Memije, 15 Phil. 167 (1910).
429Bnnag, Jr. v. Court of Appeals, 2 1 1 SCRA 441 (1992).
 OBLIGATIONS AND CONTRACTS 603
Contracts

(4) Sale o f Goods, Sale of goods is covered if the

price is not less than P500. If the price is
P500 or more, the sale is covered, except in
the following cases:
(i) when the buyer accepts and receives
part of the goods or chattels or some
of them;
(ii) when the buyer accepts and receives
evidences or some of them;
(iii) when he paid part of the price.
(5) Lease for more than one year. A lease for more
than one year creates a real right. Thus,
a lease for six months is not covered by
the statute of frauds and need not be in
writing. A lease for two years is covered
by the statute and should be in writing to
be enforceable. However, a lease for more
than one year is no longer covered if the
tenant or lessee is already in possession of
the property because the contract is already
partially performed.
(6) Sale o f real property or an interest therein.
The Statute of Frauds covers sale of
a parcel of land or sale of a building.
Interest on land: m ay include conveyance
of right of first refusal (2013 Bar).
However, the following are NOT covered
by the Statute of Frauds:
(i) An agreement to give another person
a right of way to the land;430
(ii) An agreement allowing the right of
repurchase of a parcel of land if there
is a written deed of sale; the deed
of sale and the verbal agreement

430Westem Mindanao Lumber Co., Inc. v. Me dalle, G.R. No. L-23213, October 28,
604 REVIEWER ON CIVIL LAW

allowing the right of repurchase

' are considered integral parts of the
whole;431
(iii) Partition of real estate since this is not
a sale or lease of property; it is merely
a division of property.432
(7) Representation as to the credit o f third
person. This refers to "an assurance that
somebody has a certain amount of credit,
made with the intention of enabling the
person in whose favor it is made to obtain
credit by virtue of such assurance or
representation."433 Example: An agreement
whereby Mr. B assures Mr. C that Mr. X has
sufficient properties to pay all his (Mr. X)
liabilities.
19.03.04. When both are incapacitated. An example of this
contract that is covered by the statute of frauds is the
contract between minors (2012 Bar). For instance, the
contract is between Mr. A and Mr. B. If only Mr. A is a
minor, the contract is voidable. If both Mr. A and Mr.
B are minors, the contract is unenforceable.
a) Article 1317 provides that no one may contract
in the name of another without being authorized
by the latter or unless he has the power to
represent him. The contract is unenforceable
' unless ratified;
b) Chi the other hand, the principles of agency in the
New Civil Code are embodied in Articles 1868
to 1932. Article 1868 provides that by contract of
agency a person binds himself to render some
service or to do something in representation
or on behaif of another, with the consent or
authority of the latter.

^ M actan Cebu International Airport Authority v. Court of Appeals, supra.

^M aglucot-aw v. Maglucot, G.R. No. 132518, March 28,2000. .......
433IV Paras 790.
 OBLIGATIONS AND CONTRACTS 605
Contracts

19.03.05. Ratification by Guardians. The guardians may ratify

an unenforceable contract where both parties are
incapacitated. Ratification when both contracting
parties are incapacitated is subject to the following
rules:43*
(1) If only one contracting party or guardian ratified
— the contract becomes voidable;
(2) If both contracting parties or their guardians
ratified — the contract becomes valid from the
time of perfection.
19.04. VOID AND INEXISTENT CONTRACTS (Art.
1409). A contract may be void because:
a) any of the elements of a contract (consent,
consideration .or object) is actually non-existent;
Example: There is an agreement with respect to
the price but the parties must still agree on the
specific object (2011 Bar);
b) the cause or object is illegal or illicit (contrary to
law, moral, good customs, etc.); or
c) the law prohibits the contract or declares it to be
void.
19.04.01. Grounds. The following contracts are inexistent and
void from the beginning:
(1) Those whose cause, object or purpose is
contrary to law, morals, good customs,
public order or public policy;
(2) Those which are absolutely simulated or
fictitious;;
(3) Those whose cause or object did not exist
at the time of the transaction;
(4) Those whose object is outside the
commerce of men;
\*

^ A rt. 1407, NCC.

 606 REVIEWER ON CIVIL LAW

(5) Those which contemplate an impossible

service;
(6) Those where the intention of the parties
relative to the principal object of the
contract cannot be ascertained;
(7) Those expressly prohibited or declared
void by law.
a) Prohibited or Void by Law.435 Contracts that are
expressly provided for in the New Civil Code or
special law as void include the following:
(1) Article 1490, New Civil Code — Sale
between spouses.
(2) Article 96 of the Family Code — Any
alienation or encumbrance made by the
husband of the conjugal partnership
property without the consent of the wife is
void.436
(3) Article 1347, New Civil Code — Contracts
involving future inheritance (with certain
exceptions).
(4) Article 1874, New Civil Code — This is an
example' of a case when the law declares
a contract void if certain formalities are
not complied with. Thus, in sale of real
property through an agent, the authority
of the agent must be in writing otherwise
the sale is void.437
19.04.02. Basic characteristics:
a) A void contract has no effect from the very
beginning. Example: A void contract of sale
cannot be invoked by the plaintiff as a basis of
his or her cause of action or by the defendant as

435Art. 1409(7), NCC.

436Spouses Godofredo Alfredo v. Spouses Armando Borras, G.R. No. 144225, June
17,2003.
^ Sp o u ses Firme v. Bukal Enterprises, supra.
 OBLIGATIONS AND CONTRACTS 607
Contracts

a basis of his defense in any case including an

ejectment case.438
(1) In contrast to annullable contract that are
considered valid until annulled, a void
contract is void from the very beginning. In
addition, unlike annullable contracts, void
contracts cannot be ratified (2004 Bar).
(2) The rule is that if a void contract has
already been performed, each party may
be required to restore what has been given
under the void contract; restitution of what
each party has given is a consequence of
a void and inexistent contract. This is
consistent with the principle against unjust
enrichment under Article 22 of the New
Civil Code.439
b) A void contract cannot be ratified.
c) The void nature of the contract can be used as a
defense in cases filed in court.
d) If the ground is illegality, the right to set up the
illegality of the void contract cannot be waived.
e) A void contract can be questioned and the action
for declaration that it is void does not pres­
cribe440 (1999 Bar).
(1) The defect of inexistence of a contract is
permanent and incurable. A void contract
cannot be cured by ratification or by
prescription. Mere lapse of time cannot
give efficacy to contracts that are null and
void.441
(2) It should be noted, however, that there
is actually no need to file an action to set

43®Fullido v. Grilli, G JR. No. 215014, February 26,2016.

439Tan, Jr. v. Hosana, G.R. No. 190846, February 3,2016.
440Art. 1410, NCC.
^ L ita Enterprises, Inc. v. Intermediate Appellate Court, 129 SCRA 79 (1984).
608 REVIEWER ON CIVIL LAW

aside a void or inexistent contract, though

an action to declare it as such can be
maintained. However, it may be necessary
to file an action for such declaration because
the plaintiff may have given something by
virtue of a contract. In the same action for
declaration that the contract is void, the
plaintiff may recover what was given by
virtue of the contract.442
f) In case of a divisible contract, if the illegal terms
can be separated from the legal ones, the latter
may be enforced.443
g) The defense of illegality of contract is not
available to third persons whose interests are
not directly affected.444
19.04.03. In P ari D elicto Rule. Articles 1411 and 1412 embody
what is known as the in pari delicto rule. Basically,
the rule is that parties to an illegal contract have no
right to enforce the contract. This is consistent with
the time-honored maxim "ex pacto illicito non oritur
action" — no action arises out of an illicit bargain.445
Having entered into an illegal contract, neither party
can seek relief from the courts and each must bear the
consequences of his acts.
(1) If the contract or act constitutes criminal
offense and both parties are at fault, the
following are the effects: (1) Both parties
have no action against each other (Example:
no party can file an action for specific
performance); (2) Criminal cases can be
filed against both parties.
(2) The effects of the crime shall be disposed of
in accordance with the Revised Penal Code

442RongaviDa v. Court o f Appeals, 294 SCRA 289 (1998).

443Art. 1420, NCC.
444Art. 1421, ibid.
445Teja Marketing v. Intermediate Appellate Court, 148 SCRA 347 (1987).
 OBLIGATIONS AND CONTRACTS 609
Contracts

if the contract or act is in violation of the

said law.
(3) If the act is unlawful or forbidden but does
not constitute a criminal offense and both
parties are at fault, the following rules
apply: (1) Both parties cannot enforce the
contract by demanding performance; (2)
Both parties cannot recover what the other
has given by virtue of the contract.
(4) If the contract or act constitutes a criminal
offense and only one party is at fault, the
applicable rules are: (1) Both parties have
no action against each other for specific
performance or the enforcement of the
contract; (2) The innocent party has the
right to claim what he has given and shall
not be bound to comply with his promise;
and (3) The guilty party may be prosecuted.
(5) If the act is unlawful or forbidden but
does not constitute a criminal offense and
only one party is at fault: (1) The guilty
party or the party at fault may not recover
what he has given; (2) Both parties cannot
enforce the contract; and (3) The innocent
party may recover what he has given
without any obligation to comply with his
promise.
a) If the parties entered into a contract that is
contrary to law,, the courts will leave them as
they are. For example, if under the law, the
Construction Agreement can be entered into by a
government employee and Mr. A, the real party,
used a "dummy" Mr. B who is a government
employee for such purpose, there can be no
action between the real party Mr. A and Mr. B.446

446Spouses Angel v. Sim plido Aledo and Felixberto Modales, G.R. No. 145031,
January 22,2004.
610 REVIEWER ON CIVIL LAW

b) If a void contract has already been performed,

the restoration of what has been given is in
order, and, corollarily, interest thereon will run
only from the time the aggrieved party demands
for the return of the amount.447
c) The in pari delicto rule does not apply to
absolutely simulated contracts. The doctrine can
be applied if there is an object or consideration
but said consideration or object is illegal.448
d) Neither party may recover what he has given
by virtue of the contract if he is at fault.449 This
rule applies if a party, knowing die illegality of
the contract proceeded to give his consent to
the contract. The exceptions to this rule are as
follows:
(1) If the party repudiated the illegal contract
before the illegal purpose is accom­
plished;
(2) If the party is incapacitated or incapable of
giving consent.
NOTE: In both cases, however, the return
of what has been given is not mandatory. The
discretion is still with the court. The court must
determine if public interest will be served or if
the interest of justice so demands. Otherwise,
the thing given will not be ordered returned.
e) Exceptions to In Pari Delicto Rule: Cases when
there can be recovery (1977 Bar).
(1) Interest paid in excess of the interest
allowed by the usury laws may be
recovered by the debtor, with interest
thereon from the date of the payment.450

M7Nool v. Court of Appeals, 276 SC RA 149 (1996).

^ M odina v. Court of Appeals, 317 SCRA 696 (1999).
449Art. 1412, NCC.
450Art. 1413. ibid.
 OBLIGATIONS AND CONTRACTS 611
Contracts

(2) When money is paid or property delivered

for an illegal purpose, the contract may be
repudiated by one of the parties before the
purpose has been accomplished, or before
any damage has been caused to a third
person. In such case, the courts may, if
the public interest will thus be subserved,
allow the party repudiating the contract to
recover the money or property.451
(3) Where one of the parties to an illegal
contract is incapable of giving consent,
the courts may, if the interest of justice
so demands allow recovery of money or
property delivered by the incapacitated
person.452
(4) When the agreement is not illegal per se but
is merely prohibited, and the prohibition
by the law is designated for the protection
of the plaintiff, he may, if public policy is
thereby enhanced, recover what he has
paid or delivered.453
Examples:
(i) Sale of a homestead which was pre­
viously awarded by the government
under the Public Land Act within five
years. The sale is void but the land
will be returned to the awardee.454
(ii) A transfer of a land to an alien is
void because aliens cannot own land
under the Constitution. However, if
the sale is declared void, the land will
, be restored to the Filipino.455

451Art. 1414, NCC.

452Art. 1415, ibid.
453Art. 1416, ibid.
^A ngeles v. Court of Appeals, 102 Phil. 1006.
^ Philippine Banking Corporation v. Lui She, 21 SCRA 52 (1967).
612 REVIEWER ON CIVIL LAW

(iii) If the law makes the price of gasoline

P30.00 per liter and makes it illegal to
charge more than such amount, there
is an obligation to return if the amount
paid is more than the maximum.
(5) When the price of any article or commodity
is determined by statute, or by authority
of law, any person paying any amount in
excess of the maximum price allowed may
recover such excess.456
(6) When the law fixes, or authorizes the fixing
of the maximum number of hours of labor,
and a contract is entered into whereby a
laborer undertakes to work longer than
the maximum thus fixed, he may demand
additional compensation for service
rendered beyond the time limit.457
(7) When the law sets, or authorizes the setting
of a minimum wage for laborers, and a
contract is agreed upon by which a laborer
accepts a lower wage, he shall be entitled
to recover the deficiency.458
(8) Where the application of the in pari delicto
rule contravenes public policy such as the
policy against unjust enrichment.459
19.04.04. Effect of Previous Contract. A void contract cannot
be cleansed of its defect because it is void from the
very beginning. It has no legal effect. Consequently,
if a contract was a direct result of a previous illegal
contract, the second contract is also void and has no
leg to stand on.460

456Art. 1417, NCC.

457Art. 1418, ibid.
458Art. 1419, ibid.
459Gonzalo v. Tarnate, Jr., G.R. No. 160600, January 15, 2014.
*»Art. 1422, NCC.
 OBLIGATIONS AND CONTRACTS 613
Contracts

EXAMPLE:
Mr. A and Mr. B entered into a contract whereby Mr. A will supply
Mr. B with shabu for one year as wholesaler. Mr. B was authorized to look
for retailers. Later, Mr. B gave Mr. X the right to sell on retail the goods of
Mr. A without specifying and without Mr. X knowing the real goods to be
sold. However, the only goods to be sold by Mr. B are the illegal drugs.
The first contract for the supply of shabu is illegal, therefore the resulting
contract with Mr. X is also void and inexistent.

19.04.05. Accessory Contracts and Undertakings. The validity

of accessory contracts will depend on the validity of
the principal because without the principal contract,
there can be no accessory contract.461 The accessory
contract is in this sense the direct result of the principal
contract. For instance, if the principal contract of loan
is void, the accessory contract of mortgage is also
inexistent.462
19.04.06. Interest (Art. 1413). The provision on payment of
usurious interest is illegal hence the agreement as
to interest is void. The loan agreement is still valid
but the agreement on usurious interest is void.463
This is actually a case of divisible undertakings, the
agreement as to interest is divisible from the principal
obligation.

20. NATURAL OBLIGATIONS. In natural obligations, a juridical

tie is created by reason of equity and natural justice. In all the
specific cases of natural obligation recognized by the Civil
Code, there is a moral but not a legal duty to perform or pay,
but the person thus performing or paying feels that in good
conscience he should comply with his undertaking which is
based on moral grounds. Natural obligations do not grant a
right of action to enforce their performance, but after voluntary
fulfillment by the obligor, they authorize the retention of what
has been delivered or rendered by reason thereof.464

461Art. 1423, NCC.

^C elestina T. Naguiat v. Court of Appeals and Aurora Queano, G.R. No. 118375,
October 3,2003.
463Angel Jose v. Chelda Enterprises, 41 SCRA404 (1971).
464Art. 1423, NCC.
614 REVIEW ER ON CIVIL LAW

a) Natural obligation should be distinguished from

purely moral obligation because in the latter, no
juridical tie is created.
b) Distinguished from Civil Obligations. (1)
Civil obligations give a right of action to compel
their performance while in Natural obligations,
there is a right of action to enforce performance.
Natural obligations are based on equity and
natural law while Civil obligations are based on
positive law or agreement.465
20.01. EXAMPLES OF NATURAL OBLIGATIONS.
a) Payment of Prescribed Obligation. When a
right to sue upon a civil obligation has lapsed
by extinctive prescription, the obligor who
voluntarily performs the contract cannot recover
what he has delivered or the value of the service
he has rendered466 (1950 Bar).
(1) Example: The prescriptive period to enforce
a written contract is 10 years. Mr. A sold
B a watch for P3,000. The contract was
evidenced by a deed of sale. After 10 years,
Mr. B demanded delivery of the watch.
Under the circumstances, any action to
enforce the contract may be dismissed
on the ground of prescription. However,
before any case is filed, Mr. A delivered the
watch and received P3,000. In this case, Mr.
A can no longer recover the watch.
b) Reimbursement to Third Person. When without
the knowledge or against the will of the debtor, a
third person pays a debt which the obligor is not
legally bound to pay because the action thereon
has prescribed, but the debtor later voluntarily
reimburses the third person, the obligor cannot
recover what he has paid.467

465Art. 1423, NCC.

466Art. 1424, ibid.
467Art. 1425, ibid.
 OBLIGATIONS AND CONTRACTS 615
Contracts

(1) Example: Mr. A sold B a watch for P3,000.

The contract was evidenced by a deed of
sale. After 10 years, Mr. A demanded pay­
ment of P3,000. Under the circumstances,
any action to enforce the contract may be
dismissed on the ground of prescription.
However, before any case is filed, Mr. C
paid Mr. A. Later, Mr. B reimbursed Mr. C.
In this case, Mr. B can no longer recover the
amount received by Mr. A.
c) Voluntary Performance After Dismissal of
Case. When, after an action to enforce a dvil
obligation has failed the defendant voluntarily
performs the obligation, he cannot demand the
return of what he has delivered or the payment
of the value of the service he has rendered.468
(1) Example: If a person files an action for
specific performance but the case was
dismissed for his failure to prosecute but
the obligor paid the obligation thereafter,
the obligor can no longer recover the
' amount that he paid.
d) Excess Payment by Heir. When a testate or
intestate heir voluntarily pays a debt of the
decedent exceeding the value of the property
which he received by will or by the law of
intestacy from the estate of the deceased, the
payment is valid and cannot be rescinded by the
payor.469
(1) Example: If an heir received properties
worth P100,000 through succession
whether testate or intestate (without a will)
but he paid the obligation of the deceased
from whom he inherited worth P110,000,
the said heir cannot recover what he paid.

468Art. 1428, NCC.

469Art. 1429, ibid.
616 REVIEW ER ON CIVIL LAW

e) Void Will. When a will is declared void because

it has not been executed in accordance with
the formalities required by law, but one of the
intestate heirs, after the settlement of the debts
of the deceased, pays a legacy in compliance
with a clause in the defective will, the payment
is effective and irrevocable.470

E. ESTOPPEL AND TRUSTS

1. ESTOPPEL. Through estoppel an admission or representation

is rendered conclusive upon the person making it, and cannot
be denied or disproved as against the person relying thereon.471
1.01. KINDS. Estoppel may be in pais or by deed or by
laches (1967and 1969 Bar).472
a) Estoppel in pais. — "A person is considered in
estoppel if by his conduct, representations or
admissions or silence when he ought to speak
out, whether intentionally or through culpable
negligence, causes another to believe certain
facts to exist and such other rightfully relies and
acts on such belief, as a consequence of which he
would be prejudiced if the former is permitted
to deny die existence of such facts."473
b) Estoppel by deed. — It occurs when a party
to a deed and his privies are precluded from
denying ahy material fact stated in the said deed
as against the other party and his privies."474
c) Estoppel by laches. — It is "considered an
equitable estoppel wherein a person who failed
or neglected to assert a right for an unreasonable
and unexplained length of time is presumed to

470Art. 1430, supra.

471Art. 1431, NCC.
472Art. 1433, ibid.
473Spouses Chien v. Sta. Luda Realty* & Development, Inc., G.R. No. 162090,
January 31,2007.
**M L
 OBLIGATIONS AND CONTRACTS 617
Estoppel and Thists

have abandoned or otherwise declined to assert

such right and cannot later on seek to enforce
the same, to the prejudice of the other party,
who has no notice or knowledge that the former
would assert such rights and whose condition
has so changed that the latter cannot, without
injury or prejudice, be restored to his former
state."475 The requisites of laches are as follows
(2000 Bar):
(1) conduct on the part of the defendant or one
under whom he claims, giving rise to the
situation of which complaint is made and
for which the complainant seeks a remedy;
(2) delay in asserting the complainant's right,
the complainant having had knowledge or
notice of defendant's conduct and having
been afforded an opportunity to institute a
suit;
(3) lack of knowledge or notice on the part of
the defendant that the complainant would
assert the right on which he bases his claim;
and
(4) injury or prejudice to the defendant in the
event relief accorded to the complainant,
or the suit is not held barred.476
1.02. TO WHOM EFFECTIVE., Estoppel is effective only
as between the parties thereto or their successors-in-
interest.477
1.03. EXAMPLES OF CASES WHEN ESTOPPEL
APPLIES.
a) Seller Acquires Thing Sold After Sale. When
a person who is not the owner of a thing sells

i75Ibid.; Philippine Carpet Manufacturing Corp. v. Tagyamon, 712 SCRA489 (2013).

476Catholic Bishop of Balanga v. Court of Appeals, 264 S C R A 181, November 14,
1996, per Hermosisima Jr., /.; Go Chi Gun, et al. v. Co Cho, el al., 96 Phil. 622, February 28,
1995; Mejia de Lucas v. Gamponia, 100 Phil. 277, October 31,1956.
477A rt.l439,N C C .
618 REVIEW ER ON CIVIL LAW

or alienates and delivers it, and later the seller

or grantor acquires title thereto, such title passes
by operation of law to the buyer or grantee.478
b) Seller Estopped from Asserting Title. If a person
in representation of another sells or alienates a
thing, the former cannot subsequently set up his
own title as against the buyer or grantee.479
c) Lessee or Bailee Estopped from Asserting Title.
A lessee or a bailee is estopped from asserting
title to the thing leased or received, as against
the lessor or bailor.480
d) Estoppel by Who Misleads. When in a contract
between third persons concerning immovable
property, one of them is misled by a person with
respect to the ownership or real right over the
real estate, the latter is precluded from asserting
his legal title or interest therein, provided all
these requisites are present:
(1) There must be fraudulent representation
or wrongful concealment of facts known to
the party estopped;
(2) The party precluded must intend that
the other should act upon the facts as
misrepresented;
(3) The party misled must have been unaware
of the true facts; and
(4) The party defrauded must have acted in
accordance with the misrepresentation.481
e) Estoppel in Pledge. One who has allowed
another to assume apparent ownership of
personal property for the purpose of making
any transfer of it, cannot, if he received the sum

478Art. 1434, supra.

479Art. 1435, ibid.
480Art. 1436, ibid.
481Art. 1438, NCC.
 OBLIGATIONS AN D CONTRACTS 619
Estoppel and Trusts

for which a pledge has been constituted, set up

his own title to defeat the pledge of the property,
made by the other to a pledgee who received the
same in good faith and for value.482
2. TRUSTS. It is a fiduciary relationship by virtue of which a
person (known as the Trustor) reposes to another (known as
the Trustee) his confidence as regards property for benefit a
person referred to as the beneficiary.483
a) The principles of the general law of trusts,
insofar as they are not in conflict with the New
Civil Code, the Code of Commerce, the Rules of
Court and special laws govern trust.484
2.01. KINDS.485 Trusts are either express or implied.
a) Express trusts are created by the intention of the
trustor or of the parties.
b) Implied trusts come into being by operation of
law.
(1) Resulting Trust. — it is raised by implication
of law and presumed to have been
contemplated by the parties; there is an
intention to create a trust although not in
fact created by agreement. It results from
the words and acts of the parties expressly
or impliedly evincing a direct intention to
create a trust although there is no meeting
of minds to perfect a contract.486 Example:
There is a resulting trust if a company
acquired and paid for a membership share
in a golf club placing it in the name of its
officers. The officer signed the certificate
in blank and turned over the same to the
company. The intention is for the company

482Art. 1439, supra.

483Art. 1440, ibid.
484Art. 1442, ibid.
485Art. 1441, ibid.
' “ Ramos v. Ramos, 6 1 SCRA284.
620 REVIEW ER ON CIVIL LAW

not to give up the beneficial interest and

right over the share.487
(2) Constructive Trust. — the parties do not
intend, expressly or impliedly to create
a trust but it is created by force of law by
reason of the demands of equity and justice
(2007 Bar).
2.02. EXPRESS TRUSTS. No particular words are required
for the creation of an express trust, it being sufficient
that a trust is clearly intended.488
a) Parol Evidence When Not Allowed. No express
trusts concerning an immovable or any interest
therein may be proved by parol evidence.489
2.02.01. Trustee Declines. No trust shall fail because the
trustee appointed declines the designation, unless the
contrary should appear in the instrument constituting
the trust.490
2.02.02. Acceptance. Acceptance by the beneficiary is neces­
sary. Nevertheless, if the trust imposes no onerous
condition upon the beneficiary, his acceptance shall
be presumed, if there is no proof to the contrary.491
2.03. IMPLIED TRUSTS. An implied trust may be proved
by oral evidence.492
2.03.01. Examples of Implied Trust.
a) There is an implied trust when property is sold,
and the legal estate is granted to one party but
the price is paid by another for the purpose of
having the beneficial interest of the property.493
This is an example of a Resulting Trust.

^ S im e Darby Pilipinas, Inc. v. Mendoza, G.R. No. 202247, June 19,2013.

^ A rt. 1444, NCC.
489Art. 1443, ibid.
490Art. 1445, ibid.
491Art. 1446, ibid.
492Art. 1457, NCC.
493Art. 1448, ibid.
 OBLIGATIONS AN D CONTRACTS 621
Estoppel and Trusts

(1) Exception: There is NO implied trust if

the person to whom the title is conveyed
is a child, legitimate or illegitimate, of the
one paying the price of the sale. No trust
is implied by law, it being disputably
presumed that there is a gift in favor of the
child.494
b) There is also an implied trust when a donation
is made to a person but it appears that although
the legal estate is transmitted to the donee, he
nevertheless is either to have no beneficial
interest or only a part thereof.495
c) If the price of a sale of property is loaned or paid
by one person for the benefit of another and the
conveyance is made to the lender or payor to
secure the payment of the debt, a trust arises by
operation of law in favor of the person to whom
the money is loaned or for whom it is paid. The
latter may redeem the property and compel a
conveyance thereof to him.496
d) When land passes by succession to any person
and he causes the legal title to be put in the name
of another, a trust is established by implication
of law for the benefit of the true owner.497
e) If two or more persons agree to purchase
property and by common consent the legal
title is taken in the name of one of them for the
benefit of all, a trust is created by force of law in
favor of the others in proportion to the interest
of each.498
f) When property is conveyed to a person in
reliance upon his declared intention to hold it

m Supra.
495Art. 1449, ibid.
496Art. 1450, ibid.
497Art. 1451, ibid.
498Art. 1452. NCC.
622 REVIEWER ON CIVIL LAW

for, or transfer it to another or the grantor, there

is an implied trust in favor of the person whose
benefit is contemplated:499
g) If an absolute conveyance of property is made in
order to secure the performance of an obligation
of the grantor toward the grantee, a trust by
virtue of law is established. If the fulfillment of
the obligation is offered by the grantor when it
becomes due, he may demand the reconveyance
of the property to him.500
h) When any trustee, guardian or other person
holding a fiduciary relationship uses trust
funds for the purchase of property and causes
the conveyance to be made to him or to a third
person, a trust is established by operation of
law in favor of the person to whom the funds
belong.501
i) If property is acquired through mistake or
fraud, the person obtaining it is, by force of law,
considered a trustee of an implied trust for the
benefit of the person from whom the property
comes.502*
2.04. RECONVEYANCE.
2.04.01. Express Trust. — imprescriptible; the property held
in trust can be recovered at any time.
a) Exception: If there is repudiation of the express
trust, the action for reconveyance prescribes 10
years from the repudiation of the trust.
2.04.02. Implied Trust. — ten years from the time the trust
is created if the plaintiff is not in possession of the
property.5?3 i

499Art. 1453, supra.

' “ Art. 1454, ibid.
501Art. 1455, ibid.
502A i t 1456, ibid.
“ ^Torbela v. Rosario, 6 6 1 SCRA 633 (2012V
 OBLIGATIONS AND. CONTRACTS 623
Estoppel and Trusts'

a) If the implied trust involves registration of the

property in the name of the trustee, the action
for reconveyance must be filed within 10 years
from the issuance of the Torrens Title over the
property.504
b) If in Possession. If the plaintiff-trustor is in
possession, the action does not prescribe.
NOTE: When the action for reconveyance is based
on a void contract, as when there was no
consent on the part of the alleged vendor or
where the sale contract is forged, the action
is imprescriptible. This action is not based on
implied or express trust.505
2.05. ACQUISITIVE PRESCRIPTION. As a general
rule, in an express trust, the trustee cannot acquire
the property held in trust through prescription. The
possession of the trustee is not possession in the
concept of an owner.
a) Exception: If there is conclusive evidence of a
clear and unequivocal act of repudiation of the
trust made known to the cestui que trust (See Part
II, Note 7.06.01[b], page 179 of this work for
the requirements). Mere registration of the title
in the name of the trustee may not be enough
because the registration in the name of the trustee
may even be part of the trust arrangement. An
example of repudiation is the filing of a case in
court where the cestui que trust is made a party.

PROBLEM:
In the year 2000, Maureen purchased two lots in a plush subdivision
registering Lot 1 in her name and Lot 2 in the name of her brother Walter
with the latter's consent. The idea was to circumvent a subdivision policy
against the acquisition of more than one lot by one buyer. Maureen
constructed a house on Lot 1 with an extension on Lot 2 to serve as a

504Yared v. Txongco, 659 SCRA 545 (2012).

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624 REVIEWER ON CIVIL LAW

guesthouse. In 1987, Walter who had suffered serious business losses

demanded that Maureen remove the extension house since the lot on
which the extension was built was his property. In 2012, Maureen sued
for the reconveyance to her of Lot 2 asserting that a resulting trust was
created when she had the lot registered in W alter's name even if she paid
the purchase price. Walter opposed the suit arguing that assuming the
existence of a resulting trust the action of Maureen has already prescribed
since ten years have already elapsed from the registration of the title in
his name. Decide. Discuss fully.
A: The action for reconveyance has. not prescribed. An implied trust was
created when the property, Lot 2, was placed in the name of Walter for
the benefit of Maureen who iS the beneficial owner of the property. The
problem indicates that Maureen is in possession of Lot 2 because of the
extension of her house is on Lot 2. Even if the entire lot is not covered by
the extension, there is deemed to be constructive possession of the entire
Lot 2 , Since Maureen is in possession of Lot 2, the action for reconveyance
based On implied trust is imprescriptible.